AdaptHealth(US:AHCO)2020-08-07 01:31PART I FINANCIAL INFORMATION Consolidated Interim Financial Statements (Unaudited) This section presents AdaptHealth Corp.'s unaudited consolidated financial statements, detailing financial position, operations, and cash flows, along with explanatory notes Consolidated Balance Sheets Total assets increased to $739.3 million and liabilities to $746.1 million by June 30, 2020, while stockholders' deficit improved Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $739,309 | $546,121 | | Cash and cash equivalents | $110,587 | $76,878 | | Accounts receivable | $119,243 | $78,619 | | Goodwill | $342,851 | $266,791 | | Total Liabilities | $746,103 | $575,370 | | Long-term debt, less current portion | $443,248 | $395,112 | | Total Stockholders' Deficit | ($6,794) | ($29,249) | Consolidated Statements of Operations Net revenue grew significantly in Q2 2020 to $232.1 million, resulting in net income of $4.0 million, a substantial improvement year-over-year Key Operating Results (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $232,116 | $124,154 | $423,555 | $243,652 | | Operating income | $16,470 | $14,911 | $25,781 | $20,258 | | Net income (loss) attributable to AdaptHealth Corp. | $4,033 | ($2,083) | $3,875 | ($7,884) | | Diluted EPS | $0.08 | ($0.10) | $0.08 | ($0.44) | Consolidated Statements of Cash Flows Net cash from operating activities significantly increased to $111.0 million in H1 2020, while investing activities used $117.3 million, primarily for acquisitions Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $111,008 | $26,036 | | Net cash used in investing activities | ($117,332) | ($38,710) | | Net cash provided by (used in) financing activities | $40,033 | ($10,353) | | Net increase (decrease) in cash | $33,709 | ($23,027) | Notes to Consolidated Interim Financial Statements These notes detail accounting policies, revenue recognition, significant acquisitions, debt structure, equity compensation, and major subsequent financing and acquisition events - The company is a leading provider of home healthcare equipment and medical supplies, focusing on sleep therapy, HME, oxygen, and other supplies for chronically ill patients33 Net Revenue by Core Service Line (Q2 2020 vs Q2 2019, in thousands) | Service Line | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Sleep | $107,065 | $69,377 | | Supplies to the home | $34,240 | $1,915 | | HME | $25,989 | $20,438 | | Respiratory | $48,970 | $21,454 | | Other | $15,852 | $10,970 | | Total Net Revenue | $232,116 | $124,154 | - In H1 2020, the company completed several acquisitions for a total consideration of $114.5 million, adding $76.1 million to goodwill, including Patient Care Solutions (PCS) and Advanced Home Care, Inc. (Advanced)585960 - Subsequent to the quarter end, on July 1, 2020, the company acquired Solara Medical Supplies for $380.7 million in cash and 3.9 million shares, and ActivStyle, Inc. for $65.5 million in cash131132 - In July 2020, the company completed several major financing transactions, including a $190 million private placement, a $134 million public offering, and a $350 million senior unsecured notes offering, and refinanced its credit facility into a new $250 million term loan and $200 million revolver129130134135 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, revenue growth from acquisitions and organic expansion, COVID-19 impact, operating results, non-GAAP measures, liquidity, and subsequent financing activities Overview and Trends AdaptHealth, a leading HME provider, benefits from an aging population, rising chronic conditions, and a shift to cost-effective in-home care, with an addressable market exceeding $25 billion - Key market drivers include an aging U.S. population, increasing prevalence of chronic conditions, and a shift towards in-home treatment, which is more cost-effective than institutional care146 - The Home Medical Equipment (HME) market is projected to grow at a 6.1% CAGR over the next nine years, with AdaptHealth's addressable market now exceeding $25 billion following recent acquisitions146 Impact of the COVID-19 Pandemic COVID-19 led to declines in elective procedures but increased demand for respiratory products, with the company receiving CARES Act funds and implementing a 6% workforce reduction - The company received approximately $47 million in recoupable advance payments and $17 million in provider relief funds under the CARES Act to enhance liquidity149 - Revenue from elective services like new CPAP starts declined, but this was offset by increased demand for respiratory products (oxygen, ventilators) and strong performance in the resupply business150152 - In April 2020, the company reduced its workforce by approximately 6%, incurring a one-time severance charge of $1.6 million150151 Results of Operations Q2 2020 net revenue increased 87.0% to $232.1 million, driven by acquisitions and COVID-related demand, while costs and G&A expenses also rose Q2 2020 vs Q2 2019 Results (in thousands) | Metric | Q2 2020 | Q2 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $232,116 | $124,154 | +87.0% | | Cost of Net Revenue | $197,517 | $102,150 | +93.4% | | Operating Income | $16,470 | $14,911 | +10.5% | | Net Income (loss) attributable to AdaptHealth Corp. | $4,033 | ($2,083) | -293.6% | - The Q2 2020 revenue increase of $108.0 million was primarily driven by acquisitions ($77.0 million), organic growth, and $28.4 million from sales of ventilation and oxygen equipment for COVID-19 patients164 - Interest expense for Q2 2020 decreased to $7.5 million from $14.6 million in Q2 2019, primarily due to a $6.7 million non-cash charge in the prior period for interest rate swaps now accounted for through other comprehensive income169171 EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex Adjusted EBITDA for Q2 2020 increased to $42.6 million, and Adjusted EBITDA less Patient Equipment Capex rose to $30.6 million, reflecting improved operational performance Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) attributable to AdaptHealth Corp. | $4,033 | ($2,083) | $3,875 | ($7,884) | | EBITDA | $34,844 | $28,145 | $60,895 | $46,343 | | Adjusted EBITDA | $42,634 | $29,480 | $73,094 | $57,696 | | Less: Patient equipment capex | ($12,068) | ($11,405) | ($25,035) | ($22,648) | | Adjusted EBITDA less Patient Equipment Capex | $30,566 | $18,075 | $48,059 | $35,048 | Liquidity and Capital Resources The company held $110.6 million in cash as of June 30, 2020, with liquidity bolstered by CARES Act funds and significant subsequent capital raises and debt refinancing - As of June 30, 2020, the company had $110.6 million in cash and cash equivalents198 - In July 2020, the company raised significant capital through a $134.0 million public offering and a $350.0 million senior unsecured notes offering200201 - On July 29, 2020, the company refinanced its debt, entering into a new credit agreement with a $250 million term loan and a $200 million revolver, maturing in July 2025202 Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $111,008 | $26,036 | | Net cash used in investing activities | ($117,332) | ($38,710) | | Net cash provided by (used in) financing activities | $40,033 | ($10,353) | Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company - This section is not applicable because AdaptHealth is a smaller reporting company215 Controls and Procedures Management concluded that disclosure controls were ineffective as of June 30, 2020, due to material weaknesses in non-routine transaction review and IT general controls, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of June 30, 2020216 - Two material weaknesses were identified: (1) untimely review controls over non-routine transactions, and (2) deficiencies in IT general controls, particularly user access and segregation of duties216219 - Remediation efforts are underway, including hiring experienced technical resources and modifying system access rights to strengthen controls218219 PART II OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, including an ongoing U.S. Attorney's Office investigation into ventilator billing practices, which are not expected to be material - The company is subject to various investigations and lawsuits arising in the ordinary course of business, which are not expected to be material222 - The company is cooperating with an ongoing investigation by the U.S. Attorney's Office for the Eastern District of Pennsylvania concerning ventilator billing practices for a specific payor, having responded to a subpoena and civil investigative demand223 Risk Factors This section details significant risks, including COVID-19 impacts, supply chain reliance, Medicare/Medicaid policy changes, healthcare fraud laws, acquisition integration, and Tax Receivable Agreement obligations Risks Related to Our Business and Industry Key business risks include COVID-19 impacts, supplier reliance, Medicare/Medicaid reimbursement changes, private payor pressure, complex billing, and compliance with extensive healthcare fraud and abuse laws - The COVID-19 pandemic poses significant risks, including operational disruption from remote work, potential supply chain constraints, and uncertain demand for services225226227 - The company relies on a small number of suppliers for most of its equipment, creating risk from price increases or supply disruptions, which could be exacerbated by events like the COVID-19 pandemic231 - A significant portion of revenue (26% for Q2 2020) is derived from Medicare and Medicaid, making the business vulnerable to statutory and regulatory changes that could reduce reimbursement rates232 - The business is subject to extensive federal and state healthcare fraud and abuse laws, such as the Anti-Kickback Statute and the Stark Law, where violations can lead to substantial penalties, including exclusion from federal healthcare programs273274275 Risks Related to Our Securities Securities risks include stock price volatility, dependence on AdaptHealth Holdings for distributions, significant Tax Receivable Agreement obligations, and influence from principal stockholders - The company's only significant asset is its ownership interest in AdaptHealth Holdings, and its ability to pay obligations or dividends depends on distributions from this subsidiary311 - The company is required to make potentially significant payments under the Tax Receivable Agreement (TRA), which are based on 85% of the tax savings it realizes from certain tax attributes and basis step-ups325 - Payments under the TRA could be accelerated in a change of control or early termination scenario, potentially exceeding the actual tax benefits realized326 - Principal stockholders, including Everest Trust and OEP Purchaser, hold significant voting power and can influence corporate actions317 Risks Related to the Acquisitions Acquisition risks for Solara and ActivStyle include challenges in integration, potential loss of key employees, business disruption, and failure to achieve anticipated synergies and revenue growth - The success of the Solara and ActivStyle acquisitions depends on the ability to efficiently integrate their operations, which carries risks of business disruption, loss of key employees, and inconsistencies in systems and policies344 - The company may not achieve the anticipated revenue growth, cost synergies, and other benefits from the acquisitions, which could adversely affect financial performance344345 Unregistered Sales of Equity Securities and Use of Proceeds The company issued 3.6 million Class A Common Stock shares in exchange for AdaptHealth Units and Class B Common Stock, and granted over 500,000 restricted shares to officers and directors - As of June 30, 2020, the company issued 3,605,049 shares of Class A Common Stock in exchange for AdaptHealth Units and Class B Common Stock under the Exchange Agreement347 - The company granted 504,186 restricted shares of Class A Common Stock to certain officers and directors348 Defaults upon Senior Securities No defaults upon senior securities were reported for the period - No defaults upon senior securities were reported for the period349 Mine Safety Disclosures This section is not applicable to the company - This section is not applicable to the company350 Other Information No other information was reported for the period - No other information was reported for the period351 Exhibits This section provides an index of all exhibits filed with or furnished as part of the quarterly report, including various agreements and certifications