AdaptHealth Corp. Q3 2025 earnings call

Thank you, and good morning, everyone, and welcome to the call. I'm pleased to report that Q3 was a milestone for AdaptHealth. If you recall, last year at this time, we realigned our business into four reporting segments, each under general managers and dedicated sales leaders. This was intended to focus our efforts on improving patient service and operational efficiency. By doing so, it allowed us to better manage our resources, and that decision was a key contributor to the mid-single-digit organic growth each segment produced this quarter. The theme for today's call is that over the past year, the team has worked tirelessly to transform our business, and we are now seeing our progress taking hold and flowing through to our financial results. In the third quarter, we completed substantial operational improvements across the organization and delivered financial results that exceeded our expectations.

We are continuing to demonstrate progress across all three value drivers: growth, profitability, and risk profile. Starting with growth, our third quarter revenue was $820.3 million, up 1.8% from prior year quarter. Organic revenue growth, which does not include changes in revenue from divestitures or acquisitions, was 5.1% versus the prior year quarter, with strength across each of our four reportable segments. Sleep new starts were up nearly 7% from the prior year quarter, making it our highest quarter in two years. We also set new patient census records in both sleep and respiratory health. We experienced robust year-over-year growth in our wellness at home segment, driven by orthotics and hospice. In diabetes health, we delivered the first quarter of revenue growth since Q1 2024.

Moving to profitability, our third quarter adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter and above the high end of our guidance range. Adjusted EBITDA margin was 20.7%, up 30 basis points from the prior year quarter, as we exhibited discipline on expenses, even as we made forward investments in talent, technology, and infrastructure to support our new large capitated partnership we announced in August. Turning to our risk profile, we reduced debt by another $50 million during the third quarter, bringing our year-to-date total debt reduction to $225 million. We are deleveraging quickly and rapidly approaching our 2.50 times target net leverage ratio, with our net leverage ratio standing at 2.68 times at quarter end. Debt reduction remains among our highest capital allocation priorities, as we believe a strong balance sheet is essential to unlocking and sustaining value for shareholders.

During the quarter, we continued to make significant strides towards improving patient service and field operations. As planned, we completed the implementation of our standard field operating model and organizational structure, starting with consolidating from six to four regions. This was a huge step forward. It required empowering our best operators to lead these four regions and realigning nearly 8,000 employees to our new field operating structure and standard workflows. As a reminder, we enter nearly 40,000 homes per day. We operate 640 locations across 47 states, and without a standard operating model and/or structure, rolling out standard workflows and technology can be slow and inefficient. Now, with a standard operating model across the country, we can more efficiently deploy operational improvements and technology solutions in a timely manner and at scale.

Another initiative that's taken place over the last many months is the consolidation of our previously fragmented call centers into a new national contact center and utilizing a single patient services technology platform. This is a significant enhancement that allows us to dramatically improve how we route our incoming call volume and standardize patient interaction, which creates a higher quality, more consistent experience for the patients we serve. Looking forward, as we deploy technology that allows more patients to self-serve, this new call center will supplement the local branches with increased capacity to manage the most critical patient concerns. We continue to believe that there is significant potential to deploy AI and automation across our business. Therefore, we continue to selectively but aggressively pursue and pilot the use of these tools to drive service excellence and operational efficiencies, and we are already beginning to see the early benefits.

For example, in the third quarter, automation enabled the revenue cycle management team to reduce its reliance on offshore labor by approximately 5%. Let me connect these results to where we are headed strategically. We are moving quickly to establish the infrastructure required to service our recently announced exclusive capitated agreement with a large integrated delivery network. This is a significant undertaking that will require approximately 1,200 employees, 30 locations, and 300 vehicles. Our partnership with this customer is off to a strong start because we share a philosophy about how best to unite our efforts to provide superior care for patients. This starts with a mutual recognition that the combination of an integrated delivery network and at-scale home medical equipment and service provider, working through a per member, per month, or capitated fee model, produces the strongest alignment of incentives.

This means we share a common commitment to a seamless handoff of care as patients are discharged from the hospital when they are at their most vulnerable, and the risk of readmission is the highest. It means being rewarded for clinical appropriateness and efficiency by providing exactly what the patients need, nothing more, nothing less. It also means being motivated to drive patient adherence by investing in setup, training, education, and ongoing support to ensure patients use equipment correctly. In short, we are strategic partners working to keep patients healthy at the lowest sustainable cost. We arrived at this moment because of our success with our Humana capitated arrangement, which demonstrated for the first time that an at-scale HME provider could lift and shift significant volumes of activity while maintaining high service standards.

Our immediate objective is to replicate that success by delivering on our promises to our new IVN partner, as well as to another new capitation partner, a major payer for whom we will be the exclusive provider to an additional 170,000 lives, as announced this morning. As we look out on the horizon, we intend to lead the evolution of our industry by using our results to prove to every IVN and large hospital system in the U.S. that partnering with us produces better outcomes for patients. That means faster time to therapy, higher adherence, greater patient satisfaction, and ultimately finding ways to lower readmission rates and deliver genuine clinical value in the home. AdaptHealth is uniquely positioned with our technology infrastructure and operational capacity to offer this value proposition at scale.

Our relentless focus on operational discipline and service excellence, demonstrated in our Q3 progress, is all about enhancing the value proposition. Our national contact center, centralized order intake, and adoption of AI and automation are just a few examples of how we are alleviating patient, physician, and hospital pain points. This focus extends beyond capitation to our entire business. To be clear about what is at stake, service excellence is where HME providers win or lose loyalty. Hospitals and physicians remember which HME companies respond timely, who handles logistics seamlessly, and who prevents patient readmissions. Service excellence creates referral stickiness. For us, operational discipline as the foundation for service excellence is not just about margin improvement. It's the key to competitive differentiation. Because of this, ingraining this discipline into our DNA is becoming one of our highest strategic imperatives.

As we look toward the upcoming round of CMS's competitive bidding program, our operating efficiency is a unique and critical strategic asset. While the final rule has yet to be released and the ongoing government shutdown holds the potential to delay it, CMS has not minced words about what it hopes to achieve with the redesign of the program. As outlined in the proposed rule, CMS sees the successful process as one that will cause HME participants, small and large, to submit competitive bids, and it seems to view limiting the number of contracts awarded as the key mechanism for achieving that aim. Some look at the bidding program and focus only on the reimbursement risk. However, rate compression is not a foregone conclusion, and moreover, it is only half the equation.

The other half is that if CMS retains its proposal to limit contract awards, this would, by definition, consolidate traditional Medicare market share with knock-on effects that would likely force industry consolidation more broadly. As a result, competitive bidding has more potential to transform HME industry structure than perhaps any other dynamic. AdaptHealth has been preparing for this moment for years. Our cost structure enables us to participate in the bidding program from an advantaged position. Furthermore, as government policy continues to evolve, our improving financial strength affords us the flexibility to take strategic action to consolidate market share. Where others may see risk, we see opportunity. Before I close, I'd like to express how grateful I am to my AdaptHealth colleagues. The progress we've made over the last year, and especially in the third quarter, demonstrated our grit, determination, and focus is paying off.

We have a lot of momentum coming into 2026 and expect to see continuous improvements across our business as our teams execute on these growth opportunities ahead of us. With that, I'd like to pass the call over to Jason to review our financials.

Thank you, Suzanne. And thanks to everyone for joining our call today. After covering our third quarter 2025 results, I'll provide a review of the balance sheet and our plans for capital allocation. Then I'll finish with guidance for the remainder of 2025 and some perspective on our early expectations for 2026. For third quarter 2025, net revenue of $820.3 million increased 1.8% from the prior year quarter. Organic revenue growth was 5.1% in the quarter.

This does not include $34.4 million of prior year revenues related to the divestiture of certain assets from the wellness at home segment and $7.7 million of revenue from acquired businesses. As Suzanne noted, our third quarter revenues were characterized by strength across all four reportable segments, with each producing year-over-year organic growth. Third quarter sleep health segment net revenue increased 5.7% versus the prior year quarter to $354.8 million. Sleep health starts were approximately 130,000, up 6.8% versus the prior year quarter, resulting in our highest quarter in two years. Our sleep health census reached a new record of 1.72 million patients, up from 1.70 million in the prior quarter. Third quarter respiratory health segment net revenue increased 7.8% from the prior year quarter to $177.0 million.

Despite lower-than-anticipated oxygen new starts, retention remained strong, resulting in an oxygen census of 330,000 patients, which was a new third quarter record. Third quarter diabetes health segment net revenue increased 6.4% versus the prior year quarter to $150.1 million. Our first quarter of year-over-year growth since the first quarter of 2024. Although CGM starts were softer than we expected, CGM census grew over the prior year quarter for the third consecutive quarter, driven by continued improvement in retention rates. Pump and pump supplies revenue continued to grow over the prior year quarter. For the wellness at home segment, third quarter net revenue declined 16.0% from the prior year quarter to $138.4 million, including the previously mentioned impact of the dispositions of certain non-core assets. Turning to profitability, third quarter 2025 adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter.

Adjusted EBITDA margin was 20.7%, slightly above the midpoint of our Q3 guidance range and up 30 basis points from 20.4% in Q3 2024. The year-over-year margin trend reflected modest improvement in operating expenses, as well as the disposal of less profitable non-core product lines. Our labor expenses were well contained, even as we invested in advance of revenue for a new capitated agreement. Moving to cash flow, balance sheet, and capital allocation. Q3 2025 cash flow from operations was $161.1 million. CapEx of $94.2 million was 11.5% of revenue, up slightly from the prior quarter as we continue to invest in new patient growth. Free cash flow was $66.8 million, in line with our expectations, and unrestricted cash stood at $80.4 million at the end of the quarter. At quarter end, net debt stood at $1.73 billion, down from $1.80 billion at the end of the second quarter.

We reduced our TLA balance by $50 million in Q3 2025, bringing the year-to-date total to $225 million. Our focus on debt reduction has decreased year-to-date interest expense by over $15 million as compared with the same period for 2024. Our net leverage ratio stood at 2.68 times, down from 2.81 times at the end of the second quarter and rapidly approaching our target of two and a half times. Turning to capital allocation, our highest priorities continue to be investing to accelerate organic growth and debt reduction to strengthen our financial position. Followed by strategic acquisitions of home medical equipment providers to round out our geographic footprint and increase patient access. So far in 2025, we have allocated $19 million of capital to tuck-in deals, and we are continuing to advance modest tuck-in deals through our pipeline.

Turning to guidance, we are maintaining our full year 2025 revenue guidance range and expect to come in very modestly above the midpoint of that range. We are also maintaining our full year 2025 adjusted EBITDA guidance, but we expect to come in at the bottom end of that range as we prudently accelerate investments in infrastructure, technology, and labor to stand up our new capitated arrangement. We are maintaining our free cash flow guidance at a range of $170-$190 million. While the government shutdown has the potential to push some cash collections into Q1 2026. Given the free cash flow generated year-to-date, we remain confident that we will still achieve our prior guidance range. Given the number of moving parts affecting our expectations for 2026, let me provide a preview of how we are thinking about next year.

We anticipate the top line will grow 6-8% over full year 2025. Which assumes accelerating growth in our core products, revenue from our new capitated contract, and the impact of certain assets disposed in 2025. We expect revenue growth will start slower in the first half but will accelerate in the back half due to the timing of the ramp of the capitated contract and the dispositions. We anticipate full year 2026 adjusted EBITDA margin to be approximately 50 basis points better than 2025, even as we invest in new capitated infrastructure in early 2026 ahead of the revenue ramp. As a reminder, we expect this capitated contract, once fully ramped, to produce at least $200 million of annual revenue with adjusted EBITDA margin and free cash flow margin in line with the rest of our business.

As has been our practice, we intend to provide formal full year 2026 guidance when we report fourth quarter earnings this coming February. That brings me to the end of my remarks. Operator, would you kindly open up the call for questions?