AdaptHealth Corp. Q4 FY2021 Earnings Call

Thank you, operator. I'd like to welcome everyone to today's AdaptHealth Corp. conference call for the fourth quarter and full year ended December 31, 2021. Everyone should have received a copy of our earnings release earlier this morning. If not, I'd like to highlight that the earnings release as well as the supplemental slide presentation regarding Q4 and full year 2021 results is posted on the Investor Relations section of our website. In a moment, we'll have some prepared remarks from Steve Griggs, Chief Executive Officer of AdaptHealth; Josh Parnes, President of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth. We'll then open the call for questions. Before we begin, I'd like to remind everyone that statements included in this conference call and in our press release 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 our financial results for 2021 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 our annual and quarterly SEC filings. AdaptHealth Corp. shall have no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, we will reference certain financial measures such as EBITDA, adjusted EBITDA and adjusted EBITDA less patient equipment CapEx, all of which are non-GAAP financial measures. This morning's call is being recorded, and a replay of the call will be available later today. I'm now pleased to introduce our Chief Executive Officer, Steve Griggs.

Thank you, Chris. I'm going to begin with a review of 2021 and then provide an outlook for 2022. For the past two years, the worldwide pandemic has directly impacted every part of our business. Despite this and the added stress caused by higher supply chain-related costs and the reduction in supply of CPAP devices, I'm very proud to report our business has grown and prospered. AdaptHealth more than doubled in size in 2021 as measured by a 102% increase in net revenue and a 99% increase in adjusted EBITDA. We now provide needed and often life-saving equipment and supplies to approximately 3.8 million patients each year. Every day, more than 32,000 patients receive delivery of our products in order to live healthier lives in their homes. We now have 11,049 team members across 757 locations in 47 states. It is a testament to their hard work, resilience, and creativity that we're able to carry out our mission, and I thank them all for their continued dedication. AdaptHealth always strives to serve the needs of our patients and referral partners in spite of any short-term disruptions. The February 2021 merger with AeroCare was the most significant driver of our growth in 2021. By all metrics, including the achievement of projected synergies, this transaction has been a great success for AdaptHealth. Aside from the financial improvements, we also brought together enhanced both companies' best-in-class technology solutions. With the AeroCare merger and the 22 other acquisitions we did in 2021, we are now truly a national company, thereby enhancing our value proposition for managed care partners and referral sources. In addition, we also expanded our direct-to-consumer e-commerce operations in 2021. I think it's also worth noting how our capital structure evolved to fund these acquisitions and to begin to simplify our balance sheet. Since July 2021, we have raised $600 million in fixed-rate debentures. As rates have begun to rise, that transaction looks increasingly attractive in retrospect. Some of these proceeds were used to retire expensive debt that AdaptHealth had incurred as a private company, with the balance used to make accretive acquisitions. The most significant challenge we faced in 2021 and continue to face was the June 2021 Philips PAP device recall and the resulting reduction in the supply of PAP machines, which has had a more negative effect on our business than originally contemplated. Unfortunately, Philips will be unable to provide new CPAP devices for longer than we originally anticipated, and other manufacturers have been unable to make up for the shortage. The demand for these products continues to be robust, but we were unable to fill the needs of all of our patients in the fourth quarter and are projecting a continued shortfall in devices through 2022. This shortage will end at some point; hopefully, by the end of this year. And when it does, AdaptHealth will be well positioned to resume its historic organic growth. As these situations improve, we believe the actions we've taken and the investments we've made to ensure patients and referral sources are taken care of position us well to gain market share going forward. And now I'll pass the call over to our President, Josh Parnes.

Thank you, Steve. I'd like to add my thanks to our AdaptHealth employees for their hard work throughout the past year and their ongoing dedication to improving the health of the 3.8 million patients we serve on an annual basis. In an environment of increased cost and supply chain challenges, it is even more important for us to be best-in-class operators as measured by efficiency and cost. Over the past 12 months, the AeroCare and AdaptHealth teams have worked side by side to integrate our businesses, bring together our best-in-class technologies, and maximize financial and operational synergies. For example, we implemented an enterprise-wide delivery tracking system that allows for real-time updates to patients waiting for their equipment as well as a consolidated sales reporting platform which gives our sales teams continuously updated patient order statuses that are vital to our physicians and facility referral partners. This produces a measurably better customer service experience for our patients. As Jason will also touch on a bit later, we're excited to have also launched our enterprise-wide Oracle ERP system on February 1, which will dramatically improve visibility into our business and its trends. I'm also excited to announce the December 31 close of our acquisition of Community Surgical Supply, a clinically focused home care equipment and services provider with over 50 years of health care experience, headquartered in Toms River, New Jersey. Community Surgical is the largest HME and respiratory acquisition in Adapt's history, outside of the AeroCare merger, adding approximately $100 million in annual revenue. This transaction further expands AdaptHealth's already robust product offering in the New York, New Jersey, and Pennsylvania markets as well as many surrounding states, enhancing patient service levels, response times, as well as deepening our relationships with local referral sources. Consistent with many of the transactions we complete, Community Surgical brings not only strong operational and financial performance but also experienced sales and executive leadership. We have known and competed with this team there for 20 years, and we are thrilled to be joining forces. This combination brings the complementary strengths of both organizations together. The integration is well underway, and we expect a smooth transition with high expectations for improved performance and patient care. AdaptHealth continues to invest in innovative workflow solutions and technologies that not only enhance our operating efficiencies and leverage our capabilities but also continue to move us up the chain of value-based care. The company already has over $50 million in programs underway with managed care payers based on shared savings and value-based reimbursement models. And as these programs prove themselves out through improved cost of care as well as better patient outcomes and satisfaction, we anticipate that opportunities with payers will continue to increase. We believe that as the last mile provider into approximately 3.8 million patient homes across all 50 states, we are uniquely positioned to add significantly more value in the coming years to the health care continuum. We will do this by continuing to work with our payer and referral partners to improve clinical outcomes through the connected therapies and devices that we provide, and we are excited about what the future holds on that front. With that, I'll pass the call over to our CFO, Jason Clemens.

Thanks, Josh. Good morning, and thank you for joining our call. I'll discuss the fourth quarter operating results, our cash flow and capital allocation activity for the fourth quarter and full year 2021 and conclude with our updated guidance for 2022. For the fourth quarter ending December 31, 2021, AdaptHealth reported net revenue of $702 million, representing year-over-year growth of 102%, including contribution from the AeroCare acquisition that closed in February 2021. Organic growth for the quarter was 2.7% and non-acquired growth was 2.4%, as outlined in our earnings supplement. As Steve noted, we were pleased with our ability to deliver revenue ahead of expectations despite the ongoing impact of the Philips recall. However, our profitability was negatively impacted by these factors, leading to adjusted EBITDA and margin below our expectations. Specifically, adjusted EBITDA was $158 million for the quarter, representing adjusted EBITDA margin of 22.5%, which included the one-time benefit of $11 million in PRF funds. While we had anticipated some cost pressures related to these factors, our margin performance was further affected by lower-than-expected availability of PAPs from manufacturers, which resulted in lower rental revenue. Even though PAP resupply and diabetes products outperformed, these businesses carry a significantly higher cost of goods relative to the rental business, thus reducing our overall EBITDA margin. On the positive side, we were pleased to see sequential improvement in cash flow performance for the quarter. Recall, third quarter 2021 cash flow was lower than normal due to a temporary spike in DSOs, partly related to the consolidation of billing operations in connection with the integration of the AeroCare acquisition. As expected, AR collections improved sequentially, contributing to free cash flow of $37 million during the fourth quarter, up significantly from negative $33 million in the third quarter and representing just over 5% of fourth quarter net revenues. Additionally, the company increased inventory levels in order to mitigate continued supply chain disruption, and we anticipate that inventory levels and AR will remain elevated in the short term and convert to cash over the next few quarters. For the full year, cash flow from operations was $276 million, and free cash flow was $72 million. We estimate that the recoupment of CARES Act funding and other factors represented an approximate $70 million reduction to cash flow for the year. We expect $13 million of final recoupment and approximately $10 million of other one-time impacts in the first half of 2022. Even with this continued recoupment of the CARES Act funding, we expect to improve free cash flow conversion, and we remain comfortable with our long-term target for free cash flow of approximately 6% to 7% of net revenue. We also remain confident that our acquisition strategy is adding significant shareholder value. Note that for the 22 transactions we completed outside of AeroCare, the average multiple on last 12-month EBITDA was under 6x, and year 1 performance has exceeded that through synergy. That being said, we acknowledge that an escalating rate environment will be increasingly important for the company to exercise discipline with capital allocation decisions. At the end of 2021, our net debt to adjusted EBITDA leverage was just under 3.2x as defined under our bank covenants and leverage on trailing 12-month EBITDA was 3.7x. Available liquidity was approximately $585 million, including cash on the balance sheet and the revolver. Turning to our 2022 guidance. We are updating our outlook based on the latest developments and what we are seeing across the business lines. As discussed in this morning's press release, we now anticipate fiscal 2022 net revenue of $2.825 billion to $3.025 billion versus our prior range of $2.7 billion to $2.9 billion. And adjusted EBITDA of $610 million to $670 million versus our prior range of $635 million to $695 million. We continue to anticipate total CapEx representing 9% to 11% of net revenue. Although we believe the organic growth for our business in a normal operating environment is at least 8%, given the performance in the fourth quarter and the continuing impact from the recall, we think it is prudent to set 2022 organic growth at a midpoint of 4%. That includes about 1 point of pricing from the DMEPOS fee schedule and about 3 points from volume growth. We also added approximately $100 million of revenue through the Community acquisition discussed earlier. As it relates to our previous guidance, we are now estimating a $45 million greater reduction in our EBITDA from the Philips recall and PAP supply challenges and the resulting impact on our rental mix. This is partly offset by contribution from the Community acquisition that was not in our previous guidance. Although we believe the PAP shortages discussed on this call will alleviate by the end of 2022, we believe it is appropriate to re-base our guidance with the assumption that it will take the entire year before Respironics equipment is back on the market, and that we will not return to prior allocations with our main supplier until the back half of the year. As is typical, our guidance does not include contribution from acquisitions that have not yet closed. With that, I'll turn the call back over to Steve.

Before we start the Q&A, I'd like to make a few additional comments about the PAP supply situation. We are now either the first or second largest provider of PAPs in the country. So the current shortage of supply will affect us, but only as long as this temporary situation persists. We estimate that over 2 million PAPs are delivered in a typical year. But with the shortage of supply that began last year, we estimate that only approximately 70% of the patients who will need machines will receive them. This suggests that at the end of 2022, after 1.5 years of reduced PAP supply, there will be approximately 900,000 patients diagnosed with OSA, waiting for delivery of PAP device to begin their prescribed therapy. Given our leadership position in the industry, we expect to capture a significant share of this backlog and benefit from the historic organic growth of the sleep sector. Operator, please open the line for questions.

Our first questions come from Pito Chickering with Deutsche Bank.

I guess going back to the 2022 EBITDA bridge, you said that the guidance came down to the midpoint by $25 million. You said that CPAP was actually $45 million worse. Can you just sort of get back to the bridge, sort of where we were before? What are the good guys and bad guys here? Just so we understand better sort of what occurs for the 2022 guidance.

Pito, this is Jason. Sure, I'll be glad to address that. So to help shine a light on the trend we saw in Q4, I'd point you to Slide 5 in our supplement. That sleep rental line is really where the big impact is, and we just missed on the Philips expectations. I mean we tightened the band last quarter to expect about a $10 million hit. The reality is that came in closer to $30 million plus another $5 million in oxygen noise, really just we had a bit of a COVID spike in Q3, and those patients fell off faster than we thought. So that was about $5 million. But the $30 million on the sleep side, if you look at Q2 2021, that sleep rental run rate was about $66 million. While it is declining, it's not declining as rapidly as it might appear because we have acquisitions piling in there. So what we should have expected on a normal growth rate of about 1.5% to 2% sequentially per quarter, that $66 million should have been closer to about $69 million in Q4, and that same unit portfolio, if you will, delivered $52 million. So we ended up missing by $17 million. And then there is a compounding effect within the sleep resupply. So that's some of the gory detail of what we're seeing in Q4 as we bridge to 2022. Yes, we brought the guide down by $45 million. So most of that is the negative impact of the recall and the continuing trend that we saw in Q4, at least for the early part of '22. And then we have netted some upside for DMEPOS fee schedule and kind of other benefits and then $20 million for Community. So that will bridge you out to the $640 million in our midpoint.

Got it. So fundamentally, ironically, the guidance would have increased if you hadn't raised the CPAP challenges, which should diminish once Philips improves their situation.

Without question. Yes, without question. I mean we had last quarter, so we reported on November 4, we thought the impact of the recall in 2022 would be in the neighborhood of $20 million. So kind of the same $20 million we had in the back half of '21, we thought that would be about $20 million first half '22. And now just with a much bigger miss in Q4, that number is closer to $65 million of PAP rental impact in '22. So yes, without the impact, we would have been up. It's disappointing, but it's just where we are.

Okay. One more quick question here. Can you walk us through looking at 2022? We've seen many manufacturers face wage and raw material inflation. Are any vendors trying to push pricing increases to you? How should you model gross margin in 2022 considering your long-term contracts and manufacturers attempting to raise prices?

Yes. Sure, Pito. I mean, I'll start on the number side, and then I'll pass it to the guys to know operationally what we're seeing. So first, the DMEPOS fee schedule was announced in mid-December. So that was around a ballpark 5% increase, and we've accounted for that in our guidance on the top line. So we brought the top line up about 1 point, maybe a touch higher as you heard in my prepared remarks. But that Medicare DMEPOS fee schedule increase is a very heavily inflation-based metric, which is a good thing because we're certainly seeing inflation, as you said. So there is some dollar pass-through of that, but downstream, if you will, at the manufacturer level, they're certainly seeing inflation and surcharge on raw materials. And so a sizable portion of that increase will hit our COGS. Guys, you want to weigh in on what you're seeing with the main manufacturers operationally?

Yes, we've noticed that the public entities we work with have implemented price increases. Additionally, the private entities have also managed to raise their prices, although not to the same extent as the public ones. This is a positive development. However, the freight surcharges and higher freight costs are definitely being passed on to us. We anticipate that these issues from the supply chain will start to diminish towards the end of 2022 and into 2023.

And Pito, this is Josh. I'll add a quick note. For 2022, we accounted for not just the shortage of PAPs affecting the rental census, but also the considerable expenses we incurred to expedite products we could secure. Strategically, we want to be well-positioned as we exit 2022 to capture market opportunities and referral sources that remained with us or turned to other vendors during the Philips recall, which we anticipate will primarily affect most of 2022 with some improvement in the latter half. However, we are adopting a more conservative outlook on how quickly we believe normalcy will return. We are incurring significant air freight and other expensive shipping costs strategically, as we recognize this will affect us in 2022, but we aim to be ready to maximize opportunities in 2023 and beyond to address that backlog.

Okay. Just one question on the expedited shipping. That's just on the CPAP or you have to do that on a diabetes? Just because I know that the margins on diabetes are thinner and if you are expediting shipping, that can really crush those margins, I believe.

It's just on CPAP right now. We're not having any access issues with other supplies at this point.

I have a question regarding CPAP. Steve, you mentioned that there is a backlog developing. How do you plan to address that? People are still visiting doctors, so is there a system in place to track referrals as they come in? I would like to hear your thoughts on how this will unfold as we move beyond 2022.

Yes, thank you, Brian. The backlog is going to persist. We are monitoring those patients as they come in. They used to be informed that it would take a few weeks to receive their PAP device, but now it's a few months. They are being added to the list, which, unfortunately, is getting longer, and the wait time is increasing. Some doctors are hesitant to prescribe due to this extended list. We inform them that the wait isn’t getting shorter, so it's important to add patients to the list. Doctors are still prescribing, and we are improving our education for patients about the global supply chain. They are added to the list; however, as we know from experience, the longer the wait between ordering and delivery, the more likely some patients may decide they no longer need it. But that won't address their sleep apnea, so they may seek solutions later on. It's crucial to recognize that around 1 million patients will have a prescription for a PAP device and will be looking for ways to resolve this issue. Right now, it will depend on who can process and deliver the product. We are all receiving similar allocations based on our historical demand. We are keeping track of these patients, processing them as quickly as possible, keeping them in the queue, and ensuring they stay informed.

Yes, of course, Brian. There’s no change in our guidance for organic growth across most product categories except for sleep. In diabetes, we expect growth of 18% or more in 2022. We see respiratory growth at 5% for the same year. The HME and other categories are projected to grow at 4%. As for sleep, it's estimated to decline about 5% to 6% year-over-year. When you calculate the weighted average, it averages out to around 4%. Aside from sleep and our challenges with PAPs, everything else looks good. Regarding margins, we anticipate deterioration in Q4 and into 2022, particularly in the sleep segment, due to the nuances of our rental product lines and the associated accounting. Each dollar of rental revenue effectively contributes about 95% to EBITDA after accounting for some equipment depreciation, in contrast to dollar-for-dollar margins seen in sales. For products like diabetes or PAP resupply, gross margins can range from 30% to 50%. While we performed well in those resupply categories, the costs have been significant, resulting in only $0.30 to $0.50 of margin, depending on the product. Rental losses were considerable, reflecting a 25 million shortfall we mentioned earlier, which means that excluding PRF, we missed our mid-target by $20 million. This shortfall will impact our overall margin profile moving into 2022. Currently, we’re showing adjusted EBITDA at 21.9% at the mid-point, but we are confident we can improve that to the upper 23s or into the low 24% range as we finish 2022 and move into 2023.

Our next questions come from the line of Joanna Gajuk with Bank of America.

This is actually Courtney Fondufe on for Joanna. I guess just turning back to the inflation conversation, you guys mentioned, I think, last quarter that you were seeing some minor staffing shortages and some back office positions like delivery personnel. Can you just give an update on what you're seeing there now? And I guess, what is the wage inflation for those positions looking like?

The cost of hiring has certainly increased. We're planning for a 2% to 3% increase since we addressed most of these issues in 2021, but we've factored that into our projections for the future. At the start of 2021, we faced some personnel challenges, but as the year progressed and with fewer people available, we were able to reallocate staff to other functions. While we still find it tough to recruit, our overall need for personnel in 2022 is less than it would have been due to the issues with resupplying personnel. This situation provides some positive news, as we could benefit from having more people available to fulfill necessary roles in the field.

And this is Josh. I'll just add a little detail to that. A lot of the things we do with improved technology efficiencies mean we're not as reliant on personnel as many other companies in the home care sector. Therefore, back office revenue cycle management and customer service roles are less affected because we can utilize technology and other strategies to enhance efficiency, which helps offset the rise in labor costs. As labor costs increase and we become more efficient, we aren't seeing a significant rise in labor as a percentage of revenue. This is a positive aspect, and we believe we are in a good position regarding labor costs relative to net revenue.

Yes. And to add some specific numbers to that. In Q3, our labor as a percent of net revenue was 26.1%, that's actually come down a touch. So in Q4, you'll see when the K drops early next week, we're down to 25.3%. Now some of that is the outperformance of revenue, specifically in diabetes and resupply lines. So again, we feel great about that. But we're holding firm in that 26% of revenue in terms of labor. So as Steve mentioned, we are facing some pressure. Ideally, we're not going to grow labor at the same level we're growing revenue. That's not ideal. But we're certainly not growing any faster.

Yes. That's really helpful. And I guess just one last one for me. You guys mentioned that the recall impact is coming in worse than expected, and that it will have a longer overhang than what you were initially baking in. So could you just talk through kind of the cadence of what you are currently assuming in terms of how the supply chain improvement largely plays out?

In our guidance, we have not included any products from Philips. If Philips is able to produce items for new patients in 2022, it would positively affect our guidance. Additionally, we reflect historical production levels from ResMed in our guidance. Should ResMed manage to produce more than their historical output, our guidance would improve as well. However, up until now, they have not been able to do so, except for the last few months. This is what will alter our guidance moving forward. It's worth noting that the team at ResMed is dedicated to finding ways to increase production. They have the capability to manufacture, but they are currently facing component shortages. If they obtain the necessary components, they will ramp up production and potentially surpass their output before Philips catches up. The reason for this is that they would achieve a lasting increase in market share. Consequently, ResMed is working earnestly toward this goal, and Philips is aware, pushing to return to the market quickly as well. It has become a competitive race between these two companies, and we will benefit from this situation. It's important to emphasize that every PAP device made will be distributed in 2022, and the same is expected for devices made in 2023 and likely in 2024 as well. The supply chain issues and related component shortages will not persist indefinitely, and once resolved, I anticipate a significant availability of products alongside a considerable number of patients awaiting them.

Our next questions come from the line of Kevin Caliendo with UBS.

I guess my question is around the acquisition environment. When you have these kinds of pressures and supply chain issues, does it limit or does it prompt you to want to slow down acquiring products? Like does that create more of a logjam for you if you continue to buy? Or steady state and let's keep going and the plan isn't really for near term, but for long term. Can you sort of help us think about how this impacts your acquisition strategy?

Yes. It's definitely going to affect our strategy. So let's say there's a provider out there that's a great provider, but they were a heavy Philips Respironics customer. So I just don't think we can make a deal with them that they would accept. It would have to get very, very creative and that kind of thing. And most of the smaller players out there are predominantly Philips. If you look at the market share that ResMed had, I think all the 3 major suppliers were well over what they were in the market share. So that means everybody else was predominantly a Philips provider. So when you go out there and look at those, we just can't do those today. So if we had a great company we looked at, they are heavy Philips, I just don't see how we can make a deal that they would accept. So within that, that limits us. And then we have this great acquisition that Josh is leading in Community that we feel very, very great about it because it's right within our marketplace. So I think the deals that we'll be looking at will be smaller in nature, that will solve specific needs, specific markets. So yes, I think you could look to that, that in a normal environment, our acquisitions will be a lot higher than we expect them to be in 2022.

Yes, I believe, as Steve mentioned, that Philips' major suppliers will definitely feel the effects on both valuation and our approach to those deals in 2022. In fact, some of the agreements we secured in 2021, particularly those with a significant Philips involvement, have influenced our overall supply. We are now compelled to acquire whatever PAPs we can and allocate them to these acquisitions. This is why we are seeing some impact within our core business, as we're trying to support these acquisitions with products that historically wouldn't have been part of their offerings if we hadn't acquired them. On the diabetes front and among other respiratory HME supply providers, we have a wide range of products. We are strategically exploring opportunities, including geographical ones. We have a lot to process, with Community coming on board as a deal worth over $100 million, strengthening our presence in the Northeast. We feel optimistic about integrating that with our clinical respiratory focus to capitalize on a rapidly expanding market at that scale. Nationwide, we are evaluating where we can achieve greater density, which products and teams are strategic, and whether there are any technologies incorporated in the organizations we're looking at. I would say we are taking a more careful and concentrated approach while also focusing on effectively integrating the acquisitions from 2021. We are confident we can uncover significant opportunities through synergies and operational efficiencies. We recognize the work ahead of us, and we plan to remain active, but our primary focus will be on digesting what we've acquired.

Fair enough. If I can ask a quick follow-up, how should we think about cadence for the year? I mean is your expectation that backlog starts to get better, is the year now going to look a little bit more back half weighted because of that? Is there anything we should think about when modeling out the course of the year?

Kevin, this is Jason. The guys may round this out. But in terms of the numbers, yes, I mean, it's probably slightly more tilted than normal. I think we talked about 22% to 23%, maybe 23% to 24% Q1 last quarter as a percent of kind of annual revenue. That probably comes off a point, maybe a touch higher due to this. Now for the rest of the business, I mean, again, it's all systems go and everything is operating as normal. And so this sleep rental as a percent of total is certainly going to tilt us a little bit. So again, a little lower in Q1 and ramping as the year goes on. Guys, do you have anything to add there?

No, I think that's right.

Just a couple for Jason. Jason in the fourth quarter, is it possible to tease out to get to sort of an adjusted or call it or a more normalized organic growth number? The impact of Philips and also some of the contracts you exited in early in '21, I assume those were also a headwind. Can you give us sort of a more normalized organic growth number if that's relevant?

Yes, Mat, sure. I'd be glad to. Regarding the exited contracts, you will see in our supplement that the impact from PCS is diminishing as we expected in Q4. It was probably around $2 million to $3 million less compared to the prior year, which was closer to $7 million to $8 million per quarter at the beginning of 2021, since those contracts were exited in late 2020 and early 2021. We are now approaching a more normalized level with PCS. There’s a small amount there. However, the larger issue is with Philips. We previously mentioned an expected miss of $10 million in Q4, but it turned out to be $35 million. Adjusting for that, you would see a more normal upper single-digit organic growth rate of about 7% to 8%. Nevertheless, we believe it's wise to anticipate around 4% overall for 2022, and we'll provide updates if that changes. Yes. That's the right way to look at the toggle. I mean I think some may look and say, 'Well, gee, your margin is coming off so much. Are you contemplating a material cost-out initiative or something like that?' And our response is, 'We are not.' I mean we know how to do that. I think we've demonstrated that in the turnaround of PCS and just other cost-out initiatives we run over the years here. But the reality is if PAPs come, we're not going to have enough people. We're not going to have enough bodies, enough trucks, enough of everything we need to meet the demand that Steve talked about. And so we think the right thing to do for this business is to hold firm, keep the trains running and do what we do every day, taking care of patients and wait this out. I mean that's our view. So as we get late in the year, if there's further disruption outside of what we're already thinking, would we contemplate something like that? Sure. But we just think where we are. We're going to need a lot more of everything we got if these PAPs come through.

Our next questions come from the line of David Common with JPMorgan.

I'm doing sort of updates and ticking and tying to your new commentary this morning. I wanted to go back to your traditional metric of EBITDA minus patient CapEx. I see the total CapEx is wrapped around, I think, $300 million, but I wondered if you could comment on whether we could use sort of a subset of that as patient CapEx or maintenance CapEx that's more sort of apples-to-apples in the whole $300 million.

David, sure. So I'll point you to the press release that came out this morning, the statement of cash flows. You'll see the purchases of other fixed assets at $203 million. And in addition, I don't think we have it in the press release, but you'll see it in the K and every time we produce a statement of cash flows, there's a bit of a supplement at the bottom that will call out equipment that was acquired on leases. That has been about $23 million through Q3. So I'd really add those numbers together and call it $225 million or maybe $230 million. You'll also note when the K drops, we had $0 of equipment acquired through leases. We're really ceasing that activity. One, it was just part of some deals that we cut at the manufacturer level earlier in the year. And secondly, we just think it's going to provide a much cleaner view of free cash flow. So overall, that's the $225 million or maybe $230 million. And then in terms of kind of maintenance versus growth, I mean we generally run about 1 point, so we're guiding 10% of revenue in terms of CapEx for 2022. So 9% of that would be from patient equipment and call it about another point from non-patient equipment.

It seems that even within the 9%, there appears to be an increase compared to previous figures, and it looks like there may be some non-maintenance components included. I'm not looking to extract every last bit of value, but if you could provide some insight on how much this might be contributing to growth, I would appreciate it, or perhaps I'm misunderstanding the situation.

No, I don’t think you’re misreading at all, David. I mean some of this is what we’re seeing in terms of freight forwarding and surcharge activity and just the cost to acquire these units. That is increasing. Now in some, we’ve got this – I mean we technically get a benefit on CapEx if we’re putting out less PAPs. I mean we’re not happy about that because we want to put out more PAPs. But there’s a little bit of noise in there. But in general, we’re just seeing surcharge and freight forwarding impacting that line, which is why we brought it up a point last quarter.

Just wondering if you could briefly go into a little more detail on the Community Surgical acquisition and kind of the impact on business mix and kind of what that acquisition looks like with regard to the charts you have on Page 4.

This is Josh. I'll take that. Community Surgical is primarily a clinical respiratory program that focuses on oxygen, ventilation, sleep, and full-service home medical equipment. They also have a significant amount of business with the Veterans Affairs and various other sectors, which we believe presents an attractive opportunity for us to expand and learn from their model. The business has many cross-pollination opportunities with our current operations in the Northeast. In terms of business mix, it's mainly focused on respiratory, with some involvement in sleep and ventilation. They have a strong ventilation segment and a solid oxygen business, which presents good growth potential. We see opportunities on the sleep side as we move past the Philips challenges and on the sleep resupply front. Additionally, there's potential to leverage their advanced clinical respiratory expertise across Adapt over the coming years. Overall, they have a talented team that can assist us in scaling, and we are excited about this opportunity.

Josh, you mentioned some technology offsetting some of the labor wage pressures. You also mentioned the enterprise tracking system and the rollout of the ERP. How are those factored? Is there any benefit associated with those systems here in 2022 factored into the guidance?

Sure. I think what we're seeing is generally an increase in operational capacity following some investments made in 2020 and 2021, both in the AeroCare delivery system and in our technology as well as in the Adapt revenue cycle management systems. These systems are being upgraded to support our growing organization and to enhance scalability. While we didn't incorporate these benefits into our numbers, we believe they help offset rising labor costs. As labor costs potentially rise, our operational technology enables greater efficiencies, which helps manage those costs. This is especially true for our back office functions like revenue cycle management, claims processing, and customer engagement technologies, which are becoming more digital and automated. We are at the forefront of this trend and are able to offset some labor expenses as a result. However, we did not specifically include this in our guidance. I will now turn it over to Jason for more insights.

Sure. So I'd add here that what we're seeing as we exit '21 is the full integration of technology across the company. And so we're seeing that across the revenue cycle platform. We've got a common revenue cycle platform now. We fully integrated it. We talked about in Q3, the conversion activity that DSOs were up probably 5, 6 days. And as we said, we expected that to normalize as we exit Q4. You'll note in our financials, I mean DSOs are back down 4 days. And correspondingly, the cash is flowing in as we expected. We're running a touch over 5% of revenue, and that will continue to increase. And secondly, we're on a common HCM or HRIS platform for human capital. Single platform for every employee in the company, at 11,000 plus. And then finally, Oracle is fully live and enabled at all 750-plus locations. As we stand here today, requisitions are being placed there electronically. POs are getting matched electronically. It's all flowing downstream and payments go electronically. I mean it's just a new day in the company in terms of the way we work, particularly in the back office. And so that's really going to show itself in cash flow and the generation of cash flow over the course of 2022. I'd say that between the carriers repayment and the cost to achieve the synergy that we talked about previously, we had pegged that at $20 million. We're looking at $70 million plus cash that would have been generated in '21, as you heard in my prepared remarks. I mean pushing $150 million is what that number would have been without the cost to achieve and without CARES recoupment. So now as we're looking at Q1, Q2, there's a remaining $13 million that will go out as part of CARES recoupment and that will be done and final. So that will be nonrecurring. We won't deal with that again. And probably about another $10 million or so as we get Oracle finalize some just general costs in ensuring that we start extracting the value from these investments. And as we lap that, you're going to see cash flow, a huge focus of the company. We'll be reporting it out every quarter. We think it's just such a core important part of our business that, frankly, was misunderstood in '21 due to all the ins and outs. So it's hard to blame anybody for that because there are a lot of ins and outs. But as we stand here today, we feel great about the investments we made and about where we're heading.

The estimate we provided was $50 million, but it is likely somewhere between $50 million and $100 million currently. These programs involve evaluating the full HME respiratory and supply spend, where we assess annual expenditures and decide whether to manage it on a per member per month basis or to handle the entire book of business. This helps us underwrite outcomes, patient satisfaction metrics, delivery timelines, and various product mixes. We have made significant progress in this area over the past year, engaging with several payers in different regions across the U.S. This approach enables us to reduce costs for the plans. Our extensive product range, which includes supplies, respiratory items, ventilation, and custom rehab, allows us to offer tailored solutions to meet the diverse needs of different plans, particularly those focused on cost savings and enhancing customer satisfaction metrics and delivery times. Since every plan is unique, our solution is not one-size-fits-all. We believe that by being an efficient and low-cost provider, alongside our capability to deliver products at home with last-mile services and connected devices like CPAPs, CGMs, and ventilators, we can enhance patient outcomes at a lower cost. We maintain existing relationships with patients, doctors, health plans, and health systems, which places us at a crucial intersection within the healthcare continuum. We feel well-positioned not just to cut costs but also to improve outcomes over time. This is our primary focus, and we plan to invest significant resources in both technology and human capital. While we are not including this in our '22 guidance just yet, we believe it has the potential to gain momentum in the coming years, which we find encouraging. However, we are cautious and not overly optimistic at this stage.

Yes. Thanks to all for your interest and your continued support, and we look forward to updating you as things progress throughout the year. Appreciate it. Have a great day.

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