Equity Method Investments

6 Months Ended

Jun. 30, 2017

Equity Method Investments and Joint Ventures [Abstract]

As of June 30, 2017, the Company held a 2.6% equity interest in Evolent Health LLC (“Evolent LLC”) and a 6.3% equity ownership interest in Evolent Health, Inc. (“Evolent Inc.”), which had no material operations outside of its 96.1% ownership interest in Evolent LLC. These investments are accounted for under the equity method, with the Company’s proportionate share of the investees’ losses recognized in the consolidated statements of operations. The Company has the right to designate two individuals to Evolent Inc.'s board of directors, who were the Company’s Chief Financial Officer and an unaffiliated designee of the Company as of June 30, 2017.

Evolent Inc.

During the three months ended June 30, 2017, the Company recognized in the consolidated statements of operations its proportionate share of the losses of Evolent Inc. of $1.0 million. During the three months ended June 30, 2016, the Company's proportionate share of the losses of Evolent Inc. was $1.2 million. The Company recorded $0.3 million of these losses against the remaining carrying amount of its investment at June 30, 2016. The remaining losses were not recorded as they exceeded the Company's investment balance.

During the six months ended June 30, 2017, the Company recognized in the consolidated statements of operations its proportionate share of the losses of Evolent Inc. of $2.3 million. During the six months ended June 30, 2016, the Company's proportionate shares of the losses of Evolent Inc. was $2.0 million, of which $1.1 million was recognized in the consolidated statements of operations, offset by a $1.1 million dilution gain.

The carrying balance of the Company’s investment in Evolent Inc. was $8.0 million and $10.3 million as of June 30, 2017 and December 31, 2016, respectively. The Company had no unrecorded losses related to its investment in Evolent Inc. as of June 30, 2017.

Evolent LLC

During the three and six months ended June 30, 2017, the Company received total cash of $30.5 million and $71.9 million, respectively, from the sale in one transaction in three months ended March 31, 2017 and two transactions in the three months ended June 30, 2017 of shares of Evolent Inc. Class A common stock which the Company received in exchange, on a one-for-one basis, for Evolent LLC Class B common units and shares of Evolent Inc. Class B common stock. The transactions resulted in post-tax gains of $18.9 million and $42.3 million for the three and six months ended June 30, 2017, respectively.

The Company's proportionate share of the losses of Evolent LLC was $0.8 million during the three months ended June 30, 2017. During the three months ended June 30, 2016, the Company's proportionate share of the losses of Evolent LLC was $1.0 million. The Company recorded $0.2 million of these losses against the remaining carrying amount of its investment at June 30, 2016. The remaining losses were not recorded as they exceeded the Company's investment balance. The Company's proportionate share of the losses of Evolent LLC was $2.4 million during the six months ended June 30, 2017. During the six months ended June 30, 2016, the Company's proportionate share of the losses of Evolent LLC was $2.5 million, of which $1.6 million was recognized in the consolidated statements of operations, offset by a $0.9 million dilution gain. The remaining losses were not recorded as they exceeded the Company's investment balance.

The carrying balance of the Company’s investment in Evolent LLC was $2.2 million and $9.6 million as of June 30, 2017 and December 31, 2016, respectively. The Company had no unrecorded losses related to its investment in Evolent LLC as of June 30, 2017.

At the time of Evolent Inc.'s initial public offering and related reorganization, the Company carried over its basis in the investment, resulting in a significant difference between its basis and its proportionate share in the equity of Evolent Inc. As of June 30, 2017, the basis difference totaled $43.0 million and will decrease over time through amortization and upon any sale or dilutive transactions. Evolent Inc. gained control of Evolent LLC in the transaction and applied purchase and push down accounting. The Company has excluded the effects of this accounting in its determination of the equity in Evolent LLC losses, thereby reducing its share of losses from Evolent LLC for the affected periods.

Because of Evolent LLC's treatment as a partnership for federal income tax purposes, the losses of Evolent LLC pass through to the Company and the other members. The Company's proportionate share of the losses of Evolent LLC is recorded net of the estimated tax benefit the Company believes will be realized from the equity in loss of equity method investments on the consolidated statements of operations. Historically, the Company had provided a full valuation allowance against the deferred tax asset resulting from these benefits. In the three and six months ended June 30, 2016, tax benefits of $0.1 million and $0.3 million, respectively, were recorded for the tax effects of the current year losses received from Evolent LLC. The provision for income taxes from gains (losses) from equity method investments for the three months ended June 30, 2017 was $9.2 million, representing an effective tax rate of 34.2%. Tax expense of $9.8 million was recorded for the tax effect of the current period gain on sale of shares in Evolent LLC, offset by a $0.6 million tax benefit for the allocated share of losses from Evolent LLC and Evolent, Inc. The provision for income taxes from gains (losses) from equity method investments for the six months ended June 30, 2017 was $22.9 million, representing an effective tax rate of 36.8%. Tax expense of $24.6 million was recorded for the tax effect of the current period gain on sale of shares in Evolent LLC, offset by a $1.7 million tax benefit for the allocated share of losses from Evolent LLC and Evolent, Inc.

The gains (losses) from equity method investments on the consolidated statement of operations for the combined Evolent entities consisted of the following (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Dilution gain	$	—		$	—		$	—		$	2,026
Gain on partial sale of investment	28,736			—			66,853			—
Allocated share of losses	(1,763		)	(511		)	(4,661		)	(2,732		)
Tax (expense) benefit	(9,237		)	100			(22,879		)	261
Gains (losses) from equity method investments	$	17,736		$	(411	)	$	39,313		$	(445	)

In connection with Evolent Inc.'s initial public offering and the related reorganization, the Company and certain investors in Evolent LLC entered into a tax receivables agreement with Evolent Inc. Under the terms of that agreement, Evolent Inc. will make cash payments to the Company and certain investors in amounts equal to 85% of Evolent Inc.'s actual tax benefit realized from various tax attributes related to activity before the initial public offering. Interest will be included on the tax savings at the applicable London interbank offered rate plus 100 basis points. The tax receivables agreement will generally apply to Evolent Inc.'s taxable years up to and including the 15th anniversary date of the transaction. As of June 30, 2017, the Company had not received any payments pursuant to the tax receivables agreement. As the amount the Company will receive pursuant to the tax receivables agreement is unknown, the Company will recognize payments, if any, associated with this agreement when such payments are received.

The following is a summary of the financial position of Evolent LLC as of the dates presented (in thousands):



	As of
	June 30, 2017		December 31, 2016
Assets:
Current assets	$	319,180	$	154,555
Non-current assets	930,407		921,556
Total assets	$	1,249,587	$	1,076,111
Liabilities and members’ equity:
Current liabilities	$	224,432	$	131,926
Non-current liabilities	130,960		24,654
Total liabilities	355,392		156,580
Members’ equity	894,195		919,531
Total liabilities and members’ equity	$	1,249,587	$	1,076,111

The following is a summary of the operating results of Evolent LLC for the periods presented (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenue	$	107,071		$	56,517		$	213,309		$	105,967
Cost of revenue (exclusive of depreciation and amortization)	67,993			32,779			135,521			61,390
Gross profit	$	39,078		$	23,738		$	77,788		$	44,577

Net loss	$	(20,298	)	$	(12,371	)	$	(43,016	)	$	(187,170	)

The following is a summary of the consolidated financial position of Evolent Inc. as of the dates presented (in thousands):



	As of
	June 30, 2017		December 31, 2016
Assets:
Current assets	$	192,620	$	264,966
Non-current assets	945,732		934,873
Total assets	$	1,138,352	$	1,199,839
Liabilities and shareholders' equity:
Current liabilities	$	101,760	$	131,941
Non-current liabilities	142,143		155,784
Total liabilities	243,903		287,725
Total shareholders' equity attributable to Evolent Health, Inc.	859,769		702,526
Non-controlling interests	34,680		209,588
Total liabilities and shareholders’ equity	$	1,138,352	$	1,199,839

The following is a summary of the consolidated operating results of Evolent Inc. for the periods presented (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenue	$	107,071		$	56,518		$	213,310		$	105,967
Cost of revenue (exclusive of depreciation and amortization)	67,994			32,779			135,523			61,390
Gross profit	$	39,077		$	23,739		$	77,787		$	44,577

Loss before income taxes and non-controlling interests	$	(20,398	)	$	(12,370	)	$	(43,143	)	$	(187,169	)
Net loss	$	(19,698	)	$	(11,999	)	$	(42,848	)	$	(185,810	)
Loss attributable to Evolent Health, Inc.	$	(16,905	)	$	(8,387	)	$	(34,918	)	$	(131,127	)

Evolent LLC is in the early stages of its business plan and, as a result, the Company expects both Evolent Inc. and Evolent LLC to continue to incur losses. The Company’s investments are evaluated for impairment whenever events or changes in circumstances indicate that there may be an other-than-temporary decline in value. As of June 30, 2017, the Company believes that no impairment charge is necessary. For additional information on the fair value of the Company’s investment in the Evolent entities, see Note 3, “Fair value measurements.”

ADVISORY BOARD CO 10-Q