Aveanna Healthcare Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: 13 weeks ended July 1, 2023; six-month comparison is against the six months ended July 2, 2022. Aveanna provides pediatric and adult home healthcare, hospice, therapy, and medical products through Private Duty Services (PDS), Home Health & Hospice (HHH), and Medical Solutions (MS). Figures below are unaudited and in U.S. dollars.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $471.9M | $443.0M | $938.4M | $893.5M |
| Gross margin | $155.3M; 32.9% | $145.0M; 32.7% | $299.7M; 31.9% | $289.9M; 32.4% |
| Operating income (loss) | $37.5M | $(456.4)M | $55.1M | $(442.6)M |
| Net income (loss) | $25.6M | $(473.9)M | $(6.4)M | $(448.6)M |
| Adjusted EBITDA (non-GAAP) | $35.9M | $37.0M | $64.3M | $74.9M |
| Net cash from operating activities | Not presented separately by quarter | $(3.0)M | $(29.4)M |
Q2 diluted earnings per share were $0.13; six-month diluted loss per share was $0.03. Prior-year operating and net losses included a $470.2M non-cash goodwill impairment charge, so the large year-over-year improvement does not represent a comparable increase in underlying earnings. Q2 interest expense, net, rose to $37.9M from $22.8M; six-month expense increased to $73.8M from $45.1M.
Liquidity and debt at July 1, 2023: Cash was $28.0M. Current assets were $301.3M versus current liabilities of $355.6M. Debt principal totaled $1.479B, including $1.319B of term loans and $160.0M drawn under the receivables securitization facility; the revolving facility had no balance. Reported revolving borrowing capacity was approximately $162.0M, with a further $15.0M available under the securitization facility. Management said cash, operating flows, and facility availability should be sufficient for at least 12 months. The company was in compliance with financial covenants at quarter-end.
Material changes and operating performance
- Q2 revenue rose 6.5%. PDS revenue increased 8.5%, supported by 2.7% higher care hours and a 5.8% higher revenue rate. MS revenue grew 15.9%, with patient volume up 9.0%. HHH revenue fell 9.7%, primarily on lower volume.
- For the first six months, revenue grew 5.0%, but gross margin percentage declined 0.5 percentage points to 31.9% and Adjusted EBITDA fell 14.1%. HHH revenue declined 12.9% and its gross margin percentage fell 1.9 percentage points.
- Q2 Field contribution, a non-GAAP measure, increased 14.2% to $64.0M; its margin rose to 13.6% from 12.7%. Corporate expenses fell 27.2% to $26.4M, reflecting lower transition, integration, share-based compensation, and professional-service costs.
- Operating cash use improved year over year, but remained negative. The filing attributes the improvement partly to working-capital changes, deferred monthly term-loan interest, and a one-time deferral of employee medical-plan payments. Cash used in investing was $6.1M; financing provided $17.9M.
Outlook, risks, contingencies, and unusual items
- No numerical earnings or revenue guidance is provided. Management identifies labor availability and wage inflation, reimbursement rates and payer mix, collections, regulation, and substantial debt as important uncertainties.
- Debt is variable-rate; stated rates at July 1 were 8.89% on the extended term loan and 12.14% on the second-lien loan. Interest-rate swaps and caps provide partial protection. The company transitioned debt and derivative benchmarks from LIBOR to SOFR; management did not expect a material impact. On July 31, 2023, after quarter-end, the securitization facility maturity was extended to July 31, 2026, with its $175M maximum unchanged.
- A proposed federal Medicaid rule would require at least 80% of payments for personal care and similar services to go to direct-care-worker compensation. The effect depends on the final rule; the company says it could be adverse or improve access to services. ARPA recovery funds contributed $2.0M to Q2 revenue and $4.7M to first-half revenue; future receipts are uncertain and depend on compliance with funding terms.
- Government matters include a longstanding DOJ Antitrust Division investigation concerning nurse wages, reimbursement, and hiring, and a July 2023 Civil Investigation Demand concerning a hospice subsidiary’s Medicare claims and alleged referral-related remuneration. Management says it is cooperating, does not consider a loss probable, and cannot estimate a possible loss or outcome.
- Other matters include a $7.9M arbitration award the company intends to appeal, a confidential settlement of a Texas judgment, and $6.8M held in escrow for IRS audits under appeal. The filing says additional tax amounts above escrow may be payable, subject to contractual reimbursement rights. Insurance reserves totaled $94.0M.
- Disclosure controls were deemed ineffective because of a previously reported material weakness in IT general controls and controls over information used in business and management reviews. Remediation is underway; the weakness is not considered remediated until controls operate effectively and are tested. Management reported no related financial-statement misstatements.
Important facts for investors to verify
- Whether PDS and MS growth can offset continued HHH volume weakness, and whether labor costs allow margins to hold.
- Cash conversion, receivables and DSO (46.2 days at July 1), especially given first-half operating cash outflow and working-capital effects.
- Debt service capacity and exposure to floating rates, including the effect of derivative settlements and facility availability.
- Developments and potential financial exposure from DOJ inquiries, litigation, arbitration, and IRS audits.
- Progress in remediating the material weakness and the final requirements and impact of the proposed Medicaid rule.