Acadia Healthcare Company, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing. Unless noted, financial figures below are for 2014 and comparisons are with 2013. The filing was signed February 27, 2015.
Business context and reporting period
Acadia operates behavioral healthcare facilities in the United States, United Kingdom and Puerto Rico. At year-end 2014, it operated 78 facilities with more than 5,800 beds. Its growth strategy centers on acquisitions, adding capacity and improving existing operations. The July 2014 Partnerships in Care acquisition expanded the business into the U.K.; the February 11, 2015 CRC acquisition, completed after year-end, substantially expanded U.S. substance-use treatment operations.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue, net of doubtful-account provision | $1,004.6 million | $713.4 million |
| Revenue before doubtful-account provision | $1,030.8 million | $735.1 million |
| Income from continuing operations | $83.2 million | $43.3 million |
| Net income | $83.0 million | $42.6 million |
| Diluted EPS from continuing operations | $1.50 | $0.86 |
| Cash from continuing operating activities | $115.5 million | $65.3 million |
| Cash and cash equivalents at year-end | $94.0 million | $4.6 million |
| Total debt at year-end | $1,096.3 million | $617.1 million |
| Working capital at year-end | $108.2 million | $30.4 million |
- Revenue before the doubtful-account provision grew 40.2%; the filing attributes the increase principally to acquisitions, especially Partnerships in Care. Same-facility revenue before that provision rose 10.8%, driven by 10.3% growth in patient days and 0.6% growth in revenue per day.
- Income from continuing operations before tax was $126.2 million, or 12.6% of revenue; continuing-operations income was 8.3% of revenue. Segment EBITDA, a non-GAAP measure, was $215.5 million, approximately 21.4% of revenue. The filing cautions that Segment EBITDA is not a GAAP measure.
- Operating cash flow increased to $115.5 million. Investing activities used $860.8 million, including $738.7 million for acquisitions and $113.2 million for capital expenditures; financing activities provided $838.0 million.
- Routine maintenance capital expenditures were $28.6 million, or 2.8% of revenue; expansion capital expenditures were $84.6 million. Days sales outstanding improved to 37 from 46.
- Year-end current assets were $274.1 million and current liabilities $165.9 million. The approximate current ratio was 1.65. The company reported $299.6 million of availability under its revolving credit line at year-end.
- Debt included variable-rate borrowings: $525.6 million of term loans and $570.7 million of fixed-rate debt. A hypothetical 10% increase in interest rates was estimated to reduce annual net income and cash flows by $1.6 million based on year-end borrowings. The company reported compliance with its credit covenants at December 31, 2014.
Material changes versus the prior comparable period
- Revenue rose from $713.4 million to $1,004.6 million, while net income increased from $42.6 million to $83.0 million. Acquisition contribution was significant; reported growth should not be read as purely organic.
- Acquisitions completed during 2014 included Partnerships in Care for $661.7 million net of specified items, McCallum for $37.4 million, Pacific Grove for $10.5 million, Croxton for $15.6 million and Skyway for $0.3 million.
- Debt increased by approximately $479.1 million year over year, principally reflecting acquisition financing. Acadia also raised $374.4 million net from a June 2014 common-stock offering and issued $300 million of 5.125% senior notes to help fund Partnerships in Care.
- Interest expense increased to $48.2 million from $37.3 million. Depreciation and amortization increased to $32.7 million from $17.1 million, reflecting acquired assets and capital investment.
- The 2014 income statement included a $15.3 million gain on foreign-currency derivatives related to the Partnerships in Care purchase-price payment; this was a notable nonrecurring benefit. Transaction-related expenses were $13.7 million, up from $7.2 million.
- Revenue mix shifted with the U.K. acquisition: Medicaid represented 38.3% of revenue before doubtful accounts, down from 48.0%; NHS represented 14.5% in 2014 and was absent in 2013. Medicare was 19.4%, commercial payors 23.0%, and self-pay 2.5%.
Guidance, outlook, risks and unusual items
- Management expected to add approximately 500 beds during 2015 at facilities owned as of December 31, 2014. It also described plans to pursue selective acquisitions, broaden services and referrals, and improve existing-facility performance; the filing does not provide numerical earnings or revenue guidance.
- On February 11, 2015, Acadia completed its approximately $1.3 billion CRC acquisition. It issued 5,975,326 shares, repaid CRC debt, borrowed $500 million under a new Term Loan B facility and $25 million under the revolving facility, and issued $375 million of 5.625% senior notes. The filing does not provide a clear combined post-acquisition debt total.
- Management identified integration and execution risks across major acquisitions. CRC had reported net losses in 2013 and 2014, and expected cost savings and synergies may not be achieved. CRC facilities had been subject to regulatory investigations, including U.S. Drug Enforcement Administration inquiries concerning controlled-substance requirements; Acadia received no indemnification rights from CRC’s sellers.
- CRC’s historical financial statements had been restated, with material weaknesses identified in income-tax accounting and stock-based compensation. Acadia’s own management and auditor reported effective internal control over financial reporting at year-end, but the assessment excluded Partnerships in Care, McCallum, Croxton and Skyway, which together represented $732.0 million of assets and $155.4 million of 2014 revenue.
- Key business risks include dependence on government and third-party reimbursement, regulatory and licensing compliance, patient-care incidents and litigation, staffing costs, acquisition integration, variable interest rates, foreign-exchange movements and NHS funding. Partnerships in Care derived over 98% of its revenue from publicly funded U.K. entities for the six months ended December 31, 2014.
- Acadia recognized a $9.6 million U.K. pension liability at year-end. It also reported a $66.2 million foreign-currency translation loss in other comprehensive income. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect; future audit, reimbursement and regulatory outcomes remain uncertain.
- Fourth-quarter 2014 revenue was $294.9 million, net income was $22.1 million, and diluted EPS was $0.37. The filing presents these as unaudited quarterly figures.
Most important facts for investors to verify
- How much of reported growth and profitability reflects acquisitions versus same-facility performance, and whether the 10.8% same-facility revenue growth is sustained.
- Post-CRC combined debt, leverage, interest expense and covenant headroom, including the effect of variable-rate borrowings and integration costs.
- CRC’s operating turnaround, expected synergies and integration progress, together with developments in the disclosed DEA inquiries, other claims and historical control weaknesses.
- U.K. NHS commissioning, reimbursement and funding trends, foreign-currency exposure, and the funding requirements of the assumed pension plans.
- Cash conversion, doubtful-account provisions and receivable aging: the 2014 doubtful-account provision was $26.2 million, and 16.1% of year-end receivables was more than 150 days old.