Business Context and Reporting Period
AdaptHealth Corp. filed its Form 10-K for the fiscal year ended December 31, 2019. The company provides home healthcare equipment, supplies and related services, including sleep therapy, respiratory and oxygen services, home medical equipment, and other chronic-care supplies. At year-end, it served approximately 1.2 million patients annually in 49 states through 173 locations.
The November 8, 2019 Business Combination with AdaptHealth Holdings was accounted for as a reverse recapitalization. Accordingly, historical results primarily reflect AdaptHealth Holdings, while the public-company structure and related costs began in late 2019.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | $529.6 million | $345.3 million | +53.4% |
| Operating income | $29.7 million | $31.1 million | -4.5% |
| Operating margin | 5.6% | 9.0% | -3.4 pts |
| Net income attributable to AdaptHealth Corp. | $(15.0) million | $23.3 million | Decline of $38.3 million |
| Net margin | (2.8%) | 6.7% | -9.5 pts |
| Adjusted EBITDA | $123.0 million | $84.4 million | +45.7% |
| Adjusted EBITDA less patient equipment capex | $75.6 million | $45.1 million | +67.6% |
| Net cash provided by operating activities | $60.4 million | $68.4 million | -11.7% |
Revenue was composed of approximately 60% point-in-time sales and 40% fixed monthly equipment reimbursements, compared with 55% and 45%, respectively, in 2018. Sleep-related revenue was $305.4 million, or 57.7% of total revenue. Government programs, including Medicare and Medicaid, represented approximately 32% of revenue; private insurance represented approximately 57% and patient pay approximately 11%.
Fourth-quarter revenue was $149.5 million, compared with $108.7 million in the fourth quarter of 2018. The filing does not provide a clear fourth-quarter net income or operating margin in the supplied text.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $76.9 million at December 31, 2019, compared with $25.2 million at December 31, 2018.
- Working capital was $30.5 million, compared with a working-capital deficit of $44.9 million in 2018.
- Total debt, including the current portion and net of deferred financing costs, was $396.8 million; total long-term debt including the current portion was reported as $396.8 million.
- Debt included $246.3 million of secured term loans, $12.0 million drawn on the revolver, and $143.5 million of promissory notes. The promissory notes generally mature in November 2029 and carry 12% interest, with 6% payable in cash and 6% payable in kind through the seventh anniversary.
- The company had $160.5 million available under its credit facilities at year-end, including $100.0 million under the delayed-draw term loan and approximately $60.5 million under the revolver after letters of credit.
- Net cash used in investing activities was $84.9 million, including $63.5 million for acquisitions and $21.3 million for equipment and other fixed assets.
- Management stated that expected operating cash flow, existing cash and available credit were sufficient to fund operations and planned growth for at least the next 12 months. The company was in compliance with its debt covenants at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $184.4 million, primarily from acquisitions, which contributed approximately $156.3 million, with the remainder attributed to organic growth.
- Cost of net revenue improved to 83.1% of revenue from 85.0%, but general and administrative expense rose to 10.7% from 5.2% because of acquisition support costs, public-company expenses, equity compensation and transaction costs.
- Interest expense increased to $39.3 million from $7.5 million, reflecting higher debt balances, the 2019 recapitalization and an $11.4 million noncash change in the fair value of interest-rate swaps.
- The company completed 18 acquisitions for approximately $67 million of aggregate consideration, compared with 21 acquisitions for approximately $171 million in 2018.
- Goodwill increased to $266.8 million from $202.4 million. No goodwill impairment was recorded.
- ASC 606 was adopted on January 1, 2019 using the modified retrospective method. Approximately $27.5 million of estimated uncollectible amounts were presented as reductions of revenue rather than as doubtful-account expense; prior periods were not restated.
- Cash flow from operations declined despite higher adjusted EBITDA, primarily because of the net loss, higher transaction and interest costs, and increased investment in operating assets.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal numerical revenue, earnings or margin guidance. Management’s strategy emphasizes organic growth, continued acquisitions, technology-enabled operating efficiencies, expanded product offerings and value-based reimbursement arrangements.
- In January 2020, the company acquired McKesson’s Patient Care Solutions business for approximately $15 million, expanding into wound care, ostomy, urological, incontinence, diabetic-care and breast-pump supplies. Management stated that the acquisition increased annual patient coverage to approximately 1.4 million across all 50 states.
- Additional acquisitions announced after year-end included Advanced Home Care for approximately $67.5 million and Healthline Medical Equipment for approximately $38.4 million, subject to deferred, escrow and contingent consideration.
- CMS Round 2021 competitive bidding was scheduled to begin January 1, 2021. The company estimated that approximately $145 million of 2019 revenue related to items in affected competitive-bidding areas, creating potential reimbursement and market-access risk.
- The company faces substantial Medicare, Medicaid and private-payor reimbursement, documentation, audit, licensing, fraud-and-abuse and healthcare-regulatory risks. A pending EDPA investigation concerns historical ventilator billing practices; the company could not assure that the matter would not proceed further.
- A subsidiary remains subject to a Corporate Integrity Agreement that expires in April 2022. Noncompliance could result in monetary penalties or exclusion from federal healthcare programs.
- Management identified a material weakness in internal control over financial reporting relating to the timeliness of review controls over non-routine transactions. Disclosure controls were deemed ineffective, and remediation was ongoing.
- The company had approximately $10.8 million recorded for obligations under its Tax Receivable Agreement, which generally requires payment of 85% of realized tax savings to specified holders and could create significant future liquidity obligations.
- Goodwill represented approximately $266.8 million of assets, and the company’s total stockholders’ equity was a deficit of $29.2 million at year-end.
- The company identified potential supply-chain disruption from the coronavirus outbreak affecting suppliers’ facilities in China, although the ultimate impact was not estimable at filing.
Most Important Facts for Investors to Verify
- Reconcile reported revenue growth and margin trends after separating acquired revenue, organic growth, ASC 606 presentation effects and public-company costs.
- Review debt maturities, variable-rate exposure, cash-versus-PIK interest requirements, covenant thresholds and the company’s ability to fund ongoing acquisitions.
- Assess the sustainability of adjusted EBITDA, including the sizable add-backs for equity compensation, transaction costs, severance, debt extinguishment and other unusual items.
- Monitor CMS competitive-bidding results, reimbursement rates, documentation requirements, audits and any resulting revenue or margin pressure.
- Track remediation of the material weakness and the company’s ability to establish effective controls following the reverse recapitalization.
- Evaluate the EDPA ventilator-billing investigation, the subsidiary’s Corporate Integrity Agreement and other regulatory contingencies.
- Review the Tax Receivable Agreement, potential acceleration provisions and future cash payments to its holders.
- Verify integration and financing outcomes for the PCS, Advanced Home Care and Healthline acquisitions completed or announced after year-end.