Acadia Healthcare Company, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited interim financial statements. Unless stated otherwise, amounts are in U.S. dollars. Acadia operated 585 behavioral healthcare facilities with approximately 17,900 beds across the U.S., U.K. and Puerto Rico.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $765.7 million | $715.9 million | $1,508.0 million | $1,395.1 million |
| Income before taxes | $69.3 million | $66.2 million | $117.3 million | $114.7 million |
| Net income attributable to Acadia | $58.8 million | $49.6 million | $109.7 million | $84.6 million |
| Diluted EPS | $0.67 | $0.57 | $1.26 | $0.97 |
| Segment EBITDA | $165.0 million | $162.2 million | $310.7 million | $298.6 million |
- Revenue increased 7.0% in Q2 and 8.1% for the first half. Management attributed growth to same-facility revenue gains of 5.2% and 5.4%, respectively, and favorable currency translation of $16.2 million and $45.8 million, respectively.
- Q2 net income attributable to Acadia rose about 18.6%; first-half net income rose about 29.6%. Reported net margins were 7.7% versus 6.9% in Q2 and 7.4% versus 6.0% for the first half. Segment EBITDA margin was approximately 21.5% versus 22.7% in Q2 and 20.6% versus 21.4% for the first half.
- Labor costs increased faster than revenue: salaries, wages and benefits were 54.4% of Q2 revenue versus 53.6%, and 54.9% versus 54.5% for the first half. Professional fees rose to 7.0% and 7.1% of revenue, respectively, with management citing higher U.K. contract labor costs.
- Same-facility U.S. revenue grew 5.0% in Q2 and 5.5% in the first half; U.K. same-facility revenue grew 5.6% and 5.1%. U.K. same-facility EBITDA margin fell 110 basis points in Q2 and 40 basis points in the first half; U.S. margin fell 30 basis points in Q2 and was unchanged for the first half.
Cash flow, debt and liquidity
- First-half operating cash flow was $217.9 million, up from $188.4 million. Investing cash outflow was $173.7 million, including $161.6 million of capital expenditures and $8.9 million for real estate. Financing cash outflow was $30.6 million, including $23.2 million of debt principal payments. Cash increased $12.2 million to $79.5 million.
- Capital expenditures included $128.8 million for expansion and $32.8 million for routine needs. Working capital was $95.1 million, compared with $94.2 million at year-end. Days sales outstanding increased to 40 from 38.
- Debt carrying value was $3.221 billion, including current debt; cash was $79.5 million. The $500 million revolving facility had $495 million available, with $5 million of standby letters of credit outstanding. The company reported compliance with its debt covenants at June 30. The filing does not provide a clear actual leverage ratio.
- Q2 net interest expense was $45.8 million, up from $43.5 million; first-half interest expense was $91.1 million, up from $86.3 million. The company cited higher rates on variable-rate debt, partly offset by 2018 credit-facility repricing amendments.
Material changes, outlook and risks
- Acadia adopted the new revenue standard on January 1, 2018 using the modified retrospective method. It moved most doubtful-account provisions from a separate expense line to a reduction of revenue; management said adoption did not significantly affect reported results, and prior periods were not restated.
- The Tax Act reduced the U.S. corporate tax rate. The effective tax rate was 15.0% in Q2 and 6.5% for the first half, versus 25.0% and 26.4% in the comparable periods. The first-half rate benefited from a discrete $10.5 million tax benefit related to a change in a provisional estimate. Tax accounting remained incomplete at June 30; a cumulative $19.3 million provisional deferred-tax remeasurement amount had been recognized.
- Foreign-currency translation reduced Q2 other comprehensive income by $143.6 million and first-half other comprehensive income by $50.8 million. Q2 comprehensive loss attributable to Acadia was $55.7 million despite positive net income.
- Management expected to add more than 800 beds in 2018, excluding acquisitions. Acadia added 276 beds in the first half, including 152 at two new facilities. No numerical earnings or revenue guidance is provided in the filing.
- Key disclosed risks include substantial indebtedness and covenant restrictions; variable interest rates; foreign-exchange exposure and U.K. political and economic uncertainty; dependence on U.K. public funding, including the NHS; staffing availability and labor costs; reimbursement and regulatory changes; patient incidents, litigation and government investigations; and acquisition and integration risks. Management reported no proceeding it believed would have a material adverse effect, while noting ongoing exposure to claims and potential government inquiries.
Important facts for investors to verify
- Whether revenue growth and planned bed additions translate into improved operating margins, particularly given rising labor and U.K. contract staffing costs.
- The continuing effect of GBP/USD movements on reported revenue, earnings, comprehensive income and debt-related hedging.
- Debt repayment capacity, actual leverage and covenant headroom, and sensitivity to further increases in LIBOR-based borrowing costs.
- Receivables quality and collections: DSO rose to 40 days; the filing’s aging schedule shows 15.4% of receivables over 150 days at June 30, versus 16.6% at year-end.
- Final Tax Act accounting and the extent to which the unusually low first-half effective tax rate reflects recurring versus discrete benefits.
- Execution and returns on expansion spending: first-half capital expenditures were $161.6 million, substantially higher than the prior-year $117.5 million.