Business Context and Reporting Period
AdaptHealth Corp. is a national provider of healthcare-at-home solutions, including sleep therapy, diabetes devices, respiratory services, home medical equipment, and medical supplies. It serves Medicare, Medicaid, and commercial insurance beneficiaries through approximately 750 locations in 47 states and serviced approximately 3.9 million patients annually as of September 30, 2022.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The filing was signed November 8, 2022.
Key Financial Metrics
| Metric | Three months ended September 30, 2022 | Three months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 |
|---|---|---|---|---|
| Net revenue | $756.5 million | $653.3 million | $2.190 billion | $1.752 billion |
| Operating income | $52.9 million | $75.7 million | $163.7 million | $156.5 million |
| Operating margin | 7.0% | 11.6% | 7.5% | 8.9% |
| Net income attributable to AdaptHealth | $16.1 million | $58.1 million | $71.9 million | $133.2 million |
| Net margin attributable to AdaptHealth | 2.1% | 8.9% | 3.3% | 7.6% |
| Adjusted EBITDA | $160.2 million | $156.3 million | $447.8 million | $407.8 million |
| Net cash provided by operating activities | Not separately reported | Not separately reported | $276.9 million | $174.8 million |
- Revenue increased 15.8% in the third quarter and 25.0% year to date. Acquisitions contributed approximately $63.2 million of third-quarter revenue growth and $412.1 million of year-to-date growth; non-acquired businesses contributed approximately $39.6 million and $35.6 million, respectively.
- Cost of net revenue rose to 85.5% of revenue in the third quarter from 81.1%, and to 84.6% year to date from 80.9%, reflecting acquisition growth, inflation, higher product and labor costs, supply-chain costs, and higher patient-equipment depreciation.
- Interest expense increased 17.6% in the third quarter to $28.5 million and 13.4% year to date to $78.9 million, driven by higher debt balances and interest rates.
- Cash and cash equivalents were $110.7 million at September 30, 2022, compared with $149.6 million at December 31, 2021. Working capital was approximately $165.0 million, compared with $170.2 million at year-end 2021.
- Year-to-date capital expenditures were $248.5 million, primarily for patient equipment and other fixed assets. Year-to-date acquisition spending was $16.1 million.
Liquidity, Debt, and Capital Allocation
- Debt consisted of $770.0 million of secured term loans and $1.450 billion of senior unsecured notes. Debt reported on the balance sheet, net of deferred financing fees, was $2.192 billion, including a $30.0 million current portion.
- The $800 million term loan had $770.0 million outstanding and bore interest at 4.56% as of September 30, 2022. The term loan matures in January 2026, with scheduled amortization increasing beginning in mid-2023.
- No revolving credit borrowings were outstanding. Availability under the $450 million revolver, net of $17.4 million of letters of credit, was $432.6 million.
- The company was in compliance with all debt covenants at September 30, 2022. Management stated that operating cash flow, existing cash, and available credit are expected to fund operations and growth strategies for at least the next twelve months.
- During the nine months, AdaptHealth repurchased $14.0 million of common stock under a program authorizing up to $200 million through December 31, 2022. The company purchased 750,835 shares year to date and 551,417 shares during the third quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth was strong, but profitability margins contracted materially because cost of revenue grew faster than revenue. Third-quarter operating income declined 30.1% and net income attributable to AdaptHealth declined 72.2%.
- Year-to-date operating income increased only 4.6% despite 25.0% revenue growth. Year-to-date net income attributable to AdaptHealth declined 46.0%, primarily reflecting the absence of significant prior-year non-cash gains and debt-related items, together with higher interest expense and operating costs.
- Prior-year results benefited from a $57.4 million year-to-date non-cash gain from the change in fair value of the warrant liability and a $34.1 million gain from contingent consideration common shares. The 2022 warrant gain was $17.1 million, and there was no 2022 contingent-share liability gain.
- Prior-year results also included $20.2 million of debt extinguishment losses, whereas no such loss was recorded in 2022.
- AdaptHealth completed several smaller acquisitions in 2022, acquiring two HME providers and certain assets of five other HME providers for total consideration of $16.9 million. The 2021 comparison included the much larger AeroCare acquisition.
- Operating cash flow increased $102.2 million year to date, while investing cash outflows declined substantially from 2021 because the 2021 period included $1.418 billion of acquisition payments.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide explicit revenue, earnings, or Adjusted EBITDA guidance.
- Management cited inflationary pressure on equipment, supplies, labor, shipping, fuel, and warehousing costs, and stated that the company may not be able to pass all cost increases to customers.
- The Philips Respironics recall continues to constrain availability of certain ventilator, BiPAP, and CPAP products and has materially affected the company’s ability to meet patient demand.
- Medicare sequestration resumed at a 2% reduction for Medicare fee-for-service claims beginning July 1, 2022, after temporary payment increases earlier in the year.
- The CMS recoupment period for CARES Act advance payments ended. Approximately $3.2 million remained payable to CMS at September 30, 2022. A further $4.3 million of deferred employer FICA taxes was included in current liabilities and expected to be paid shortly after December 31, 2022.
- AdaptHealth had $304.8 million of liabilities under its Tax Receivable Agreement, including $298.9 million classified as long term.
- Goodwill was $3.525 billion, representing approximately 67% of total assets. No goodwill or identifiable intangible asset impairment was recorded during the periods presented, but future declines in market capitalization, revenue, operating income, or cash flow could trigger a material non-cash impairment charge.
- The company disclosed ongoing investigations concerning ventilator billing and oxygen-tank-content billing, as well as a False Claims Act investigation involving subsidiary Community Surgical Supply. It also disclosed a securities class action and a stayed shareholder derivative action. No material legal accruals were recorded, but adverse outcomes could materially affect results, cash flows, or financial condition.
- Disclosure controls and procedures were not effective because of previously reported material weaknesses in internal control over financial reporting, including insufficient accounting and control resources, ineffective risk assessment and information-technology controls, non-routine transaction review, and accounts payable controls. Remediation efforts were ongoing and had not been completed.
Most Important Facts for Investors to Verify
- Whether revenue growth from acquisitions and core operations can offset continued inflation, labor pressure, supply constraints, and Medicare reimbursement changes.
- Whether operating margins recover from the 2022 compression and whether Adjusted EBITDA growth translates into sustainable cash generation after capital expenditures.
- The company’s leverage, variable-rate exposure, scheduled term-loan amortization, and continued compliance with debt covenants.
- The status and potential financial exposure from the securities litigation, derivative litigation, healthcare billing investigations, and False Claims Act inquiry.
- Progress toward remediation of the disclosed material weaknesses in internal control over financial reporting.
- The collectability of accounts receivable, the remaining CMS advance-payment obligation, and potential future Tax Receivable Agreement payments.
- The recoverability of the substantial goodwill balance and the impact of the Philips Respironics product recall on patient starts and revenue.