AdaptHealth (NASDAQ:AHCO) reported second-quarter revenue growth in its continuing operations but lowered its full-year profitability outlook, citing higher-than-expected costs in its West Coast capitated contract, a supplier price increase and portfolio actions.
Chief Executive Officer Suzanne Foster said the company delivered 15.9% organic revenue growth during the quarter, supported by record volume gains. Continuing-operations net revenue rose 12.7% year over year to $740.3 million, while adjusted EBITDA declined to $132 million from $136.4 million a year earlier. Adjusted EBITDA margin was 17.8%.
Revenue Growth Led by Sleep and Respiratory Segments
Sleep Health revenue increased 15.5% from the prior-year quarter to $386.5 million, while Respiratory Health revenue rose 14.1% to $194.4 million. Wellness at Home revenue grew 4.9% to $159.4 million.
The West Coast capitated contract accounted for 10.7 percentage points of the company’s organic growth, while the base business contributed 5.2 percentage points. Total capitated revenue reached $103.3 million, representing about 14% of continuing-operations revenue and more than three times the level reported a year earlier.
Foster said AdaptHealth also expanded its relationship with Humana OneHome in May, transitioning 478,000 members in South Florida and Texas. The company’s Humana capitated relationship now spans 33 states, the District of Columbia and South Florida.
AdaptHealth also said its enterprise sales team secured preferred-provider agreements with several multi-hospital health systems during the quarter.
West Coast Contract Pressures Earnings
The company said its West Coast capitated arrangement fell short of expectations by $15 million in the second quarter. AdaptHealth expects a further $40 million effect on profitability relative to its earlier projections during the second half of 2026.
Foster said order volumes have run above expectations, particularly in Sleep Health resupply products and enteral products. She attributed the elevated Sleep Health resupply volumes largely to transition-related pent-up demand, which the company expects to be temporary. Enteral volumes, however, will require further intervention.
AdaptHealth also identified inefficiencies in inherited workflows, including non-standard use of urgent orders, which have increased logistics and labor costs. The company is working with its customer to align ordering practices with contract assumptions, expand drop-shipping, introduce technology into workflows, and adjust fleet and labor levels.
“We remain confident that with sustained work and additional time, this contract will be a strong contributor to our profitability,” Foster said.
Chief Financial Officer Jason Clemens said approximately two-thirds of the West Coast profitability shortfall relates to volume and the remainder is tied to labor. The company continues to target a 20% long-term margin for its capitated business and expects the West Coast contract to reach run-rate profitability next year, with sequential improvement anticipated over the next several quarters.
Foster said the company has not yet been able to generate the expected “halo effect” from its West Coast footprint because a government-imposed DME moratorium has prevented it from securing new Medicare billing numbers, known as PTANs, for its 40 new locations. If the moratorium is lifted, the company sees an opportunity to serve additional fee-for-service patients and other customers within the region.
Portfolio Simplification and Cost Actions
AdaptHealth has continued to narrow its focus around Sleep Health, Respiratory Health and supporting home medical equipment operations. In addition to the Diabetes Health sale, the company discontinued proactive sales of certain low-growth and low-margin Wellness at Home products.
The company also agreed to contribute its CPAP Shop e-commerce operation into a new joint venture with an e-commerce competitor and a telehealth prescriber network. Foster said the venture is intended to serve direct-to-consumer customers through home sleep testing and a digital path from diagnosis to treatment.
Clemens said the Wellness at Home product exits represent a one-time profitability headwind. While the company has started shutting down sales channels, it will continue to carry expenses associated with existing patients as they transition to other providers over the next several quarters.
AdaptHealth also restructured its workforce during the second quarter, a move expected to generate $19 million in annualized savings. Foster said the company is using technology and automation to lower its cost to serve. Its myAPP digital platform had 512,000 users at quarter-end, up 56% from the end of 2025.
Lowered Outlook and Balance Sheet Actions
The company lowered its full-year 2026 adjusted EBITDA outlook for continuing operations to between $490 million and $520 million. The prior outlook was $680 million to $730 million, including the Diabetes Health business.
- The Diabetes Health divestiture accounts for a $100 million reduction, including $40 million of adjusted EBITDA moving into discontinued operations and $60 million of corporate costs that will remain with continuing operations.
- Revised West Coast contract expectations account for a $55 million reduction.
- A price increase imposed by a large supplier effective July 1 is expected to reduce second-half profitability by $30 million.
- Other portfolio actions account for a $15 million reduction in second-half projections.
Foster said the supplier notified AdaptHealth on June 30 that it was terminating its contract and implementing an immediate price increase. The company is negotiating with the supplier and is evaluating supplier mix and product profitability to mitigate the effect, but has included the full $30 million impact in its outlook.
For 2026, AdaptHealth expects continuing-operations revenue of $2.85 billion to $2.89 billion and free cash flow of $80 million to $120 million, including cash flow from Diabetes Health. Third-quarter revenue is projected at $720 million to $740 million, with adjusted EBITDA margin of about 17.9% and free cash flow of about $50 million.
Free cash flow was negative $20.9 million in the second quarter, primarily due to $166.2 million of capital expenditures supporting the capitated contract, including about $25 million in one-time equipment and vehicle purchases. The company ended the quarter with a consolidated leverage ratio of 3.06 times and said it remains committed to a 2.5-times net leverage target.
After the quarter ended, AdaptHealth drew $325 million under a delayed-draw term loan and used the proceeds to redeem its 6.125% senior notes due in 2028. Clemens said the company intends to use a significant portion of Diabetes Health sale proceeds to reduce debt further.
About AdaptHealth (NASDAQ:AHCO)
AdaptHealth, Inc operates as a leading provider of home medical equipment (HME) and related services in the United States. The company focuses on delivering respiratory care, mobility solutions and bathroom safety products to patients with chronic and acute medical needs. Through its comprehensive service offerings, AdaptHealth aims to enhance quality of life and clinical outcomes for patients who require long-term support outside of a hospital setting.
The company’s respiratory portfolio includes products such as continuous positive airway pressure (CPAP) devices, oxygen concentrators, ventilators, and associated supplies for patients with sleep apnea, COPD and other pulmonary conditions.
