What Management Said
Read the full Q2 2026 transcript ↗First, we delivered 16% organic growth with record volumes gains across the business. Third, I'll speak to two near-term profitability challenges we're navigating: our West Coast capitated contracts and a material price increase from one of our largest manufacturers. Second quarter net revenue from continuing operations was $740.3 million, up 12.7% versus the prior year quarter, and 15.9% on an organic basis. Our West Coast capitated contract contributed 10.7 points of that organic growth, with 5.2 points coming from our base business.
Sleep Health net revenue was $386.5 million, up 15.5% versus the prior year. Total capitated revenue grew to $103.3 million in the quarter and now represents approximately 14% of our continued operations net revenue. This is more than three times the prior year with our West Coast capitated contract driving nearly all of that increase. Second quarter Adjusted EBITDA from continuing operations was $132 million, with an Adjusted EBITDA of 17.8%, driven by elevated West Coast capitated contract costs, which I'll speak to later.
The parts of the portfolio where we have the strongest value proposition and the clearest path to growth. A move that we expect will ultimately improve our growth rate, enhance our margin profile, and allow us to sidestep looming industry risks. We also took a further step in focusing our portfolio on the core by discontinuing proactive sales of certain product categories within our Wellness at Home segment. This action removes non-strategic, low-growth, and low-margin product lines from our portfolio.
What went well
- AdaptHealth delivered 15.9% organic revenue growth (from continuing operations) with record volume gains, including 10.7 points from the new West Coast capitated contract and 5.2 points from the base business.
- The company completed a multi-year portfolio-simplification effort, signing a definitive agreement to sell its Diabetes Health business for $235 million and contributing its CPAP Shop e-commerce business into a new joint venture with an e-commerce competitor and a telehealth prescriber network.
- Sleep Health revenue grew 15.5% to $386.5 million and Respiratory Health grew 14.1% to $194.4 million, the two core segments the company is now built around.
- Capitated revenue more than tripled year-over-year to $103.3 million (about 14% of continuing-operations revenue), including a new Humana OneHome agreement that transitioned 478,000 members in South Florida and Texas without disruption, expanding the Humana relationship to 33 states plus DC.
- The digital myAPP platform reached 512,000 users (up 56% since end-2025) with a 4.8-star rating, and a new AI-powered mask-fitting tool converted 92% of in-app scans to completed orders in its first two weeks.
- The company strengthened its balance sheet, ending the quarter at 3.06x leverage, and after quarter-end drew a $325 million delayed-draw term loan to redeem its highest-cost 6.125% Senior Notes due 2028, extending maturities; a $19 million annualized restructuring further reduced costs.
What went wrong
- The West Coast capitated contract missed Q2 expectations by $15 million and is expected to cost an additional $40 million in the second half versus prior projections, driven by higher-than-expected order volumes (Sleep resupply and enteral) and inefficient inherited workflows, including non-standard urgent orders that inflated logistics and labor costs.
- A large manufacturer terminated its contract and imposed an immediate price increase effective July 1, creating a $30 million second-half impact now fully reflected in the outlook while negotiations continue.
- Management sharply reset full-year continuing-operations EBITDA guidance to $490-$520 million from $680-$730 million, a bridge that includes $100 million from the Diabetes Health divestiture (including stranded overhead), $55 million from the West Coast contract, $30 million from the supplier price increase, and $15 million from other portfolio actions.
- A non-cash goodwill impairment of $144.2 million was triggered by reallocating shared corporate costs after the Diabetes Health divestiture, weighing on GAAP results.
- Free cash flow was negative $20.9 million in the quarter, driven by $166.2 million of capital expenditures (including ~$25 million of one-time equipment and vehicle purchases) to support the capitated contract.
- The company disclosed a cybersecurity incident in which a threat actor took some data; management said it has been resolved with settlement expenses treated as non-recurring.
Guidance Changes
| Metric | Period | Current guidance |
|---|---|---|
| Net revenue (continuing ops) | FY2026 | $2.85B-$2.89B (up ~$15M at midpoint; excludes $630M Diabetes revenue moving to discontinued ops) |
| Adjusted EBITDA (continuing ops) | FY2026 | $490M-$520M |
| Free cash flow | FY2026 | $80M-$120M (includes Diabetes Health segment cash flow) |
| Net revenue | Q3 2026 | $720M-$740M |
| Adjusted EBITDA margin | Q3 2026 | ~17.9% |
| Free cash flow | Q3 2026 | ~$50M |
| West Coast capitated contract margin | Long term / 2027 | 20% target reaffirmed; run-rate profitability expected next year with sequential improvement (~$1M/quarter) |
| Net leverage target | Long term | 2.5x (Diabetes proceeds directed to debt reduction) |
Performance Breakdown
| Metric | YoY | Note |
|---|---|---|
| Net revenue (continuing ops) | +12.7% to $740.3M | 15.9% organic growth with record volumes; West Coast capitated contract contributed 10.7 points and the base business 5.2 points. |
| Sleep Health revenue | +15.5% to $386.5M | Core segment strength and resupply volumes, including transition-related pent-up demand on the West Coast. |
| Respiratory Health revenue | +14.1% to $194.4M | Continued core-segment growth. |
| Wellness at Home revenue | +4.9% to $159.4M | Slower growth; the segment is being pruned of non-core, low-margin product lines. |
| Capitated revenue | +3x to $103.3M | Now ~14% of continuing-operations revenue, with the West Coast contract driving nearly all the increase. |
| Adjusted EBITDA (continuing ops) | $132.0M vs $136.4M | 17.8% margin; elevated West Coast capitated ramp costs pressured profitability. |
| Free cash flow | -$20.9M | $166.2M of capex to support the capitated contract, including ~$25M of one-time equipment and vehicle purchases. |
Earnings Call Themes & Trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Portfolio simplification to core Sleep and Respiratory | Built via 150+ acquisitions with many subscale product lines | Completed the divestiture path (Diabetes, e-commerce JV, Continence, Custom Rehab, Home Infusion, plus non-core Wellness exits), refocusing on Sleep Health, Respiratory Health, and supporting home medical equipment to improve growth and margins. | — |
| West Coast capitated contract execution | Largest patient transition in HME history in H1 | A full quarter revealed higher-than-expected volumes (transitory Sleep resupply plus enteral) and inefficient inherited workflows (urgent orders), a two-thirds volume / one-third labor problem; management is aligning ordering practices, shifting to drop-ship, and right-sizing fleet/labor, targeting a 20% margin and run-rate profitability next year. | — |
| Capitation strategy and halo effect | Capitation to own patient footprint with fee-for-service halo upside | The halo effect (serving the 10-20% non-capitated patients and adjacent sales) is on hold on the West Coast until a government DME moratorium lifts (hoped for August 24) and new PTANs are secured; management still sees a healthy mix of capitated and fee-for-service, now across ~10 contracts. | — |
| Technology and AI in the patient journey | AI potential limited by non-standardized processes | A simplified, focused portfolio now enables faster technology rollout; myAPP connects nearly the entire patient journey (digital front door, AI intake, self-scheduling, AI mask fitting) with 512,000 users, freeing staff for higher-touch work and improving the cost base. | — |
| Supplier price increase | Strong manufacturer partnerships | A large manufacturer terminated its contract and imposed an immediate price increase on July 1, a $30 million second-half impact; management is negotiating for better price and terms while mitigating via supplier mix and product profitability. | — |
| Deleveraging and capital allocation | Net leverage target of 2.5x | Redeemed 2028 Senior Notes with a $325M delayed-draw term loan, will prioritize revolver repayment, and intends to direct a significant portion of the $235M Diabetes proceeds to debt reduction; roughly half of stranded corporate overhead to be removed within 12 months of closing. | — |
Q&A Summary
Michael Murray (RBC, for Ben) asked which segment the $30 million manufacturer price increase hits and what levers exist to offset it.
CEO Suzanne Foster declined to name the segment given active negotiations, noting the company cannot pass through price mid-year; offsets would come from supplier mix and product-level profitability, with upcoming CPI-U, and she would update at quarter-end.
Murray also asked whether the $15 million of other portfolio actions is a one-time or ongoing headwind.
CFO Jason Clemens called it a one-time headwind: sales channels for the wound-down non-core Wellness products are already shutting off (dropping ~35% gross profit per revenue dollar), but the company will continue carrying labor and operating costs to serve the existing census over the next couple of quarters, after which it will not repeat in 2027 and beyond.
Brian Tanquilut (Jefferies) asked whether the strategy is essentially to shrink the business and how the board views the endpoint.
Foster explained the company grew via 150+ acquisitions leaving subscale 'dogs and cats'; disciplined pruning to core Sleep and Respiratory is a deliberate shrink to improve growth and long-term margins, redirecting all generated dollars into the core, enabling faster technology/AI deployment, and positioning the company to benefit from industry consolidation.
Pito Chickering (Deutsche Bank) asked for the split of the West Coast (Kaiser) $55 million impact and whether it changes AdaptHealth's view on capitation versus fee-for-service.
Foster said her view on capitation is unchanged, citing strategic footprint ownership and halo upside (currently blocked by the DME moratorium), and Clemens split the impact roughly two-thirds volume and one-third labor, with modest ~$1M/quarter sequential improvement planned into Q3 and Q4.
Kevin Caliendo (UBS) asked how unusual it is for a supplier to terminate a contract and impose an immediate price increase on June 30, and the magnitude.
Foster agreed it was unusual and a surprise, declined to disclose the percentage increase while negotiating for better terms, and said that as of today there is effectively no contract, so anything ordered is under the new pricing -- which is why the full risk was reflected in the outlook.
Whit Mayo (Leerink) and others probed the reset guidance and West Coast timeline; management reiterated a 20% long-term margin target for the West Coast contract, run-rate profitability next year, and removal of roughly half the stranded Diabetes overhead within 12 months of closing.
Clemens confirmed the ~$60 million of stranded overhead, with roughly half removed within 12 months and the remaining ~$30 million addressed through organic growth, accretive tuck-in M&A, and continued expense discipline, citing the $19 million restructuring executed in the quarter.
More on AdaptHealth Corp.
Reported 2026-08-04 · figures from the AdaptHealth Corp. Q2 2026 earnings call.
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