Business Context and Reporting Period
AdaptHealth Corp. provides healthcare-at-home solutions, including sleep therapy, diabetes devices and supplies, respiratory services, home medical equipment, and other medical supplies to Medicare, Medicaid, commercial-insurance, and patient-pay customers. The unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The company served approximately 3.9 million patients annually through 753 locations in 47 states.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $706.2 million | $482.1 million | +46.5% |
| Operating income | $51.6 million | $15.4 million | +234.6% |
| Operating margin | 7.3% | 3.2% | +4.1 percentage points |
| Net income attributable to AdaptHealth | $41.8 million | $(4.0) million | Improved by $45.7 million |
| Basic EPS | $0.29 | $(0.04) | Improved |
| Diluted EPS | $0.08 | $(0.08) | Improved |
| Adjusted EBITDA | $137.6 million | $104.2 million | +32.1% |
| Adjusted EBITDA margin | 19.5% | 21.6% | Declined |
| Net cash provided by operating activities | $66.5 million | $18.4 million | +261.6% |
| Capital expenditures | $77.2 million | $35.6 million | +116.8% |
Revenue growth was concentrated in sleep, diabetes, respiratory, HME, and other services. Total revenue from sleep was $250.3 million, diabetes was $155.3 million, and respiratory was $140.7 million. Net sales revenue represented 67% of total revenue, while fixed monthly equipment reimbursements represented 33%.
Cost of net revenue increased to $597.1 million from $396.7 million and rose to 84.6% of revenue from 82.3%. General and administrative expense declined to $41.4 million from $56.6 million, primarily because of lower transaction costs and equity-based compensation, partially offset by higher professional and labor costs.
Cash and cash equivalents were $119.4 million at March 31, 2022, down from $149.6 million at December 31, 2021. Working capital was approximately $171.4 million. Accounts receivable were $369.9 million, including $19.8 million of unbilled receivables. The company generated $66.5 million of operating cash flow, used $80.1 million in investing activities, and used $16.6 million in financing activities.
Total debt, net of deferred financing fees, was $2.2 billion, consisting of $780.0 million of secured term loans and $1.45 billion of senior unsecured notes. The company had no revolver borrowings, $434.3 million of remaining revolver availability after letters of credit, and was in compliance with its debt covenants. Interest expense was $24.8 million, up from $22.2 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 46.5%, primarily reflecting acquisitions completed after December 31, 2020, including AeroCare, which contributed to the year-over-year comparison.
- Operating income improved substantially, although cost of revenue grew faster than revenue and reduced operating leverage at the gross operating level.
- Adjusted EBITDA increased, but its margin declined due principally to higher product and supply costs, labor costs, patient-equipment depreciation, and other operating expenses.
- Operating cash flow improved by $48.1 million, while capital expenditures more than doubled to support patient equipment and growth.
- The company completed smaller acquisitions for total closing consideration of $2.8 million in Q1 2022, compared with substantial acquisition activity, including AeroCare, in Q1 2021.
- A $26.7 million non-cash gain from the change in fair value of the warrant liability materially benefited Q1 2022 earnings. The comparable Q1 2021 gain was $3.2 million.
- Q1 2021 included a $4.2 million loss on debt extinguishment; no comparable charge occurred in Q1 2022.
- Other loss in Q1 2022 was $5.7 million, including a $4.5 million expense related to the Tax Receivable Agreement liability and an $0.8 million investment write-off.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal quantitative full-year revenue or earnings guidance. Management stated that expected operating cash flows, existing cash, and available credit capacity should be sufficient to fund operations and growth strategies for at least the next twelve months.
- Philips Respironics’ recall of ventilator, BiPAP, and CPAP devices caused supply shortages and materially limited the company’s ability to meet patient demand for affected products.
- COVID-19 continues to create uncertainty. CMS recouped $5.2 million of prior advance payments during the quarter, and $7.5 million remained deferred at March 31, 2022. Previously received CARES Act Provider Relief Funds could be subject to future repayment if requirements or interpretations change.
- The company has substantial goodwill of $3.5 billion. A decline in market capitalization triggered a goodwill impairment assessment; no impairment was recorded at March 31, 2022. Further stock-price declines could result in a material non-cash impairment charge.
- Seasonality may reduce early-year revenue and cash flow because of deductibles, insurance changes, and patient payment responsibility.
- Management reported material weaknesses in internal control over financial reporting, including insufficient resources and risk assessment, information-technology controls, non-routine transaction review, and accounts-payable controls. Disclosure controls were therefore deemed ineffective as of March 31, 2022. Remediation efforts, including an ERP implementation, had begun but were not complete.
- Ongoing or potential contingencies include federal investigations concerning ventilator billing and AeroCare oxygen-tank billing, a shareholder securities class action, and a shareholder derivative action. The company recorded no material accrual for these matters but stated that adverse outcomes are possible.
- The company authorized a share-repurchase program of up to $200 million on May 9, 2022, to be funded from available cash and liquidity.
Most Important Facts for Investors to Verify
- Whether revenue growth remains organic after separating acquisition contributions from underlying growth.
- Whether cost inflation, labor costs, equipment depreciation, Philips product shortages, and reimbursement changes pressure margins.
- The sustainability and cash-conversion quality of Adjusted EBITDA, including the effect of working-capital movements and high capital expenditures.
- Debt maturities, variable-rate exposure, covenant headroom, and the effect of rising interest rates despite existing interest-rate swaps.
- The status and potential financial impact of the reported material weaknesses in internal controls.
- Whether further declines in the share price trigger a goodwill impairment assessment or charge.
- Potential repayment or reversal exposure related to CARES Act funds and CMS advance-payment recoupments.
- Developments in the shareholder litigation and government billing investigations.