Acadia Healthcare Company, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial statement amounts below are in U.S. dollars; amounts originally reported in thousands are shown in millions unless otherwise noted.
Business context and period highlights
Acadia operated 52 behavioral healthcare facilities with more than 4,400 licensed beds in 24 states and Puerto Rico at June 30. The company’s strategy centers on acquiring and developing behavioral healthcare facilities and growing existing operations. On July 1, after quarter-end, Acadia completed its acquisition of Partnerships in Care, a U.K. provider operating 23 facilities with more than 1,200 beds.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue, net of doubtful-account provision | $213.8m | $177.5m | $415.2m | $338.7m |
| Income from continuing operations | $22.5m | $12.3m | $35.5m | $16.3m |
| Net income | $22.5m | $12.2m | $35.5m | $15.9m |
| Diluted EPS | $0.43 | $0.24 | $0.69 | $0.32 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $29.2m | $29.2m |
- Q2 revenue increased 20.5%; six-month revenue increased 22.6%. Management attributed growth primarily to acquired facilities and same-facility expansion. Same-facility revenue before doubtful accounts rose 11.4% in Q2 and 10.5% for the first half, reflecting patient-day growth and, to a lesser extent, revenue per day.
- Q2 continuing-operations pretax margin was 17.5%, versus 11.4%; six-month margin was 14.0%, versus 8.0%. Continuing-operations net margin was 10.5% in Q2 versus 6.9%, and 8.5% for the first half versus 4.8%.
- Q2 results included a $13.7m gain on foreign-currency forward contracts related to the U.K. acquisition. The contracts settled July 1 for a $15.3m gain. The Q2 reported profit therefore includes a significant non-operating, transaction-linked gain.
- Q2 doubtful-account provision was $6.9m, or 3.1% of revenue before provision, compared with $5.5m, or 3.0%. For the first half, the provision was $11.6m, or 2.7%, versus $9.9m, or 2.9%; management cited improved collections and business-office processes.
- First-half salaries, wages and benefits were $240.0m, up from $195.1m; excluding equity compensation, the expense was 56.8% of revenue versus 56.9%. Depreciation and amortization rose to $11.4m from $7.8m, primarily due to capital investment and acquired assets. Net interest expense was $19.4m versus $18.2m.
Cash flow, liquidity and debt
- First-half operating cash flow was $29.2m, essentially unchanged from $29.2m. Investing used $72.1m, including $43.3m of capital expenditures ($33.6m expansion and $9.7m routine) and $18.3m for real estate. Operating cash flow less capital expenditures was approximately negative $14.1m, before real-estate purchases and other investing.
- Financing provided $316.0m, largely reflecting $374.3m of net equity proceeds, partly offset by revolving-credit repayments and other debt and financing costs. Cash ended June at $277.7m, compared with $4.6m at year-end 2013. Working capital was $346.9m versus $30.4m.
- At June 30, reported debt was $567.3m, including $296.3m of term loans, $96.3m carrying value of 12.875% notes, $150.0m of 6.125% notes, and $24.7m of revenue bonds. The revolver had no balance at quarter-end and $299.6m available. The company reported compliance with its debt covenants.
- After quarter-end, Acadia issued $300m of 5.125% senior notes due 2022 and borrowed $125m under its revolver to help fund the Partnerships in Care acquisition. The acquisition’s stated net cash consideration was $662m. These subsequent transactions are not reflected in June 30 balance-sheet debt and cash.
- Debt agreements include financial and other restrictive covenants; breach could trigger default and acceleration. The company’s variable-rate debt was $296.3m at June 30; management estimated a hypothetical 10% interest-rate increase would reduce annual net income and cash flow by $0.5m at that borrowing level.
Changes, outlook and notable items
- Acadia issued 8.88m shares in June at $44 per share, raising $374.3m net and increasing shares outstanding. The proceeds were intended to partially fund the U.K. acquisition.
- The February credit-facility amendment increased the revolver to $300m, established $300m of term loans, extended maturity to February 2019, reduced pricing and eased certain covenants. A June amendment permitted the Partnerships in Care acquisition and further modified covenant provisions.
- Management expected to add more than 300 beds during 2014 through expansion, excluding acquisitions. No specific earnings or revenue guidance is provided in the filing.
- The U.K. acquisition was completed July 1, 2014 and is a major expansion beyond the company’s U.S. and Puerto Rico operations. Management identified integration, regulatory, foreign-exchange, funding and payor risks. Partnerships in Care generated approximately 97% of its revenue from the U.K. National Health Service and was operating at a net loss in 2013 and the first half of 2014.
- Acadia reported $4.6m of first-half transaction-related expenses. Acquisition accounting for Pacific Grove and Partnerships in Care remained preliminary. Management reported no legal proceeding expected to have a material adverse effect and stated disclosure controls were effective.
Key risks and contingencies
- Government and third-party reimbursement is central to results: Medicare and Medicaid represented approximately 67% of Acadia’s first-half revenue; NHS represented approximately 97% of Partnerships in Care revenue. Funding cuts, reimbursement changes, utilization controls or procurement changes could affect revenue and occupancy.
- Acquisition execution presents material uncertainties, including integration, realization of expected synergies, unknown liabilities and the U.K. business’s operating performance. The Partnerships in Care purchase agreement provided limited representations and no seller indemnification rights, as described by the company.
- The company cited substantial indebtedness, floating-rate exposure, restrictive covenants and the need to generate sufficient cash to service debt and fund investment. U.K. operations also introduce foreign-exchange, regulatory, tax and international-management risks.
- Other disclosed risks include patient-care incidents and regulatory actions, professional liability claims, staffing and labor costs, collections, competition, cybersecurity and compliance with healthcare laws. The company disclosed an underfunded Partnerships in Care defined-benefit pension plan, with a U.K.-GAAP deficit of £4.9m at December 31, 2013.
Investor verification checklist
- Reconcile reported earnings growth with the $13.7m derivative gain and assess underlying operating performance.
- Verify post-acquisition debt, cash, leverage and covenant headroom after the $300m notes issuance, $125m revolver draw and Partnerships in Care closing.
- Track Partnerships in Care integration, profitability, acquisition-accounting adjustments, NHS funding exposure and pension funding requirements.
- Monitor same-facility patient days, revenue per day, staffing costs and bad-debt trends; 14.5% of receivables were over 150 days old at June 30, versus 13.9% at year-end 2013.
- Assess whether planned bed additions and expansion capital spending translate into sustainable returns and cash generation.