Astrana Health, Inc. (filed as Apollo Medical Holdings, Inc.) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The filing identifies the registrant as Apollo Medical Holdings, Inc.
Business context
The company operates a physician-centric, risk-bearing healthcare delivery platform, primarily in California. Its services include capitation-based care, risk-sharing arrangements, physician-group management, and an accountable care organization participating in the CMS Next Generation ACO Model. Management reported responsibility for coordinating care for approximately 1.1 million patients.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $227.1 million | $180.1 million | $578.8 million | $510.4 million |
| Income from operations | $53.2 million | $37.4 million | $95.9 million | $54.6 million |
| Operating margin | 23.4% | 20.7% | 16.6% | 10.7% |
| Consolidated net income (loss) | $(5.4) million | $25.4 million | $68.6 million | $109.4 million |
| Net income attributable to Apollo Medical Holdings, Inc. | $34.3 million | $16.7 million | $60.1 million | $27.8 million |
| Diluted EPS | $0.74 | $0.45 | $1.33 | $0.75 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $82.5 million | $48.8 million |
Q3 revenue rose 26%, with higher capitation, risk-pool settlements and incentives, and fee-for-service revenue. Nine-month revenue rose 13%. Operating income increased faster than revenue in both comparisons. Q3 consolidated net loss reflected a $60.9 million unrealized investment loss; that loss was primarily attributable to noncontrolling interests, and company-attributable net income increased. For nine months, consolidated net income declined from 2020, which included a $99.6 million gain on sale of an equity-method investment.
At September 30, cash and cash equivalents were $204.8 million and marketable securities were $128.6 million. Management reported cash, cash equivalents and marketable securities of $333.3 million, working capital of $310.5 million, and sufficient liquidity for at least 12 months. Nine-month investing cash outflow was $22.5 million; financing cash outflow was $49.2 million. Cash and cash equivalents increased $10.8 million from year-end 2020.
Total debt was $187.5 million, including $180.0 million drawn on the revolving facility; net long-term debt on the balance sheet was $182.8 million. The amended five-year revolving facility has $400 million of capacity. The company reported a 1.06 consolidated leverage ratio against a maximum of 3.75 and 25.55 interest coverage against a minimum of 3.25. Q3 cost of services was $147.5 million and G&A was $21.8 million.
Material changes and notable items
- Risk-pool settlements and incentives increased 94% in Q3 and 74% for the nine-month period. Management cited reduced hospital utilization during the early COVID-19 period, with a 15–18 month settlement lag, a $14.6 million payor incentive, and a $21.8 million settlement for 2020 ACO performance.
- Capitation increased 10% in Q3, principally from membership growth at APC and Alpha Care. Nine-month growth also reflected higher average capitation rates at APC; Accountable Health Care membership declined.
- In July, the company acquired an 80% interest in APCMG for $2.0 million. In August, it acquired 49% of Sun Labs for $4.0 million and consolidated the laboratory. A remaining-interest purchase obligation is disclosed for Sun Labs.
- In October 2021, the company agreed to purchase DMG’s remaining 60% within three years; it then determined DMG was a VIE to be consolidated. This occurred after the reporting date.
- The company’s payor-partner shares became marketable securities following the partner’s June 2021 IPO. Their unrealized loss was $60.9 million in Q3 and unrealized gain was $22.8 million for the nine months. Management says these are APC “Excluded Assets,” so their gains or losses do not affect income attributable to Apollo Medical Holdings, Inc.
- A $15.7 million beneficial interest related to the 2020 UCI sale was written off in the nine-month period; management likewise identified it as an Excluded Asset that did not affect company-attributable net income.
Guidance, outlook and risks
On November 4, 2021, the company raised its 2021 guidance. It forecast revenue of $751.5–$758.5 million, net income of $81.0–$83.5 million, net income attributable to the company of $71.5–$73.5 million, diluted EPS of $1.58–$1.62, EBITDA of $139–$143 million, and adjusted EBITDA of $168.5–$170.5 million. Management cited organic growth, risk-pool settlements, and the 2020 ACO shared-savings settlement. EPS guidance and earnings measures include assumptions; the guidance assumes a payor-partner share price of $8.49. EBITDA and adjusted EBITDA are non-GAAP measures.
Key risks include uncertainty in risk-pool and ACO settlements, medical-claims and IBNR estimates, payor and provider contract interpretation, healthcare regulation and required IPA financial standards, and volatility in the payor-partner investment. The company also has floating-rate borrowings; it estimated a hypothetical 1% rate change would affect quarterly interest expense by $1.9 million. Management reported no material change to the risk factors in its 2020 Form 10-K, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- How much of reported growth and raised guidance depends on lagged hospital risk-pool settlements, the 2020 ACO settlement, and one-time incentives, versus recurring operations.
- The treatment, ownership, and potential earnings or equity effects of the payor-partner investment and other APC Excluded Assets; review the difference between consolidated results and company-attributable results.
- The assumptions and sensitivity behind medical liabilities, risk-pool estimates, and ACO settlements, including subsequent settlement experience.
- The terms, funding, and financial impact of acquisition-related obligations, including Sun Labs and the DMG purchase commitment, and the integration of APCMG and Sun Labs.
- Debt facility availability, floating-rate exposure, covenant compliance, and the distinction between consolidated cash and assets held by VIEs that may be restricted to settling their obligations.