AdaptHealth Q3 2026 Earnings Call Transcript

AdaptHealth (NASDAQ:AHCO) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

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View the webcast at https://event.on24.com/wcc/r/5541083/DA04344D82DEDEF8D9A7E6C564AD1E8E

Summary

AdaptHealth Corp. reported strong third-quarter results with net revenue of $745.6 million, representing a 10.9% increase year-over-year, and organic growth of 12.8%. Adjusted EBITDA was $141.9 million, surpassing guidance by $11.2 million.

The company highlighted improvements in its largest capitated contract, particularly in West Coast operations, resulting in a positive EBITDA contribution. AdaptHealth is working on pricing adjustments with the contract partner and is optimistic about achieving a 20% margin by Q4 2027.

AdaptHealth is in the process of selling its Diabetes Health business to Cardinal Health, with the sale expected to close in early 2027. Medline’s recall of beds is being addressed, with AdaptHealth working to mitigate impacts.

The company is expanding its enterprise sales strategy and has signed new preferred provider agreements with health systems and regional health plans. Digital tools and AI technology are enhancing patient interactions and operational efficiencies.

AdaptHealth raised its full-year revenue guidance to $2.88 billion-$2.9 billion and adjusted EBITDA guidance to $510 million-$525 million. Free cash flow guidance was adjusted to $55 million-$80 million, considering vendor payment strategies.

Management emphasized ongoing cost control, improved margins in capitated contracts, and strategic realignment towards sleep, respiratory, and wellness-at-home services. The company aims for predictable, sustainable growth.

Full Transcript

OPERATOR (Moderator)

Good day everyone and welcome to today’s AdaptHealth third quarter 2026 earnings release. Today’s speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth, and Harriss Currie, Chief Financial Officer of AdaptHealth. Before we begin, I’d like to remind everyone that statements included in this conference call and in the press release issued today may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2026 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed at length in the company’s annual and quarterly SEC filings.

AdaptHealth Corp. has no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning’s call, the company will reference certain financial measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, and free cash flow, all of which are non-GAAP financial measures. You can find more information about these non-GAAP measures in the presentation materials accompanying today’s call, which are posted on the company’s website. This morning’s call is being recorded and a replay of the call will be available later today.

I am now pleased to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster.

Suzanne Foster (Chief Executive Officer)

Good morning everyone and thank you for joining us today. First order of business is to welcome Harriss Currie, who joined AdaptHealth as our Chief Financial Officer in September. Harris will take you through our financial results and outlook after my remarks. The third quarter was a step in the right direction. We delivered strong organic growth, exceeded our guidance for revenue and adjusted EBITDA, and met our free cash flow target, driven in large part by meaningful improvement in the performance of our largest capitated contract and by a base business that continues to produce consistent performance.

This morning, I’ll overview our third quarter results, update you on the two issues that weighed on our outlook last quarter—the capitated contract and an unexpected price increase from a large manufacturer—and then give you a brief update on the pending sale of our Diabetes Health business and Medline’s field action announcement about its beds. Starting with our results. As a reminder, all figures are provided on a continuing operations basis, including prior period comparisons except for capital expenditures and free cash flow which will include Diabetes Health until the sale closes. Third quarter net revenue was 745.6 million, up 10.9% versus the prior year quarter and up 12.8% on an organic basis. Adjusted EBITDA was 141.9 million, 11.2 million above the midpoint of our implied third quarter guidance range, and free cash flow was 51.1 million, slightly ahead of our guidance.

Harris will take you through the details in a moment. Behind these results, the biggest driver was the improvement in our largest capitated contract, and specifically the West Coast operations associated with that contract. We have been working to stabilize the operation and align costs to serve with our original assumptions, and that work is now beginning to pay off. The contract made a positive contribution to adjusted EBITDA in the quarter, a swing from a loss in the second quarter and better than breakeven we assumed for the second half when we reset guidance in August.

Two dynamics drove the improvement. First, utilization, while still well above our original expectations, has come down from the peak of the early months, particularly in sleep resupply as the backlog of pent-up demand cleared. Capital spending also declined sequentially as we completed the one-time purchase of vehicles and initial buildup of patient equipment. Second, we tightened the labor model—headcount dedicated to the contract, including temporary staff, couriers, and contract workers, is down more than 12% since the end of the second quarter.

As a result, we have lowered our costs even with utilization still elevated and while exceeding our service level requirements and commitments. We are certainly encouraged by the trajectory of the contract’s profitability. September’s run-rate margin contribution was stronger than July’s, and the progress we are making gives us confidence we will achieve a 20% margin on the contract by the fourth quarter of next year. We also continue to work with our partner on the economics of the contract and are making progress with those discussions. The data supports our premise that utilization was running above our expectations on which the contract was priced.

We have been provided assurances that pricing adjustments are coming. While we do not yet know the final impact of our negotiations, we are holding on any unilateral movements under the agreement while we continue to negotiate in good faith as partners. Although we expect the agreement to be modified this quarter, we have not assumed a change to the terms in the revised outlook we are providing today. As I mentioned last quarter, there is also an opportunity to use our newly established footprint to serve patients beyond the capitated membership. The moratorium on enrollment of new suppliers in Medicare that directly affected us was lifted in August, and we are submitting our applications for new PTANs, which are the Medicare billing numbers that allow us to operate more broadly in California. This will ultimately allow us to compete for fee-for-service business in that market.

As a reminder, that opportunity is not included in our contract margin target of at least 20%. Next, the manufacturer price increase. As a reminder, we were notified on June 30 that a manufacturer was terminating our contract and imposing an immediate price increase, which we estimated would reduce second-half adjusted EBITDA by approximately 30 million. Since then, we have reached an agreement on a rebate structure that allows us to recover a portion of the lost economics. We realized a benefit of 8 million in the third quarter as a result of purchases made during the quarter.

We will carefully weigh further opportunities to capture discounts within this arrangement, as well as across all of our vendors, against our business needs and cash flow management. So we have an arrangement in place for the 2026 contract year, and we are now back to our normal annual negotiation cycle with the manufacturer. Turning to the portfolio, a brief update. The HSR waiting period has expired for the sale of our Diabetes Health business to Cardinal Health. Transition activities are progressing as planned and we expect to close early in 2027, subject to customary closing conditions. As a reminder, following the move of Diabetes Health to discontinued operations, our continuing operations results carry about 60 million of corporate overhead that was previously allocated to that business.

Of the 60 million, about half has been specifically associated with Diabetes Health activity and is expected to dissipate beginning on day one through 12 months after the close of the transaction. The remaining 30 million of overhead is true stranded cost that we expect to absorb through growth and expense discipline over the next few years. With the portfolio work now largely behind us, we are a focused sleep, respiratory, and wellness-at-home business where growth and margins are more attractive, the clinical value we add is greater, and our resupply operations keep us in continuing relationship with patients.

Now a word on Medline. You may have seen that Medline has announced it is removing its brand of beds from the market following earlier safety notices on certain home care beds. We are following Medline’s instructions, we are communicating directly with affected patients and caregivers, and we are working to repair or replace affected beds on a reasonable timeline. Medline beds are a meaningful part of our beds fleet, and the replacement will take place over multiple quarters.

We expect Medline to stand behind its products and we are working with them to address the full cost of replacement. We will update you as that work progresses. We saw continued evidence this quarter that the underlying business is improving and stable. Our enterprise sales strategy is gaining traction as we signed preferred provider agreements with four large health systems, and we broadened our capitated portfolio with two smaller agreements with regional health plans, one new and one expanded. Our strategy is focused on being the easiest and most reliable supplier for patients and physicians to work with.

We continue to gain traction with digital tools that enhance the entire patient journey and connect the patient experience. My app now has more than 615,000 registered users, up about 20% from last quarter and nearly double where we ended last year. And the AI-powered mask fitting tool we introduced last quarter has now completed more than 12,600 scans, with roughly 94% of those resulting in a completed order. Importantly, leveraging this technology also helps us control our labor and OPEX costs.

Let me close with where we go from here. The business is stabilizing after the largest patient transition in the history of the industry, and the third quarter demonstrates that the actions we took in the first half are gaining traction. With the pending sale of our Diabetes Health business, we are on the verge of completing our multi-year effort to focus our portfolio. Our priorities are to augment the returns on our largest capitated contract and to return to delivering predictable, consistent results.

Our base business continues to grow organically, and I’m grateful to our teams who have put patients first through a demanding year and are heading into next year with momentum. With that, let me turn it over to our new CFO, Harriss Currie, to review the financials.

Harriss Currie (Chief Financial Officer)

Thank you, Suzanne, and good morning, everyone. I’m certainly pleased to be here and I look forward to meeting many of you in the near future. I’ll cover our third quarter results, the balance sheet, cash flow, and our updated outlook. As noted, all figures are provided on a continuing operations basis, including prior period comparisons, except for capital expenditures and free cash flow, which include Diabetes Health until the sale closes. Third quarter net revenue of 745.6 million increased 10.9% versus the prior-year quarter, with organic growth of 12.8%. We displayed year-to-date growth in revenue over the prior year of 9.7%. Our third quarter revenue was 15.6 million above the midpoint of our guidance, driven primarily by growth in referrals and resupply in our Sleep Health segment and a slower-than-anticipated reduction in revenue related to the decision to cease actively marketing certain products within our PCs business.

On a reported basis, Sleep Health net revenue was 393.9 million, up 11%. Respiratory Health net revenue was 190.8 million, up 7.8%. Wellness at Home net revenue was 161 million, up 14.5%. Total capitated revenue was 110.3 million, about 15% of our continuing operations net revenue and more than three times that of the prior year. Our largest capitated contract contributed 10.7 percentage points of the 12.8% organic growth in the quarter. Base Business organic growth contributed the remaining 2.1 percentage points of the 12.8% organic growth.

Adjusted EBITDA was 141.9 million versus 146.1 million in the prior-year quarter, a margin of 19% versus 21.7% a year ago. On a year-to-date basis, adjusted EBITDA declined by 4.2% year over year. Year-to-date declines reflect the ramp of our largest capitated contract, partially offset by labor and operating expense discipline. Total headcount of 10,995 was down 337 from the end of June, the largest components of which were staffing reductions on the capitated contract and overall discipline on labor.

Adjusted EBITDA for the quarter was 11.2 million favorable against our guidance midpoint of 130.7 million. As Suzanne mentioned, the primary driver of this result was the largest capitated contract, which delivered a margin of approximately 10% in the quarter, up sequentially from a negative margin of 4% in the second quarter, and was tracking at a run rate of approximately 14% as we exited the quarter. The balance of the adjusted EBITDA favorability to guidance came from stronger-than-anticipated revenue across our other revenue verticals, as well as enhanced cost discipline.

On a GAAP basis, net loss attributable to AdaptHealth was 168.2 million, resulting primarily from a 184.8 million non-cash pre-tax goodwill impairment charge, which was triggered by the recent decline in our equity market capitalization. Also, as a reminder, in the third quarter we contributed our e-commerce business into a joint venture in exchange for a minority interest. As a result, we recognized 12 million pre-tax gains. Both items, the goodwill impairment and e-commerce contribution, are excluded from adjusted EBITDA.

Turning to the balance sheet, we ended the quarter with net debt of 1.85 billion, down 48 million from June 30, and had a consolidated total leverage ratio of 3.05 times, essentially unchanged from the second quarter. Unrestricted cash was 80.7 million, and during the quarter we redeemed our 6.25% senior notes due 2028 with the proceeds of the 325 million dollar delayed draw term loan, eliminating our highest-cost tranche of debt and lowering our ongoing debt service obligation by approximately 17 basis points.

We remain committed to our net leverage target of 2.5 times, and we intend to direct a significant portion of the Diabetes Health proceeds towards debt reduction. Free cash flow was 51.1 million for the quarter, in line with our guidance of approximately 50 million. Year-to-date free cash flow is 2.6 million, reflecting previous free cash flow deficits reported in earlier quarters. Capital expenditures were 105.5 million, or 14.2% of consolidated net revenue, compared to 18.1% year to date. As the elevated spending to equip the capitated contract has subsided, our capital allocation priorities remain unchanged: reducing leverage, investing to accelerate organic growth, and pursuing disciplined, smaller tuck-in acquisitions.

Turning to guidance, we are raising our full-year net revenue range to 2.88 billion to 2.9 billion, an increase of about 20 million at the midpoint, mostly reflecting our third quarter outperformance relative to our prior guidance. We are also adjusting our adjusted EBITDA range to 510 to 525 million, an increase of 12 million at the midpoint, based on our third quarter results and the September run rate on the capitated contract margin. Our guidance also assumes modest sequential improvement on the capitated contract, no change to that contract’s pricing structure, and no further improvement in manufacturer pricing.

At the bottom end of the range reflects consideration for any unanticipated short-term effects of the Medline field actions. For the fourth quarter, this implies net revenue of approximately 715 to 735 million and adjusted EBITDA of approximately 130 to 145 million. Now, let me spend a moment on free cash flow. We are lowering our full-year range to 55 to 80 million. As mentioned before, this range includes cash flows from Diabetes Health until the sale closes. The prior range communicated in August contained certain working capital assumptions, including the timing of vendor payments around year-end, that have since been pulled forward to prioritize early payment discounts over short-term cash accumulation.

The range implies fourth quarter free cash flow of roughly 50 to 75 million, or about 65 million at the midpoint, up 30% sequentially. We believe the current free cash flow guidance represents baseline cash generation as we head into 2027, and we will continue to focus on prudent working capital management. Our commitment is to run a business that can deliver sustainable, predictable, and dependable growth with measurable consistency, and to deliver reliably on our guidance. We built this entire outlook with that goal in mind. That brings us to the end of our prepared remarks. Operator, please open the call up for questions.

OPERATOR (Moderator)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. To leave the queue at any time, please press star two. Once again, that is star one to ask a question. And our first question comes from Brian Kinquellott with Jefferies. Please go ahead. Your line is now open.

Brian Kinquellott (Analyst at Jefferies)

Hey, good morning, guys. Congrats on the quarter. So maybe my first question, Suzanne, is you highlighted these preferred contract wins with health systems and the capitation wins. If you don’t mind just giving us some color on how to think about sizing these deals and what these arrangements are on the preferred side, and how we should think about the growth contribution from these as they ramp through 2027. Thanks.

Suzanne Foster (Chief Executive Officer)

Okay, thanks, Brian. So first off, I’ll take the—so we won two small regional players. Think about it as, there’s 72,000 lives those two agreements represent that we are now the exclusive provider for. So strong pipeline, as I’ve mentioned before, where we’re talking to payers about our capitated arrangement. I’m still of the mind that on the capitated front, when we have accurate data and referral conditions, these are very good for us and for the payers and for patients.

It aligns interests and it’s predictable on both sides around cost. And so much like we said on Humana and the other 10 arrangements or so that we have on the cap model, those are performing really well. And as we talked about earlier today, once we get our West Coast operations supporting Kaiser in the same place, that will be successful for us overall. So 72,000 patients, about 7 to 8 million of revenue from those two contracts alone annually. So hopefully that answers your question on the cap deals.

On your question around preferred provider agreements, the strategy there we set out on is we didn’t really have an enterprise or national sales team that was dedicated to calling on larger health systems. We had that in our existing sales force—that a regular salesperson could go out and pitch it if they so choose—but I think anyone who’s been in the industry knows there’s a uniqueness to pitching big national accounts, or regional accounts even.

So we stood up, when we took down the PCs sales force, we exchanged that sales force for what we’re calling the enterprise sales team. And it’s been about two or three quarters now that this team has been up and running. We took some of our most mature and high-performing salespeople, put them in this team, and they exclusively call on these health systems. Last quarter we signed four meaningful deals. This is volume where we have a preferred arrangement coming out of a large health system.

I don’t have numbers for you on how to think about that in terms of 2027. I’m sure we could bake that into our model for ’27 to give you some guidance. But again, the whole idea is it’s big, chunky pieces of business. We have one account that we can put a liaison in to help with the discharge cleaning and the easiness with which those referrals come to us.

Brian Kinquellott (Analyst at Jefferies)

Got it. That makes sense. And then when I think of the Medline comments that you made, are there other suppliers? I mean, guessing Hillrom and the others are easy substitutes for those. Is that the right way to think about that?

Suzanne Foster (Chief Executive Officer)

Yeah, exactly. And we had already, even before the Medline field action, been looking at diversifying our supply chain and approached some of even the smaller ones, fortunately before this even happened, to talk about how could we get them to ramp manufacturing. So yeah, we believe that we have our bases covered, but that assumes that all these different players ramp production to cover the demand.

OPERATOR (Moderator)

Thank you. Thank you for your question. Our next question comes from Kevin Caliendo with UBS. Please go ahead.

Kevin Caliendo (Analyst at UBS)

Hi, thanks for taking our question. Appreciate it. On the bed issue, how do we think about the risk that you actually bear related to Medline? You talked about the bottom end absorbing short-term effects of the field actions. Do you actually have any liability risk, or is this just cost risk of being a favored partner? I’m just trying to understand what actually you’re on the hook for here.

Suzanne Foster (Chief Executive Officer)

Think of it this way: they issued the recall to the whole market, not just us. We’re just one of the players. We have the relationship with the patient, so we’re following their instructions—the FDA and Medline’s—about how to either repair or replace, at what cadence, what’s required. They have indicated—they put out word—that they expect costs from this. They have communicated with us a refund, replacement, and cost-type program. And so for us it’s going to be just the time of going out and replacing or repairing those beds and the costs associated passed back to Medline, and making sure that our supply chain secures enough product to make sure that we keep up with not only the repair and replacement, but the new demand.

So, as we sit here today, we called it out because it is out there and we are one of their largest bed providers. We wanted to just call it out in fairness that, as we think about it today, we think that it’s under control, but it could be a risk to us if there’s something unforeseen.

Kevin Caliendo (Analyst at UBS)

Got it. And if I can ask a quick follow-up, is there an ability to frame the ResMed rebate opportunity? How much of that is tied to volume or minimum purchase commitments? How should we think about that going forward?

Suzanne Foster (Chief Executive Officer)

I think all of it is. The way our contracts work, there’s always volume rebate structure, if I’m following your question.

Harriss Currie (Chief Financial Officer)

So this — let me show you a way to think about this. There are actually two components to the overall potential price increase for that manufacturer. Number one is just a raise in net price, or gross price. Number two is the discounts that we can qualify for as we drive volume through that manufacturer. There will be a volume discount structure that’s included in the modified agreement, but there also will be a modest price increase there. We haven’t gotten the details as to, if you’re looking for the puts and takes between how much can be the price going up and then how much can we earn back down as we work through the discount structure. We haven’t talked about that. And so we’ll certainly, as it becomes clearer, I think there will be more clarity around that communication as reality lands, if you will. But we’re still working through that. Does that help?

OPERATOR (Moderator)

Thank you. Our next question comes from Peto Chickering with Deutsche Bank. Please go ahead.

Ben Shaver (Analyst at Deutsche Bank)

Hey guys, congrats on the quarter. You’ve got Ben Shaver on for Peto today. So I understand not guiding 2027, but I think it would be helpful if you could give a little bit of a framework on the puts and takes and how we should think about the moving pieces across the capitated deal, losing diabetes, and as well as the rest of the business. Thanks.

Suzanne Foster (Chief Executive Officer)

I love that. But let’s remember my new CFO has been in the seat four to five weeks. All I can say on that is, listen, this year has been a transformative year for AdaptHealth. Like I said, bringing on massive patient volume, pruning our portfolio. The teams have been heads down looking at first being effective in the marketplace, and now we spent the second half of this year being efficient and trying to get our cost structure in place. I believe we have a lot of momentum going into 2027.

The base business is improving, our referral volume is up, and our capitated model or our capitated pipeline — we are exploring those deals that make sense for us. So as you think about 2027, think about, you know, market growth across the business. Use Q4 as a good baseline for us to improve on from there because we’re continuing to improve, and then, you know, we’ll have to come back to you in February with a little more. Unless Harris wants to weigh in.

Harriss Currie (Chief Financial Officer)

Well, I mean, yeah, I’ll give you some snippets that may be useful and potentially useful, but not much in your 2027 modeling. We mentioned earlier in our comments that we expect the margins on our largest capitated contract to improve, so you would expect to see that incorporated in the results. You would also expect to see a continued focus on cost control so that we don’t allow our costs to outrun revenue growth and, as a result, expect a modest improvement in margin.

We’re not really prepared to talk about the various revenue verticals and how they might grow. But cost control, capitated margin improvement, and then the rate of organic growth of the base business — growth that we mentioned in the current quarter was only a couple percentage points. As we lap some of the issues that have happened in the current year — for instance, the reduction of focus on some of the PCs verticals and others — you would expect to see that base business growth percentage rise back to a more normalized level.

So that’s probably not helpful at all, but they’re little snippets to think about as you think about 2027. And obviously in the fourth quarter call in February, you’ll get a lot more clarity on the thoughts for the full year 2027. Does that help?

Ben Shaver (Analyst at Deutsche Bank)

Yeah, yeah, for sure. I appreciate some of that color. And then just one more quick one — you mentioned pricing adjustments on that big capitated contract could be coming, but they’re not included in the outlook. I know you can’t get into the negotiations and all the details there, but is there anything you could give us to kind of help us understand the potential magnitude or the structure of that adjustment, and whether that would be incremental to the 20% margin target by the end of next year?

Thanks, guys.

Harriss Currie (Chief Financial Officer)

The 20% margin does not include any adjustment. So if there is something to come, it would be an improvement to that or bring it in sooner.

Suzanne Foster (Chief Executive Officer)

And obviously we’re a public company. These are confidential negotiations, and we don’t want to start talking about the specifics of that until we’re done. Done, as they say.

Ben Shaver (Analyst at Deutsche Bank)

All right, appreciate it. Thanks, guys. Congrats on a great quarter.

Suzanne Foster (Chief Executive Officer)

Appreciate it.

OPERATOR (Moderator)

Thank you. As a reminder, if you would like to ask a question, please press star-one on your telephone keypad. Now we will take our next question from Ben Hendricks with RBC Capital Markets. Please go ahead.

Ben Hendricks (Analyst at RBC Capital Markets)

Great, thank you very much. I wanted to follow up on some of the large capitated contract. In the negotiations you’re having there, obviously you’re looking to address the elevated order volumes you’re seeing. I think you also, though, called out some non-standard ordering practices that were creating some headwinds and that that would be a longer-term fix. Is there anything you can do, or any concessions in those contract negotiations, to address that specifically?

Suzanne Foster (Chief Executive Officer)

Yeah, sure, Ben, I got you. So, you know, let’s just take a step back. This arrangement, you know, I believe is very strong. The partnership is strong. I believe our customer is appreciative of the service and the care that we provide to their members and patients. You know, despite all of the pressure, we are exceeding our service level agreements and performing exceptionally well under the conditions. And on the other hand, you know, we’re certainly grateful for the trust that they put in us and, you know, allowed us to take care of their members in the switch that they made earlier this year.

So we’re on strong footing, and a strong partnership exists with the intention of building a long-term relationship. Notwithstanding that, we do know now in the partnership that utilization was hotter than expected starting on day one. We have mutual agreement on that. And, as you point out, the referring workflows or the cost to serve — we’ve talked about some of those in the past — those were not assumed when the contract was priced. And so it’s those two things that have put pressure on us, as you mentioned.

And so what we’re trying to do is look at how do we now midstream, you know, a couple quarters in with full awareness of where the actuals are, look at pricing and terms that reflect our ability to continue to service at those utilization levels plus the service that’s required while we work to improve the referring patterns and the workflows. That’s going to take a little time. So in the conversations we’re having, we’re trying to figure that out as partners — to get the pricing right so that there’s no impact to patients and that AdaptHealth can have a profitable contract and that our partner can continue to enjoy the service levels that we’ve been providing.

Ben Hendricks (Analyst at RBC Capital Markets)

Thank you. Appreciate that comment. The second is a follow-up for Harris — and Harris, welcome to the call; we’re certainly looking forward to working with you in the future. Wanted to follow up on one of your comments on the expectations for 4Q cash flow. I think you definitely noted that there was going to be early pay disc, but you also noted that that is going to be kind of a baseline for 2027. Wonder if you could reconcile those two comments and kind of give us an idea of how we should think about working capital in the next year.

Oh, no worries. Just wanted to ask about cash flow — the free cash flow expectation for fourth quarter. I think there was a pull-forward of some working capital, but then also that it would be kind of a baseline for 2027. Just wanted to get, you know, kind of run-rate working capital expectations there. Thanks.

Harriss Currie (Chief Financial Officer)

So there was an opportunity for us to have cash build up at the end of the year and adjust the timing of payments, obviously within AP, to drive better balances. And there’s also some refinement, when I joined, of the aggregate forecasting process that all allowed us to get to what I believe is a reasonable number. So as you think about the fourth quarter cash flow, other than the inclusion of cash flow from the discontinued ops of Diabetes Health that we don’t quantify but it’s in there, the current baseline for the fourth quarter would be a reasonable expectation moving forward for future quarters, absent the Diabetes Health contribution that we haven’t quantified.

So you’re going to have to make an assumption there about how much of diabetes is in there because we haven’t really talked about it publicly, but we will certainly disclose that. And there’s a bit of seasonality in the first quarter as well that could affect free cash flow — it has every year. There are a number of balance sheet items, accrued liabilities that have built up over the course of the year and others that get paid in the first quarter.

And so, is it representative for the first? Maybe not, but representative for the full year times — I don’t know, three, three and a half — that’s probably a better estimate for where we might go. But you need to, again, adjust for Diabetes Health within that number. Does that help?

Ben Hendricks (Analyst at RBC Capital Markets)

That helps. Thank you very much.

OPERATOR (Moderator)

Thank you. We will take our next question from John Penny with Canaccord. Please go ahead.

John Penny (Analyst at Canaccord Genuity)

Hi, John Penny, off for Richard Close. Thanks for the questions and congrats on the progress. I guess, going back to the capitated contracts — thanks for the details there — but with these two new smaller capitated contracts just announced this quarter, granted, much smaller than the Kaiser contract, are there any learnings from the Kaiser contract that you pulled into these newer contracts? How you think about these capitated contracts going forward — any stipulations in the contracting, or just any learnings or any details you can provide would be great.

Suzanne Foster (Chief Executive Officer)

Yeah, it doesn’t quite translate. And the reason for that is when we sign on these new agreements like I just spoke about, they’re more like a Humana capitated deal, meaning the members go to multiple hospitals. You know, they’re not in an IDN. And so they kind of come on board more like and act like our Humana contracts, which we learned our lessons years ago on that. And so these are pretty, you know, smooth as they go, so to speak. The lessons have been learned.

They come on, they’re stable. You know, there’s no de novo type opening of new locations, acquiring new people. You know the difference — Kaiser’s really an N of 1. First of all, it’s an IDN. It’s in eight different markets. But the difference there, the biggest issue, if you will, that we had to deal with, was their own hospitals — they have specific ways of working that were new to us — coupled with a brand new workforce out there. Remember, we put in 40 new locations, thousands of people to support this, and we were taking that business over from an incumbent.

So there were certain ways of working that we didn’t have visibility to at the time that we have been learning in the first two quarters. So I wouldn’t expect any bump in the road. Those two capitateds are up and running and smooth as it goes. Also think about this in a way of this is about continuous improvement. And so as we move along from our first capitated contract previously to now, the company has revised policies, procedures, the way we apply our resources to these contracts and, and continues to get better. So it’s really subjective and it’s not anything that fits in your model, but it’s something you would expect as we go forward that the further down this track we get, the better at it we get in being effective at this.

That’s one of the reasons our margins are expected to be better next year. Our costs will be under better control on the contract. And so we’re just managing it better. Why? Because we’re older effectively, right? We’re, we’re growing up and getting a lot better at this. The strategic value of these, remember these think of it as exclusive capture of patient populations. I mean, our growth is going to come by increasing the number of patients that we ultimately serve and that we can access. And we’ve shown time and time again that as we bring these exclusive capitated arrangements in place, that we get into a better relationship with that referring provider and get that halo effect around that population. So strategically, it still makes a lot of sense.

And as Harrison, his short time here has realized, we’re constantly talking about continuous improvement in our workflows and how to reduce the administrative burden because that’s the biggest difference between a fee for service and a fixed model, like a capitated model, is that you can work to reduce the administrative burden that a fee for service type model inherently has in it. And you can streamline the referral practices between us and the provider, which takes out cost ultimately.

Harriss Currie (Chief Financial Officer)

Yeah, I mean, 13 to 14 is our target. Obviously we’d like to be at the bottom end of that range, but if you’re going to model it, use 14 for now.

OPERATOR (Moderator)

Thank you. Our next question is from Jay Lewis with Baird. Please go ahead.

Jay Lewis (Analyst at Baird)

Hi, thanks for the question. Just wanted to ask one more quick one on the Medline situation. Would you be able to quantify how big that, you know, recall replacement and repair is for you in terms of, you know, how many beds are a dollar value and what you see is the most likely correction course across the field, whether that be that repair or the, or the replacement.

Harriss Currie (Chief Financial Officer)

But yeah, let me just give you some perspective here. If you just carve out bed revenue out of our total revenue is low single digits of our total revenue. So how exposed are we? Pretty low. However, as Suzanne mentioned earlier, this is not just an AdaptHealth issue, this is a market issue because Medline obviously is a large supplier to the entire market. We just happen to be one of their biggest customers. So, so for us, beds are an important component of our aggregate revenue build up.

But as far as near term exposure as a result of Medline’s indicated willingness to resolve this problem for everyone in the market, we don’t see a significant amount of exposure to the company’s financial results in the near term. If anything, it’s only near term because Medline’s going to get this all worked out and by, you know, end of next year we’ll be looking back at this and hopefully it’ll be a non event.

Suzanne Foster (Chief Executive Officer)

And we know that it’s the beds that were manufactured in the last five years in our share of those. I don’t have that exact number, but we’re waiting, unfortunately we’re still waiting, waiting for instructions on what can be repaired, what needs to be replaced and what timing. So it’s still a little early to work out those details but as Harris said, it’s certainly contained and Medline has been a true partner here in coaching us through this and has ensured us that they’re going to stand behind the quality of their product and making sure that we get this right for patients.

Jay Lewis (Analyst at Baird)

Thank you, that’s helpful. Just one more quick one on the PCs business. Could you talk about the revenue that you got from that business in this quarter relative to your expectations and any updated outlook for that revenue winding down?

Harriss Currie (Chief Financial Officer)

I can’t give you the exact revenue. I can tell you how to think about it is that PCs revenue was in the the second to the third quarter. There was only a modest decline. We expected it to come down a little faster in the third quarter. However, that recession again as we move into the fourth quarter will likely accelerate into the fourth quarter and that’s one of the reasons for the fourth quarter range being a little lower than we were in the third quarter and but as a percentage of total revenue, it’s insignificant as you think about it, the part that we’re keeping it will be insignificant to total revenue.

I know that’s not real specific for you, but it’s the way to think of it is It’s a short term wind down with an immaterial effect on the financial statements of the of the company nor top line revenue. But it does affect that wellness at home line of revenue growth and has tempered the growth there. So that when we lap the PCs wind down next year you would ultimately expect the wellness at home revenue to move back to at least a market growth rate and therefore the aggregate growth rate of revenue across the company would tick up again.

I should have mentioned that earlier for the earlier question around how to think about 27. I mentioned lapping some of the issues in 26 and PCs. It’s not an issue, but some of the factors in 26 and PCs is certainly one of those.

Suzanne Foster (Chief Executive Officer)

If I may just take 30 seconds to remind everybody of the strategic reasons why we made that move. You know, PCs was acquired from McKesson years ago, a portfolio of supplies and we never did much with it in terms of where we sold it and how we sold it. And we made the strategic decision that part of that portfolio is very beneficial to us in support of our sleep and respiratory business, particularly in our capitated arrangements where they want a broader portfolio and also in our enterprise sales, meaning our national health systems don’t want just sleep and respiratory, but they want us to have a portfolio of a broader portfolio to support those patients. So we looked at the portfolio and said here’s the ones that are very strategic to us.

We’re going to keep that but we’re going to get out of the low margin channels that we were serving and we’re going to eliminate a standalone salesforce and give that to our enterprise and our top sales teams to be able to sell a portfolio that way. So I just want to make sure as we talk about PCs in the future that you understand the strategic benefit of having that portfolio. But we’ve now made it into a growing and better margins by virtue of how we’re selling it and where we’re selling it.

I think that concludes the questions, is that right? Well, I want to start again by thanking all of our employees out there for continuing a heads down approach to Q3. I want to thank the investors for sticking with us through a transformative year and hopefully you can see the hard work beginning to pay off and the momentum as we head into 2027. Thank you.

OPERATOR (Moderator)

Thank you. This brings us to the end of today’s meeting. We appreciate your time and participation. You may now disconnect.

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