AHCO

Portfolio Optimization and Strategic Focus

• The company completed a multi-year portfolio pruning process, exiting non-core, subscale, low-margin businesses to refocus on its core sleep, respiratory, and supporting home medical equipment (HME) segments, where it has the strongest value proposition and clearest growth path
• A definitive agreement was signed to sell the diabetes health business for $235 million; proceeds will be primarily used for debt reduction, and the divestiture removes exposure to looming industry competitive bid risks
• Proactive sales of non-core product lines within the Wellness at Home segment were discontinued, and the CPAP Shop direct-to-consumer e-commerce business was contributed to a new joint venture with an e-commerce competitor and telehealth prescriber network, to target the large undiagnosed obstructive sleep apnea (OSA) population

Growth and Partnership Progress

• Organic growth of 15.9% was achieved in Q2, with the West Coast capitated contract contributing 10.7 percentage points of organic growth and the base business contributing 5.2 percentage points
• A new expanded capitated agreement was signed with Humana One Home, successfully transitioning 478,000 new members in South Florida and Texas without service disruption; the Humana relationship now spans 33 states plus DC and South Florida, and performs well operationally and financially
• The new enterprise sales team focused on large health systems secured multiple new preferred provider agreements, leveraging AdaptHealth's clinical expertise and embedded care coordination capabilities

Operational and Technology Improvements

• The company launched and scaled the MyApp digital patient platform, which now has 512,000 users (up 56% since end of 2025) and a 4.8/5 App Store rating; the platform digitizes the full patient journey from intake to support, and its new AI-powered mask fitting tool converted 92% of in-app scans to completed orders in its first two weeks, with early signs of reduced refitting delays
• A workforce restructuring was completed in Q2, delivering $19 million in annualized cost savings to offset near-term cost pressures

West Coast Capitated Contract Challenges

• The ramp of the large new West Coast capitated contract has resulted in higher-than-expected costs: order volumes are higher than projected (driven by transitory pent-up transition demand for sleep resupply and persistent higher enteral volumes), and inherited inefficient workflows (including excessive non-urgent urgent orders) have driven elevated logistics and labor costs
• The company is working with the contract partner to align ordering practices with original contract assumptions, and is implementing technology and shifting more fulfillment to drop-shipping to reduce inefficiencies; the near-term impact of these challenges is $40 million in reduced profitability relative to prior projections for H2 2026
• A federal DME moratorium implemented in February 2025 currently prevents the company from obtaining new Medicare billing numbers (PTANs) to serve fee-for-service patients from its 40 new West Coast locations; once the moratorium is lifted, incremental fee-for-service revenue will absorb the fixed-cost infrastructure already in place

• Full-year 2026 net revenue guidance for continuing operations is $2.85 to $2.89 billion (excluding $630 million in discontinued diabetes revenue), with the midpoint representing a ~$15 million net increase from prior guidance, reflecting Q2 revenue outperformance offset by portfolio actions
• Full-year 2026 adjusted EBITDA guidance for continuing operations is revised sharply downward to $490 to $520 billion, from the prior $680 to $730 million. The downward revision is broken down into: $100 million from the diabetes divestiture (including $40 million of EBITDA moving to discontinued operations and $60 million of stranded corporate overhead), $55 million from higher-than-expected costs for the West Coast capitated contract, $30 million from the unanticipated manufacturer price increase, and $15 million from the exit of non-core Wellness at Home products
• Full-year 2026 free cash flow guidance is $80 to $120 million, including cash flow from the diabetes segment prior to divestiture close
• Q3 2026 guidance calls for net revenue of $720 to $740 million, an adjusted EBITDA margin of ~17.9%, and free cash flow of ~$50 million
• Management expects roughly half of the $60 million in stranded corporate overhead from the diabetes divestiture will be eliminated within 12 months of closing; remaining stranded overhead will be absorbed over time by organic growth and continued expense discipline
• Management expects sequential margin improvement for the West Coast capitated contract over the next several quarters, reaching run-rate 20% target profitability in 2027
• Management expects to fully mitigate the manufacturer price increase impact over time through negotiation and operational adjustments

All results are reported on a continuing operations basis, excluding the divested diabetes health business. Total Q2 2026 net revenue from continuing operations was $740.3 million, a 12.6% year-over-year increase. 1. Sleep Health: Net revenue of $386.5 million, up 15.5% year-over-year, contributing 52.2% of total continuing operations revenue. 2. Respiratory Health: Net revenue of $194.4 million, up 14.1% year-over-year, contributing 26.3% of total continuing operations revenue. 3. Wellness at Home: Net revenue of $159.4 million, up 4.9% year-over-year, contributing 21.5% of total continuing operations revenue. Total capitated revenue reached $103.3 million in the quarter, representing 14% of total continuing operations net revenue, more than three times the prior year level, with the West Coast capitated contract driving nearly all of this growth. Q2 2026 adjusted EBITDA from continuing operations was $132.0 million, down from $136.4 million year-over-year, with an adjusted EBITDA margin of 17.8%. A $144.2 million non-cash goodwill impairment was recorded following the diabetes divestiture and reallocation of shared corporate costs. Free cash flow was negative $20.9 million for the quarter, driven by $166.2 million in capital expenditures primarily to support the West Coast capitated contract.

• The ramp of the West Coast capitated contract has resulted in larger-than-anticipated cost overruns from higher volumes and inefficient inherited workflows, pressuring near-term profitability; resolution depends on partnership with the contract client and lifting of the federal DME moratorium to unlock incremental fee-for-service revenue
• An unanticipated immediate price increase imposed by a major manufacturer effective July 1 2026 is expected to reduce H2 2026 profitability by $30 million; negotiations to resolve the issue are ongoing, with no guaranteed outcome
• Exit of non-core Wellness at Home product lines creates a one-time $15 million headwind in H2 2026, as the company continues to incur service costs for existing patients while winding down new sales
• The federal DME moratorium on new PTANs in the West Coast currently blocks the company from accessing incremental fee-for-service revenue to absorb fixed infrastructure costs, with the expiration date of the moratorium uncertain
• Stranded corporate overhead from the diabetes divestiture will continue to pressure profitability for an extended period for the remaining half not eliminated within 12 months
• The company recently experienced a cybersecurity incident that involved data theft by a threat actor, though it has been resolved with no ongoing remaining risk

Q: The guidance includes a $30 million impact from an unanticipated manufacturer price increase; which segment does this impact, and what offsetting levers and timelines does the company have? / A: Management declined to name the impacted segment due to active ongoing negotiations. Mid-year contract terms prevent passing the price increase through to payers immediately. The company is exploring supplier mix shifts to offset costs, and negotiations are ongoing, with an update expected at the end of the current quarter.

Q: The $15 million headwind from other portfolio actions: what does this include, and is this a one-time or ongoing headwind? / A: This is a one-time headwind tied to exiting low-margin non-core Wellness at Home product lines. New sales channels for these products have already been shut down, removing low-margin revenue, but the company will continue to incur service costs for existing patients as they are transitioned to other providers over the next 2-3 quarters. There will be no ongoing impact after this transition is complete.

Q: What is the strategic rationale for the recent series of divestitures, is the company intentionally shrinking to focus on core operations? / A: Yes, the company is intentionally shrinking to a focused core of sleep, respiratory and supporting HME. After building the business via over 150 acquisitions, the portfolio review found many subscale, low-margin non-core products that would require significant additional investment to compete. Completing this round of divestitures finishes the pruning process, allowing all future capital investment to flow to the core business. A simplified, focused portfolio also allows faster deployment of AI and digital technology at scale, which will drive long-term cost efficiencies.

Q: Does the underperformance of the West Coast capitated contract change the company's overall view of capitation versus fee-for-service? / A: Management's view on capitation has not changed; a healthy mix of capitated and fee-for-service remains the company's future strategy. Capitation provides strategic value by building market footprint and density, delivering long-term savings from lower sales and administrative costs, and the 20% long-term target margin for capitated contracts does not include any upside from incremental fee-for-service "halo" revenue. The West Coast challenges are specific to this transition, not a flaw in the capitation model overall, and the company remains confident it will reach target profitability for this contract in 2027.