AdaptHealth's third quarter was its first beat-and-raise after a disruptive second-quarter reset, but the cash-flow story kept getting worse. Earnings Whispers recorded a loss of $0.19 per share on revenue of $745.65 million, with earnings down 200.0% and revenue down 9.1% year over year. The company's own continuing-operations presentation reads differently. That presentation restates prior periods to exclude the Diabetes Health business, now held for sale, and it shows net revenue up 10.9% from $672.4 million, with organic growth of 12.8%. Investors should recognize that the two growth figures rest on different comparison bases. On a GAAP basis, the quarter was far uglier: a loss from continuing operations of $1.23 per diluted share, driven by a $184.8 million non-cash goodwill write-down. The central tension is that operating results beat the company's guidance and lifted the full-year outlook, while free cash flow, the metric that matters most for a leveraged equipment provider, was cut for the third time.
The quality of the beat is better on operations than on the balance sheet. Revenue topped the guidance midpoint by about $15.6 million. Adjusted EBITDA of $141.9 million was roughly $11.2 million above the implied midpoint. Adjusted EBITDA margin recovered to 19.0% from 17.8% in the second quarter. Even so, adjusted EBITDA fell 2.9% year over year, and margin remains well below the 21.7% posted a year ago. Cost of revenue grew far faster than sales, rising to $630.8 million from $533.8 million. Depreciation including patient equipment jumped to $116.8 million from $92.2 million, reflecting heavy equipment investment.
The operating improvement came almost entirely from the large exclusive capitated agreement that derailed the second quarter. According to the call, margin on that contract swung from about -4% in Q2 to roughly 10% in Q3, and it exited the quarter near a 14% run rate. The drivers were lower utilization from peak levels and contract headcount reduced by more than 12%. Management is targeting a 20% margin by the fourth quarter of 2027. It also described pricing adjustments from the partner as assured, with a contract modification expected this quarter that is not included in guidance. A rebate arrangement with a manufacturer recovered $8 million of the roughly $30 million second-half hit. Tone shifted from defensive in Q2 to talk of momentum into 2027. Full-year revenue guidance rose to $2.88-$2.90 billion and adjusted EBITDA guidance rose to $510-$525 million.
Beneath that recovery, growth in the base business is fading. Organic growth slowed to 12.8% from 15.9% in Q2. The base business's contribution dropped to 2.1 points from 5.2 points in Q2 and about 4 points in Q1. The PCS wind-down is expected to accelerate in the fourth quarter, and the guidance implies sequentially lower Q4 revenue of roughly $715-$735 million. A new risk emerged as well: Medline is withdrawing from the home-care bed market. Those beds are a meaningful part of the fleet, and management said the low end of guidance reflects possible effects. On the positive side, the lifting of the Medicare DME enrollment moratorium opens California fee-for-service opportunities. Two new or expanded regional capitated agreements, covering roughly 72,000 lives, and four health-system preferred-provider deals add incremental pipeline.
Cash flow is where bears have legitimate ammunition. Year-to-date free cash flow is just $2.6 million, versus $140.1 million a year ago, as equipment purchases rose to $393.0 million. The release cuts full-year free cash flow guidance to $50-$75 million from $80-$120 million. The call summary cites $55-$80 million, a discrepancy investors should note. Either way, the outlook is far below the $175-$225 million originally guided. Management attributed the latest cut to pulling vendor payments forward for early-pay discounts. Long-term debt rose to $1.87 billion from $1.72 billion at year-end. Per the call, net debt fell $48 million sequentially to $1.85 billion, or 3.05 times leverage. The $235 million Diabetes Health sale, which has cleared its antitrust waiting period and is expected to close in early 2027, is earmarked for debt reduction.
The market had already priced in deep skepticism. Shares opened at $6.68 after the August report, well below the 200-day moving average of $9.17. Management tied the goodwill impairments directly to the decline in market capitalization. Investor sentiment entering this report was only modestly positive at 0.13, which suggests expectations were muted rather than hostile. A report showing contract profitability turning was the kind of evidence turnaround skeptics were not fully positioned for. Persistent cash-flow cuts, however, give them reason to stay cautious.
The bottom line is that AdaptHealth showed its largest problem contract can be fixed and earned an upward revision to revenue and EBITDA guidance. That is a genuine improvement from the Q2 reset. However, slowing base growth, a new equipment-supply disruption, back-to-back goodwill write-downs and a free cash flow outlook that keeps shrinking mean the turnaround is credible but not yet self-funding. The divestiture close and further capitated-margin gains are the next proof points.