Aveanna Healthcare Holdings, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2021, ended July 3, 2021; comparisons are to periods ended June 27, 2020. Amounts below are in millions unless stated otherwise. The interim financial statements are unaudited.
Business context and results
Aveanna provides pediatric and adult home-based healthcare and related products through Private Duty Services (PDS), Home Health & Hospice (HHH), and Medical Solutions (MS). The quarter included the April acquisition of Doctor’s Choice, a Florida home-health provider. Aveanna also completed its IPO in May.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $436.1 | $351.6 | $853.3 | $706.8 |
| Gross margin | $146.6 | $106.6 | $278.3 | $214.2 |
| Gross margin % | 33.6% | 30.3% | 32.6% | 30.3% |
| Operating income (loss) | $30.3 | ($52.0) | $58.6 | ($34.1) |
| Net income (loss) | $1.3 | ($77.6) | $7.1 | ($39.9) |
| Adjusted EBITDA (non-GAAP) | $48.8 | $37.4 | $92.6 | $67.2 |
Q2 revenue rose 24.0%; first-half revenue rose 20.7%. PDS revenue grew 11.3% in Q2, principally from higher service hours, while HHH revenue increased sharply as acquisitions made in late 2020 and Doctor’s Choice expanded the segment. MS revenue increased 11.1%. Q2 operating results also benefited from the absence of the prior-year $75.7 million goodwill impairment related to exiting ABA therapy. First-half comparison was also affected by a $50.0 million legal settlement recorded as income in 2020.
Cash flow, debt and liquidity
- Cash from operations was a use of $13.6 million in the first half, versus $76.6 million provided a year earlier. The filing cites higher receivables and working-capital timing, the absence of prior-year settlement proceeds and payroll-tax deferrals, and repayment of Medicare advances as factors.
- Investing cash outflow was $108.6 million, including $102.5 million for acquisitions. Financing provided $91.4 million, including IPO proceeds and debt repayments. Cash ended at $106.5 million, down from $137.3 million at fiscal year-end.
- Patient accounts receivable increased to $202.8 million from $172.9 million at January 2, 2021. Days sales outstanding rose to 41.6 days from 38.3 at year-end.
- At July 3, principal debt and notes payable totaled $864.8 million, compared with $1,207.6 million at January 2; net carrying value was $846.1 million. No revolver borrowings were outstanding. Revolver availability was $180.2 million, giving reported total liquidity of $286.7 million including cash.
- The IPO generated $477.7 million net proceeds; Aveanna used $307.0 million to repay the second-lien facility and $100.0 million to repay first-lien debt. It recorded an $8.9 million debt-extinguishment loss from write-off of issuance costs.
- Management stated operating cash flows, cash on hand and credit availability should meet cash requirements for the next 12 months. The company had $51.4 million of deferred payroll taxes due in equal halves by December 31, 2021 and December 31, 2022, and $11.4 million of Medicare advances remained to be repaid.
Changes, outlook and risks
- Revenue growth and improved gross margin were partly offset by higher administrative expenses. Q2 field contribution margin, a non-GAAP measure, improved to 15.8% from 14.7%; corporate expenses increased to $32.4 million from $22.7 million.
- COVID-related service costs declined: the company reported $0.5 million in Q2 2021 and $2.0 million in the first half. Management expects some relief pay, vaccine pay and PPE costs to continue, and identified possible effects from new variants, caregiver availability, referral disruptions, patient acceptance of in-home care, school closures and payer budgets. Temporary Medicaid rate increases continued in many states, but their duration and permanence are uncertain.
- No formal earnings or revenue guidance is provided. Management said it expects to pursue organic growth and acquisitions and does not expect growth solely from COVID-19 abatement. It expects approximately $2.6 million of incremental quarterly non-cash compensation expense from modified performance options beginning in Q3 2021 through an expected July 2022 completion.
- Subsequent to quarter-end, on July 15, the company refinanced first-lien term loans into an $860.0 million term loan maturing July 2028, at a stated 4.25% rate as of that date, and established an undrawn $200 million delayed-draw facility. It also amended swaps and added an interest-rate cap. An August 9 amendment reduced revolver pricing. These subsequent events are not reflected in the July 3 balance sheet.
- Key risks include dependence on government and managed-care reimbursement, caregiver recruitment and retention, competition, acquisition integration, substantial variable-rate debt and LIBOR transition. The company disclosed a DOJ Antitrust Division investigation concerning nurse wages, reimbursement rates and hiring in certain markets; it is cooperating but cannot predict the outcome. A disputed acquisition termination-fee claim could involve $75 million, and Aveanna’s Epic-related litigation and counterclaims remain unresolved; the company cannot estimate any resulting loss or recovery.
Important facts for investors to verify
- Whether receivables and DSO improve, and whether operating cash flow turns positive after acquisition and working-capital effects.
- How much revenue and margin growth is organic versus attributable to acquired businesses, particularly in HHH.
- The sustainability of Medicaid rate increases and the impact of labor costs, staffing constraints and COVID-related conditions.
- Debt service, interest-rate exposure, refinancing terms and compliance with credit-facility covenants; management reported covenant compliance at July 3.
- Progress and possible financial consequences of the DOJ inquiry and the disclosed Epic and break-up-fee disputes.
- The non-GAAP reconciliations and comparability of Adjusted EBITDA and field contribution; GAAP net income was modest despite higher adjusted EBITDA.