Alignment Healthcare, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company operates a Medicare Advantage business, including health plans in California, North Carolina and Nevada, and launched two CMS Direct Contracting Entities (DCEs) on April 1, 2021. Unless noted otherwise, financial amounts below are in U.S. dollars millions.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $309.0 | $244.3 | $576.0 | $468.9 |
| Medical expenses | $274.4 | $194.5 | $525.5 | $387.9 |
| Medical benefits ratio (MBR) | 88.0% | 79.6% | 89.6% | 82.7% |
| GAAP net income (loss) | $(44.8) | $8.4 | $(101.6) | $(1.7) |
| Adjusted EBITDA (non-GAAP) | $(4.7) | $16.5 | $(18.7) | $14.6 |
| Adjusted gross profit (non-GAAP) | $37.1 | $49.9 | $59.7 | $81.2 |
- Margins: GAAP gross margin was 11.2% in Q2 2021 versus 20.4% a year earlier, and 8.8% for the first half versus 17.3%. Operating margin was approximately (13)% and (16)% for those 2021 periods, respectively, compared with 5% and 2% in 2020.
- Membership: Health Plan Membership was 84,700 at June 30, up 31.5% year over year. The reported measure excludes third-party-payor and DCE members.
- Cash and liquidity: Cash was $494.6 at June 30, up from $207.3 at year-end 2020; cash and restricted cash totaled $495.5. Current assets were $592.9 and current liabilities $173.7. Management said available liquid assets and anticipated operating revenue should fund operating and capital needs for at least 12 months, subject to stated assumptions and risks.
- Cash flow, first half: Operating cash use was $61.6 (versus $8.3 in 2020); investing cash use was $10.9 (versus $7.4); financing provided $360.1 (versus $130.6), primarily reflecting the IPO. Net increase in cash was $287.7.
- Debt: Long-term debt had a $147.3 carrying value, net of issuance costs; principal was $135.0 and total debt balance before those costs was $152.0, including fees and payment-in-kind interest. The CRG term loan matures in June 2023 and bears 10.25% interest. The company reported compliance with its financial and nonfinancial covenants.
Material changes versus prior comparable periods
- Q2 revenue increased 26.5% and first-half revenue increased 22.8%, primarily from health-plan membership growth. Health-plan premium revenue rose 31.5% in Q2 and 30.6% for the first half; lower third-party-payor capitation revenue partly offset growth.
- Medical expenses rose faster than revenue: 41.1% in Q2 and 35.5% for the first half. The higher MBR reflected membership mix, COVID-related utilization and, in 2021, equity compensation recorded in medical expense. Q2 medical costs included a decline in COVID-related utilization as vaccinations improved, partly offset by a return of non-COVID care toward pre-pandemic levels.
- SG&A increased 111.1% in Q2 and 104.7% for the first half. Much of the increase was equity-based compensation associated with the IPO; excluding equity compensation, SG&A rose 28.1% and 25.2%, respectively, reflecting growth, sales and marketing, hiring and IPO-related costs.
- The March 2021 IPO raised approximately $361.6 net for the company. Shares sold by existing stockholders, including the over-allotment sale, did not provide proceeds to the company. Common shares outstanding were 187.3 million at June 30.
Outlook, commentary and risks
- No specific full-year revenue, earnings or cash-flow guidance is provided. Management anticipates continued investment in the platform, growth, sales and marketing, and public-company costs, and expects operating losses may continue.
- Pending regulatory approval, the company anticipated expansion in 2022 from 22 to 38 markets across four states, including Arizona, and additions to PPO, D-SNP and C-SNP offerings. These plans are not presented as approved or guaranteed.
- COVID-19 effects remain uncertain. Management cited higher COVID-related inpatient admissions in early 2021, improving Q2 COVID utilization, recovering non-COVID utilization and potential future effects of the Delta variant. Pandemic-related challenges also included member-condition documentation, lower risk-adjustment scores among new members and abnormal medical-cost seasonality.
- Key exposures include medical-cost and incurred-but-not-reported claims estimates, accuracy and auditability of risk-adjustment data, dependence on CMS payments and plan ratings, provider relationships, concentrated state exposure, regulatory and capital requirements, and continued net losses. The company cautioned that its new DCE business may not be profitable or deliver expected benefits; CMS reviews DCE contracts annually and renewal was not assured.
- Equity compensation was a significant unusual item: $62.7 in the first half, including IPO-related settlements and award modifications. Unrecognized compensation expense was $170.4 at June 30, expected to be recognized over a weighted-average 2.96 years. Management reported no material accrued legal proceedings and no material change in contractual obligations from the IPO prospectus.
Important facts for investors to verify
- Whether membership growth translates into improved MBR and sustainable gross profit as utilization normalizes and the member mix changes.
- Medical claims reserve adequacy and the effects of COVID-19, non-COVID utilization recovery, risk adjustment and prior-period claims development.
- Regulatory approval, launch economics and execution of the announced 2022 market and product expansions.
- DCE performance, risk-sharing exposure and CMS renewal decisions.
- Debt repayment plans, the June 2023 maturity, covenant compliance and the amount of cash available after considering regulatory restrictions at subsidiaries.
- Future operating cash use, equity-compensation expense and dilution from outstanding options, RSUs and restricted shares.