Acadia Healthcare Company, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless otherwise noted. Amounts are in U.S. dollars. Acadia operates behavioral healthcare facilities in the U.S., U.K. and Puerto Rico; at quarter-end it had 575 facilities and more than 17,200 beds.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior period |
|---|---|---|
| Revenue, net of doubtful accounts | $679.2 million | $616.8 million; up 10.1% |
| Income before income taxes | $48.5 million | $32.5 million |
| Net income | $34.8 million | $25.4 million |
| Net income attributable to Acadia | $35.0 million; diluted EPS $0.40 | $25.7 million; diluted EPS $0.31 |
| Segment EBITDA | $136.4 million; 20.1% of revenue | $131.0 million; 21.2% of revenue |
| Cash provided by operating activities | $57.0 million; continuing operations $57.4 million | $58.7 million; continuing operations $59.3 million |
| Capital expenditures | $50.5 million | $90.1 million |
| Cash and cash equivalents | $43.1 million | $57.1 million at December 31, 2016 |
| Long-term debt, carrying amount | $3.281 billion, including $34.8 million current | $3.288 billion at December 31, 2016 |
| Working capital | $88.2 million | $85.1 million at December 31, 2016 |
At March 31, 2017, Acadia reported $493.4 million available under its $500 million revolving facility, net of $6.6 million in standby letters of credit. Cash less reported debt was approximately $3.24 billion of net debt. The current ratio was approximately 1.26. The company was in compliance with its debt covenants.
Material changes and operating drivers
- Revenue before doubtful accounts rose 9.9% to $689.3 million. Acquired facilities, particularly Priory, contributed to growth; the weaker pound reduced reported revenue by $37.5 million. Same-facility revenue increased 4.7%, reflecting 3.7% growth in patient days and 1.0% growth in revenue per day.
- U.S. segment revenue was $440.2 million versus $408.3 million; U.K. segment revenue was $239.0 million versus $207.0 million. U.S. Segment EBITDA increased to $112.1 million from $106.8 million, while U.K. Segment EBITDA decreased to $44.2 million from $44.9 million.
- Segment EBITDA increased 4.1%, slower than revenue growth. Salaries, wages and benefits were 55.4% of revenue versus 55.3%; other operating expenses were 12.3% versus 11.4%; and depreciation and amortization was 4.9% versus 4.5%.
- Transaction-related expenses declined to $4.1 million from $26.3 million, supporting the increase in pretax income. Interest expense rose to $42.8 million from $37.7 million, primarily reflecting financing for the Priory acquisition and the 2016 senior notes issuance.
- The effective tax rate increased to 28.3% from 21.9%. Adoption of share-based payment accounting guidance increased Q1 tax expense by $1.7 million; the filing also cites the U.K. divestiture and exchange-rate movements. A $8.6 million cumulative-effect adjustment was recorded in retained earnings.
Outlook, risks and unusual items
- Management expected to add approximately 800 beds during 2017, excluding acquisitions; 82 beds were added to existing facilities in Q1. The filing gives no clear numerical financial guidance for full-year revenue, earnings or cash flow.
- Acadia completed the sale of 22 U.K. facilities, with approximately 1,000 beds, for £320 million in November 2016 to address U.K. competition concerns arising from the Priory acquisition. Management cites the divestiture and pound weakness as factors affecting current-period results and cash generation.
- Debt includes approximately $1.8 billion of variable-rate debt. Acadia estimated that a hypothetical 10% rise in interest rates would reduce annual net income and cash flow by $4.5 million. A hypothetical 10% currency-rate change would change annual net income by $11.3 million; cross-currency swaps hedge part of the exposure. The filing warns that continued pound weakness could adversely affect future results.
- Key risks include substantial indebtedness and restrictive covenants; integration and realization of acquisition benefits; reliance of U.K. facilities on public funding, including the NHS; staffing costs and clinician recruitment; reimbursement and patient volumes; regulatory compliance, investigations and patient incidents; and foreign-exchange exposure.
- Contractual obligations totaled $5.36 billion, including $4.25 billion of debt payments and $1.04 billion of operating lease payments. A potential Pocono Mountain acquisition earn-out of up to $5.0 million depended on performance targets. Management stated that ordinary-course claims and legal proceedings were not expected to have a material adverse effect.
Investor verification priorities
- Assess how much reported growth reflects Priory and other acquisitions versus same-facility performance, and how U.K. currency movements affect comparable results.
- Monitor whether operating cost growth, particularly other operating expenses and labor, constrains EBITDA margins as bed capacity expands.
- Verify cash conversion and receivables quality: operating cash flow was slightly lower year over year, days sales outstanding rose to 37 from 34 at year-end, and 15.8% of receivables were more than 150 days old.
- Review debt-service capacity, variable-rate exposure, covenant headroom and the availability of cash held outside the U.S.; approximately $40.2 million of quarter-end cash was held by foreign subsidiaries.
- Track delivery of the 2017 bed-addition plan, the Pocono earn-out outcome, and the operational and financial effects of the U.K. divestiture and Priory integration.