Business context and reporting period
Acadia Healthcare Company, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. It operates behavioral healthcare facilities in the U.S., U.K. and Puerto Rico. At year-end, it operated 583 facilities with approximately 18,100 beds; 2018 capacity additions totaled 651 beds. The filing also presents unaudited quarterly results, including the fourth quarter.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $3.012 billion | $2.836 billion |
| Segment EBITDA (non-GAAP) | $593.6 million | $604.4 million |
| Net income (loss) attributable to Acadia | $(175.8) million | $199.8 million |
| Diluted EPS | $(2.01) | $2.30 |
| Cash from continuing operating activities | $416.6 million | $401.3 million |
| Capital expenditures | $341.5 million | $274.2 million |
- Revenue increased 6.2%, supported by same-facility growth and a $36.2 million favorable currency translation effect. U.S. and U.K. revenue were $1.9 billion and $1.1 billion, respectively.
- Segment EBITDA margin was approximately 19.7%, versus 21.3% in 2017. U.S. segment EBITDA rose to $488.2 million from $475.3 million; U.K. segment EBITDA fell to $185.8 million from $198.6 million.
- Net loss primarily reflected $337.9 million of impairment charges, including $325.9 million of non-cash U.K. goodwill impairment, and $22.1 million of legal settlement expense. The U.K. impairment followed weaker performance and labor-market pressures.
- At year-end, cash was $50.5 million, working capital $34.0 million, and total debt (net of issuance costs, discounts and premiums) $3.193 billion. The company reported $486.7 million available on its $500 million revolver and compliance with its financial covenants.
- Debt included approximately $1.7 billion of variable-rate borrowings. Net interest expense was $185.4 million, up from $176.0 million. A hypothetical 0.50 percentage-point increase in rates was estimated to reduce annual net income and cash flow by $7.3 million.
Material changes and fourth-quarter results
- FY 2018 revenue rose from 2017, but operating costs increased; salaries, wages and benefits rose to 55.1% of revenue from 54.2%. Management cited higher U.K. contract labor costs, particularly agency staffing amid nursing and clinical labor shortages.
- U.S. same-facility revenue grew 5.4%; patient days rose 2.7%. U.K. same-facility revenue grew 4.7%, but EBITDA margin declined 240 basis points as census and higher expenses, including contract labor, pressured results.
- Fourth-quarter revenue was $743.5 million, compared with $724.5 million a year earlier. Acadia recorded a $331.6 million attributable net loss, versus $69.6 million of attributable net income in Q4 2017; Q4 2018 included impairment and legal settlement charges.
- Acadia adopted the new revenue standard in 2018; management said adoption did not significantly affect consolidated financial statements. The presentation of doubtful accounts changed, so reported-period comparisons should be read with that accounting change in mind.
Outlook, commentary, risks and contingencies
- Management expected to add approximately 700 beds in 2019, excluding acquisitions. The filing provides no clear earnings or revenue guidance.
- After year-end, Acadia acquired Whittier Pavilion for approximately $17.9 million and Mission Treatment for approximately $22.5 million, plus a working capital settlement. February 2019 credit amendments changed EBITDA definitions and increased permitted leverage flexibility.
- The company’s principal exposures include government and public-payor reimbursement, U.K. NHS and local-authority funding and commissioning, staffing costs, patient-care and regulatory compliance, acquisition execution, foreign exchange and Brexit uncertainty, and substantial debt and covenant restrictions.
- A False Claims Act investigation involving lab-service billing at seven West Virginia treatment centers resulted in a $19.0 million reserve; the ultimate liability was not clear. Separate federal investigations of four facilities concerning alleged medical necessity, eligibility, discharge, length-of-stay and patient-care issues remained unquantified.
- Other notable obligations include $1.061 billion of operating lease commitments and a U.K. pension-plan deficit of approximately £3.5 million under the financial-statement note (the risk-factor discussion cites £2.8 million, a difference investors may wish to reconcile). The company reported effective disclosure controls, effective internal control over financial reporting and unqualified auditor opinions.
Important facts for investors to verify
- Review the U.K. goodwill impairment valuation, forecast assumptions and continuing U.K. census, margin and staffing trends.
- Track the West Virginia lab-services investigation, the other federal investigations, and whether reserves or potential liabilities change.
- Assess debt service, variable-rate exposure, covenant headroom and the effect of the February 2019 credit amendments.
- Verify the quality and collectability of receivables, including the disclosed fourth-quarter $8.0 million U.S. accounts-receivable adjustment related primarily to CTCs and Wisconsin Medicaid.
- Monitor whether 2019 bed additions and post-year-end acquisitions deliver expected occupancy, operating results and cash generation.