AdaptHealth Corp. 10-Q Summary
Business context and reporting period
AdaptHealth provides healthcare-at-home solutions, including sleep therapy, diabetes devices and supplies, respiratory equipment, home medical equipment, and other medical supplies. It serves Medicare, Medicaid, commercial payors, and patients across all 50 states through 614 locations in 47 states and approximately 3.0 million annual patients. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenue | $482.1 million | $191.4 million | +151.8% |
| Operating income | $15.4 million | $8.2 million | +87.5% |
| Operating margin | 3.2% | 4.3% | Down 1.1 percentage points |
| Net loss | $3.6 million | $49.5 million | Loss narrowed by $45.8 million |
| Net loss attributable to AdaptHealth | $4.0 million | $34.6 million | Loss narrowed by $30.6 million |
| Basic loss per share | $0.04 | $0.82 | Loss per share improved |
| Adjusted EBITDA | $104.2 million | $30.5 million | +242.1% |
| Adjusted EBITDA less patient equipment capex | $61.9 million | $17.5 million | +253.9% |
Revenue growth was driven primarily by acquisitions, including AeroCare, acquired February 1, 2021, contributions from acquisitions completed after March 2020, organic growth in CPAP resupply, demographic growth, and increased respiratory-equipment demand. Acquired businesses contributed $142.6 million of Q1 2021 revenue and $20.4 million of operating income after acquisition.
Cost of net revenue was $396.7 million, or 82.3% of revenue, versus 87.6% in Q1 2020. General and administrative expense increased to $56.6 million, or 11.7% of revenue, from $14.3 million, or 7.5%, primarily due to acquisition-related transaction costs, professional fees, higher headcount, information technology costs, and equity compensation. Q1 2021 included $31.4 million of transaction costs and $8.6 million of equity-based compensation.
Interest expense increased to $22.2 million from $7.9 million as a result of higher debt used to fund acquisitions. The company also recorded a $4.2 million loss on extinguishment of debt related to refinancing. Noncash fair-value gains of $2.0 million on contingent consideration and $3.2 million on warrant liabilities reduced the reported loss.
Net cash provided by operating activities was $18.4 million, compared with $24.4 million in Q1 2020. Investing cash flow was negative $1.214 billion, including $1.178 billion for acquisitions and $35.6 million for equipment and other fixed assets. Financing cash flow was positive $1.228 billion, including debt borrowings, $500.0 million of senior notes, and $278.9 million of common-stock proceeds. Cash increased to $132.1 million from $100.0 million at December 31, 2020.
Balance sheet, debt, and liquidity
At March 31, 2021, total assets were $4.520 billion and total stockholders’ equity was $1.792 billion. Accounts receivable were $260.8 million and inventory was $75.5 million. Goodwill increased to $3.142 billion from $998.8 million at year-end, primarily from acquisitions; no goodwill or long-lived-asset impairment was recorded.
Total debt, net of deferred financing fees, was $1.766 billion, consisting principally of $700.0 million of secured term loans, $95.0 million drawn on the revolving facility, $850.0 million of senior unsecured notes, and a $143.5 million note payable. The company was in compliance with its debt covenants at March 31, 2021. The January 2021 credit agreement was amended in April 2021 to provide an $800 million term loan and $450 million revolving commitment, both maturing in January 2026; $40.0 million was outstanding under the revolver as of the filing date.
Liquidity included $132.1 million of cash and available revolver capacity. Management stated that expected operating cash flows, existing cash, and available credit were sufficient to fund operations and planned growth for at least the next twelve months. Working capital remained negative at approximately $9.6 million.
Material changes versus the prior comparable period
- AeroCare was acquired for total consideration of approximately $2.432 billion, including $1.208 billion of cash and $1.224 billion of equity consideration. The acquisition added approximately $2.1 billion of provisional goodwill.
- Total acquisition spending increased substantially from $112.4 million in Q1 2020 to $2.432 billion in Q1 2021.
- The company issued $500.0 million of 4.625% senior notes due 2029 and completed a $278.9 million common-stock offering at $33.00 per share to help fund AeroCare and related costs.
- All remaining Class B common stock and corresponding AdaptHealth Units were exchanged for Class A common stock on January 1, 2021. The company also converted its Series C preferred stock into 13.0 million Class A shares.
- Net loss declined substantially, but operating margin contracted because of higher transaction, integration, amortization, and financing costs.
- Net revenue mix shifted modestly toward fixed monthly equipment reimbursements, which represented 34% of revenue versus 33% in Q1 2020.
Guidance, outlook, commentary, and risks
The company expects 2021 revenue to exceed $1.07 billion, which would cause it to cease qualifying as an emerging growth company at December 31, 2021. Management’s outlook emphasizes continued acquisition-driven expansion, organic growth, and integration of AeroCare, but the filing does not provide formal revenue or earnings guidance beyond this expectation.
COVID-19 continued to affect demand and operations. Respiratory equipment and resupply revenue benefited from pandemic-related demand, while certain elective-service categories were affected by reduced procedures. CMS began recouping $49.5 million of CARES Act advance payments in April 2021, reducing cash receipts until recoupment is complete. The company also had $10.6 million of deferred CARES Act Provider Relief Funds that may be subject to additional reporting requirements, repayment, or reversal of previously recognized income.
Important risks include acquisition integration and realization of expected synergies, high leverage and variable-rate debt exposure, reimbursement reductions or audits, payor pricing pressure, supply-chain dependence, COVID-19 developments, goodwill impairment, regulatory and healthcare fraud investigations, cybersecurity and privacy events, and seasonality. The company disclosed ongoing investigations concerning ventilator billing and AeroCare oxygen-tank billing, although management did not expect a material adverse effect based on information available.
Disclosure controls and procedures were not effective because two previously disclosed material weaknesses remained: untimely review controls for non-routine transactions and deficiencies in accounts-payable vendor and invoice approvals. Management continued remediation but had not yet concluded that either weakness was remediated.
Subsequent to quarter-end, the company acquired Spiro Health Services for $66.1 million in cash and 244,641 Class A shares. Co-Chief Executive Officer Luke McGee was placed on unpaid leave in April 2021 while a board special committee investigated charges in Denmark relating to alleged personal tax fraud; the filing states the conduct was unrelated to the company’s business.
Most important facts for investors to verify
- Whether AeroCare integration delivers the anticipated revenue growth, cost synergies, and operating-margin improvement.
- Debt leverage, covenant headroom, interest-rate exposure, required amortization, and the company’s ability to fund acquisitions while generating positive operating cash flow.
- Collection quality and aging of the $260.8 million accounts-receivable balance, including reimbursement adjustments and government or private-payor audits.
- The timing and cash impact of CMS advance-payment recoupment and whether Provider Relief Funds must be repaid or recognized income reversed.
- The valuation assumptions supporting $3.142 billion of goodwill and $245.2 million of identifiable intangible assets.
- Progress in remediating the two material weaknesses before the company is subject to expanded public-company control requirements.
- Developments in the ventilator-billing, AeroCare oxygen-billing, and acquired-subsidiary Medicare-payment investigations.