Acadia Healthcare Company, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise stated. Financial amounts are in U.S. dollars; figures below are in millions except per-share data and percentages.
Business context
Acadia develops and operates behavioral healthcare facilities. At quarter-end, it operated 52 facilities with more than 4,300 licensed beds in 24 states and Puerto Rico. On January 1, 2014, it acquired Pacific Grove Hospital, a 68-bed inpatient psychiatric facility in California, for $10.5 million.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue before doubtful-account provision | $206.1 | $165.7 |
| Revenue, net of doubtful-account provision | $201.4 | $161.2 |
| Income from continuing operations | $13.0 | $4.1 |
| Net income | $13.1 | $3.7 |
| Diluted EPS | $0.26 | $0.07 |
| Cash from continuing operating activities | $7.3 | $1.2 |
- Net revenue increased 24.9%; revenue before the doubtful-account provision increased 24.4%. Same-facility revenue before that provision grew 9.4%, reflecting 7.4% more patient days and 2.3% higher revenue per day.
- Continuing-operations pretax margin was 10.3%, versus 4.2%; continuing-operations net margin was 6.5%, versus 2.5%. The 2013 comparison included $9.4 million of debt-extinguishment costs.
- Q1 2014 operating cash flow was $7.3 million. Investing cash outflow was $47.9 million, including $21.6 million of capital expenditures, $16.1 million for real estate and $10.0 million for acquisitions. Financing cash inflow was $43.3 million.
- Cash was $7.2 million at March 31, 2014. Working capital was $59.1 million, compared with $30.4 million at December 31, 2013. Days sales outstanding were 47, versus 46 at year-end.
- Total debt was $663.2 million at quarter-end, compared with $617.1 million at December 31, 2013. The company reported $205.6 million available on its revolving facility and stated it was compliant with debt covenants.
- The February 2014 credit-facility amendment increased the revolving commitment to $300 million, extended maturity to February 2019, reduced applicable rates and provided greater covenant flexibility. Debt includes $96.3 million of 12.875% notes due 2018 and $150.0 million of 6.125% notes due 2021.
Material changes and management commentary
- Management attributed most of the reported revenue increase to acquired facilities; 2013 and 2014 acquisitions contributed $33.5 million of Q1 2014 revenue. Same-facility growth also contributed.
- Revenue mix shifted: Medicaid was 44.4% of revenue before doubtful accounts, down from 50.2%; commercial was 27.3%, up from 25.6%; Medicare was 22.2%, up from 19.6%.
- Management reported that the doubtful-account provision declined to 2.3% of pre-provision revenue from 2.7%, citing improved business-office operations. Salaries, wages and benefits were 58.4% of net revenue, compared with 58.5%.
- The company expected to add more than 300 beds during 2014, excluding acquisitions, and described continued facility expansion and selective acquisitions as strategic priorities. The filing provides no specific earnings or revenue guidance.
Risks, contingencies and unusual items
- Key risks cited include reimbursement and payor changes, regulation and government investigations, patient-care claims, staffing and physician recruitment, competition, acquisition integration, debt and restrictive covenants, and collectability of patient accounts.
- Q1 included $1.6 million of transaction-related expenses. A $0.5 million increase in contingent consideration, following a change in projected payment timing, was recorded in those expenses; the liability was $7.0 million at quarter-end. Acquisition purchase-price allocations remained preliminary.
- Management said ordinary-course legal claims, including medical-malpractice and personal-injury matters, were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting.
- Management noted that interim results are not necessarily indicative of full-year results. A hypothetical 10% increase in interest rates was estimated to reduce annual net income and cash flow by $0.5 million based on quarter-end borrowings.
Important facts for investors to verify
- How much of future growth comes from same-facility patient volume and pricing versus acquisitions, and whether the planned bed additions are achieved.
- Whether receivables, days sales outstanding and doubtful-account expense remain controlled, particularly given the payer mix and the 12.9% of receivables aged over 150 days.
- Debt growth, variable-rate exposure, covenant headroom and the company’s ability to fund expansion while generating cash after capital spending.
- Integration results and final purchase accounting for recent acquisitions, including the contingent consideration estimate.
- Developments in reimbursement, regulation, patient-care litigation, staffing costs and other risks identified in the filing.