AdaptHealth Corp. — Q1 2023 Form 10-Q Summary
Business context and reporting period
AdaptHealth provides healthcare-at-home solutions, including sleep therapy, diabetes equipment and supplies, respiratory services, home medical equipment and other medical supplies. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022. The Company served approximately 3.9 million patients annually through approximately 725 locations in 47 states.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $744.6 million | $706.2 million | 5.4% increase |
| Operating income | $26.2 million | $51.6 million | 49.2% decrease |
| Operating margin | 3.5% | 7.2% | Down 3.7 percentage points |
| Net income | $16.7 million | $42.2 million | 60.5% decrease |
| Net income attributable to AdaptHealth | $15.7 million | $41.8 million | 62.4% decrease |
| Net margin attributable to AdaptHealth | 2.1% | 5.9% | Down 3.8 percentage points |
| Adjusted EBITDA | $134.0 million | $137.6 million | 2.7% decrease |
| Net cash from operating activities | $140.2 million | $66.5 million | Increase of $73.8 million |
| Free cash flow | $51.1 million | $(10.7) million | Improvement of $61.8 million |
Revenue growth was driven by $33.2 million of non-acquired growth and $5.2 million from acquisitions. Sleep revenue increased 17.6% to $294.4 million, while diabetes revenue decreased 5.7% to $146.4 million. Insurance, government and patient-pay revenue were $436.8 million, $188.8 million and $119.0 million, respectively.
Cost of net revenue increased 9.8% to $655.4 million, exceeding revenue growth and rising to 88.0% of revenue from 84.6%. General and administrative expense increased 14.7% to $47.5 million, or 6.4% of revenue. Higher product, labor, equipment depreciation, inflation and occupancy costs pressured margins. Interest expense increased 29.0% to $32.0 million, primarily because of higher interest rates and average borrowings.
Cash and liquidity improved during the quarter. Cash was $101.4 million at March 31, 2023, compared with $46.3 million at December 31, 2022. Working capital was approximately $122.2 million. Capital expenditures were $89.1 million, primarily for patient medical equipment. Management stated that expected operating cash flow, cash on hand and available credit are sufficient to fund operations and growth strategies for at least the next twelve months.
Debt and capital structure
- Total debt, net of deferred financing fees, was $2.21 billion at March 31, 2023, including $760.0 million of secured term loans, $25.0 million drawn on the revolver and $1.45 billion of senior unsecured notes.
- The term loan and revolver mature in January 2026. The term loan interest rate was 6.91% at March 31, 2023, and quarterly principal payments increase to $10.0 million beginning June 30, 2023.
- The revolver had $407.6 million of remaining availability after $17.4 million of letters of credit.
- The Company amended its credit agreement and interest-rate swaps from LIBOR-based rates to Term SOFR-based rates. It was in compliance with all debt covenants at quarter-end.
- The Company repurchased 631,953 shares for $9.2 million during the quarter, with $176.8 million remaining under its $200 million authorization.
Material changes versus the prior comparable period
- Revenue increased 5.4%, but operating income declined 49.2% and net income attributable to AdaptHealth declined 62.4%.
- Adjusted EBITDA decreased modestly, while operating cash flow and free cash flow improved substantially due largely to working-capital changes and non-cash adjustments.
- Sleep growth more than offset declines in diabetes and HME revenue. Management cited payor shifts toward dual-benefit and pharmacy-only channels, lower insulin-pump revenue and manufacturers bringing profitable distribution in-house as diabetes headwinds.
- Patient equipment depreciation increased 28.4%, reflecting higher equipment prices and rental counts.
- The non-cash gain from the warrant liability was $21.9 million, compared with $26.7 million in Q1 2022. This contributed to the unusual difference between basic EPS of $0.11 and diluted loss per share of $(0.06).
- The Company tested goodwill after a sustained decline in market capitalization. No impairment was recorded, but estimated fair value exceeded carrying value by less than 20%, creating sensitivity to further declines in market capitalization or expected results.
Guidance, outlook, risks and unusual items
- Management launched a cost-management program involving real-estate rationalization, supply-contract renegotiation, workforce changes and more efficient back-office processes. It expects approximately $40 million of annualized Adjusted EBITDA improvement, including approximately $25 million of impact in 2023, with approximately $8 million of costs to achieve.
- Inflation, supply-chain constraints, labor and transportation costs may continue to pressure demand, costs and margins. The Company may be unable to pass all cost increases to customers.
- Results are seasonal: deductibles and co-payments may defer early-year treatment, while diabetes revenue is typically higher in the fourth quarter.
- On April 21, 2023, the Company paid $5.3 million to settle an EDPA ventilator-billing investigation without a determination of liability.
- Pending matters include a shareholder securities class action, a stayed shareholder derivative action and a civil investigative demand involving subsidiary Community Surgical Supply concerning ventilator billing. The filing states that the potential effect of the latter investigation cannot currently be determined.
- Disclosure controls and procedures were not effective because previously identified material weaknesses in internal control over financial reporting remained unremediated. Management is implementing remediation measures, but the weaknesses cannot be considered remediated until controls operate effectively for a sufficient period.
- On May 9, 2023, the Company announced that CEO Stephen Griggs would step down effective June 30, 2023. Chairman Richard Barasch will serve as interim CEO if a successor is not appointed by then.
Most important facts for investors to verify
- Whether cost-management initiatives produce the projected $40 million annualized Adjusted EBITDA improvement and the stated 2023 benefit.
- Whether revenue and margins stabilize amid inflation, supply-chain constraints and diabetes-channel changes.
- Progress toward remediating material weaknesses in internal control over financial reporting.
- Liquidity, covenant compliance, interest-rate exposure and the Company’s ability to manage approximately $2.21 billion of debt.
- Potential goodwill impairment if market capitalization or operating expectations decline further.
- Developments in the securities litigation, derivative action and Community Surgical Supply investigation.
- The impact of the CEO transition and any changes to strategy, guidance or capital allocation.