AdaptHealth Corp. 2021 Q3 SEC Filing Summary
Business context and reporting period
AdaptHealth provides healthcare-at-home solutions, including sleep therapy, diabetes devices, home medical equipment, oxygen and other chronic-care supplies and services. The unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The Company served approximately 3.5 million patients annually through 716 locations in 47 states.
Results were significantly affected by acquisitions, particularly the February 2021 AeroCare acquisition, and by the continuing COVID-19 environment. The Company reported as a single operating segment.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net revenue | $653.3 million | $284.4 million | $1,752.4 million | $708.0 million |
| Operating income | $75.7 million | $13.3 million | $156.5 million | $37.0 million |
| Operating margin | 11.6% | 4.8% | 8.9% | 5.2% |
| Net income attributable to AdaptHealth | $58.1 million | $(51.0) million | $133.2 million | $(81.1) million |
| Basic EPS | $0.40 | $(0.89) | $0.97 | $(1.69) |
| Adjusted EBITDA | $156.3 million | $53.2 million | $407.8 million | $126.3 million |
| Adjusted EBITDA less patient equipment capex | $106.1 million | $35.9 million | $266.9 million | $84.0 million |
Revenue increased 129.7% in the quarter and 147.5% year to date. Management attributed the increase primarily to acquisitions, which contributed approximately $362.4 million of Q3 revenue growth and $1.08 billion of nine-month revenue growth. Fixed-monthly equipment reimbursements increased to 34% of revenue in Q3 and 9M 2021, compared with 27% and 30%, respectively, in the prior-year periods.
Cost of net revenue declined to 81.1% of revenue in Q3 and 80.9% year to date, from 84.6% and 85.7%, respectively. General and administrative expense was 5.1% of Q3 revenue and 7.6% year to date, compared with 9.2% and 8.2% in the prior-year periods. Higher amortization reflected acquired intangible assets.
Cash flow, debt and liquidity
- Operating cash flow was $174.8 million for the nine months ended September 30, 2021, compared with $145.3 million in the prior-year period.
- Investing cash flow was $(1.56) billion, including $1.42 billion for acquisitions and $139.7 million for equipment and other fixed assets.
- Financing cash flow was $1.62 billion, driven by new debt and equity financing.
- Cash and cash equivalents were $336.7 million at September 30, 2021, compared with $100.0 million at December 31, 2020. Working capital was $321.4 million, versus a working capital deficit of $55.8 million at year-end 2020.
- Debt, net of deferred financing fees, was $2.21 billion, including $790.0 million of secured term loans and $1.45 billion of senior unsecured notes. The Company had no revolving borrowings outstanding and approximately $435.1 million of remaining revolver availability after letters of credit.
- The Company issued $500.0 million of 4.625% notes due 2029 and $600.0 million of 5.125% notes due 2030 during 2021. It also repaid the remaining $71.7 million under its 12% New Promissory Note in August 2021.
- Management stated that expected operating cash flow, cash on hand and available credit were sufficient to fund operations and planned growth for at least the next twelve months. The Company was in compliance with debt covenants at September 30, 2021.
Material changes versus the prior comparable period
- AeroCare and other acquisitions materially expanded revenue, assets and debt. Total acquisition consideration during the first nine months was $2.72 billion, including $1.45 billion of cash and $1.26 billion of equity consideration.
- Goodwill increased to $3.36 billion from $998.8 million, and identifiable intangible assets increased to $209.9 million from $116.1 million.
- Total assets increased to $5.19 billion from $1.81 billion, while total liabilities increased to $3.20 billion from $1.53 billion.
- The Company adopted ASC 842 leases effective January 1, 2021, recording approximately $91.5 million of operating lease obligations and corresponding right-of-use assets at adoption.
- A January 2021 tax restructuring made the Company subject to income taxes on materially all earnings. The Tax Receivable Agreement liability increased to $300.1 million from $152.0 million.
- The Company ceased to qualify as an emerging growth company because it issued more than $1.0 billion of nonconvertible debt during the applicable three-year period.
- Internal controls remained ineffective because of two previously disclosed material weaknesses involving review controls over non-routine transactions and accounts payable vendor and invoice processes. AeroCare and Spiro were excluded from management’s internal-control assessment during their first year after acquisition.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal financial guidance. Management continued to emphasize acquisition-led growth, integration, operating cash generation and investment in patient equipment. The Company expects seasonality, with generally lower revenue and cash flow early in the year and stronger diabetes resupply activity in the fourth quarter.
- COVID-19 relief programs remained relevant. CMS had recouped $27.0 million of advance payments, with $22.5 million still deferred. Deferred CARES Act provider relief funds totaled $10.6 million. Future guidance or audits could require repayment of recognized relief income.
- Philips Respironics recalled certain ventilator, BiPAP and CPAP devices. Potential effects include product shortages, service and billing disruption, replacement costs, litigation and regulatory exposure.
- Q3 and nine-month earnings benefited from non-cash gains of $10.0 million and $34.1 million, respectively, from changes in the contingent consideration common-share liability, and $16.7 million and $57.4 million from changes in warrant fair value.
- Debt extinguishment losses were $8.2 million in Q3 and $20.2 million year to date, primarily from prepayment penalties and write-offs of deferred financing costs.
- Key risks include acquisition integration, substantial leverage and interest-rate exposure, reimbursement and payor-rate changes, government audits and healthcare fraud-and-abuse requirements, supply-chain and labor constraints, cybersecurity, goodwill impairment and the ability to remediate internal-control weaknesses.
- Pending matters include a shareholder class action alleging misleading statements regarding organic growth, ongoing government inquiries involving ventilator billing and acquired AeroCare oxygen-tank billing, and a $5.1 million Solara data-breach settlement expected to be covered by insurance and escrow.
Most important facts for investors to verify
- How much of reported growth is organic versus acquired, particularly following AeroCare, and whether integration synergies are being realized.
- Net leverage, covenant headroom, maturity schedules, variable-rate exposure and the sustainability of cash flow after patient equipment capital expenditures.
- Accounts receivable aging, collection trends, payor mix and the effect of CMS recoupments and changing reimbursement rules.
- Progress in remediating the two material weaknesses and the scope of future auditor attestation requirements.
- Potential financial and operational effects of the Philips Respironics recall, government investigations, reimbursement audits and the shareholder litigation.
- Goodwill recoverability, given goodwill of $3.36 billion and the Company’s dependence on acquisition-related forecasts and synergies.
- Future cash obligations under the $300.1 million Tax Receivable Agreement liability and contingent consideration arrangements.