InnovAge Holding Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2023; comparisons are to the periods ended March 31, 2022. Financial amounts below are in millions unless noted. The filing is for March 2023, not calendar-year 2022 Q3.
Business context
InnovAge provides comprehensive, capitated care to frail seniors through the Program of All-Inclusive Care for the Elderly (PACE). At March 31, 2023, it served approximately 6,310 participants at 17 centers in five states, versus 6,800 participants and 18 centers a year earlier. The company bears responsibility for participants’ healthcare costs. It consolidated its Germantown, Pennsylvania center with two other centers during the quarter.
Financial performance
| Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Nine months ended March 31, 2023 | Nine months ended March 31, 2022 |
|---|---|---|---|---|
| Total revenue | $172.5 | $177.4 | $511.2 | $525.8 |
| Operating income (loss) | ($8.2) | ($6.7) | ($38.5) | $7.9 |
| Net income (loss) | ($7.3) | ($3.2) | ($31.6) | $5.6 |
| Net income (loss) attributable to InnovAge | ($6.6) | ($2.8) | ($29.5) | $6.2 |
| Adjusted EBITDA | $3.8 | $1.9 | ($2.0) | $34.9 |
Quarterly revenue declined 2.7%; nine-month revenue declined 2.8%. Capitation revenue, the dominant revenue source, fell 2.7% in both periods. Lower member months drove the decline, partly offset by higher capitation rates. Nine-month member months fell 7.1% to approximately 58,270.
For the nine months, Center-level Contribution Margin was $72.8 million, or 14.2% of revenue, versus $111.7 million, or 21.3%, a year earlier. This company-defined measure is revenue less external provider costs and cost of care, excluding depreciation and amortization; it is not a GAAP operating margin. Nine-month operating expenses rose $31.8 million, or 6.1%, despite lower revenue. Cost of care increased 22.5%, reflecting higher staffing costs, wages, compliance support, transportation and other costs. External provider costs decreased 1.7% over the nine months, but cost per participant increased.
Cash flow and liquidity: Operating cash flow was $7.1 million for the nine months, down from $24.1 million. Investing used $64.3 million, including $45.0 million of short-term investment purchases and $19.3 million of property and equipment purchases. Cash, cash equivalents and restricted cash declined $62.7 million to $121.7 million; the company also held $45.8 million in short-term investments. Management said available cash, operating cash flow and financing access should fund needs for the next 12 months and beyond, while cautioning that assumptions may prove incorrect.
Debt and obligations: Debt principal was approximately $70.7 million, including $68.4 million under the term loan and $2.3 million under a convertible term loan. The term loan rate was 6.60%; the revolving facility had no borrowings and $97.0 million of remaining capacity, subject to conditions and covenants. The company reported covenant compliance. Operating and finance lease liabilities totaled $41.8 million. The credit facility is secured by substantially all company assets.
Balance sheet: Total assets were $569.4 million and total liabilities were $243.8 million at March 31, 2023. Stockholders’ equity was $312.2 million, compared with $338.5 million at June 30, 2022; retained earnings moved from $4.7 million to a $24.8 million deficit.
Material changes, outlook and risks
- Enrollment sanctions and audit remediation affected participant growth and revenue. CMS and Colorado lifted sanctions at Colorado centers in January 2023. CMS lifted the Medicare sanction for Sacramento in November 2022, and California DHCS released its sanction effective May 1, 2023, after the quarter ended; normal enrollment may resume, subject to corrective action and monitoring.
- Management cited higher labor costs, staffing competition and elevated operating expenses, and expected elevated operating expenses for the remainder of fiscal 2023. Inflation mitigation efforts continued; management said inflation’s impact on reported results was immaterial during the periods, but there is no assurance mitigations will suffice.
- Management prioritizes audit remediation and care coordination. Expansion remains constrained: California had suspended state attestations for new centers pending remediation; Kentucky and Indiana had taken steps to restrict new-center development. Florida licensing efforts for Tampa and Orlando were continuing. A New Mexico CMS audit was closed April 14, 2023.
- The company remains exposed to regulatory reviews, audits and investigations, including Colorado and DOJ civil investigative demands concerning Medicaid billing, services, referrals, documentation and related matters. Outcomes could not be predicted. A shareholder securities class action and a books-and-records demand also remained unresolved; the company had filed a motion to dismiss the securities complaint.
- In the first quarter of 2023, the company agreed to a $1.2 million settlement of a California wage-and-hour class action, subject to court approval. A $0.6 million lease-termination cost was recorded for the Germantown consolidation.
- Management identified risks from a concentrated government-payor base, healthcare-cost overruns under capitated contracts, participant enrollment and retention, labor availability, regulatory changes and the potential end of COVID-19 emergency measures. It did not provide numerical financial guidance in the filing.
- The company adopted lease accounting Topic 842 on July 1, 2022, recognizing $25.1 million of operating lease liabilities and $23.6 million of right-of-use assets; management said the adoption did not materially affect operations or cash flows. Disclosure controls were assessed as effective at March 31, 2023, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether post-sanction corrective actions and monitoring are completed satisfactorily, and whether Sacramento’s restored enrollment produces sustained participant and revenue growth.
- Whether participant medical costs, staffing and compliance expenses stabilize, and whether the deteriorating Center-level Contribution Margin and Adjusted EBITDA improve.
- Actual operating cash generation, capital spending and liquidity needs relative to management’s funding assessment, including obligations under debt and leases.
- Developments and potential financial effects of the federal and state investigations, securities litigation, books-and-records demand and wage-and-hour settlement.
- Future participant census, member months, capitation rates and risk-adjustment outcomes, as well as any required repayment or revenue true-ups.