Acadia Healthcare Company, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Dollar amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context
Acadia operates behavioral healthcare facilities in the U.S., U.K. and Puerto Rico. At quarter-end it operated 589 facilities with approximately 18,200 beds. Its U.S. segment had 231 facilities and approximately 9,600 beds; its U.K. segment had 358 facilities and approximately 8,600 beds. The U.K. business sale process, launched in January 2020, was suspended in mid-March because of COVID-19 market conditions.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $750.3 | $789.4 | $1,533.1 | $1,550.0 |
| Income before tax | $49.9 | $59.8 | $89.8 | $96.7 |
| Net income attributable to Acadia | $41.1 | $48.1 | $74.5 | $77.6 |
| Diluted EPS | $0.46 | $0.55 | $0.84 | $0.88 |
| Segment EBITDA | $144.4 | $158.9 | $277.3 | $294.9 |
| Operating cash flow | Not separately shown for Q2 | $264.9 | $128.7 |
Q2 revenue decreased 4.9% year over year; management attributed the decline to a 3.5% same-facility revenue decrease and a $9.7 million unfavorable currency impact. Q2 Segment EBITDA fell 9.1%. For the first half, revenue declined 1.1% and Segment EBITDA declined 6.0%. Segment EBITDA is a non-GAAP measure.
Q2 income included $18.1 million of CARES Act grant income. The filing also reports $20 million of Public Health and Social Services Emergency Fund payments received and approximately $45 million of CMS accelerated/advance payments, which are repayable. The CMS advance was expected to be recouped from Medicare claims over August–November 2020. Q2 diluted EPS and profit comparisons should be considered in light of this grant income and the effects of pandemic-related volume and cost changes.
At June 30, cash and cash equivalents were $211.9 million, total debt carrying value was $3,126.9 million, and revolving-credit availability was $485.6 million. Cash was up from $124.2 million at year-end 2019. First-half operating cash flow rose to $264.9 million, primarily due to government relief receipts and payroll tax deferrals. Capital expenditures were $132.1 million; cash used in investing activities was $139.9 million. Acadia reported covenant compliance at quarter-end.
Material changes and unusual items
- U.S. Q2 same-facility revenue decreased 3.4%; patient days declined 0.7%, admissions declined 4.6%, and average length of stay increased 4.1%. The U.S. same-facility EBITDA margin improved 70 basis points.
- U.K. Q2 same-facility revenue decreased 3.8%; patient days declined 4.5%, admissions declined 22.0%, and average length of stay increased 22.4%. The U.K. same-facility EBITDA margin declined 350 basis points.
- Management reported improving U.S. same-facility patient-day trends: down 6.7% in April, up 0.1% in May and up 4.7% in June versus prior-year months. July was up 5.4%. U.K. same-facility patient days were down 3.4% in June and 2.1% in July.
- Acadia issued $450 million of 5.5% senior notes due 2028 and funded the redemption of its $150 million 6.125% notes due 2021 and $300 million 5.125% notes due 2022. It recorded $3.3 million of debt-extinguishment costs. The credit agreement was amended in April to increase permitted leverage ratios for the remainder of 2020.
- Foreign currency translation losses contributed to a $86.0 million first-half comprehensive loss attributable to Acadia, despite positive net income attributable to the company.
Outlook, commentary and risks
Management said COVID-19 adversely affected operations and that its future financial impact could not then be quantified. The filing warned that pandemic-related referral and volume declines, staffing costs, supply disruptions and higher PPE prices could harm results, cash flow, liquidity and debt-service capacity. Management also cited increased unemployment and the risk of deterioration in receivable collectability. It stated that available cash, operating cash flow and revolver capacity were expected to meet liquidity needs for the next 12 months, while cautioning that future conditions remained uncertain.
For 2020, management expected to add more than 500 beds, excluding acquisitions. It also expected approximately $39 million of cash benefit from deferred employer Social Security taxes, approximately $16 million from 2019 interest-deduction changes, and $15–$20 million from 2020 interest-deduction changes; these were estimates, not assured outcomes. The filing disclosed no earnings or revenue guidance.
Other key exposures include significant indebtedness and restrictive covenants, LIBOR transition and interest-rate risk, GBP/USD currency risk, the suspended U.K. sale process, and potential goodwill or long-lived-asset impairment if conditions worsen. Acadia disclosed securities and derivative litigation, a California wage-and-hour class/PAGA matter for which it recorded approximately $4.0 million for expected settlement and legal fees in Q2, and government investigations concerning regulatory and billing matters. Potential liabilities for the securities cases and government investigations were not quantifiable in the filing.
Important facts for investors to verify
- Whether U.S. and U.K. patient volumes and referral trends continued to recover after July, and how renewed COVID-19 disruptions affected subsequent periods.
- How much of reported cash flow and earnings reflected temporary government support, tax deferrals or other working-capital timing, and the repayment/recoupment schedule for the approximately $45 million CMS advance.
- Debt maturities, refinancing plans, covenant headroom and the impact of variable rates; total debt carrying value was approximately $3.13 billion at quarter-end.
- Whether the U.K. sale process resumed, and the effect of foreign-exchange movements and U.K. operating performance.
- Developments in the disclosed litigation and government investigations, including potential costs beyond amounts accrued.