Acadia Healthcare Company, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Business context
Acadia operates behavioral healthcare facilities in the U.S., U.K. and Puerto Rico. At quarter-end, it operated 582 facilities with approximately 18,300 beds. Its U.S. segment comprised 229 facilities and about 9,800 beds; its U.K. segment comprised 353 facilities and about 8,500 beds.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $833.3 | $777.3 | $2,366.4 | $2,327.2 |
| Income before taxes | $44.7 | $49.6 | $134.5 | $146.2 |
| Net income attributable to Acadia | $37.0 | $42.6 | $111.5 | $120.2 |
| Diluted EPS | $0.42 | $0.48 | $1.26 | $1.37 |
| Segment EBITDA (non-GAAP) | $159.4 | $146.6 | $436.7 | $441.5 |
| Cash from operating activities | — | — | $472.2 | $213.5 |
Q3 revenue grew 7.2% year over year, while attributable net income fell 13.1%. Q3 net margin was approximately 4.4%, versus 5.5% a year earlier. Segment EBITDA margin was approximately 19.1%, compared with 18.9%. For the nine-month period, revenue increased 1.7%, but attributable net income declined 7.2% and Segment EBITDA declined 1.1%.
Q3 U.S. same-facility revenue grew 7.5%, patient days 4.2%, and EBITDA margin improved 50 basis points. U.K. same-facility revenue grew 2.7%, while patient days declined 0.1%; U.K. EBITDA margin improved 50 basis points for the quarter. YTD U.K. same-facility EBITDA margin declined 140 basis points.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $338.7, versus $124.2 at year-end 2019. Cash from operations was $472.2 for the first nine months; capital expenditures were $195.8. Operating cash flow less capital expenditures was approximately $276.4.
- Available revolving-credit capacity was $485.9, with $14.1 of standby letters of credit outstanding. Cash plus disclosed available capacity was approximately $824.6.
- Reported debt was $3,118.1, including $50.9 current and $3,067.2 long-term. Debt less cash was approximately $2,779.4; this excludes lease liabilities. Operating lease liabilities were $507.8.
- Current assets were $756.4 and current liabilities $601.3. Acadia reported covenant compliance at quarter-end; actual leverage ratios are not stated in the supplied filing text.
- Interest expense fell to $37.6 in Q3 from $46.6, primarily due to lower rates on variable-rate debt. About $1.6 billion of debt was variable-rate; management estimated a hypothetical 10% rate increase would reduce annual net income and cash flow by $3.6.
Material changes, outlook and notable items
- COVID-19 reduced referrals and patient volumes, particularly in late March and April. Management said volumes improved in Q2 and continued improving in Q3, but future effects remained difficult to predict. Supply constraints, staffing costs, patient collections and potential further volume declines remained risks.
- The company issued $450.0 of 5.5% senior notes in June 2020 and used the proceeds to redeem its 6.125% notes due 2021 and 5.125% notes due 2022; it recorded $3.3 of debt-extinguishment costs. On October 14, 2020, it issued $475.0 of 5.0% notes due 2029 and used approximately $453.3 to prepay Tranche B-3 borrowings.
- In October 2020, Acadia relaunched the formal sale process for its U.K. business after suspending it in March due to pandemic-related market conditions. There is no assurance of a sale or its timing or terms.
- Management expected to add approximately 500 beds in 2020, excluding acquisitions. No earnings or revenue guidance is provided in the supplied text.
- CAREs Act-related support included approximately $19.7 of initial Provider Relief Fund receipts, $12.8 received in August, and $45 of Medicare advance payments. The filing says Q3 included an $18.1 reversal of income previously recorded for relief funds, while the income statement displays an $18.1 “other income” line; investors should reconcile this presentation and the recognition treatment. The company was still assessing eligibility and conditions for retaining relief funds.
- Management cited expected CARES Act tax-related cash benefits, including approximately $39 of deferred employer Social Security tax payments, a $14 refund already received, and expected tax-payment reductions and NOL refunds. These estimates depend on tax rules and company assumptions.
- Acadia recorded $20.2 of non-cash impairment charges related to closing certain U.K. elderly-care facilities: $16.4 for leases and $3.8 for long-lived assets. Transaction-related expenses were $8.5 in Q3, including costs associated with restructuring and the U.K. sale process.
- Risks include ongoing COVID-19 disruption, significant indebtedness and covenants, U.K. public-funding dependence and foreign exchange exposure, staffing and supply costs, and regulatory and litigation matters. Securities-related litigation, California wage-and-hour claims, and government investigations were disclosed; potential exposure for several matters was not quantifiable.
Most important facts for investors to verify
- Whether the Q3 relief-fund reversal and the $18.1 “other income” line are presented consistently, and whether any received Provider Relief Funds must be repaid.
- Whether the improved patient-volume trends persist and how COVID-19 affects staffing, supply costs, receivables and cash generation.
- Progress, expected terms and potential proceeds from the relaunched U.K. sale process.
- Debt maturities, refinancing or repayment plans, covenant headroom and the effect of the October 2020 note issuance and debt prepayment.
- Final tax benefits under the CARES Act and developments in the disclosed legal proceedings and government investigations.