Aveanna Healthcare Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; year-to-date results cover the nine months ended September 30, 2023. Aveanna provides pediatric and adult home-based healthcare through Private Duty Services (PDS), Home Health & Hospice (HHH), and Medical Solutions (MS).
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $478.0 million | $443.0 million | $1,416.4 million | $1,336.5 million |
| Gross margin | $147.3 million; 30.8% | $134.6 million; 30.4% | $447.0 million; 31.6% | $424.5 million; 31.8% |
| Operating income (loss) | $(76.4) million | $4.8 million | $(21.2) million | $(437.8) million |
| Net income (loss) | $(102.4) million | $24.3 million | $(108.8) million | $(424.3) million |
| Adjusted EBITDA (non-GAAP) | $36.2 million | $24.7 million | $100.5 million | $99.7 million |
| Operating cash flow | — | $25.7 million | $(8.2) million |
- Q3 revenue rose 7.9%. PDS revenue increased 8.2%, HHH 6.3%, and MS 7.3%. PDS growth reflected higher service volume and reimbursement rates; HHH benefited from improved implicit price concessions despite lower volume; MS growth came from more patients served.
- Q3 field contribution, a non-GAAP measure, increased 24.9% to $56.3 million; its margin improved to 11.8% from 10.2%. Corporate expenses declined 17.4% to $27.4 million.
- Q3 operating results included a $105.1 million non-cash goodwill impairment in HHH. The company cited forecast volumes not being achieved, primarily amid labor-market challenges. The impairment drove the quarterly operating loss.
- Year-to-date operating loss narrowed substantially versus 2022, principally because the prior-year period included $470.2 million of goodwill impairment. Year-to-date gross margin percentage edged down 0.2 percentage points.
- Interest expense, net, increased to $39.5 million in Q3 and $113.3 million year to date, reflecting higher interest rates. Q3 other income fell to $14.1 million from $45.1 million, largely due to lower non-cash derivative valuation gains.
Cash, debt and liquidity
- At September 30, 2023, cash was $48.3 million, patient accounts receivable $235.7 million, and current assets $318.2 million. Current liabilities were $364.3 million; total liabilities were $1.758 billion. Stockholders’ deficit was $105.7 million.
- Debt principal comprised $902.1 million of extended term loans, $415.0 million of second-lien term loans, and $155.0 million drawn on the securitization facility: $1.472 billion in total. Term-loan rates were 9.27% and 12.52%; the securitization rate was 8.91%. The revolving facility had no balance.
- Management reported approximately $168.0 million of revolver capacity and $20.0 million available under the securitization facility. It said cash, operating cash flows, and available facilities should meet requirements for at least 12 months. Revolver availability is subject to a leverage covenant when utilization exceeds 30% of total commitment. The company reported compliance with financial covenants.
- Cash from operations was $25.7 million, investing used $7.2 million, and financing provided $10.6 million in the first nine months. Cash interest paid was $99.3 million. The filing’s MD&A describes operating cash flow as having “increased” by $33.8 million in cash used; the cash flow statement instead shows an improvement from cash used of $8.2 million to cash provided of $25.7 million.
Outlook, risks and unusual items
- No formal financial guidance is provided. Management’s liquidity assessment is for at least the next 12 months, but it cautions that future cash needs depend on operations, acquisitions, and capital requirements.
- Key risks include labor availability and wage inflation, reimbursement and payer-mix changes—particularly Medicaid and Medicare Advantage—collections and billing execution, substantial variable-rate debt, regulatory compliance, litigation, and cybersecurity and information-system controls.
- Medicaid MCO accounted for 56.8% of Q3 revenue, versus 50.9% a year earlier; Medicare declined to 12.0% from 19.0%. ARPA recovery funds contributed $2.9 million of Q3 revenue; future amounts and timing are uncertain.
- The company recorded a $5.1 million non-cash gain on acquiring certain business licenses and other net assets. A $6.8 million escrow was funded for tax audits under appeal; additional tax amounts could be payable, with contractual reimbursement rights against former sellers.
- Legal matters include a $7.9 million Texas arbitration award for which the company obtained a $9.1 million collateralized appellate bond and intends to pursue appeals. The company also disclosed DOJ inquiries concerning nurse wages and hiring, and a separate Civil Investigation Demand involving hospice billing eligibility and alleged referral-related remuneration. Management says it is cooperating and does not believe a loss is probable, but outcomes and potential loss ranges are not clear.
- Disclosure controls were deemed ineffective due to a previously reported material weakness involving IT general controls, information completeness and accuracy, and related business-process and review controls. Management is implementing remediation; the weakness is not considered remediated until controls operate effectively for a sufficient period and are tested.
Important facts for investors to verify
- Whether HHH volumes and labor capacity improve, and whether further goodwill impairment is required.
- Whether revenue growth and field margins can be sustained after caregiver cost increases and reimbursement changes.
- Cash conversion, receivables and collections, and the filing’s inconsistent description of year-to-date operating cash flow.
- Debt service capacity under elevated variable rates, facility availability, and covenant headroom.
- Developments in the DOJ matters, Texas arbitration appeal, and IRS tax audits, including any cash impact or material change in management’s assessments.
- Progress and independent evidence supporting remediation of the material weakness in internal controls.