Aveanna Healthcare Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: 13 weeks ended October 2, 2021; year-to-date period covers January 3 through October 2, 2021. Comparisons are with the periods ended September 26, 2020. Financial statements are unaudited. Amounts below are in millions unless noted.
Business context and performance
Aveanna provides pediatric and adult home-based healthcare and related products through Private Duty Services (PDS), Home Health & Hospice (HHH), and Medical Solutions (MS). Growth in HHH reflects acquisitions, including Doctor’s Choice in April 2021, and makes comparisons with 2020 less like-for-like.
- Q3 revenue: $411.3 million, up 12.4%. PDS revenue was $327.1 million (down 0.6%), HHH $47.0 million, and MS $37.1 million (up 14.9%).
- Q3 profitability: Gross margin was $139.7 million, or 34.0% of revenue, versus $114.1 million and 31.2% a year earlier. Operating income was $18.3 million (4.5% margin), compared with $12.9 million (3.5%). Net income was $2.1 million, versus a $7.4 million loss; diluted EPS was $0.01.
- Nine-month results: Revenue was $1,264.5 million, up 17.9%; gross margin was $418.0 million (33.1%), versus $328.3 million (30.6%). Operating income was $76.9 million, compared with an operating loss of $21.2 million; net income was $9.1 million, versus a net loss of $47.3 million.
- Non-GAAP measure: Adjusted EBITDA was $45.8 million in Q3 versus $40.0 million, and $138.4 million for nine months versus $107.2 million. The company’s adjustments include items such as acquisition and integration costs, stock compensation, and debt-related costs; the measure is not a substitute for GAAP results.
- Segment trends: Q3 PDS hours declined 4.4%, which management attributed primarily to caregiver recruitment and retention pressures, while higher reimbursement rates supported revenue per hour. MS unique patients rose 11.4%. Q3 segment gross margins were 30.7% for PDS, 48.7% for HHH, and 43.8% for MS.
Cash flow, debt, and liquidity
- Operating cash flow: $22.2 million for nine months, down from $118.1 million. Management cited working-capital timing, prior-year deferred payroll taxes, repayments of Medicare advances, and other period-to-period items.
- Investing and financing: Investing used $113.5 million, including $103.2 million for acquisitions. Financing provided $75.7 million, including $477.7 million of IPO proceeds and significant term-loan repayments. Cash declined $15.6 million to $121.7 million.
- Debt: At October 2, term-loan principal was $860.0 million, with $838.3 million of long-term obligations net of issuance costs and current portion. The loan bears variable interest; its reported rate was 4.25%. No revolver borrowings were outstanding. The company reported compliance with financial covenants.
- Liquidity: Cash of $121.7 million plus $180.2 million available under the revolving facility resulted in reported total liquidity of $301.9 million. Current liabilities were $219.6 million.
- Other obligations: Deferred payroll taxes totaled $51.4 million, payable in two 50% installments by December 31, 2021 and December 31, 2022. Remaining acquired-company Medicare advances were $6.9 million.
Material changes, outlook, and risks
- The May 2021 IPO generated $477.7 million net proceeds. The company used $407.0 million to repay debt. In July, it refinanced remaining first-lien loans into an $860 million term loan maturing in 2028, at a lower stated margin, and established a $200 million delayed-draw facility that was undrawn at quarter-end.
- Q3 operating income improved alongside higher gross margin and field contribution, but branch and regional administrative expense grew faster than revenue, partly reflecting the higher support costs of HHH operations. Nine-month 2020 results included a $75.7 million goodwill impairment; 2020 net income also included a $50 million legal settlement, both affecting year-over-year comparisons.
- Management said it expected to continue incurring COVID-related costs through the remainder of 2021, including workforce retention, protective equipment, vaccination and testing compliance costs. It identified caregiver availability, wages, patient demand, referral access, and Medicaid reimbursement as potential pressures. The filing provides no quantitative earnings or revenue guidance.
- Federal vaccination requirements and legal challenges to them could affect staffing and operating costs; the filing noted a court stay of the OSHA standard at the time. Management also warned of possible conflicts between federal requirements and state restrictions.
- After quarter-end, the company agreed to acquire Comfort Care and related businesses for approximately $345 million in cash, subject to customary conditions. It also agreed to acquire Accredited Nursing Services for $180 million plus $45 million held in escrow, subject to volume reconciliation and closing conditions. These transactions were pending, not completed, as of the filing.
- After quarter-end, the company entered a receivables financing facility with up to $150 million of capacity, subject to borrowing-base requirements, maturing in November 2024.
- Contingencies include a disputed potential $75 million termination fee from a previously terminated acquisition agreement, ongoing acquisition-related litigation with uncertain outcome, routine litigation, and a DOJ Antitrust Division investigation into nurse wages, reimbursement rates, and hiring in certain markets. Management said it could not predict the outcomes or estimate potential losses for certain matters.
Important facts for investors to verify
- Whether caregiver recruitment and retention improve, and how staffing constraints affect PDS service hours, revenue, and labor costs.
- How much reported growth and margin improvement is attributable to acquisitions versus underlying organic performance, particularly in HHH.
- Cash conversion and receivables collection trends: patient accounts receivable rose to $189.0 million, and reported days sales outstanding increased to 43.4 from 37.9 a year earlier.
- Funding, leverage, and integration implications of the pending acquisitions, including the Comfort Care and Accredited transaction terms and the new receivables facility.
- Potential cash requirements from deferred payroll taxes, Medicare advance repayments, legal matters, and COVID-related compliance obligations.