Acadia Healthcare Company, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Acadia operated 589 behavioral healthcare facilities, with approximately 18,000 beds, across the U.S., U.K. and Puerto Rico.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $777.3 million | $760.9 million | $2,327.2 million | $2,268.9 million |
| Income before taxes | $49.6 million | $55.0 million | $146.2 million | $172.4 million |
| Net income attributable to Acadia | $42.6 million | $46.2 million | $120.2 million | $155.9 million |
| Diluted EPS | $0.48 | $0.53 | $1.37 | $1.78 |
| Segment EBITDA | $146.6 million | $148.9 million | $441.5 million | $459.7 million |
| Operating cash flow | Not separately presented for the quarter | $213.5 million | $288.7 million |
Q3 revenue rose 2.1%, but Acadia-attributable net income fell 7.9%; reported net margin declined to 5.5% from 6.1%. For the first nine months, revenue increased 2.6%, while attributable net income fell 22.9% and diluted EPS declined to $1.37 from $1.78. Segment EBITDA is a non-GAAP measure defined by the company.
Q3 U.S. revenue was $509.4 million, up 4.2%; U.K. revenue was $267.9 million, down 1.6% as reported. Management said same-facility revenue growth was partly offset by adverse USD/GBP translation: $14.6 million in Q3 and $48.3 million for the nine-month period.
Liquidity, debt and investment
- Cash and equivalents were $92.9 million at September 30, 2019, versus $50.5 million at year-end 2018; working capital was $78.7 million versus $34.0 million.
- Operating cash flow for the first nine months fell to $213.5 million from $288.7 million. The company cited lower U.K. earnings, legal settlement payments and increased net cash taxes.
- Long-term debt, including current maturities and net of unamortized costs, was $3.175 billion; cash was $92.9 million. The $500 million revolving facility had $485.1 million available, with $14.9 million of standby letters of credit outstanding. The company reported compliance with debt covenants.
- Cash capital expenditures were $202.7 million for the nine months, including $141.1 million for expansion and $61.6 million for routine needs. Acquisitions used $44.9 million; debt principal payments were $24.7 million.
- Adoption of the lease accounting standard added $479.9 million of operating lease right-of-use assets and $506.9 million of operating lease liabilities at quarter-end. Total operating and finance lease liabilities were $557.4 million.
Operating changes and management commentary
- U.S. same-facility results for Q3: revenue +4.9%, patient days +2.8%, admissions +4.7%, and EBITDA margin down 140 basis points. Management attributed the margin pressure to temporary operational issues at certain facilities.
- U.K. same-facility results for Q3: revenue +4.0%, patient days down 1.1%, and EBITDA margin down 30 basis points. For the first nine months, U.K. EBITDA margin fell 270 basis points; management cited lower census and higher operating expenses, particularly labor.
- Acadia acquired Bradford, Whittier and Mission Treatment for total cash consideration of approximately $44.9 million. It also closed a 168-bed New Mexico residential treatment center in Q1 and a 108-bed Montana center in Q3; the Montana property was held for sale.
- The company commenced a review of strategic alternatives for its U.K. operations, including a potential sale. Management said the path and likelihood of any alternative remained uncertain.
- Management expected to add approximately 650 beds during 2019, excluding acquisitions. It reported 414 beds added during the first nine months, including capacity additions and two new facilities. No earnings or revenue guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- In Q2, Acadia paid $17.0 million to settle a West Virginia Medicaid billing matter involving lab claims at seven treatment centers and entered into a corporate integrity agreement for its CRC Health subsidiary.
- Government investigations involving facility claims and patient-care or regulatory requirements remained ongoing; the company said potential liability could not be quantified. Securities class-action and related derivative litigation also remained unresolved, with potential liability not quantifiable.
- Foreign currency translation loss was $60.0 million in Q3 and contributed to a consolidated comprehensive loss attributable to Acadia of $5.8 million, despite positive net income.
- Q3 transaction-related expenses were $5.8 million, versus $2.4 million; nine-month expenses were $15.3 million, versus $10.0 million, primarily reflecting termination, restructuring and strategic review costs.
- Risks highlighted include substantial indebtedness and covenant restrictions, labor availability and costs, reliance on government payors (including the U.K. NHS), foreign exchange exposure, regulatory compliance and litigation. A hypothetical 10% increase in interest rates was estimated to reduce annual net income and cash flow by $4.9 million; a hypothetical 10% GBP/USD exchange-rate change was estimated to change annual net income by $7.2 million.
Most important facts for investors to verify
- Whether U.S. facility operating issues prove temporary and U.S. labor and other costs stabilize.
- Whether U.K. census, labor costs and margins recover, and the outcome of the U.K. strategic review.
- Cash conversion and capital spending needs, including the causes of lower year-to-date operating cash flow.
- Debt maturities, covenant headroom, variable-rate exposure and the company’s ability to manage its significant debt and lease obligations.
- Potential financial and operating consequences of government investigations, the West Virginia settlement and corporate integrity agreement, and unresolved securities litigation.