Acadia Healthcare Company, Inc. quarterly report, Q3 FY2021

Acadia Healthcare Company, Inc. — Q3 2021 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results. Acadia operates U.S. behavioral healthcare facilities; following the January 2021 U.K. sale, the U.K. business is reported as discontinued operations. At quarter-end, Acadia operated 230 facilities with approximately 10,200 beds in 40 states and Puerto Rico.

Financial performance

Metric	Q3 2021	Q3 2020	Nine months 2021	Nine months 2020
Revenue	$587.6 million	$548.0 million	$1,720.9 million	$1,548.7 million
Income from continuing operations	$67.9 million	$36.9 million	$136.7 million	$83.5 million
Net income attributable to Acadia	$66.1 million	$37.0 million	$120.4 million	$111.5 million
Diluted EPS attributable to Acadia	$0.73	$0.42	$1.33	$1.26
Cash from continuing operating activities	Not separately provided	Not separately provided	$276.4 million	$366.4 million

Q3 revenue increased 7.2%; income from continuing operations rose to $67.9 million from $36.9 million. The continuing-operations pretax margin was 14.6%, compared with 8.4%. For the nine-month period, revenue rose 11.1% and continuing-operations pretax margin was 10.5%, versus 7.0%. These are reported results, not adjusted for unusual items.

Same-facility revenue grew 7.9% in Q3 and 10.9% year to date. Q3 same-facility patient days increased 2.2%, admissions 0.6%, and revenue per patient day 5.6%; year-to-date growth was 4.8%, 4.8%, and 5.8%, respectively. Same-facility Adjusted EBITDA margin improved 360 basis points in Q3 and 280 basis points year to date; the filing does not provide the corresponding absolute Adjusted EBITDA amounts in the supplied text. Excluding equity compensation, salaries and benefits declined to 51.1% of revenue from 52.0% in Q3, and to 52.2% from 54.0% year to date.

Cash, debt and liquidity

• Cash and cash equivalents were $196.3 million at September 30, 2021, down from $378.7 million at December 31, 2020.
• Continuing operating cash flow was $276.4 million for the first nine months, down from $366.4 million. Capital expenditures were $156.6 million; operating cash flow less capital expenditures was approximately $119.8 million, a simple derived measure.
• Reported debt, net of unamortized issuance costs, discount and premium, was $1.429 billion, compared with $3.122 billion at year-end 2020. Debt consisted of $450 million of 5.5% notes due 2028, $475 million of 5.0% notes due 2029, and borrowings under the new credit facility. Cash less reported debt was approximately $1.233 billion of net debt, derived from those balance-sheet amounts.
• The $600 million revolving facility had $100 million drawn and $496.6 million available, net of $3.4 million in standby letters of credit. The $425 million term loan and revolving facility mature in March 2026. Acadia reported compliance with the credit facility’s maximum 5.0x total net leverage and minimum 3.0x interest coverage covenants at quarter-end.
• At quarter-end, $516.9 million of debt was variable-rate. Management estimated that a 10% rate increase, equivalent to a 0.16 percentage-point rise on variable-rate debt, would reduce annual net income and cash flows by approximately $0.6 million.

Material changes and unusual items

• Acadia completed the sale of its U.K. operations on January 19, 2021. Gross proceeds were approximately $1.525 billion; net proceeds were approximately $1.425 billion. Together with balance-sheet cash, the proceeds supported $1.64 billion of debt reduction. U.K. results are presented as discontinued operations for all periods.
• The company redeemed its 5.625% notes due 2023 and 6.5% notes due 2024 and replaced its prior credit facility. Nine-month debt extinguishment costs were $24.7 million, including $6.3 million cash charges and $18.4 million non-cash charges. Interest expense declined to $61.4 million from $118.4 million year to date, principally reflecting debt repayments.
• Nine-month impairment expense was $24.3 million: a $23.2 million non-cash charge for the existing Pennsylvania facility replaced by a 260-bed facility, and a $1.1 million non-cash charge for hurricane damage at a Louisiana facility.
• Q3 2020 included $18.1 million of reported other income associated with Provider Relief Fund assistance; Q3 2021 had no other income. Comparisons therefore include this prior-period item. The company received an additional $24.2 million of relief funds in April 2021, which remained included in accrued liabilities at quarter-end.
• Medicaid accounted for 49.0% of Q3 revenue and 49.1% year to date. Staffing and professional fees were notable cost pressures; Q3 professional fees were 6.1% of revenue versus 5.4% a year earlier.

Outlook, risks and contingencies

• No formal financial earnings or margin guidance is stated in the supplied filing text. Acadia expected to add approximately 300 beds at existing facilities, open one wholly owned facility with 80 beds, and open 11 comprehensive treatment centers during 2021.
• Management cited favorable demand trends, but also a tight labor market and difficulty recruiting and retaining clinical staff. It said challenges had generally been temporary and market-specific and that it was focused on staffing facilities to meet demand.
• COVID-19 may affect patient volumes, staffing costs, supplies, operations, collections, reserves and asset valuations; management said the financial impact could not then be quantified. Pandemic-related vaccine mandates, supply constraints and higher labor costs were identified risks.
• The company was continuing to assess compliance with terms attached to government relief funds. It was repaying $45 million of Medicare advance payments through claims recoupments, with repayment expected to continue through September 2022. It also expected to repay the remaining deferred payroll taxes by December 31, 2022.
• Legal and regulatory matters include a securities class action, stayed shareholder derivative actions, a California wage-and-hour matter settled with final court approval in September 2021 and payment in October, and government investigations involving alleged regulatory and patient-care issues at facilities. Acadia said it could not quantify potential exposure for the securities litigation or government investigations.
• Other stated risks include substantial indebtedness and restrictive covenants, payer and reimbursement changes, regulatory compliance, patient incidents, cybersecurity, weather events and dependence on key management. The filing also lists the ability to identify and integrate a new CEO as a risk.

Important facts for investors to verify

• Whether same-facility volume and pricing growth can persist, and whether staffing shortages or wage inflation erode margin gains.
• How operating cash generation develops after the unusually large U.K. divestiture-related debt repayments and changes in government relief cash flows.
• Debt balances, floating-rate exposure, available revolver capacity and covenant headroom under the new credit facility.
• Resolution and potential financial exposure from government investigations, litigation, insurance claims and conditions on relief funds.
• Progress against the stated 2021 bed and facility expansion plans; the filing provides no formal financial guidance.