AdaptHealth Corp. 10-Q Summary
Business context and reporting period
AdaptHealth provides healthcare-at-home solutions, including sleep therapy, diabetes devices and supplies, respiratory services, home medical equipment, and other chronic-care supplies to Medicare, Medicaid, commercial insurance, and patient-pay customers. The filing covers the unaudited three months ended March 31, 2024. The Company served approximately 4.1 million patients annually through approximately 670 locations in 47 states.
Richard Barasch served as interim Chief Executive Officer during the quarter. Suzanne Foster was appointed Chief Executive Officer effective May 20, 2024; Mr. Barasch intends to resign as a director effective June 30, 2024.
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net revenue | $792.5 million | $744.6 million | 6.4% increase |
| Operating income | $50.5 million | $26.2 million | 93.0% increase |
| Operating margin | 6.4% | 3.5% | Up 290 basis points |
| Net income attributable to AdaptHealth | $(2.1) million | $15.7 million | Declined $17.8 million |
| Net margin attributable to AdaptHealth | (0.3)% | 2.1% | Down 240 basis points |
| Adjusted EBITDA | $158.5 million | $134.0 million | 18.3% increase |
| Adjusted EBITDA margin | 20.0% | 18.0% | Up 200 basis points |
| Cash flow from operations | $49.0 million | $140.2 million | Declined $91.2 million |
| Free cash flow | $(38.9) million | $51.1 million | Declined $90.0 million |
Revenue growth was primarily non-acquired growth of $46.1 million, with acquisitions contributing $1.8 million. Sleep revenue increased 4.0%, respiratory revenue increased 1.6%, and diabetes revenue increased 2.0%. Revenue from capitated arrangements was $32.0 million, compared with an immaterial amount in the prior-year quarter.
Cost of net revenue increased 3.1% to $675.7 million, declining to 85.3% of revenue from 88.0%. General and administrative expense increased 1.8% to $48.4 million, or 6.1% of revenue versus 6.4%. Depreciation and amortization excluding patient equipment depreciation declined 26.8% to $11.4 million, primarily due to lower intangible amortization.
Reported earnings were affected by a $7.5 million non-cash increase in the fair value of the warrant liability, compared with a $21.9 million non-cash gain in Q1 2023; a $6.5 million non-cash goodwill impairment charge; $5.1 million of other loss, including litigation-related items; and income tax expense of $6.6 million versus a $1.7 million benefit in the prior-year quarter.
Liquidity, debt, and balance sheet
- Cash was $79.6 million at March 31, 2024, compared with $77.1 million at December 31, 2023.
- Working capital was approximately $163.3 million, compared with $112.0 million at year-end 2023.
- Total debt, net of deferred financing fees, was $2.20 billion, comprising a $695.0 million term loan, $75.0 million drawn on the revolver, and $1.45 billion of senior unsecured notes.
- The term loan and revolver mature in January 2026. The Company made $25.0 million of term-loan repayments during the quarter and an additional voluntary $15.0 million repayment in April 2024.
- The $75.0 million revolver borrowing was repaid in April 2024. As of the filing date, no revolver borrowings were outstanding, although $21.6 million of letters of credit remained outstanding.
- The Company was in compliance with its debt covenants at March 31, 2024. A 100-basis-point change in interest rates was estimated to affect annual pre-tax income by approximately $5.2 million.
- Capital expenditures were $87.9 million, primarily for patient medical equipment. Interest paid was $50.3 million.
Material changes versus the prior comparable period
- Revenue increased 6.4%, while operating income nearly doubled because revenue growth outpaced cost growth and amortization expense declined.
- Net income attributable to AdaptHealth shifted from $15.7 million of income to a $2.1 million loss, primarily because the prior period benefited from a $21.9 million warrant-liability gain, while Q1 2024 included a $7.5 million warrant-liability charge, higher taxes, and litigation-related costs.
- Operating cash flow and free cash flow declined substantially because of working-capital usage, particularly a $40.6 million increase in accounts receivable and a $65.1 million decrease in operating liabilities.
- Accounts receivable increased to $429.6 million from $388.9 million, while unbilled receivables declined to $31.9 million from $68.4 million.
- The Company completed no acquisitions in Q1 2024, compared with a small acquisition in Q1 2023.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide clear formal revenue, earnings, or cash-flow guidance. Management expects operating cash flows, existing cash, and available credit capacity to fund operations and growth strategies for at least the next twelve months, but notes that additional financing may be required for acquisitions or other growth initiatives.
The February 2024 Change Healthcare cybersecurity incident disrupted claims processing through a third-party software provider, delayed collections, increased accounts receivable, and materially reduced Q1 operating cash flow. Nearly all pending claims had been released by the end of April, and management expects cash flows to normalize during Q2 2024. The Company borrowed $75.0 million under its revolver to support liquidity during the quarter and repaid it in April.
Inflation continues to pressure materials, labor, transportation, shipping, and operating costs. Other risks include reimbursement changes, payor collection estimates, seasonal weakness early in the year, competition, regulatory and healthcare-law compliance, interest-rate exposure, and the ability to maintain profitable growth.
The Company recorded $4.2 million of expense related to the fair-value increase of shares expected to be issued under a proposed securities class-action settlement and $0.9 million related to a proposed derivative-action settlement. The settlements remain subject to court approval. The Company also faces an ongoing False Claims Act investigation concerning ventilator billing and separate shareholder litigation related to diabetes-business disclosures; the potential impact of these matters is not determinable from the filing.
Management reported material weaknesses in internal control over financial reporting involving revenue data processed by a third-party service provider and subservice organization, procurement three-way matching, and inventory valuation controls. Remediation efforts are ongoing, and the weaknesses had not been deemed remediated as of March 31, 2024.
Most important facts for investors to verify
- Whether Change Healthcare claims-processing disruptions were fully resolved and whether operating cash flow normalized in Q2 2024.
- The timing and final terms of the securities and derivative litigation settlements, including court approvals and issuance of approximately 1 million settlement shares.
- Progress in remediating the three reported material weaknesses in internal control over financial reporting.
- Ability to refinance or repay the term loan and revolver obligations maturing in January 2026 while continuing substantial equipment investment.
- Trends in diabetes reimbursement and pharmacy-channel migration, sleep and respiratory patient census, and capitated revenue.
- Potential outcomes of the False Claims Act investigation and the pending shareholder and derivative litigation.
- Impact of variable interest rates, inflation, reimbursement changes, and accounts-receivable collectability on margins and liquidity.