Evolent Health(US:EVH)2023-02-23 16:00PART I Item 1. Business Evolent Health leads in value-based care, offering integrated solutions across Clinical Solutions and Evolent Health Services, leveraging acquisitions and proprietary technology for growth - Evolent Health is a market leader in value-based care, driven by price pressure in traditional FFS, market incentives for value-based models, growth in consumer-focused insurance, and data innovation 2425320 - The company operates in two segments: Clinical Solutions (specialty care management) and Evolent Health Services (administrative simplification), with Clinical Solutions accounting for approximately 70% of corporate revenue in 2022 30322323 - Recent acquisitions, including Vital Decisions, IPG, and NIA, are central to expanding Evolent's specialty care management offerings 122934 - Key competitive strengths include early innovation in value-based care, comprehensive solutions, deep market experience, proprietary technology (Identifi® and CarePro™), a provider-heritage brand, and a partnership-driven model 616263 - Growth opportunities include expanding existing partnerships, capitalizing on the rapidly growing value-based care market, capturing additional value through clinical results, and pursuing strategic acquisitions 727375 Item 1A. Risk Factors The company faces significant risks from acquisition integration, revenue concentration, evolving healthcare regulations, data security, and substantial debt obligations - Key risks include difficulties in efficiently integrating NIA into operations, the unreliability of NIA's historical financial information, and pro forma financial information not being indicative of future financial condition 131132134 Revenue Concentration by Largest Partners (2022) | Partner | % of Revenue (2022) | | :-------------------------------- | :------------------ | | Cook County Health and Hospitals System | 22.4% | | Florida Blue Medicare, Inc. | 11.5% | - The company is exposed to significant risks from the rapidly evolving value-based healthcare market, including uncertainty in demand for products and services, and potential negative impacts from changes in managed care industry practices 142 - The healthcare regulatory and political framework is uncertain and evolving, with potential policy changes that could significantly impact business methods, costs, and revenues 143145149 - Failure to accurately underwrite performance-based contracts, especially in specialty care management, could lead to reduced profitability due to unpredictable healthcare costs and pricing pressures 169 - The company has recorded significant goodwill of $722.8 million as of December 31, 2022, and intangible assets, which are subject to impairment tests, with future impairments potentially affecting results of operations 182183569 - Significant debt following the NIA acquisition ($421.8 million principal outstanding as of December 31, 2022, plus an additional $265.0 million debt financing for NIA) and Series A Preferred Stock obligations could adversely affect liquidity and limit future growth 280281444 - The company is subject to privacy and data protection laws and online security risks, with failure to safeguard confidential data potentially leading to significant liabilities and reputational harm 213216222 Item 1B. Unresolved Staff Comments There are no unresolved staff comments applicable to the company - The discussion of legal proceedings is incorporated by reference from "Part II – Item 8. Financial Statements and Supplementary Data - Note 11 - Commitments and Contingencies - Litigation Matters" 309 Item 2. Properties Evolent Health leases its corporate headquarters in Arlington, Virginia, and other global offices, with total rental expense of $14.6 million in 2022 - Evolent Health's corporate headquarters are located in Arlington, Virginia, occupying approximately 34,000 square feet of office space, with additional leased offices in other U.S. locations, Pune, India, and Manila, Philippines 307 - The company leases all of its facilities and does not own any real property 307 Total Rental Expense on Operating Leases (2022) | Metric | Amount (in millions) | | :----- | :------------------- | | Total Rental Expense (net of sublease income) | $14.6 | Item 3. Legal Proceedings Legal proceedings are incorporated by reference from Note 11 of the financial statements, detailing ongoing and resolved litigation - The discussion of legal proceedings is incorporated by reference from "Part II – Item 8. Financial Statements and Supplementary Data - Note 11 - Commitments and Contingencies - Litigation Matters" 309 Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable to Evolent Health, Inc 310 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Evolent Health's Class A common stock trades on NYSE under "EVH," with 93 record holders, and no cash dividends are anticipated as earnings are retained for growth - Evolent Health's Class A common stock is traded on the New York Stock Exchange (NYSE) under the symbol "EVH" 313 Class A Common Stock Holders (as of Feb 16, 2023) | Metric | Value | | :----- | :---- | | Holders of Record | 93 | - The company has not declared or paid any cash dividends on its common stock and does not anticipate paying any in the foreseeable future, intending to retain future earnings for business development and growth 305314 Item 6. Reserved This item is reserved and contains no content Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenue increased 48.9% to $1,352.0 million in 2022, driven by acquisitions and partner expansion, improving operating income to $3.6 million with a focus on specialty conditions INTRODUCTION - Evolent Health is a market leader in value-based care, providing integrated solutions to healthcare providers and payers to improve health care quality and outcomes while reducing costs 320 - The company manages operations across two reportable segments: Evolent Health Services (EHS) for administrative simplification and Clinical Solutions for specialty care management and total cost of care improvement 322 - The company anticipates its future focus will be primarily on maximizing the market opportunity in the management of complex specialty conditions, which constituted approximately 70% of corporate revenue for the year ended December 31, 2022, prior to the NIA acquisition 323 Recent Events Customers Transactions Critical Accounting Policies and Estimates Adoption of New Accounting Standards RESULTS OF OPERATIONS Consolidated Financial Highlights (2022 vs 2021) | Metric | 2022 (in millions) | 2021 (in millions) | Change ($ in millions) | Change (%) | | :----------------------------------- | :------------------ | :------------------ | :--------------------- | :--------- | | Revenue | $1,352.0 | $908.0 | $444.1 | 48.9% | | Cost of revenue | $1,035.4 | $657.6 | $377.9 | 57.5% | | Selling, general and administrative expenses | $269.3 | $219.5 | $49.8 | 22.7% | | Depreciation and amortization expenses | $67.2 | $60.0 | $7.2 | 11.9% | | Change in fair value of contingent consideration | $(23.5) | $13.3 | $(36.8) | (277.1)% | | Total operating expenses | $1,348.4 | $950.4 | $398.0 | 41.9% | | Operating income (loss) | $3.6 | $(42.4) | $46.1 | 108.6% | | Cost of revenue as a % of revenue | 76.6% | 72.4% | | | | Selling, general and administrative expenses as a % of revenue | 19.9% | 24.2% | | | - Total revenue increased by $444.1 million (48.9%) in 2022, primarily due to $79.3 million from IPG and Vital Decisions acquisitions and $364.8 million from new and expanded partner relationships 387388 - Cost of revenue increased by $377.9 million (57.5%) in 2022, mainly due to higher claims costs ($253.8 million) from acquisitions and risk-based contracts, increased personnel costs ($33.6 million), professional fees ($22.1 million), and surgical management costs at IPG ($40.9 million) 391 - Selling, general, and administrative expenses increased by $49.8 million (22.7%) in 2022, driven by higher personnel fees ($33.1 million), stock compensation ($15.2 million), technology services ($9.1 million), severance costs ($1.5 million), and acquisition costs ($7.5 million) 392393 Discussion of Non-Operating Results - The company recorded a partial Tax Receivable Agreement (TRA) liability of $46.0 million as of December 31, 2022, due to a reduction in the valuation allowance from deferred tax liabilities established during the IPG acquisition 414 REVIEW OF CONSOLIDATED FINANCIAL CONDITION Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from floating-rate debt and Series A Preferred Stock, with a 1% SOFR increase adding $4.9 million in interest and $1.8 million in dividends, plus foreign currency risk Cash and Restricted Cash (as of Dec 31, 2022) | Category | Amount (in millions) | | :------- | :------------------- | | Cash and cash equivalents | $188.2 | | Restricted cash and restricted investments | $27.0 | | Total | $215.2 | Debt and Preferred Stock Exposure (as of Dec 31, 2022, and post-NIA acquisition) | Instrument | Principal Amount (in millions) | Interest Rate Type | | :-------------------------------- | :----------------------------- | :----------------- | | Convertible notes (2024 & 2025) | $196.8 | Fixed | | Secured term loan (2022) | $175.0 | Floating (SOFR) | | Secured revolving credit facility (2022) | $50.0 | Floating (SOFR) | | Additional secured term loan (post-NIA) | $240.0 | Floating (SOFR) | | Additional secured revolving credit facility (post-NIA) | $25.0 | Floating (SOFR) | | Series A Preferred Stock (post-NIA) | $168.0 (gross proceeds) | Floating (SOFR + 6.00%) | - For every 1% increase in SOFR, the company would incur an additional $4.9 million in annual interest expense and $1.8 million in preferred dividends 444 - The company faces foreign currency risks from operating expenses denominated in Indian Rupee and Philippino Peso, recognizing translation losses of $0.8 million in 2022, and has not yet used derivatives to hedge this risk 446 Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements, including balance sheets, statements of operations, cash flows, and comprehensive notes detailing accounting policies, acquisitions, debt, and subsequent events - The financial statements present the financial position, results of operations, and cash flows in conformity with U.S. GAAP, audited by Deloitte & Touche LLP 452455 Consolidated Balance Sheet Highlights (as of Dec 31, 2022 vs 2021) | Asset/Liability | 2022 (in millions) | 2021 (in millions) | | :-------------------------------- | :------------------ | :------------------ | | Assets: | | | | Cash and cash equivalents | $188.2 | $266.3 | | Accounts receivable, net | $254.7 | $130.6 | | Total current assets | $478.1 | $524.0 | | Property and equipment, net | $87.9 | $81.4 | | Intangible assets, net | $442.8 | $279.8 | | Goodwill | $722.8 | $426.3 | | Total assets | $1,817.3 | $1,419.5 | | Liabilities: | | | | Total current liabilities | $433.4 | $445.5 | | Long-term debt, net | $413.0 | $215.7 | | Tax receivable agreement liability | $46.0 | $0 | | Total liabilities | $957.9 | $725.8 | | Shareholders' Equity: | | | | Total shareholders' equity | $859.4 | $693.6 | Consolidated Statements of Operations Highlights (2022 vs 2021 vs 2020) | Metric | 2022 (in millions) | 2021 (in millions) | 2020 (in millions) | | :----------------------------------- | :------------------ | :------------------ | :------------------ | | Revenue | $1,352.0 | $908.0 | $924.6 | | Cost of revenue | $1,035.4 | $657.6 | $696.6 | | Selling, general and administrative expenses | $269.3 | $219.5 | $210.4 | | Operating income (loss) | $3.6 | $(42.4) | $(262.8) | | Net loss attributable to common shareholders | $(19.2) | $(37.6) | $(334.2) | | Basic and diluted loss per share | $(0.20) | $(0.44) | $(3.94) | Consolidated Statements of Cash Flows Highlights (2022 vs 2021 vs 2020) | Activity | 2022 (in millions) | 2021 (in millions) | 2020 (in millions) | | :----------------------------------------- | :------------------ | :------------------ | :------------------ | | Net cash and restricted cash provided by (used in) operating activities | $(11.6) | $38.7 | $(16.2) | | Net cash and restricted cash provided by (used in) investing activities | $(259.1) | $(15.8) | $261.1 | | Net cash and restricted cash provided by (used in) financing activities | $131.5 | $(29.5) | $(11.9) | - The company's goodwill balance increased significantly to $722.8 million as of December 31, 2022, primarily due to the IPG acquisition ($296.6 million) 573574577 - Long-term debt, net, increased to $413.0 million in 2022 from $215.7 million in 2021, reflecting new secured term loans and revolving credit facilities to finance the IPG acquisition 469582717 - As a subsequent event, the company completed the NIA acquisition on January 20, 2023, for $400.0 million in cash, $265.0 million in debt financing, and 8.5 million shares of Class A common stock 58715724 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure 737 Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022, excluding newly acquired IPG, with no material changes during the year - Management, with the participation of the CEO and CFO, concluded that the disclosure controls and procedures were effective as of December 31, 2022 738 - The company's management is responsible for establishing and maintaining adequate internal control over financial reporting, designed to provide reasonable assurance regarding financial reporting reliability 739 - IPG, acquired in Q3 2022, was excluded from the assessment of internal control over financial reporting as of December 31, 2022, as permitted by SEC guidance for newly acquired entities 740747 - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting during the year ended December 31, 2022 742 Item 9B. Other Information No other information is reported under this item - No other information is reported under this item 754 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections No disclosures regarding foreign jurisdictions that prevent inspections are applicable - No disclosures regarding foreign jurisdictions that prevent inspections are applicable 755 PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement, with a Code of Business Conduct and Ethics available online - Information on Directors is incorporated by reference from the 2023 Proxy Statement for the Annual Meeting of Shareholders 758 - Information on Executive Officers is presented in "Part I - Item 1. Business - Information about our Executive Officers" of this Annual Report on Form 10-K and the 2023 Proxy Statement 759 - The company has adopted a Code of Business Conduct and Ethics applicable to all directors, officers, and employees, available on its investor relations website 760 Item 11. Executive Compensation Executive compensation information is incorporated by reference from the company's 2023 Proxy Statement - Information required by this Item 11 is incorporated by reference to the company's 2023 Proxy Statement 761 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and related stockholder matters are incorporated by reference from the company's 2023 Proxy Statement - Information required by this Item 12 is incorporated by reference to the company's 2023 Proxy Statement 761 Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement - Information required by this Item 13 is incorporated by reference to the company's 2023 Proxy Statement 762 Item 14. Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the company's 2023 Proxy Statement - Information required by this Item 14 is incorporated by reference to the company's 2023 Proxy Statement 762 PART IV Item 15. Exhibits, Financial Statement Schedules This section lists financial statements from Item 8 and provides an extensive index of exhibits, including agreements for acquisitions, credit facilities, securities, and corporate governance documents - The financial statements of the registrant and the report of the independent registered public accounting firm are included in Item 8 765 - An Exhibit Index lists numerous documents filed with or incorporated by reference, including agreements for acquisitions (Vital Decisions, IPG, NIA), credit facilities (2022 Credit Agreement, Amendment No. 1), securities (Convertible Senior Notes, Series A Preferred Stock), corporate governance documents, and various compensation plans 765767768769770 Item 16. Form 10-K Summary A Form 10-K Summary is not applicable - Form 10-K Summary is not applicable 771 Signatures This section contains required signatures from the CFO, CEO, CAO, and Board members, certifying the Form 10-K report's submission - The report is signed by the Chief Financial Officer, Chief Executive Officer, Chief Accounting Officer, and members of the Board of Directors, certifying compliance with Section 13 or 15(d) of the Securities Exchange Act of 1934 773775776777