Acadia Healthcare Company, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparison with the corresponding 2016 periods. Unless otherwise stated, amounts below are U.S. dollars.
Business context
Acadia operates behavioral healthcare facilities across the United States, the United Kingdom and Puerto Rico. At June 30, 2017, it operated 576 facilities with approximately 17,300 beds. Its reporting segments are U.S. Facilities and U.K. Facilities.
Financial performance and liquidity
- Q2 revenue: $715.9 million, down 5.4% year over year. Revenue before doubtful-account provisions was $725.6 million; the provision was $9.7 million.
- Q2 earnings: Net income was $49.6 million versus $55.6 million; net income attributable to Acadia was $49.6 million versus $56.4 million. Diluted EPS was $0.57 versus $0.65. Net margin was approximately 6.9% versus 7.3%.
- First-half revenue and earnings: Revenue was $1.395 billion, up 1.6%; net income was $84.4 million versus $81.0 million; attributable net income was $84.6 million versus $82.1 million. Diluted EPS was $0.97 in both periods. Net margin was approximately 6.0% versus 5.9%.
- Segment EBITDA: Q2 was $162.2 million versus $172.2 million; first half was $298.6 million versus $303.2 million. U.S. segment EBITDA increased in both periods, while U.K. segment EBITDA declined.
- Cash flow: First-half cash from continuing operating activities was $188.4 million, compared with $185.8 million; total operating cash flow was $187.6 million. Investing used $146.3 million, including $117.5 million in capital expenditures and $22.9 million for real estate. Financing used $23.2 million. Cash increased $22.4 million to $79.4 million.
- Liquidity: Working capital was $112.5 million, up from $85.1 million at year-end 2016. The company reported $493.5 million of revolver availability, net of $6.5 million in standby letters of credit. Days sales outstanding rose to 37 from 34.
- Debt: Debt carrying value was $3.275 billion, compared with $3.288 billion at December 31, 2016. The company had no revolving-credit borrowings outstanding and was in compliance with its debt covenants. Q2 net interest expense was $43.5 million, down from $48.8 million.
Material changes and management commentary
- Q2 revenue before doubtful-account provisions fell $41.5 million, primarily reflecting the U.K. facility divestiture ($43.1 million of revenue impact) and weaker sterling ($35.4 million impact), partly offset by same-facility growth. Same-facility revenue increased 6.3%, with patient days up 4.6% and revenue per day up 1.8%.
- For the first half, same-facility revenue increased 5.6%, as patient days grew 4.4% and revenue per day rose 1.2%. Reported revenue growth also reflected the contribution of facilities acquired in 2016, offset by the divestiture and currency effects.
- Q2 pre-tax income was $66.2 million versus $73.9 million; first-half pre-tax income was $114.7 million versus $106.3 million. First-half operating expenses rose 1.1%; other operating expenses and depreciation increased, while transaction expenses and interest expense decreased.
- Management expected to add approximately 800 beds during 2017, excluding acquisitions; 173 beds had been added to existing facilities in the first half. The company described growth initiatives including expansion, new services, referral development and selective acquisitions. No earnings or revenue guidance is stated in the provided filing text.
Risks, contingencies and unusual items
- Foreign exchange and U.K. exposure: The filing identifies sterling weakness after the Brexit vote as a risk to translated revenue and earnings. A hypothetical 10% exchange-rate change was estimated to change annual net income by $10.8 million. Cross-currency swaps hedge a portion of exposure.
- Debt and interest rates: Significant indebtedness, variable-rate borrowing and covenant requirements remain risks. A hypothetical 10% increase in interest rates was estimated to reduce annual net income and cash flows by $4.5 million. The May 2017 term-loan repricing reduced applicable spreads; the company recorded $0.8 million of debt-extinguishment costs.
- Other Q2 unusual costs: Transaction-related expenses were $9.1 million, including $6.9 million of severance and contract-termination costs. First-half transaction expenses were $13.2 million.
- Accounting and tax: Adoption of share-based payment accounting guidance increased first-half income tax expense by $1.7 million and the effective tax rate by 1.5 percentage points; the reported first-half effective tax rate was 26.4%. Management was evaluating the effect of forthcoming revenue-recognition and lease standards.
- Legal and operating risks: Management said ordinary-course claims and proceedings were not expected to have a material adverse effect. Disclosed risks include regulation and reimbursement, NHS dependence, staffing and labor costs, patient incidents, collections, cybersecurity, competition and acquisition integration. The filing reports effective disclosure controls and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether same-facility patient-day and revenue-per-day growth continues, and how it translates into margins and earnings.
- The ongoing effects of the U.K. divestiture and sterling movements, including the relationship between U.K. operating performance and reported results.
- Debt service capacity, covenant headroom, variable-rate exposure and continued availability of the revolving credit facility.
- Execution of the stated 2017 bed-expansion plan and the costs, utilization and returns associated with expansion capital spending.
- Accounts-receivable aging and collections: receivables were $288.1 million, and 15.1% of the disclosed aging distribution was over 150 days past due.