What AdaptHealth (AHCO) Said on Its Q3 Earnings Call

Key Points

• Q3 results exceeded expectations: Revenue rose 10.9% year over year to $745.6 million, while adjusted EBITDA reached $141.9 million and free cash flow was $51.1 million. Organic growth was 12.8%, led largely by the company’s biggest capitated contract.
• Capitated contract performance improved sharply: The contract’s margin turned positive at approximately 10%, versus negative 4% in Q2, due to lower utilization, reduced capital spending and staffing cuts. AdaptHealth is targeting a 20% margin by Q4 2027, excluding potential pricing adjustments.
• Outlook was mixed but generally strengthened: Full-year revenue guidance increased to $2.88 billion–$2.9 billion and adjusted EBITDA guidance to $510 million–$525 million, while free cash flow guidance was reduced to $55 million–$80 million. The company plans to use proceeds from its expected 2027 Diabetes Health sale to reduce debt.

AdaptHealth NASDAQ: AHCO reported third-quarter results that exceeded its revenue and adjusted EBITDA guidance, citing improving performance in its largest capitated contract, continued organic growth in its base business and tighter cost controls.

Chief Executive Officer Suzanne Foster said the quarter marked “a step in the right direction” as the company works to stabilize operations following a large patient transition and reshapes its portfolio around Sleep, Respiratory and Wellness at Home businesses.

Third-quarter net revenue totaled $745.6 million, up 10.9% from a year earlier and 12.8% on an organic basis. Adjusted EBITDA was $141.9 million, exceeding the midpoint of the company’s implied guidance by $11.2 million, while free cash flow was $51.1 million, slightly above guidance.

Capitated Contract Turns Profitable

The company’s largest capitated contract was the principal contributor to the quarterly improvement. Foster said West Coast operations associated with the agreement made a positive contribution to adjusted EBITDA during the third quarter after generating a loss in the second quarter.

Chief Financial Officer Harriss Currie said the contract delivered an approximately 10% margin in the third quarter, compared with a negative 4% margin in the prior quarter. The contract was running at an approximately 14% margin as the quarter ended.

Management attributed the improvement to lower utilization from early-year peaks, particularly in sleep-resupply demand, reduced capital spending after initial purchases of vehicles and patient equipment, and a leaner labor model. Headcount dedicated to the contract, including temporary staff, couriers and contractors, fell more than 12% from the end of the second quarter, Foster said.

AdaptHealth expects to achieve a 20% margin on the contract by the fourth quarter of 2027. That target does not incorporate any potential pricing adjustments currently being negotiated with its partner. Foster said the company has received assurances that pricing adjustments are coming, though no changes to contract terms were included in the updated outlook.

The company also said it is applying for new Medicare billing numbers, known as PTANs, after a moratorium on new suppliers was lifted in August. The approvals would enable AdaptHealth to compete for fee-for-service business more broadly in California, an opportunity that is not included in the contract-margin target.

Segment Results and Cost Actions

Sleep Health revenue rose 11% to $393.9 million, Respiratory Health revenue increased 7.8% to $190.8 million, and Wellness at Home revenue grew 14.5% to $161 million. Capitated revenue was $110.3 million, representing about 15% of continuing-operations revenue and more than triple the prior-year level.

The largest capitated contract accounted for 10.7 percentage points of organic growth, while the base business accounted for the remaining 2.1 percentage points.

Adjusted EBITDA declined from $146.1 million a year earlier, and the adjusted EBITDA margin fell to 19% from 21.7%. Currie said the year-over-year decline reflected the ramp-up of the large capitated contract, partly offset by labor and operating-expense discipline.

Total headcount stood at 10,995 at the end of the quarter, down 337 from the end of June. The reductions were driven primarily by staffing changes on the capitated contract and broader labor discipline, according to Currie.

On a GAAP basis, AdaptHealth recorded a net loss attributable to the company of $168.2 million. The loss primarily reflected a $184.8 million non-cash, pre-tax goodwill impairment charge triggered by the recent decline in the company’s equity market capitalization. The company also recognized a $12 million pre-tax gain after contributing its e-commerce business into a joint venture in exchange for a minority interest.

Updated Outlook, Cash Flow and Debt

AdaptHealth raised its full-year revenue outlook to a range of $2.88 billion to $2.9 billion, reflecting an increase of about $20 million at the midpoint. It increased its adjusted EBITDA outlook to $510 million to $525 million, up $12 million at the midpoint.

• Fourth-quarter revenue is expected to be approximately $715 million to $735 million.
• Fourth-quarter adjusted EBITDA is expected to be approximately $130 million to $145 million.
• Full-year free cash flow guidance was lowered to $55 million to $80 million.

Currie said the lower free-cash-flow outlook reflected working-capital decisions, including pulling forward vendor payments to capture early-payment discounts rather than preserving short-term cash. The updated range implies fourth-quarter free cash flow of roughly $50 million to $75 million.

Net debt was $1.85 billion at quarter-end, down $48 million from June 30, while the company’s consolidated total leverage ratio was 3.05 times. AdaptHealth redeemed its 6.25% senior notes due 2028 using proceeds from a $325 million delayed-draw term loan, lowering its ongoing debt-service obligation by approximately 17 basis points. The company reiterated its target of reducing net leverage to 2.5 times and said it expects to direct a significant portion of proceeds from the Diabetes Health sale toward debt reduction.

Capital expenditures were $105.5 million, or 14.2% of consolidated revenue, as elevated spending related to the capitated contract subsided. Currie said the company’s target for capital expenditures remains 13% to 14% of revenue.

Diabetes Sale, Medline Beds and Growth Initiatives

The waiting period under the Hart-Scott-Rodino Act has expired for the pending sale of AdaptHealth’s Diabetes Health business to Cardinal Health. The transaction is expected to close early in 2027, subject to customary conditions.

Foster said continuing operations will retain about $60 million of corporate overhead that had previously been allocated to Diabetes Health. Roughly half of that amount is specifically tied to Diabetes Health and is expected to dissipate between closing and 12 months afterward. The company expects to absorb the remaining $30 million of stranded overhead through growth and expense discipline over the next several years.

AdaptHealth is also responding to Medline’s decision to remove its brand of beds from the market following safety notices involving certain home-care beds. The company is contacting affected patients and caregivers and plans to repair or replace beds over multiple quarters. Management said Medline beds are a meaningful component of its bed offering, but bed revenue is in the low single digits as a percentage of total company revenue.

Foster said the company expects Medline to address replacement costs and is working with alternative suppliers to support repair, replacement and new demand. The lower end of AdaptHealth’s guidance range incorporates potential short-term effects from the field action.

On the growth front, AdaptHealth signed preferred-provider agreements with four large health systems and added two smaller regional capitated agreements representing about 72,000 lives and an estimated $7 million to $8 million in annual revenue. The company’s MyAPP platform surpassed 615,000 registered users, up about 20% from the prior quarter, while its AI-powered mask-fitting tool completed more than 12,600 scans. About 94% of those scans resulted in a completed order, Foster said.

About AdaptHealth (NASDAQ:AHCO)

AdaptHealth Corp. NASDAQ: AHCO is a provider of home medical equipment, supplies and related healthcare services in the United States. The company helps patients manage chronic conditions and recover from illness or injury outside of traditional healthcare facilities, working with individuals, caregivers, physicians and payers.

Its products and services include respiratory equipment and supplies, oxygen therapy, sleep therapy devices such as continuous positive airway pressure systems, diabetes management products, mobility and accessibility equipment, and other durable medical equipment.

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