Acadia Healthcare Company, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparative periods ended June 30, 2015. Amounts below are in U.S. dollars. Acadia operated 591 behavioral healthcare facilities with approximately 17,800 beds across the U.S., U.K. and Puerto Rico.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue, after doubtful-account provision | $756.5m | $453.7m | $1,373.4m | $819.4m |
| Income from continuing operations | $55.6m | $33.8m | $81.0m | $48.4m |
| Net income attributable to Acadia | $56.4m | $33.8m | $82.1m | $48.4m |
| Diluted EPS | $0.65 | $0.49 | $0.97 | $0.74 |
| Segment EBITDA | $172.2m | $105.8m | $303.2m | $184.5m |
- Revenue increased 66.8% in Q2 and 67.6% for the first half. Growth primarily reflected acquisitions, especially Priory; same-facility revenue before doubtful accounts grew 8.1% in Q2 and 8.5% for the first half.
- Q2 continuing-operations margin was 7.3% versus 7.5%; first-half margin was 5.9% in both periods. Q2 pretax margin declined to 9.8% from 10.9%; first-half pretax margin declined to 7.7% from 8.6%.
- First-half operating cash flow from continuing operations was $185.8m, up from $90.6m. Investing cash outflow was $890.0m, including $683.3m for acquisitions and $177.7m for capital expenditures.
- Cash was $30.7m at June 30, 2016. Working capital was negative $27.4m, compared with positive $4.5m at year-end; management attributed the change primarily to Priory’s negative working capital. Revolver availability was $141.4m.
- Balance-sheet debt was $3,651.8m, including $73.4m current and $3,578.4m long-term, net of unamortized issuance costs, discounts and premiums. Interest expense was $48.8m in Q2 and $86.5m for the first half, up from $28.0m and $50.2m, respectively. The company reported compliance with debt covenants.
Material changes and unusual items
- The February 2016 Priory acquisition, for approximately $2.2bn in total consideration, substantially expanded U.K. operations. Acadia added 328 facilities during the first half, including Priory’s 324 facilities.
- On July 28, 2016, the U.K. Competition and Markets Authority said it would consider Acadia’s proposed undertakings instead of proceeding immediately to a phase 2 investigation. The proposal requires divestiture of 19 facilities with approximately 750 beds; Priory integration remains restricted pending CMA review.
- Foreign-currency translation losses were $261.9m for the first half, contributing to a comprehensive loss attributable to Acadia of $155.8m despite reported net income. The company also recorded a $40.5m asset from cross-currency swaps designated as net investment hedges.
- First-half transaction-related expenses were $32.4m. The effective tax rate declined to 23.9% from 31.4%, primarily due to Priory’s lower-tax jurisdiction and the permanent reinvestment of its earnings.
- In May 2016, Acadia entered into $650m aggregate-notional cross-currency swaps to convert part of its U.S.-dollar senior notes into fixed-rate sterling-denominated debt. The GBP weakened following the Brexit vote; management warned that continued weakness could negatively affect results.
Outlook, commentary and risks
- Management expected to add approximately 800 beds during 2016, excluding acquisitions. No financial earnings or revenue guidance is provided in the supplied filing text.
- Management cited acquisition integration, patient-demand growth, referral development and facility expansion as strategic priorities. It noted that Priory integration is on hold during CMA review.
- Key risks include CMA-required divestitures or review delays, Brexit-related political and economic uncertainty, sterling exchange-rate exposure, significant debt and covenant restrictions, reliance on government and third-party payors (including the NHS for Priory and Partnerships in Care), staffing costs and availability, regulatory and legal matters, and acquisition integration and synergy execution.
- Management stated that ordinary-course legal claims were not expected to have a material adverse effect. The company had $8.6m of standby letters of credit outstanding for workers’ compensation security.
Investor verification priorities
- Track CMA review outcomes, the terms and timing of the proposed 750-bed divestiture, and when Acadia can integrate Priory.
- Separate acquisition-driven growth from same-facility performance; verify patient-day growth, revenue per day, and segment margins.
- Assess leverage, interest burden, covenant headroom, maturity schedules and revolver availability following Priory financing.
- Monitor cash conversion and capital spending, including whether Priory’s negative working capital persists and how acquisition and expansion spending are funded.
- Review GBP exposure, swap effectiveness and the impact of currency translation on reported earnings, assets and equity.
- Confirm delivery against the approximately 800-bed 2016 expansion expectation and the operational and financial assumptions behind it.