Cano Health (CANO) Misses Q2 EPS by 40c, Substantial Doubt on Ability to Continue as Going Concern

Cano Health (NYSE: CANO) reported Q2 EPS of ($0.51), $0.40 worse than the analyst estimate of ($0.11). Revenue for the quarter came in at $766.7 million versus the consensus estimate of $829 million.

Update on Strategic Actions

Today, Cano Health announced that it is pursuing a comprehensive process to identify and evaluate interest in a sale of the Company, or all or substantially all of its assets, consistent with the terms and conditions of the 2023 Side-Car Amendment, discussed below. The Company has engaged advisors to assist in the process. The Company has not set a timetable for the conclusion of this process and there is no assurance that the process will result in any transaction. Cano Health does not intend to comment while it undergoes this process, unless required by law or the Company determines that it would be in its best interests.

In addition to the foregoing process, the Company has made significant progress in its assessment of its non-core assets. So far, Cano Health plans to exit operations in California, New Mexico and Illinois by the fall of 2023. As of June 30, 2023, these geographies accounted for approximately 5,000 total members and 17 medical centers across the three states. The Company also plans to exit its Puerto Rico operations by January 1, 2024, which has approximately 8,000 members cared for by affiliates. The Company is continuing to assess the divestiture of other non-core assets and business lines, while focusing on improving operations for its Medicare Advantage and ACO REACH businesses in its remaining core geographies. Proceeds from any non-core divestitures would be utilized for general corporate purposes and debt repayment.

Cano Health has also developed a plan to further restructure its operations to streamline and simplify the organization to improve efficiency and reduce costs. In connection with its restructuring plan, in the third quarter of 2023, the Company expects to reduce its workforce by approximately 700 employees, or 17% of its workforce. Approximately 40% of the workforce reductions will be attributable to exiting operations in certain markets, with the remainder attributable to consolidation efforts and other administrative operations. These actions are expected to yield approximately $50 million of annualized cost reductions beginning in the third quarter of 2023 and through the end of 2024. The Company expects to record a restructuring charge in the third quarter of 2023 of approximately $4 million, the majority of which will be paid in 2023 and a lesser amount in 2024, consisting primarily of employee-related costs, such as severance, retention and other contractual termination benefits.

2023 Guidance

As a result of management's evaluation of Cano Health's operations and strategic interest in a sale of the Company or all or substantially all of its assets, the Company is withdrawing its fiscal year 2023 guidance provided on May 9, 2023.

The Company expects its performance to improve in the second half of 2023, driven by operational improvements, third-party medical cost recoveries, the favorable impact of seasonality, and the absence of non-recurring items that negatively impacted results in the second quarter of 2023. The operational improvements include:

Exiting markets in California, New Mexico and Illinois;
Restructuring operations to streamline and simplify the organization, improve efficiency and reduce costs; and
Optimizing our operations to improve patient outcomes by improving payor relations and affiliate partnerships, enhancing our arrangements with specialty networks, and strengthening our patient engagement programs.

As of August 9, 2023, the Company had approximately 285 million shares of Class A common stock and 253 million shares of Class B common stock issued and outstanding. Total share count for the purposes of calculating the Company's market capitalization was approximately 539 million.

Liquidity & Capital Management Update

As of June 30, 2023, the Company's total liquidity was approximately $125 million, comprised of $15 million of unrestricted cash on its balance sheet and $110 million of available capacity under its revolving credit facility under the Credit Suisse Credit Agreement (as amended, the "CS Revolving Line of Credit "). For the testing period ended June 30, 2023, the Company was not in compliance with its financial maintenance covenant under the Side-Car Credit Agreement3. Accordingly, on July 28, 2023, the Company delivered to the administrative agent under the Side-Car Credit Agreement a notice of its intent to cure such noncompliance by September 5, 2023. Thereafter, on August 10, 2023, the Company obtained a waiver of such noncompliance and entered into an amendment of the Side-Car Credit Agreement (the "2023 Side-Car Amendment") under which, among other things, the Company will not be required to test compliance with the Side-Car Credit Agreement's financial maintenance covenant until the fiscal quarter ending September 30, 2024, and includes modifications to the Side-Car Credit Agreement, such as (i) requiring the Company to formally launch, announce and pursue a comprehensive process to sell the Company; (ii) increasing the interest rate for the 2023 Term Loan to 16% during the payment-in-kind period ending on February 24, 2025; (iii) requiring a premium payment of 5% of the outstanding principal amount of the 2023 Term Loan to be paid in kind by capitalizing such payment to the principal amount of the 2023 Term Loan; (iv) requiring the applicable prepayment premium to be required in connection with any voluntary or mandatory prepayment or repayment of the 2023 Term Loan; and (v) providing the lenders under the 2023 Term Loan with participation rights in certain new debt financings by the Company. Pursuant to the terms of the 2023 Side-Car Amendment, the Company will not be required to pursue its cure right discussed above.

The Company's current liquidity as of August 9, 2023 was approximately $101 million, consisting of cash and cash equivalents (excluding restricted cash of approximately $14 million). As of August 9, 2023, the CS Revolving Line of Credit was fully drawn to ensure that the Company had access to liquidity while it was negotiating the 2023 Side-Car Amendment; provided, however, having secured the 2023 Side-Car Amendment on August 10, 2023, the Company currently expects to repay a significant portion of such line of credit by the end of September 2023.

The Company currently believes that this amount of liquidity is not sufficient to cover the Company's operating, investing and financing uses for the next 12 months. Management has concluded that there is substantial doubt about the Company's ability to continue as a going concern within one year.

For earnings history and earnings-related data on Cano Health (CANO) click here.

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