Acadia Healthcare Company, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Acadia operated 593 behavioral healthcare facilities with approximately 18,100 beds across the U.S., U.K. and Puerto Rico.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $760.6 million | $742.2 million | +2.5% |
| Income before taxes | $36.9 million | $48.1 million | -23.3% |
| Net income attributable to Acadia | $29.5 million | $50.8 million | -42.0% |
| Diluted EPS | $0.34 | $0.58 | -41.4% |
| Operating cash flow | $43.7 million | $72.6 million | -39.9% |
Revenue grew, but total expenses increased faster, to $723.7 million from $694.2 million. Net income margin declined to 3.9% from 6.9%. Segment EBITDA, a non-GAAP measure, was $136.0 million versus $145.7 million; its margin was approximately 17.9% versus 19.6%.
- U.S. facilities: Revenue was $488.0 million, up 5.5%; Segment EBITDA was $119.0 million versus $117.1 million. Same-facility revenue rose 6.1%, with patient days up 4.3% and revenue per patient day up 1.7%.
- U.K. facilities: Revenue was $272.7 million, down 2.6% reported, while same-facility revenue increased 4.7% excluding exchange-rate effects. Segment EBITDA fell to $40.1 million from $51.2 million; same-facility EBITDA margin declined 430 basis points, attributed to lower census and higher expenses, particularly labor.
Reported revenue growth was partly offset by a $17.9 million adverse U.S. dollar/sterling exchange-rate effect. Salaries and benefits rose to 56.5% of revenue from 55.4%; management also cited higher U.K. agency labor costs amid nursing and clinical staffing shortages. Interest expense increased to $48.1 million from $45.2 million.
Cash, debt and liquidity
- Cash and cash equivalents were $43.7 million at March 31, down from $50.5 million at year-end. Working capital was $27.8 million, versus $34.0 million.
- Operating cash flow was $43.7 million. Investing activities used $110.1 million, including $69.2 million of capital expenditures and $40.4 million for acquisitions. Capital spending included $50.7 million for expansion and $18.5 million for routine expenditures.
- Financing activities provided $58.5 million, including $71.6 million drawn on the revolving facility, partly offset by $8.2 million of debt principal payments. Revolver availability was $414.7 million; $13.7 million of standby letters of credit were outstanding.
- Reported debt carrying value, including current maturities, was $3.258 billion, compared with $3.193 billion at December 31, 2018. The company reported $48.1 million of quarterly interest expense and was in compliance with debt covenants at quarter-end.
- Lease accounting adoption added $506.8 million of operating lease right-of-use assets and $532.7 million of operating lease liabilities at March 31. Prior-period figures were not adjusted. Finance lease liabilities had a present value of $51.7 million.
Changes, outlook and material items
- Acadia acquired Whittier Pavilion, a 71-bed inpatient psychiatric facility, and Mission Treatment, which operated nine treatment centers, on February 15 for approximately $17.9 million and $22.5 million, respectively. It acquired Bradford Recovery Center for approximately $4.5 million on April 1, after quarter-end.
- During Q1, Acadia acquired 10 facilities and added 260 beds excluding acquisitions, including 100 beds at existing facilities and 160 at two new facilities. Management expected to add approximately 700 beds during 2019, excluding acquisitions. No earnings or revenue guidance was provided in the supplied filing text.
- Two February amendments to the credit agreement increased covenant flexibility, including by removing a cap on certain non-cash goodwill impairment adjustments and increasing the permitted maximum leverage ratio.
- The effective tax rate was 20.0%, compared with a tax benefit and rate of (5.8%) in Q1 2018. The prior-year result included a $10.5 million discrete tax benefit related to provisional Tax Act amounts.
- Management cited risks from significant indebtedness, variable interest rates, foreign exchange movements, U.K. public-payer dependence, labor shortages and costs, acquisition integration, regulation, and patient-care and compliance matters. A hypothetical 10% rate increase was estimated to reduce annual net income and cash flow by $5.9 million; a hypothetical 10% sterling exchange-rate change was estimated to change annual net income by $7.7 million.
Contingencies and unusual items
The company had reserved $19.0 million in 2018 for a West Virginia False Claims Act investigation concerning lab-service billing and expected a corporate integrity agreement. Additional government investigations concern alleged regulatory and billing issues, including medical necessity, admission and discharge decisions, length of stay, and patient care. Acadia said it was cooperating and could not quantify potential liabilities in several investigations. A securities class action and a related shareholder derivative action were also pending; potential liability was not quantifiable. Acadia paid $3.1 million in January 2019 to resolve a class action related to its PHC merger.
Acadia closed a 168-bed residential treatment center in Albuquerque during Q1 and was evaluating the property’s future use. The filing also reports $21.1 million of assets held for sale at March 31.
Important facts for investors to verify
- Whether U.K. operating performance and labor costs improve, and how staffing shortages affect margins.
- Whether U.S. same-facility growth and planned bed additions translate into sustainable earnings and cash generation.
- Progress and potential financial exposure from the West Virginia investigation, other government inquiries, and securities litigation.
- Debt covenant headroom, refinancing and repayment obligations, and sensitivity to LIBOR and other rate changes.
- Acquisition integration and returns, and the implications of the new lease liabilities for liquidity and leverage analysis.