Aveanna Healthcare Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: 13 weeks ended April 3, 2021; compared with the 13 weeks ended March 28, 2020. Unaudited. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise noted.
Business context
Aveanna provides pediatric and adult home-based healthcare services across 30 states through Private Duty Services (PDS), Home Health & Hospice (HHH), and Medical Solutions (MS). PDS remains the largest segment. HHH revenue increased substantially following acquisitions completed in 2020.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $417.2 million | $355.2 million |
| Gross margin | $131.7 million; 31.6% | $107.5 million; 30.3% |
| Operating income | $28.3 million; 6.8% of revenue | $17.9 million; 5.0% |
| Net income | $5.8 million; $0.04 diluted EPS | $37.6 million; $0.27 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $43.7 million | $29.8 million |
| Operating cash flow | $(32.9) million | $44.1 million |
- Revenue grew 17.4%. PDS revenue increased 9.5%, HHH 604.0% (largely due to acquisitions), and MS 15.2%.
- Gross margin improved 1.3 percentage points; field contribution, a non-GAAP measure, increased 30.2% to $62.3 million, with margin rising from 13.5% to 14.9%.
- Net income fell 84.6% despite stronger operating income. Q1 2020 included a $50.0 million acquisition-related legal settlement in other income; Q1 2021 did not. Q1 2021 also included a $2.8 million swap valuation gain, versus a $6.4 million loss in Q1 2020.
- Cash and cash equivalents were $67.1 million at April 3, down from $137.3 million at January 2. Current assets were $293.2 million and current liabilities $207.5 million. Reported total liquidity, including available revolver capacity, was $122.3 million.
- Operating cash use reflected working-capital needs, including a $22.9 million increase in patient accounts receivable. Investing cash use was $3.2 million, including $2.7 million of capital expenditures; financing cash use was $34.2 million, including repayment of $29.4 million of government stimulus funds.
- Debt principal was $1.204 billion at April 3; net long-term obligations and notes payable were $1.175 billion. The company had no revolver borrowings and reported covenant compliance. Cash-flow generation and liquidity should be considered alongside the company’s substantial leverage.
Material changes, outlook and risks
- Q1 revenue growth reflected higher PDS volume, acquisitions in HHH and PDS, and MS volume and rate growth. PDS hours increased 11.1%, while its revenue rate declined 1.6%, partly because growth in lower-rate unskilled services diluted average rates. Winter Storm Uri also reduced PDS hours.
- Management said COVID-related incremental costs had declined from Q4 2020 to $1.5 million in Q1 2021 and expected the trend to continue downward over the remainder of 2021. It remained optimistic that vaccination progress could support volume recovery, while identifying uncertainty around caregiver availability, patient acceptance of in-home care, referrals, PPE costs, school closures, and reimbursement.
- No specific earnings or revenue guidance was provided. Management stated it believed operating cash flow, cash on hand and credit availability would meet requirements for the next 12 months, while noting future needs depend on operating results, capital investment and acquisitions.
- COVID relief items included repayment of $25.1 million of Provider Relief Fund payments and $4.3 million of Pennsylvania stimulus funds. Deferred employer Social Security taxes totaled $49.6 million, with half due by December 31, 2021 and half by December 31, 2022. Medicare advances of $4.3 million are subject to repayment through payment offsets.
- On April 16, 2021, after quarter-end, Aveanna acquired Doctor’s Choice for $115.0 million, funded in part by a $67.0 million incremental second-lien borrowing. The May 2021 IPO generated $425.6 million net of underwriting discounts, commissions and offering expenses; a further $45.2 million net was received from the sale of 4.0 million overallotment shares. The company used $307.0 million to repay the second-lien facility and $100.0 million to repay first-lien debt. These are subsequent events, not quarter-end balances.
- Risks and contingencies include reimbursement and payer concentration (Medicaid and Medicaid MCO accounted for 80.6% of Q1 revenue), staffing and wage pressures, COVID-19 disruption, substantial debt and variable interest rates, and integration of acquisitions. The filing also discusses a DOJ Antitrust Division inquiry into nurse wages and hiring, and a disputed potential $75.0 million break-up fee related to a terminated acquisition; the company could not estimate any loss range. Insurance reserves were $79.7 million.
- Disclosure controls were assessed as effective at a reasonable-assurance level. No material changes to the risk factors in the IPO prospectus were reported.
Important facts for investors to verify
- How much of growth and improved margins is sustainable after separating acquisition contributions, temporary Medicaid rate increases and mix effects.
- Whether receivables and operating cash flow improve, given Q1 cash use and the company’s explanation of billing, collection and Electronic Visit Verification-related timing.
- Post-IPO debt, interest expense, cash and revolver availability after debt repayments and the Doctor’s Choice acquisition; Q1 debt and liquidity figures predate these transactions.
- The outcome and potential financial exposure, if any, from the DOJ inquiry and disputed break-up fee claim.
- Share count and dilution following the IPO and overallotment: the filing reports 184,164,184 common shares outstanding as of May 25, 2021.