Acadia Healthcare Company, Inc. annual report, FY2013

Acadia Healthcare Company, Inc. — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Unless stated otherwise, amounts are in U.S. dollars.

Business context and reporting period

Acadia operates inpatient psychiatric and specialty facilities, residential treatment centers, and outpatient behavioral-health services. At year-end it operated 51 facilities with approximately 4,200 licensed beds in 23 states and Puerto Rico. Revenue mix was 66% acute inpatient psychiatric and specialty facilities, 29% residential treatment, and 5% outpatient community-based services.

Growth was acquisition-led: the company acquired seven facilities during 2013 and added 325 beds, including two newly developed facilities. Acquisitions completed in 2012 and 2013 contributed $325.6 million of 2013 revenue.

Financial and operating highlights

Metric20132012
Revenue, net of doubtful-account provision$713.4 million$407.5 million
Revenue before doubtful-account provision$735.1 million$413.9 million
Provision for doubtful accounts$21.7 million; 3.0% of pre-provision revenue$6.4 million; 1.5%
Income from continuing operations$43.3 million; 6.1% of revenue$20.5 million; 5.0%
Net income$42.6 million$20.4 million
Diluted EPS from continuing operations$0.86$0.53
Net cash from continuing operating activities$65.3 million$34.3 million
Cash and cash equivalents at year-end$4.6 million$49.4 million
Working capital at year-end$30.4 million$69.1 million
Total debt at year-end$617.1 million$473.3 million

Revenue rose 77.6% before the doubtful-account provision, primarily reflecting acquisitions. Same-facility revenue before that provision increased 10.5%, driven by 8.8% growth in patient days and 1.1% growth in revenue per day. Salaries, wages and benefits fell to 57.2% of revenue from 58.8%; pre-tax margin increased to 9.7% from 8.0%. Interest expense increased to $37.3 million from $29.8 million. The 2013 results included a $9.4 million debt-extinguishment charge related to redeeming part of the 12.875% notes.

Operating cash flow was more than offset by $68.9 million of capital expenditures; cash used in investing activities was $243.0 million, including $164.0 million for acquisitions. Maintenance capital expenditures were 2.3% of revenue. Days sales outstanding increased to 46 from 39, which management attributed mainly to longer collection periods at 2013 acquisitions.

For the fourth quarter of 2013, revenue was $190.0 million, income from continuing operations before tax was $19.9 million, and net income was $12.3 million, or $0.25 per basic share and $0.24 per diluted share.

Debt, liquidity, and material changes

Year-end debt included $346.0 million under the senior credit facility, $96.2 million of 12.875% notes, $150.0 million of 6.125% notes, and $24.9 million of revenue bonds. The company reported $46.1 million available under its revolving credit line at year-end and compliance with its debt covenants. A hypothetical 10% increase in interest rates was estimated to reduce annual net income and cash flows by $0.6 million.

In March 2013, Acadia issued $150.0 million of 6.125% notes due 2021 and redeemed $52.5 million of 12.875% notes at a premium, recording the charge noted above. After year-end, a February 2014 credit amendment expanded the revolver to $300.0 million, set term loans at $300.0 million, extended facility maturity, lowered applicable rates, and increased covenant flexibility.

Outlook, commentary, risks, and unusual items

  • Management expected to add more than 300 beds in 2014, excluding acquisitions, and intended to pursue further acquisitions and organic growth.
  • On January 1, 2014, Acadia acquired Pacific Grove Hospital for $10.5 million. The 2013 acquisition purchase-price allocations were preliminary; some acquired receivables, liabilities, real estate, and intangibles remained under assessment.
  • Payor exposure is material: Medicare and Medicaid together represented 69.5% of 2013 revenue (reported as approximately 70%). Medicaid alone was 48%. Reimbursement reductions, utilization controls, and state budget pressure could affect results.
  • Other principal risks include substantial debt and restrictive covenants; acquisition integration and execution; staffing and physician recruitment; regulatory, fraud-and-abuse, licensing, and certificate-of-need compliance; malpractice claims; and collection risk. Five states—Arkansas, Michigan, Mississippi, Tennessee, and Texas—accounted for approximately 45% of revenue.
  • Management and the auditor reported effective internal control over financial reporting, but the assessment excluded certain 2013 acquisitions, which represented 9.4% of revenue and 14.5% of year-end assets. The financial-statement audit opinion was unqualified.
  • The company stated it did not anticipate paying cash dividends in the foreseeable future. Summer, holiday, and school-break periods can bring lower patient volumes because of the company’s significant child and adolescent business.

Important facts for investors to verify

  • How much of reported growth and earnings improvement is sustainable same-facility performance versus acquired revenue, and whether acquisition synergies materialize.
  • Whether the sharp increase in doubtful-account provisions, higher DSO, and acquired-facility collection patterns persist or require further reserve adjustments.
  • Current debt balances, covenant headroom, borrowing availability, variable-rate exposure, and the post-year-end credit amendment’s terms and effects.
  • Final acquisition purchase-price allocations and any resulting changes to goodwill, intangible assets, or assumed liabilities.
  • Reimbursement developments and operating performance in the states and government-payor programs on which the company is concentrated.