Business Context and Reporting Period
AdaptHealth Corp. filed its Form 10-K for the fiscal year ended December 31, 2020. The company provides home healthcare equipment, medical supplies and chronic disease management services across sleep therapy, diabetes, respiratory care, home medical equipment and other supplies. At year-end, it served approximately 1.9 million patients annually through 283 locations in 42 states. The filing is an annual report, not a standalone fourth-quarter filing.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenue | $1,056.4 million | $529.6 million | +99.5% |
| Operating income | $71.3 million | $29.4 million | +142.9% |
| Operating margin | 6.8% including grant income; 5.3% based on net revenue | 5.5% | Comparison affected by $14.3 million of 2020 grant income |
| Net loss attributable to AdaptHealth | $64.5 million | $17.1 million | Loss increased |
| Basic and diluted loss per share | $1.23 loss | $0.76 loss | Loss increased |
| Net cash from operating activities | $195.6 million | $60.4 million | +223.8% |
| Adjusted EBITDA | $205.6 million | $123.0 million | +67.1% |
| Adjusted EBITDA less patient equipment capex | $142.5 million | $75.6 million | +88.5% |
| Cash and cash equivalents | $100.0 million | $76.9 million | +30.0% |
| Total debt, including current portion | $784.7 million | $396.8 million | +97.8% |
Revenue mix shifted materially toward point-in-time sales: net sales revenue represented 71.9% of 2020 revenue versus 59.7% in 2019, while fixed monthly equipment reimbursements declined to 28.1% from 40.3%. Insurance revenue was $657.0 million, government revenue was $295.7 million and patient-pay revenue was $103.7 million. Private third-party payors represented approximately 62% of revenue and Medicare and Medicaid approximately 28%.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by acquisitions, which contributed approximately $450.2 million of 2020 revenue, organic CPAP resupply growth and $36.5 million of COVID-19-related respiratory equipment sales.
- AdaptHealth completed acquisitions involving 22 companies for approximately $941.5 million of total consideration, including $790.6 million in cash, $123.9 million in equity and $27.1 million in contingent consideration. Major transactions included PCS, Advanced Home Care, Solara, ActivStyle and Pinnacle.
- Cost of net revenue increased to 85.0% of revenue from 83.1%, reflecting a higher mix of product and supply sales. General and administrative expense declined to 8.5% of revenue from 10.7% despite higher absolute spending.
- Net loss increased primarily because of a $98.7 million non-cash increase in the fair value of contingent consideration common shares, higher transaction and equity-based compensation costs, and greater interest expense.
- Goodwill increased to $998.8 million from $266.8 million, primarily from acquisitions. No goodwill or long-lived asset impairment charges were recorded.
- The company reported material weaknesses in internal control over financial reporting involving non-routine transactions, information technology controls and accounts payable processes. The IT weakness was remediated as of December 31, 2020; the other weaknesses remained unremediated.
- Previously issued 2020 quarterly financial information was restated for the liability classification and fair-value accounting of contingent consideration common shares. The correction affected reported earnings, assets, liabilities and equity, but not revenue, operating income or cash flows.
Cash Flow, Debt and Liquidity
Operating cash flow was $195.6 million, while investing cash flow was negative $815.7 million, including $769.3 million for acquisitions and $39.8 million for equipment and fixed assets. Financing cash flow was positive $643.2 million, supported by debt, equity and senior note issuances. Working capital was negative $58.8 million at year-end compared with positive working capital of $27.4 million in 2019.
At December 31, 2020, debt included $248.4 million of secured term loans, $55.0 million drawn on the revolving facility, $350.0 million of 6.125% senior unsecured notes due 2028 and $143.5 million of notes payable. The company stated that operating cash flow, cash on hand and available credit were expected to fund operations and growth for at least the next twelve months, although additional financing may be needed for acquisitions.
Subsequent to year-end, AdaptHealth issued $500.0 million of 4.625% senior notes due 2029, raised $265.6 million net from an equity offering and entered into a new credit agreement with a $700.0 million term loan and a $250.0 million revolver. These financings helped fund the AeroCare acquisition and refinance existing debt.
Guidance, Outlook, Commentary and Risks
- Management emphasized continued growth through acquisitions, market-share gains, technology-enabled operating improvements, broader product offerings and value-based reimbursement arrangements.
- CMS largely canceled the planned 2021 DMEPOS competitive bidding awards except for off-the-shelf knee and back braces. Management viewed the resulting maintenance of current reimbursement rates as significantly positive and expected the brace impact to be immaterial.
- COVID-19 reduced elective-related demand, including new CPAP starts and certain HME and orthopedic products, but increased respiratory demand, CPAP resupply activity and sales to hospitals. The company reduced its workforce by approximately 6% in April 2020 and incurred approximately $1.6 million of severance costs.
- AdaptHealth received approximately $46 million of recoupable CMS advance payments and approximately $17 million of Provider Relief Fund payments. It recognized $14.3 million of grant income and deferred $2.7 million. Changes in HHS reporting requirements could require reversal or repayment of some recognized funds.
- On February 1, 2021, the company acquired AeroCare for approximately $1.1 billion in cash, 13.99 million Class A shares, Series C preferred stock and options. Integration, financing, leverage and realization of expected synergies are significant post-year-end risks.
- Material legal and regulatory matters include ongoing investigations concerning ventilator billing and AeroCare oxygen-tank billing, Medicare payment suspensions involving two acquired subsidiaries representing less than 2% of annual revenue, and continuing healthcare compliance, audit, documentation and False Claims Act exposure.
- Other principal risks include reimbursement reductions, payor contract termination or pricing pressure, supplier concentration, cybersecurity and privacy incidents, acquisition integration, goodwill impairment, variable-rate debt and LIBOR transition, liquidity constraints, and the company’s material weaknesses in internal controls.
Most Important Facts to Verify
- Reconcile GAAP net loss with Adjusted EBITDA and assess the recurring nature of the substantial add-backs, particularly the $98.7 million contingent consideration charge.
- Evaluate post-AeroCare leverage, debt maturities, interest rates, covenant compliance and the cash funding required for the acquisition.
- Verify the sustainability of operating cash flow after excluding CARES Act advances, Provider Relief Fund receipts and acquisition-related working-capital effects.
- Review the status and potential financial exposure of the EDPA and WDKY investigations, Medicare payment suspensions and other reimbursement audits.
- Monitor remediation of the non-routine transaction and accounts payable material weaknesses and the effect of the 2020 quarterly restatements.
- Assess whether reimbursement rates, CPAP resupply volumes, private-payor pricing and the shift toward supply sales support the reported margin profile.
- Confirm the final purchase accounting and integration results for AeroCare, including goodwill, intangible assets, dilution and any contingent liabilities.