Business context and reporting period
Acadia Healthcare Company, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company operates inpatient psychiatric, residential treatment, substance abuse and outpatient behavioral healthcare facilities. At quarter-end it operated 46 facilities with more than 3,700 licensed beds in 21 states and Puerto Rico. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue, after doubtful-account provision | $177.5 | $100.5 | $338.7 | $190.1 |
| Income from continuing operations | $12.3 | $6.1 | $16.3 | $9.4 |
| Net income | $12.2 | $5.9 | $15.9 | $9.6 |
| Diluted EPS | $0.24 | $0.16 | $0.32 | $0.28 |
| Continuing-operations pretax margin | 11.4% | 10.0% | 8.0% | 7.9% |
- Revenue before doubtful accounts increased 78.1% in the quarter and 79.7% in the first half. Growth primarily reflected acquisitions; same-facility revenue before doubtful accounts rose 10.6% in the quarter and 10.0% in the first half.
- Quarterly same-facility patient days grew 8.2% and revenue per day 2.7%; first-half increases were 8.5% and 1.5%, respectively.
- Cash provided by continuing operating activities was $28.3 million for the first half, versus $10.7 million a year earlier. Investing used $156.0 million, including $121.7 million for acquisitions and $29.7 million for capital expenditures. Financing provided $86.0 million; cash declined $42.0 million to $7.4 million.
- At June 30, cash was $7.4 million, working capital was $40.4 million (down from $69.1 million at year-end), and the current ratio was approximately 1.5. The revolving credit facility had $99.6 million available. Days sales outstanding increased to 44 from 39 at December 31, 2012.
- Total debt was $569.6 million, including $13.3 million current debt, compared with $473.3 million at December 31, 2012. Debt included $298.1 million of term loans, $96.1 million of 12.875% notes due 2018, $150.0 million of 6.125% notes due 2021 and $25.3 million of revenue bonds. The company reported covenant compliance.
- For the first half, the doubtful-account provision was $9.9 million, or 2.9% of revenue before provision, versus $3.9 million, or 2.0%, a year earlier. The allowance for doubtful accounts was $11.6 million at June 30.
Material changes versus prior comparable periods
- Acquisitions materially expanded reported revenue and expenses. Acquired operations contributed $79.6 million of revenue and $8.9 million of pretax continuing income in the quarter; first-half contributions were $146.9 million and $14.9 million. The company completed the Greenleaf, Delta and UMC acquisitions in 2013; UMC consideration was $99.4 million. Purchase accounting valuations remained preliminary for certain acquired assets and liabilities.
- Quarterly salaries, wages and benefits were $100.8 million versus $58.6 million, while the reported expense ratio improved to 56.8% from 58.3%. First-half expense was $195.1 million versus $113.7 million, with the ratio improving to 57.6% from 59.8%. Several other expense categories rose in absolute terms as acquired facilities were consolidated.
- Interest expense increased to $9.4 million in the quarter from $7.5 million and to $18.2 million in the first half from $14.8 million, reflecting additional borrowings and the new notes, partly offset by redemption of higher-rate notes.
- First-half results included a $9.4 million debt-extinguishment charge following redemption of $52.5 million of 12.875% notes at a premium. The company issued $150.0 million of 6.125% notes due 2021.
- Revenue mix shifted: Medicaid represented 48.8% of quarterly revenue before doubtful accounts versus 62.5% a year earlier; commercial payors and Medicare accounted for larger shares. Management attributed the higher doubtful-account provision rate in part to acquired facilities’ payor mix.
Outlook, commentary and risks
- Management stated it expected to add approximately 300 beds during 2013, excluding acquisitions. A 75-bed Tampa facility was scheduled to open in the fourth quarter; the company expected to complete the 85-bed Refuge acquisition on August 1, 2013.
- Management’s strategy is to expand through acquisitions and facility development, improve operations, broaden services and referral networks, and pursue further selective growth. The filing provides no specific full-year financial guidance.
- Risks highlighted include reliance on government and commercial payors, reimbursement and collection uncertainty, significant debt and restrictive covenants, acquisition integration and execution, staffing and clinician recruitment, competition, regulatory compliance and investigations, patient claims, and privacy/cybersecurity matters. A hypothetical 10% increase in interest rates was estimated to reduce annual net income and cash flows by $0.6 million.
- The company reported ordinary-course legal claims, including personal injury, malpractice, contract and employment matters, but management did not believe any pending proceeding would materially adversely affect the company. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported growth and earnings reflects acquired facilities versus continuing same-facility performance, and whether expected acquisition synergies are realized.
- Whether receivables, collections and doubtful-account estimates remain adequate as DSO and the acquired-facility payor mix change.
- Liquidity and debt capacity after acquisition and expansion spending, including covenant headroom, variable-rate exposure and the maturity/refinancing profile.
- Final purchase accounting valuations and the operating performance and opening timing of facilities under construction or pending acquisition.
- The sustainability of margins given higher acquired-facility operating costs, rising transaction expenses and the change in payor mix.