AdapthHealth Corp. 10-Q Summary
Reporting period: Three and six months ended June 30, 2020; filed August 6, 2020. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Reporting Period
AdaptHealth provides home healthcare equipment, medical supplies and related services across sleep therapy, home medical equipment, respiratory care, diabetes, wound care, urological, ostomy and nutritional supplies. It serves Medicare, Medicaid and commercial insurance beneficiaries and reported approximately 1.6 million annual patients through 220 locations in 38 states as of June 30, 2020.
Comparability with 2019 is significantly affected by acquisitions, including SleepMed and Choice in 2019 and Patient Care Solutions, Healthline and Advanced Home Care in 2020. The November 2019 business combination was accounted for as a reverse recapitalization.
Financial Performance and Key Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net revenue | $232.1 million | $124.2 million | $423.6 million | $243.7 million |
| Revenue growth | 87.0% | — | 73.8% | — |
| Operating income | $16.5 million | $14.9 million | $25.8 million | $20.3 million |
| Operating margin | 7.1% | 12.0% | 6.1% | 8.2% |
| Net income attributable to AdaptHealth | $4.0 million | $(2.1) million | $3.9 million | $(7.9) million |
| Diluted EPS | $0.08 | $(0.10) | $0.08 | $(0.44) |
| Adjusted EBITDA | $42.6 million | $29.5 million | $73.1 million | $57.7 million |
| Adjusted EBITDA less patient equipment capex | $30.6 million | $18.1 million | $48.1 million | $35.0 million |
Cost of net revenue was 85.1% of revenue in Q2 and 86.0% for the six-month period, compared with 82.3% and 83.1%, respectively, in the prior-year periods. The higher consolidated cost ratio primarily reflected the Patient Care Solutions integration and operating losses; PCS cost of net revenue exceeded its revenue during the period.
- Q2 revenue mix was 69% point-in-time sales and 31% fixed monthly equipment reimbursements, compared with 59% and 41% in the prior-year quarter.
- Q2 revenue by service line included sleep of $107.1 million, respiratory of $49.0 million, supplies to the home of $34.2 million, HME of $26.0 million and other revenue of $15.9 million.
- Private insurance represented approximately 64% of Q2 revenue, government payors 26%, and patient pay 10%.
Cash Flow, Liquidity and Debt
| Metric | Six Months 2020 | Six Months 2019 |
|---|---|---|
| Cash provided by operating activities | $111.0 million | $26.0 million |
| Cash used in investing activities | $(117.3) million | $(38.7) million |
| Cash provided by/(used in) financing activities | $40.0 million | $(10.4) million |
| Ending cash and cash equivalents | $110.6 million | $2.2 million |
- Operating cash flow benefited from approximately $46 million to $47 million of recoupable CMS advance payments and approximately $17.2 million of CARES Act provider relief funds. Approximately $63 million of these amounts was recorded in other current liabilities at June 30, 2020.
- Investing cash flow included $107.5 million of acquisition spending and $10.9 million of equipment and fixed-asset purchases.
- Gross long-term debt was $445.8 million at June 30, 2020, including $295.6 million of secured term loans, $12.0 million drawn on the revolver and $143.5 million of note payable debt. Capital lease obligations totaled $22.8 million.
- Working capital was $6.5 million at June 30, 2020, down from $30.5 million at December 31, 2019. Accounts receivable increased to $119.2 million from $78.6 million, including $16.8 million of unbilled revenue.
- Management stated that expected operating cash flow, cash balances and available credit were sufficient to fund operations and growth for at least the next 12 months. The company was in compliance with debt covenants at June 30, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue increased 87.0% in Q2 and 73.8% for the six-month period, primarily from acquisitions, organic CPAP resupply growth and COVID-19-related respiratory equipment demand.
- Operating income increased in dollars but operating margin declined because acquisition-related costs, PCS integration losses, higher supplies expense and public-company costs grew faster than revenue.
- The company moved from a net loss attributable to AdaptHealth in 2019 to positive net income in 2020. Lower interest expense also benefited results because 2019 included significant non-cash fair-value losses on interest-rate swaps.
- Goodwill increased to $342.9 million from $266.8 million, principally from 2020 acquisitions. No goodwill impairment was recorded.
- In June 2020, an investor exchanged 15.8 million Class A shares for 158,105 shares of non-voting Series B-1 convertible preferred stock, convertible generally at 100 Class A shares per preferred share subject to ownership limitations.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance is provided in the filing.
- COVID-19 reduced demand for elective-related services, including new CPAP starts and certain HME products, while increasing demand for oxygen, ventilators and other respiratory equipment. The company reduced its workforce by approximately 6% in April 2020 and recorded approximately $1.6 million of severance and related costs.
- CARES Act provider relief funds are subject to restrictions, reporting requirements and potential recoupment. CMS advance payments are expected to begin recoupment in the third quarter of 2020.
- A subsidiary representing less than 2% of annual revenue received a June 2020 notice suspending Medicare payment privileges based on alleged billing for services not rendered or medically unnecessary and improper solicitation. The company planned to submit a rebuttal, but reinstatement was not assured.
- The company disclosed two material weaknesses in internal control over financial reporting: ineffective review controls for non-routine transactions and deficiencies in IT general controls, including user access and segregation of duties. Remediation was underway but not complete.
- An ongoing U.S. Attorney investigation concerns historical ventilator billing practices. The company has cooperated and cannot assure that the matter will not progress.
- Key ongoing risks include Medicare and Medicaid reimbursement changes, payor audits and recoupments, competitive bidding, supplier concentration, acquisition integration, goodwill impairment, leverage and variable interest rates, cybersecurity, healthcare fraud-and-abuse compliance and the Corporate Integrity Agreement applicable to a subsidiary through 2022.
Subsequent Events
- In July 2020, the company raised approximately $190 million through a private placement, $35 million through Series B-2 preferred stock and $134 million net through a public offering of Class A common stock.
- On July 1, 2020, the company acquired Solara Medical Supplies for approximately $380.7 million in cash plus 3.9 million Class A shares and acquired ActivStyle for $65.5 million in cash. Following these acquisitions, management reported approximately 1.7 million annual patients through 251 locations in 40 states.
- On July 29, 2020, the company issued $350 million of 6.125% senior unsecured notes due 2028 and refinanced its credit facilities with a $250 million term loan and $200 million revolving commitment due in 2025. No amounts were drawn on the new revolver at issuance.
- The company announced redemption of outstanding public warrants for $0.01 per warrant on September 2, 2020; exercises following the notice were required to be cashless.
Most Important Facts for Investors to Verify
- Whether PCS integration losses improve and whether acquisitions produce the expected revenue growth, synergies and margins.
- The timing and amount of CMS advance-payment recoupments and whether CARES Act provider relief funds must be returned.
- The outcome of the Medicare payment suspension, ventilator billing investigation and other payor or regulatory audits.
- Progress in remediating the two disclosed material weaknesses in internal control over financial reporting.
- Post-refinancing leverage, interest expense, covenant compliance and cash requirements following the Solara and ActivStyle acquisitions.
- The sustainability of COVID-19-related respiratory demand and the effect of returning elective procedures on the company’s product mix.
- Potential goodwill impairment and the valuation and integration risks associated with the 2020 and July 2020 acquisitions.