AdaptHealth(AHCO) - 2021 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Consolidated Interim Financial Statements (Unaudited) Presents AdaptHealth Corp.'s unaudited consolidated financial statements for Q2 2021, including balance sheets, income statements, and cash flows with explanatory notes Consolidated Balance Sheets Consolidated Balance Sheet Highlights (as of June 30, 2021 vs. Dec 31, 2020) | Account | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Assets | $4,687,665 | $1,813,472 | | Cash and cash equivalents | $178,189 | $99,962 | | Goodwill | $3,231,200 | $998,810 | | Total Liabilities | $2,793,622 | $1,532,627 | | Long-term debt, less current portion | $1,776,326 | $776,568 | | Total Stockholders' Equity | $1,894,043 | $280,845 | Consolidated Statements of Operations Statement of Operations Summary (Three and Six Months Ended June 30) | Metric (in thousands, except EPS) | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $617,017 | $232,116 | $1,099,136 | $423,555 | | Operating income | $65,407 | $15,570 | $80,816 | $23,790 | | Net income attributable to AdaptHealth Corp. | $79,107 | $4,470 | $75,141 | $(30,081) | | Diluted net income (loss) per share | $0.12 | $0.08 | $0.06 | $(0.70) | Consolidated Statements of Cash Flows Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $147,624 | $111,008 | | Net cash used in investing activities | $(1,372,027) | $(117,332) | | Net cash provided by financing activities | $1,302,630 | $40,033 | | Net increase in cash | $78,227 | $33,709 | Notes to Consolidated Interim Financial Statements Net Revenue by Core Service Line (Three Months Ended June 30) | Service Line (in thousands) | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Sleep | $229,666 | $107,065 | | Diabetes | $126,530 | $6,372 | | Respiratory | $124,682 | $48,970 | | Supplies to the home | $42,675 | $27,868 | | HME | $54,791 | $25,989 | | Other | $38,673 | $15,852 | | Total Net Revenue | $617,017 | $232,116 | - On February 1, 2021, the Company acquired AeroCare Holdings, Inc. for total consideration consisting of approximately $1.1 billion in cash, 14.0 million shares of Class A Common Stock, and 130,475 shares of Series C Preferred Stock[65] - Goodwill increased from $998.8 million at December 31, 2020, to $3.23 billion at June 30, 2021, primarily due to acquisitions, with $2.25 billion added from acquisitions in H1 2021[89] - In January 2021, the company refinanced its debt, entering a new credit agreement for an $800 million term loan and a $450 million revolver It also issued $500 million in 4.625% senior unsecured notes due 2029[120][127] - A shareholder class action complaint was filed on July 29, 2021, alleging the company made false and misleading statements regarding its organic growth trajectory between November 11, 2019, and July 16, 2021[189] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial performance, highlighting revenue and operating income growth driven by acquisitions, COVID-19 impacts, and liquidity Results of Operations Comparison of Q2 2021 vs. Q2 2020 | Metric (in thousands) | Q2 2021 | Q2 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $617,017 | $232,116 | 165.8% | | Cost of Net Revenue | $490,720 | $198,418 | 147.3% | | Operating Income | $65,407 | $15,570 | 320.1% | | Net Income (to AdaptHealth) | $79,107 | $4,470 | 1,669.7% | - The increase in net revenue for Q2 2021 was primarily driven by acquisitions completed after April 1, 2020, which contributed $405.3 million to the increase[224] - General and administrative expenses increased by 151.3% to $42.9 million in Q2 2021, primarily due to higher transaction costs from acquisitions, professional fees for Sarbanes-Oxley compliance, increased headcount, and higher equity-based compensation[229] EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex Reconciliation to Adjusted EBITDA (in thousands) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) attributable to AdaptHealth Corp. | $79,107 | $4,470 | $75,141 | $(30,081) | | EBITDA | $179,328 | $35,540 | $243,382 | $9,124 | | Adjusted EBITDA | $147,391 | $42,634 | $251,566 | $73,094 | | Adjusted EBITDA less Patient Equipment Capex | $98,866 | $30,566 | $160,783 | $48,059 | Liquidity and Capital Resources - As of June 30, 2021, the company had $178.2 million in cash and cash equivalents Management believes existing cash, operating cash flows, and available credit will be sufficient to fund operations for at least the next twelve months[271][270] - The company received $45.8 million in recoupable advance payments from CMS under the CARES Act Recoupment began in April 2021, with $15.9 million recouped in Q2 2021, leaving a deferred balance of $33.6 million[271][272] - Net cash used in investing activities for H1 2021 was $1.37 billion, primarily consisting of $1.29 billion for business acquisitions, most notably the AeroCare acquisition[286] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company - The company states this item is not applicable to smaller reporting companies[299] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were ineffective due to material weaknesses in non-routine transaction review and accounts payable processes - Management identified two material weaknesses in internal control over financial reporting: one related to the timeliness of review controls over non-routine transactions, and another related to the accounts payable process[300] - Remediation efforts include hiring experienced accounting and finance professionals, implementing a new ERP system, and engaging third-party consultants for internal audit and accounts payable functions[302][305] PART II OTHER INFORMATION Item 1. Legal Proceedings This section discloses ongoing legal matters Key proceedings include a subpoena from the U.S. Attorney's Office (EDPA) regarding ventilator billing practices, a civil investigative demand (CID) into AeroCare's oxygen billing, and a recent shareholder class action lawsuit alleging misleading statements about organic growth - On July 29, 2021, a shareholder class action lawsuit was filed against the company and certain officers, alleging violations of federal securities laws by making false and misleading statements regarding the company's organic growth trajectory[313] - The company is responding to a subpoena from the U.S. Attorney's Office for the Eastern District of Pennsylvania regarding ventilator billing practices[308] - AeroCare, an acquired subsidiary, is under investigation by the U.S. Attorney for the Western District of Kentucky regarding allegations of improper billing for oxygen tank contents prior to its acquisition by AdaptHealth[309][312] Item 1A. Risk Factors Updates significant risks, including the Philips Respironics recall, supply chain issues, regulatory challenges, and acquisition integration complexities - A key supplier, Philips Respironics, initiated a voluntary recall on June 14, 2021, for certain ventilator, BiPAP, and CPAP devices due to potential health risks from sound abatement foam This could lead to supply shortages, litigation, and affect the company's ability to service patients[325][326][327] - The company's business is highly dependent on sleep therapy equipment and supplies, which generated approximately 37% of net revenue in Q2 2021[331] - The company will no longer qualify as an "emerging growth company" as of December 31, 2021, which will increase compliance costs and require its independent auditor to attest to the effectiveness of internal controls over financial reporting[459][481] - The company is required to make payments under a Tax Receivable Agreement (TRA) equal to 85% of realized tax savings from certain basis step-ups and other tax attributes, which could be significant[471] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2021, the company issued 441,420 shares of Class A Common Stock as partial consideration for certain acquisitions These securities were issued in private transactions exempt from registration under the Securities Act - In Q2 2021, the company issued 441,420 shares of Class A Common Stock to former equity holders of acquired companies, pursuant to the exemption from registration in Section 4(a)(2) of the Securities Act[489]