Acadia Healthcare Company, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016. Acadia operates behavioral-health facilities in the United States, the United Kingdom and Puerto Rico. At quarter-end, it reported 585 facilities and more than 17,400 beds. Results reflect substantial acquisition-driven expansion, notably the February 16 acquisition of UK provider Priory for approximately $2.2 billion.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue, after doubtful-account provision | $616.8 million | $365.8 million |
| Income before taxes | $32.5 million | $21.2 million |
| Net income attributable to Acadia | $25.7 million | $14.6 million |
| Diluted EPS | $0.31 | $0.23 |
| Segment EBITDA | $131.0 million | $78.7 million |
| Cash from continuing operating activities | $59.3 million | $18.1 million |
Revenue grew approximately 69% year over year, and attributable net income approximately 76%. The reported net-income margin was about 4.2% versus 4.0%; pretax margin was 5.3% versus 5.8%. Segment EBITDA, a company-defined non-GAAP measure, was about 21.2% of revenue versus 21.5%.
Management reported same-facility revenue growth of 8.9%, driven by 8.6% growth in patient days and 0.5% higher revenue per day. Same-facility salaries, wages and benefits were 50.7% of revenue, improving from 51.5%.
At March 31, cash was $36.6 million and debt carrying value was approximately $3.57 billion, up from $2.24 billion at year-end. Working capital was negative $15.5 million, compared with positive $4.5 million at December 31; management attributed the change primarily to Priory’s negative working capital. The revolving facility had $241.5 million available, and Acadia said it was in compliance with debt covenants. Cash used in investing was $685.4 million, including $580.1 million for acquisitions and $90.1 million for capital expenditures. Financing provided $654.0 million.
Material changes versus the prior period
- Priory added 324 facilities and approximately 7,100 beds, materially increasing UK operations. US and UK facility revenue was $408.3 million and $207.0 million, respectively, versus $290.5 million and $73.3 million a year earlier.
- Acadia funded the Priory transaction with new debt and an equity offering: the quarter included a $390 million 6.5% senior-note issuance, incremental term loans and $685.0 million net proceeds from issuing shares. Common shares outstanding increased to 86.5 million from 70.7 million at year-end.
- Interest expense increased to $37.7 million from $22.1 million, and depreciation and amortization rose to $28.0 million from $13.1 million, largely reflecting acquisitions and investment.
- Transaction-related expenses rose to $26.3 million from $18.4 million. The effective tax rate fell to 21.9% from 31.2%, primarily due to Priory’s lower-tax jurisdiction and permanent-reinvestment treatment.
- Foreign-currency translation loss was $48.4 million, contributing to comprehensive loss attributable to Acadia of $22.7 million despite positive net income.
Outlook, commentary and risks
- Management expected to add approximately 800 beds during 2016, excluding acquisitions. The filing does not provide formal financial guidance.
- The UK Competition and Markets Authority was reviewing the Priory acquisition. Acadia could not predict when the review would conclude, could not integrate Priory pending review, and might be required to divest businesses.
- Management highlighted acquisition integration and synergy realization, significant indebtedness and covenant restrictions, reimbursement and government-payor dependence, staffing costs and recruitment, regulation, patient incidents, legal claims, competition and foreign-exchange movements as risks. Priory and Partnerships in Care facilities have significant NHS payment exposure.
- NHS payments accounted for 30.9% of revenue before doubtful accounts, up from 19.4% a year earlier; Medicaid accounted for 28.4%, down from 33.8%.
- A hypothetical 10% increase in interest rates would reduce annual net income and cash flow by an estimated $3.7 million. A hypothetical 10% GBP/USD movement would change quarterly net income by an estimated $2.5 million.
- On April 1, 2016, Acadia acquired Serenity Knolls, a 30-bed facility, for approximately $10 million. Management said ordinary-course claims and legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Progress and outcome of the CMA review, including any integration restrictions or required divestitures.
- How much revenue and earnings growth is organic: reported results include acquisitions, while pro forma revenue rose to $725.7 million from $685.5 million but pro forma pretax income fell to $12.4 million from $14.8 million.
- Debt, interest-rate exposure, covenant headroom, and the company’s capacity to fund capital spending and acquisition plans.
- Cash conversion and working-capital trends, including collection performance and receivables aging.
- Operating performance and reimbursement exposure in the UK, particularly NHS dependence, and the effects of GBP/USD movements.