Acadia Healthcare Company, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unless otherwise noted, dollar amounts are in millions. Acadia operated 76 behavioral healthcare facilities with approximately 5,800 licensed beds across 24 states, the United Kingdom and Puerto Rico.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue, net of doubtful accounts | $294.5 | $184.7 | $709.7 | $523.4 |
| Income from continuing operations before tax | $33.2 | $22.3 | $91.3 | $49.3 |
| Net income | $25.4 | $14.4 | $60.9 | $30.3 |
| Diluted EPS | $0.43 | $0.29 | $1.13 | $0.60 |
| Segment EBITDA (non-GAAP) | $65.1 | $38.5 | $149.1 | $106.1 |
- Revenue increased 59.4% in Q3 and 35.6% for the nine-month period; net income rose 76.8% and 101.0%, respectively.
- Net income margins were approximately 8.6% in Q3 2014 versus 7.8% a year earlier, and 8.6% for the nine months versus 5.8%. The nine-month comparison includes a $9.4 million debt-extinguishment charge in 2013.
- Q3 revenue before doubtful accounts was $303.0 million; the provision was $8.5 million, or 2.8% of that amount. For the nine months, the provision was $20.1 million, also 2.8%.
- Q3 same-facility revenue before doubtful accounts grew 10.4%, with patient days up 11.2%. Nine-month same-facility revenue grew 10.5%, reflecting patient days up 9.8% and revenue per day up 0.5%.
- Acquisitions, especially Partnerships in Care, contributed substantially to reported growth. Partnerships in Care added $76.0 million of Q3 revenue and was not included in the prior-year comparison.
- For Q3, salaries, wages and benefits were 57.2% of revenue versus 56.2% a year earlier; depreciation and amortization increased to 3.5% from 2.4%. For the nine months, those ratios were 57.6% versus 57.1%, and 3.1% versus 2.3%, respectively.
- The 2014 effective tax rate was 23.2% for Q3 and 33.3% year to date, compared with 34.7% and 37.4%. Acadia attributed the lower rates primarily to Partnerships in Care earnings in a lower-tax jurisdiction that are permanently reinvested.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $69.0 million, up from $46.2 million. Cash from continuing operations was $69.1 million versus $46.8 million. Receivables used $25.4 million of operating cash.
- Investing cash outflow was $801.2 million, including $722.8 million for acquisitions, $70.7 million for capital expenditures and $22.2 million for real estate acquisitions. Capital expenditures included $51.9 million of expansion spending and $18.8 million of routine spending.
- Financing provided $771.2 million, including $374.4 million of net equity proceeds and $307.5 million of long-term borrowings. Cash at September 30 was $42.2 million, versus $4.6 million at year-end; working capital was $87.3 million versus $30.4 million.
- Total debt was approximately $1.029 billion ($13.3 million current and $1.016 billion long term), up from $617.1 million at December 31, 2013. The company also reported $135.6 million of availability on its revolving facility and compliance with debt covenants.
- Debt included $300 million of 5.125% notes due 2022, issued to help fund Partnerships in Care, as well as revolving and term loans, 12.875% notes due 2018, 6.125% notes due 2021 and revenue bonds. Variable-rate debt was $458.4 million; fixed-rate debt was $570.9 million. Management estimated a hypothetical 10% rate increase would reduce annual net income and cash flow by $0.5 million.
Material developments, outlook and risks
- Acadia acquired Partnerships in Care, a UK provider with 23 facilities and more than 1,200 beds, on July 1 for $661.7 million cash consideration. It also acquired McCallum Place for $37.4 million and Pacific Grove for $10.5 million. Acquisition purchase accounting remained preliminary; the Partnerships in Care acquisition included an assumed frozen pension plan with a reported $5.8 million liability at quarter-end.
- The company raised $374.3 million net through a June share offering of 8.9 million shares at $44 each, increasing shares outstanding. It also recorded a $36.9 million foreign-currency translation loss in other comprehensive income, and a $15.3 million gain on foreign-currency forwards related to the Partnerships in Care purchase.
- Management expected to add approximately 400 beds during 2014, excluding acquisitions. It described continued facility expansion, service development and selective acquisitions as elements of its strategy. The filing provides no quantitative earnings or revenue guidance.
- On October 29, 2014, Acadia agreed to acquire CRC Health Group for estimated consideration of approximately $1.175 billion, including up to 6.3 million Acadia shares; CRC debt would be repaid. Completion and financing were not assured. The filing identifies acquisition integration, financing, leverage, covenant compliance and UK operating/regulatory conditions as significant risks.
- Management reported no legal proceeding expected to have a material adverse effect. The company noted ordinary-course claims, including medical malpractice and employment matters. Disclosure controls were assessed as effective; the company was still reviewing Partnerships in Care’s internal controls.
Important facts for investors to verify
- Whether acquired facilities and same-facility results support the reported growth, and how much of future performance depends on successful integration.
- Debt levels, covenant headroom, revolving-facility availability and the financing, dilution and closing conditions for the announced CRC transaction.
- Cash conversion and receivables collectability, including the doubtful-account provision and aging of receivables.
- Partnerships in Care’s NHS revenue exposure, foreign-currency effects and pension-plan assumptions and funding requirements.
- The non-GAAP definition and reconciliation of Segment EBITDA, and the effect of acquisition, transaction and derivative items on reported earnings.