Acadia Healthcare Company, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Dollar amounts below are in millions unless stated otherwise. Acadia operates behavioral-health facilities in the U.S., U.K. and Puerto Rico; at quarter-end it reported 589 facilities and approximately 17,900 beds.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue, net of doubtful accounts | $734.7 | $479.7 | $2,108.0 | $1,299.2 |
| Segment EBITDA | $155.8 | $108.5 | $459.1 | $293.0 |
| Income (loss) from continuing operations before taxes | $(115.8) | $41.7 | $(9.5) | $112.2 |
| Net income (loss) attributable to Acadia | $(117.8) | $29.6 | $(35.7) | $78.0 |
| Diluted EPS | $(1.36) | $0.42 | $(0.42) | $1.15 |
| Cash from continuing operating activities | Not presented quarterly | Not presented quarterly | $265.2 | $143.6 |
Segment EBITDA was approximately 21.2% of revenue in Q3 2016 and 21.8% for the first nine months; it is a company-defined non-GAAP measure. The reported losses chiefly reflect a $174.7 million loss on the planned U.K. divestiture. Revenue before doubtful-account provisions grew 52.4% in Q3 and 61.5% for the nine-month period. Management attributed much of the increase to acquisitions, especially Priory; same-facility revenue before provision grew 6.5% in Q3, with patient days up 6.3%.
Liquidity, debt and cash flow
- At September 30, cash was $27.8 million, current assets $392.9 million and current liabilities $380.2 million; working capital was $12.7 million. Days sales outstanding was 35, versus 40 at December 31, 2015.
- Reported debt carrying value, including current maturities, was approximately $3.66 billion, up from $2.24 billion at year-end 2015. The company reported $120.6 million of revolver availability and compliance with its debt covenants.
- Nine-month operating cash flow was $259.7 million including discontinued operations. Investing activities used $971.8 million, including $683.3 million for acquisitions and $250.0 million for capital expenditures. Financing activities provided $738.2 million. Ending cash was $27.8 million.
- Debt includes $2.2 billion of variable-rate borrowings; management estimated a hypothetical 10% rate increase would reduce annual net income and cash flows by $5.2 million based on period-end borrowing levels.
Material changes, outlook and risks
- The February 2016 Priory acquisition added 324 U.K. facilities and approximately 7,100 beds. Acadia also completed several smaller U.S. acquisitions. Acquisition-related growth substantially expanded revenue, assets and debt; Q3 interest expense rose to $48.8 million from $27.7 million.
- Following U.K. competition concerns about Priory, Acadia agreed on October 18, 2016 to sell 22 facilities, with approximately 1,000 beds, to BC Partners for £320 million cash, subject to CMA approval. The company expected approval by November 18 and completion shortly thereafter; without approval, a phase 2 CMA investigation could proceed. Acadia recorded $392.5 million of assets held for sale and the $174.7 million divestiture loss.
- Management expected to add approximately 800 beds during 2016, excluding acquisitions. It described continued growth through facility expansion, new services, referral development and selective acquisitions. The filing does not provide earnings or revenue guidance.
- Foreign-currency translation losses were $351.5 million for the first nine months. The company cited Brexit-related U.K. uncertainty and sterling weakness; a hypothetical 10% GBP/USD change would affect nine-month net income by an estimated $12.5 million. Cross-currency swaps with $650 million notional were used to hedge part of U.S.-dollar debt exposure.
- Other significant risks include high indebtedness and restrictive covenants, integration and synergy execution, reliance of Priory and Partnerships in Care on NHS payments, staffing and labor costs, reimbursement and collection risks, regulatory compliance, patient incidents and litigation. Management stated that no known legal proceeding was expected to have a material adverse effect.
Key facts for investors to verify
- Whether the CMA approved and the company completed the U.K. disposal, and the final proceeds and accounting impact.
- Underlying same-facility growth, margins and cash conversion apart from acquired operations and the divestiture charge.
- Debt levels, covenant headroom, variable-rate exposure and the use of sale proceeds.
- Acquisition integration, Priory performance and the sustainability of NHS-funded revenue.
- Collection quality and share dilution: outstanding shares increased from 70.7 million at December 31, 2015 to 86.7 million at September 30, 2016; 87.5 million were outstanding on November 2, 2016.