Acadia Healthcare Company, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 5, 2015. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise indicated.
Business context and reporting period
Acadia develops and operates behavioral healthcare facilities in the United States, United Kingdom and Puerto Rico. At June 30, 2015, it operated 223 facilities with more than 9,000 beds. Results include substantial acquired operations, notably CRC Health Group, acquired February 11, 2015, and Partnerships in Care, acquired in July 2014; reported year-over-year growth is therefore not solely organic.
During the first half of 2015, Acadia acquired CRC, Quality Addiction Management, and multiple U.K. facilities. On July 1, 2015, it acquired Belmont Behavioral Health and The Manor Clinic, after the reporting period.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue, net of doubtful accounts | $453.7 | $213.8 | $819.4 | $415.2 |
| Income from continuing operations | $33.8 | $22.5 | $48.4 | $35.5 |
| Net income | $33.8 | $22.5 | $48.4 | $35.5 |
| Diluted EPS | $0.49 | $0.43 | $0.74 | $0.69 |
| Segment EBITDA | $105.8 | $44.7 | $184.5 | $84.0 |
| Cash from continuing operating activities | Not stated for quarter | Not stated for quarter | $90.6 | $29.3 |
Q2 revenue increased 112% and net income increased 51% year over year; first-half revenue increased 97% and net income increased 36%. Same-facility revenue before doubtful accounts rose 8.3% in Q2 and 9.2% for the first half, driven mainly by patient-day growth. Same-facility patient days increased 7.4% and 8.9%, respectively.
Reported continuing-operations margins were 7.5% versus 10.5% in Q2 and 5.9% versus 8.5% for the first half. Segment EBITDA is a non-GAAP measure: it was $105.8 million in Q2 and $184.5 million for the first half. Comparisons were affected by acquisition-related costs, higher interest expense and the prior-year foreign-exchange derivative gain.
Liquidity, debt and cash flows
- Cash and cash equivalents were $34.6 million at June 30, down from $94.0 million at December 31, 2014. Working capital was $82.8 million, versus $108.2 million at year-end.
- Long-term debt, including current maturities, was approximately $1.953 billion; total debt less cash was approximately $1.919 billion. The company reported $291.1 million available under its revolving credit facility and compliance with debt covenants.
- First-half operating cash flow was $91.1 million including discontinued operations. Investing used $413.6 million, including $286.7 million for acquisitions and $122.0 million for capital expenditures ($99.3 million expansion and $22.7 million routine). Financing provided $261.8 million.
- The company issued $375 million of 5.625% senior notes due 2023 and completed a May equity offering generating $331.5 million net proceeds. It also issued shares as part of the CRC acquisition. Interest expense rose to $28.0 million in Q2 from $9.7 million and to $50.2 million for the first half from $19.4 million.
Material changes and unusual items
- CRC was acquired for approximately $1.3 billion; the transaction included 5,975,326 shares issued and repayment of $904.5 million of CRC debt. First-half acquisitions also included QAM and U.K. facilities. Goodwill rose to $1.946 billion from $803.0 million at year-end; acquisition purchase-price allocations remained preliminary.
- First-half transaction-related expenses were $25.6 million, including $10.3 million of advisory and financing commitment fees, $9.1 million of legal, accounting and other costs, and $6.2 million of severance and contract termination costs.
- Foreign-currency derivatives produced a $1.0 million loss in Q2 2015, compared with a $13.7 million gain in Q2 2014. The filing attributes the prior-year gain to the Partnerships in Care acquisition hedging.
- The effective tax rate declined to 31.4% from 39.9% in Q2 and 39.0% for the first half, primarily because of U.K. earnings in a lower-tax jurisdiction that the company intends to permanently reinvest.
- Self-pay represented 10.9% of Q2 revenue before doubtful accounts, up from 2.8% a year earlier. Receivables older than 150 days were 9.7% of receivables at June 30, compared with 16.1% at year-end.
Outlook, commentary and risks
Management emphasized growth through acquisitions, facility development, expanded referral networks and broader services. It expected to add approximately 500 beds during 2015 to facilities owned at December 31, 2014. No full-year revenue or earnings guidance is stated in the provided filing text.
Key risks include integration and realization of acquisition synergies; substantial indebtedness and restrictive covenants; reimbursement and regulatory exposure, including dependence of U.K. Partnerships in Care facilities on the NHS; staffing and clinician recruitment; patient-care incidents and litigation; collection risk; and currency fluctuations. A hypothetical 10% interest-rate increase was estimated to reduce annual net income and cash flows by $1.4 million; a hypothetical 10% GBP/USD move would change first-half net income by $2.5 million. Management reported no legal proceeding expected to have a material adverse effect and stated that disclosure controls were effective.
Most important facts for investors to verify
- How much of reported growth and EBITDA reflects acquired businesses versus same-facility performance, and whether integration benefits are being realized.
- Final acquisition valuations, including CRC goodwill and the measurement of acquired assets, liabilities and tax matters.
- Debt leverage, covenant headroom, interest-rate exposure and the company’s capacity to fund ongoing expansion and debt service.
- Receivables quality and collection trends, particularly self-pay balances and aging, as well as the effect of payer mix and NHS reimbursement.
- Progress against the expected 2015 bed additions, expansion-capital spending plans and post-quarter acquisitions.