Accendra Health, Inc. (ACH) Q2 2026 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by. Welcome to the Accendra Health Second Quarter 2026 Earnings Conference Call. Please be advised that today's conference call is being recorded. [Operator Instructions] I would now like to hand the conference call over to your first speaker today, Will Parrish, Vice President, Strategy, Corporate Development and Investor Relations.

Thank you, operator, and good morning, everyone. I'd like to welcome you to Accendra Health's second quarter earnings call. Our comments on the call will be focused on the financial results of the second quarter of 2026, all of which are included in today's press release. The press release, along with the second quarter 2026 supplemental slides, which we will refer to throughout the call are posted in the Investor Relations section of our website. Please note that during this call, we will make forward-looking statements that reflect the current views of Accendra Health about our business, financial performance and future events. The matters addressed in these statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied here today. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs and projections will result or be achieved. Please refer to our SEC filings for a full description of these risks and uncertainties, including the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call, in our earnings press release or in our supplemental slides are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In our discussion today, we will refer to non-GAAP financial measures and believe they might help investors to better understand our performance or business trends. Information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release. Today, I'm joined by Ed Pesicka, Accendra Health's President and Chief Executive Officer; Jon Leon, the company's Chief Financial Officer; and Perry Bernocchi, the company's Chief Operating Officer. I will now turn the call over to Ed. Ed?

Thank you, Will. Good morning, everyone, and thank you for joining us on the call today. Before I dive into our second quarter results and the outlook for the balance of the year, I'd like to take a moment to address the announcement included in today's press release that I have informed the Board of Directors of my intention to retire by the end of 2026. The decision to retire is never easy. However, after considerations with my family and careful thought, I've decided that now is the right time. It has been an honor and privilege to serve as President and CEO for nearly 8 years. During that time, we initially stabilized the company when I joined, enabling us to successfully guide the company through the unprecedented challenges of COVID-19 pandemic, then navigate the company through post-pandemic environment, completed the sale of the P&HS segment and most recently executed our balance sheet optimization and debt realignment. Together, these milestones have transformed the company into a focused pure-play home-based health care business with a strong strategic foundation. With these important milestones largely behind us, I believe the company is well positioned for its next chapter. The timing is right to begin a thoughtful leadership transition that allows the next CEO to build on the foundations we've established, capitalize on the opportunities ahead and create long-term value for our patients, customers, employees and shareholders. The Board has a long-standing succession planning process, and I'm confident that we will have a successful CEO transition. In closing, I would like to personally thank the Board of Directors, the company leadership team and our 6,000 teammates for all the dedication, hard work and support over the last 8 years. Now, let me turn to the business updates. Looking at our second quarter performance, our results did not meet the expectations we set for ourselves. At the same time, the quarter reflected continued progress in several areas that are critical to our long-term transformation. We successfully advanced our separation from Owens & Minor, remained on schedule with the transition away from a large commercial payor earlier this year and continue to strengthen the operational foundation of the business as Accendra Health. That said, our results also demonstrate that we have additional work to do to optimize our cost structure and improve execution. As I'll discuss in a moment, we have already implemented a number of these initiatives and have additional actions planned that are designated to streamline our operations, improve efficiencies and reduce costs. We also experienced several discrete headwinds during the quarter that we believe are temporary in nature and affect our near-term financial performance and cash flow. I'll provide more detail on these shortly. Importantly, the quarter also included several accomplishments that reinforce our confidence in the future. We made meaningful progress in a number of strategic initiatives that we believe have the potential to drive attractive growth beginning in late 2026 and continuing into 2027. Turning now to the key drivers of our second quarter performance. There were 3 primary factors that contributed to the variance from our forecast: one, revenue growth below our expectations; two, the timing of planned cost reductions; and three, slower-than-expected recovery of our collection rate. Starting with revenue. While we were pleased to see revenue growth improve sequentially from the first quarter to the second quarter, excluding the impact of the large commercial payor exits, overall growth remained below both our expectations and the level this business is capable of delivering. To accelerate growth, we have made targeted changes within our commercial and operational organizations to improve customer responsiveness, strengthen execution and reinvigorate our sales force. We are already seeing positive momentum, and several important initiatives are either underway or expected to begin contributing over the coming quarters. Starting with the renewal of our largest soft good contract with our largest commercial payor, which we discussed during the last earnings call, but was formally executed during the second quarter. This provides greater stability across an important portion of our commercial payor portfolio for years to come. Building on that success, we also signed a new sole-source agreement with a regional health system that is expected to launch in early 2027. In addition, we executed a broader enterprise-wide fee-for-service agreement with another payor that we believe will drive additional patient volume, improve capacity utilization and create meaningful value for both organizations. Moving now to cost reductions. Following our separation from Owens & Minor on December 31 and the transition away from the large commercial payor during the first quarter, we identified and eliminated more than $125 million of annualized costs. Soon after completing this takeout, we identified the need to allow the business to settle and stabilize from these changes before introducing additional cost reductions, which could have created disruption while we were, one, settling in as a new pure-play home-based health care business; two, completing the exit of the large commercial payor; and three, executing our balance sheet optimization. In addition, while our transition service agreements with Owens & Minor continue to wind down on schedule, those temporary interdependencies have limited our ability to fully optimize our organizational structure during the first half of the year. Although the timing has been somewhat later than originally anticipated, our commitment to improving our cost structure has not changed. Approximately 1 month into the third quarter, we have already executed the next phase of targeted cost reductions, and we'll continue evaluating additional opportunities in the coming months. Another example of our ongoing efforts to reduce our cost to serve is the pursuit of new arrangements with leading logistics providers for inventory management and fulfillment across select product categories. We expect the arrangements to go live later this year and believe they will both lower our operating cost and reduce inventory, thereby improving cash flow. Looking further ahead, continued investment in technology, automation and process improvement should enable us to operate even more efficiently while supporting future growth. Continuing with the theme of operational efficiencies and cost reductions, we continue to advance our national rollout of our Sleep Center of Excellence during the second quarter. While there is still work to complete, we remain optimistic about this program's ability to contribute to both growth and profitability beginning in late 2026 and continuing into 2027. Finally, moving on to slow payment of collections from payors. We continue to see reimbursement collection rates below the historical norm of the business' typical performance. This has negatively impacted our revenue and adjusted EBITDA in the range of nearly $20 million in the first half of the year. The underlying cause is related to several factors, including growing pains associated with recent technology investments and slower payor payments. Jon will discuss this further in his prepared remarks, specifically related to some discrete inefficiencies with specific commercial payor processes that affected collections and increased AR. Importantly, we have already implemented mitigation plans with those payors and are seeing encouraging progress, and we expect this issue to recover towards the end of the year and into next year, but we acknowledge that this is taking longer than we initially anticipated. Looking ahead, as I mentioned earlier, we are excited about the commercial and operation changes, the logistics arrangements as well as several strategic agreements that we believe can increase throughput with key commercial payors and further strengthen our competitive position. It is also important to recognize the significant work completed this year to strengthen our financial foundation. In June, we successfully completed our balance sheet optimization, significantly reducing debt. In closing, while we are not satisfied with our second quarter financial performance, we are encouraged by the progress we continue to make in transforming the business. The operational actions underway, the commercial opportunities we have secured and the investments we are making today give us the confidence in our ability to improve execution, accelerate growth and expand profitability over time. As I look forward to the remainder of the year and into 2027, I believe Accendra Health is well positioned, and I remain excited about the opportunities ahead for the company. Let me now turn the call over to Jon. Jon?

Thanks, Ed, and good morning. There is much to cover this morning, and I'll begin by reviewing results for the second quarter. Then, I'll cover a few final details of the successful balance sheet optimization transaction that concluded in June, our outlook for the remainder of the year and I'll wrap up with a couple of actions to be taken that will further strengthen our financial profile. As is now the norm, unless otherwise stated, my remarks today will focus on the continuing operations. The continuing operations financial statements represent the total of Accendra Health. And please also note that any discussion about the financial results and outlook for the company will cover only non-GAAP financial measures. You can find GAAP to non-GAAP financial reconciliations in the press release filed a short time ago and residing on our website at accendrahealth.com. In the second quarter of 2026, we faced headwinds in top line growth that was below our expectations and a collection rate waterfall model impact on income that is improving at a slower rate than we had expected. However, during the quarter, and since the end of the quarter, much of the activity that we believe will positively impact our results late in the year is in flight and should benefit the top line margin, adjusted EBITDA and cash flow. As I walk through the quarterly results, I will speak to them excluding the impact of a large commercial payor that rolled off in Q1 so that everyone has a true like-to-like comparison. Our reported results, of course, include the impact of this payor in the prior year second quarter and its absence in the second quarter and first 6 months of 2026. With that backdrop, working through detail for the quarter beginning on Slide 7, you can see that revenue in the second quarter, excluding the aforementioned impact of the commercial payor grew at 2%. The improvement in growth rate from recent quarters was driven by the large and very important sleep category. On a like-for-like basis, we saw good mid-single-digit growth in sleep of about 5.5%, including a marked improvement in sleep equipment and continued strong growth in sleep supplies. Diabetes grew 4%, which was a 500 basis point improvement in the year-over-year growth rate compared to Q1. But like recent quarters, in Q2, we saw a very strong year-over-year growth in insulin pumps, partially offset by weakness in CGM. Also, similar to recent quarters, the Respiratory and Wound categories are yet to recover and were down year-over-year. On the positive side, Ostomy and Urology, which have been growing nicely for some time, once again posted high single-digit year-over-year growth rates. These revenue trends are expected to continue through the third quarter before the impact of our improvement efforts begin to take hold. We are laser-focused on improving the underperforming categories, especially the higher-margin sleep and respiratory categories and are encouraged by improving sleep growth rates and believe there's still plenty of upside. Looking at Slide 8. Second quarter adjusted EBITDA was just over $60 million, and there was a small margin rate improvement versus the first quarter. Adjusted EBITDA less patient service equipment, or PSE CapEx, was $16.3 million and down slightly from the first quarter as PSE CapEx was higher due largely to an improving outlook for sleep starts in the coming months. However, the lower-than-expected growth rate and expenses as a percentage of revenue, which continued to run above historic rates, some of which is category mix related, were a drag on adjusted EBITDA and are a focal point for the second half of the year in 2027. The impact of our collection rate waterfall once again hampered revenue and earnings. The overall adverse impact in Q2 of the change on collections was approximately $10 million and was $20 million for the first 6 months ended June 30. It is important for everyone to understand that the income statement impact of the collections waterfall is derived from a rolling look-back analysis and are always reflective of current cash collection activity. And as a reminder, the collection waterfall is a revenue cycle tool, which creates adjustments to gross revenue, which fall straight through to the bottom line. And during the second quarter and carrying into the third quarter, the collection rate income statement impacting and cash receipts have been affected by recent inefficiencies beyond normal audit activity among certain key commercial insurers. Additionally, higher cost of net revenue and delays in cost reduction efforts has limited EBITDA expansion in the first and second quarters. As Ed mentioned, actions are planned and underway to address both cost of net revenue and SG&A. From a working capital perspective, we saw the change in accounts receivable worsened in the second quarter and was largely driven by the spate of inefficient audit issues with certain insurers that I just mentioned. While payor audit issues are not uncommon for us and the industry, what we are temporarily dealing with is well outside the norm. Efforts are constructively trending toward resolution in the third quarter, and we believe realized cash flow will improve upon conclusion. Looking back at Slide 6 of the quarterly supplemental slides, which details free cash flow for the second quarter and 6 months ended June 30, it is worth noting that cash interest paid in the second quarter includes $12 million for the payment of interest that had been accrued for the exchanged 2029 and 2030 unsecured notes, which had to be cash settled with the exchange of those notes. Also, looking ahead, we will not experience the cash impact of higher interest rates from the balance sheet optimization transaction until December, when we make the first interest payment on the new first lien and second lien notes. Turning to the balance sheet. With the successful completion of our balance sheet optimization transaction, total debt of $1.72 billion was down by almost $400 million since the end of March, and net debt was more than $55 million lower over that period. And recall that we have doubled the weighted average life of our debt structure to nearly 5.5 years and have no maturities until 2029, and the recurring revenue nature of the business backstopped by committed revolving credit facilities will continue to ensure plenty of liquidity. As a reminder of the successful reset of our capital structure, please see Pages 9 and 10 of our supplemental slides. Free cash flow fully levered, as defined on Slide 6, is now expected to be breakeven to slightly positive for the full year 2026 due to the change in expected annual adjusted EBITDA and the higher cash interest I just described. While cash flow will not be what we expected in 2026, our confidence in the cash generation strength of the business and a consistent ability to generate around $100 million annual free cash flow in a less muddy of a year remains unchanged. Additionally, at the end of July, we closed on the sale of a small noncore asset and expect another small noncore asset sale to close in late Q3 or early Q4 that will provide incremental cash flow. As we think about the remainder of 2026, we have to recognize the second quarter underperformance as well as the now later timing of the benefits of revenue growth, productivity gain projects and cost savings actions. Sitting here over one month into the third quarter, we are seeing some positive signs, particularly around expense reduction and the collections waterfall income statement impact, but it's not enough in the remaining 5 months to catch up with previous guidance. As a result, and as shown on Slide 11, we have revised the 2026 full-year outlook for revenue to be between $2.45 billion and $2.55 billion, and a full-year adjusted EBITDA to be between $300 million and $320 million. Unsurprisingly, we expect the fourth quarter to be much stronger than the third quarter, which will provide a kickstart to 2027. In the coming weeks, we expect to be launching actions that will better position the company's balance sheet and protect key assets. First, we expect to activate a small at-the-market equity program. We're still finalizing the details of the program, but we expect to have the ATM effective in the near term. We intend to use the proceeds from these sales to reduce outstanding indebtedness, which will allow for a deliberate, continued deleveraging of the balance sheet through the occasional issuance of equity into the market at prevailing prices. Also, the business has significant tax attributes that are often forgotten about. The quantum of net operating loss carryforwards alone going into 2027 will exceed $200 million. This has meaningful value, especially at the currently depressed market capitalization. As many companies in similar positions do, we want to help ensure protection of that value. There are counterintuitive and confusing rules around deemed ownership changes caused by trading activity that could jeopardize often inadvertently those tax attributes. So in order to help avoid very costly foot fault by one or more shareholders, we will be putting a net operating loss, or NOL, rights plan in place. Not only will this help protect shareholders from an inadvertent and adverse impact on the valuable NOLs, these type of plans do not need to limit planned or desired shareholder activity since certain shareholder activity can be exempted from the NOL rights plan. And the plan is limited in duration, and it can be easily and quickly canceled if and when desired. Following the successful balance sheet optimization transaction, the NOL rights plan and anticipated ATM program are additional steps to further improve and preserve the financial strength of the company. Finally, with the earlier announcement around Ed's intention to retire in the coming months, this could be Ed's last earnings conference call. In the event it is, I want to make sure to take the opportunity on behalf of all 6,000 Accendra teammates to thank Ed for his guidance and leadership over the last several years. The company looks very different than when Ed arrived and walked into a bit of a storm, and it's been a very active 8 years, and Ed has been the perfect person to guide us through. Personally, I want to thank Ed for his mentoring, partnership and always reminding me, through his example, that no matter how hectic things are to never take yourself too seriously and to stop and laugh. Thanks, Ed. With that, I'll turn the call back to the operator for Q&A. Operator?

[Operator Instructions] Your first question comes from the line of Kevin Caliendo from UBS.

Ed, congratulations on the retirement. I hope that all works out well for you and the company and the like, but congrats.

Thanks, Kevin.

It's certainly been. There's a lot to digest here, obviously, the payor situation, I don't quite understand how that evolves over time, but maybe if you can talk a little bit in specifics around what happened there. And then two, have there been any other -- like I'm looking at the numbers and looking at what it's implied in the second half, and obviously, the fourth quarter is a bigger ramp, is there anything else affecting what's implied for the second half of the year? One of your competitors talked about their contract being ripped up and having a negative impact with a price increase on supply. Is there anything like that impacting the second half of the year? And then, I guess, lastly, should we take what's implied for the fourth quarter as any sort of run rate? Is that a more normalized thing? I'm not asking for '27 guidance. Obviously, there's always seasonality in your business. But whatever puts and takes or one-timers are in there, just trying to think about what is the proper way to think because there's so many moving parts here, what's the proper way to think about the run rate going forward?

Thanks, Kevin. I'll start. I'll take this. So really, I think there's 3 things you want -- you're asking us to help you digest. One is on the payor, that being the collection area, the second being supplier impacts, and then third is, is Q4 kind of representative of what we would think go forward would be. Let me start with the suppliers, and then, I'll hand it over to Jon and to Perry to add some other commentary on this as well as the other 2 topics. So -- when I think about our suppliers, we really do have good relationships with our suppliers. We have those relationships -- we haven't had a supplier come to us and say, "Hey, we're tearing up the agreement. We're going to move on and go in a different path." I think what we do really well is we find ways to work together with our suppliers. Ultimately, they're looking to grow their share. Those suppliers are looking to find partners that can help them do that. I think as a company, you have to balance that because you have -- especially in categories where there's a lot of suppliers, you have to balance that with what's best for the patient as well as finding ways that we can win together. That may be an overused phrase, but finding ways that we can help them grow their share, in the same sense make sure we're managing our supplier portfolio. So that way, it can help us offset some of the costs we have as well as the normal pressures you have from reimbursement. I think competition, when I think about suppliers and I think about it across categories, some categories are deeper suppliers, some are much more narrow. Overall, my perspective is competition within the categories is actually good for the business. When I say the business, it's also good for the industry. And where we're sitting here today is we don't see and we don't have any of those suppliers that have come to us and torn up an agreement. I think the other thing we do really well is we know when most of our contracts -- well, we won that most, we know when our contracts expire and making sure we have the right plan long enough in advance to work with those suppliers to get to a renewal state that works for both parties or make different decisions, if that's what it takes. So that's where we are. I can't talk about where others are and how they manage it, but that's how we think about our supplier community. Let me maybe turn it over to Jon to cover a little bit on some of the collections and the impact on the waterfall. And then, we'll come back to the last one here, the fourth quarter and is that a fair picture of what the run rate of '27 would look like. So Jon?

Yes. Thanks. Kevin, so the payor audits, whether commercial or government are constant in our business. So that's nothing unusual there. What was unusual is a couple of months ago, we started seeing the actual -- not number of audits, the number of items audited actually begin to increase at an exponential rate. And that had a twofold knock on us. One, it was actually -- we weren't getting paid as we were under audit for -- and had been under audit for a lot of these issues. And secondly, the volume that we were seeing was causing us to take resources, humans off other projects like our automation work that we're working on to improve our collections profile and address these audits. So it's a very, very manual process. Jane Doe says X, Jane Doe didn't get delivery, Jane Doe did -- Jane Doe obviously didn't want. We had to go back and actually find all the documentation, prove it to the commercial payors. So as the volume had increased at an unprecedented level, we haven't been getting paid, and we're spending more time and resources to actually solve these audits. So it had a knock-on effect, both on our improvement efforts as well as our cash collections during the quarter, and it's running into the third quarter. As I mentioned, and Ed mentioned in his remarks as well, the good news is we are making significant progress in the last couple of weeks with these payors. We have a plan forward to resolve the issues, and we're pretty confident we wrapped up in the third quarter, which, one, bring more cash back into the company, and second, allow us to actually go back and to focus on those automation issues, which have been going on for several months, but are critical to actually improving our collections overall. So -- and what happens from a P&L perspective, as these age out, again to older aging buckets, AR buckets, they begin to go through that waterfall calculation and run through the P&L in addition to collection. So it's unprecedented, unusual, and we're pretty confident just a temporary blip here that will solve in the coming weeks.

And then maybe I'll wrap it up on the last one here, that being the Q4. Yes, Q4 will be -- is expected to be our best quarter, and Q4 will be the jump-off point really for 2027. Obviously, you're correct, there is seasonality in the business. Some of the things that give us comfort as we look forward on that is, and I talked a little bit in my prepared remarks, we did see some nice revenue growth sequentially from Q1 to Q2. I talked about some new agreements. We got a new sole-source agreement with the regional health care system. That will go into place really in late 2026 and will carry into '27. We just signed a nice size fee-for-service agreement with a payor. That again will go into effect later in the year, where it will -- they will be narrowing the network, too. So we see some really positive signs and benefits that will happen in from a top line standpoint in late '26, early '27. The other aspect of that is really from a sales execution. We have made a few adjustments within our selling organization to reinvigorate the team, and we'll see that happen later in the year. I think the other thing that impacts us in late '26 and into '27, as we talked a little bit about some additional expansion of our Sleep Center of Excellence as well as lastly, around cost reductions. And then what Jon just talked about really on the payor and the collection aspect of it, that has a delayed impact. You get that fixed. And then, on the waterfall, it will help you in the future as you start to look at -- as you're looking in the rearview mirror. So those are the things that are really -- I'll call it, really late in Q4 in '26 that should then translate into '27. Hopefully, that takes care of those 3 questions or points you needed us to cover there.

Your next question comes from the line of Michael Cherny from Leerink Partners.

I have 2. I'll just throw them both together. Maybe one, building on that 4Q dynamic, as we think about the moving pieces in the build, appreciate that you recognize the seasonality, but what do you think you have, let's call it, within your control versus your customers in the market waiting for you, if you can kind of risk weight to make sure that we understand the bridge to 4Q even though you don't explicitly have quarterly guidance out there? And then, the other question is just on the tax agreements. I heard you, Jon, on the dynamics behind it, but why now, the net operating losses has been in place for a long period of time? What was the Board's rationale for doing this now?

Great. I'll take the first part of this and let Jon take the second part of it. So what are some of the levers we can pull now? One, I talked a little bit about some of the cost reductions we have in store. Some of them we've already started to take action on in the first month of this quarter. But I want to reiterate, we took out well north of $125 million of annualized cost as we rolled into this year, and that happened in the first quarter, as we completed that. But we did take a pause because we wanted to stabilize the business. And then now, we've already started additional cost reductions. I think on the revenue growth standpoint, some of those factors, part of that is also just purely implementation speed. We have working with the supplier -- or working with the customer to get those contracts. Once you get the contracts finalized, to start to move the patients towards us. So that becomes sales execution aspect. And then lastly, we're working with some logistics providers within the industry that, that can help us, as we move some of the supply and logistics work to them that can drive operational savings for us as well as working capital savings. And again, that is just speed to get those implemented. So -- and then, I don't want to lose the fact that our commercial organization from a business development standpoint is continuing to look for the next thing and the next thing to fill the pipeline. And then lastly, just pure commercial execution. Those are other things that don't need to wait until we get to 2027, when we start to see the impact of the new sole-source agreements or the new fee-for-service agreement. Hopefully, that helps. And then let me turn it over to Jon to talk a little bit about the tax aspect.

Yes. Mike, there were 2 real drivers that really answers the question of why now. One, as we were wrapping up the balance sheet optimization transaction, we asked ourselves and outside advisers, what else should we be doing at the same time to just clear up the overall financial profile and strength of things. And an NOL rights plan, which I wasn't familiar with, came to our attention and to -- we were educated about. It's a very convoluted structure, and the rules around are really confusing. Additionally, in the last few months, we had seen some large shareholders come into the stock. And as you know, 13Fs, 13Gs are very delayed. And when we went back and did a very high-level kind of Section 382 study, we saw that we have well over half of -- well, let me back up a second, based on the rules of this transaction through Section 382 rules, we saw that we were halfway to potentially having a problem should the shareholders continue to buy, and we have large 5% shareholders come in, and we don't know about it, obviously, after the fact. So when we saw those couple of things happen, and then, we talked to outside tax counsel, they brought this to our attention. We brought to the Board as a fairly not uncommon way to protect those NOLs and something that we weren't aware of before. And obviously, that companies -- public companies don't always go back and check their -- run Section 382 studies on a regular basis. So it was just the right time to clean it up. It was brought to our attention, and we look back at trading history and saw that it was probably a prudent thing to do to protect shareholder interest and the value of those NOLs.

Your next question comes from the line of John Stansel from JPMorgan.

Can you just spend a little bit more time talking about what drove the need for a pause in some of the cost-outs? As we think about that, I don't want to conflate 2 separate things, but is it driven by the need for the increased audit support that was more manual or anything else just as we think about the resumption and kind of going full speed ahead into cost outs into the back of the year into '27?

Sure. Yes, I think to simplify it is -- I made it -- in my prepared remarks, I did make a comment that we took out more than $125 million of annualized cost. And I think it was just really related to the massive amount of costs that we took out of the business. Part of that is due to the transition of the large commercial payor contract that we had. In addition to that, removal of stranded costs. So there was just a massive amount taken out as well as we were in the middle of divesting or in the middle of the transition service agreements with the sale of our P&HS segment. Those things combined just made us step back and say, let's let everything settle in, let's make sure we didn't break anything while we did that and then reset and start to move forward and do it again -- or look at it again, where there's other ways we can attack the cost. It really didn't have to do with the collections issue. The collection issues really, as Jon described earlier, that was partially we were taking resources and putting resources in that as well as transferring resources from their day job to work through some of these payor audits.

Great. And then just quickly, if I could squeeze in a question. The noncore assets that you're selling, can you just talk about the assessment you did, kind of how you came to the conclusion that there was a better home for them? And how we should think about that kind of going forward on the portfolio side?

Yes, John, a couple of things. One, it was just a couple of assets. One is a legacy that -- the one we had not, so we're working to close in this quarter, early next quarter, is a legacy business that has nothing to do with our current business at this point. We inherited in the Halyard acquisition back in 2018 and something that was not of interest to any party when we went through the P&HS divestiture. So pretty small there. The other one is basically not in the -- not really in the same realm of what we do today. It is very small, so we've never talked about, so we never disclosed. This was very, very small. And we had an attractive opportunity to actually capitalize on that business. This has -- runs well given it's pretty small. But we actually saw an opportunity for a buyer to come in, pay us a nice fair price for it and at a time when the cash flow is pointed to us.

Your next question comes from the line of Daniel Grosslight from Citi.

I want to focus a bit more on free cash flow. Your guidance implies to get you back up to breakeven around $27 million of free cash flow in the second half of the year. Can you just walk us through the pacing of that free cash flow improvement in Q3 and Q4? And your cash flow is -- or your cash balance is now down to around $8 million. I'm wondering if you are anticipating drawing down on the revolver, you obviously are putting into place the ATM, but that's going to be quite dilutive at these share prices. So how are you just thinking about your liquidity in the near term?

Yes, Daniel. It's Jon. I'll start with that. So obviously, the free cash flow is going to be really -- the biggest driver is going to be the EBITDA. And as Ed alluded to, that's going to be more -- that's going to -- a lot more of that is going to come in Q4 than Q3. So to your point, we don't need a lot of free cash flow to get back to that breakeven or slightly positive, but it's going to be EBITDA-driven -- Q4 as well. On the other aspects of it, well, first of all, on the ATM, I would just point out, ATM programs are -- this is a small program. They take a long time to fully execute. Typically, they're based on parts, specifically daily volume. So any dilution will occur over a long period of time. And I forgot the other -- your third part of your question, I'm sorry, Daniel.

If you're going to have to draw down on the revolver...

Right. So all the cash that we had previously on the balance sheet went to the debt reduction. You should expect to see fairly low cash levels going forward as anything that would generally is being used to repay debt or being put right back into the business for future investment. The revolver will be drawn occasionally as based on lumpiness in working capital needs. Very much unlike what we saw in the past was continuously drawn. Certainly, we have some very large payments to a couple of key suppliers that we will have to draw on based on the time of a month, the time of the quarter, those invoices get paid. But for the most part, we will be undrawn in many, many days and drawn some occasional days, but we won't be consistently drawn at any meaningful level the way we were in the past.

Got it. Okay. And Jon, you mentioned that you're confident that this business can generate $100 million of free cash flow in a normalized year. Is 2027 going to be a normalized year? Do you think you'll get up to $100 million of free cash flow next year? Or is there still some costs, some working capital improvement that we need to see before you generate that $100 million?

Yes. It's a fair question because we're all dying to get back to a normalized year. The only major change -- the only thing I would call now a normal that we know about right now, Daniel, is that we'll have our last payment on transaction costs to the new owner of Owens & Minor in Q1 '27. Other than that, everything -- we don't have anything right now that will be normal, and all these activities that Ed mentioned earlier that are bearing fruit late this year will be fully operational in our run rate for '27.

Your next question comes from the line of Allen Lutz from Bank of America.

First, Ed, congrats on the retirement. It's been great to work with you in the past several years. A question either for Ed or Jonathan, on the sleep business, in the prepared remarks, you talked about a marked improvement in sleep equipment and continued strong growth in sleep supplies. As we think about the transition from the first half of the year to the second half of the year, can you just dive into the drivers of the improvement you're seeing in sleep equipment and some of the expectations you have into the second half of the year?

Yes, I can start. This is Ed, excuse me. I'll start, and I'll let Perry add additional color on this. So if you think about sleep, one of the nice things we saw is we saw sequential growth in sleep. When I say growth, I'm talking about the year-over-year growth rates. We continue to see really nice -- really, really nice performance in sleep supplies. That's really carrying the bulk of the water, and that is the larger part of the category. And then sleep starts, we saw a nice improvement in growth year-over-year from Q1 to Q2 also in sleep equipment. And then, the other aspect of it is we're continuing to do things to streamline our operations in sleep focused primarily with our Center of Excellence. So those are the numbers of what we're seeing and just the increased focus. With that, maybe let Perry add additional commentary on this area.

Yes. Thanks, Ed. To piggyback on Ed, the back half of the year is really the acceleration and completion of the Center of Excellence so that our entire organization for sleep is within the Center of Excellence and our customers can experience that. It both improves the process, creates more efficiencies and improves the overall adherence rates for our sleep patients.

And then moving on to the payor collections commentary. I assume we're talking about large and sophisticated payors. Is this one of your top 3 payors? Is it just 1 payor stakeholder here? And do you think that your peers are also dealing with the same issue?

It's more than one payor. I would call them large. I don't know how sophisticated they are. This process has not demonstrated a lot of sophistication. But I would tell you that -- I don't know what our peers are seeing, but clearly, there's a lot of pressure on payors now to make sure that we're getting waste, fraud and abuse out of healthcare, which we're all very supportive of. And we just need to work with our payor partners to make sure we're going about it in the most efficient way possible.

And there are no further questions. I will now turn the call back over to Edward for closing remarks.

Thank you. Well, thank you, everyone, for joining today. As I think about the future here, we are into '26 and into '27. We also -- we already have multiple operation actions that are already underway. I talked a lot about the commercial opportunities that we've secured already as well as additional opportunities that we're in planning, we're continuing to work towards. Look -- also, look at the investments that we're making, and it really gives me extreme confidence in our ability to improve the business as we move forward. One of the things we've got to make sure we focus on is actually improved execution. That improved execution will help us accelerate growth and continue to expand profitability over time. And it gives me tremendous encouragement and excitement about the future. Regarding retirement, there's never an easy time, but now just feels right after conversations with my family. I do want to take the opportunity to let everyone know, as I said in my prepared remarks, with the Board, we've had a long-standing succession planning process. I am confident and committed that we'll have a successful CEO transition. We'll make sure we get the right candidate to carry this forward as the pure-play business that we are today. And in closing, again, I want to really thank the Board of Directors. I want to thank the company leadership that's on this call today as well as those that aren't on this call today. I want to thank the 6,000 teammates that are part of Accendra Health as well as the 15,000 teammates that were part of P&HS that moved on for all their dedication, hard work and support over the last 8 years. With that, thank you, everyone, and have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.