AdapHealth Corp. 2020 Q3 Form 10-Q Summary
Business context and reporting period
AdaptHealth provides home healthcare equipment, medical supplies and related services, including sleep therapy, diabetes, respiratory, home medical equipment and chronic-care supplies. The unaudited results cover the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The 2020 results include substantial acquisition activity, including PCS, Advanced, Solara and ActivStyle. The company serviced approximately 1.8 million patients annually through 269 locations in 41 states.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net revenue | $284.4 million | $136.5 million | $708.0 million | $380.1 million |
| Operating income | $13.3 million | $8.7 million | $39.0 million | $29.0 million |
| Operating margin | 4.7% | 6.4% | 5.5% | 7.6% |
| Net income attributable to AdaptHealth | $(2.5) million | $(3.7) million | $1.4 million | $(11.6) million |
| Diluted EPS | $(0.04) | $(0.17) | $0.02 | $(0.60) |
| Adjusted EBITDA | $53.2 million | $31.7 million | $126.3 million | $89.4 million |
| Adjusted EBITDA less patient equipment capex | $35.9 million | $18.7 million | $84.0 million | $53.8 million |
Revenue increased 108.4% in the quarter and 86.3% year to date, primarily from acquisitions, organic CPAP resupply growth and COVID-19-related respiratory equipment demand. Sales revenue represented 73% of Q3 revenue versus 61% in the prior-year quarter; fixed monthly equipment reimbursement represented 27% versus 39%.
Operating margin declined because cost of net revenue increased to 84.5% of revenue in Q3 and 85.5% year to date, compared with 84.1% and 83.4%, respectively. The company reported a $5.3 million loss on extinguishment of debt in Q3 related to refinancing. Nine-month interest expense declined to $27.8 million from $31.7 million, largely because 2019 included non-cash interest expense from interest-rate swap fair-value changes.
Cash provided by operating activities was $145.3 million for the nine months, compared with $43.2 million in 2019. Investing cash use was $627.1 million, including $605.3 million for acquisitions and $22.8 million for equipment and other fixed assets. Financing cash flow was $677.3 million, supported by debt and equity issuances. Cash and cash equivalents were $272.3 million at September 30, 2020, versus $76.9 million at December 31, 2019. Reported working capital was $169.6 million, versus $30.5 million at year-end 2019.
Total debt, net of discounts and deferred financing fees, was approximately $731.2 million at September 30, 2020, including $250.0 million of secured term loans, $350.0 million of senior unsecured notes and a $143.5 million note payable. The company had no revolver borrowings and approximately $196.0 million of remaining revolver availability after letters of credit. Management stated that all debt covenants were satisfied at quarter-end and that available liquidity was expected to fund operations and growth for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven predominantly by acquisitions; acquired businesses contributed $146.2 million of Q3 revenue and $285.0 million for the nine-month period.
- Diabetes and supplies-to-the-home revenue expanded materially following the Solara, ActivStyle and PCS acquisitions.
- Goodwill increased from $266.8 million at December 31, 2019 to $810.5 million at September 30, 2020, primarily from acquisitions. Identifiable intangible assets were $94.7 million at quarter-end.
- The company refinanced its credit facilities in July 2020, issued $350.0 million of 6.125% senior unsecured notes due 2028 and entered into a $250.0 million term loan and $200.0 million revolver maturing in 2025.
- The company raised $225.0 million through private placements of common and preferred securities, $142.6 million through a public common-stock offering and $24.5 million from warrant exercises.
- Public warrants were redeemed in September 2020; 4.3 million private placement warrants remained outstanding at quarter-end.
- Net income attributable to AdaptHealth improved to $1.4 million year to date from a $11.6 million loss, although Q3 remained loss-making.
- Management identified two continuing material weaknesses in internal control over financial reporting: review controls over non-routine transactions and information-technology general controls, including user access and segregation of duties.
Guidance, outlook, commentary, risks and unusual items
No formal quantitative revenue or earnings guidance is provided in the filing. Management expects continued growth from acquisitions, CPAP resupply, respiratory demand and demographic trends, but noted that COVID-19 reduced demand for elective-related services such as new CPAP starts and certain HME products.
The company received approximately $45.8 million of recoupable CMS advance payments and approximately $17.2 million of CARES Act provider relief funds. CMS recoupment of the advance payments was expected to begin in 2021. The provider relief funds remain subject to reporting requirements, eligibility determinations, audit and potential repayment. The filing contains differing presentations of the related current liability: the financial-statement note indicates $63.0 million, while MD&A indicates $67.8 million after assumed acquired-company liabilities; investors should reconcile this difference.
Other significant items include approximately $1.6 million of severance associated with a workforce reduction of approximately 6% and substantial acquisition, equity-based compensation and transaction costs. The company completed the acquisition of Pinnacle Medical Solutions on October 1, 2020 for $81.5 million in cash, 1.0 million shares of Class A common stock and potential additional consideration.
Key risks include COVID-19 effects, reimbursement reductions or audits, payor concentration and contract changes, supplier dependence, acquisition integration, goodwill impairment, high leverage and variable-rate debt, LIBOR replacement, healthcare regulatory compliance, cybersecurity and data privacy. An acquired subsidiary's Medicare payment privileges were suspended following a CMS UPIC notice; the subsidiary represents less than 2% of annual revenue, but the outcome of the audit and reinstatement process remained uncertain. The company also disclosed an ongoing DOJ-related investigation concerning historical ventilator billing and a cybersecurity-related class action and regulatory investigations involving Solara.
Important facts for investors to verify
- Reconcile the $63.0 million versus $67.8 million CARES Act-related liability disclosures.
- Assess whether acquisition-driven revenue growth can continue without further margin dilution and whether acquired businesses, particularly PCS, achieve expected profitability.
- Review debt covenant headroom, required amortization, the 12% note payable interest burden and the maturity/refinancing requirements for 2025 and 2028 debt.
- Monitor CMS recoupment, CARES Act provider relief eligibility, Medicare payment suspensions and potential audit or overpayment liabilities.
- Evaluate goodwill and intangible-asset concentration, including the $810.5 million goodwill balance and sensitivity to impairment.
- Track remediation of the two material weaknesses in financial reporting and information-technology controls.
- Review the status and potential exposure from the ventilator-billing investigation, Solara data-security matters and other healthcare compliance proceedings.
- Confirm the effect of the October 2020 Pinnacle acquisition and any subsequent acquisition-related dilution or contingent consideration.