Acadia Healthcare Company, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; the 2015 annual figures include acquisitions only from their respective closing dates. Priory was acquired after year-end, on February 16, 2016.
Business context
Acadia operates behavioral healthcare facilities in the United States, United Kingdom and Puerto Rico. At year-end it operated 258 facilities with 9,968 beds. Its growth strategy centers on acquisitions, expansion of existing facilities and improving facility performance. The year included the acquisition of CRC Health and numerous other facilities; the Priory acquisition substantially expanded its U.K. footprint after year-end.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue, net of doubtful-account provision | $1.794 billion | $1.005 billion |
| Income from continuing operations before taxes | $164.8 million | $126.2 million |
| Income from continuing operations | $111.4 million | $83.2 million |
| Net income attributable to Acadia | $112.6 million | $83.0 million |
| Diluted EPS from continuing operations | $1.64 | $1.50 |
| Cash from continuing operating activities | $242.1 million | $115.5 million |
| Capital expenditures | $276.0 million | $113.2 million |
| Cash and cash equivalents at year-end | $11.2 million | $94.0 million |
| Total debt at year-end | $2.241 billion | $1.080 billion |
- Revenue increased 77.5%, driven primarily by acquisitions, especially CRC. Same-facility revenue before doubtful accounts rose 7.8%, with patient days up 8.0%.
- Income from continuing operations was 6.2% of revenue, versus 8.3% in 2014; pretax margin was 9.2%, versus 12.6%. Interest expense more than doubled to $106.7 million, and transaction costs rose to $36.6 million.
- Segment EBITDA, a company-defined non-GAAP measure, was $404.8 million, up from $215.5 million. The filing cautions that this measure is not GAAP and may not be comparable across companies.
- Operating cash flow increased to $242.1 million. Investing activities used $884.5 million, including $574.8 million for acquisitions and $276.0 million for capital expenditures. Working capital fell to $4.5 million from $108.2 million; year-end cash was $11.2 million.
- At year-end, revolving-credit availability was $135.7 million. Acadia reported compliance with its debt covenants. Approximately $1.1 billion of debt was variable-rate; management estimated that a hypothetical 10% rate increase would reduce annual net income and cash flow by $3.3 million.
Fourth-quarter results
For the quarter ended December 31, 2015, revenue was $495.3 million, pretax income from continuing operations was $52.5 million, net income attributable to Acadia was $34.6 million, and basic and diluted EPS were each $0.49. The filing provides quarterly summary results but does not provide a clear standalone fourth-quarter cash-flow figure in the supplied text.
Material changes, outlook and unusual items
- CRC was acquired in February 2015 for approximately $1.3 billion; Acadia issued 5,975,326 shares and repaid $904.5 million of CRC debt. The company also acquired 176 facilities during 2015 and added approximately 670 beds.
- On February 16, 2016, Acadia completed the approximately $2.2 billion Priory acquisition, funded with approximately $1.9 billion cash and 4,033,561 Acadia shares. Financing included $685.0 million of January 2016 equity proceeds, $955.0 million of incremental Term Loan B borrowings, $135.0 million added to the Term Loan A facility and $390.0 million of 6.500% senior notes. The added TLA borrowing was used to pay down most of the revolving facility.
- After Priory financing, the filing reports projected aggregate debt maturities of $3.613 billion, including principal and interest assumptions. This is a material increase from year-end 2015 debt and increases leverage and financing risk.
- Management expected to add approximately 800 beds in 2016, excluding acquisitions. It emphasized acquisition integration, service quality, referral growth and operating improvement; it did not provide specific 2016 revenue or earnings guidance.
- 2015 included $10.8 million of debt-extinguishment costs from retiring the 12.875% notes and a $1.9 million foreign-currency derivative loss, compared with a $15.3 million derivative gain in 2014. The 2015 tax rate was 32.4%, down from 34.0%.
- Priory’s acquisition remained subject to Competition and Markets Authority review, which could delay integration or require divestitures. The filing also flags possible legacy liabilities at Priory and CRC, including regulatory matters and pending corporate-manslaughter-related matters at a Priory facility; Priory’s purchase agreement provided minimal representations and no seller indemnification.
- Other key risks include reimbursement and NHS funding pressure, acquisition integration and synergy execution, substantial debt and variable rates, staffing costs and availability, patient-care incidents, regulatory investigations, litigation and insurance exposure, foreign-exchange movements, and pension funding obligations. Pro forma 2015 revenue of $2.852 billion and pretax income of $91.4 million, including Priory and other acquisitions as if completed at the start of 2014, are illustrative and not forecasts.
Important facts for investors to verify
- Post-Priory debt, leverage, covenant headroom, interest expense and liquidity, including the impact of acquisition financing and the revolver paydown.
- Priory integration progress, CMA review outcome, acquisition accounting adjustments and any required divestitures or legacy liabilities.
- Whether acquisition-driven growth translates into sustainable same-facility growth, margins and cash generation; distinguish reported results from pro forma figures and non-GAAP Segment EBITDA.
- Receivables quality and collection trends: days sales outstanding rose to 40 from 37, and the year-end allowance for doubtful accounts was approximately 12% of accounts receivable.
- Exposure to reimbursement changes and publicly funded U.K. contracts, plus developments in CRC-related investigations, patient-care claims, Priory legal matters, insurance reserves and pension funding.