Acadia Healthcare Company, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The September 30 financial results include the YFCS acquisition, completed April 1, but exclude the PHC merger, completed November 1. Amounts below are in millions unless stated otherwise.
Business context and results
Acadia operates inpatient psychiatric and substance-abuse facilities, residential treatment centers, group homes and outpatient behavioral-health services. It acquired YFCS, which operated 13 facilities, for approximately $178 million. Following the subsequent PHC merger, Acadia reported operating 34 facilities with approximately 1,950 beds in 18 states.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2011 / 2010 | $63.1 / $15.9; up 297.3% | $146.0 / $48.3; up 202.0% |
| Income (loss) from continuing operations before tax, 2011 / 2010 | $4.6 / $1.8 | $(14.8) / $6.1 |
| Income (loss) from continuing operations, 2011 / 2010 | $3.7 / $1.6 | $(18.2) / $5.7 |
| Net income (loss), 2011 / 2010 | $3.1 / $1.6 | $(19.0) / $5.7 |
| Continuing-operations margin after tax, 2011 / 2010 | 5.9% / 10.4% | (12.5)% / 11.9% |
| Cash from continuing operating activities, 2011 / 2010 | Not presented for the quarter | $8.6 / $5.3 |
Financial position and liquidity
- At September 30, cash was $1.3; current assets were $36.4 and current liabilities $36.4, leaving slightly negative working capital of approximately $0.05.
- Debt was $138.1: $131.6 in term loans and $6.5 drawn on the revolving facility. The balance sheet classified $6.75 as current and $131.4 as long-term. The company reported $23.1 of revolver availability, net of a $0.4 letter of credit.
- Continuing investing activities used $187.6 in the first nine months, primarily for YFCS ($178.0), capital expenditures ($6.8) and real estate ($2.2). Financing activities provided $172.9, including $135.0 of term borrowings, $6.5 of revolver borrowings and $51.0 of Holdings contributions. Cash declined $7.4 from year-end 2010.
- The secured facility carried a 4.2% borrowing rate at September 30, matures April 1, 2016, is secured by substantially all company and domestic subsidiary assets, and includes financial covenants. Acadia said it was in compliance at quarter-end.
Material changes and unusual items
- Management attributed most revenue growth to YFCS, which contributed $45.4 of third-quarter revenue and $92.4 from April through September. Same-facility patient days grew 11.0% in the quarter and 7.0% year to date; outpatient visits grew 13.8% and 16.4%, respectively.
- Nine-month salaries, wages and benefits included $19.8 of equity-based compensation, and transaction-related expenses were $10.6, largely associated with YFCS and the PHC merger. These costs contributed materially to the nine-month loss. Management said equity-based compensation was not expected to be as significant in future periods following the PHC merger.
- Revenue was highly concentrated in Medicaid: 81% in the third quarter and 77% for the first nine months of 2011, versus 38% and 43% in the comparable 2010 periods. Medicare represented 7% and 8%, respectively. The changing payer mix largely reflects the enlarged business after YFCS.
- On November 1, after quarter-end, Acadia completed the PHC merger and issued $150.0 of 12.875% senior notes due 2018. Proceeds were used in part for a $74.4 dividend to existing Acadia stockholders, repayment of $26.4 of PHC debt, $5.0 cash merger consideration, a $20.6 fee to terminate the Waud Capital Partners services agreement, and transaction expenses. The notes were issued at a $2.5 discount. The merger also involved issuing 4,891,667 Acadia shares to PHC stockholders.
Outlook, risks and contingencies
- The filing provides no quantified financial guidance. Management described a strategy of acquiring and developing behavioral-health facilities, improving facility operations, and expanding services and referral networks.
- Key stated risks include substantial indebtedness and ability to service or incur debt; reliance on government and third-party payers; regulatory compliance and reimbursement interpretation; staffing and physician recruitment; patient volumes and competition; and integration of YFCS and PHC and realization of expected synergies.
- The company noted ordinary-course personal-injury, malpractice, contract and employment claims, but management did not believe any current proceeding would materially adversely affect the business. Medicare and Medicaid settlements remain subject to later audit and adjustment; management said it had made adequate provision but could not assure that final adjustments would not be material.
- Variable-rate debt exposed earnings and cash flow to interest-rate changes; the filing estimated that a hypothetical 10% rate increase would reduce annual net income and cash flow by approximately $0.8. The subsequent senior notes add fixed-rate debt at 12.875%.
Important facts for investors to verify
- Post-merger total debt, interest burden, liquidity and covenant headroom, including the effect of the senior notes and the PHC debt repayment.
- Whether YFCS and PHC integration delivers the operating improvements and synergies anticipated, and how same-facility trends develop.
- Medicaid reimbursement exposure, receivable collection and aging, and the effect of audits or final government-payor settlements.
- The nature and recurrence of transaction, compensation and other unusual expenses; the filing’s September 30 results exclude PHC.
- The company’s ability to meet debt obligations and its leverage and fixed-charge coverage requirements as covenant limits tighten.