Acadia Healthcare Company, Inc. annual report, FY2018

Business context and reporting period

Acadia Healthcare Company, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. It operates behavioral healthcare facilities in the U.S., U.K. and Puerto Rico. At year-end, it operated 583 facilities with approximately 18,100 beds; 2018 capacity additions totaled 651 beds. The filing also presents unaudited quarterly results, including the fourth quarter.

Financial performance and liquidity

Metric	FY 2018	FY 2017
Revenue	$3.012 billion	$2.836 billion
Segment EBITDA (non-GAAP)	$593.6 million	$604.4 million
Net income (loss) attributable to Acadia	$(175.8) million	$199.8 million
Diluted EPS	$(2.01)	$2.30
Cash from continuing operating activities	$416.6 million	$401.3 million
Capital expenditures	$341.5 million	$274.2 million

• Revenue increased 6.2%, supported by same-facility growth and a $36.2 million favorable currency translation effect. U.S. and U.K. revenue were $1.9 billion and $1.1 billion, respectively.
• Segment EBITDA margin was approximately 19.7%, versus 21.3% in 2017. U.S. segment EBITDA rose to $488.2 million from $475.3 million; U.K. segment EBITDA fell to $185.8 million from $198.6 million.
• Net loss primarily reflected $337.9 million of impairment charges, including $325.9 million of non-cash U.K. goodwill impairment, and $22.1 million of legal settlement expense. The U.K. impairment followed weaker performance and labor-market pressures.
• At year-end, cash was $50.5 million, working capital $34.0 million, and total debt (net of issuance costs, discounts and premiums) $3.193 billion. The company reported $486.7 million available on its $500 million revolver and compliance with its financial covenants.
• Debt included approximately $1.7 billion of variable-rate borrowings. Net interest expense was $185.4 million, up from $176.0 million. A hypothetical 0.50 percentage-point increase in rates was estimated to reduce annual net income and cash flow by $7.3 million.

Material changes and fourth-quarter results

• FY 2018 revenue rose from 2017, but operating costs increased; salaries, wages and benefits rose to 55.1% of revenue from 54.2%. Management cited higher U.K. contract labor costs, particularly agency staffing amid nursing and clinical labor shortages.
• U.S. same-facility revenue grew 5.4%; patient days rose 2.7%. U.K. same-facility revenue grew 4.7%, but EBITDA margin declined 240 basis points as census and higher expenses, including contract labor, pressured results.
• Fourth-quarter revenue was $743.5 million, compared with $724.5 million a year earlier. Acadia recorded a $331.6 million attributable net loss, versus $69.6 million of attributable net income in Q4 2017; Q4 2018 included impairment and legal settlement charges.
• Acadia adopted the new revenue standard in 2018; management said adoption did not significantly affect consolidated financial statements. The presentation of doubtful accounts changed, so reported-period comparisons should be read with that accounting change in mind.

Outlook, commentary, risks and contingencies

• Management expected to add approximately 700 beds in 2019, excluding acquisitions. The filing provides no clear earnings or revenue guidance.
• After year-end, Acadia acquired Whittier Pavilion for approximately $17.9 million and Mission Treatment for approximately $22.5 million, plus a working capital settlement. February 2019 credit amendments changed EBITDA definitions and increased permitted leverage flexibility.
• The company’s principal exposures include government and public-payor reimbursement, U.K. NHS and local-authority funding and commissioning, staffing costs, patient-care and regulatory compliance, acquisition execution, foreign exchange and Brexit uncertainty, and substantial debt and covenant restrictions.
• A False Claims Act investigation involving lab-service billing at seven West Virginia treatment centers resulted in a $19.0 million reserve; the ultimate liability was not clear. Separate federal investigations of four facilities concerning alleged medical necessity, eligibility, discharge, length-of-stay and patient-care issues remained unquantified.
• Other notable obligations include $1.061 billion of operating lease commitments and a U.K. pension-plan deficit of approximately £3.5 million under the financial-statement note (the risk-factor discussion cites £2.8 million, a difference investors may wish to reconcile). The company reported effective disclosure controls, effective internal control over financial reporting and unqualified auditor opinions.

Important facts for investors to verify

1. Review the U.K. goodwill impairment valuation, forecast assumptions and continuing U.K. census, margin and staffing trends.
2. Track the West Virginia lab-services investigation, the other federal investigations, and whether reserves or potential liabilities change.
3. Assess debt service, variable-rate exposure, covenant headroom and the effect of the February 2019 credit amendments.
4. Verify the quality and collectability of receivables, including the disclosed fourth-quarter $8.0 million U.S. accounts-receivable adjustment related primarily to CTCs and Wisconsin Medicaid.
5. Monitor whether 2019 bed additions and post-year-end acquisitions deliver expected occupancy, operating results and cash generation.