# AdaptHealth Corp. (AHCO) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AdaptHealth Corp.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1725255/000162828024007254/ahco-20231231.htm
Accession: 0001628280-24-007254
Filing date: 2024-02-27
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AHCO/
All MD&A years: /company/AHCO/mda/
Previous year: /company/AHCO/mda/fy2022/ (FY 2022)
Next year: /company/AHCO/mda/fy2024/ (FY 2024)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with AdaptHealth Corp.'s ("AdaptHealth" or the "Company") consolidated financial statements and the accompanying notes included in this report. All amounts presented are in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), except as noted. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences include, but are not limited to, those discussed in Item 1A, "Risk Factors", of this Annual Report on Form 10-K. Certain amounts that appear in this section may not sum due to rounding.

AdaptHealth Corp. Overview

AdaptHealth is a national leader in providing patient-centered, healthcare-at-home solutions including home medical equipment ("HME"), medical supplies, and related services. The Company focuses primarily on providing (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from obstructive sleep apnea ("OSA"), (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors and insulin pumps), (iii) home medical equipment to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. The Company services beneficiaries of Medicare, Medicaid and commercial insurance payors. As of December 31, 2023, AdaptHealth serviced approximately 4.1 million patients annually in all 50 states through its network of approximately 680 locations in 47 states. The Company's principal executive offices are located at 220 West Germantown Pike, Suite 250, Plymouth Meeting, Pennsylvania 19462.

Impact of Inflation

Current and future inflationary effects may be driven by, among other things, general inflationary cost increases, supply chain disruptions and governmental stimulus or fiscal policies. The cost to manufacture and distribute the equipment and products that AdaptHealth provides to patients is influenced by the cost of materials, labor, and transportation, including fuel costs. AdaptHealth continues to experience inflationary pressure and higher costs as a result of the increasing cost of materials, labor and transportation. The increase in the cost of equipment and products is due in part to higher cost of shipping and general inflationary cost increases. Additionally, it is not certain that AdaptHealth will be able to pass increased costs onto customers to offset inflationary pressures. Continuing increases in inflation could impact the overall demand for AdaptHealth’s products and services, its costs for labor, equipment and products, and the margins it is able to realize on its products, all of which could have an adverse impact on AdaptHealth’s business, financial position, results of operations and cash flows. In addition, future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect AdaptHealth’s financial results. Although there have been increases in inflation, AdaptHealth cannot predict whether these trends will continue. AdaptHealth’s mitigation efforts relating to these inflationary pressures include utilizing AdaptHealth’s purchasing power in negotiations with vendors and the increased use of technology to drive operating efficiencies and control costs, such as AdaptHealth’s digital platform for prescriptions, orders and delivery. In April 2023, AdaptHealth formalized a cost management program to drive operating efficiencies and implement more simplified and scalable business processes. The steps in the program were substantially complete as of December 31, 2023. The program included a rationalization of AdaptHealth's real estate footprint, renegotiation of certain supply contracts, workforce reductions, and expanded use of more efficient operating models for certain back-office functions. These changes reflect AdaptHealth's continued strategic focus on process standardization and efficiency across the enterprise through technology and related investments. This program delivered Adjusted EBITDA improvement in 2023 of approximately $25 million, and is expected to result in approximately $40 million of annualized Adjusted EBITDA improvement in future years. The cost to achieve this program during the year ended December 31, 2023 was approximately $14.3 million. In addition, AdaptHealth continues to evaluate opportunities to rationalize its operating footprint and related cost structure to better align with business needs.

Key Components of Operating Results

Net Revenue. Net revenue is recognized for services and related products that AdaptHealth provides to patients for home healthcare equipment, medical supplies to the home and related services. AdaptHealth' s primary product lines are (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from OSA, (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors and insulin pumps), (iii) home medical equipment to patients discharged from acute care and other facilities, (iv)

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oxygen and related chronic therapy services in the home, and (v) other HME devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. Revenues are recognized either at a point in time for the sale of supplies and disposables, over the service period for equipment rental (including, but not limited to, CPAP machines, hospital beds, wheelchairs and other equipment), net of implicit price concessions for amounts estimated to be received from patients or under reimbursement arrangements with Medicare, Medicaid and other third-party payors, including private insurers, or in the month in which eligible members are entitled to receive healthcare services in connection with at-risk capitation arrangements. Certain trends or uncertainties that may have a material impact on revenue growth and operating results include the Company's ability to obtain new patient starts and to generate referrals from patient referral sources and the ability to meet the increased demand considering inflationary pressures.

Cost of Net Revenue. Cost of net revenue primarily includes the cost of non-capitalized medical equipment and supplies, distribution expenses, labor costs, facilities and vehicle rental costs, revenue cycle management costs and depreciation for capitalized patient equipment. Distribution expenses represent the cost incurred to coordinate and deliver products and services to the patients. Included in distribution expenses are leasing, maintenance, licensing and fuel costs for the vehicle fleet; salaries, benefits and other costs related to drivers and dispatch personnel; and amounts paid to couriers.

General and Administrative Expenses. General and administrative expenses consist of corporate support costs including information technology, human resources, finance, contracting, legal, compliance, equity-based compensation, transaction expenses and other administrative costs.

Depreciation and Amortization, Excluding Patient Equipment Depreciation. Depreciation expense includes depreciation charges for capital assets other than patient equipment (which is included as part of the cost of net revenue). Amortization expense includes amortization of identifiable intangible assets.

Factors Affecting AdaptHealth’s Operating Results

AdaptHealth’s operating results and financial performance are influenced by certain unique events during the periods discussed herein, including the following:

Goodwill Impairment

AdaptHealth has a significant amount of goodwill on its balance sheet that resulted from the business acquisitions AdaptHealth has made. Goodwill is not amortized, rather, it is assessed for impairment annually and upon the occurrence of a triggering event or change in circumstances indicating a possible impairment. Such triggering events potentially warranting an annual or interim goodwill impairment assessment include, among other factors, declines in historical or projected revenue, operating income or cash flows, and sustained decreases in AdaptHealth's stock price or market capitalization. Such changes in circumstance can include, among others, changes in the legal environment, reimbursement environment, operating performance, and/or future prospects. AdaptHealth performs its annual impairment assessment of goodwill during the fourth quarter of each year. The impairment assessment can be performed on either a quantitative or qualitative basis. AdaptHealth first assesses qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment analysis. If determined necessary, AdaptHealth applies the quantitative impairment test to identify and measure the amount of impairment, if any. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors, such as estimates of a reporting unit's fair value, including the revenue growth rates, discount rate, and control premium used to estimate the reporting unit’s fair value, and judgment about impairment triggering events. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual or interim goodwill impairment test will prove to be accurate predictions of the future.

During the year ended December 31, 2023, AdaptHealth experienced declines in its market capitalization as a result of sustained decreases in AdaptHealth's stock price and also revised its financial projections. AdaptHealth considered these items to represent triggering events and performed a goodwill impairment test at each quarterly reporting date during 2023. Based on the results of the tests performed as of September 30, 2023 and December 31, 2023, it was concluded that the estimated fair value of AdaptHealth's reporting unit was less than its carrying values at such dates; as such, AdaptHealth recognized an aggregate non-cash goodwill impairment charge of $830.8 million during the year ended December 31, 2023, which included an impairment charge of $318.9 million recognized during the fourth quarter. If in future periods AdaptHealth were to experience a further decline in its market capitalization or expected results for a sustained period of time, AdaptHealth may be required to perform an additional goodwill impairment test at an interim or

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annual period and could be required to recognize an additional non-cash goodwill impairment charge at that time, which could be material.

Acquisitions

AdaptHealth accounts for its acquisitions in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations, and the operations of the acquired entities are included in the historical results of AdaptHealth for the periods following the closing of the acquisition. See Note 3, Acquisitions, included in our consolidated financial statements for the year ended December 31, 2023 included in this Annual Report on Form 10-K for additional information regarding AdaptHealth’s acquisitions.

Debt

In January 2021, AdaptHealth refinanced its debt borrowings and entered into a new credit agreement, which was subsequently amended in April 2021 and March 2023 (the “2021 Credit Agreement”). The 2021 Credit Agreement consists of an $800 million term loan (the “2021 Term Loan”) and $450 million in commitments for revolving credit loans with a $55 million letter of credit sublimit (the “2021 Revolver”), both with maturities in January 2026.

In August 2021, AdaptHealth issued $600.0 million aggregate principal amount of 5.125% senior unsecured notes (the “5.125% Senior Notes”). The 5.125% Senior Notes will mature on March 1, 2030. Interest on the 5.125% Senior Notes is payable on March 1st and September 1st of each year, and began on March 1, 2022. In January 2021, AdaptHealth issued $500.0 million aggregate principal amount of 4.625% senior unsecured notes (the “4.625% Senior Notes”). The 4.625% Senior Notes will mature on August 1, 2029. Interest on the 4.625% Senior Notes is payable on February 1st and August 1st of each year, and began on August 1, 2021. In July 2020, AdaptHealth issued $350.0 million aggregate principal amount of 6.125% senior unsecured notes (the “6.125% Senior Notes”). The 6.125% Senior Notes will mature on August 1, 2028. Interest on the 6.125% Senior Notes is payable on February 1st and August 1st of each year, and began on February 1, 2021. See section below, titled Liquidity and Capital Resources, for additional discussion related to AdaptHealth’s senior unsecured notes.

In March 2019, AdaptHealth entered into a Note and Unit Purchase Agreement with an investor. Pursuant to the agreement, AdaptHealth issued a promissory note with a principal amount of $100 million (the "Promissory Note"). In November 2019, the Promissory Note was replaced with a new amended and restated promissory note with a principal amount of $100 million, and the investor converted certain of its members’ interests to a $43.5 million promissory note. The new $100 million promissory note, together with the $43.5 million promissory note, are collectively referred to herein as the "New Promissory Note". In June 2021, AdaptHealth repaid $71.8 million of the outstanding principal balance under the New Promissory Note. In August 2021, AdaptHealth repaid the remaining outstanding principal balance of $71.7 million under the New Promissory Note. The outstanding principal balance under the New Promissory Note bore interest at 12%.

Seasonality

AdaptHealth’s business experiences some seasonality. Its patients are generally responsible for a greater percentage of the cost of their treatment or therapy during the early months of the year due to co-insurance, co-payments and deductibles, and therefore may defer treatment and services of certain therapies until meeting their annual deductibles. In addition, changes to employer insurance coverage often go into effect at the beginning of each calendar year which may impact eligibility requirements and delay or defer treatment. Also, net revenue generated by the Company’s diabetes product line is typically higher in the fourth quarter compared to the earlier part of the year due to the timing of when patients meet their annual deductibles and their associated reordering patterns. These factors may lead to lower net revenue and cash flow in the early part of the year versus the latter half of the year. Additionally, the increased incidence of respiratory infections during the winter season may result in initiation of additional respiratory services such as oxygen therapy for certain patient populations. AdaptHealth’s quarterly operating results may fluctuate significantly in the future depending on these and other factors.

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Key Business Metrics

AdaptHealth focuses on Net revenue, EBITDA, Adjusted EBITDA and Free Cash Flow as it reviews its performance. Refer to EBITDA, Adjusted EBITDA and Free Cash Flow included in the Non-GAAP measures section below.

Total net revenue is comprised of net sales revenue and net revenue from fixed monthly equipment reimbursements. Net sales revenue consists of revenue recognized at a point in time for the sale of supplies and disposables and revenue recognized in connection with at-risk capitation arrangements. Net revenue from fixed monthly equipment reimbursements consists of revenue recognized over the service period for equipment (including, but not limited to, CPAP machines, oxygen concentrators, ventilators, hospital beds, wheelchairs and other equipment).

[[GREPCENT_TABLE]]
[["","Three Months Ended"],["Net Revenue","March 31, 2023","","June 30, 2023","","September 30, 2023","","December 31, 2023"],["(in thousands, except revenue percentage, \"%\")","$","","%","","$","","%","","$","","%","","$","","%","","Total $","","%"],["","(Unaudited)"],["Net sales revenue - Point in time"],["Sleep","$","213,457","","","28.7","%","","$","215,849","","","27.2","%","","$","227,005","","","28.2","%","","$","240,808","","","28.1","%","","$","897,119","","","28.0","%"],["Diabetes","142,544","","","19.1","%","","165,021","","","20.8","%","","157,328","","","19.6","%","","182,538","","","21.3","%","","647,431","","","20.2","%"],["Supplies to the home","46,555","","","6.3","%","","48,323","","","6.1","%","","48,349","","","6.0","%","","49,248","","","5.7","%","","192,475","","","6.0","%"],["Respiratory","7,929","","","1.1","%","","8,191","","","1.0","%","","8,164","","","1.0","%","","8,086","","","0.9","%","","32,370","","","1.0","%"],["HME","28,563","","","3.8","%","","27,237","","","3.4","%","","27,095","","","3.4","%","","27,302","","","3.2","%","","110,197","","","3.4","%"],["Other","53,207","","","7.1","%","","57,012","","","7.3","%","","64,184","","","8.0","%","","77,307","","","9.0","%","","251,710","","","8.0","%"],["Total Net sales revenue","$","492,255","","","66.1","%","","$","521,633","","","65.8","%","","$","532,125","","","66.2","%","","$","585,289","","","68.2","%","","$","2,131,302","","","66.6","%"],["Net revenue from fixed monthly equipment reimbursements"],["Sleep","$","80,922","","","10.9","%","","$","86,783","","","10.9","%","","$","88,387","","","11.0","%","","$","87,957","","","10.2","%","","$","344,049","","","10.8","%"],["Diabetes","3,831","","","0.5","%","","3,886","","","0.5","%","","2,609","","","0.3","%","","2,282","","","0.3","%","","12,608","","","0.4","%"],["Respiratory","134,723","","","18.1","%","","145,889","","","18.4","%","","142,919","","","17.8","%","","142,919","","","16.7","%","","566,450","","","17.7","%"],["HME","22,341","","","3.0","%","","23,974","","","3.0","%","","25,087","","","3.1","%","","24,926","","","2.9","%","","96,328","","","3.0","%"],["Other","10,554","","","1.4","%","","11,121","","","1.4","%","","12,904","","","1.6","%","","14,861","","","1.7","%","","49,440","","","1.5","%"],["Total Net revenue from fixed monthly equipment reimbursements","$","252,371","","","33.9","%","","$","271,653","","","34.2","%","","$","271,906","","","33.8","%","","$","272,945","","","31.8","%","","$","1,068,875","","","33.4","%"],["Total net revenue"],["Sleep","$","294,379","","","39.6","%","","$","302,632","","","38.1","%","","$","315,392","","","39.2","%","","$","328,765","","","38.3","%","","$","1,241,168","","","38.8","%"],["Diabetes","146,375","","","19.6","%","","168,907","","","21.3","%","","159,937","","","19.9","%","","184,820","","","21.6","%","","660,039","","","20.6","%"],["Supplies to the home","46,555","","","6.3","%","","48,323","","","6.1","%","","48,349","","","6.0","%","","49,248","","","5.7","%","","192,475","","","6.0","%"],["Respiratory","142,652","","","19.2","%","","154,080","","","19.4","%","","151,083","","","18.8","%","","151,005","","","17.6","%","","598,820","","","18.7","%"],["HME","50,904","","","6.8","%","","51,211","","","6.4","%","","52,182","","","6.5","%","","52,228","","","6.1","%","","206,525","","","6.4","%"],["Other","63,761","","","8.5","%","","68,133","","","8.7","%","","77,088","","","9.6","%","","92,168","","","10.7","%","","301,150","","","9.5","%"],["Total Net revenue","$","744,626","","","100.0","%","","$","793,286","","","100.0","%","","$","804,031","","","100.0","%","","$","858,234","","","100.0","%","","$","3,200,177","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Three Months Ended"],["Net Revenue","March 31, 2022","","June 30, 2022","","September 30, 2022","","December 31, 2022"],["(in thousands, except revenue percentage, \"%\")","$","","%","","$","","%","","$","","%","","$","","%","","Total $","","%"],["","(Unaudited)"],["Net sales revenue - Point in time"],["Sleep","$","192,335","","","27.2","%","","$","194,693","","","26.8","%","","$","198,206","","","26.2","%","","$","208,787","","","26.8","%","","$","794,021","","","26.7","%"],["Diabetes","151,359","","","21.4","%","","162,259","","","22.3","%","","169,075","","","22.3","%","","188,295","","","24.1","%","","670,988","","","22.6","%"],["Supplies to the home","39,865","","","5.6","%","","43,881","","","6.0","%","","47,793","","","6.3","%","","47,787","","","6.1","%","","179,326","","","6.0","%"],["Respiratory","8,145","","","1.2","%","","7,891","","","1.1","%","","9,734","","","1.3","%","","8,572","","","1.1","%","","34,342","","","1.2","%"],["HME","30,052","","","4.3","%","","30,313","","","4.2","%","","29,463","","","3.9","%","","28,714","","","3.7","%","","118,542","","","4.0","%"],["Other","54,199","","","7.7","%","","53,617","","","7.3","%","","58,252","","","7.7","%","","52,393","","","6.7","%","","218,461","","","7.4","%"],["Total Net sales revenue","$","475,955","","","67.4","%","","$","492,654","","","67.7","%","","$","512,523","","","67.7","%","","$","534,548","","","68.5","%","","$","2,015,680","","","67.9","%"],["Net revenue from fixed monthly equipment reimbursements"],["Sleep","$","57,938","","","8.2","%","","$","65,661","","","9.0","%","","$","72,423","","","9.6","%","","$","76,683","","","9.8","%","","$","272,705","","","9.2","%"],["Diabetes","3,946","","","0.6","%","","4,034","","","0.6","%","","4,211","","","0.6","%","","3,912","","","0.5","%","","16,103","","","0.5","%"],["Respiratory","132,580","","","18.8","%","","128,865","","","17.7","%","","130,618","","","17.3","%","","128,634","","","16.5","%","","520,697","","","17.5","%"],["HME","25,725","","","3.6","%","","25,547","","","3.5","%","","25,482","","","3.4","%","","25,502","","","3.3","%","","102,256","","","3.4","%"],["Other","10,059","","","1.4","%","","10,853","","","1.5","%","","11,238","","","1.4","%","","11,004","","","1.4","%","","43,154","","","1.5","%"],["Total Net revenue from fixed monthly equipment reimbursements","$","230,248","","","32.6","%","","$","234,960","","","32.3","%","","$","243,972","","","32.3","%","","$","245,735","","","31.5","%","","$","954,915","","","32.1","%"],["Total Net revenue"],["Sleep","$","250,273","","","35.4","%","","$","260,354","","","35.8","%","","$","270,629","","","35.8","%","","$","285,470","","","36.6","%","","$","1,066,726","","","35.9","%"],["Diabetes","155,305","","","22.0","%","","166,293","","","22.9","%","","173,286","","","22.9","%","","192,207","","","24.6","%","","687,091","","","23.1","%"],["Supplies to the home","39,865","","","5.6","%","","43,881","","","6.0","%","","47,793","","","6.3","%","","47,787","","","6.1","%","","179,326","","","6.0","%"],["Respiratory","140,725","","","20.0","%","","136,756","","","18.8","%","","140,352","","","18.6","%","","137,206","","","17.6","%","","555,039","","","18.7","%"],["HME","55,777","","","7.9","%","","55,860","","","7.7","%","","54,945","","","7.3","%","","54,216","","","7.0","%","","220,798","","","7.4","%"],["Other","64,258","","","9.1","%","","64,470","","","8.8","%","","69,490","","","9.1","%","","63,397","","","8.1","%","","261,615","","","8.9","%"],["Total Net revenue","$","706,203","","","100.0","%","","$","727,614","","","100.0","%","","$","756,495","","","100.0","%","","$","780,283","","","100.0","%","","$","2,970,595","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Three Months Ended"],["Net Revenue","March 31, 2021","","June 30, 2021","","September 30, 2021","","December 31, 2021"],["(in thousands, except revenue percentage, \"%\")","$","","%","","$","","%","","$","","%","","$","","%","","Total $","","%"],["","(Unaudited)"],["Net sales revenue - Point in time"],["Sleep","$","128,682","","","26.7","%","","$","163,331","","","26.5","%","","$","173,359","","","26.5","%","","$","188,758","","","26.9","%","","$","654,130","","","26.6","%"],["Diabetes","95,017","","","19.7","%","","123,314","","","20.0","%","","134,228","","","20.5","%","","175,523","","","25.0","%","","528,082","","","21.5","%"],["Supplies to the home","41,363","","","8.6","%","","42,675","","","6.9","%","","42,441","","","6.5","%","","41,351","","","5.9","%","","167,830","","","6.8","%"],["Respiratory","5,621","","","1.2","%","","13,154","","","2.1","%","","6,228","","","1.0","%","","6,013","","","0.9","%","","31,016","","","1.3","%"],["HME","23,401","","","4.9","%","","29,268","","","4.7","%","","29,919","","","4.6","%","","31,217","","","4.4","%","","113,805","","","4.6","%"],["Other","23,181","","","4.8","%","","28,855","","","4.7","%","","45,996","","","7.1","%","","46,511","","","6.6","%","","144,543","","","6.0","%"],["Total Net sales revenue","$","317,265","","","65.8","%","","$","400,597","","","64.9","%","","$","432,171","","","66.2","%","","$","489,373","","","69.7","%","","$","1,639,406","","","66.8","%"],["Net revenue from fixed monthly equipment reimbursements"],["Sleep","$","48,109","","","10.0","%","","$","66,335","","","10.8","%","","$","62,755","","","9.6","%","","$","60,053","","","8.6","%","","$","237,252","","","9.7","%"],["Diabetes","2,853","","","0.6","%","","3,216","","","0.5","%","","3,722","","","0.6","%","","3,332","","","0.5","%","","13,123","","","0.5","%"],["Respiratory","83,454","","","17.3","%","","111,528","","","18.1","%","","117,918","","","18.0","%","","114,370","","","16.3","%","","427,270","","","17.4","%"],["HME","20,380","","","4.2","%","","24,431","","","4.0","%","","26,043","","","4.0","%","","25,082","","","3.6","%","","95,936","","","3.9","%"],["Other","10,058","","","2.1","%","","10,910","","","1.7","%","","10,684","","","1.6","%","","9,896","","","1.3","%","","41,548","","","1.7","%"],["Total Net revenue from fixed monthly equipment reimbursements","$","164,854","","","34.2","%","","$","216,420","","","35.1","%","","$","221,122","","","33.8","%","","$","212,733","","","30.3","%","","$","815,129","","","33.2","%"],["Total Net revenue"],["Sleep","$","176,791","","","36.7","%","","$","229,666","","","37.3","%","","$","236,114","","","36.1","%","","$","248,811","","","35.5","%","","$","891,382","","","36.3","%"],["Diabetes","97,870","","","20.3","%","","126,530","","","20.5","%","","137,950","","","21.1","%","","178,855","","","25.5","%","","541,205","","","22.0","%"],["Supplies to the home","41,363","","","8.6","%","","42,675","","","6.9","%","","42,441","","","6.5","%","","41,351","","","5.9","%","","167,830","","","6.8","%"],["Respiratory","89,075","","","18.5","%","","124,682","","","20.2","%","","124,146","","","19.0","%","","120,383","","","17.2","%","","458,286","","","18.7","%"],["HME","43,781","","","9.1","%","","53,699","","","8.7","%","","55,962","","","8.6","%","","56,299","","","8.0","%","","209,741","","","8.5","%"],["Other","33,239","","","6.9","%","","39,765","","","6.4","%","","56,680","","","8.7","%","","56,407","","","7.9","%","","186,091","","","7.7","%"],["Total Net revenue","$","482,119","","","100.0","%","","$","617,017","","","100.0","%","","$","653,293","","","100.0","%","","$","702,106","","","100.0","%","","$","2,454,535","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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Results of Operations

Comparison of Year Ended December 31, 2023 and Year Ended December 31, 2022.

The following table summarizes AdaptHealth’s consolidated results of operations for the years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["(in thousands, except percentages)","","Year Ended December 31,"],["","2023","","2022"],["","Dollars","","Revenue Percentage","","Dollars","","Revenue Percentage","","Increase/(Decrease)"],["","","","","","Dollars","","Percentage"],["","","(Unaudited)"],["Net revenue","","$","3,200,177","","","100.0","%","","$","2,970,595","","","100.0","%","","$","229,582","","","7.7","%"],["Costs and expenses:"],["Cost of net revenue","","2,720,613","","","85.0","%","","2,553,169","","","85.9","%","","167,444","","","6.6","%"],["General and administrative expenses","","190,091","","","5.9","%","","162,125","","","5.5","%","","27,966","","","17.2","%"],["Depreciation and amortization, excluding patient equipment depreciation","","57,087","","","1.8","%","","64,890","","","2.2","%","","(7,803)","","","(12.0)","%"],["Goodwill impairment","","830,787","","","26.0","%","","\u2014","","","\u2014","%","","830,787","","","\u2014","%"],["Total costs and expenses","","3,798,578","","","118.7","%","","2,780,184","","","93.6","%","","1,018,394","","","36.6","%"],["Operating (loss) income","","(598,401)","","","(18.7)","%","","190,411","","","6.4","%","","(788,812)","","","(414.3)","%"],["Interest expense, net","","130,299","","","4.1","%","","109,414","","","3.7","%","","20,885","","","19.1","%"],["Change in fair value of warrant liability","","(34,482)","","","(1.1)","%","","(17,158)","","","(0.6)","%","","(17,324)","","","101.0","%"],["Other loss, net","","29,566","","","0.9","%","","253","","","\u2014","%","","29,313","","","11586.2","%"],["(Loss) income before income taxes","","(723,784)","","","(22.6)","%","","97,902","","","3.3","%","","(821,686)","","","(839.3)","%"],["Income tax (benefit) expense","","(49,004)","","","(1.5)","%","","24,769","","","0.8","%","","(73,773)","","","(297.8)","%"],["Net (loss) income","","(674,780)","","","(21.1)","%","","73,133","","","2.5","%","","(747,913)","","","(1022.7)","%"],["Income attributable to noncontrolling interests","","4,115","","","0.1","%","","3,817","","","0.1","%","","298","","","7.8","%"],["Net (loss) income attributable to AdaptHealth Corp.","","$","(678,895)","","","(21.2)","%","","$","69,316","","","2.4","%","","$","(748,211)","","","(1079.4)","%"]]
[[/GREPCENT_TABLE]]

Net Revenue. The comparability of AdaptHealth's net revenue between periods was impacted by certain factors as described below. The table below presents the items that impacted the change in AdaptHealth's net revenue between periods.

[[GREPCENT_TABLE]]
[["","Variance 2023 vs. 2022"],["(in thousands, except percentages)","$","","%"],["","(Unaudited)"],["Revenue change driver:"],["Increase from non-acquired growth","$","217,268","","","7.3","%"],["Increase from acquisitions","12,314","","","0.4","%"],["Total change in net revenue","$","229,582","","","7.7","%"]]
[[/GREPCENT_TABLE]]

Net revenue for the years ended December 31, 2023 and 2022 was $3,200.2 million and $2,970.6 million, respectively, an increase of $229.6 million or 7.7%. The increase in net revenue was primarily driven by non-acquired growth of $217.3 million, as well as acquisitions, which increased net revenue by $12.3 million.

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Net revenue from AdaptHealth's sleep business increased by $174.4 million, or 16.4%, for the year ended December 31, 2023 compared to the prior year period, primarily due to increased patient census driven by strong patient demand for sleep products, including CPAP resupply products. Net revenue from AdaptHealth's respiratory business increased by $43.8 million, or 7.9%, for the year ended December 31, 2023 compared to the prior year period, primarily due to increased patient census driven by strong patient demand for respiratory products. Net revenue from AdaptHealth's diabetes business decreased by $27.1 million, or 3.9%, for the year ended December 31, 2023 compared to the prior year period, primarily due to a shift in diabetes patients by certain large commercial insurance and other payors from DME suppliers to dual-benefit and pharmacy-only suppliers and lower net revenue from insulin pumps and supplies as a result of a shift toward more pumps being sold to patients through the pharmacy channel, as well as the effect from manufacturers bringing additional distribution business in-house, partially offset by an increase in CGM patient census.

For the year ended December 31, 2023, net sales revenue (recognized at a point in time) comprised 67% of total net revenue, compared to 68% of total net revenue for the year ended December 31, 2022. For the year ended December 31, 2023, net revenue from fixed monthly equipment reimbursements comprised 33% of total net revenue, compared to 32% of total net revenue for the year ended December 31, 2022.

Cost of Net Revenue.

The following table summarizes cost of net revenue for the years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["(in thousands, except percentages)","","Year Ended December 31,"],["","2023","","2022"],["","Dollars","","Revenue Percentage","","Dollars","","Revenue Percentage","","Increase/(Decrease)"],["","","","","","Dollars","","Percentage"],["(Unaudited)"],["Costs of net revenue:"],["Cost of products and supplies","","$","1,305,219","","","40.8","%","","$","1,199,481","","","40.4","%","","$","105,738","","","8.8","%"],["Salaries, labor and benefits","","785,876","","","24.5","%","","777,306","","","26.1","%","","8,570","","","1.1","%"],["Patient equipment depreciation","","325,696","","","10.2","%","","286,288","","","9.6","%","","39,408","","","13.8","%"],["Rent and occupancy","","67,783","","","2.1","%","","64,375","","","2.2","%","","3,408","","","5.3","%"],["Other operating expenses","","236,039","","","7.4","%","","225,719","","","7.6","%","","10,320","","","4.6","%"],["Total cost of net revenue","","$","2,720,613","","","85.0","%","","$","2,553,169","","","85.9","%","","$","167,444","","","6.6","%"]]
[[/GREPCENT_TABLE]]

Cost of net revenue for the years ended December 31, 2023 and 2022 was $2,720.6 million and $2,553.2 million, respectively, an increase of $167.4 million or 6.6%. Costs of products and supplies increased by $105.7 million primarily as a result of increased net sales revenue and general inflationary cost increases. Salaries, labor and benefits increased by $8.6 million, primarily due to increased benefit costs, annual merit increases, and workforce wage pressure driven by inflation, partially offset by cost savings actions driven by headcount reductions. Patient equipment depreciation was 10.2% of net revenue in 2023 compared to 9.6% in 2022, primarily as a result of higher medical equipment prices and rental counts.

General and Administrative Expenses. General and administrative expenses for the years ended December 31, 2023 and 2022 were $190.1 million and $162.1 million, respectively, an increase of $28.0 million or 17.2%. This increase is primarily due to higher professional fees and higher equity-based compensation expense, partially offset by lower transaction costs. General and administrative expenses as a percentage of net revenue was 5.9% in 2023, compared to 5.5% in 2022. General and administrative expenses in 2023 included $19.6 million of equity-based compensation expense, $1.0 million of transaction costs, and other non-recurring expenses of $28.9 million, primarily consisting of $12.8 million of expenses associated with litigation, $6.5 million of expenses associated with cost savings initiatives, and $5.6 million of expenses associated with systems implementation activities. General and administrative expenses in 2022 included $15.8 million of equity-based compensation expense, $6.0 million of transaction costs, and other non-recurring expenses of $19.7 million, primarily consisting of $11.7 million of consulting expenses associated with systems implementation activities and post-implementation support services and $7.4 million of expenses associated with litigation.

Depreciation and amortization, excluding patient equipment depreciation. Depreciation and amortization, excluding patient equipment depreciation, for the years ended December 31, 2023 and 2022 was $57.1 million and $64.9 million, respectively, a decrease of $7.8 million, primarily related to lower intangible amortization expense.

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Goodwill Impairment. The Company performed a goodwill impairment test at each quarterly reporting date during 2023, and based on the results of the tests performed at September 30, 2023 and December 31, 2023, it was concluded that the estimated fair value of AdaptHealth’s reporting unit was less than its carrying values at such dates, as such, AdaptHealth recognized an aggregate non-cash goodwill impairment charge of $830.8 million. See Note 5, Goodwill and Identifiable Intangible Assets, for additional details.

Interest Expense, net. Interest expense, net for the years ended December 31, 2023 and 2022 was $130.3 million and $109.4 million, respectively. Interest expense related to AdaptHealth's credit agreement increased by $27.6 million in 2023 compared to 2022 as a result of higher interest rates, offset by lower average outstanding borrowings in 2023 compared to 2022. Interest expense on AdaptHealth's finance leases increased by $1.1 million in 2023 compared to 2022. These increases were offset by a reduction in interest expense of $8.3 million related to AdaptHealth's interest rate swap agreements.

Change in Fair Value of Warrant Liability. AdaptHealth has outstanding warrants to purchase shares of Common Stock, as discussed in Note 11, Stockholders' Equity – Warrants, to the accompanying December 31, 2023 consolidated financial statements. These warrants are liability-classified, and the change in fair value of the warrant liability represents a non-cash gain in 2023 and 2022 for the change in the estimated fair value of such liability during the respective periods.

Other loss, net. Other loss, net for the year ended December 31, 2023 consisted of an expense of $25.1 million relating to an agreement to settle a previously disclosed securities class action lawsuit, net of expected contributions from the Company’s insurers, $4.8 million of lease termination costs associated with a cost management program, $0.9 million of impairments of operating lease right-of-use assets, $1.2 million of expenses associated with other legal settlements, and a $0.3 million charge for the increase in the fair value of a contingent consideration liability related to an acquisition, offset by income of $2.5 million related to changes in AdaptHealth’s estimated TRA liability, and $0.3 million of equity income related to an equity method investment. Other loss, net for the year ended December 31, 2022 consisted of $3.2 million of expenses associated with legal settlements, $2.2 million of increases in the fair value of contingent consideration liabilities related to acquisitions, and $0.2 million of other charges, offset by income of $2.9 million related to changes in AdaptHealth’s estimated TRA liability and $2.4 million in gains from asset sales.

Income Tax (Benefit) Expense. Income tax benefit for the year ended December 31, 2023 was $49.0 million compared to income tax expense of $24.8 million for the year ended December 31, 2022. Income tax expense on ordinary income for the year ended December 31, 2023 decreased as compared to the year ended December 31, 2022 due to lower pre-tax income net of warrant liability fair value adjustments. Additionally, the Company recognized a $64.8 million income tax benefit, and corresponding increase to net deferred tax assets, related to non-cash goodwill impairment charges of $830.8 million recognized during the year ended December 31, 2023. See Note 5, Goodwill and Identifiable Intangible Assets, for additional details.

Comparison of Year Ended December 31, 2022 and Year Ended December 31, 2021.

For a comparison of AdaptHealth's results of operations for the years ended December 31, 2022 and December 31, 2021, see "Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Operations" of AdaptHealth's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023.

EBITDA and Adjusted EBITDA

AdaptHealth uses EBITDA and Adjusted EBITDA, which are financial measures that are not in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, to analyze its financial results and believes that they are useful to investors, as a supplement to U.S. GAAP measures. In addition, AdaptHealth’s ability to incur additional indebtedness and make investments under its existing credit agreement is governed, in part, by its ability to satisfy tests based on a variation of Adjusted EBITDA.

AdaptHealth defines EBITDA as net income (loss) attributable to AdaptHealth Corp., plus net income (loss) attributable to noncontrolling interests, interest expense, net, income tax expense (benefit), and depreciation and amortization, including patient equipment depreciation.

AdaptHealth defines Adjusted EBITDA as EBITDA (as defined above), plus loss on extinguishment of debt, equity-based compensation expense, transaction costs, change in fair value of the warrant liability, goodwill impairment,

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change in fair value of the contingent consideration common shares liability, litigation settlement expense, and certain other non-recurring items of expense or income.

AdaptHealth believes Adjusted EBITDA is useful to investors in evaluating AdaptHealth’s financial performance. AdaptHealth uses this metric as the profitability measure in its incentive compensation plans that have a profitability component and to evaluate acquisition opportunities, where it is most often used for purposes of contingent consideration arrangements.

EBITDA and Adjusted EBITDA should not be considered as measures of financial performance under U.S. GAAP, and the items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. Accordingly, these key business metrics have limitations as an analytical tool. They should not be considered as an alternative to net income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flows from operating activities as a measure of AdaptHealth’s liquidity.

The following unaudited table presents the reconciliation of net (loss) income attributable to AdaptHealth Corp., to EBITDA and Adjusted EBITDA for the years ended December 31, 2023, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands)","","2023","","2022","","2021"],["","","(Unaudited)"],["Net (loss) income attributable to AdaptHealth Corp.","","$","(678,895)","","","$","69,316","","","$","156,175"],["Income attributable to noncontrolling interest","","4,115","","","3,817","","","1,978"],["Interest expense, net","","130,299","","","109,414","","","95,195"],["Income tax (benefit) expense","","(49,004)","","","24,769","","","32,806"],["Depreciation and amortization, including patient equipment depreciation","","382,783","","","351,178","","","258,053"],["EBITDA","","(210,702)","","","558,494","","","544,207"],["Loss on extinguishment of debt (a)","","\u2014","","","\u2014","","","20,189"],["Equity-based compensation expense (b)","","22,468","","","22,397","","","25,323"],["Transaction costs (c)","","960","","","6,003","","","49,081"],["Change in fair value of warrant liability (d)","","(34,482)","","","(17,158)","","","(53,181)"],["Goodwill impairment (e)","","830,787","","","\u2014","","","\u2014"],["Change in fair value of contingent consideration common shares liability (f)","","\u2014","","","\u2014","","","(29,389)"],["Litigation settlement expense (g)","","25,140","","","\u2014","","","\u2014"],["Other non-recurring expenses, net (h)","","36,624","","","24,034","","","9,688"],["Adjusted EBITDA","","$","670,795","","","$","593,770","","","$","565,918"],["Net (loss) income attributable to AdaptHealth Corp. as a percentage of net revenue","","(21.2)%","","2.3%","","6.4%"],["Adjusted EBITDA as a percentage of net revenue","","21.0%","","20.0%","","23.1%"]]
[[/GREPCENT_TABLE]]

(a)Represents the write-off of unamortized deferred financing costs and other expenses related to refinancing of debt and prepayment penalties for early debt payoff.

(b)Represents non-cash equity-based compensation expense for awards granted to employees and non-employee directors.

(c)Represents transaction costs and expenses related to integration efforts related to acquisitions.

(d)Represents non-cash gains for the changes in the estimated fair value of the warrant liability. See Note 11, Stockholders’ Equity – Warrants, included in the accompanying notes to the consolidated financial statements for the year ended December 31, 2023 for additional discussion of such non-cash gains.

(e)Represents non-cash goodwill impairment charges as a result of the fair value of the Company’s reporting unit being less than its carrying value. See Note 5, Goodwill and Identifiable Intangible Assets, included in the

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accompanying notes to the consolidated financial statements for the year ended December 31, 2023 for additional discussion of such impairment charges.

(f)Represents a non-cash gain for the change in the estimated fair value of the contingent consideration common shares liability. See Note 11, Stockholders’ Equity – Contingent Consideration Common Shares, included in the accompanying notes to the consolidated financial statements for the year ended December 31, 2023 for additional discussion of such non-cash gain.

(g)Represents an expense relating to an agreement to settle a previously disclosed securities class action lawsuit, net of expected contributions from the Company’s insurers. See Note 16, Commitments and Contingencies, included in the accompanying notes to the consolidated financial statements for the year ended December 31, 2023 for additional discussion of such agreement.

(h)The 2023 period consists of $13.9 million of expenses associated with litigation, $7.1 million of severance charges (of which $2.9 million relates to the separation of the Company's former CEO), $5.6 million of consulting expenses associated with systems implementation activities, $5.2 million of consulting expenses associated with cost savings initiatives, $4.8 million of lease termination costs associated with a cost management program, $0.9 million of net impairments of operating lease right-of-use assets as a result of vacating the leased facilities, and $1.6 million of other non-recurring expenses, offset by income of $2.5 million related to changes in AdaptHealth's estimated TRA liability. The 2022 period consists of $11.7 million of consulting expenses associated with systems implementation activities and post-implementation support services, $10.5 million of expenses associated with litigation, a $0.8 million loss related to the write-off of an investment, and $3.9 million of net other non-recurring expenses, offset by income of $2.9 million related to changes in AdaptHealth’s estimated TRA liability. The 2021 period includes $2.1 million of expenses related to legal and other costs associated with the separation of the Company’s former Co-CEO, $3.9 million of expenses associated with litigation, claims and settlements, $1.9 million of expenses associated with lease terminations, and $4.6 million of net other non-recurring expenses, offset by a $1.9 million gain in connection with the consolidation of an equity method investment, and $0.9 million of net reductions in the fair value of contingent consideration liabilities related to acquisitions.

Free Cash Flow

AdaptHealth uses free cash flow, which is a financial measure that is not in accordance with U.S. GAAP, in its operational and financial decision-making and believes free cash flow is useful to investors because similar measures are frequently used by securities analysts, investors, ratings agencies and other interested parties to evaluate AdaptHealth's competitors and to measure the ability of companies to service their debt. AdaptHealth's presentation of free cash flow should not be construed as a measure of liquidity or discretionary cash available to AdaptHealth to fund its cash needs, including investing in the growth of its business and meeting its obligations.

Free cash flow should not be considered as a measure of financial performance under U.S. GAAP. Accordingly, this key business metric has limitations as an analytical tool. It should not be considered as an alternative to any performance measures derived in accordance with U.S. GAAP or as an alternative to cash flows from operating activities as a measure of AdaptHealth’s liquidity.

AdaptHealth defines free cash flow as net cash provided by operating activities less cash paid for purchases of equipment and other fixed assets. For further discussion on free cash flow, including a reconciliation from cash flows provided by operating activities, see Liquidity and Capital Resources - Free Cash Flow below.

Liquidity and Capital Resources

AdaptHealth’s principal sources of liquidity are its operating cash flows, borrowings under its credit agreements and other debt arrangements, and proceeds from equity issuances. AdaptHealth has used these funds to meet its capital requirements, which primarily consist of capital expenditures including patient equipment, product and supply costs, salaries, labor, benefits and other employee-related costs, third-party customer service, billing and collections and logistics costs, acquisitions and debt service, and to fund share repurchases. AdaptHealth’s future capital expenditure requirements will depend on many factors, including its patient volume and revenue growth rates.

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AdaptHealth’s capital expenditures are made in advance of patients beginning service. Certain operating costs are incurred at the beginning of the equipment service period and during initial patient set up.

AdaptHealth believes that its expected operating cash flows, together with its existing cash and amounts available under its existing credit agreement, will continue to be sufficient to fund its operations and growth strategies for at least the next twelve months.

AdaptHealth may seek additional equity or debt financing in connection with the growth of its business, primarily for acquisitions. In addition, economic conditions may cause disruption in the capital markets, which could make financing more difficult and/or expensive. In the event that additional financing is required from outside sources, AdaptHealth may not be able to raise it on acceptable terms or at all. If additional capital is unavailable when desired, AdaptHealth’s business, results of operations, and financial condition could be materially adversely affected.

As of December 31, 2023, AdaptHealth had approximately $77.1 million of cash.

At December 31, 2023, AdaptHealth had $720.0 million outstanding under its existing credit facility. In January 2021, AdaptHealth refinanced its debt borrowings and entered into a new credit agreement, which was subsequently amended in April 2021 and March 2023 (the “2021 Credit Agreement”). The 2021 Credit Agreement consists of a $800 million term loan (the “2021 Term Loan”) and $450 million in commitments for revolving credit loans with a $55 million letter of credit sublimit (the “2021 Revolver”), both with maturities in January 2026. The borrowing under the 2021 Term Loan requires quarterly principal repayments of $5.0 million beginning June 30, 2021 through March 31, 2023, increasing to $10.0 million beginning June 30, 2023 through December 31, 2025, and the unpaid principal balance is due at maturity in January 2026. Borrowings under the 2021 Revolver may be used for working capital and other general corporate purposes, including for capital expenditures and acquisitions permitted under the 2021 Credit Agreement. As of December 31, 2023, there were no outstanding borrowings under the 2021 Revolver. At December 31, 2023, based on the financial debt covenants under the 2021 Credit Agreement, the maximum amount the Company could borrow under the 2021 Revolver and remain in compliance with the financial debt covenants under the agreement was $226.2 million.

Amounts borrowed under the 2021 Credit Agreement bear interest quarterly at variable rates based upon, except in the case of Base Rate Loans (as defined), the sum of (a) the forward looking term rate based on a secured overnight financing rate ("Term SOFR") (subject to a zero percent floor) equal to Term SOFR plus a Term SOFR Adjustment (as defined) of 0.10%, plus (b) an Applicable Margin (as defined) ranging from 1.50% to 3.25% per annum based on the Consolidated Senior Secured Leverage Ratio (as defined). On March 31, 2023, the Company amended the 2021 Credit Agreement to change the base interest rate under the agreement from LIBOR to be based on Term SOFR. The 2021 Revolver carries a commitment fee during the term of the 2021 Credit Agreement ranging from 0.25% to 0.50% per annum of the actual daily undrawn portion of the 2021 Revolver based on the Consolidated Senior Secured Leverage Ratio.

Under the 2021 Credit Agreement, AdaptHealth is subject to a number of restrictive covenants that, among other things, impose operating and financial restrictions on AdaptHealth. Financial covenants include a Consolidated Total Leverage Ratio and a Consolidated Interest Coverage Ratio, both as defined in the 2021 Credit Agreement. The 2021 Credit Agreement also contains certain customary events of default, including, among other things, failure to make payments when due thereunder, failure to observe or perform certain covenants, cross-defaults, bankruptcy and insolvency-related events, and non-compliance with healthcare laws. AdaptHealth was in compliance with the applicable covenants in the aforementioned credit facility as of December 31, 2023.

Any borrowing under the 2021 Credit Agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty, other than customary breakage costs, and any amounts repaid under the 2021 Revolver may be reborrowed. Mandatory prepayments are required under the 2021 Revolver when borrowings and letter of credit usage exceed the total commitments for revolving credit loans. Mandatory prepayments are also required in connection with the disposition of assets to the extent not reinvested, unpermitted debt transactions, and calculation of excess cash flow, as defined, if certain leverage tests are not met. As a result of the calculation of excess cash flow as of December 31, 2023, AdaptHealth is required to make a mandatory prepayment of $13.4 million. This amount is included in the current portion of long-term debt as of December 31, 2023 in the accompanying consolidated balance sheets, and AdaptHealth expects to make this payment by the end of March 2024.

At December 31, 2023, AdaptHealth had $1,450.0 million aggregate principal amount of unsecured senior notes outstanding. In August 2021, AdaptHealth LLC issued $600.0 million aggregate principal amount of 5.125% senior unsecured notes (the “5.125% Senior Notes”). The 5.125% Senior Notes will mature on March 1, 2030. Interest on the

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5.125% Senior Notes is payable on March 1st and September 1st of each year. The 5.125% Senior Notes will be redeemable at AdaptHealth’s option, in whole or in part, at any time on or after March 1, 2025, and the redemption price for the 5.125% Senior Notes if redeemed during the 12 months beginning (i) March 1, 2025 is 102.563%, (ii) March 1, 2026 is 101.281%, (iii) March 1, 2027 and thereafter is 100.000%, in each case together with accrued and unpaid interest. AdaptHealth may also redeem some or all of the 5.125% Senior Notes before March 1, 2025 at a redemption price of 100% of the principal amount of the 5.125% Senior Notes, plus a “make-whole” premium, together with accrued and unpaid interest. In addition, AdaptHealth may redeem up to 40% of the original aggregate principal amount of the 5.125% Senior Notes before March 1, 2025 with the proceeds from certain equity offerings at a redemption price equal to 105.125% of the principal amount of the 5.125% Senior Notes, together with accrued and unpaid interest. Furthermore, AdaptHealth may be required to make an offer to purchase the 5.125% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control.

In January 2021, AdaptHealth LLC issued $500.0 million aggregate principal amount of 4.625% senior unsecured notes (the “4.625% Senior Notes”). The 4.625% Senior Notes will mature on August 1, 2029. Interest on the 4.625% Senior Notes is payable on February 1st and August 1st of each year. The 4.625% Senior Notes will be redeemable at AdaptHealth’s option, in whole or in part, at any time on or after February 1, 2024, and the redemption price for the 4.625% Senior Notes if redeemed during the 12 months beginning (i) February 1, 2024 is 102.313%, (ii) February 1, 2025 is 101.156%, and (iii) February 1, 2026 and thereafter is 100.000%, in each case together with accrued and unpaid interest. AdaptHealth may also redeem some or all of the 4.625% Senior Notes before February 1, 2024 at a redemption price of 100% of the principal amount of the 4.625% Senior Notes, plus a “make-whole” premium, together with accrued and unpaid interest. In addition, AdaptHealth may redeem up to 40% of the original aggregate principal amount of the 4.625% Senior Notes before February 1, 2024 with the proceeds from certain equity offerings at a redemption price equal to 104.625% of the principal amount of the 4.625% Senior Notes, together with accrued and unpaid interest. Furthermore, AdaptHealth may be required to make an offer to purchase the 4.625% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control.

In July 2020, AdaptHealth LLC issued $350.0 million aggregate principal amount of 6.125% senior unsecured notes (the “6.125% Senior Notes”). The 6.125% Senior Notes will mature on August 1, 2028. Interest on the 6.125% Senior Notes is payable on February 1st and August 1st of each year. The 6.125% Senior Notes will be redeemable at AdaptHealth’s option, in whole or in part, at any time on or after August 1, 2023, and the redemption price for the 6.125% Senior Notes if redeemed during the 12 months beginning (i) August 1, 2023 is 103.063%, (ii) August 1, 2024 is 102.042%, (iii) August 1, 2025 is 101.021% and (iv) August 1, 2026 and thereafter is 100.000%, in each case together with accrued and unpaid interest. AdaptHealth may also redeem some or all of the 6.125% Senior Notes before August 1, 2023 at a redemption price of 100% of the principal amount of the 6.125% Senior Notes, plus a “make-whole” premium, together with accrued and unpaid interest. In addition, AdaptHealth may redeem up to 40% of the original aggregate principal amount of the 6.125% Senior Notes before August 1, 2023 with the proceeds from certain equity offerings at a redemption price equal to 106.125% of the principal amount of the 6.125% Senior Notes, together with accrued and unpaid interest. Furthermore, AdaptHealth may be required to make an offer to purchase the 6.125% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control.

As of December 31, 2023 and 2022, AdaptHealth had working capital of $112.0 million and $129.1 million, respectively. A significant portion of AdaptHealth’s current assets consists of accounts receivable from third-party payors that are responsible for payment for the products and services that AdaptHealth provides.

Cash Flow. The following table presents selected data from AdaptHealth’s consolidated statements of cash flows for years ended December 31, 2023, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands)","","2023","","2022","","2021"],["","","(Unaudited)"],["Net cash provided by operating activities","","$","480,666","","$","373,867","","$","275,679"],["Net cash used in investing activities","","(357,278)","","","(411,171)","","","(1,824,753)"],["Net cash (used in) provided by financing activities","","(92,528)","","(66,051)","","1,598,739"],["Net increase (decrease) in cash","","30,860","","(103,355)","","49,665"],["Cash at beginning of period","","46,272","","149,627","","99,962"],["Cash at end of period","","$","77,132","","$","46,272","","$","149,627"]]
[[/GREPCENT_TABLE]]

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Net cash provided by operating activities for the years ended December 31, 2023 and 2022 was $480.7 million and $373.9 million, respectively, an increase of $106.8 million. The increase was the result of a $747.9 million reduction in net income (loss), a net increase of $769.3 million in non-cash charges, primarily from goodwill impairment charges, depreciation and amortization, the change in the estimated fair value of the warrant liability, deferred income taxes, and the reduction in the carrying amount of operating and finance lease right-of-use assets, payments of contingent consideration related to acquisitions of $2.5 million in the 2022 period, and a net $82.9 million increase resulting from the change in operating assets and liabilities, primarily from the change in accounts receivable, inventory and accounts payable and accrued expenses.

Net cash provided by operating activities for the years ended December 31, 2022 and 2021 was $373.9 million and $275.7 million, respectively, an increase of $98.2 million. The increase was the result of (1) a $85.0 million reduction in net income, (2) a net increase of $139.4 million in non-cash charges, primarily from depreciation and amortization, the change in the estimated fair value of the warrant liability and contingent consideration common shares liability, equity-based compensation expense, and loss on extinguishment of debt, (3) an increase of $1.5 million in payments for contingent consideration related to acquisitions, and (4) a net $45.3 million resulting from the change in operating assets and liabilities, primarily from the change in accounts receivable, inventory and accounts payable and accrued expenses.

Net cash used in investing activities for the years ended December 31, 2023, 2022 and 2021 was $357.3 million, $411.2 million and $1,824.8 million, respectively. The use of funds in 2023 consisted of $337.5 million for equipment and other fixed asset purchases, $19.7 million for business acquisitions, and $0.1 million for other investments. The use of funds in 2022 consisted of $19.0 million for business acquisitions, $391.4 million for equipment and other fixed asset purchases and $0.7 million for other investments. The use of funds in 2021 consisted of $1,620.3 million for business acquisitions, primarily for the AeroCare acquisition, $203.3 million for equipment and other fixed asset purchases and $1.1 million for other investments.

Net cash used in financing activities for 2023 was $92.5 million and consisted of repayments of $101.8 million on long-term debt and finance lease liabilities, payments of $29.3 million for Common Stock purchases under a share repurchase program, payments of $3.2 million in connection with the Company's liability relating to the TRA, payments of $5.8 million for tax withholdings associated with equity-based compensation and stock option exercises, a payment of $2.5 million for a distribution to the noncontrolling interest, and payments of $2.5 million for deferred purchase price in connection with acquisitions, offset by borrowings of long-term debt of $50.0 million, proceeds of $2.0 million in connection with the employee stock purchase plan and proceeds of $0.6 million relating to stock option exercises.

Net cash used in financing activities for 2022 was $66.1 million and consisted of repayments of $36.2 million on long-term debt and finance lease obligations, payments of $14.5 million for contingent consideration and deferred purchase price related to acquisitions, payments of $14.0 million for Common Stock repurchases under a share repurchase program, a payment of $2.0 million for a distribution to noncontrolling interests, and payments of $3.5 million for tax withholdings associated with equity-based compensation activity and stock option exercises, offset by proceeds of $1.6 million in connection with the employee stock purchase plan and proceeds of $2.5 million relating to stock option exercises.

Net cash provided by financing activities for 2021 was $1,598.7 million and consisted of proceeds of $1,165.0 million from borrowings on long-term debt and lines of credit, proceeds of $1,100.0 million from the issuance of senior unsecured notes, proceeds of $278.9 million from the issuance of shares of Common Stock in connection with a public underwritten offering, proceeds of $12.3 million from the exercise of stock options, and proceeds of $1.0 million in connection with the employee stock purchase plan, offset by total repayments of $869.4 million on long-term debt and finance lease obligations, payments of $13.8 million for equity issuance costs, payments of $29.2 million for debt issuance costs, payments of $25.2 million for contingent consideration and deferred purchase price related to acquisitions, payments of $16.1 million for debt prepayment penalties, payments of $1.1 million for distributions to noncontrolling interests, and payments of $3.6 million relating to tax withholdings associated with equity-based compensation activity and stock option exercises.

Free Cash Flow

The following table reconciles net cash provided by operating activities to free cash flow, which is a non-GAAP measure, for the years ended December 31, 2023, 2022 and 2021:

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[["","","Year Ended December 31,"],["(in thousands)","","2023","","2022","","2021"],["","","(Unaudited)"],["Net cash provided by operating activities","","$","480,666","","","$","373,867","","","$","275,679"],["Purchases of equipment and other fixed assets","","(337,463)","","","(391,423)","","","(203,308)"],["Free cash flow","","$","143,203","","","$","(17,556)","","","$","72,371"]]
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Free cash flow was positive $143.2 million for the year ended December 31, 2023, compared to negative $17.6 million for the year ended December 31, 2022. The increase in free cash flow was primarily due to higher net cash provided by operating activities due to a net decrease in the use of cash from operating assets and liabilities, primarily from accounts receivable, inventory and accounts payable and accrued expenses, and a decrease in, and timing of, purchases of patient medical equipment for operating requirements, offset by an increase in cash paid for interest. Free cash flow was negative $17.6 million for the year ended December 31, 2022, compared to positive $72.4 million for the year ended December 31, 2021. The reduction in free cash flow was primarily due to an increase in, and timing of, purchases of patient medical equipment for operating requirements, partially offset by higher net cash provided by operating activities due to an increase in the source of cash for improved results from operations.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of the Company’s consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. The Company’s management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different assumptions and judgments would change the estimates used in the preparation of the Company’s consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company’s financial position and results of operations.

Critical estimates are those that the Company’s management considers the most important to the portrayal of the Company’s financial condition and results of operations because they require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s critical estimates in relation to its consolidated financial statements include those related to revenue recognition and valuation of goodwill.

Revenue Recognition

Revenues are recognized either at a point in time for the sale of supplies and disposables, over the service period for equipment rental (including, but not limited to, CPAP machines, hospital beds, wheelchairs and other equipment), net of implicit price concessions for amounts estimated to be received from patients or under reimbursement arrangements with Medicare, Medicaid and other third-party payors, including private insurers, or in the month in which eligible members are entitled to receive healthcare services in connection with at-risk capitation arrangements. The Company determines the transaction price based on contractually agreed-upon amounts or rates, referred to as explicit price concessions, adjusted for estimates of variable consideration, such as implicit price concessions, based on historical reimbursement experience. The Company utilizes the expected value method to determine the amount of variable consideration, including implicit and explicit price concessions, that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The Company applies constraint to the transaction price, such that net revenue is recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such adjustments become known.

The estimated implicit price concession requires significant judgment as it involves the complexity of third-party billing arrangements, contractual terms and the uncertainty of reimbursement amounts. The estimated implicit price concession is developed using assumptions based on the best information available to the Company at the time, but which

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are inherently uncertain and unpredictable and as a result, actual results may differ significantly from the Company's estimates.

Valuation of Goodwill

The Company has a significant amount of goodwill on its balance sheet that resulted from the business acquisitions the Company has made. Goodwill is not amortized, rather, it is assessed for impairment annually and also upon the occurrence of a triggering event or change in circumstances indicating a possible impairment. Such triggering events potentially warranting an annual or interim goodwill impairment assessment include, among other factors, declines in historical or projected revenue, operating income or cash flows, and sustained decreases in the Company’s stock price or market capitalization. Such changes in circumstance can include, among others, changes in the legal environment, reimbursement environment, operating performance, and/or future prospects. The Company performs its annual impairment assessment of goodwill during the fourth quarter of each year. The impairment assessment can be performed on either a quantitative or qualitative basis. The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment analysis. If determined necessary, the Company applies the quantitative impairment test to identify and measure the amount of impairment, if any. When performing a quantitative assessment to estimate the fair value of the Company's goodwill, the Company applies (1) a discounted cash flow method which includes assumptions on the projected future cash flows, earnings, discount rates, working capital adjustments, long-term growth rates, and others, and (2) a market approach to estimate value through the analysis of recent sales of comparable assets or business entities. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors, such as estimates of a reporting unit's fair value, including the revenue growth rates, discount rate, and control premium used to estimate the reporting unit’s fair value, and judgment about impairment triggering events. As a result, there can be no assurance that the estimates and assumptions made for purposes of the Company's goodwill impairment test will prove to be accurate predictions of the future. The use of different estimates or assumptions in determining the fair value of the Company's goodwill may result in a different value recorded, which could result in a material non-cash impairment charge.

Recent Accounting Pronouncements

Recently issued accounting pronouncements that may be relevant to the Company’s operations but have not yet been adopted are outlined in Note 2, Summary of Significant Accounting Policies - (ee) Recently Issued Accounting Pronouncements, to its consolidated financial statements included in this report.

Commitments and Contingencies

In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business that cover a wide range of matters. In accordance with FASB ASC Topic 450, Accounting for Contingencies, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. If there is no probable estimate within a range of reasonably possible outcomes, the Company’s policy is to record at the low end of the range of such reasonably possible outcomes. Significant judgment is required to determine both probability and the estimated amount. The Company reviews its accruals at least quarterly and adjusts accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. At this time, the Company has no material accruals related to lawsuits, claims, investigations and proceedings, except as disclosed below. While there can be no assurance, based on the Company’s evaluation of information currently available, the Company’s management believes any liability that may ultimately result from resolution of such loss contingencies will not have a material adverse effect on the Company’s financial conditions or results of operations. However, the Company’s assessment may be affected by limited information. Accordingly, the Company’s assessment may change in the future based upon availability of new information and further developments in the proceedings of such matters. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible. Professional legal fees are expensed as they are incurred.

On July 25, 2017, AdaptHealth Holdings was served with a subpoena by the U.S. Attorney’s Office for the United States District Court for the Eastern District of Pennsylvania (“EDPA”) pursuant to 18 U.S.C. §3486 to produce certain audit records and internal communications regarding ventilator billing. The investigation focused on billing practices regarding one payor that contracted for bundled payments for certain ventilators. AdaptHealth Holdings cooperated with the investigation and on April 21, 2023, the Company entered into a settlement agreement with the EDPA resolving all allegations and claims related to the investigation without a determination of liability on the part of the Company. In connection with the settlement, the Company made a payment of $5.3 million, which was fully accrued as of December 31, 2022, and was not required to enter into any post-settlement agreements related to the settlement.

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In March 2019, prior to its acquisition by the Company, AeroCare Holdings, Inc. (“AeroCare”) was served with a civil investigative demand (“CID”) issued by the United States Attorney for the Western District of Kentucky (“WDKY”). The CID sought to investigate allegations that AeroCare improperly billed, or caused others to improperly bill, for oxygen tank contents that were not delivered to beneficiaries. The WDKY requested documents related to such oxygen tank content billing as well as other categories of information. AeroCare cooperated fully with the investigation and on June 23, 2022, the complaint filed in connection with this investigation was dismissed by the United States District Court in the Western District of Kentucky with the consent of the WDKY.

On July 29, 2021, Robert Charles Faille Jr., a purported shareholder of the Company, filed a purported class action complaint against the Company and certain of its current and former officers in the United States District Court for the Eastern District of Pennsylvania for alleged violations of the federal securities laws arising from allegedly false and misleading statements and/or failures to disclose material information regarding changes made to the methodology used to calculate the Company’s organic growth trajectory. On October 14, 2021, the court appointed Delaware County Employees Retirement System and the Bucks County Employees Retirement System as Lead Plaintiffs. On November 22, 2021, Lead Plaintiffs filed a consolidated complaint against the Company and certain of its current and former officers and directors on behalf of shareholders that purchased or otherwise acquired the Company’s stock and options between November 8, 2019 and July 16, 2021 (as to the complaint, the “Consolidated Complaint”; as to the action, the “Consolidated Class Action”). The Consolidated Complaint generally alleges that the defendants violated federal securities laws by making allegedly false and misleading statements and/or failing to disclose material information regarding changes made to the methodology used to calculate the Company’s organic growth trajectory and the Company’s former Co-CEO’s alleged tax fraud arising from certain past private activity. The Consolidated Complaint seeks unspecified damages. On January 20, 2022, the defendants filed a motion to dismiss the Consolidated Complaint, which the court denied on June 9, 2022. On June 7, 2023, the court entered an order staying the Consolidated Class Action pending the outcome of a private mediation between the parties.

On February 26, 2024, defendants entered into a stipulation and agreement of settlement with the Lead Plaintiffs. The Company’s portion of the proposed settlement is expected to be funded as follows (i) $32.2 million of cash from the Company’s insurance carriers; (ii) $17.8 million of cash from the Company; and (iii) 1 million shares of the Company’s Common Stock (the “Settlement Shares”). In addition, as part of the proposed settlement, the Company has agreed to the implementation of certain corporate governance reforms. At December 31, 2023, the Company recorded a liability of $57.3 million, consisting of the aggregate cash payments of $50.0 million and the fair value of the Settlement Shares, which was determined to be $7.3 million; such liability is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. In addition, at December 31, 2023, the Company recorded a receivable of $32.2 million, representing the amount to be received from the Company’s insurance carriers, which is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. For the year ended December 31, 2023, the Company recorded a pre-tax expense of $25.1 million associated with the proposed settlement, which is included in other loss, net in the accompanying consolidated statements of operations. The Company anticipates that the Settlement Shares will be issued from available Treasury Stock. Upon issuance of the Settlement Shares, $7.3 million will be reclassified from liabilities to stockholders' equity.

The proposed settlement is subject to preliminary and final Court approval and other customary closing conditions. Upon the effectiveness of the proposed settlement, the Company and its directors and officers as well as the other defendants named in the Consolidated Complaint will be released from the claims that were asserted or could have been asserted in the Consolidated Class Action, with certain limitations, by class members participating in the settlement. The Company has always maintained, and continues to believe, that it did not engage in any wrongdoing or otherwise commit any violation of federal or state securities laws or other laws. The settlement includes no admission of liability or wrongdoing and is subject to court approval. There can be no assurance that the settlement will be finalized and approved and, even if approved, whether the conditions to closing will be satisfied, and the actual outcome of this matter may differ materially from the terms of the settlement described herein.

The Company has also reached an agreement in principle with its directors and officers liability insurers to resolve a proceeding that the Company filed in Delaware Superior Court concerning coverage in connection with the Consolidated Class Action and the Derivative Action discussed immediately below. The proposed settlement will exhaust $35.0 million in D&O coverage limits available to the Company for the policy period from November 8, 2020 to November 8, 2021. There can be no assurance that the settlement will be finalized or the conditions to closing will be satisfied, and the actual outcome of this matter may differ materially from the terms of the settlement described herein.

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On December 6, 2021, a putative shareholder of the Company, Carol Hessler, filed a shareholder derivative complaint against certain current and former directors and officers of the Company in the United States District Court for the Eastern District of Pennsylvania (as to the complaint, the “Derivative Complaint”; as to the action, the “Derivative Action”). The Derivative Complaint generally alleges that the defendants breached their fiduciary duties owed to the Company by, among other things, allegedly causing or allowing misrepresentations and/or omissions regarding changes made to the methodology used to calculate the Company’s organic growth and the Company’s former Co-CEO’s alleged criminal activity and engaging in insider trading. The Derivative Complaint also alleges claims for waste of corporate assets and unjust enrichment. Finally, the Derivative Complaint alleges that certain of the individual defendants violated Section 14(a) of the Securities Exchange Act by allegedly negligently issuing, causing to be issued, and participating in the issuance of materially misleading statements to stockholders in the Company’s Proxy Statements on Schedule DEF 14A in connection with a Special Meeting of Stockholders, held on March 3, 2021, and the 2021 Annual Meeting of Stockholders, held on July 27, 2021. The Derivative Complaint seeks, among other things, an award of money damages.

On March 4, 2022, the parties to the Derivative Action stipulated to stay the Derivative Action pending final resolution of the Consolidated Class Action. On March 7, 2022, the court so-ordered the parties’ stipulation.

The defendants have reached an agreement in principle with the derivative plaintiff to settle the Derivative Action. The settlement, which would include no admission of liability or wrongdoing by the defendants, is subject to negotiation and execution of definitive settlement documentation and court approval. The proposed settlement consideration would consist of certain corporate governance reforms and reasonable attorneys’ fees, at an amount to later be determined, to be approved by the court.

Upon the effectiveness of the proposed settlement, the Company and its directors and officers as well as the other defendants named in the Derivative Complaint would be released from the claims that were asserted or could have been asserted in the Derivative Complaint. The proposed settlement is subject to court approval and other customary closing conditions. There can be no assurance that the settlement will be finalized and approved and, even if approved, whether the conditions to settlement will be satisfied, and the actual outcome of this matter may differ materially from the terms of the settlement described herein.

On May 2, 2022, the U.S. Attorney’s Office for the Southern District of New York issued a civil investigative demand to a subsidiary of the Company, pursuant to the False Claims Act, 31 U.S.C. § 3733 ("FCA") surrounding whether the subsidiary submitted false claims in violation of the FCA related to its billing of, and reimbursements from, federal health care programs for ventilators provided to patients from January 1, 2015 to the present. The Company is fully cooperating with the investigation. Given the stage of the investigation, it is not possible to determine whether it will have a material adverse effect on the Company.

On October 24, 2023, Allegheny County Employees’ Retirement System, a purported shareholder of the Company, filed a purported class action complaint against the Company and certain of its current and former officers, and certain underwriters in the United States District Court for the Eastern District of Pennsylvania (the “Allegheny County Complaint”). The Allegheny County Complaint purports to be asserted on behalf of a class of persons who purchased the Company’s stock between August 4, 2020 and February 27, 2023. The Allegheny County Complaint alleges, among other things, that the defendants violated federal securities laws by making allegedly false and misleading statements and/or failing to disclose material information regarding the Company’s organic growth in its diabetes business. The Allegheny County Complaint seeks unspecified damages. On January 23, 2024, the court entered an order appointing Allegheny County Employees' Retirement System, International Union of Operating Engineers, Local No. 793, Members Pension Benefit Trust of Ontario, and City of Tallahassee Pension Plan as Lead Plaintiffs. On February 6, 2024, the parties filed a joint stipulation outlining proposed deadlines for Lead Plaintiffs to identify an operative complaint or file an amended or consolidated complaint and for defendants to respond to the operative complaint.

The Company intends to vigorously defend against the allegations contained in the Allegheny County Complaint, but there can be no assurance that the defense will be successful.