0001832332false1847Q1--12-310001832332avah:AmendedInterestRateSwapAgreementsMember2021-07-310001832332avah:SecuritizationFacilityMemberavah:BloombergShortTermBankYieldIndexMember2021-01-012022-01-010001832332srt:MinimumMemberavah:AmendedTwoThousandTwentyOneExtendedTermLoanAndDelayedDrawTermLoanFacilityMemberus-gaap:BaseRateMember2021-07-150001832332us-gaap:InterestRateCapMember2022-02-092022-02-0900018323322022-01-0100018323322021-04-030001832332us-gaap:InterestRateCapMemberus-gaap:NondesignatedMember2022-01-022022-04-020001832332us-gaap:SuretyBondMember2022-04-020001832332avah:SecondLienTermLoanMember2022-01-022022-04-020001832332us-gaap:EmployeeStockMemberavah:CorporateExpensesAndBranchAndRegionalAdministrativeExpensesMember2022-01-022022-04-020001832332us-gaap:AdditionalPaidInCapitalMember2021-04-030001832332avah:SelfPayCustomerMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2022-01-022022-04-020001832332avah:AmendedInterestRateSwapAgreementsMember2022-04-020001832332avah:MedicareMember2022-01-022022-04-020001832332us-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2022-01-022022-04-020001832332us-gaap:PerformanceSharesMember2021-01-032021-04-030001832332us-gaap:CommonStockMember2022-01-010001832332avah:MedicareMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2021-01-032021-04-030001832332avah:AmendedDelayedDrawTermLoanFacilityMember2022-01-010001832332avah:SecondLienTermLoanMember2022-01-010001832332srt:MaximumMember2022-04-020001832332us-gaap:WorkersCompensationInsuranceMember2022-01-022022-04-020001832332us-gaap:EmployeeStockMember2022-01-022022-04-020001832332us-gaap:InterestRateCapMember2022-02-090001832332us-gaap:PerformanceSharesMember2022-04-020001832332avah:PennsylvaniaDepartmentOfHumanResourcesMember2021-02-040001832332avah:AmendedDelayedDrawTermLoanFacilityMember2022-04-020001832332srt:ManagementMemberus-gaap:RestrictedStockUnitsRSUMember2021-01-032021-04-030001832332avah:MedicaidMCOMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2022-01-022022-04-020001832332us-gaap:EmployeeStockOptionMember2021-01-032021-04-030001832332us-gaap:LetterOfCreditMember2022-01-0100018323322021-03-112021-03-110001832332us-gaap:ProfessionalMalpracticeLiabilityMember2022-04-020001832332avah:MedicareMember2021-12-012022-03-310001832332avah:MedicareMember2022-01-010001832332us-gaap:InterestRateSwapMember2018-10-310001832332us-gaap:RestrictedStockUnitsRSUMembersrt:DirectorMember2021-01-032021-04-030001832332us-gaap:LetterOfCreditMember2022-04-020001832332avah:SelfPayCustomerMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2021-01-032021-04-030001832332avah:TimeVestingOptionsMember2022-04-020001832332us-gaap:LondonInterbankOfferedRateLIBORMemberavah:SecondLienTermLoanMember2021-12-102021-12-100001832332us-gaap:WorkersCompensationInsuranceMember2022-04-020001832332us-gaap:CommonStockMember2022-04-020001832332avah:LongTermIncentivePlanMemberavah:PerformanceStockUnitMember2022-04-0200018323322019-12-292021-01-020001832332us-gaap:LondonInterbankOfferedRateLIBORMembersrt:MinimumMemberavah:AmendedTwoThousandTwentyOneExtendedTermLoanAndDelayedDrawTermLoanFacilityMember2021-07-150001832332avah:CashCollateralMember2022-04-020001832332us-gaap:RevolvingCreditFacilityMember2022-01-010001832332avah:TermLoanMember2022-01-010001832332avah:MedicareMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2022-01-022022-04-020001832332avah:CommercialMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2021-01-032021-04-030001832332us-gaap:EmployeeStockMember2021-01-032021-04-030001832332avah:MedicareMember2020-04-300001832332avah:HomeHealthAndHospiceMember2021-01-032021-04-030001832332us-gaap:EmployeeStockOptionMember2022-01-022022-04-020001832332srt:MinimumMemberavah:AmendedTwoThousandTwentyOneExtendedTermLoanAndDelayedDrawTermLoanFacilityMemberus-gaap:BaseRateMember2021-07-152021-07-150001832332avah:MedicaidMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2021-01-032021-04-030001832332avah:CommercialMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2022-01-022022-04-020001832332us-gaap:AdditionalPaidInCapitalMember2022-04-020001832332us-gaap:OtherNoncurrentLiabilitiesMember2022-01-010001832332us-gaap:RestrictedStockUnitsRSUMember2022-01-022022-04-020001832332avah:PrivateDutyServicesMember2022-01-022022-04-020001832332us-gaap:InterestRateSwapMember2022-04-020001832332srt:ManagementMemberus-gaap:RestrictedStockUnitsRSUMember2022-04-020001832332avah:AmendedTwoThousandTwentyOneExtendedTermLoanMember2022-01-010001832332us-gaap:LondonInterbankOfferedRateLIBORMemberus-gaap:RevolvingCreditFacilityMember2022-01-022022-04-020001832332us-gaap:RetainedEarningsMember2021-01-032021-04-030001832332us-gaap:RestrictedStockUnitsRSUMembersrt:DirectorMember2022-04-020001832332us-gaap:CommonStockMember2021-01-020001832332us-gaap:RetainedEarningsMember2021-04-030001832332avah:AmendedInterestRateSwapAgreementsMember2022-01-010001832332avah:SecuritizationFacilityMember2022-01-010001832332avah:MedicareMember2022-04-020001832332avah:AmendedTwoThousandTwentyOneExtendedTermLoanMember2021-07-150001832332us-gaap:RetainedEarningsMember2022-01-022022-04-020001832332avah:SecuritizationFacilityMember2021-11-122021-11-120001832332us-gaap:OtherNoncurrentLiabilitiesMember2022-04-020001832332avah:PennsylvaniaDepartmentOfHumanResourcesMember2019-12-292021-01-020001832332us-gaap:OtherNoncurrentAssetsMember2022-01-010001832332us-gaap:NondesignatedMemberus-gaap:InterestRateSwapMember2021-01-032021-04-030001832332us-gaap:AdditionalPaidInCapitalMember2021-01-020001832332avah:AmendedTwoThousandTwentyOneExtendedTermLoanMember2022-01-022022-04-020001832332avah:AmendedTwoThousandTwentyOneExtendedTermLoanMemberus-gaap:LondonInterbankOfferedRateLIBORMember2022-01-022022-04-020001832332avah:LongTermIncentivePlanMember2021-01-032021-04-030001832332us-gaap:RestrictedStockUnitsRSUMemberavah:LongTermIncentivePlanMember2022-04-020001832332avah:MedicareMembersrt:ScenarioForecastMember2022-07-012022-07-010001832332srt:ManagementMemberus-gaap:RestrictedStockUnitsRSUMember2022-01-022022-04-020001832332us-gaap:FairValueInputsLevel2Member2022-01-010001832332avah:SecondLienTermLoanMemberavah:OneMonthLiborRateMember2021-12-102021-12-100001832332srt:MinimumMember2020-08-052020-08-060001832332avah:SecondLienTermLoanMemberus-gaap:BaseRateMember2021-12-102021-12-100001832332us-gaap:AdditionalPaidInCapitalMember2022-01-022022-04-020001832332avah:TermLoanMember2022-04-020001832332avah:AmendedTwoThousandTwentyOneExtendedTermLoanMember2022-04-0200018323322022-05-0200018323322022-01-022022-04-0200018323322022-04-020001832332us-gaap:LondonInterbankOfferedRateLIBORMemberavah:SecondLienTermLoanMember2022-01-022022-04-020001832332us-gaap:RevolvingCreditFacilityMember2022-04-020001832332us-gaap:InterestRateCapMember2022-04-020001832332avah:HomeHealthAndHospiceMember2022-01-022022-04-0200018323322021-12-310001832332us-gaap:CommonStockMember2021-04-030001832332us-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2021-01-032021-04-030001832332avah:OtherThanPennsylvaniaMember2019-12-292021-01-0200018323322022-12-3100018323322020-08-060001832332avah:SecondLienTermLoanMember2022-04-020001832332avah:MedicaidMCOMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2021-01-032021-04-030001832332us-gaap:NondesignatedMemberus-gaap:InterestRateSwapMember2022-01-022022-04-020001832332avah:MedicalSolutionsMember2021-01-032021-04-030001832332us-gaap:RevolvingCreditFacilityMember2022-01-022022-04-020001832332avah:SecondLienTermLoanMember2021-12-102021-12-1000018323322021-01-020001832332us-gaap:WorkersCompensationInsuranceMember2022-01-010001832332us-gaap:FairValueInputsLevel2Member2022-04-020001832332us-gaap:PerformanceSharesMember2022-01-022022-04-020001832332us-gaap:FairValueInputsLevel2Memberus-gaap:InterestRateCapMember2022-04-020001832332srt:MaximumMember2020-08-052020-08-060001832332us-gaap:FairValueInputsLevel2Memberus-gaap:InterestRateSwapMember2022-01-0100018323322021-01-032021-04-030001832332avah:SecuritizationFacilityMember2021-11-120001832332us-gaap:FairValueInputsLevel2Memberus-gaap:InterestRateSwapMember2022-04-020001832332us-gaap:OtherNoncurrentAssetsMember2022-04-020001832332avah:LongTermIncentivePlanMemberavah:PerformanceStockUnitMember2022-01-022022-04-020001832332avah:SecuritizationFacilityMember2022-04-020001832332avah:TimeVestingOptionsMember2021-01-032021-04-030001832332avah:MedicareMembersrt:ScenarioForecastMember2022-04-012022-06-300001832332avah:CashCollateralMember2022-01-010001832332us-gaap:AdditionalPaidInCapitalMember2021-01-032021-04-030001832332avah:PerformanceStockUnitMember2022-01-022022-04-020001832332us-gaap:RetainedEarningsMember2022-01-010001832332us-gaap:FederalFundsEffectiveSwapRateMemberavah:SecondLienTermLoanMember2021-12-102021-12-100001832332avah:MedicalSolutionsMember2022-01-022022-04-020001832332avah:AmendedInterestRateSwapAgreementsMember2021-07-012021-07-310001832332avah:TimeVestingOptionsMember2022-01-022022-04-0200018323322021-12-012021-12-310001832332us-gaap:RetainedEarningsMember2021-01-020001832332us-gaap:EmployeeStockMember2022-04-020001832332us-gaap:InterestRateCapMember2022-04-020001832332us-gaap:RestrictedStockUnitsRSUMemberavah:LongTermIncentivePlanMember2022-01-022022-04-020001832332avah:PrivateDutyServicesMember2021-01-032021-04-030001832332us-gaap:AdditionalPaidInCapitalMember2022-01-010001832332avah:SecondLienTermLoanMember2021-12-100001832332us-gaap:LondonInterbankOfferedRateLIBORMembersrt:MaximumMemberavah:AmendedTwoThousandTwentyOneExtendedTermLoanAndDelayedDrawTermLoanFacilityMember2021-07-152021-07-150001832332us-gaap:SuretyBondMember2022-01-0100018323322021-09-302021-09-300001832332us-gaap:InterestRateSwapMember2022-01-0100018323322021-10-012021-10-0100018323322019-12-200001832332avah:MedicaidMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerProductAndServiceBenchmarkMember2022-01-022022-04-020001832332avah:MedicareMember2013-04-010001832332avah:SecuritizationFacilityMemberavah:BloombergShortTermBankYieldIndexMember2022-01-022022-04-0200018323322018-12-240001832332avah:MedicareMember2020-05-012021-12-310001832332us-gaap:RestrictedStockUnitsRSUMembersrt:DirectorMember2022-01-022022-04-020001832332us-gaap:ProfessionalMalpracticeLiabilityMember2022-01-010001832332us-gaap:RetainedEarningsMember2022-04-02avah:Swapxbrli:purexbrli:sharesavah:Stateiso4217:USDxbrli:sharesavah:Segmentiso4217:USD

▪

▪

▪

▪

▪

▪

▪

▪

▪

▪

▪

▪

▪

▪

▪

▪

1. DESCRIPTION OF BUSINESS

Aveanna Healthcare Holdings Inc. (together with its consolidated subsidiaries, referred to herein as the “Company”) is headquartered in Atlanta, Georgia and has locations in 33 states with concentrations in California, Texas and Pennsylvania, providing a broad range of pediatric and adult healthcare services including nursing, hospice, rehabilitation services, occupational nursing in schools, therapy services, day treatment centers for medically fragile and chronically ill children and adults, as well as delivery of enteral nutrition and other products to patients. The Company also provides case management services in order to assist families and patients by coordinating the provision of services between insurers or other payers, physicians, hospitals, and other healthcare providers. In addition, the Company provides respite healthcare services, which are temporary care provider services provided in relief of the patient’s normal caregiver. The Company’s services are designed to provide a high quality, lower cost alternative to prolonged hospitalization.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3. REVENUE

The Company evaluated the nature, amount, timing and uncertainty of revenue and cash flows using the five-step process. The Company uses a portfolio approach to group contracts with similar characteristics and analyze historical cash collection trends.

Revenue is primarily derived from (i) pediatric healthcare services provided to patients including private duty nursing services, unskilled care, and therapy services; (ii) adult home health and hospice services (collectively “patient revenue”); and (iii) from the delivery of enteral nutrition and other products to patients (“product revenue”). The services provided by the Company have no fixed duration and can be terminated by the patient or the facility at any time, and therefore, each service provided is its own stand-alone contract. Incremental costs of obtaining a contract are expensed as incurred due to the short-term nature of the contracts.

Services ordered by a healthcare provider in an episode of care are not separately identifiable and therefore have been combined into a single performance obligation for each contract. The Company recognizes revenue as its performance obligations are completed. For patient revenue, the performance obligation is satisfied over time as the customer simultaneously receives and consumes the benefits of the healthcare services provided. For product revenue, the performance obligation is satisfied at the point in time of delivery of the product to the patient. The Company recognizes patient revenue equally over the number of treatments provided in a single episode of care. Typically, patients and third-party payers are billed within several days of the service being performed, and payments are due based on contract terms.

The Company’s lines of business are generally classified into the following categories: private duty services; home health and hospice; and medical solutions.

Private Duty Services (“PDS”). The PDS business includes a broad range of pediatric and adult healthcare services including private duty skilled nursing, unskilled services which include employer of record support services and personal care services, pediatric therapy services, rehabilitation services, and nursing services in schools and pediatric day healthcare centers.

Home Health & Hospice (“HHH”). The HHH business provides home health, hospice, and personal care services to predominately elderly patients.

Medical Solutions (“MS”). The MS business includes the delivery of enteral nutrition and other products to patients.

For the PDS, HHH, and MS businesses, the Company receives payments from the following sources for services rendered: (i) state governments under their respective Medicaid programs (“Medicaid”); (ii) Managed Care providers of state government Medicaid programs (“Medicaid MCO”); (iii) commercial insurers; (iv) other government programs including Medicare and Tricare and ChampVA (“Medicare”); and (v) individual patients. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.

The Company determines the transaction price based on established billing rates reduced by contractual adjustments and discounts provided to third-party payers and implicit price concessions. Contractual adjustments and discounts are based on contractual agreements, discount policies and historical experience. For the PDS, HHH, and MS businesses, implicit price concessions are based on historical collection experience. As of April 2, 2022 and January 1, 2022, estimated explicit and implicit price concessions of $57.8 million and $55.8 million, respectively, were recorded as reductions to patient accounts receivable balances to arrive at the estimated collectible revenue and patient accounts receivable. For the PDS, HHH, and MS businesses, most contracts contain variable consideration. However, it is unlikely a significant reversal of revenue will occur when the uncertainty is resolved, and therefore, the Company has included the variable consideration in the estimated transaction price. Subsequent changes resulting from a patient’s ability to pay are recorded as bad debt expense which is included as a component of operating expenses in the consolidated statements of operations. The Company did not record any bad debt expense for the three-month periods ended April 2, 2022 and April 3, 2021, respectively.

7

 

---

AVEANNA HEALTHCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company derives a significant portion of its revenue from Medicaid, Medicaid MCO, Medicare and other payers that receive discounts from established billing rates. The regulations and various managed care contracts under which these discounts must be estimated are complex and subject to interpretation. Management estimates the transaction price on a payer-specific basis given its interpretation of the applicable regulations or contract terms. Updated regulations and contract negotiations occur frequently, necessitating regular review and assessment of the estimation process by management; however, there were no material revenue adjustments recognized from performance obligations satisfied or partially satisfied in previous periods for the three-month periods ended April 2, 2022 and April 3, 2021, respectively.

4. LONG-TERM OBLIGATIONS

The 2021 Extended Term Loan and any Delayed Draw Term Loans bear interest, at the Company’s election, at a variable interest rate based on either LIBOR (subject to a minimum of 0.50%), or ABR (subject to a minimum of 2.00%) for the interest period relevant to such borrowing, plus an applicable margin of 3.75% for loans accruing interest based on LIBOR and an applicable margin of 2.75% for loans accruing interest based on ABR. As of April 2, 2022, the $860.0 million principal amount of the 2021 Extended Term Loan accrued interest at a rate of 4.25%.

 

The Second Lien Term Loan bears interest at a rate per annum equal to, at the Company’s option, either (1) an applicable margin (equal to 6.00%) plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the Federal Funds Effective Rate, (b) the Prime Rate and (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%; or (2) an applicable margin (equal to 7.00%) plus LIBOR determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs; provided that such rate is not lower than a floor of 0.50%. As of April 2, 2022, the $415.0 million principal amount of the Second Lien Term Loan accrued interest at a rate of 7.50%.

8

 

---

AVEANNA HEALTHCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Debt issuance costs related to the term loans are recorded as a direct deduction from the carrying amount of the debt. The balance for debt issuance costs related to the term loans as of April 2, 2022 and January 1, 2022 was $36.7 million and $37.7 million, respectively. Debt issuance costs related to the Revolving Credit Facility and Delayed Draw Term Loans are recorded within other long-term assets. The balance for debt issuance costs related to the Revolving Credit Facility and Delayed Draw Term Loans as of April 2, 2022 and January 1, 2022 was $2.6 million and $3.2 million, respectively. The Company recognized interest expense related to the amortization of debt issuance costs of $1.7 million and $2.1 million during the three-month periods ended April 2, 2022 and April 3, 2021, respectively.

Issued letters of credit as of April 2, 2022 and January 1, 2022 were $17.6 million and $17.6 million, respectively. There were no swingline loans outstanding as of April 2, 2022 or January 1, 2022. Borrowing capacity under the Company's Revolving Credit Facility was $182.4 million as of April 2, 2022 and $182.4 million as of January 1, 2022.

The fair value of the long-term obligations was $1,270.7 million at April 2, 2022. Due to the variable rate nature of the 2021 Extended Term Loan and Second Lien Term Loan, the Company believes that the carrying amount approximates fair value at April 2, 2022.

The Company was in compliance with all financial covenants and restrictions under the foregoing instruments at April 2, 2022.

5. SECURITIZATION FACILITY

 

On November 12, 2021, the Company (through a wholly owned special purpose entity, Aveanna SPV I, LLC) (the “special purpose entity”) entered into a Receivables Financing Agreement (the “Securitization Facility”) with a lending institution with a termination date of November 12, 2024. The maximum amount available under the Securitization Facility is $150.0 million subject to certain borrowing base requirements. The Company incurred debt issuance costs of $1.3 million in connection with the Securitization Facility, which were capitalized and included in other long-term assets.

 

Pursuant to two separate sale agreements dated November 12, 2021, each of which is among Aveanna Healthcare, LLC, as initial servicer, certain of the Company's subsidiaries and the special purpose entity, the subsidiaries sold substantially all of their existing and future accounts receivable balances to the special purpose entity. The special purpose entity uses the accounts receivable balances to collateralize loans made under the Securitization Facility. The Company retains the responsibility of servicing the accounts receivable balances pledged as collateral under the Securitization Facility and provides a performance guaranty.

 

The outstanding balance under the Securitization Facility was $140.0 million and $120.0 million at April 2, 2022 and January 1, 2022, respectively. The balance accrues interest at a rate tied to the Bloomberg Short-term Bank Yield Index (“BSBY”) plus an applicable margin, which can increase or decrease based upon the Company's credit rating. The interest rate under the Securitization Facility was 2.39% and 2.08% at April 2, 2022 and January 1, 2022, respectively.

 

The Securitization Facility is accounted for as a collateralized financing activity, rather than a sale of assets, and therefore: (i) accounts receivable balances pledged as collateral are presented as assets and the borrowings are presented as liabilities in the accompanying consolidated balance sheets; (ii) the accompanying consolidated statements of operations reflect the interest expense associated with the collateralized borrowings; and (iii) receipts from customers related to the underlying accounts receivable are reflected as operating cash flows and borrowings and repayments under the collateralized loans are reflected as financing cash flows within the accompanying consolidated statements of cash flows. The Securitization Facility is included within current liabilities on the accompanying interim unaudited consolidated balance sheets as it is collateralized by current patient accounts receivable and not because payments are due within one year of the balance sheet date.

6. FAIR VALUE MEASUREMENTS

The carrying amounts of cash and cash equivalents, patient accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their fair values due to the short-term maturities of the instruments.

The fair values of the interest rate swap and cap agreements are based on the estimated net proceeds or costs to settle the transactions as of the respective balance sheet dates. The valuations are based on commercially reasonable industry and market practices for valuing similar financial instruments. See Note 7 – Derivative Financial Instruments for further details on the Company’s interest rate swap and cap agreements.

7. DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates, and the Company seeks to mitigate a portion of this risk by entering into derivative contracts. The derivatives the Company currently uses are interest rate swaps and interest rate caps. The Company recognizes derivatives as either assets or liabilities at fair value on the accompanying consolidated balance sheets and does not designate the derivatives as hedging instruments. Changes in the fair value of derivatives are therefore recorded in earnings throughout the term of the respective derivatives.

In October 2018, the Company entered into two interest rate swap agreements to limit its exposure to interest rate risk on its variable rate debt. In July 2021, the Company amended its interest rate swap agreements to extend the expiration dates to June 30, 2026 and reduce the fixed rate paid under the swaps. As amended, the Company pays a fixed rate of 2.08% and receives the one-month LIBOR rate, subject to a 0.50% floor. The aggregate notional amount of the interest rate swaps remained unchanged at $520.0 million at April 2, 2022 and January 1, 2022, respectively. The fair value of the interest rate swaps at April 2, 2022 and January 1, 2022 was a $10.4 million asset included in other long-term assets and a $15.3 million liability included in other long-term liabilities on the accompanying interim unaudited consolidated balance sheets, respectively. The Company does not apply hedge accounting to these agreements and records all mark-to-market adjustments directly to other income in the accompanying interim unaudited consolidated statements of operations, which are included within cash flows from operating activities in the accompanying interim unaudited consolidated statements of cash flows. The net settlements incurred with swap counterparties under the swap agreements prior to the amendment were recognized through cash flows from operating activities in the accompanying consolidated statements of cash flows. Subsequent to the interest rate swap amendment in July 2021, the net settlements are recognized through cash flows from financing activities in the accompanying interim unaudited consolidated statements of cash flows due to an other-than-insignificant financing element on the interest rate swaps resulting from the amendment.

On February 9, 2022, the Company entered into interest rate cap agreements for an aggregate notional amount of $880.0 million and a cap rate of 3.00%. The premium paid for the interest rate cap agreements was $11.7 million. The cap agreements have an expiration date of February 28, 2027, and provide that the counterparty will pay the Company the amount by which LIBOR exceeds 3.00% in a given measurement period. The fair value of the interest rate cap agreements at April 2, 2022 was $24.3 million and is included in other long-term assets on the accompanying interim unaudited consolidated balance sheets. The Company does not apply hedge accounting to these agreements and records all mark-to-market adjustments directly to other income in the accompanying interim unaudited consolidated statements of operations, which are included within cash flows from operating activities in the accompanying interim unaudited consolidated statements of cash flows.

10

 

---

AVEANNA HEALTHCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company does not utilize financial instruments for trading or other speculative purposes.

8. INCOME TAXES

The Company’s provision for income taxes is recorded on an interim basis based upon the Company’s estimate of the annual effective income tax rate for the full year applied to “ordinary” income or loss, adjusted each quarter for discrete items.

The Company recorded income tax expense of $2.6 million and $0.3 million for the three-month periods ended April 2, 2022, and April 3, 2021, respectively. The Company’s effective tax rate was 8.7% and 4.8% for the three-month periods ended April 2, 2022 and April 3, 2021, respectively. The effective tax rates for the three-month periods ended April 2, 2022 and April 3, 2021 differ from the statutory rate of 21% primarily due to the changes in the valuation allowance recorded against certain deferred tax assets, and separate state and local income taxes on taxable subsidiaries.

For the three-month period ended April 2, 2022, there were no material changes to the Company's uncertain tax positions. There has been no change to the Company's policy that recognizes potential interest and penalties related to uncertain tax positions in income tax expense in the accompanying interim unaudited consolidated statements of operations.

9. SHARE-BASED COMPENSATION

Time-Vesting Options

 

The Company recorded compensation expense, net of forfeitures, was $0.4 million, and $0.7 million for the three-month periods ended April 2, 2022 and April 3, 2021, respectively, which is included in corporate and branch and regional administrative expenses in the accompanying consolidated statements of operations. Unrecognized compensation expense as of April 2, 2022 associated with outstanding performance-vesting options was $2.9 million.

Performance-Vesting Options

 

The Company recorded compensation expense for the three-month period ended April 2, 2022 of $1.9 million, net of forfeitures of $0.9 million, which is included in corporate and branch and regional administrative expenses in the accompanying consolidated statements of operations. Unrecognized compensation expense as of April 2, 2022 associated with outstanding performance-vesting options was $3.3 million.

 

The Company did not incur or record any expense associated with the performance-vesting options during the three-month period ended April 3, 2021.

Director Restricted Stock Units

The Company recorded compensation expense for the three-month period ended April 2, 2022 of $0.2 million, which is included in corporate expenses in the accompanying consolidated statements of operations. The Company did not incur or record any such expense in the three-month period ended April 3, 2021. Unrecognized compensation expense as of April 2, 2022 associated with outstanding performance-vesting options was $0.2 million.

Management Restricted Stock Units

The Company recorded compensation expense for the three-month period ended April 2, 2022 of $1.0 million, which is included in corporate expenses in the accompanying consolidated statements of operations. The Company did not incur or record any such expense in the three-month period ended April 3, 2021. Unrecognized compensation expense as of April 2, 2022 associated with outstanding management restricted stock units was $14.9 million.

11

 

---

AVEANNA HEALTHCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Employee Stock Purchase Plan

Eligible participants contributed $1.6 million during the three-month period ended April 2, 2022, which is included in accrued payroll and employee benefits in the accompanying consolidated balance sheets as of April 2, 2022. The Company recorded compensation expense of $0.6 million which is included in corporate expenses, branch and regional administrative expenses and cost of revenue, excluding depreciation and amortization in the accompanying consolidated statements of operations for the three-month period ended April 2, 2022. The Company did not incur or record any expense associated with the employee stock purchase plan during the three-month period ended April 3, 2021. Unrecognized compensation expense as of April 2, 2022 associated with the remaining ESPP purchase period through June 30, 2022 was $0.6 million.

Long-Term Incentive Plan ("LTIP")

During the three-month period ended April 2, 2022, the Compensation Committee of the Company's Board of Directors approved grants of restricted stock units ("RSUs") and performance stock units ("PSUs") under the Company's 2021 Omnibus Incentive Plan.

The RSUs are subject to a three-year service-based cliff vesting schedule commencing on the date of grant. Compensation cost for the RSUs is measured based on the grant date fair value of each share and the number of shares granted and is recognized over the applicable vesting period on a straight-line basis. During the three-month period ended April 2, 2022, the Company granted 2,124,212 RSUs with a grant date per share fair value of $4.93. The Company recorded compensation expense of $0.4 million which is included in corporate expenses and branch and regional administrative expenses in the accompanying consolidated statements of operations for the three-month period ended April 2, 2022. Unrecognized compensation expense as of April 2, 2022 associated with the remaining RSUs was $10.0 million.

The PSUs contain two performance criteria: (i) 50% based on relative total shareholder return ("TSR") over a three-year performance period, which measures the Company's total shareholder return as compared to the total shareholder return of a designated peer group, and (ii) 50% based on an adjusted EBITDA target over a one-year performance period. The PSUs are also subject to a three-year service-based cliff vesting schedule commencing on the date of grant. For the PSUs that have a service and a market condition, compensation cost is measured based on the grant date estimated fair value determined using a Monte Carlo simulation model and is recognized over the applicable vesting period on a straight-line basis. The fair value inputs included in the Monte Carlo simulation model were remaining measurement period of 2.88 years, stock price on date of grant of $4.93, daily average closing stock price for the two calendar months prior to the beginning of the performance period of $7.29, risk free rate of 1.77%, and the performance payout per TSR performance percentile. For the PSUs that have a service and a performance condition, compensation cost is initially measured based on the grant date fair value of each share. Cumulative compensation cost is subsequently adjusted at the end of each reporting period to reflect the current estimation of achieving the performance condition. During the three-month period ended April 2, 2022, the Company granted 1,389,801 PSUs with a weighted average grant date per share fair value of $5.24. The Company recorded compensation expense of $0.3 million which is included in corporate expenses and branch and regional administrative expenses in the accompanying consolidated statements of operations for the three-month period ended April 2, 2022. Unrecognized compensation expense as of April 2, 2022 associated with the remaining PSUs was $7.0 million.

The Company did not incur or record any expense associated with the LTIP during the three-month period ended April 3, 2021.

10. COMMITMENTS AND CONTINGENCIES

Insurance Reserves

As is typical in the healthcare industry, the Company is subject to claims that its services have resulted in patient injury or other adverse effects.

The accrued insurance reserves included in the accompanying consolidated balance sheets include estimates of the ultimate costs, in the event the Company was unable to receive funds from claims made under commercial insurance policies, for claims that have been reported but not paid and claims that have been incurred but not reported at the balance sheet dates. Although substantially all reported claims are paid directly by the Company’s commercial insurance carriers, the Company is ultimately responsible for payment of these claims in the event its insurance carriers become insolvent or otherwise do not honor the contractual obligations under the malpractice policies. The Company is required under U.S. GAAP to recognize these estimated

12

 

---

AVEANNA HEALTHCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

liabilities in its consolidated financial statements on a gross basis; with a corresponding receivable from the insurance carriers reflecting the contractual indemnity provided by the carriers under the related malpractice policies.

The Company maintains primary commercial insurance coverage on a claims-made basis for professional malpractice claims with a $1.0 million per claim deductible and $5.5 million per claim and annual aggregate limits as of October 1, 2021. Prior to October 1, 2021, the Company maintained primary commercial insurance coverage on a claim basis for professional malpractice claims with a $0.5 million per claim deductible and $6.0 million per claim and annual aggregate limits. Moreover, the Company maintains excess insurance coverage for professional malpractice claims. In addition, the Company maintains workers’ compensation insurance with a $0.5 million per claim deductible and statutory limits. The Company reimburses insurance carriers for deductible losses under these policies. The Company’s insurance carriers require collateral to secure the Company’s obligation to reimburse insurance carriers for these deductible payments. Collateral as of April 2, 2022 was comprised of $17.6 million of issued letters of credit, $2.9 million in cash collateral, and $2.9 million in surety bonds. Collateral as of January 1, 2022 was comprised of $17.6 million of issued letters of credit, $2.9 million in cash collateral, and $2.9 million in surety bonds.

As of April 2, 2022, insurance reserves totaling $86.9 million were included on the accompanying interim unaudited consolidated balance sheets, representing $41.9 million and $45.0 million of reserves for professional malpractice claims and workers’ compensation claims, respectively. At January 1, 2022, insurance reserves totaling $80.5 million were included on the accompanying interim unaudited consolidated balance sheets, representing $38.7 million and $41.8 million of reserves for professional malpractice claims and workers’ compensation claims, respectively.

Litigation and Other Current Liabilities

On December 24, 2018, Aveanna Healthcare LLC, an indirect wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Agreement”) to acquire a pediatric home health company (the “Seller”). The agreement contained a provision whereby a $75.0 million transaction termination fee (the “Break-up Fee”) could be payable to the Seller under certain circumstances. On December 20, 2019, Aveanna Healthcare LLC terminated the Agreement, and the Seller demanded payment of the Break-up Fee. The Company believes the Agreement was terminated for cause and therefore no payment of the Break-up Fee is due to the Seller. The Seller has disputed this assertion. While the Company believes that litigation over this matter is unlikely at the present time, it is possible that the Company and the Seller may in the future pursue claims and counterclaims related to the termination of the Agreement and payment of the Break-up Fee. At this time, the Company is unable to predict the possible loss or range of loss, if any, associated with the resolution of any such litigation, or any potential related effect on the Company or its business or operations.

On August 6, 2020, the Company sued Epic/Freedom, LLC (“Seller”), Webster Capital Corporation, and Webster Equity Partners (collectively, the “Defendants”) in the Delaware Superior Court. The Company asserted that the Defendants made fraudulent representations and warranties in connection with the Epic acquisition. The Company is seeking damages ranging from $24.0 million to $50.0 million. The Company also requested a declaratory judgment holding that the Defendants waived any claim to the Company’s continued possession of $7.1 million in escrow funds (the “Escrow Funds”) that were delivered to the Company in January 2018 by the Epic acquisition escrow agent. In response, the Defendants asserted four counterclaims: (1) specific performance of an alleged right to control a tax audit; (2) advancement of litigation fees and expenses for certain individual Defendants; (3) a declaratory judgment; and (4) breach of contract claim concerning the Escrow Funds. The Company subsequently reached an agreement with the Defendants, which (1) allowed the Defendants to take a principal role in the applicable tax audit, though the Company will continue to communicate with the Internal Revenue Service and retain the ability to make strategic decisions with respect to the audit and (2) dismissed claims against certain individual Defendants mooting Defendants’ claims for advancement of litigation fees and expenses. On July 29, 2021, the Delaware Superior Court denied the Defendants’ motion for judgment on the pleadings with respect to the Company’s claim for fraud against the Defendants, which allows the Company to pursue discovery with respect to the alleged fraud claim. With respect to the Company’s retention of certain tax refunds the Company received on behalf of Defendants, the Court denied the Company’s motion for judgment on the pleadings, pursuant to which the Company sought to retain the tax refunds as matter of law. The Court also ordered Seller to refile its motion for summary judgment on the same subject and abated a ruling pending further discovery and resolution of whether the parties entered into a post-closing agreement, allowing the Company to retain the tax refunds pending the outcome of the related tax audits. Lastly, the Court denied the Company’s motion for judgment on the pleadings as to its continued possession of the Escrow Funds. At this time, the Company cannot predict the ultimate resolution or estimate the amount of any loss or recovery, if any, related to this matter.

The Company is currently a party to various routine litigation incidental to the business. While management currently believes that the ultimate outcome of such proceedings, individually and in the aggregate, will not have a material adverse effect on the

13

 

---

AVEANNA HEALTHCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Company’s financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. Management has established provisions within other current liabilities in the accompanying consolidated balance sheets, which in the opinion of management represents the best estimate of exposure and adequately provides for such losses that may occur from asserted claims related to the provision of professional services and which may not be covered by the Company’s insurance policies. Management believes that any additional unfavorable provisions would not be material to the Company’s results of operations or financial position; however, if an unfavorable ruling on any asserted or unasserted claim were to occur, there exists the possibility of a material adverse impact on the Company’s net earnings or financial position. The estimate of the potential impact from legal proceedings on the Company’s financial position or overall results of operations could change in the future.

Healthcare Regulatory Matters

Starting on October 30, 2019 the Company has received grand jury subpoenas (“Subpoenas”) issued by the U.S. Department of Justice, Antitrust Division (the “Antitrust Division”) requiring the production of documents and information pertaining to nurse wages, reimbursement rates, and hiring activities in a few of its local markets. The Company is fully cooperating with the Antitrust Division with respect to this investigation and management believes that it is not probable that this matter will materially impact the Company’s business, results of operations or financial condition. However, based on the information currently available to the Company, management cannot predict the timing or outcome of this investigation or predict the possible loss or range of loss, if any, associated with the resolution of this litigation.

Laws and regulations governing the government payer programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action. From time to time, governmental regulatory agencies conduct inquiries and audits of the Company’s practices. It is the Company’s practice to cooperate fully with such inquiries. In addition to laws and regulations governing the Medicaid, Medicaid Managed Care, and Tricare programs, there are a number of federal and state laws and regulations governing matters such as the corporate practice of medicine, fee splitting arrangements, anti-kickback statues, physician self-referral laws, false or fraudulent claims filing and patient privacy requirements. Failure to comply with any such laws or regulations could have an adverse impact on the Company’s operations and financial results. The Company believes that it is in material compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of wrongdoing.

11. COVID-19

In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 outbreak has adversely impacted economic activity and conditions worldwide, including workforces, liquidity, capital markets, consumer behavior, supply chains and macroeconomic conditions. After the declaration of a national emergency in the United States on March 13, 2020, in compliance with stay-at-home and physical distancing orders and other restrictions on movement and economic activity intended to reduce the spread of COVID-19, the Company altered numerous clinical, operational, and business processes. While each of the states deemed healthcare services an essential business, allowing the Company to continue to deliver healthcare services to patients, the effects of the pandemic have been wide-reaching.

In response to COVID-19, the U.S. Government enacted the CARES Act on March 27, 2020. The CARES Act has impacted the Company as follows:

Provider Relief Fund (“PRF”): Beginning in April 2020, funds were distributed to health care providers who provide or provided diagnoses, testing, or care for individuals with possible or actual cases of COVID-19. In fiscal year 2020, the Company received PRF payments from the U.S. Department of Health and Human Services (“HHS”) totaling $25.1 million. On March 5, 2021, the Company repaid these PRF payments in full. In December 2021, the Company also received PRF payments from HHS totaling $2.5 million. The Company repaid these PRF payments in full in December 2021.

State Sponsored Relief Funds: In fiscal year 2020, the Company received $4.8 million of stimulus funds from the Commonwealth of Pennsylvania Department of Human Services (“Pennsylvania DHS”). Such funds were not applied for or requested. The Company did not receive stimulus funds from any individual state other than Pennsylvania. The Company previously recognized $0.5 million of income related to these funds in fiscal year 2020. On February 4, 2021, the Company repaid the remaining $4.3 million of direct stimulus funds to Pennsylvania DHS.

Deferred payment of the employer portion of social security taxes: The Company was permitted to defer payments of the employer portion of social security taxes in fiscal year 2020, which are payable in 50% increments, with the first 50% due by December 31, 2021 and the second 50% due by December 31, 2022. The Company did not defer any payroll taxes after December 31, 2020. As

14

 

---

AVEANNA HEALTHCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

of April 2, 2022 and January 1, 2022, the Company had remaining deferred payments of $25.5 million of social security taxes in total, which is recorded in the current portion of deferred payroll taxes on the accompanying interim unaudited consolidated balance sheets.

Reimbursement rate increases from various state Medicaid and Medicaid Managed Care Programs: Shortly after the onset of COVID-19 in March 2020, numerous state Medicaid programs began to issue temporary rate increases and similarly directed Medicaid Managed Care programs within those states to likewise adjust rates. These temporary rate increases are paid to the Company via normal claim processing by the respective payers. Over the remainder of fiscal year 2020, continuing through fiscal year 2021 and into fiscal year 2022, while some states discontinued the temporary rate increases, most state legislatures either made such increases permanent or otherwise increased PDS reimbursement rates in their annual budgetary processes.

Medicare Advances: Certain of the home health and hospice companies the Company has acquired received advance payments from the Centers for Medicare & Medicaid Services (“CMS”) in April 2020, pursuant to the expansion of the Accelerated Payments Program provided for in the CARES Act. These advances became repayable beginning one year from the date on which the accelerated advance was issued. The repayments occur via offsets by CMS to current payments otherwise due from Medicare at a rate of 25% for the first eleven months. After the eleven months end, payments will be recouped at a rate of 50% for another six months, after which any remaining balance will become due. Gross advances received by acquired companies in April 2020 totaled $15.7 million. The Company began repaying the gross amount of the advances, via the offset mechanism described above, during the second quarter of 2021, and had repaid an aggregate amount of $12.9 million of such advances as of April 2, 2022. Remaining unpaid advances as of April 2, 2022 and January 1, 2022 totaled $2.8 million and $3.5 million, respectively, and are recorded in other current liabilities on the accompanying interim unaudited consolidated balance sheets.

Temporary Suspension of Medicare Sequestration: The Budget Control Act of 2011 requires a mandatory, across the board reduction in federal spending, called a sequestration. Medicare fee-for-service claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments. All Medicare rate payments and settlements are subject to this mandatory reduction, which will continue to remain in place through at least 2023, unless Congress takes further action. In response to COVID-19, the CARES Act temporarily suspended the automatic 2.0% reduction of Medicare claim reimbursements for the period from May 1, 2020 through December 31, 2021. In December 2021, Congress extended the suspension of the automatic 2.0% reduction through March 2022 and reduced the sequestration adjustment to 1.0% from April 1, 2022 through June 30, 2022, with the full 2.0% reduction for sequestration resuming thereafter.

 

American Rescue Plan Act (“ARPA”): On March 11, 2021 President Biden signed ARPA into law. ARPA is a federal stimulus bill designed to aid public health and economic recovery from the COVID-19 pandemic. ARPA includes $350 billion in emergency funding for state, local, territorial and tribal governments, known as the Coronavirus State and Local Fiscal Recovery Funds (“ARPA Recovery Funds”). States must obligate the ARPA Recovery Funds by December 31, 2024 and spend such funds by December 31, 2026. Usage of the ARPA Recovery Funds is subject to the requirements specified in the United States Treasury Department’s Final Rule issued on January 6, 2022. The Final Rule provides states with substantial flexibility in utilizing ARPA Relief Funds, including to support public health expenditures such as vaccination programs and testing, and PPE purchases, as well as providing premium pay for essential workers, including those in home-care settings, among many other things. States may not use ARPA Recovery Funds to fund tax cuts, fund budget deficits, or to support public employee pensions. During the quarter ended April 2, 2022 we received $3.1 million of ARPA Recovery Funds from various states, which we recognized in the PDS segment as revenue in our accompanying unaudited interim consolidated statements of operations.

12. RELATED PARTY TRANSACTIONS

The Company had entered into an advisory services agreement with affiliates of certain stockholders of the Company (the “Management Agreement”). Under this agreement, the managers provided general and strategic advisory services and were paid a quarterly management fee plus out of pocket expenses. Upon completion of the Company's initial public offering in April 2021 (the "IPO"), the Management Agreement was terminated. Additionally, the managers agreed to waive the fee due to them from the Company upon the successful completion of the IPO. The Company did not incur any management fees or expenses during the three-month period ended April 2, 2022. The Company incurred management fees and expenses of $0.9 million during the three-month period ended April 3, 2021, which are included in corporate expenses in the accompanying interim unaudited consolidated statements of operations. The Company did not owe any amounts in connection with the Management Agreement as of April 2, 2022 or January 1, 2022, respectively.

As of April 2, 2022, one of the Company’s stockholders owned 6.4% of the Company’s 2021 Extended Term Loan.

13. SEGMENT INFORMATION

The Company’s operating segments have been identified based upon how management has organized the business by services provided to customers and how the chief operating decision maker (“CODM”) manages the business and allocates resources. The Company has three operating segments and three reportable segments, Private Duty Services, Home Health & Hospice, and Medical Solutions. The PDS segment predominantly includes private duty skilled nursing services, unskilled and personal care services, and pediatric therapy services. The HHH segment provides home health and hospice services to predominately elderly patients. Through the MS segment, the Company provides enteral nutrition and other products to adults and children, delivered on a periodic or as-needed basis.

The CODM evaluates performance using gross margin (and gross margin percentage). Gross margin includes revenue less all costs of revenue, excluding depreciation and amortization, but excludes branch and regional administrative expenses, corporate expenses and other non-field expenses. The CODM does not evaluate a measure of assets when assessing performance.

Results shown for the three-month periods ended April 2, 2022 and April 3, 2021 are not necessarily those which would be achieved if each segment was an unaffiliated business enterprise. There are no intersegment transactions.