Astrana Health, Inc. (then Apollo Medical Holdings, Inc.) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The filing was signed August 6, 2021. The company operated a physician-centric, risk-bearing healthcare platform, primarily in California, with approximately 1.1 million patients under care coordination. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $175.6 | $165.2 | $351.7 | $330.3 |
| Operating income | $21.0 | $12.9 | $42.8 | $17.3 |
| Net income | $59.5 | $81.0 | $74.0 | $84.0 |
| Net income attributable to Apollo Medical Holdings | $12.7 | $7.0 | $25.8 | $11.1 |
| Diluted earnings per share | $0.28 | $0.19 | $0.58 | $0.30 |
| Operating margin | 12.0% | 7.8% | 12.2% | 5.2% |
Revenue increased 6% in both the quarter and first half. Capitation remained the largest revenue stream; risk pool settlements and incentives grew, as did fee-for-service revenue. Management cited membership growth at APC and Alpha Care, increased visits at surgery and heart centers, and risk-pool revenue reflecting lower hospital utilization during the early COVID-19 period (with a 15–18 month reporting lag). Six-month risk-pool revenue also included a $4.5 million prior-year settlement.
Operating income improved as revenue rose and six-month cost of services declined 1%; Q2 cost of services was nearly flat. General and administrative expense rose 23% in Q2, primarily due to costs associated with the amended credit facility. Equity-method results turned to a loss, principally reflecting increased claims expense at LMA.
Reported net income comparisons were heavily affected by unusual investment items. 2021 other income included an $83.8 million unrealized gain after a payer partner’s IPO and an offsetting $15.7 million write-off of a beneficial interest. The payer-partner investment was an excluded asset for APC and did not affect income attributable to ApolloMed. In 2020, results included a $99.6 million gain on sale of an equity-method investment. Net income attributable to ApolloMed rose despite lower consolidated net income, in part because income attributable to noncontrolling interests declined following the 2020 sale of UCI.
Cash flow, debt and liquidity
- Operating cash flow: $31.3 million for the first half of 2021, versus $12.6 million a year earlier.
- Investing cash flow: $9.8 million used, including $7.4 million of property and equipment purchases and a $4.5 million investment prepayment. Prior-year investing cash flow was positive $67.2 million, including UCI sale proceeds.
- Financing cash flow: $38.2 million used, including $238.2 million of debt repayments and $21.1 million in dividends, partly offset by $180.0 million drawn on the revolver and $40.1 million from a share sale.
- Cash and marketable securities: $364.5 million at June 30, 2021, compared with $261.2 million at year-end 2020. Cash, cash equivalents and restricted cash were $177.3 million, down from $194.0 million.
- Working capital: $342.5 million, versus $223.6 million at year-end 2020. Management stated that liquidity was sufficient for at least the next 12 months.
- Debt: $187.6 million gross debt, including a $180.0 million revolver balance; long-term debt carrying value was $182.7 million after current debt and financing costs. In June, the company refinanced into a five-year $400 million revolving facility. The reported leverage ratio was 1.02 against a maximum of 3.75; interest coverage was 21.17 against a minimum of 3.25.
Outlook, changes and risks
On August 5, 2021, management raised full-year guidance, citing organic growth and first-half results. Revised ranges were revenue of $700–720 million, net income of $56–66 million, net income attributable to ApolloMed of $48–58 million, EBITDA of $100–119 million, and adjusted EBITDA of $120.5–130.5 million. The filing cautions that actual results may differ materially; EBITDA measures are non-GAAP.
Notable post-quarter or pending transactions included a July agreement to acquire 80% of Access Primary Care Medical Group, a planned $4.0 million purchase of a 49% interest in Sun Clinical Laboratories, and an agreement to purchase a 30% interest in CAIPA MSO. Sun Labs and CAIPA transactions were expected to close by the end of Q3 2021; the filing does not provide final outcomes.
- The business bears healthcare-cost and claims risk through capitated, shared-risk and CMS NGACO arrangements. Risk-pool revenue and settlements are subject to estimation uncertainty, IBNR claims and timing lags; 2021 AIPBP surplus or deficit was considered too uncertain to estimate.
- Receivables were concentrated: Payors F and G represented 41.1% and 34.4% of receivables and related-party receivables, respectively, at June 30. Several payors each contributed a material share of revenue.
- Interest-rate exposure remains on floating-rate borrowing, partly mitigated by swaps. Management estimated a hypothetical 1% rate change would change quarterly interest expense by $1.9 million.
- Healthcare regulation, medical-liability claims, contract interpretation, medical-liability estimates and related-party relationships are material areas to monitor. The company reported ordinary-course litigation and no material change in risk factors from its 2020 10-K.
- Consolidated VIEs had $1.35 billion of assets restricted to settling their obligations; their creditors generally had no recourse to the parent’s general credit. This is substantially larger than reported consolidated assets and reflects VIE consolidation and intercompany structures.
Key facts for investors to verify
- Separate recurring operating performance from the large, volatile payer-investment gain and the beneficial-interest write-off; confirm how excluded assets affect parent-attributable earnings and guidance.
- Track claims utilization, IBNR reserves, risk-pool settlements and the NGACO’s eventual CMS reconciliation, especially given the disclosed revenue lag and estimation constraints.
- Review the quality and collectability of concentrated receivables, including balances due from related parties and the AHMC hospital risk-sharing arrangement.
- Confirm debt-facility availability, covenant compliance, interest-rate swap coverage and funding needs as acquisitions proceed.
- Check whether the Access Primary Care, Sun Labs and CAIPA transactions closed, and assess their price, financing, integration and earnings contribution.