AdaptHealth(AHCO) - 2022 Q4 - Annual Report

PART I Business AdaptHealth provides national healthcare-at-home solutions, including HME and medical supplies, serving 3.9 million patients annually with revenue from rentals and sales - AdaptHealth is a national leader in healthcare-at-home solutions, including HME and medical supplies, focusing on sleep therapy, diabetes, and oxygen services. As of year-end 2022, the company served approximately 3.9 million patients annually through a network of about 725 locations in 47 states[22] FY 2022 Revenue Breakdown by Type | Revenue Type | Percentage of Net Revenue | | :--- | :--- | | Resupply & One-Time Sales | ~68% | | Fixed Monthly Equipment Rentals | ~32% | - A key element of AdaptHealth's growth strategy is accretive acquisitions. In 2022, the company completed acquisitions of eight companies for approximately $17.6 million, a significant decrease from 2021 when it acquired 23 companies for about $2.9 billion, primarily due to the AeroCare acquisition[33][34] - The company's operations were materially impacted by the June 2021 Philips Respironics recall of certain ventilator, BiPAP, and CPAP devices, which led to supply chain shortages and affected the company's ability to meet patient demand throughout 2022[35] - AdaptHealth is subject to extensive government regulation, including federal and state laws governing reimbursement, fraud and abuse (such as HIPAA and the HITECH Act), and Medicare's Competitive Bidding Program. The company maintains a compliance program to adhere to these complex regulations[45][47][48] Risk Factors AdaptHealth faces risks from supplier reliance, supply chain, inflation, cybersecurity, payor pricing, regulatory changes, goodwill impairment, and internal control weaknesses - The company relies on a small number of suppliers for its equipment. The June 2021 Philips recall of sleep and respiratory care devices created significant supply shortages that materially impacted the business in 2021 and 2022[69][71][74] - AdaptHealth is exposed to macroeconomic risks, including supply chain disruptions, economy-wide labor shortages, and inflationary pressures that increase the cost of materials, labor, and transportation[75][78] - A significant portion of revenue comes from specific sources, creating concentration risk: - Private Payors: Approximately 61% of net revenue for FY2022 was from private third-party payors, who are increasingly seeking to control costs. - Sleep Therapy: Approximately 36% of net revenue for FY2022 was from sleep therapy equipment and supplies. - Government Payors: Approximately 26% of net revenue for FY2022 was from Medicare and Medicaid programs, which are subject to policy and reimbursement changes[84][90][118] - The company is subject to various governmental audits and investigations related to healthcare fraud and abuse laws, including ongoing inquiries by the U.S. Attorney's Offices for the Eastern District of Pennsylvania and the Western District of Kentucky regarding ventilator and oxygen billing practices[134][136][138] - As of December 31, 2022, the company had $3.5 billion of goodwill on its balance sheet. A significant drop in market capitalization or other triggering events could lead to a material impairment charge[165] - The company has identified material weaknesses in its internal control over financial reporting, which could subject it to adverse regulatory consequences and harm investor confidence[174][175] Unresolved Staff Comments The company has no unresolved staff comments from the Securities and Exchange Commission - None[190] Properties AdaptHealth leases all its corporate headquarters and operating facilities, which are considered adequate for current business needs - The company leases all of its offices and facilities. Its corporate headquarters is located at 220 West Germantown Pike, Suite 250, Plymouth Meeting, Pennsylvania 19462[191] Legal Proceedings Legal proceedings information is incorporated by reference from the Commitments and Contingencies section within Item 7 - This section refers to the Commitments and Contingencies section within Item 7 for details on legal proceedings[192] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[192] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities AdaptHealth's common stock trades on Nasdaq under "AHCO," with no cash dividends paid or planned, and no equity security repurchases in Q4 2022 - The company's common stock is listed on the Nasdaq Stock Market under the trading symbol "AHCO"[195] - AdaptHealth has not paid any cash dividends on its common stock and has no current plans to do so in the foreseeable future[196] - There were no issuer purchases of equity securities during the quarter ended December 31, 2022[199] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2022, net revenue grew 21.0% to $2.97 billion, while net income decreased 55.6% to $69.3 million, and Adjusted EBITDA increased to $593.8 million Results of Operations In 2022, net revenue grew 21.0% to $2.97 billion, operating income decreased 15.6%, and net income declined 55.6% to $69.3 million Consolidated Results of Operations (2022 vs. 2021) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $2,970.6M | $2,454.5M | $516.1M | 21.0% | | Cost of Net Revenue | $2,553.2M | $2,008.9M | $544.2M | 27.1% | | Operating Income | $190.4M | $225.6M | ($35.2M) | (15.6)% | | Interest Expense, net | $109.4M | $95.2M | $14.2M | 14.9% | | Net Income (to AHCO) | $69.3M | $156.2M | ($86.9M) | (55.6)% | Revenue Change Drivers (2022 vs. 2021) | Driver | Change ($) | Change (%) | | :--- | :--- | :--- | | Increase from acquisitions | $439.8M | 17.9% | | Increase from non-acquired growth | $86.4M | 3.5% | | Decrease in business to business revenue | ($10.1M) | (0.4)% | | Total change in net revenue | $516.1M | 21.0% | - Cost of net revenue increased 27.1% to $2.55 billion in 2022, driven by acquisition growth, increased product costs, higher wages due to inflation, and a $2.6 million increase in fuel costs[233] - General and administrative expenses decreased by 3.2% to $162.1 million in 2022, primarily due to lower transaction costs from reduced M&A activity, offset by higher professional fees for systems implementation and legal matters[234] Consolidated Results of Operations (2021 vs. 2020) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $2,454.5M | $1,056.4M | $1,398.1M | 132.4% | | Operating Income | $225.6M | $71.3M | $154.3M | 216.2% | | Net Income (Loss) (to AHCO) | $156.2M | ($161.6M) | $317.8M | (196.6)% | Key Business Metrics Net revenue is disaggregated by service line, with Sleep (35.9%) and Diabetes (23.1%) being the largest contributors to the $2.97 billion total in 2022 Net Revenue by Service Line (FY 2022) | Service Line | Net Revenue (in millions) | % of Total | | :--- | :--- | :--- | | Sleep | $1,066.7 | 35.9% | | Diabetes | $687.1 | 23.1% | | Respiratory | $555.0 | 18.7% | | HME | $220.8 | 7.4% | | Supplies to the home | $179.3 | 6.0% | | Other | $261.6 | 8.9% | | Total Net Revenue | $2,970.6 | 100% | Net Revenue by Service Line (FY 2021) | Service Line | Net Revenue (in millions) | % of Total | | :--- | :--- | :--- | | Sleep | $891.4 | 36.3% | | Diabetes | $541.2 | 22.0% | | Respiratory | $458.3 | 18.7% | | HME | $209.7 | 8.5% | | Supplies to the home | $167.8 | 6.8% | | Other | $186.1 | 7.7% | | Total Net Revenue | $2,454.5 | 100% | EBITDA and Adjusted EBITDA Adjusted EBITDA increased to $593.8 million in 2022 from $565.9 million in 2021, reflecting specific adjustments from net income Reconciliation of Net Income to Adjusted EBITDA | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net income (loss) attributable to AdaptHealth Corp. | $69,316 | $156,175 | ($161,632) | | Income (loss) attributable to noncontrolling interests | $3,817 | $1,978 | ($32,454) | | Interest expense | $109,414 | $95,195 | $41,430 | | Income tax expense (benefit) | $24,769 | $32,806 | ($11,955) | | Depreciation and amortization | $351,178 | $258,053 | $82,445 | | EBITDA | $558,494 | $544,207 | ($82,166) | | Adjustments | $35,276 | $21,711 | $287,785 | | Adjusted EBITDA | $593,770 | $565,918 | $205,619 | Liquidity and Capital Resources AdaptHealth's liquidity is from operations and debt, with $46.3 million cash, $2.15 billion long-term debt, and negative free cash flow of $17.6 million in 2022 Cash Flow Summary | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $373,867 | $275,679 | $195,634 | | Net cash used in investing activities | ($411,171) | ($1,824,753) | ($815,703) | | Net cash (used in) provided by financing activities | ($66,051) | $1,598,739 | $643,153 | | Net (decrease) increase in cash | ($103,355) | $49,665 | $23,084 | Free Cash Flow Calculation | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $373,867 | $275,679 | $195,634 | | Purchases of equipment and other fixed assets | ($391,423) | ($203,308) | ($39,755) | | Free cash flow | ($17,556) | $72,371 | $155,879 | - As of December 31, 2022, the company had $765.0 million outstanding under its term loan and $432.6 million available under its revolving credit facility[274][318] Commitments and Contingencies The company faces ongoing government investigations into billing practices and shareholder lawsuits, though a Corporate Integrity Agreement expired in April 2022 - A five-year Corporate Integrity Agreement (CIA) assumed from the PPS acquisition expired in April 2022, and the OIG confirmed all obligations were satisfied as of January 2023[308][579] - The company is subject to several ongoing government investigations: - U.S. Attorney's Office (EDPA) investigation into ventilator billing practices from 2017. - U.S. Attorney's Office (WDKY) investigation into pre-acquisition billing for oxygen tank contents by AeroCare. - U.S. Attorney's Office (SDNY) civil investigative demand regarding potential False Claims Act violations related to ventilator billing from 2015 to present[309][310][317] - AdaptHealth is defending against a shareholder class action complaint alleging false and misleading statements regarding organic growth and a shareholder derivative complaint alleging breaches of fiduciary duty[312][315] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its variable-rate debt, with $765.0 million outstanding under the 2021 Term Loan as of December 31, 2022 - The company's main market risk is from interest rate fluctuations on its variable-rate borrowings. As of December 31, 2022, there was $765.0 million outstanding under the 2021 Term Loan, which is tied to the Adjusted LIBOR Rate[318] Financial Statements and Supplementary Data This section presents audited consolidated financial statements, with KPMG LLP issuing an unqualified opinion on financials but an adverse opinion on internal controls as of December 31, 2022 Consolidated Financial Statements The consolidated financial statements show total assets of $5.22 billion and liabilities of $3.06 billion at year-end 2022, with $2.97 billion net revenue and $69.3 million net income Consolidated Balance Sheet Data (as of Dec 31) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $585,308 | $670,058 | | Goodwill | $3,545,297 | $3,512,567 | | Total Assets | $5,219,587 | $5,250,484 | | Total Current Liabilities | $456,214 | $499,812 | | Long-term debt, less current portion | $2,153,267 | $2,183,552 | | Total Liabilities | $3,061,829 | $3,183,795 | | Total Stockholders' Equity | $2,157,758 | $2,066,689 | Consolidated Statement of Operations Data (Year Ended Dec 31) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net revenue | $2,970,595 | $2,454,535 | $1,056,389 | | Operating income | $190,411 | $225,605 | $71,346 | | Net income (loss) to AHCO | $69,316 | $156,175 | ($161,632) | | Diluted EPS | $0.33 | $0.67 | ($3.08) | Consolidated Statement of Cash Flows Data (Year Ended Dec 31) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $373,867 | $275,679 | $195,634 | | Net cash used in investing activities | ($411,171) | ($1,824,753) | ($815,703) | | Net cash (used in) provided by financing activities | ($66,051) | $1,598,739 | $643,153 | - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements but an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[324][332] - The auditor identified the evaluation of the implicit price concession estimate as a critical audit matter, requiring complex and subjective judgment to evaluate the historical reimbursement experience used in the estimate[329] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[618] Controls and Procedures Management concluded disclosure controls were not effective as of December 31, 2022, due to material weaknesses in internal control over financial reporting, also noted by KPMG LLP - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022, due to material weaknesses in internal control over financial reporting[619] - The material weaknesses relate to an insufficient complement of resources to complete a risk assessment, resulting in ineffective process-level controls and general information technology controls[620][624] - The independent registered public accounting firm, KPMG LLP, issued an adverse report on the operating effectiveness of the Company's internal control over financial reporting as of December 31, 2022[626] - Remediation efforts undertaken in 2022 include establishing an executive steering committee, expanding resources, completing a risk assessment, and implementing an ERP system. However, the material weaknesses are not yet considered fully remediated[627] Other Information The company reports no other information for this item - None[629] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[630] PART III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference to the Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[632] Executive Compensation Executive compensation information is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference to the Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[633] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference to the Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[634] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference to the Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[635] Principal Accountant's Fees and Services Principal accountant's fees and services information is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference to the Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[636] PART IV Exhibits and Financial Statement Schedules This section lists consolidated financial statements and provides an index of all exhibits filed with the Annual Report on Form 10-K - This item lists the consolidated financial statements and exhibits filed with the report[638][639] Form 10-K Summary The company did not provide a summary for Form 10-K - None[640]