Adapthealth Corp. quarterly report, Q1 FY2020

Business Context and Reporting Period

AdaptHealth Corp. is a U.S. provider of home healthcare equipment, medical supplies and related services, including sleep therapy, home medical equipment, oxygen and chronic-care supplies. The unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The company served approximately 1.6 million patients annually through 220 locations in 38 states.

Comparability was significantly affected by acquisitions, including Patient Care Solutions (PCS) in January 2020 and Healthline and Advanced Home Care in February and March 2020, respectively. The November 2019 business combination was accounted for as a reverse recapitalization.

Key Financial Metrics

Metric	Q1 2020	Q1 2019	Change
Net revenue	$191.4 million	$119.5 million	+60.2%
Operating income	$9.3 million	$5.3 million	+74.1%
Operating margin	4.9%	4.5%	+0.4 percentage points
Net income (loss)	$0.3 million	$(5.5) million	Improved
Net loss attributable to AdaptHealth	$(0.2) million	$(5.8) million	Improved
Adjusted EBITDA	$30.5 million	$28.2 million	+8.0%
Adjusted EBITDA less patient equipment capex	$17.5 million	$17.0 million	+3.1%
Net cash provided by operating activities	$24.4 million	$16.2 million	+50.2%

Cost of net revenue was $166.5 million, or 87.0% of revenue, compared with 83.9% in the prior-year quarter. General and administrative expense was $14.3 million, or 7.5% of revenue, compared with 10.9% previously. Interest expense increased to $7.9 million from $6.3 million.

Revenue growth was driven primarily by acquisitions, which contributed approximately $57.9 million of the increase, including $33.9 million from PCS, with the balance primarily reflecting organic growth in CPAP resupply and core markets. Sales revenue represented 67% of total revenue versus 58% in the prior-year quarter; fixed monthly equipment reimbursements represented 33% versus 42%.

Liquidity, Cash Flow and Debt

Cash and cash equivalents were $48.2 million at March 31, 2020, down from $76.9 million at December 31, 2019.
Working capital was $3.4 million at March 31, 2020, compared with $30.5 million at year-end 2019.
Operating cash flow was $24.4 million. Investing cash flow was $(111.3) million, including $105.8 million for acquisitions and $7.5 million for equipment and fixed assets. Financing cash flow was $58.2 million, primarily reflecting $70.0 million of borrowings.
Total long-term debt, net of deferred financing fees, was $466.2 million, compared with $396.8 million at December 31, 2019. Capital lease obligations were $20.6 million.
Debt consisted primarily of $295.9 million of secured term loans, $32.0 million drawn on the revolving facility and a $143.5 million note payable. The secured term loans and revolver generally mature in March 2024; the note payable matures in November 2029 and bears an initial annual rate of 12%, split between cash and payment-in-kind interest.
Available credit capacity was approximately $90.5 million at March 31, 2020. The company stated that it was in compliance with its debt covenants and expected cash, operating cash flow and available credit to fund operations and growth for at least the next 12 months.

Material Changes Versus the Prior Comparable Period

Revenue increased 60.2%, primarily from acquisitions and organic CPAP resupply growth.
Operating income improved despite higher cost of revenue, while the company moved from a consolidated net loss to modest net income; the parent company continued to report a small attributable loss.
The prior-year period included a $2.1 million loss on extinguishment of debt and $2.7 million of non-cash interest expense from interest-rate swap fair-value changes. No debt extinguishment loss or swap fair-value expense was recorded in Q1 2020 because the swaps were designated as cash-flow hedges.
Other comprehensive loss was $11.2 million in Q1 2020, primarily from a $10.7 million loss recognized in other comprehensive income on interest-rate swaps.
PCS produced approximately $40.7 million of acquired revenue but an operating loss of approximately $5.6 million during the quarter. PCS cost of revenue was 115.4% of PCS revenue, reflecting integration and restructuring-related operating losses.
Acquisitions required $112.4 million of total consideration, including $106.2 million in cash and $6.2 million in equity. Goodwill increased by $74.0 million to $340.8 million.
Accounts receivable increased to $118.7 million from $78.6 million, including $18.1 million of unbilled revenue, up from $8.6 million at year-end.

Guidance, Outlook, Commentary and Risks

The filing does not provide formal quantitative revenue or earnings guidance. Management cited long-term growth opportunities from aging demographics, chronic conditions, increased preference for in-home treatment and expansion of the home medical equipment market.

COVID-19 had no material impact on consolidated operating results through March 31, 2020, but the company reported declining demand for elective-related services, including new CPAP starts and some equipment associated with facility discharges. Offsetting factors included increased demand for oxygen and other respiratory products, higher resupply activity, sales of ventilators and related equipment, temporary Medicare reimbursement relief, and expanded telemedicine and documentation flexibility.

The company reduced its workforce by approximately 6% in April 2020 and expected a one-time severance charge of approximately $1.6 million.
In April 2020, the company received approximately $47 million of recoupable CMS advance payments and approximately $17 million of CARES Act provider relief funds. The relief funds carry restrictions and may be subject to recoupment.
The company repaid the $20 million drawn under its revolver in April 2020 after receiving the CMS advance and provider relief funds. It also elected to defer certain employer-paid FICA taxes, payable in installments in December 2021 and December 2022.
Key risks include the uncertain duration and effects of COVID-19, supply-chain disruption, reimbursement and post-payment audit risk, acquisition integration, leverage and covenant compliance, goodwill impairment, dependence on suppliers and government payors, and access to capital.
The company disclosed an ongoing civil investigative matter concerning ventilator billing practices. It has cooperated with the U.S. Attorney’s Office, but cannot assure that further information requests or actions will not occur.
Disclosure controls were not effective because of a material weakness involving the timeliness of review controls over non-routine transactions. Management was implementing remediation procedures, but the weakness had not yet been considered remediated.
No accrual was recorded for lawsuits, claims, investigations or proceedings, and the filing states that there were no material off-balance-sheet arrangements.

Important Facts for Investors to Verify

Whether PCS and other recent acquisitions achieve expected integration, cost synergies and profitability, given PCS’s reported operating losses.
The sustainability of revenue growth and margins after separating acquisition contributions, COVID-19-related respiratory demand and temporary reimbursement benefits.
Accounts receivable aging, collection trends and the effect of unbilled revenue and potential payor adjustments.
Debt leverage, variable-rate exposure, interest-rate swap valuations and compliance with financial covenants.
The terms, restrictions and potential recoupment obligations associated with CMS advances and CARES Act provider relief funds.
Progress in remediating the material weakness in internal control over financial reporting.
The status and potential financial or regulatory consequences of the ventilator billing investigation and the contingent payment of up to $9.0 million related to the Advanced acquisition.
The extent of COVID-19 effects on elective services, suppliers, staffing, acquisitions, reimbursement and liquidity beyond the reporting date.