Alignment Healthcare, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Alignment operates Medicare Advantage plans, primarily in California, North Carolina, Nevada and Arizona, alongside a Direct Contracting arrangement. Financial amounts below are in U.S. dollars; “millions” is used for readability.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $366.5 million | $309.0 million | $712.0 million | $576.0 million |
| Medical expenses | $307.3 million | $274.4 million | $611.0 million | $525.5 million |
| Medical benefits ratio (MBR) | 83.4% | 88.0% | 85.1% | 89.6% |
| GAAP operating loss | $6.6 million | $40.5 million | $43.1 million | $93.2 million |
| Net loss | $11.6 million | $44.8 million | $52.4 million | $101.6 million |
| Adjusted EBITDA | $10.3 million | $(4.7) million | $6.4 million | $(18.7) million |
| Adjusted gross profit | $61.0 million | $37.1 million | $105.9 million | $59.7 million |
Q2 GAAP operating margin was approximately negative 1.8% and net margin approximately negative 3.2%; for the first half, approximately negative 6.1% and negative 7.4%, respectively. MBR is the company-defined measure of medical expenses excluding medical depreciation and equity compensation, divided by revenue. Adjusted EBITDA and adjusted gross profit are non-GAAP measures.
- Growth: Revenue increased 18.6% year over year in Q2 and 23.6% for the first half. Management attributed growth to higher membership and higher revenue per member, including increased CMS benchmark rates. Health Plan Membership reached 95,900 at quarter-end, up 13.2% year over year; this excludes DCE participants and certain third-party-payor members.
- Cash flow: First-half operating cash use was $1.3 million, versus $61.6 million in 2021. Investing used $12.0 million, mainly for technology and infrastructure capital spending and acquisitions. Cash and restricted cash declined $13.4 million to $455.0 million; balance-sheet cash was $453.2 million.
- Liquidity and debt: Current assets were $585.6 million and current liabilities $213.7 million. Long-term debt, net of issuance costs, was $153.9 million; gross debt balance was $156.3 million, including payment-in-kind interest and fees. The loan bears 10.25% interest. The company extended maturity to September 30, 2023 after quarter-end and said it expects to refinance before maturity.
Changes versus the prior comparable period
- Q2 medical expenses rose 12.0%, slower than revenue growth; first-half medical expenses rose 16.3%, also below revenue growth. MBR improved by 4.6 percentage points in Q2 and 4.5 points for the first half.
- GAAP losses narrowed substantially. Adjusted EBITDA turned positive in both Q2 and the first half.
- Q2 SG&A declined 13.3% as lower equity-based compensation more than offset growth spending. Excluding equity compensation, SG&A increased 20.1% in Q2 and 22.1% for the first half, reflecting investment in network development, sales and marketing.
- Medical expenses included favorable prior-year claims development of $4.9 million in Q2 and $10.8 million for the first half, excluding provision for adverse deviation; management cited better-than-expected recoveries and claims experience.
Outlook, risks and other notable items
- Management said existing liquid assets should fund operating and organic capital needs for at least 12 months, while cautioning that growth, expansion and spending assumptions may change and additional financing may be needed.
- The company announced anticipated 2023 expansion into 14 additional markets, including Florida and Texas, subject to CMS approval. It also reported approximately 5,000 participants in its Direct Contracting arrangement.
- Management expects continued investment in platform development, new-market expansion, sales and marketing, and public-company costs. Results are seasonal: membership growth is concentrated in the first quarter, while medical costs may be higher in the first and fourth quarters; Part D costs can also be higher in the first half.
- COVID-19 utilization and claims-reserve estimates remain uncertain. The filing cites risks from medical-cost and labor inflation, economic downturn and government budget pressure, CMS reimbursement and risk-adjustment estimates, competition, provider relationships, regulation, data security, and geopolitical disruption including the Russia-Ukraine conflict.
- The company reported compliance with debt and state regulatory capital requirements, no material legal accruals, and no material changes in contractual obligations or off-balance-sheet arrangements. Management concluded disclosure controls were effective as of June 30, 2022.
Important facts for investors to verify
- Whether improved MBR and favorable prior-year claims development persist, and how COVID-related utilization affects claims and reserves.
- CMS approval and execution of the announced 2023 expansion, including the costs and membership economics of new markets.
- Whether cash generation supports growth plans and repayment or refinancing of the term loan before its September 2023 maturity.
- The quality and timing of CMS risk-adjustment revenue, pharmacy rebates and receivable collections, and the effects of regulated-subsidiary cash-transfer limits.
- How much underlying operating-cost growth is obscured by equity-based compensation exclusions in non-GAAP measures.