Aveanna Healthcare Holdings, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Aveanna provides pediatric and adult home-based healthcare, hospice, therapy, and enteral nutrition services across 33 states. This unaudited report covers the 13 weeks ended April 1, 2023; the comparable period ended April 2, 2022. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $466.4 million | $450.5 million |
| Gross margin | $144.5 million; 31.0% | $144.8 million; 32.1% |
| Operating income | $17.6 million; 3.8% of revenue | $13.8 million; 3.1% of revenue |
| Net income (loss) | $(32.0) million; $(0.17) per share | $25.3 million; $0.14 per share |
| Adjusted EBITDA (non-GAAP) | $28.5 million | $38.0 million |
| Cash from operating activities | $7.5 million | $(9.5) million |
Cash and cash equivalents were $34.4 million at April 1, 2023, up from $19.2 million at December 31, 2022. Investing activities used $4.8 million and financing activities provided $12.5 million; cash increased by $15.2 million during the quarter.
Total indebtedness, including the securitization facility, was $1.477 billion; the weighted-average interest rate was 9.5%, versus 8.9% at the prior-year comparison date. Term-loan principal was $1.322 billion and securitization borrowings were $155.0 million. Revolver borrowings were zero, with approximately $162 million of borrowing capacity; securitization availability was $20 million. The company reported covenant compliance. Interest expense was $36.0 million, compared with $22.4 million.
Changes versus the prior comparable period
- Revenue rose 3.5%, but cost of revenue grew faster, at 5.3%; gross margin declined slightly and gross margin percentage fell 1.1 percentage points.
- PDS revenue increased 6.5%, reflecting 1.8% higher care hours and a 4.7% higher revenue rate. Higher caregiver costs contributed to a 4.9% increase in cost per hour.
- HHH revenue fell 15.8%, primarily on lower volume; gross margin percentage declined from 48.7% to 44.6%.
- Medical Solutions revenue increased 10.7%, supported by 9.0% more unique patients; its gross margin percentage declined from 41.7% to 40.8%.
- Field contribution, a non-GAAP measure, decreased 5.9% to $52.8 million, and its margin fell from 12.4% to 11.3%. Lower corporate expense and depreciation helped lift operating income.
- Net results swung from profit to loss. Higher interest expense and a reversal from derivative valuation gains to losses outweighed improved operating income. Other expense was $12.2 million, compared with other income of $36.5 million; derivative mark-to-market movements are non-cash and volatile.
- Payer mix shifted toward Medicaid managed care: 54.6% of revenue versus 49.5%; Medicare’s share declined to 12.6% from 18.3%.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no specific revenue, earnings, or cash-flow guidance. Management said cash, operating cash flows, and available credit were expected to meet requirements for at least the next 12 months, while noting future capital needs and financing access are uncertain.
- Liquidity demands: The company expected to post up to $7.9 million of cash collateral for an appellate bond during Q2 2023. It also funded approximately $6.8 million into escrow in April for IRS tax audits under appeal. These amounts restrict cash available for general use.
- Litigation: A $19.8 million Texas judgment is under appeal; an $18.4 million garnishment was reversed and the funds returned, with $3.4 million of cash collateral remaining for the appellate bond. A separate $7.9 million arbitration award is also under appeal. Management did not expect these matters to materially affect the financial statements, but acknowledged litigation outcomes are uncertain.
- Other legal and regulatory matters: The company is cooperating with a DOJ Antitrust Division investigation concerning nurse wages, reimbursement rates, and hiring in certain markets; it could not predict the outcome or any possible loss. A March 2023 confidential settlement resolved acquisition-related litigation; $6.8 million was subsequently placed in escrow for IRS audits. The company also carries $94.3 million of insurance reserves.
- Reimbursement and labor: Risks include changes to Medicare and Medicaid rates or payment models, payer mix, caregiver shortages and wage inflation, and collection delays. A proposed HHS Medicaid rule would require states to assure at least 80% of payments for personal care and similar services go to direct-care-worker compensation. Its final form and effects are not yet known.
- Debt and rates: Substantial variable-rate debt exposes the company to rising interest costs. Interest-rate swaps and caps provide some protection, but derivative fair-value changes affect reported earnings. LIBOR transition could also affect credit facilities.
- Internal controls: Disclosure controls were reported ineffective due to a previously identified material weakness in IT general controls and controls over information used in financial reporting. Remediation was in progress; management said no financial-statement misstatements were identified and prior statements were not changed.
- Other unusual items: The company recognized $2.7 million of state ARPA funds as revenue, down from $3.1 million. Future receipts are uncertain and depend on compliance with funding conditions. The company recorded $2.1 million of restructuring costs in Q1.
Most important facts for investors to verify
- Whether PDS labor costs and HHH volume stabilize, and whether segment margin deterioration continues.
- Cash collection and receivables trends: patient accounts receivable rose to $241.8 million from $221.2 million; reported DSO was 45.2 days, versus 44.5 days at year-end.
- Interest expense, variable-rate exposure, derivative settlements, and covenant-related limits on revolver availability.
- Cash requirements and outcomes for the Texas appeal, arbitration appeal, and IRS audits, including the escrow and appellate-bond collateral.
- Progress in remediating the material weakness and whether the relevant controls operate effectively over a sufficient testing period.
- The final terms and implementation of the proposed Medicaid payment rule and any resulting reimbursement or compensation effects.