Acadia Healthcare Company, Inc. — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
Acadia operates behavioral healthcare facilities in the U.S., U.K. and Puerto Rico. At year-end it operated 573 facilities with approximately 17,100 beds. Its strategy centers on acquisitions, organic bed growth and improving operations at existing facilities.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue, net of doubtful accounts | $2.811 billion | $1.794 billion |
| Revenue before doubtful-account provision | $2.853 billion | $1.830 billion |
| Income from continuing operations before tax | $33.0 million | $164.8 million |
| Income from continuing operations | $4.2 million | $111.4 million |
| Net income attributable to Acadia | $6.1 million | $112.6 million |
| Diluted EPS | $0.07 | $1.64 |
| Cash from continuing operating activities | $371.7 million | $242.1 million |
| Cash and cash equivalents at year-end | $57.1 million | $11.2 million |
| Total debt, net of issuance costs, discounts and premiums | $3.288 billion | $2.241 billion |
| Working capital | $85.1 million | $4.5 million |
- Revenue increased 55.9%, primarily due to acquisitions, especially Priory. Same-facility revenue before doubtful accounts rose 7.5%; same-facility patient days increased 7.2%.
- Segment EBITDA was $608.6 million versus $404.8 million. This non-GAAP measure excludes significant expenses and should not be treated as GAAP earnings.
- Reported operating costs included $135.1 million of depreciation and amortization, $181.3 million of net interest expense, $48.3 million of transaction costs and $178.8 million of losses on divestitures.
- The effective tax rate was 87.3%, versus 32.4%, largely reflecting differences between the accounting and tax treatment of the U.K. divestiture.
- Cash used in investing activities was $660.4 million, including $683.5 million for acquisitions and $307.5 million for capital expenditures, partly offset by $373.3 million received on divestitures. Financing activities provided $358.8 million.
Fourth-quarter results
Unaudited Q4 2016 revenue was $702.9 million; income before tax was $42.4 million; net income attributable to Acadia was $41.8 million; and diluted EPS was $0.48. Q3 included a $174.7 million divestiture loss and debt-extinguishment costs, contributing to a reported quarterly net loss attributable to Acadia of $117.8 million.
Material changes and transactions
- Acadia acquired Priory on February 16, 2016, for approximately $2.2 billion, including $1.9 billion cash and 4.0 million shares. The purchase expanded its U.K. business substantially.
- To address U.K. competition concerns, Acadia sold 22 U.K. facilities with approximately 1,000 beds to BC Partners for £320 million on November 30, 2016. The filing reports $178.8 million in total divestiture losses; the Priory-related disposal loss is separately described as $175.0 million.
- Acadia issued 11.5 million shares in January 2016, generating approximately $685 million net proceeds, and issued $390 million of 6.5% senior notes due 2024 to help fund Priory.
- Year-end debt included $1.5 billion of fixed-rate and $1.8 billion of variable-rate debt. The November refinancing increased the revolving facility to $500 million, extended facility maturities to November 2021 and reduced the effective rate on the revolver and Term Loan A by 50 basis points. Revolver availability was $491.7 million.
- Foreign-currency translation losses were $477.8 million in 2016. Acadia reported a $35.6 million adverse revenue impact from GBP/USD movements and had cross-currency swaps with $650 million aggregate notional to hedge exposure.
Outlook, risks and contingencies
- Management expected to add approximately 800 beds in 2017, excluding acquisitions. No numerical earnings or revenue guidance is provided in the supplied filing text.
- Key risks include dependence on government and U.K. public funding, reimbursement and utilization changes, potential U.S. healthcare-law changes, labor costs and staffing, regulatory compliance and patient-care incidents.
- Acadia highlighted acquisition integration and execution risks, including uncertain Priory synergies and potential liabilities from acquired businesses. It specifically disclosed no indemnification rights against Priory sellers and regulatory investigations involving certain CRC facilities.
- Other material exposures include high leverage and variable-rate interest costs, restrictive debt covenants, Brexit-related U.K. economic and currency uncertainty, litigation and insurance claims, and potential audits or repayment demands from payors.
- At December 31, 2016, Acadia reported compliance with its debt covenants. It also reported that management and the auditor considered internal control over financial reporting effective, but the assessment excluded Priory and certain other 2016 acquisitions.
- The company did not anticipate paying cash dividends in the foreseeable future. The filing says ordinary-course legal proceedings were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether post-acquisition operating performance and Priory integration support sustainable margins and cash generation, apart from acquisition-driven revenue growth.
- The composition and trajectory of debt, variable-rate exposure, covenant headroom, and the use of the $491.7 million revolver availability.
- The final accounting and tax consequences of the U.K. divestiture and the impact of GBP movements on reported results and equity.
- Current status and potential exposure from investigations, payor audits, acquired-company liabilities, and professional-liability claims.
- Whether the planned 2017 bed additions and organic patient-day growth were achieved without weakening care quality, staffing or occupancy economics.