Acadia Healthcare Company, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 6, 2018. Acadia operated 586 behavioral healthcare facilities with approximately 18,000 beds across the U.S., U.K. and Puerto Rico. Financial figures below are in U.S. dollars; millions unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $760.9 | $716.7 | $2,268.9 | $2,111.8 |
| Segment EBITDA | $148.9 | $152.3 | $459.7 | $450.8 |
| Net income attributable to Acadia | $46.2 | $45.6 | $155.9 | $130.2 |
| Diluted EPS | $0.53 | $0.52 | $1.78 | $1.50 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $286.2 | $271.4 |
Q3 revenue rose 6.2% year over year; nine-month revenue rose 7.4%. Segment EBITDA margin was approximately 19.6% in Q3 versus 21.2% a year earlier, and 20.3% for the nine months versus 21.4%. Net income attributable to Acadia increased about 19.7% for the nine-month period, aided by a lower effective tax rate: 9.5% versus 26.3%. The 2018 nine-month tax provision included a $10.5 million discrete benefit related to the Tax Act.
Q3 U.S. same-facility revenue grew 7.2%, with patient days up 3.3% and revenue per patient day up 3.8%; U.S. same-facility EBITDA margin improved 60 basis points. U.K. same-facility revenue grew 4.4%, but EBITDA margin fell 450 basis points. Management attributed U.K. pressure to lower census and higher operating costs, particularly agency labor amid nursing and clinical staffing shortages. For nine months, U.S. and U.K. same-facility revenue grew 6.1% and 4.8%, respectively.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $286.2 million. Investing used $262.5 million, including $250.0 million of capital expenditures ($197.0 million expansion and $53.0 million routine); financing used $40.7 million. Cash declined $18.4 million to $48.9 million.
- Working capital was $100.0 million, up from $94.2 million at year-end 2017. Current assets were $490.7 million and current liabilities $390.7 million. Days sales outstanding increased to 42 from 38.
- Total debt carrying amount was approximately $3.215 billion, down from $3.240 billion at December 31, 2017; cash was $48.9 million. The $500 million revolving facility had $494.1 million available, with $5.9 million of standby letters of credit outstanding. The company reported compliance with debt covenants.
- Debt includes $1.5 billion of fixed-rate and $1.7 billion of variable-rate debt. Management estimated that a hypothetical 10% increase in interest rates would reduce annual net income and cash flow by $6.5 million. A hypothetical 10% GBP exchange-rate change would alter annual net income by $9.5 million.
Material changes, outlook and risks
- Q3 pretax income declined to $55.0 million from $61.5 million despite higher revenue. Salaries and benefits, professional fees, and other operating expenses rose; U.K. contract labor costs were a key pressure. Nine-month interest expense increased to $137.7 million from $130.8 million, primarily due to higher rates on variable-rate debt.
- Revenue presentation changed with adoption of ASC 606 on January 1, 2018: most doubtful-account provisions are now deducted directly from revenue. Prior periods were not restated and adoption had no significant income-statement impact. For context, 2018 revenue before doubtful-account provision was $760.9 million in Q3 versus $728.7 million in Q3 2017; reported revenue comparisons therefore reflect the presentation change.
- Management expected to add more than 800 beds during 2018, excluding acquisitions; 408 beds had been added in the first nine months. The filing provides no specific earnings or revenue guidance. Management cited the Tax Act’s lower federal corporate rate as expected to benefit future results and cash flow.
- After quarter-end, Acadia conditionally planned to redeem its 9.0% and 9.5% revenue bonds on December 1, 2018 at 104% of principal plus accrued interest, using the revolver if needed. It also signed agreements to acquire Mission Treatment for approximately $22.5 million plus a working-capital settlement, and Whittier Pavilion for approximately $17.9 million.
- A U.S. Attorney’s Office investigation involving seven West Virginia treatment centers concerns claims for certain laboratory services under the False Claims Act. Acadia is cooperating but said it could not quantify potential liability. The filing also highlights risks from substantial debt, payor and regulatory exposure, staffing shortages, U.K. public-funding dependence, foreign exchange, acquisitions and litigation.
Investor verification priorities
- Track the West Virginia False Claims Act investigation, its scope and any potential financial exposure.
- Assess whether U.K. census and staffing costs improve, and whether U.S. operating-margin gains continue.
- Review receivables aging and DSO, cash conversion, and the level and returns of expansion capital spending.
- Verify debt reduction, covenant headroom, variable-rate exposure and revolver use, including any bond redemption financing.
- Confirm the timing, funding and integration results of the announced acquisitions and progress against the 2018 bed-addition target.