Executive Summary / Key Takeaways

• Transformative Growth Ahead: AdaptHealth is poised for accelerated growth in 2026 and beyond, anchored by a landmark 5-year capitated agreement with a major national healthcare system, projected to generate at least $200 million in new annual revenue once fully ramped. This strategic partnership significantly increases recurring revenue and validates AdaptHealth's scale and patient-centric model.
• Operational Excellence & Tech-Driven Efficiency: The "One Adapt" initiative, coupled with aggressive AI and automation adoption, is streamlining operations, improving patient experience, and enhancing profitability. Early results show 99.6% accuracy in automated fax processing and a one-third improvement in CPAP setup times, demonstrating a strong foundation for future efficiency gains.
• Diabetes Segment Turnaround: After facing significant operational challenges, the Diabetes Health segment is showing promising signs of recovery, with sequential improvements in new patient starts and resupply retention. Management anticipates a return to growth for this segment as early as the second half of 2025, removing a key drag on enterprise performance.
• Strengthening Financial Foundation: The company has made substantial progress in deleveraging, reducing debt by $345 million over the last six quarters to a net leverage ratio of 2.81x, with a clear target of 2.5x. Strategic divestitures of non-core assets and the positive cash tax implications of the OBBBA tax bill further bolster liquidity and free cash flow generation.
• Competitive Moat & Market Opportunity: AdaptHealth's extensive geographic footprint, diversified HME offerings, and ability to adapt to various payment models position it as a consolidator in a fragmented industry. Its focus on service excellence and tech-enabled patient support provides a competitive edge against both specialized and broad-line rivals, enabling market share capture.

A New Chapter for Home Healthcare: AdaptHealth's Strategic Evolution

AdaptHealth Corp., founded in 2012, has rapidly ascended to become a national leader in providing patient-centered, healthcare-at-home solutions. Its journey has been marked by hundreds of strategic acquisitions, culminating in an expansive network serving approximately 4.2 million patients annually across 47 states by June 2025. This aggressive expansion established AdaptHealth's formidable geographic footprint and operational scale, a critical foundation for its current strategic pivot. The company’s core business revolves around four key segments: Sleep Health, Respiratory Health, Diabetes Health, and Wellness at Home, addressing the growing demand for chronic care solutions driven by an aging U.S. population and the ongoing shift towards home-based healthcare.

AdaptHealth's strategic evolution, encapsulated by its "One Adapt" initiative launched in August 2024, aims to transform its fragmented operational structure into a cohesive, high-performing enterprise. This involves standardizing workflows, implementing new operating structures, and fostering a culture of continuous improvement. The company's unique value proposition lies in its ability to deliver patient service excellence at scale, a critical differentiator in a highly fragmented industry where service levels often vary widely. This commitment to superior execution is designed to capture market share without requiring major incremental capital investments or aggressive, capital-intensive M&A.

Technological Edge: The Engine of Efficiency and Patient Experience

AdaptHealth's technological differentiation is a cornerstone of its strategy, directly contributing to its competitive moat and operational efficiency. The company is aggressively leveraging automation and Artificial Intelligence (AI) to streamline operations and enhance the patient experience. A prime example is the successful automation of incoming unstructured data, such as faxes, a pervasive challenge in healthcare. The new AI-enabled process has demonstrated remarkable accuracy, achieving 99.6% accuracy compared to just 89% with the legacy system. This significant improvement reduces manual administrative burden and enhances data integrity.

Further innovation is evident in the company's myAPP mobile application, which now features self-pay and CPAP self-scheduling capabilities. The CPAP self-scheduling feature, launched in December 2024, eliminates the need for patients to interact with a customer service representative, offering greater convenience. These digital initiatives have already yielded tangible benefits, with CPAP setup times improving by one-third from the prior quarter, accelerating patient access to critical therapies. The company's existing tech architecture and infrastructure are well-prepared to support the rapid and responsible deployment of these advanced technologies. This technological roadmap is designed to significantly increase agent productivity, reduce reliance on lower-skilled contract labor, and create capacity for upskilling the workforce, ultimately slowing the rate of new hiring required for business growth. These advancements are not merely about cost savings; they are about building an unrivaled reputation for reliability and convenience in the industry, directly translating into improved patient outcomes and a stronger competitive position.

Competitive Landscape: Scale as a Differentiator

AdaptHealth operates in a dynamic and competitive landscape, facing both direct and indirect rivals. Its primary publicly traded competitors in the HME and medical supplies space include ResMed Inc. (RMD), Owens & Minor Inc. (OMI), and Koninklijke Philips N.V. (PHG).

ResMed, a global leader in digital health technologies, emphasizes advanced digital connectivity for remote monitoring. While ResMed boasts stronger profitability margins and efficiency metrics, possibly due to its focus on higher-margin device sales and faster data processing, AdaptHealth differentiates itself through comprehensive HME distribution and personalized, in-home care coordination across a broader range of needs. AdaptHealth's extensive distribution network and strong payer relationships provide enhanced customer loyalty and recurring revenue, which helps counter ResMed's technological strengths by emphasizing service reliability.

Owens & Minor, primarily a distributor of medical and surgical supplies, excels in logistics and supply chain efficiency, allowing it to compete on price and reach. AdaptHealth, however, offers a more specialized focus on home-based HME services with direct patient engagement and tailored support, providing greater efficiency in home delivery and patient adherence programs. While Owens & Minor may have lower operating costs in logistics, AdaptHealth's service depth in HME-specific needs gives it a distinct advantage in customer loyalty.

Philips, a diversified health technology company, focuses on high-tech medical devices and diagnostics. AdaptHealth's value proposition lies in accessible, home-centric services and comprehensive patient support, which can offer greater efficiency in care coordination compared to Philips' device-oriented approach. AdaptHealth leads in the breadth of HME services for diverse patient needs, while Philips maintains an edge in product innovation and advanced device capabilities.

Overall, AdaptHealth's market positioning is characterized by its significant scale and integrated home care services. Its ability to "flex and configure resources to accommodate whichever payment models a payer prefers," whether capitated or fee-for-service, is a key competitive advantage. This flexibility, combined with its commitment to patient service excellence, positions AdaptHealth to consolidate the fragmented HME market, especially as mounting external pressures on smaller operators accelerate consolidation.

Financial Performance and Strategic Momentum

AdaptHealth's financial performance in the first half of 2025 reflects a company in transition, strategically divesting non-core assets while investing in core growth and operational efficiency. For the three months ended June 30, 2025, net revenue was $800.4 million, a slight decrease from $806.0 million in the prior year quarter. This was largely in line with expectations, adjusting for the disposition of certain infusion assets. Adjusted EBITDA for Q2 2025 was $155.5 million, with an Adjusted EBITDA margin of 19.4%, at the high end of guidance. For the six months ended June 30, 2025, net revenue was $1.58 billion, compared to $1.60 billion in the prior year period, with Adjusted EBITDA of $283.5 million and a margin of 18.0%.

Segment-wise, Sleep Health revenue increased 0.9% in Q2 2025 to $334.7 million, driven by higher CPAP resupply sales. Respiratory Health revenue grew 5.6% to $170.5 million, benefiting from increased patient census for oxygen equipment. Conversely, Diabetes Health revenue declined 4.1% to $145.0 million due to a payor mix shift, though it showed a third consecutive quarter of sequential improvement in new starts and strong resupply retention. Wellness at Home revenue decreased 7.2% to $150.3 million, primarily due to asset dispositions.

The company has made substantial progress in strengthening its balance sheet. Free cash flow was $73.3 million in Q2 2025, exceeding expectations.

AdaptHealth reduced its debt balance by another $150 million in Q2 2025, funded in part by proceeds from divesting incontinence and infusion assets. This brings total debt reduction to $175 million year-to-date and $345 million over the last six quarters. The net leverage ratio stood at 2.81x at the end of Q2 2025, steadily tracking towards the new multi-year target of 2.5x. The company's liquidity remains robust, with $68.6 million in cash at quarter-end and $274.5 million available under its revolving credit facility.

Outlook and Strategic Initiatives

AdaptHealth's 2025 guidance reflects a "transition year" focused on strengthening its foundation for accelerated growth in 2026 and beyond. For the full year 2025, the company maintains the midpoint of its revenue guidance at $3.18 billion to $3.26 billion. Adjusted EBITDA guidance has been reduced to a range of $642 million to $682 million. This adjustment is attributed to the strategic decision to maintain infrastructure expenses, originally planned for reduction, in anticipation of supporting the significant new capitated arrangement, and the timing of certain payer rate negotiations now expected in 2026. Despite the revised EBITDA, free cash flow guidance is maintained at $170 million to $190 million, largely offset by the positive impact of the "One Big Beautiful Bill Act" (OBBBA) tax law, which is expected to significantly reduce cash taxes over the next few years due to reinstated bonus depreciation and favorable interest deduction limitations.

The cornerstone of AdaptHealth's future growth is the recently signed definitive agreement to become the exclusive HME and supplies provider for a major national healthcare system. This 5-year capitated arrangement, covering over 10 million members, is projected to generate at least $200 million in new annual revenue once fully ramped. Revenues are expected to ramp throughout 2026, reaching the $200 million annual run rate by the exit of 2026, with full service by 2027. This partnership will elevate capitated revenue to at least 10% of total revenue, increasing the mix of recurring revenue. The company anticipates a material investment in patient equipment CapEx before the end of 2025 to support this contract, which will be offset by lower cash taxes from the OBBBA.

Operationally, the Sleep Health segment is expected to continue its momentum, with Q2 new setups being the highest in two years, driven by improved scheduling and order intake. The Diabetes Health segment, despite recent declines, is showing strong sequential improvement in new starts and resupply retention, with management cautiously optimistic about a return to growth as early as the second half of 2025. This turnaround is critical, as the market for diabetes treatment is vast, with over 100 million potential patients.

Risks and Challenges

While AdaptHealth's outlook is promising, investors should be aware of several key risks. The company faces ongoing legal proceedings and investigations, including civil investigative demands from the U.S. Attorney's Office related to billing practices for ventilators, humidifiers, and respiratory devices, as well as shareholder class action and derivative complaints concerning billing practices and compliance. While management believes these will not have a material adverse effect, outcomes are inherently uncertain.

Inflationary pressures on material, labor, and transportation costs could impact margins, and the ability to pass these costs onto customers is uncertain. The company also continues to address a material weakness in internal control over financial reporting related to inventory valuation, though remediation efforts are underway with a perpetual inventory system rollout.

The proposed CMS competitive bidding rule for home health and DME, potentially including CGMs and medical supplies, introduces uncertainty. While AdaptHealth believes its scale positions it to navigate cost containment and benefit from reduced contract awards, the full impact remains to be quantified.

Conclusion

AdaptHealth Corp. is undergoing a significant transformation, strategically shifting from an acquisition-led growth model to one focused on operational excellence, technological innovation, and organic expansion. The recent landmark capitated agreement with a major national healthcare system underscores the validation of its scale and patient-centric approach, promising substantial recurring revenue growth and a more balanced capital structure. The company's disciplined deleveraging, coupled with the favorable tax implications of the OBBBA, provides a strong financial foundation to support its strategic investments.

While challenges remain, particularly in fully revitalizing the Diabetes Health segment and navigating regulatory changes like competitive bidding, AdaptHealth's proactive measures in leadership, technology, and operational streamlining are building a more resilient and efficient enterprise. The company's ability to leverage its extensive geographic footprint and tech-enabled patient services positions it as a formidable force in the evolving home healthcare landscape. For investors, AdaptHealth presents a compelling narrative of a market leader poised to unlock significant value by capitalizing on its unique competitive advantages and the secular tailwinds driving the shift to healthcare at home.