Business Context and Reporting Period
AdaptHealth Corp. provides healthcare-at-home solutions, including sleep therapy, diabetes devices and supplies, respiratory services, home medical equipment, and other medical supplies. The company serves Medicare, Medicaid, and commercial payors across all 50 states through approximately 690 locations and serves approximately 4.0 million patients annually.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Richard Barasch continued as Interim Chief Executive Officer following Stephen Griggs’s resignation effective June 30, 2023.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net revenue | $804.0 million | $756.5 million | $2.342 billion | $2.190 billion |
| Revenue growth | 6.3% | — | 6.9% | — |
| Operating income (loss) | $(461.0) million | $52.9 million | $(380.6) million | $163.7 million |
| Net income (loss) attributable to AdaptHealth | $(454.1) million | $16.1 million | $(424.4) million | $71.9 million |
| Adjusted EBITDA | $161.2 million | $160.2 million | $466.2 million | $447.8 million |
| Adjusted EBITDA margin | 20.0% | 21.2% | 19.9% | 20.4% |
| Operating cash flow | $98.8 million | $107.0 million | $325.4 million | $276.9 million |
| Free cash flow | $21.7 million | $12.9 million | $76.6 million | $28.4 million |
Reported Q3 and nine-month operating and net losses were primarily driven by a $511.9 million non-cash goodwill impairment charge. Basic loss per share was $3.37 in Q3 and $3.15 for the nine-month period, compared with basic earnings per share of $0.11 and $0.49, respectively, in the prior-year periods.
Revenue mix shifted toward fixed monthly equipment reimbursements, which represented 34% of revenue in both the quarter and nine-month period, versus 32% in the comparable 2022 periods. Q3 product-line revenue increased in Sleep by 16.5% and Respiratory by 7.6%, while Diabetes declined 7.7%.
Liquidity, Debt, and Balance Sheet
- Cash was $56.1 million at September 30, 2023, compared with $46.3 million at December 31, 2022.
- Long-term debt, including the current portion and net of deferred financing fees, was $2.167 billion. Gross debt consisted of $740.0 million of secured term loans and $1.450 billion of senior unsecured notes.
- The secured term loan carried a 7.43% interest rate at September 30, 2023 and matures in January 2026. The senior notes mature between 2028 and 2030.
- No borrowings were outstanding under the $450 million revolving facility; covenant-based availability was $144.3 million, with $21.6 million of letters of credit outstanding.
- The company was in compliance with its debt covenants at September 30, 2023 and reported working capital of $136.9 million.
- Capital expenditures were $248.8 million for the first nine months, substantially offsetting operating cash generation. Cash paid for interest was $113.1 million.
- Accounts receivable totaled $370.7 million, including $44.7 million of unbilled receivables. The company remains exposed to collection, reimbursement, and payor-estimate risk.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6.3% in Q3 and 6.9% for the first nine months, driven primarily by non-acquired growth and stronger Sleep and Respiratory demand. Acquisitions contributed $2.5 million of Q3 growth and $10.0 million of nine-month growth.
- Cost of net revenue increased faster than revenue, rising 7.2% in Q3 and 9.1% year to date. Product costs, inflation, labor, higher medical-equipment prices, and increased rental counts pressured margins.
- Interest expense increased 13.3% in Q3 and 22.7% year to date because of higher variable interest rates, partly offset by interest-rate swaps and lower average borrowings.
- The company recognized a $511.9 million goodwill impairment after a sustained decline in market capitalization and revised financial projections. Goodwill declined to $3.041 billion from $3.545 billion at year-end 2022.
- The impairment generated a $39.9 million discrete income-tax benefit and increased deferred tax assets.
- Operating cash flow increased year to date despite the reported net loss, largely because of the goodwill impairment, depreciation and amortization, and other non-cash items. Free cash flow increased to $76.6 million from $28.4 million.
- Management’s cost-management program was substantially complete at quarter-end. The company expects approximately $25 million of Adjusted EBITDA improvement in 2023 and approximately $40 million of annualized improvement in future years; costs incurred through September 30 were approximately $12.2 million.
- Subsequent to quarter-end, the company repurchased 2.5 million shares for $19.4 million under its repurchase program.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that expected operating cash flows, existing cash, and available revolver capacity should be sufficient to fund operations and growth strategies for at least the next twelve months. The filing does not provide a clear consolidated revenue or earnings guidance range.
- Inflation, labor and transportation costs, supply-chain conditions, and the company’s ability to pass higher costs to customers could pressure margins.
- Diabetes revenue is being affected by shifts from durable medical equipment suppliers to pharmacy-only and dual-benefit channels, lower insulin-pump and supply revenue, and manufacturers bringing distribution in-house.
- Revenue and cash flow are seasonal, with deductibles and insurance changes affecting early-year demand and diabetes revenue typically stronger in the fourth quarter.
- Further declines in market capitalization, operating results, cash flows, or projections could require additional material goodwill impairment charges.
- The company reported material weaknesses in internal control over financial reporting related to risk assessment, process-level controls, and supporting information-technology general controls. Disclosure controls were therefore not effective as of September 30, 2023. Remediation remains in progress and is not complete.
- Legal and regulatory matters include a Southern District of New York False Claims Act investigation concerning ventilator billing, a stayed securities class action and related derivative action, and a new shareholder class action filed October 24, 2023 concerning alleged diabetes-growth disclosures. The filing states that no material accrual has been recorded for these matters and that outcomes remain uncertain.
- A prior Eastern District of Pennsylvania ventilator-billing investigation was settled in April 2023 for $5.3 million, which had been accrued at December 31, 2022, without an admission of liability.
- The company had a $294.2 million Tax Receivable Agreement liability at September 30, 2023.
Important Facts for Investors to Verify
- Whether Sleep and Respiratory growth can offset continuing Diabetes-channel pressure and sustain approximately 20% Adjusted EBITDA margins.
- The assumptions underlying the $511.9 million goodwill impairment test and the risk of additional impairments.
- Debt maturity and refinancing plans, particularly the January 2026 secured-term-loan maturity, in a higher-interest-rate environment.
- Whether cost-management savings reach the stated $25 million 2023 and $40 million annualized Adjusted EBITDA targets without impairing service levels or growth.
- Accounts-receivable aging, payor collections, implicit price concessions, and reimbursement changes affecting cash conversion.
- Progress and independent validation of remediation of the reported material weaknesses in internal controls.
- Potential financial and operational effects of the pending litigation, False Claims Act investigation, and insurer coverage dispute.
- The sustainability of capital expenditures, share repurchases, and acquisitions relative to free cash flow and debt obligations.