Acadia Healthcare Company, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are to the same periods in 2016 unless noted. Amounts are U.S. dollars. Acadia operated 579 behavioral healthcare facilities with approximately 17,400 beds across 39 states, the U.K. and Puerto Rico.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue, after doubtful-account provision | $716.7M | $734.7M | $2,111.8M | $2,108.0M |
| Net income (loss) attributable to Acadia | $45.6M | ($117.8M) | $130.2M | ($35.7M) |
| Diluted earnings (loss) per share | $0.52 | ($1.36) | $1.50 | ($0.42) |
| Segment EBITDA | $152.3M | $155.8M | $450.8M | $459.1M |
| Net interest expense | $44.5M | $48.8M | $130.8M | $135.3M |
- Q3 net income margin was approximately 6.4% of revenue, versus a 16.0% net loss margin in Q3 2016. The prior-year loss included a $174.7M U.K. divestiture loss; there was no such charge in 2017.
- Segment EBITDA margin was approximately 21.2% in both Q3 periods. Segment EBITDA declined despite growth in U.S. operations; it is a non-GAAP measure defined by the company.
- For the first nine months, revenue before doubtful accounts rose 0.2% to $2,143.7M, while reported revenue increased 0.2%. Same-facility revenue before doubtful accounts grew 5.7%, reflecting 4.1% more patient days and 1.5% higher revenue per day.
- Q3 same-facility revenue before doubtful accounts grew 5.7%, with patient days up 3.5% and revenue per day up 1.9%. Reported revenue fell 2.4%, principally because the disposed U.K. facilities contributed $45.4M less revenue.
- U.S. segment revenue was $453.7M in Q3, up from $431.5M; U.K. segment revenue was $263.0M, down from $303.1M. For nine months, U.S. revenue rose to $1,355.3M from $1,270.0M, while U.K. revenue fell to $756.5M from $836.0M.
- Q3 salaries, wages and benefits were 53.8% of revenue versus 55.6% a year earlier. Professional fees, other operating expenses and doubtful-account provision increased as a share of revenue. Nine-month other operating expenses rose to $249.2M from $231.0M.
Cash flow, balance sheet and debt
- Cash from continuing operating activities was $272.6M for the first nine months, versus $265.2M; total operating cash flow was $271.4M after discontinued operations. Capital expenditures were $193.8M, including $141.7M of expansion spending; real estate acquisitions used $33.3M.
- Cash and equivalents were $75.7M at September 30, 2017, versus $57.1M at year-end 2016. Working capital was $122.6M, up from $85.1M; days sales outstanding rose to 38 from 34.
- Long-term debt, including current maturities and net of unamortized financing items, was $3,269.0M, down from $3,287.8M at year-end. Cash less this debt implies net debt of approximately $3,193M. The $500M revolver had $493.5M available, with $6.5M of standby letters of credit outstanding.
- Debt included approximately $1.5B of fixed-rate and $1.8B of variable-rate borrowings. Pro Rata Facility borrowings bore interest at LIBOR plus 2.75%. The company reported compliance with debt covenants. A hypothetical 10% interest-rate increase was estimated to reduce annual net income and cash flow by $4.5M.
- Total assets were $6,342.6M and total liabilities were $3,836.4M. The current ratio was approximately 1.36, based on current assets of $463.8M and current liabilities of $341.2M.
Changes, outlook and risks
- The 2016 comparison reflects Priory acquisition effects and the November 2016 sale of 22 U.K. facilities with approximately 1,000 beds. Management attributed nine-month revenue growth to acquired operations, offset by $129.1M of revenue reduction from the U.K. divestiture and $64.5M from pound-to-dollar exchange-rate movements.
- Management expected to add approximately 800 beds during 2017, excluding acquisitions; 352 beds had been added to existing facilities in the first nine months. The filing provides no earnings or revenue guidance.
- Management cited demand and bed additions as drivers of same-facility patient-day growth, while noting higher U.K. contract labor costs. U.K. operations depend significantly on NHS and other public funding. A hypothetical 10% currency-rate change was estimated to change annual net income by $10.3M; management warned that a persistently weak pound could adversely affect results.
- Key risks include substantial debt and restrictive covenants; variable interest rates; foreign-exchange exposure and Brexit-related uncertainty; reliance on government and third-party payors; staffing costs and clinician recruitment; patient incidents, regulatory investigations and litigation; collectability of receivables; and integration or execution risks.
- Management said it was evaluating the impact of new accounting standards, including revenue recognition and lease accounting. It expected the revenue standard to move most doubtful-account provision into a direct reduction of revenue. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
- The company reported ordinary-course legal claims and investigations, but management did not believe any current proceeding would have a material adverse effect. No additional material contingency amount is specified in the provided filing text.
Most important facts for investors to verify
- Whether U.S. same-facility growth and planned bed additions translate into sustained revenue and EBITDA growth, particularly as U.K. revenue and segment EBITDA weakened.
- Receivables quality and collection trends: accounts receivable reached $295.8M, days sales outstanding increased, and 16.5% of receivables were aged over 150 days.
- Debt service capacity, covenant headroom, variable-rate exposure and the availability of the revolver, given approximately $3.27B of debt.
- The effect of GBP movements, Brexit and U.K. public-payor dependence on reported results and cash flows.
- The composition and persistence of transaction-related costs, labor-cost pressure and other operating expense growth.
- How adoption of revenue-recognition and lease standards may affect reported revenue, doubtful-account presentation, assets and liabilities.