Aveanna Healthcare Holdings, Inc. (AVAH) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the PSLRA, Section 27A of the Securities Act, and Section 21E of the Exchange Act, about our expectations, beliefs, plans and intentions regarding our product development efforts, business, financial condition, results of operations, strategies and prospects. You can identify forward-looking statements by the fact that these statements do not relate to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in “Item 1A — Risk Factors” of this Annual Report on Form 10-K. Forward-looking statements reflect our views only as of the date they are made. We do not undertake any obligation to update forward-looking statements except as required by applicable law. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA.

Our fiscal year ends on the Saturday that is closest to December 31 of a given year, resulting in either a 52-week or 53-week fiscal year. Our “fiscal year 2021” refers to the 52-week fiscal year ended on January 1, 2022. Our “fiscal year 2020” refers to the 53-week fiscal year ended on January 2, 2021. Our "fiscal year 2019" refers to the 52-week fiscal year ended on December 28, 2019.

Overview

We are a leading, diversified home care platform focused on providing care to medically complex, high-cost patient populations. We directly address the most pressing challenges facing the U.S. healthcare system by providing safe, high-quality care in the home, the lower cost care setting preferred by patients. Our patient-centered care delivery platform is designed to improve the quality of care our patients receive, which allows them to remain in their homes and minimizes the overutilization of high-cost care settings such as hospitals. Our clinical model is led by our caregivers, primarily skilled nurses, who provide specialized care to address the complex needs of each patient we serve across the full range of patient populations: newborns, children, adults and seniors. We have invested significantly in our platform to bring together best-in-class talent at all levels of the organization and support such talent with industry leading training, clinical programs, infrastructure and technology-enabled systems, which are increasingly essential in an evolving healthcare industry. We believe our platform creates sustainable competitive advantages that support our ability to continue driving rapid growth, both organically and through acquisitions, and positions us as the partner of choice for the patients we serve.

Segments

We deliver our services to patients through three segments: Private Duty Services (“PDS”); Home Health & Hospice (“HHH”); and Medical Solutions (“MS”).

The following table summarizes the revenues generated by each of our segments for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019:

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PDS Segment

Private Duty Services predominantly includes private duty nursing (“PDN”) services, as well as pediatric therapy services. Our PDN patients typically enter our service as children, as our most significant referral sources for new patients are children’s hospitals. It is common for our PDN patients to continue to receive our services into adulthood, as approximately 50% of our PDN patients are over the age of 18.

Our PDN services involve the provision of skilled and unskilled hourly care to patients in their homes, which is the preferred setting for patient care. PDN services typically last four to 24 hours a day, provided by our registered nurses, licensed practical nurses, home health aides, and other unskilled caregivers who are focused on providing high-quality short-term and long-term clinical care to medically fragile children and adults with a wide variety of serious illnesses and conditions. Patients who typically qualify for our PDN services include those with the following conditions:

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Tracheotomies or ventilator dependence;

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Dependence on continuous nutritional feeding through a “G-tube” or “NG-tube”;

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Dependence on intravenous nutrition;

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Oxygen-dependence in conjunction with other medical needs; and

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Complex medical needs such as frequent seizures.

Our PDN services include:

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In-home skilled nursing services to medically fragile children;

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Nursing services in school settings in which our caregivers accompany patients to school;

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Services to patients in our Pediatric Day Healthcare Centers (“PDHC”); and

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Unskilled care, including programs such as employer of record support services and personal care services.

Through our pediatric therapy services, we provide a valuable multidisciplinary approach that we believe serves all of a child’s therapy needs. We provide both in-clinic and home-based therapy services to our patients. Our therapy services include physical, occupational and speech services. We regularly collaborate with physicians and other community healthcare providers, which allows us to provide more comprehensive care. Additionally, our Applied Behavioral Analysis (“ABA”) Therapy services previously provided children with the strategies and skills necessary to maximize their individual potential, achieve meaningful outcomes, and reach their goals to the greatest extent possible. In July 2020, we discontinued providing ABA Therapy services.

HHH Segment

Our Home Health and Hospice segment predominantly includes home health services, as well as hospice and specialty program services. Our HHH patients typically enter our service as seniors, and our most significant referral sources for new patients are hospitals, physicians and long-term care facilities.

Our home health services involve the provision of in-home services to our patients by our clinicians which may include nurses, therapists, social workers and home health aides. Our caregivers work with our patients’ physicians to deliver a personalized plan of care to our patients in their homes. Home healthcare can help our patients recover after a hospitalization or surgery and assist patients in managing chronic illnesses. We also help our patients manage their medications. Through our care, we help our patients recover more fully in the comfort of their own homes, while remaining as independent as possible. Our home health services include: in-home skilled nursing services; physical, occupational and speech therapy; medical social services and aide services.

Our hospice services involve a supportive philosophy and concept of care for those nearing the end of life. Our hospice care is a positive, empowering form of care designed to provide comfort and support to our patients and their families when a life-limiting illness no longer responds to cure-oriented treatments. The goal of hospice is to neither prolong life nor hasten death, but to help our patients live as dignified and pain-free as possible. Our hospice care is provided by a team of specially trained professionals in a variety of living situations, including at home, at the hospital, a nursing home, or an assisted living facility.

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MS Segment

Through our Medical Solutions segment, we offer a comprehensive line of enteral nutrition supplies and other products to adults and children, delivered on a periodic or as-needed basis. We provide our patients with access to one of the largest selections of enteral formulas, supplies and pumps in our industry, with more than 300 nutritional formulas available. Our registered nurses, registered dietitians and customer service technicians support our patients 24 hours per day, 365 days per year, in-hospital, at-home, or remotely to help ensure that our patients have the best nutrition assessments, change order reviews and formula selection expertise.

Acquisitions and other Factors Affecting Results of Operations and Comparability

Acquisition-related Activities

During the third quarter of fiscal year 2020, we acquired three companies that primarily deliver PDN services, in addition to medical solutions services (collectively, the “2020 PDS Acquisitions”). The 2020 PDS Acquisitions generated revenues in 2020 prior to being acquired by us of $55.0 million and $22.8 million after being acquired by us. We report the results of the 2020 PDS Acquisitions in our PDS segment and MS segment.

In the fourth quarter of fiscal year 2020, we acquired two companies that primarily deliver home health and hospice services, as well as PDN services (collectively, the “2020 HHH Acquisitions”). The 2020 HHH Acquisitions generated revenues in 2020 prior to being acquired by us of $104.1 million and $13.1 million after being acquired by us. Home health and hospice businesses are primarily reimbursed by Medicare for services rendered and these new lines of business accordingly began to diversify our payer base beyond Medicaid and Medicaid Managed Care revenue. We report the results of the 2020 HHH Acquisitions in our HHH segment and PDS segment.

Total revenues generated by the 2020 PDS Acquisitions and 2020 HHH Acquisitions for fiscal year 2020, including the periods in fiscal year 2020 prior to being acquired by us, were $195.0 million.

On April 16, 2021, we acquired Doctor’s Choice Holdings, LLC (“Doctor’s Choice”), which provides home health services in the state of Florida. Doctor’s Choice generated revenues in 2021 prior to being acquired by us of $22.9 million and $51.6 million after being acquired by us. On December 10, 2021, we acquired Comfort Care Home Health Services, LLC, including its subsidiaries (“Comfort Care”), which provides home health and hospice services in the states of Alabama and Tennessee. Comfort Care generated revenues in 2021 prior to being acquired by us of $94.4 million and $6.0 million after being acquired by us. Collectively, we refer to the acquisitions of Doctor's Choice and Comfort Care as the “2021 HHH Acquisitions". On a pro forma basis after giving effect to the 2021 HHH Acquisitions as if they had occurred on January 3, 2021, our HHH segment would have generated revenues of $294.6 million in fiscal year 2021. Between the 2020 HHH Acquisitions and 2021 HHH Acquisitions we believe we have built a home health and hospice program of significant size and scale, focused on delivering high-quality patient care in attractive geographies.

On November 30, 2021, we acquired Accredited Nursing Services (“Accredited”), a provider of primarily unskilled services in the state of California. Accredited generated revenues in 2021 prior to being acquired by us of $107.1 million and $8.9 million after being acquired by us. We report the results of Accredited in our PDS segment.

Total revenues generated by the 2021 HHH Acquisitions and Accredited in fiscal year 2021, including the periods in fiscal year 2021 prior to being acquired by us, were $290.9 million.

COVID-19 Pandemic Impact on our Business

In March 2020, the World Health Organization declared COVID-19 a pandemic. We continue to monitor the impact of COVID-19 on our caregivers and support personnel, our patients and their families, and our referral sources. We have adapted our operations as necessary to best protect our people and serve our patients and our communities. We continue to take precautions to protect the safety and well-being of our employees and patients by purchasing and delivering additional supplies of personal protective equipment and COVID-19 testing kits (“PPE”), and other medical supplies to branches and regional offices across the country as necessary. We have also invested in technology and equipment that allows support personnel to provide, on a remote basis, seamless functionality and support to our

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clinicians who continue to care for our patients. The majority of our employees at our corporate support offices in Georgia, Texas and Arizona continue to work remotely.

With the onset of the COVID-19 pandemic in March 2020, we began incurring incremental costs of patient services necessary to maintain our clinical workforce in the COVID-19 environment. The nature of the incremental COVID-19 costs we have incurred has changed over time as dictated by the continually evolving COVID-19 environment. Examples of the incremental costs we have incurred over time include incremental compensation paid to caregivers such as hero and hazard pay, COVID-19 relief pay, incremental overtime, and most recently, staffing and retention related incentives to attract and retain caregivers in the midst of the Omicron variant surge. We have also incurred incremental worker compensation costs, as well as mandated leave costs while applicable regulations were in effect, and incremental PPE costs to support, protect and test our caregivers, and care for our patients. Additionally, we recorded an impairment in the fourth quarter of fiscal 2021 in four of the reporting units within our PDS segment as a result of the continued impact of COVID-19 on our business. See "Goodwill Impairment" below.

Looking forward to fiscal year 2022, we believe we will continue to incur incremental COVID-19 costs as dictated by the continually evolving COVID-19 environment, including costs required to comply with federal, state and local vaccination mandates testing requirements, worker compensation for mandated quarantine time; and remaining staffing and retention related incentives to attract and retain caregivers.

Despite the recent surges in COVID-19 cases attributable to the Omicron variant and the attendant pressures on our clinical workforce, we continue to execute on our strategic business plans to grow our services both organically and through acquisitions. As the percentage of vaccinated caregivers grows, the overall hospitalization and rates of severe reactions decrease, and as caregivers return to the workforce, we believe this will increase our staffed hours and allow us to meet more of the unmet patient demand for our services. However, while the rate of COVID-19 hospitalizations and deaths in the United States are currently decreasing again, longer-term public health trends as a result of COVID-19 are unknown. As such, it is impossible to predict the effect and ultimate impact of the COVID-19 pandemic on the Company as conditions related to the COVID-19 pandemic continue to evolve.

The following factors could negatively impact our results of operations in the future as a result of COVID-19: a further increase in the number of cases due to the Omicron or other variants; any future shelter-in-place orders; a decrease in the rate of return of confidence in our patients’ families to allow our caregivers into their homes; the return of patient confidence to enter a hospital or a doctor’s office; our ability to attract and retain qualified caregivers as a result of COVID-19 quarantine requirements or due to caregiver non-compliance with vaccination and testing mandates; uncertainty regarding vaccine distribution timing and efficacy; and our ability to readily access referrals from children’s hospitals. Potential negative impacts of COVID-19 on our results include lower revenue or higher salary and wage expenses due to increased market rate expectations of caregivers, increased workers compensation insurance and leave costs, costs to comply with various federal, state and local vaccine or leave mandates, civil monetary penalties from CMS if we are unable to comply with its IFR requiring COVID-19 vaccinations, and any future spikes in PPE supply costs. The impacts to revenue may consist of the following: lower volumes due to interruption of the operations of our referral sources; lower volumes due to lack of availability of caregivers in the workforce; the unwillingness of patients to accept services in their homes; lower reimbursement due to missed home health visits; lower reimbursement rates due to any negative impacts to state Medicaid budgets as a result of the pandemic; or denial of payments from CMS if we are unable to comply with its IFR requiring COVID-19 vaccinations.

CARES Act

In response to COVID-19, the U.S. Government enacted the CARES Act on March 27, 2020. The CARES Act has impacted us as follows:

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Provider Relief Fund (“PRF”): Beginning in April 2020, funds were distributed to health care providers who provide or provided diagnoses, testing, or care for individuals with possible or actual cases of COVID-19. In fiscal year 2020, we received PRF payments from HHS totaling $25.1 million, which were included in government stimulus liabilities in the accompanying consolidated balance sheet as of January 2, 2021. On March 5, 2021, we repaid these PRF payments in full. In December 2021, we also received PRF payments from HHS totaling $2.5 million, which we repaid in full in December 2021.

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State Sponsored Relief Funds: In fiscal year 2020, we received $4.8 million of stimulus funds from the Commonwealth of Pennsylvania Department of Human Services (“Pennsylvania DHS”), which we did not apply for or request. We did not receive stimulus funds from any individual state other than Pennsylvania. We recognized $0.5 million of income related to these funds in fiscal year 2020, with the remaining $4.3 million included in government stimulus liabilities in the accompanying consolidated balance sheet as of January 2, 2021. On February 4, 2021, we repaid the remaining $4.3 million of direct stimulus funds to Pennsylvania DHS.

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Deferred payment of the employer portion of social security taxes: We were permitted to defer payments of the employer portion of social security taxes in fiscal year 2020, which are payable in 50% increments, with the first 50% due by December 31, 2021 and the second 50% due by December 31, 2022. We did not defer any payroll taxes after December 31, 2020. In December 2021, we repaid $25.9 million of deferred payroll taxes. As of January 1, 2022, we had remaining deferred payments of $25.5 million of social security taxes in total, which is recorded in the current portion of deferred payroll taxes in the accompanying consolidated balance sheet.

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Reimbursement rate increases from various state Medicaid and Medicaid Managed Care Programs: Shortly after the onset of COVID-19 in March 2020, numerous state Medicaid programs began to issue temporary rate increases and similarly directed Medicaid Managed Care programs within those states to likewise adjust rates. These temporary rate increases are paid to the Company via normal claim processing by the respective payers. Over the remainder of fiscal year 2020 and continuing into fiscal year 2021, while some states discontinued the temporary rate increases, most states issued continuations of the temporary rate increases with many state legislatures communicating support for either making such increases permanent or otherwise increasing PDS reimbursement rates. Furthermore, the focus at both the Federal and State levels on supporting the provision of care in the home, as well as expanding Federal matching funds for the Medicaid Program in recent government legislation, supports a positive outlook on Medicaid reimbursement in the future. As a result of all these factors, and based upon an evaluation of each state individually, beginning in the first quarter of fiscal year 2021, we no longer treat temporary rate increases as an adjustment in calculating our Adjusted EBITDA (see “Non-GAAP Financial Measures” below).

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Medicare Advances: Certain of the home health and hospice companies the Company has acquired received advance payments from CMS in April 2020, pursuant to the expansion of the Accelerated Payments Program provided for in the CARES Act. These advances became repayable beginning one year from the date on which the accelerated advance was issued. The repayments occur via offsets by Medicare to current payments otherwise due from Medicare at a rate of 25% for the first eleven months. After the eleven months end, payments will be recouped at a rate of 50% for another six months, after which any remaining balance will become due. Gross advances received by acquired companies in April 2020 totaled $15.7 million. The Company began repaying the gross amount of the advances, via the offset mechanism described above, during the second quarter of fiscal year 2021, and had repaid an aggregate amount of $12.2 million of such advances as of January 1, 2022. Remaining unpaid advances as of January 1, 2022 totaled $3.5 million and are recorded in other current liabilities in the accompanying consolidated balance sheet.

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Temporary Suspension of Medicare Sequestration: The Budget Control Act of 2011 requires a mandatory, across the board reduction in federal spending, called a sequestration. Medicare fee-for-service claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments. All Medicare rate payments and settlements are subject to this mandatory reduction, which will continue to remain in place through at least 2023, unless Congress takes further action. In response to COVID-19, the CARES Act temporarily suspended the automatic 2.0% reduction of Medicare claim reimbursements for the period from May 1, 2020 through December 31, 2021. In December 2021, Congress extended the suspension of the automatic 2.0% reduction through March 2022 and reduced the sequestration adjustment to 1.0% from April 1, 2022 through June 30, 2022, with the full 2.0% reduction for sequestration resuming thereafter.

Important Operating Metrics

We review the following important metrics on a segment basis and not on a consolidated basis:

PDS and MS Segment Operating Metrics

Volume

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Volume represents PDS hours of care provided and MS unique patients served, which is how we measure the amount of our patient services provided. We review the number of hours of PDS care provided on a weekly basis and the number of MS unique patients served on a weekly basis. We believe volume is an important metric because it helps us understand how the Company is growing in each of these segments through strategic planning and acquisitions. We also use this metric to inform strategic decision making in determining opportunities for growth.

Revenue Rate

For our PDS and MS segments, revenue rate is calculated as revenue divided by PDS hours of care provided or the number of MS unique patients served, respectively. We believe revenue rate is an important metric because it represents the amount of revenue we receive per PDS hour of patient service or per individual MS patient transaction and helps management assess the amount of fees that we are able to bill for our services. Management uses this metric to assess how effectively we optimize reimbursement rates.

Cost of Revenue Rate

For our PDS and MS segments, cost of revenue rate is calculated as cost of revenue divided by PDS hours of care provided or the number of unique patients served, respectively. We believe cost of revenue rate is an important metric because it helps us understand the cost per PDS hour of patient service or per individual MS patient transaction. Management uses this metric to understand how effectively we manage labor and product costs.

Spread Rate

For our PDS and MS segments, spread rate represents the difference between the respective revenue rates and cost of revenue rates. Spread rate is an important metric because it helps us better understand the margins being recognized per PDS hour of patient service or per individual MS patient transaction. Management uses this metric to assess how successful we have been in optimizing reimbursement rates, managing labor and product costs, and assessing opportunities for growth.

HHH Segment Operating Metrics

Home Health Total Admissions and Home Health Episodic Admissions

Home health total admissions represents the number of new patients who have begun receiving services. We review the number of home health admissions on a daily basis as we believe it is a leading indicator of our growth. We measure home health admissions by reimbursement structure, separating them into home health episodic admissions and fee-for-service admissions (other admissions), which allows us to better understand the payer mix of our home health business.

Home Health Total Episodes

Home health total episodes represents the number of episodic admissions and episodic recertifications to capture patients who have either started to receive services or have been recertified for another episode of care. Management reviews home health total episodes on a monthly basis as to understand the volume of patients who were authorized to receive care during the month.

Home Health Revenue Per Completed Episode

Home health revenue per completed episode is calculated by dividing total payments received from completed episodes by the number of completed episodes during the period. Episodic payments are determined by multiple factors including type of referral source, patient diagnoses, and utilization. Management tracks home health revenue per completed episode over time to evaluate both the clinical and financial profile of the business in a single metric.

Results of Operations

Fiscal Year Ended January 1, 2022 Compared to the Fiscal Year Ended January 2, 2021

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The following table summarizes our consolidated results of operations for the fiscal years indicated:

The following table summarizes our consolidated key performance measures, including Field contribution and Field contribution margin, which are non-GAAP measures (see “Non-GAAP Financial Measures” below), for the fiscal years indicated:

The following tables summarize our key performance measures by segment for the fiscal years indicated:

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1.
Represents the period over period change in revenue rate, plus the change in revenue rate attributable to the change in volume.

2.
Represents the period over period change in cost of patient services rate, plus the change in cost of patient services rate attributable to the change in volume.

3.
Represents the period over period change in spread rate, plus the change in spread rate attributable to the change in volume.

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Represents the change in margin percentage year over year.

5.
Represents home health episodic and fee-for-service admissions.

6.
Represents home health episodic admissions.

7.
Represents episodic admissions and recertifications.

8.
Represents Medicare revenue per completed episode.

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** We entered the home health business in the fourth quarter of fiscal year 2020. These metrics do not pertain to hospice or certain other Medicare services provided in this segment, neither of which were material in the aggregate for the periods presented.

The following discussion of our results of operations should be read in conjunction with the foregoing tables summarizing our consolidated results of operations and key performance measures, as well as our audited consolidated financial statements contained elsewhere in this Annual Report on Form 10-K.

Summary Operating Results

Operating Loss

Overall, our operating loss was $36.1 million, or 2.2% of revenue, for the fiscal year ended January 1, 2022, as compared to an operating loss of $3.5 million, or 0.2% of revenue, for the fiscal year ended January 2, 2021, a net increase in operating loss of $32.6 million.

The operating loss for fiscal year 2021 primarily resulted from a $117.7 million non-cash charge for goodwill impairment recorded in the fourth quarter of 2021, offset in part by an increase of $31.5 million, or 14.7%, in Field contribution as compared to fiscal year 2020. The $31.5 million increase in Field contribution resulted from a $183.5 million, or 12.3%, increase in consolidated revenue, combined with a 0.3% improvement in Field contribution margin to 14.6% for fiscal year 2021 from 14.3% for the fiscal year 2020.

In addition to the $31.5 million increase in Field Contribution, the $32.6 million increase in operating loss was primarily attributable to the following activity:

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$42.0 million of incremental goodwill impairment recorded in fiscal year 2021 over the prior year;

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a $16.6 million increase in corporate expenses over the prior fiscal year;

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a $3.3 million increase in acquisition-related costs; and

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a $3.5 million increase in depreciation and amortization expense.

Net Loss

The $60.0 million increase in net loss for the fiscal year ended January 1, 2022, as compared to the fiscal year ended January 2, 2021, was primarily driven by the following:

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the previously discussed $32.6 million increase in operating loss;

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a $14.0 million decrease in interest expense, net of interest income;

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the absence of $50.0 million in other income associated with a legal settlement received in the prior year;

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a $18.1 million net increase in valuation gains associated with our interest rate swaps and $0.9 million lower net settlements incurred with swap counterparties;

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a $13.6 million increase in loss on debt extinguishment over the prior year; and

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a $1.8 million net decrease in income tax expense.

Revenue

Revenue was $1,678.6 million for the fiscal year ended January 1, 2022 as compared to $1,495.1 million for the fiscal year ended January 2, 2021, an increase of $183.5 million, or 12.3%. This increase resulted from the following segment activity:

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a $28.4 million, or 2.1%, increase in PDS revenue;

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a $146.1 million, or 468.5%, increase in HHH revenue; and

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a $9.1 million, or 6.7%, increase in MS revenue.

Our PDS segment revenue growth of $28.4 million, or 2.1%, for the fiscal year ended January 1, 2022 was attributable to an increase in revenue rate of 2.1%, with volume unchanged on a net basis. The net unchanged PDS volume on a year over year basis was attributable to a number of factors, including:

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•
an increase in volumes for a full year of operations contributed by our 2020 PDS Acquisitions;

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new volumes contributed by the Accredited acquisition in December 2021; net of,

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a net volume decline in our PDN businesses due to the continuing impact of the COVID-19 environment, including the Delta and Omicron variants and the effect of vaccine mandates, on caregiver recruitment and retention; and

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the absence of a 53rd week of operations in fiscal year 2021.

The net 2.1% increase in PDS revenue rate for the fiscal year ended January 1, 2022, as compared to the fiscal year ended January 2, 2021, resulted primarily from reimbursement rate increases issued by various state Medicaid programs and Managed Medicaid payers.

Our HHH segment revenue growth of $146.1 million, or 468.5%, for the fiscal year ended January 1, 2022 resulted from a full year of operations contributed by our 2020 HHH Acquisitions, and new revenue contributed by the 2021 HHH Acquisitions.

Our MS segment revenue growth of $9.1 million, or 6.7%, for the fiscal year ended January 1, 2022, as compared to the fiscal year ended January 2, 2021, was attributable to 4.1% volume growth combined with an increase in revenue rate of 2.6%. Overall, our MS volumes in fiscal year 2021 grew both organically and from a full year of operations contributed by our 2020 PDS Acquisitions. One of the 2020 PDS Acquisitions included MS businesses in two new markets, Illinois and Oklahoma, which we have integrated into the overall MS segment platform. The 2.6% revenue rate increase primarily resulted from a shift in product mix related to these new markets, net of payer rate decreases that became effective in September 2021.

Cost of Revenue, Excluding Depreciation and Amortization

Cost of revenue, excluding depreciation and amortization, was $1,136.2 million for the fiscal year ended January 1, 2022, as compared to $1,040.6 million for the fiscal year ended January 2, 2021, an increase of $95.6 million, or 9.2%. This increase resulted from the following segment activity:

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a $14.2 million, or 1.5%, increase in PDS cost of revenue;

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a $75.7 million, or 423.6%, increase in HHH cost of revenue; and

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a $5.7 million, or 7.8%, increase in MS cost of revenue.

The 1.5% increase in PDS cost of revenue for the fiscal year ended January 1, 2022 resulted from the previously described 2.1% increase in PDS revenue rate for the fiscal year ended January 2, 2021, net of a 1.5% increase in PDS cost of revenue rate. The 1.5% increase in cost of revenue rate primarily resulted from higher caregiver labor costs including pass-through of state reimbursement rate increases received by the Company during the fiscal year ended January 1, 2022 and a slight increase in COVID-19 related costs, net of lower professional liability and workers’ compensation insurance costs compared to the prior fiscal year.

As a result of the evolving COVID-19 environment, we have incurred incremental costs of patient services, which have changed over time. Examples of the incremental costs we have incurred over time include incremental compensation paid to caregivers such as hero and hazard pay, COVID-19 relief pay, incremental overtime, and most recently, staffing and retention related incentives to attract and retain caregivers in the midst of the Omicron surge. We also incurred incremental worker compensation costs, as well as mandated leave costs, during the period for which applicable regulations were in effect, and incremental PPE costs to support, protect and test our caregivers, and care for our patients. In the aggregate these costs were $15.7 million and $14.8 million for fiscal years 2021 and 2020, respectively. Looking forward to fiscal year 2022, we believe we will continue to incur incremental COVID-19 costs as dictated by the continually evolving COVID-19 environment, including costs required to comply with federal, state and local vaccination mandates, testing requirements, worker compensation for mandated quarantine time, and remaining staffing and retention-related incentives to attract and retain caregivers in the midst of the Omicron surge.

The 423.6% increase in HHH cost of revenue for the fiscal year ended January 1, 2022 was driven by the increased volumes associated with the 2020 HHH Acquisitions and 2021 HHH Acquisitions.

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The 7.8% increase in MS cost of revenue for the fiscal year ended January 1, 2022 was driven by the previously described 4.1% growth in MS volumes during fiscal year 2021, as well as a 3.7% increase in cost of revenue rate primarily attributable to certain shifts in product mix.

Gross Margin and Gross Margin Percentage

Gross margin was $542.4 million, or 32.3% of revenue, for the fiscal year ended January 1, 2022, as compared to $454.5 million, or 30.4% of revenue, for the fiscal year ended January 2, 2021. Gross margin increased $87.9 million, or 19.3%, year over year. The 1.9% increase in gross margin percentage for the fiscal year ended January 1, 2022 resulted from the combined changes in our revenue rates and cost of revenue rates in each of our segments, which we refer to as the change in our spread rate, as follows:

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a 3.7% increase in PDS spread rate from $10.05 to $10.43, driven by the 2.1% increase in PDS revenue rate, net of the 1.5% increase in PDS cost of revenue rate;

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a 1.4% increase in MS spread rate from $205.80 to $208.59, driven by the 2.6% increase in MS revenue rate, net of the 3.7% increase in MS cost of revenue rate; and

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our HHH segment, which increased HHH gross margin percentage by 4.5%.

Branch and Regional Administrative Expenses

Branch and regional administrative expenses were $297.4 million, or 17.7% of revenue, for the fiscal year ended January 1, 2022, as compared to $240.9 million, or 16.1% of revenue, for the fiscal year ended January 2, 2021, an increase of $56.4 million, or 23.4%.

The increase in branch and regional administrative expenses of $56.4 million, or 23.4%, exceeded revenue growth of 12.3% for the fiscal year ended January 1, 2022, as compared to the fiscal year ended January 2, 2021. The 1.6% increase in branch and regional administrative expenses as a percentage of revenue year over year was primarily driven by higher HHH branch and regional administrative expenses as a percentage of revenue than our historical consolidated averages which are necessary to support our HHH operations; net of higher costs savings as a percentage of revenue than our consolidated average resulting from our exit of the ABA Therapy business in the second quarter of fiscal year 2020. While our HHH businesses have higher gross margins than our PDS businesses, they have higher branch and regional administrative expenses than our PDS businesses.

As a result of the COVID-19 environment, we have also incurred incremental branch and regional administrative expenses in the form of COVID-19 relief pay, costs of remote work enablement, severance and lease termination costs, and most recently, staffing and retention related incentives to attract and retain caregivers in the midst of the Omicron variant surge. These costs in aggregate were $2.1 million and $4.1 million in fiscal years 2021 and 2020, respectively.

Field Contribution and Field Contribution Margin

Field contribution was $245.0 million, or 14.6% of revenue, for the fiscal year ended January 1, 2022 as compared to $213.6 million, or 14.3% of revenue, for the fiscal year ended January 2, 2021. Field contribution increased $31.5 million, or 14.7%, for the fiscal year ended January 1, 2022, as compared to the fiscal year ended January 2, 2021. The 0.3% increase in Field contribution margin for the fiscal year ended January 1, 2022 resulted from the following:

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the 1.9% increase in gross margin percentage in the fiscal year ended January 1, 2022, as compared to the fiscal year ended January 2, 2021; net of

•
the 1.6% increase in branch and regional administrative expenses as a percentage of revenue in the fiscal year ended January 1, 2022, as compared to the fiscal year ended January 2, 2021.

Field Contribution and Field Contribution Margin are non-GAAP financial measures. See “Non-GAAP Financial Measures” below.

Corporate Expenses

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Corporate expenses as a percentage of revenue for the fiscal years ended January 1, 2022 and January 2, 2021 were as follows:

Corporate expenses were $130.4 million, or 7.8% of revenue, for the fiscal year ended January 1, 2022, as compared to $113.8 million, or 7.6% of revenue, for the fiscal year ended January 2, 2021. Our corporate expenses as a percentage of revenue increased by 0.2% primarily as a result of: a $8.5 million current year increase in non-cash, share-based compensation expense; a $2.9 million current year increase in non-capitalizable debt amendment costs (included in Professional services in the above table); and a $3.3 million current year increase in public company insurance costs (included in Other in the above table). Absent these items, we believe we leveraged our corporate footprint and infrastructure in 2021 as we continued to grow Aveanna in size and scale. We expect to invest in our corporate infrastructure in 2022 as we develop as a public company.

We incurred non-cash stock compensation expense of $11.6 million in fiscal year 2021 compared with $3.0 million in fiscal year 2020. As more fully discussed in Note 13 – Share-Based Compensation to the Consolidated Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K, the increase was primarily attributable to $8.5 million of incremental non-cash compensation expense associated with the modification of performance vesting options in June 2021. We incurred debt modification expenses of $7.2 million in July 2021 associated with the refinancing of our first lien term loans under our First Lien Credit Agreement (as defined below), as compared to debt modification expenses of $4.3 million that we incurred in September 2020 related to a $185.0 million first lien term loan used to fund our 2020 PDS Acquisitions and 2020 HHH Acquisitions.

Goodwill Impairment

Goodwill impairment was $117.7 million for the fiscal year ended January 1, 2022, compared to $75.7 million for the fiscal year ended January 2, 2021, an increase of $42.0 million. We recorded an impairment in the fourth quarter of fiscal 2021 in four of the reporting units within our PDS segment as a result of the continued impact of COVID-19 on our business. In the second quarter of fiscal year 2020, we recorded a $75.7 million goodwill impairment charge related to our decision to exit the pediatric ABA Therapy business. Please see Critical Accounting Estimates for further discussion of goodwill impairment.

Depreciation and Amortization

Depreciation and amortization was $20.6 million for the fiscal year ended January 1, 2022, compared to $17.0 million for the fiscal year ended January 2, 2021, an increase of $3.5 million, or 20.7%. The $3.5 million increase primarily resulted from incremental depreciation and amortization associated with assets acquired in connection with the 2020 PDS Acquisitions, 2020 HHH Acquisitions and the acquisition of Doctor’s Choice.

Acquisition-related Costs

Acquisition-related costs were $12.8 million for the fiscal year ended January 1, 2022, compared to $9.6 million for the fiscal year ended January 2, 2021. Our overall acquisition-related activity was higher in fiscal year 2021 than in

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fiscal year 2020 with respect to size and scale of the businesses acquired, including the amount of work necessary to complete such acquisitions. Acquisition-related costs in 2021 were primarily attributable to the 2021 HHH Acquisitions and the Accredited acquisition completed in the fourth quarter of fiscal year 2021. In fiscal year 2020, the Company incurred acquisition-related costs associated with the 2020 PDS Acquisitions and 2020 HHH Acquisitions.

Interest Expense, net of Interest Income

Interest expense, net of interest income was $68.7 million for the fiscal year ended January 1, 2022, compared to $82.6 million for the fiscal year ended January 2, 2021, a decrease of $14.0 million, or 16.9%. Interest expense was impacted in fiscal year 2021 by changes to our debt structure, as discussed below in the Liquidity and Capital Resources section. The primary drivers of the net decrease were the following:

•
a decrease in interest associated with our $407.0 million aggregate repayment of first and second lien term loans in May 2021 with proceeds from our IPO;

•
a decrease in interest resulting from a reduction in the interest rate under our 2021 Extended Term Loan (as defined below) subsequent to the refinancing of the first lien term loans in July 2021; net of

•
incremental interest expense associated with the $415.0 million Second Lien Term Loan (as defined below) issued in December 2021 in connection with the Accredited and Comfort Care acquisitions; and

•
incremental interest expense associated with the $150.0 million Securitization Facility (as defined below) entered into in December 2021.

Loss on Debt Extinguishment

Loss on debt extinguishment was $13.7 million for the fiscal year ended January 1, 2022, compared to a loss of $0.1 million for the fiscal year ended January 2, 2021. Such costs in 2021 were related to capital structure changes we made as a result of our IPO in April, 2021. For example, in May 2021 we used $307 million of proceeds from our IPO to fully repay and extinguish our second lien credit agreement dated as of March 16, 2017 (as amended, the “Prior Second Lien Credit Agreement”). We also used proceeds from our IPO to repay $100.0 million under our First Lien Credit Agreement. In aggregate, these repayments resulted in debt extinguishment charges of $8.9 million recorded in the second quarter of fiscal year 2021. On July 15, 2021 we entered into an Extension Amendment to our First Lien Credit Agreement, thereby converting outstanding balances under our remaining first lien term loans into a single term loan, the 2021 Extended Term Loan, in an aggregate principal amount of $860.0 million. This resulted in a debt extinguishment charge of $4.8 million recorded in the third quarter of fiscal year 2021.

Other Income (Expense)

Other income was $4.9 million for the fiscal year ended January 1, 2022, compared to other income of $34.5 million for the fiscal year ended January 2, 2021, a decrease of $29.6 million. The primary driver of the change was our receipt of a $50.0 million legal settlement in the first quarter of fiscal year 2020. We also realized an $18.1 million increase in valuation gains associated with interest rate derivatives in fiscal year 2021 resulting from the market expectation of an increase in interest rates. Details of other income in fiscal years 2021 and 2020 included the following:

Income Taxes

We incurred income tax expense of $3.5 million for the fiscal year ended January 1, 2022, as compared to income tax expense of $5.3 million for the fiscal year ended January 2, 2021, a net 34.8% increase. This decrease in tax expense

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was primarily driven by the reversal in the third quarter of 2021 of a pre-acquisition tax position initially recorded through goodwill, along with changes in federal and state valuation allowances and state tax expense.

Fiscal Year 2020 Compared to the Fiscal Year 2019

The information in response to this item is included in Management's Discussion and Analysis of Financial Condition and Results of Operations in our registration statement on Form S-1 (File No. 333-254981), filed with the SEC on April 28, 2021.

Non-GAAP Financial Measures

In addition to our results of operations prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), which we have discussed above, we also evaluate our financial performance using EBITDA, Adjusted EBITDA, Field contribution and Field contribution margin.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are non-GAAP financial measures and are not intended to replace financial performance measures determined in accordance with U.S. GAAP, such as net income (loss). Rather, we present EBITDA and Adjusted EBITDA as supplemental measures of our performance. We define EBITDA as net income (loss) before interest expense, net; income tax (expense) benefit; and depreciation and amortization. We define Adjusted EBITDA as EBITDA, adjusted for the impact of certain other items that are either non-recurring, infrequent, non-cash, unusual, or items deemed by management to not be indicative of the performance of our core operations, including impairments of goodwill, intangible assets, and other long-lived assets; non-cash, share-based compensation; sponsor fees; loss on extinguishment of debt; fees related to debt modifications; the effect of interest rate derivatives; acquisition-related and integration costs; legal costs and settlements associated with acquisition matters; the discontinuation of our ABA Therapy services; non-acquisition-related legal settlements; and other system transition costs, professional fees and other costs. As non-GAAP financial measures, our computations of EBITDA and Adjusted EBITDA may vary from similarly termed non-GAAP financial measures used by other companies, making comparisons with other companies on the basis of this measure impracticable.

Management believes our computations of EBITDA and Adjusted EBITDA are helpful in highlighting trends in our core operating performance. In determining which adjustments are made to arrive at EBITDA and Adjusted EBITDA, management considers both (1) certain non-recurring, infrequent, non-cash or unusual items, which can vary significantly from year to year, as well as (2) certain other items that may be recurring, frequent, or settled in cash but which management does not believe are indicative of our core operating performance. We use EBITDA and Adjusted EBITDA to assess operating performance and make business decisions.

We have incurred substantial acquisition-related costs and integration costs in fiscal years 2021, 2020, and 2019. The underlying acquisition activities take place over a defined timeframe, have distinct project timelines and are incremental to activities and costs that arise in the ordinary course of our business. Therefore, we believe it is important to exclude these costs from our Adjusted EBITDA because it provides management a normalized view of our core, ongoing operations after integrating our acquired companies, which is an important measure in assessing our performance.

Given our determination of adjustments in arriving at our computations of EBITDA and Adjusted EBITDA, these non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as substitutes or alternatives to net income or loss, revenue, operating income or loss, cash flows from operating activities, total indebtedness or any other financial measures calculated in accordance with U.S. GAAP.

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The following table reconciles net loss to EBITDA and Adjusted EBITDA for the periods indicated:

1.
Represents annual management fees payable to our sponsors under our Management Agreement as defined in Note 18 – Related Party Transactions to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. The Management Agreement terminated in accordance with its terms upon completion of our initial public offering.

2.
Represents income and (expense) associated with interest rate derivatives not included in interest expense, net which were included in other income (expense).

3.
Represents (i) transaction costs incurred in connection with planned, completed, or terminated acquisitions, which include investment banking fees, legal diligence and related documentation costs, and finance and accounting diligence and documentation, as presented on the Company’s consolidated statements of operations, of $12.8 million, $9.6 million, and $22.7 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively; and (ii) corporate salary and severance costs in connection with our January 2020 corporate restructuring in response to the 2019 Transaction of $2.5 million and $5.8 million for the fiscal years ended January 2, 2021 and December 28, 2019, respectively; there were no such costs in fiscal year 2021.

4.
Represents (i) costs associated with our Integration Management Office, which focuses solely on our integration efforts, of $3.6 million, $3.4 million, and $3.4 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively; and (ii) transitionary costs incurred to integrate acquired companies into our field and corporate operations of $13.9 million, $5.2 million, and $13.8 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively. Transitionary costs incurred to integrate acquired companies include IT consulting costs and related integration support costs; salary, severance and retention costs associated with duplicative acquired company personnel until such personnel are exited from the Company; accounting, legal and consulting costs; expenses and impairments related to the closure and consolidation of overlapping markets of acquired companies, including lease termination and relocation costs; costs associated with terminating legacy acquired company contracts and systems; and one-time costs associated with rebranding our acquired companies and locations to the Aveanna brand.

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5.
Represents legal and forensic costs, as well as settlements associated with resolving legal matters arising during or as a result of our acquisition-related activities. This includes costs associated with pursuing and resolving certain claims in connection with acquisition-related legal matters, as well as a $50.0 million settlement received pertaining to one such matter in the first quarter of fiscal year 2020. It also includes costs of $1.5 million, $3.0 million and $1.1 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively, to comply with the U.S. Department of Justice, Antitrust Division’s grand jury subpoena related to nurse wages and hiring activities in certain of our markets, in connection with the 2019 Transaction.

6.
Represents costs incurred as a result of the COVID-19 environment, primarily including, but not limited to, (i) relief, vaccine, and hero pay provided to our caregivers; staffing and retention related incentives to attract and retain caregivers in the midst of the Omicron surge; and other incremental compensation costs; (ii) sick leave for our caregivers required by OSHA's Emergency Temporary Standard, costs required to comply with federal, state and local vaccination mandates and testing requirements, and worker compensation costs for mandated quarantine time; (iii) incremental PPE costs; (iv) salary, severance and lease termination costs associated with workforce reductions necessitated by COVID-19; and (v) costs of remote workforce enablement, all of which totaled $19.0 million and $20.1 million for the fiscal years ended January 1, 2022 and January 2, 2021, respectively; net of temporary reimbursement rate increases provided by certain state Medicaid and Medicaid Managed Care programs which approximated $0.1 million and $4.3 million for the fiscal years ended January 1, 2022 and January 2, 2021, respectively. There were no such costs for the fiscal year ended December 28, 2019.

7.
Represents the results of operations for the periods indicated related to the ABA Therapy services business that we exited as a result of the COVID-19 environment, as well as one-time costs incurred in connection with exiting the ABA Therapy services business.

8.
Represents (i) costs associated with the implementation of, and transition to, new electronic medical record systems, billing and collection systems, business intelligence systems, duplicative system costs while such transformational projects are in-process, and other system transition costs of $5.6 million, $2.8 million, and $0.1 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019 respectively; and (ii) professional fees associated with preparation for Sarbanes-Oxley compliance, advisory fees associated with preparation for and execution of our initial public equity offering, and advisory costs associated with the adoption of new accounting standards, of $4.5 million, $2.6 million and $1.0 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively; and (iii) certain other costs or (income) that are either non-cash or non-core to the Company’s ongoing operations of ($1.5) million, ($0.5) million, and $0.1 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively.

9.
The table below reflects the increase or decrease, and aggregate impact, to the line items included on our consolidated statements of operations based upon the adjustments used in arriving at Adjusted EBITDA from EBITDA for the periods indicated:

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Field contribution and Field Contribution Margin

Field contribution and Field contribution margin are non-GAAP financial measures and are not intended to replace financial performance measures determined in accordance with U.S. GAAP, such as operating income (loss). Rather, we present Field contribution and Field contribution margin as supplemental measures of our performance. We define Field contribution as operating income (loss) prior to corporate expenses and other non-field related costs, including depreciation and amortization, acquisition-related costs, and other operating expenses. Field contribution margin is Field contribution as a percentage of revenue. As non-GAAP financial measures, our computations of Field contribution and Field contribution margin may vary from similarly termed non-GAAP financial measures used by other companies, making comparisons with other companies on the basis of these measures impracticable.

Field contribution and Field contribution margin have limitations as analytical tools and should not be considered in isolation or as substitutes or alternatives to net income or loss, revenue, operating income or loss, cash flows from operating activities, total indebtedness or any other financial measures calculated in accordance with U.S. GAAP.

Management believes Field contribution and Field contribution margin are helpful in highlighting trends in our core operating performance and evaluating trends in our branch and regional results, which can vary from year to year. We use Field contribution and Field contribution margin to make business decisions and assess the operating performance and results delivered by our core field operations, prior to corporate and other costs not directly related to our field operations. These metrics are also important because they guide us in determining whether or not our branch and regional administrative expenses are appropriately sized to support our caregivers and direct patient care operations. Additionally, Field contribution and Field contribution margin determine how effective we are in managing our field supervisory and administrative costs associated with supporting our provision of services and sale of products.

The following table reconciles operating income to Field contribution and Field contribution margin for the periods indicated:

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Liquidity and Capital Resources

Overview

Our principal sources of cash have historically been from operating activities. Our principal source of liquidity in excess of cash from operating activities has historically been from proceeds from our credit facilities and issuances of common stock. In May, 2021 we raised net proceeds of $477.7 million from our initial public offering, after deducting underwriting discounts and commissions and inclusive of our underwriters’ partial exercise of their overallotment option. We used $407.0 million of these proceeds to repay certain first lien and second lien debt obligations with the balance used for acquisitions in 2021 and general corporate purposes. In November 2021, we entered into the Securitization Facility, which we also use as a source of liquidity for completing acquisitions and for working capital as needed.

Our principal uses of cash and liquidity have historically been for acquisitions, interest and principal payments under our credit facilities, payments under our interest rate swaps, and financing of working capital. Payment of interest and related fees under our credit facilities is the most significant use of our operating cash flow. Our goal is to use cashflow provided by operations as a source of cash to supplement the purchase price for acquisitions.

As permitted by the CARES Act, we deferred payment of $46.8 million of payroll taxes to the Internal Revenue Service (“IRS”) in fiscal year 2020, which increased our net cash provided by operating activities and available cash on hand. Certain companies we acquired in 2020 and 2021 had also deferred payroll taxes of $4.6 million in aggregate in fiscal year 2020. We did not defer any payroll taxes after December 31, 2020. In December 2021, we used cash from operating activities to pay $25.9 million to the IRS, reducing our aggregate deferred payroll tax liabilities to $25.5 million as of January 1, 2022. This remaining balance will be paid to the IRS on or before December 31, 2022.

Certain of our acquired home health and hospice companies received advance payments from CMS in April 2020 pursuant to the CARES Act. Receipt of the advances did not increase our net cash provided by operating activities in 2020 as such amounts reduced the respective purchase prices of those acquired companies. Gross advances received by acquired companies totaled $15.7 million. We began repaying the gross amount of the advances in April 2021, using cash from operating activities, and had repaid an aggregate amount of $12.2 million of such advances as of January 1, 2022. As of January 1, 2022 remaining advances to be repaid totaled $3.5 million, which we expect to repay in full during fiscal year 2022.

We believe that our operating cash flows, available cash on hand and availability under our Securitization Facility and credit facilities will be sufficient to meet our cash requirements for the next twelve months. Our future capital requirements will depend on many factors that are difficult to predict, including the size, timing and structure of any future acquisitions, future capital investments and future results of operations. We cannot assure you that cash provided by operating activities or cash and cash equivalents will be sufficient to meet our future needs. If we are unable to generate sufficient cash flows from operations in the future, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. We cannot assure you that we could obtain refinancing or additional financing on favorable terms or at all.

We evaluate our liquidity based upon our current cash balances, the availability we have under our credit facilities in addition to the net cash provided by or (used in) operating, investing and financing activities. Specifically, we review the activity under the Securitization Facility and Revolving Credit Facility and consider period end balances outstanding under each. Based upon the outstanding borrowings and letters of credit under the securitization and revolving credit facilities, we calculate the availability for borrowings under the Securitization Facility and Revolving Credit Facility. Such amount, in addition to cash on our balance sheet, is what we consider to be our “Total Liquidity.”

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The following table provides a calculation of our Total Liquidity for the fiscal years ended January 1, 2022 and January 2, 2021, respectively:

Cash Flow Activity

The following table sets forth a summary of our cash flows from operating, investing, and financing activities for the fiscal years presented:

Operating Activities

The primary sources of our operating cash flow is operating income or operating losses, net of any goodwill impairments that we record as well as any other significant non-cash items such as depreciation, amortization and share-based compensation, less cash paid for interest. The timing of collections of accounts receivable and the payment of accounts payable, other accrued liabilities and accrued payroll can also impact and cause fluctuations in our operating cash flow. Cash provided by operating activities decreased by $128.0 million in fiscal year 2021 compared to fiscal year 2020, primarily due to:

•
growth in operating losses in fiscal year 2021, net of significant non-cash items such as goodwill impairment, depreciation and amortization, and share-based compensation;

•
a decrease in cash paid for interest from $73.1 million in 2020 to $59.0 million in 2021;

•
the comparative usage of cash of $72.7 million from the deferral of social security payroll tax payments, as permitted by the CARES Act which provided $46.8 million of operating cash during fiscal year 2020, and used $25.9 million of cash upon repayment of the first 50% of total amounts deferred in the fourth quarter of 2021;

•
a one-time $50.0 million legal settlement received in fiscal year 2020;

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•
the comparative usage of cash of $25.3 million related to the timing of accrued payroll, primarily due to a 53rd week of operations that was accrued at January 2, 2021 and paid in fiscal year 2021, as well as the payment of one-time payroll and related obligations from acquired companies;

•
the comparative usage of cash of $17.4 million related to the timing of collections of accounts receivable attributable in part to growth in our DSO.

Days Sales Outstanding (“DSO”)

DSO provides us with a gauge to measure the timing of cash collections against accounts receivable and related revenue. DSO is derived by dividing our average patient accounts receivable for the fiscal period by our average daily revenue for the fiscal period. The collection cycle for our HHH segment is generally longer than that of our PDS segment, primarily due to longer billing cycles for HHH, which is generally billed in thirty day increments. The following table presents our trailing five quarter DSO for the respective periods:

Investing Activities

Net cash used in investing activities was $681.8 million for the fiscal year ended January 1, 2022, as compared to $193.5 million for the fiscal year ended January 2, 2021. The $488.3 million increase in cash used in the fiscal year ended January 1, 2022 was primarily related an increase in cash used for acquisitions in 2021. Cash paid for acquisitions of businesses, net of cash acquired, was $666.9 million in 2021 as compared to $178.3 million in 2020.

Financing Activities

Net cash provided by financing activities increased by $375.4 million, from $210.9 million for the fiscal year ended January 2, 2021 to $586.3 million for the fiscal year ended January 1, 2022. The $586.3 million net cash provided in fiscal year 2021 was primarily related to the following items:

•
$477.7 million in net proceeds from the IPO;

•
$120.0 million in net proceeds from our Securitization Facility;

•
$42.4 million in net proceeds from the issuance and repayment of certain term loans and notes payable in 2021; net of

•
payment of $15.2 million of debt issuance costs; and

•
the return of $31.9 million of government stimulus funds, net of $2.5 million of funds received.

The $210.9 million net cash provided in fiscal year 2020 was primarily related to the following items:

•
$169.0 million in net proceeds from the issuance and repayment of term loans and notes payable in 2020;

•
$50.0 million of proceeds from the issuance of shares of common stock to our sponsors, Bain Capital L.P. and J.H. Whitney Capital Partners;

•
$29.4 million in proceeds from government stimulus funds; net of

•
$31.5 million of net payments under the Revolving Credit Facility.

Purchases of Property and Equipment (capital expenditures)

We manage our capital expenditures based upon a percentage of revenue. Our capital expenditures expressed as a percentage of revenue were as follows for the fiscal years presented:

•
$16.0 million, or 1.0% of revenue for the fiscal year ended January 1, 2022; and

•
$15.2 million, or 1.0% of revenue for the fiscal year ended January 2, 2021.

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We typically plan for capital expenditures equal to 1.0% as a percentage of revenue, and capital expenditures for fiscal years 2021 and 2020 were consistent with this target.

Indebtedness

We typically incur term loan indebtedness to finance our acquisitions, and we borrow under our Securitization Facility and Revolving Credit Facility from time to time for working capital purposes, as well as to finance acquisitions, as needed. The following table presents our current and long-term obligations under our credit facilities as of January 1, 2022 and January 2, 2021, as well as related interest expense for fiscal years 2021 and 2020, respectively:

1.
Variable rate debt instruments which accrue interest at a rate equal to the LIBOR rate (subject to a minimum of 1.00%), plus an applicable margin.

2.
Variable rate debt instruments which accrue interest at a rate equal to the LIBOR rate (subject to a minimum of 0.50%), plus an applicable margin.

3.
No amounts were outstanding on the Delayed Draw Term Loan ("DDTL") at January 1, 2022, however, the Company incurred commitment fees of $2.1 million in fiscal year 2021 in order to maintain the availability of the DDTL.

4.
Variable rate debt instrument that accrues interest at a rate equal to the Bloomberg Short-term Bank Yield Index (“BSBY”) plus an applicable margin.

5.
Represents the weighted average annualized interest rate based upon the outstanding balances at January 1, 2022 and January 2, 2021, respectively, and the applicate interest rates at that date.

We were in compliance with all financial covenants and restrictions related to existing credit facilities at January 1, 2022 and January 2, 2021.

On March 11, 2021, we amended our senior secured revolving credit facility under the First Lien Credit Agreement (the “Revolving Credit Facility”) to increase the maximum availability to $200.0 million, subject to the occurrence of an initial public offering prior to December 31, 2021, which was completed on May 3, 2021. The amendment also extended the maturity date to April 29, 2026 upon completion of the IPO and subject to the completion of the refinancing of our terms loans, which occurred with the Extension Amendment.

On May 3, 2021, we completed our initial public offering, and with a portion of the proceeds received, paid an aggregate principal amount of $307.0 million to repay in full all outstanding obligations under the Prior Second Lien Credit Agreement, including the incremental amount borrowed in connection with financing the acquisition of Doctor’s Choice, thereby terminating the Prior Second Lien Credit Agreement. In addition, on May 4, 2021, we repaid $100.0 million in principal amount of our outstanding indebtedness under our First Lien Credit Agreement.

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On May 4, 2021, following completion of the initial public offering and satisfaction of the other applicable conditions precedent, the maximum availability of our Revolving Credit Facility increased from $75.0 million to $200.0 million. In connection with this increase in capacity, we incurred debt issuance costs of $1.6 million, which we capitalized and included in other long-term assets.

On July 15, 2021 we entered into an Extension Amendment (the “Extension Amendment”) to our First Lien Credit Agreement, originally dated as of March 16, 2017, with Barclays Bank, as administrative agent, the collateral agent, a letter of credit issuer, and swingline lender, and the lenders and other agents party thereto from time to time (as amended to date, the “First Lien Credit Agreement”). The Extension Amendment converted outstanding balances under all remaining first lien term loans into a single term loan in an aggregate principal amount of $860.0 million (the “2021 Extended Term Loan”), and extended the maturity date to July 2028. The Extension Amendment also provided for a delayed draw term loan facility (the “Delayed Draw Term Loan Facility”) in an aggregate principal amount of $200.0 million, which permits us to incur senior secured first lien term loans (the “Delayed Draw Term Loans”) from time to time until July 15, 2023, in each case subject to certain terms and conditions. The Delayed Draw Term Loan Facility was undrawn as of January 1, 2022, and any future draws thereunder would also mature in July 2028.

For the 2021 Extended Term Loan and the Delayed Draw Term Loans, we can elect, at our option, the applicable interest rate for borrowings using a variable interest rate based on either LIBOR (subject to a minimum of 0.50%), prime or federal funds rate (“Annual Base Rate” or “ABR”) (subject to a minimum of 2.00%) for the interest period relevant to such borrowing, plus an applicable margin of 3.75% for loans accruing interest based on LIBOR and an applicable margin of 2.75% for loans accruing interest based on ABR, which are subject to certain adjustments as set forth in the First Lien Credit Agreement. The $857.9 million principal amount of the 2021 Extended Term Loan currently accrues interest at a rate equal to 4.25%. Undrawn portions of the Delayed Draw Term Loan Facility incur a commitment fee of 50% of the LIBOR margin of 3.75% beginning 45 days after the amendment date, and the full LIBOR margin beginning 90 days after the amendment date.

On July 15, 2021, we also amended our interest rate swap agreements to extend the expiration dates to June 30, 2026 and reduce the fixed rate paid under the swaps. As amended, our swap rate decreased to 2.08% from 3.107%, with a reduction in the LIBOR floor under the swaps from 1.00% to 0.50%. The notional amount under the interest rate swaps remains at $520.0 million. We also entered into a three-year, $340.0 million notional interest rate cap agreement with a cap rate of 1.75%. in July, 2021, which we sold in November 2021.

On August 9, 2021, we entered into the Seventh Amendment to the First Lien Credit Agreement to reduce the interest rates applicable to loans under the Revolving Credit Facility. As amended, such revolving loans bear interest, at our election, at a variable interest rate based on either LIBOR (subject to a minimum of 0.50%) or ABR (subject to a minimum of 2.00%) for the interest period relevant to such borrowing, plus an applicable margin of 3.75% for loans accruing interest based on LIBOR and an applicable margin of 2.75% for loans accruing interest based on ABR.

On November 12, 2021, we entered into a three-year Securitization Facility (the "Securitization Facility") which increases the Company’s borrowing capacity by collateralizing a portion of our patient accounts receivable at favorable interest rates relative to our 2021 Extended Term Loan. The maximum amount available under the Securitization Facility is $150.0 million, subject to maintenance of certain borrowing base requirements. Borrowings under this facility carry variable interest rates tied to BSBY plus an applicable margin. Please see Note 8 – Securitization Facility, to the audited Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion related to the Securitization Facility.

On December 10, 2021, we entered into a Second Lien Credit Agreement (the “Second Lien Credit Agreement” and together with the First Lien Credit Agreement, the “Senior Secured Credit Facilities”) with a syndicate of lending institutions and Barclays Bank, as administrative agent and collateral agent, which provides for a second lien term loan (the “Second Lien Term Loan”) in an aggregate principal amount of $415.0 million, which matures on December 10, 2029. The Second Lien Term Loan bears interest at a rate per annum equal to, at our option, either (1) an applicable margin (equal to 6.00%) plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the Federal Funds Effective Rate, (b) the Prime Rate and (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%; or an applicable margin (equal to 7.00%) plus LIBOR determined by reference to the cost of funds for U.S. dollar deposits

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for the interest period relevant to such borrowing adjusted for certain additional costs; provided that such rate is not lower than a floor of 0.50%. As of January 1, 2022, the $415.0 million principal amount of the Second Lien Term Loan accrued interest at a rate of 7.50%.

On February 9, 2022 we entered into a five-year, $880.0 million notional interest rate cap agreement with a cap rate of 3.0%. The cap agreement provides that the counterparty will pay us the amount by which LIBOR exceeds 3.0% in a given measurement period and expires in February 2027.

In July 2017, the U.K. Financial Conduct Authority, the regulator of the LIBOR, indicated that it will no longer require banks to submit rates to the LIBOR administrator after 2021 (“LIBOR Phaseout”). This announcement signaled that the calculation of LIBOR and its continued use could not be guaranteed after 2021 and the anticipated cessation date is June 30, 2023. A change away from LIBOR may impact our Senior Secured Credit Facilities. We continue to monitor developments related to the LIBOR transition and/or identification of an alternative, market-accepted rate. The impact related to any changes cannot be predicted at this time.

Contractual Obligations

Our contractual obligations consist primarily of long-term debt obligations, interest payments, operating and financing leases. These contractual obligations impact our short-term and long-term liquidity and capital needs.

Critical Accounting Estimates

In preparing our consolidated financial statements in conformity with U.S. GAAP, we must use estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures and the reported amounts of revenue and expenses. In general, our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates. We believe the following critical accounting estimates affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Patient Services and Product Revenue

Because our services have no fixed duration and can be terminated by the patient or the facility at any time, we consider each treatment as a stand-alone contract for revenue recognition purposes. Additionally, as services ordered by a healthcare provider in an episode of care cannot be separately identified, we combine all services provided into a single performance obligation for each contract. We recognize patient revenue in the reporting period in which we perform the service, and we recognize product revenue on the date required shipping commitments have been completed. We have minimal unsatisfied performance obligations at the end of the reporting period as our patients typically are under no obligation to remain under our care.

All revenue is recognized based on established billing rates reduced by contractual adjustments and discounts provided to third-party payers and implicit price concessions. Contractual adjustments and discounts are based on contractual agreements, discount policies and historical experience. Implicit price concessions are based on historical collection experience. Our revenue cycle management systems calculate contractual adjustments and discounts on a patient-by-patient or product-by-product basis based on the rates in effect for each primary third-party payer. Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-party payers, which are often subject to interpretation and review, we may receive reimbursement for healthcare services authorized and provided that is different from our estimates. In addition, due to changes in general economic conditions, patient accounting service center operations, or payer mix, historical collection experience may not accurately reflect current period collections.

We continually review the contractual and implicit concession estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms that result from contract renegotiations and renewals. In addition, laws and regulations governing the Medicaid, Medicaid MCO and Medicare programs are complex and subject to interpretation. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.

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Business Combinations

We account for acquisitions of entities that qualify as business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations. In determining whether an acquisition should be accounted for as a business combination or asset acquisition, we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the single identifiable asset or the group of similar assets is not deemed to be a business and is instead deemed to be an asset. Under the acquisition method of accounting, the total consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

In determining the fair value of assets acquired and liabilities assumed in a business combination, we primarily use an income approach to estimate the value of tradenames acquired and a cost approach to estimate the value of licenses acquired. The income approach utilizes projected operating results and cash flows and includes significant assumptions such as base revenue, revenue growth rate, projected EBITDA margin, discount rates, rates of increase in operating expenses, and the future effective income tax rates. The cost approach utilizes projected cash outflows and includes significant assumptions such as projected facility costs, projected administrative costs and estimates of the time and effort to acquire a license. The valuations of our significant acquired companies have been performed by a third-party valuation specialist under our management’s supervision. We believe that the estimated fair value assigned to the assets acquired and liabilities assumed is based on reasonable assumptions and estimates that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates. Future changes in our assumptions or the interrelationship of those assumptions may result in purchase price allocations that are different than those recorded in recent years.

Acquisitions related costs are not considered part of the consideration paid and are expensed as operating expenses as incurred. Contingent consideration, if any, is measured at fair value initially on the acquisition date as well as subsequently at the end of each reporting period until the contingency is resolved and settlement occurs. Subsequent adjustments to contingent considerations are recorded in our consolidated statements of operations. We include the results of operations of the businesses acquired as of the beginning of the acquisition dates.

Goodwill

We perform an impairment test for goodwill and indefinite-lived intangible assets at least annually or more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. We perform our annual goodwill impairment test on the first day of the fourth quarter of each fiscal year for each of our reporting units. Tests are performed more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The impairment test is a single-step process. The process requires us to estimate and compare the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, the goodwill is not considered impaired. To the extent a reporting unit’s carrying amount exceeds its fair value, the reporting unit’s goodwill is deemed impaired, and an impairment charge is recognized based on the excess of a reporting unit’s carrying amount over its fair value. The fair value of the reporting units is measured using Level 3 inputs such as operating cash flows and market data.

A reporting unit is either an operating segment or one level below the operating segment, referred to as a component. When the components within our operating segments have similar economic characteristics, we aggregate the components of our operating segments into one reporting unit. Since quoted market prices for our reporting units are not available, we apply judgment in determining the fair value of these reporting units for purposes of performing the goodwill impairment test. For both interim and annual goodwill impairment tests, we engage a third-party valuation firm to assist management in calculating a reporting unit’s fair value, which is derived using a combination of both income and market approaches. The income approach utilizes projected operating results and cash flows and includes significant assumptions such as revenue growth rates, projected EBITDA margins, and discount rates. The market approach compares reporting units’ earnings and revenue multiples to those of comparable companies. Estimates of fair value may differ from actual results due to, among other things, economic conditions, changes to business models or changes in operating performance. These factors increase the risk of differences between projected and actual

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performance that could impact future estimates of fair value of all reporting units. Significant differences between these estimates and actual future performance could result in impairment in future fiscal years.

We performed our annual goodwill impairment test during the fourth quarter of fiscal year 2021. The continuing impact of COVID-19 on our business has pressured our clinical workforce and caregiver availability in our core PDS businesses, thereby constraining PDS volume growth. As a result, we determined that the carrying value of four reporting units within our PDS segment exceeded their fair value and we recorded a goodwill impairment charge of $117.7 million during the fourth quarter of fiscal year 2021. The continuing COVID-19 environment has not impacted our other reporting units to the same extent, and the fair value of our other reporting units significantly exceeded their carrying value.

As a result of the onset of COVID-19 in 2020, during the second quarter of fiscal year 2020 we made the decision to exit our pediatric ABA Therapy business, which we completed as of the end of the third quarter of fiscal year 2020. Annual ABA Therapy revenues in 2019 approximated $16.4 million. In connection with these activities, we evaluated our Therapy reporting unit for goodwill impairment and recorded an impairment charge of $75.7 million during our second quarter of fiscal year 2020. During our annual goodwill impairment tests for fiscal year 2019, we did not identify any reporting units in which the related carrying value exceeded the estimated fair value.

We can provide no assurance that our goodwill will not become subject to impairment in any future period.

Insurance Reserves

As is typical in the healthcare industry, we are subject to claims that our services have resulted in patient injury or other adverse effects.

The Company maintains primary commercial insurance coverage on a claim basis for professional malpractice claims with a $1.0 million per claim deductible and $5.5 million per claim and annual aggregate limits as of October 1, 2021. The Company maintains excess insurance coverage for professional malpractice claims. In addition, the Company maintains workers’ compensation insurance with a $0.5 million per claim deductible and statutory limits. Our insurance reserves include estimates of the ultimate costs, in the event we are unable to receive funds from claims made under commercial insurance policies, for claims that have been reported but not paid and claims that have been incurred but not reported at the balance sheet dates. Although substantially all reported claims are paid directly by our commercial insurance carriers less any applicable deductibles and/or self-insured retentions), we are ultimately responsible for payment of these claims in the event our insurance carriers become insolvent or otherwise do not honor the contractual obligations under the malpractice policies. We are required under U.S. GAAP to recognize these estimated liabilities in our consolidated financial statements on a gross basis, with a corresponding receivable from the insurance carriers reflecting the contractual indemnity provided by the carriers under the related malpractice policies.

Our insurance reserves require management to make assumptions and apply judgment to estimate the ultimate cost of reported claims and claims incurred but not reported as of the balance sheet date. Our reserves and provisions for professional liability, general liability, and workers’ compensation risks are based largely upon semi-annual actuarial calculations prepared by third-party actuaries. Periodically, we review our assumptions and the valuations provided by third-party actuaries to determine the adequacy of our insurance reserves. The following are certain of the key assumptions and other factors that significantly influence our estimate of insurance reserves:

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historical claims experience;

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trending of loss development factors;

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trends in the frequency and severity of claims;

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coverage limits of third-party insurance;

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statistical confidence levels;

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medical cost inflation; and

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payroll dollars.

The time period to resolve claims can vary depending upon the jurisdiction, the nature, and the form of resolution of the claims. The estimation of the timing of payments beyond a year can vary significantly. In addition, if current and

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future claims differ from historical trends, our estimated reserves for insured claims may be significantly affected. Our insurance reserves are not discounted.

We believe our insurance reserves are adequate to cover projected costs for claims that have been reported but not paid and for claims that have been incurred but not reported. Due to the considerable variability that is inherent in such estimates, there can be no assurance that the ultimate liability will not exceed management’s estimates. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.