Evolent Health(US:EVH)2024-02-22 16:00Part I Business Evolent Health leads in managing complex conditions for health plans, operating as a single segment with revenue from multi-year PMPM contracts, fueled by organic growth and strategic acquisitions - Evolent focuses on connecting care for patients with complex conditions like cancer and cardiovascular disease to improve outcomes and lower costs through evidence-based clinical pathways23 - The company has grown through strategic acquisitions including New Century Health (2018), Vital Decisions (2021), IPG (2022), and NIA (2023) to enhance its specialty care offerings25 - Effective January 1, 2023, Evolent consolidated its operations into a single reportable segment, combining specialty care management, total cost of care management, and administrative services26 Our Solutions Evolent offers three primary solutions: Specialty Care Management, Total Cost of Care Management, and Administrative Services, leveraging proprietary technology and value-based models - The company's three main solutions are Specialty Care Management, Total Cost of Care Management, and Administrative Services27 - The Specialty Care Management solution focuses on oncology, cardiology, and musculoskeletal markets, utilizing high-performance provider networks, evidence-based clinical pathways, and the proprietary CareProTM technology platform282932 - The Administrative Services solution is centered around the Identifi® platform, offering health plan services, pharmacy benefit management (PBM), risk management, and analytics to help customers manage patient health and costs373839 Sources of Revenue The majority of Evolent's revenue comes from recurring, multi-year contracts with fixed per-member-per-month (PMPM) fees, categorized into Performance, Specialty Technology and Services, and Administrative Suites - Revenue is primarily derived from recurring multi-year contracts with a fixed fee per member per month (PMPM) structure41 - Revenue streams are categorized into: Performance Suite (capitated arrangements), Specialty Technology and Services Suite (non-capitation specialty care), and Administrative Services (platform/operations contracts)41 Growth Opportunities and Competition Evolent's growth strategy involves expanding services with existing partners, capturing more value through risk-sharing, entering new areas like kidney care, and pursuing strategic acquisitions in a fragmented and competitive market - Growth avenues include increasing lives with existing partners, cross-selling solutions, and capturing more value through risk-sharing arrangements5657 - The company plans to expand offerings into new areas such as physician employment, specialty pharmacy, and additional specialty care lines like kidney and fetal-maternal medicine58 - The market is highly competitive and fragmented, with competitors ranging from small niche companies to large, well-financed entities, competing on quality, performance, brand, technology integration, and price66 Human Capital Management As of December 31, 2023, Evolent had approximately 4,700 global employees, with a human capital strategy focused on talent attraction, competitive compensation, employee development, well-being, and Diversity, Equity, and Inclusion (DEI) - As of December 31, 2023, the company had approximately 4,700 global employees, none of whom are represented by a labor union85 Diversity, Equity, and Inclusion (DEI) Demographics (2023) | Category | 2023 | 2022 | |---|---|---| | Gender (Global) | | | | Women | 68% | 62% | | Men | 32% | 38% | | Leadership (MD+ Level) | | | | Women | 50% | 48% | | Racial & Ethnic Minorities (U.S.) | 30% | 28% | | Employee Self-ID (U.S.) | | | | LGBTQ+ | 11.3% | 8.7% | | Disabled Individual | 13.9% | 7.8% | Risk Factors The company faces significant risks from acquisition integration, reliance on key partners, evolving healthcare regulations, potential unprofitability of performance-based contracts, cybersecurity threats, and substantial debt obligations - A significant portion of revenue is derived from the largest partners; for the year ended December 31, 2023, the three largest partners were Cook County Health and Hospitals System (15.7%), Molina Healthcare, Inc. (13.5%), and Humana Insurance Company (12.0%), with loss or renegotiation of these contracts posing a negative impact112 - The company faces risks related to integrating the NIA acquisition, including harmonizing business cultures, retaining key employees, and realizing anticipated synergies106107 - The business is subject to extensive and evolving healthcare regulations, including potential changes to Medicare and Medicaid programs, prior authorization rules (CMS-4201-F, CMS-0057-F), and fraud, waste, and abuse laws, which could adversely affect operations118121130 - The company has significant debt, including convertible notes and obligations under a credit agreement, which could affect its ability to meet obligations and fund growth; as of December 31, 2023, total debt was $612.5 million249 - The company is required to make potentially substantial payments under a Tax Receivables Agreement (TRA) to pre-IPO investors for certain tax benefits; the recorded TRA liability was $107.9 million as of December 31, 2023232235237 Cybersecurity Evolent manages cybersecurity risks through an enterprise risk management program overseen by the Board's Compliance and Regulatory Affairs Committee, led by the CISO, and has not experienced any material incidents in the last three fiscal years - The Compliance and Regulatory Affairs Committee of the Board provides oversight of cybersecurity risks, receiving regular updates from the Chief Information Security Officer (CISO)279 - The company's CISO has over 25 years of experience and is responsible for assessing and managing material risks from cybersecurity threats281 - In the last three fiscal years, the company has not experienced any material cybersecurity incidents, and associated expenses have been immaterial278 Properties Evolent's corporate headquarters is in Arlington, Virginia, under a new 7-year lease, and the company leases all its facilities globally, with total rental expense of $14.0 million for 2023 - The corporate headquarters is located in Arlington, Virginia, under a new 7-year lease for 8,500 square feet, effective January 1, 2024283 - Total rental expense on operating leases, net of sublease income, was $14.0 million for the year ended December 31, 2023283 Legal Proceedings The company is involved in ordinary course legal disputes, including a shareholder derivative action dismissed in January 2023, and a subsequent shareholder demand letter which the Board refused in February 2024, with no estimable loss currently - A shareholder derivative action filed in June 2021 was dismissed without prejudice in January 2023570 - In response to a shareholder demand letter from April 2023, the Board investigated and, in February 2024, refused to take the requested actions, including commencing litigation570 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Evolent's Class A common stock trades on the NYSE under 'EVH', with 84 holders of record as of February 15, 2024, and no anticipated cash dividends on common stock, though $18.8 million in dividends were paid to Series A Preferred stockholders in 2023 - The company's Class A common stock is traded on the New York Stock Exchange (NYSE) under the symbol "EVH"288 - No cash dividends have been declared or paid on Class A common stock, and none are anticipated in the foreseeable future289 - For the year ended December 31, 2023, dividends paid to Series A Preferred stockholders amounted to $18.8 million289 Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2023, Evolent's revenue grew 45.3% to $1.96 billion, driven by acquisitions and growth in Performance and Specialty Technology suites, resulting in an operating loss of $71.2 million and a net loss attributable to common shareholders of $142.3 million Results of Operations For the year ended December 31, 2023, total revenue increased by 45.3% to $1.96 billion, primarily due to acquisitions and partner growth, leading to an operating loss of $71.2 million from a prior operating income, largely due to higher operating expenses including a $24.1 million right-of-use asset impairment Consolidated Results of Operations (in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | |---|---|---|---|---| | Revenue | $1,963,896 | $1,352,013 | $611,883 | 45.3% | | Cost of revenue | $1,503,426 | $1,035,429 | $467,997 | 45.2% | | SG&A expenses | $358,110 | $269,269 | $88,841 | 33.0% | | Depreciation & amortization | $123,415 | $67,195 | $56,220 | 83.7% | | Right-of-use assets impairment | $24,065 | $0 | $24,065 | 100.0% | | Operating income (loss) | $(71,211) | $3,642 | $(74,853) | (2,055.3)% | Revenue by End-Market (in thousands) | End-Market | 2023 | 2022 | |---|---|---| | Medicaid | $785,053 | $559,362 | | Medicare | $708,853 | $458,413 | | Commercial and other | $469,990 | $334,238 | | Total | $1,963,896 | $1,352,013 | Lives on Platform and Average PMPM Fees | Suite | Avg. Lives on Platform 2023 (thousands) | Avg. PMPM Fee 2023 | Avg. PMPM Fee 2022 | |---|---|---|---| | Performance Suite | 4,236 | $23.90 | $38.02 | | Specialty Technology and Services Suite | 69,494 | $0.36 | $0.39 | | Administrative Services | 1,831 | $13.48 | $21.56 | Liquidity and Capital Resources As of December 31, 2023, Evolent had $192.8 million in cash, with net cash provided by operating activities at $142.6 million, net cash used in investing activities at $415.5 million primarily for the NIA acquisition, and net cash provided by financing activities at $281.3 million, ensuring sufficient liquidity for the next twelve months Cash and Cash Equivalents | Date | Cash and Cash Equivalents | |---|---| | Dec 31, 2023 | $192.8 million | | Dec 31, 2022 | $188.2 million | Summary of Cash Flows (in thousands) | Activity | 2023 | 2022 | |---|---|---| | Net cash from Operating Activities | $142,582 | $(11,553) | | Net cash used in Investing Activities | $(415,544) | $(259,115) | | Net cash from Financing Activities | $281,340 | $131,541 | - Operating cash flow in 2023 was positively affected by a $204.3 million increase in the reserve for claims and performance-based arrangements, but negatively impacted by a $142.7 million increase in accounts receivable, primarily from Cook County Health and Hospitals System381 Critical Accounting Policies and Estimates Evolent's critical accounting policies involve significant management judgment and estimates in areas such as goodwill impairment testing, revenue recognition, income taxes, reserves for claims and performance-based arrangements, and purchase price allocation in business combinations - Goodwill is tested for impairment annually on October 31; for the 2023 test, a qualitative assessment was performed for the single reporting unit, and no indicators of impairment were found315319 - Reserves for claims and performance-based arrangements are a critical estimate, using actuarial methods and completion factors to determine the ultimate cost of claims incurred but not reported, involving considerable judgment327328 - The company uses significant judgment in determining its provision for income taxes and any valuation allowance against deferred tax assets, considering recent operating results and projections of future taxable income322323 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk from its $37.5 million secured revolving credit facility and $175.0 million Series A Preferred Stock, both tied to SOFR, and minimal foreign currency exchange risk from international operating expenses - The company has $37.5 million in a secured revolving credit facility and $175.0 million of Series A Preferred Stock with floating interest/dividend rates based on SOFR; for every 1% increase in SOFR, annual interest expense would increase by $0.4 million and preferred dividends by $1.8 million402 - The $575.0 million in outstanding convertible notes are fixed-rate instruments and are not subject to interest rate fluctuation risk402 - Foreign currency risk is related to operating expenses in India and the Philippines; the foreign currency translation loss was immaterial at $0.1 million for the year ended December 31, 2023404 Financial Statements and Supplementary Data Evolent Health's consolidated financial statements for 2023 received an unqualified opinion from Deloitte & Touche LLP, with the 'Reserve for Claims and Performance-Based Arrangements' identified as a critical audit matter due to significant estimation, showing total assets of $2.68 billion and a net loss attributable to common shareholders of $142.3 million - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements410 - The audit identified the 'Reserve for Claims and Performance-Based Arrangements' as a critical audit matter because its development involves significant management estimation and judgment415417 Consolidated Balance Sheets As of December 31, 2023, Evolent's total assets increased to $2.68 billion from $1.82 billion in 2022, primarily due to higher goodwill and intangible assets from the NIA acquisition, while total liabilities rose to $1.43 billion and total shareholders' equity grew to $1.07 billion Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | |---|---|---| | Cash and cash equivalents | $192,825 | $188,200 | | Goodwill | $1,116,542 | $722,774 | | Intangible assets, net | $752,009 | $442,784 | | Total Assets | $2,680,308 | $1,817,293 | | Long-term debt, net | $597,049 | $412,986 | | Tax receivables agreement liability | $107,932 | $45,950 | | Total Liabilities | $1,434,180 | $957,876 | | Total Shareholders' Equity | $1,067,701 | $859,417 | Consolidated Statements of Operations For the year ended December 31, 2023, Evolent reported $1.96 billion in revenue, an operating loss of $71.2 million, and a net loss attributable to common shareholders of $142.3 million, or $(1.28) per share, after accounting for preferred stock dividends and accretion Consolidated Statement of Operations Highlights (in thousands) | Account | 2023 | 2022 | |---|---|---| | Revenue | $1,963,896 | $1,352,013 | | Operating income (loss) | $(71,211) | $3,642 | | Loss from continuing operations | $(113,040) | $(18,701) | | Dividends and accretion of Series A Preferred Stock | $(29,220) | $0 | | Net loss attributable to common shareholders | $(142,260) | $(19,164) | | Basic and diluted loss per share | $(1.28) | $(0.20) | Notes to Financial Statements The notes provide detailed information on significant accounting policies and transactions, including the NIA and IPG acquisitions, revenue recognition, goodwill and intangible assets, long-term debt, Tax Receivables Agreement, lease obligations, Series A Preferred Stock, stock-based compensation, income taxes, and the reserve for claims - The acquisition of NIA on January 20, 2023, had a total consideration of $715.7 million, including $387.8 million in cash, $261.3 million in stock, and $66.6 million in contingent consideration, adding $404.0 million in intangible assets and $395.2 million in goodwill490491492 - As of December 31, 2023, the company had $575.0 million in convertible senior notes ($172.5 million due 2025, $402.5 million due 2029) and $37.5 million outstanding under its revolving credit facility537541559 - The reserve for claims and performance-based arrangements increased from $199.7 million at the beginning of 2023 to $404.0 million at year-end, with total claims incurred during the year of $891.1 million660 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, excluding the recently acquired NIA, which represented 31.0% of total assets and 12.3% of total revenues for the year - Management concluded that disclosure controls and procedures were effective as of December 31, 2023665 - The assessment of internal control over financial reporting excluded the NIA acquisition, completed on January 20, 2023, which constituted 31.0% of total assets and 12.3% of revenues for the year667673 - Excluding the NIA acquisition, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023667 Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and the Code of Business Conduct and Ethics is incorporated by reference from the company's 2024 Proxy Statement and available on its investor relations website - Information required by this item is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Shareholders683 Executive Compensation Information concerning executive compensation is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the company's 2024 Proxy Statement686 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the company's 2024 Proxy Statement686 Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the company's 2024 Proxy Statement687 Principal Accounting Fees and Services Information concerning principal accounting fees and services is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the company's 2024 Proxy Statement687 Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and various exhibits filed with the Form 10-K, including acquisition agreements, debt instruments, equity plans, and CEO/CFO certifications - This section contains the list of all financial statements, schedules, and exhibits filed with the report691 Form 10-K Summary This item is not applicable to this report - Item 16, Form 10-K Summary, is noted as 'Not Applicable'696