Acadia Healthcare Company, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Amounts below are in U.S. dollars, millions, except per-share data and where noted.
Business context
Acadia operates inpatient psychiatric, residential treatment, substance-abuse and outpatient behavioral-health facilities. At September 30, 2013, it operated 47 facilities with approximately 3,900 licensed beds across 21 states and Puerto Rico. Growth strategy centers on acquisitions, facility expansion and improving operating performance.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue, net of doubtful accounts | $184.7 | $103.1 | $523.4 | $293.2 |
| Revenue before doubtful accounts | $190.6 | $104.6 | $539.2 | $298.6 |
| Income from continuing operations before tax | $22.3 | $10.3 | $49.3 | $25.3 |
| Income from continuing operations | $14.5 | $6.6 | $30.9 | $16.0 |
| Net income | $14.4 | $6.5 | $30.3 | $16.0 |
| Diluted EPS | $0.29 | $0.15 | $0.60 | $0.43 |
Margins: Continuing-operations pretax margin was 12.1% in Q3 and 9.4% year to date, versus 10.0% and 8.6%, respectively, in 2012. Continuing-operations net margin was 7.9% in Q3 and 5.9% year to date, versus 6.4% and 5.4%. These margins use reported net revenue.
- Cash flow: Continuing operating cash flow was $45.4 for the first nine months, compared with $23.7 in 2012. Investing used $192.0, including $135.6 for acquisitions and $50.7 for capital expenditures; financing provided $101.8. Cash declined $45.4 to $4.0.
- Liquidity: Working capital was $41.6, down from $69.1 at year-end 2012. Current assets were $142.9 and current liabilities $101.3. The revolving credit facility had $80.1 of availability.
- Debt: Total debt carrying amount was $585.3 ($13.3 current; $572.0 long-term), up from $473.3 at December 31, 2012. Debt included $313.9 under the senior credit facility, $96.2 of 12.875% notes, $150.0 of 6.125% notes and $25.2 of revenue bonds. The company reported compliance with its debt covenants.
- Receivables: Net accounts receivable was $93.3 versus $63.9 at year-end. Days sales outstanding rose to 46 from 39; management attributed the increase mainly to longer collection periods at 2013 acquisitions.
Material changes versus prior periods
- Revenue before doubtful accounts rose 82.2% in Q3 and 80.6% year to date. Acquisitions made the largest contribution; same-facility revenue before doubtful accounts increased 10.5% in Q3 and 10.7% year to date, supported by patient-day growth of 8.4% and 9.3%, respectively, and modest revenue-per-day growth.
- The provision for doubtful accounts increased to 3.1% of pre-provision revenue in Q3 from 1.4%; year to date it was 2.9% versus 1.8%. The filing attributes the increase primarily to payor mix at acquired facilities. Medicaid represented 45.9% of Q3 pre-provision revenue versus 60.5% a year earlier; Medicare and commercial shares increased.
- Operating leverage improved in some cost areas: salaries, wages and benefits, excluding equity compensation, fell to 55.5% of revenue in Q3 from 57.6%, and to 56.4% year to date from 58.6%. However, acquired facilities had higher professional-fee, supply and other-operating-expense ratios, contributing to increases in those cost ratios.
- Interest expense increased to $9.5 in Q3 and $27.7 year to date, primarily reflecting additional borrowings and the new notes, partly offset by the redemption of higher-rate debt.
Outlook, risks and unusual items
- Expansion outlook: Management expected to add more than 300 beds during 2013, excluding acquisitions. During the first nine months it added 195 beds and opened a 60-bed facility; a further 42-bed facility opened in October. The UMC-acquired 75-bed Tampa hospital also opened October 1. The filing provides no clear full-year revenue or earnings guidance.
- Acquisitions: 2013 acquisitions included Greenleaf, Delta Medical Center, the UMC facilities and The Refuge, with aggregate cash consideration described in the filing. Longleaf was acquired October 1, after quarter-end, for $8.5. Purchase-price allocations remained preliminary for certain acquired assets and liabilities.
- Debt refinancing and unusual expense: In March, Acadia issued $150.0 of 6.125% notes due 2021 and redeemed $52.5 of 12.875% notes. The redemption generated $9.35 of debt-extinguishment expense, including the redemption premium and deferred financing-cost write-off. Nine-month transaction expenses were $3.8, mainly acquisition-related.
- Key risks: The filing highlights reimbursement and payor changes, bad-debt collection, regulatory and compliance requirements, patient incidents and related investigations, labor recruitment and cost, competition, acquisition integration, indebtedness and restrictive covenants, and access to patients under managed-care contracting arrangements. A hypothetical 10% rise in interest rates was estimated to reduce annual net income and cash flow by $0.6.
- Contingencies: The company described ordinary-course personal-injury, malpractice, contract, tort and employment claims; management did not believe any pending proceeding would have a material adverse effect. Park Royal acquisition consideration includes contingent payments of up to $7.0 tied to financial targets. No material off-balance-sheet arrangements were identified beyond $0.4 of standby letters of credit.
Important facts for investors to verify
- How much of reported growth and margin improvement reflects acquired operations versus same-facility performance, and whether acquisition synergies are being realized.
- Whether higher doubtful-account provisions, longer DSO and the aging of receivables (11.8% over 150 days at September 30) indicate sustained collection or payor-mix pressure.
- Cash generation relative to substantial acquisition and expansion spending, the low period-end cash balance, and remaining revolver availability.
- Debt-service capacity, floating-rate exposure, covenant headroom and the scheduled principal repayments under the credit facility.
- Final purchase accounting for recent acquisitions, integration costs, and the operating contribution and ramp-up of facilities opened or acquired near quarter-end.