Acadia Healthcare Company, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed November 4, 2015. The company operates behavioral healthcare facilities in the U.S., U.K. and Puerto Rico. At quarter-end it operated 233 facilities with more than 9,600 beds.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue, net of doubtful accounts | $479.7 | $294.5 | $1,299.2 | $709.7 |
| Income from continuing operations | $29.0 | $25.5 | $77.4 | $60.9 |
| Net income attributable to Acadia | $29.6 | $25.4 | $78.0 | $60.9 |
| Diluted EPS | $0.42 | $0.43 | $1.15 | $1.13 |
| Segment EBITDA* | $108.5 | $65.1 | $293.0 | $149.1 |
- Revenue grew 62.9% in Q3 and 83.1% for the nine-month period. Management attributed most growth to acquired facilities, particularly CRC and Partnerships in Care. Same-facility revenue before doubtful accounts rose 5.7% in Q3 and 7.8% year to date, primarily from higher patient days.
- Q3 pretax margin was 8.7%, versus 11.3% a year earlier; continuing-operations net margin was 6.0%, versus 8.6%. For nine months, pretax margin was 8.6%, versus 12.9%, and continuing-operations net margin was 6.0%, versus 8.6%. Higher interest, transaction costs, depreciation and other expenses weighed on margins.
- Cash provided by continuing operating activities was $143.6 million for nine months, compared with $69.1 million in 2014. Investing activities used $616.8 million, including $391.2 million for acquisitions and $200.8 million for capital expenditures ($164.7 million expansion and $36.1 million routine). Cash fell to $50.8 million from $94.0 million at year-end 2014.
- At September 30, 2015, current assets were $378.3 million and current liabilities $264.5 million; working capital was $113.8 million. Days sales outstanding increased to 41 from 37 at year-end.
- Total debt carrying value was approximately $2.134 billion, including $42.0 million current and $2.092 billion long-term, versus approximately $1.096 billion at December 31, 2014. The company reported $293.7 million available on its revolving credit line and compliance with debt covenants. Approximately $1.1 billion of debt was fixed-rate and $1.0 billion variable-rate.
Material changes and unusual items
- CRC was acquired in February for approximately $1.3 billion, including repayment of $904.5 million of assumed debt and issuance of 5.98 million Acadia shares. The company also completed multiple U.S. and U.K. acquisitions during 2015. These transactions drove substantial growth in assets, goodwill, revenue and debt.
- Acadia issued $275 million of additional 5.625% senior notes in September, bringing that series to $650 million. It tendered for approximately $88.3 million of 12.875% notes and recognized $10.0 million in debt-extinguishment costs; the remaining notes were redeemed after quarter-end.
- Transaction-related expenses were $31.4 million year to date, versus $10.8 million, including advisory and financing fees, legal and other costs, and severance. Foreign-currency derivatives generated a $1.9 million loss year to date, compared with a $15.3 million gain in 2014.
- Foreign currency translation losses were $32.7 million in Q3 and $15.9 million year to date, contributing to a Q3 comprehensive loss attributable to Acadia of $3.2 million despite positive net income.
- The May equity offering generated net proceeds of approximately $331.5 million. The share count also increased from acquisition-related stock issuance and other equity activity.
Outlook, risks and contingencies
- Management expected to add approximately 500 beds during 2015 to facilities owned at year-end 2014. This is an operational target; the filing provides no specific financial earnings or revenue guidance.
- Management described acquisition integration, referral growth, service expansion and operating efficiencies as strategic priorities. It cautioned that interim results are not necessarily indicative of full-year results.
- Key disclosed risks include significant indebtedness and restrictive covenants; integrating acquisitions and realizing synergies; reimbursement and government-payor exposure, including U.K. NHS dependence; staffing and physician recruitment; regulatory compliance, investigations and patient incidents; collectability of receivables; competition; and foreign-exchange exposure.
- Management stated that ordinary-course legal claims, including medical malpractice, personal injury, employment and contract matters, were not expected to have a material adverse effect. The filing reports $6.3 million of standby letters of credit for workers’ compensation security.
- A hypothetical 10% interest-rate increase was estimated to reduce annual net income and cash flow by $0.5 million. A hypothetical 10% GBP/USD exchange-rate change was estimated to change nine-month net income by $3.7 million.
Most important facts for investors to verify
- How much reported growth and EBITDA improvement reflects acquired operations versus same-facility performance, and whether acquisition synergies are being realized.
- Debt levels, interest expense, covenant headroom and refinancing capacity following the CRC acquisition and note transactions.
- Receivables quality, the increase in days sales outstanding, self-pay exposure and the adequacy of doubtful-account provisions.
- Capital spending needs and integration costs, and whether operating cash generation can support expansion while maintaining liquidity.
- Final acquisition purchase-price allocations, which the filing says remain preliminary for several acquisitions, and subsequent acquisition performance.
*Segment EBITDA is a non-GAAP measure defined by the company; it excludes specified expenses and should not be treated as a substitute for GAAP results.