Acadia Healthcare Company, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Acadia operates behavioral healthcare facilities in the U.S., U.K. and Puerto Rico. At quarter-end it operated 595 facilities with approximately 18,200 beds.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $789.4m | $765.7m | $1,550.0m | $1,508.0m |
| Income before taxes | $59.8m | $69.3m | $96.7m | $117.3m |
| Net income attributable to Acadia | $48.1m | $58.8m | $77.6m | $109.7m |
| Diluted EPS | $0.55 | $0.67 | $0.88 | $1.26 |
| Segment EBITDA | $158.9m | $165.0m | $294.9m | $310.7m |
Q2 revenue grew 3.1%, while income before taxes and attributable net income fell about 14% and 18%, respectively. Reported net margin was 6.0%, versus 7.7% a year earlier; pretax margin was 7.5%, versus 9.1%. Six-month net margin was 5.1%, versus 7.4%. Segment EBITDA is a non-GAAP measure defined by the company.
- Segment trends: Q2 U.S. revenue rose to $509.8m from $481.5m; U.S. Segment EBITDA increased to $135.4m from $130.0m. U.K. revenue declined to $279.5m from $284.3m, and U.K. Segment EBITDA fell to $45.8m from $54.2m. Corporate and other costs increased to $22.3m from $19.2m.
- Cash flow and liquidity: Six-month operating cash flow was $128.7m, down from $217.9m; investing cash outflow was $178.0m and financing inflow was $42.5m. Cash was $43.5m at June 30, down from $50.5m at year-end; working capital was $40.8m. The company reported $422.4m available under its revolver and $12.6m in standby letters of credit.
- Debt and leases: Debt carrying value was $3.246bn, including $38.9m current; cash was $3.2bn lower than debt. The company was in compliance with debt covenants. It adopted the lease accounting standard in 2019, recording $491.6m in operating lease right-of-use assets and $518.5m in operating lease liabilities at quarter-end; these are separate from reported debt.
Material changes and management commentary
- U.S. same-facility revenue grew 6.6% in Q2, supported by 3.3% growth in patient days and 3.2% growth in revenue per patient day. U.K. same-facility revenue grew 3.9% on a constant-currency basis, but patient days declined 0.2%; U.K. EBITDA margin contracted 360 basis points, which management attributed to lower census and higher operating costs, particularly labor.
- Reported consolidated revenue growth was partly offset by GBP depreciation: management estimated a $15.7m Q2 and $33.7m six-month revenue impact. Higher U.K. agency labor costs and higher interest expense also pressured results.
- Acadia acquired three businesses/facilities in 2019 for approximately $44.9m. It closed a 168-bed New Mexico residential treatment center and was evaluating future use of the property.
- Management expected to add approximately 700 beds during 2019, excluding acquisitions. It had begun a review of strategic alternatives involving U.K. operations, including a potential sale; the outcome remained uncertain.
Risks, contingencies and unusual items
- Acadia paid $17.0m to settle a U.S. Attorney’s Office matter concerning historical lab billing at seven West Virginia treatment centers and entered into a corporate integrity agreement. The company also disclosed ongoing government investigations at facilities concerning, among other matters, medical necessity, eligibility, discharge decisions and patient care; potential liability was not quantifiable.
- A securities class action and related shareholder derivative lawsuits were pending. The company said it could not quantify potential liability because the cases were at an early stage.
- Major business risks include substantial indebtedness, variable interest rates, U.K. public-payor dependence and currency exposure, labor shortages and costs, healthcare regulation, and potential consequences of investigations and litigation. A hypothetical 10% increase in interest rates was estimated to reduce annual net income and cash flows by $7.4m; a hypothetical 10% GBP exchange-rate change was estimated to change annual net income by $7.2m.
- Transaction-related expenses were $5.2m in Q2, including termination, restructuring and strategic-review costs. The six-month effective tax rate rose to 19.6% from 6.5%, primarily due to an uncertainty reserve related to equity-compensation deductibility and a prior-year $10.5m discrete tax benefit.
Important facts for investors to verify
- Whether U.K. operations improve census, labor costs and EBITDA margins, and whether the strategic review leads to a transaction.
- Cash conversion and working-capital trends, given the decline in six-month operating cash flow and the $17.0m settlement payment.
- Debt-service capacity, covenant headroom and exposure to variable rates and GBP movements.
- Developments and potential financial consequences of government investigations, the corporate integrity agreement and shareholder litigation.
- Whether planned bed additions and recent acquisitions contribute to growth without further margin pressure.