AdaptHealth Corp. 10-Q Summary
Business context and reporting period
AdaptHealth provides healthcare-at-home solutions, including sleep therapy, diabetes devices, respiratory and home medical equipment, medical supplies, and related services to Medicare, Medicaid, and commercial-insurance beneficiaries. The unaudited report covers the three and six months ended June 30, 2022, compared with the same 2021 periods. As of June 30, 2022, the company served approximately 3.9 million patients annually through 759 locations in 47 states.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $727.6 million | $617.0 million | $1.434 billion | $1.099 billion |
| Operating income | $59.2 million | $65.4 million | $110.7 million | $80.8 million |
| Operating margin | 8.2% | 10.6% | 7.7% | 7.4% |
| Net income attributable to AdaptHealth | $14.0 million | $79.1 million | $55.8 million | $75.1 million |
| Diluted EPS | $0.09 | $0.12 | $0.24 | $0.06 |
| Adjusted EBITDA | $150.0 million | $147.4 million | $287.7 million | $251.6 million |
- Q2 revenue increased 17.9%; six-month revenue increased 30.4%. Growth was primarily acquisition-driven, including $119.5 million of Q2 and $332.9 million of six-month incremental revenue from acquisitions completed after the comparable 2021 dates.
- Q2 cost of net revenue rose to 83.8% of revenue from 79.5%, reducing operating margin. Higher product costs, labor, wages, overtime, fuel, and patient-equipment depreciation contributed to the pressure.
- Six-month operating income increased 37.0%, while six-month net income attributable to AdaptHealth declined 25.8%, primarily because the 2021 period benefited from larger noncash gains on warrant and contingent-share liabilities.
- Q2 net income was also affected by an $8.2 million noncash warrant-liability loss, compared with a $37.5 million gain in Q2 2021. The six-month 2022 period included an $18.5 million noncash warrant-liability gain.
- Operating cash flow for the first six months was $169.9 million, up from $147.6 million. Capital expenditures were $154.3 million, compared with $79.4 million in 2021, and acquisition spending was $15.3 million versus $1.293 billion.
- Cash declined to $118.8 million at June 30, 2022 from $149.6 million at December 31, 2021. Working capital was approximately $169.7 million, compared with $170.2 million at year-end 2021.
Debt, liquidity, and capital allocation
- Total long-term debt, net of deferred financing fees, was $2.196 billion, including $775.0 million of secured term loans and $1.450 billion of senior unsecured notes. The current portion was $25.0 million.
- The $450 million revolving facility had no borrowings outstanding; after $17.4 million of letters of credit, approximately $432.6 million remained available.
- The term loan carried a 3.06% interest rate at June 30, 2022 and matures in January 2026. The company was in compliance with all debt covenants.
- Management stated that operating cash flow, cash on hand, and available credit were expected to fund operations and planned growth for at least the next twelve months, although additional financing may be needed for acquisitions.
- In May 2022, the board authorized a share-repurchase program of up to $200 million through December 31, 2022. The company repurchased 199,418 shares for $3.4 million during the quarter.
Material changes, outlook, and unusual items
- The Philips Respironics recall continued to restrict access to certain ventilator, BiPAP, and CPAP devices and materially affected the company’s ability to meet patient demand.
- Medicare sequestration benefits ended after June 30, 2022. The company expected a 2% reduction to Medicare fee-for-service claims beginning July 1, 2022.
- CMS recouped $9.1 million of CARES Act advance payments during the first six months; $3.7 million remained to be recouped or repaid during the remainder of 2022. A remaining $4.3 million of deferred employer FICA taxes was expected to be paid shortly after December 31, 2022.
- The company completed six smaller acquisitions during the first half of 2022 for total consideration of $16.8 million, primarily cash, compared with substantial acquisition activity in the first half of 2021.
- Care expenses and reimbursement estimates depend on third-party payors, including Medicare and Medicaid. Revenue is subject to implicit price concessions, billing delays, documentation requirements, and potential adjustments as collections are resolved.
- Management identified no goodwill impairment through June 30, 2022, but a sustained decline in market capitalization or operating performance could require a material noncash impairment charge.
- The company reported no material accruals for litigation claims, but disclosed ongoing government investigations concerning ventilator and oxygen billing, a securities class action, a shareholder derivative action, and a newer False Claims Act investigation involving Community Surgical Supply.
- Disclosure controls and procedures were ineffective because of material weaknesses in internal control over financial reporting, including insufficient accounting and control resources, risk assessment and information-technology controls, review of non-routine transactions, and accounts-payable controls. Remediation efforts were underway and had not yet been completed.
Important facts for investors to verify
- Whether acquisition-driven growth can continue without further deterioration in cost of net revenue and operating margins.
- The effect of Philips product shortages, Medicare sequestration, reimbursement changes, and healthcare-regulatory developments on revenue and cash flow.
- Debt-service capacity, variable-rate exposure, scheduled term-loan amortization, and compliance with leverage and interest-coverage covenants.
- The timing and cash impact of CMS advance-payment recoupment, deferred payroll taxes, the Tax Receivable Agreement liability of approximately $304.8 million, and other contractual obligations.
- Progress in remediating material weaknesses in internal control over financial reporting.
- Potential financial and reputational exposure from the securities litigation, derivative action, and federal billing investigations.
- The sustainability of management’s liquidity assessment given cash of $118.8 million, significant capital expenditures, acquisition plans, and approximately $2.2 billion of net debt.