Aveanna Healthcare Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: The 13-week quarter ended October 1, 2022; comparative quarter ended October 2, 2021. Year-to-date figures cover nine months. Amounts below are in millions unless otherwise noted.
Business context
Aveanna provides pediatric and adult home-based healthcare and related products across three segments: Private Duty Services (PDS), Home Health & Hospice (HHH), and Medical Solutions (MS). PDS generated 81% of Q3 revenue, HHH 11%, and MS 8%.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $443.0 | $411.3 | $1,336.5 | $1,264.5 |
| Gross margin | $134.6 (30.4%) | $139.7 (34.0%) | $424.5 (31.8%) | $418.0 (33.1%) |
| Operating income (loss) | $4.8 | $18.3 | $(437.8) | $76.9 |
| Net income (loss) | $24.3 | $2.1 | $(424.3) | $9.1 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(8.2) | $22.2 |
Q3 revenue grew 7.7%, but cost of revenue rose 13.6%; gross margin fell $5.2 million and operating income declined $13.6 million. Nine-month results include a $470.2 million non-cash goodwill impairment recorded in Q2. The Q3 net profit and year-to-date net loss were significantly affected by non-cash fair-value gains on interest-rate derivatives: other income was $45.1 million in Q3 and $86.5 million year to date. Q3 interest expense, net, increased to $28.3 million from $12.1 million.
At October 1, cash was $63.7 million. Total liquidity, as defined by the company, was $278.9 million, including $32.8 million of securitization availability and $182.4 million of revolver availability. Principal debt was $1,326.3 million under term loans and $140.0 million under the receivables securitization facility. The company reported compliance with financial covenants. It expects to pay the remaining $25.5 million of deferred payroll taxes in December 2022.
Changes, outlook, and risks
- Margins and operations: Field contribution margin declined to 10.2% in Q3 from 15.4%. Management cited caregiver shortages and wage inflation, higher HHH labor costs, increased branch overhead, and lower HHH margin. The company began restructuring branch and regional administration, including severance and office-closure costs.
- Segments: Q3 PDS revenue rose 8.7%, with hours up 7.3%; labor costs grew faster than revenue. HHH revenue rose 6.1%, while gross margin percentage fell to 33.9% from 48.7%. MS revenue rose 1.1%. Year-to-date HHH revenue growth primarily reflected acquisitions; MS revenue declined 3.2%, including effects of payer rate decreases and product recalls.
- Unusual items: Derivative valuation gains were non-cash and sensitive to interest-rate expectations. The company also recorded $2.1 million of Q3 expense for impairment of licenses tied to a legacy billing and collection system. ARPA state funds contributed $5.0 million to year-to-date revenue.
- Outlook: No specific revenue or earnings guidance was provided. Management believes cash, operating cash flows, and available credit should cover requirements for the next 12 months, while noting that future needs depend on operating results and potential acquisitions and additional financing may be required if cash generation is insufficient.
- Key risks and contingencies: Labor availability and wage pressure; Medicaid/Medicare and other payer rates and policy changes; collections and billing-system transitions; substantial variable-rate debt and LIBOR transition; and COVID-19 effects. The company disclosed a DOJ Antitrust Division investigation concerning nurse wages, reimbursement rates, and hiring in certain markets. It also described unresolved acquisition-related litigation, including a disputed potential $75 million termination fee; the company said it could not estimate any loss or range of loss. Routine claims and insurance reserves are also disclosed.
- Financial reporting controls: Disclosure controls were deemed ineffective because of a material weakness in IT general controls for a PDS revenue system and dependent business-process controls. No financial-statement errors were identified. Remediation through implementation of a new revenue system was planned for Q1 2023.
Most important facts to verify
- Whether caregiver staffing, wage costs, and field contribution margins improve, and whether the announced restructuring reduces overhead.
- Cash conversion and collections: year-to-date operating cash flow was negative, and DSO was 47.8 days at quarter-end.
- Debt service and refinancing exposure: reported principal debt of $1.466 billion, variable rates, and the effectiveness of rate caps and swaps.
- Completion of the revenue-system control remediation and whether subsequent filings report any control deficiencies or financial adjustments.
- Developments in the DOJ inquiry and acquisition-related disputes, for which outcomes or potential losses were not estimable in the filing.