Acadia Healthcare Company, Inc. — Q1 2015 Form 10-Q
Unaudited results for the three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Amounts are in U.S. dollars, generally millions. Acadia operates behavioral healthcare facilities in the U.S., U.K. and Puerto Rico. At quarter-end it operated 203 facilities with more than 8,400 beds.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue before doubtful accounts | $374.2 | $206.1 |
| Revenue, net of doubtful accounts | $365.8 | $201.4 |
| Income from continuing operations before tax | $21.2 | $20.8 |
| Net income | $14.6 | $13.1 |
| Diluted EPS | $0.23 | $0.26 |
| Segment EBITDA | $78.7 | $39.3 |
| Cash from continuing operations | $18.1 | $7.3 |
| Cash and cash equivalents | $38.0 | $94.0 at Dec. 31, 2014 |
| Total debt, including current portion | $2,054.0 | $1,096.3 at Dec. 31, 2014 |
| Working capital | $94.7 | $108.2 at Dec. 31, 2014 |
- Revenue increased 81.5%, primarily from acquisitions. Same-facility revenue before doubtful accounts grew 9.5%, with patient days up 9.9% and revenue per day down 1.2%.
- Net income rose modestly, but diluted EPS fell as weighted-average diluted shares increased to 62.9 million from 50.5 million. Continuing-operations net margin was approximately 4.0%, down from 6.5%.
- Segment EBITDA margin was approximately 21.5% of net revenue, versus 19.5%. EBITDA is a non-GAAP measure and excludes equity compensation, transaction costs, interest, depreciation and amortization, and other items.
- Operating cash flow improved, but investing used $104.6 million, including $52.9 million of capital expenditures and $49.6 million for acquisitions. Operating cash flow less capital expenditures was negative $34.8 million.
- Current assets were $325.4 million and current liabilities $230.7 million. Cash included $23.2 million held by foreign subsidiaries; the company said it intended to permanently reinvest foreign cash abroad.
Material changes versus the prior comparable period
- Acadia completed its approximately $1.3 billion acquisition of CRC Health Group on February 11, 2015, issuing 5.98 million shares and repaying CRC debt of approximately $904.5 million. CRC contributed $147.6 million of Q1 revenue and $20.5 million of pretax income during the period it was consolidated.
- Acadia acquired Quality Addiction Management on March 1 for approximately $54.6 million. The company reported acquiring 123 facilities and adding 185 beds to existing facilities during the quarter.
- Total debt increased substantially, while cash declined. Interest expense rose to $22.1 million from $9.7 million. Transaction-related expenses increased to $18.4 million from $1.6 million, including advisory and financing fees, legal and other costs, and severance and contract termination costs.
- Goodwill increased to $1.90 billion from $803.0 million, largely reflecting acquisitions. Foreign currency translation produced a $29.4 million other comprehensive loss.
- Payor mix changed with the addition of U.K. operations: NHS accounted for 19.4% of revenue before doubtful accounts in Q1 2015. Medicaid represented 33.8%, commercial 22.3%, Medicare 13.1%, and self-pay 7.9%.
Outlook, commentary, risks and contingencies
- Management expected to add approximately 500 beds during 2015 to facilities owned at December 31, 2014, and described continued marketing, service expansion and selective acquisitions as strategic priorities. The filing provides no earnings or revenue guidance.
- After quarter-end, the company completed acquisitions announced at approximately $87.8 million in total: Choice facilities, Pastoral Care Group and Mildmay Oaks, all in the U.K.
- Debt comprised approximately $0.9 billion fixed-rate and $1.1 billion variable-rate borrowings. A hypothetical 10% interest-rate increase was estimated to reduce annual net income and cash flow by $4.0 million. A hypothetical 10% GBP/USD exchange-rate change was estimated to affect quarterly net income by $1.3 million.
- The company reported compliance with its debt covenants at March 31, 2015 and $198.1 million of revolving-credit availability. Debt agreements include financial and restrictive covenants; a default could accelerate repayment. Management identified significant indebtedness and integration of acquisitions among key risks.
- Other stated risks include U.K. regulatory and business conditions, dependence of Partnerships in Care on NHS payments, reimbursement and collection risk, patient incidents, staffing costs and availability, healthcare regulation, and foreign-exchange fluctuations. Management cited no legal proceeding expected to have a material adverse effect; ordinary-course claims remain possible.
- Acquisition purchase-price allocations were preliminary and subject to revision. A McCallum earn-out of up to $6.0 million depends on performance targets. Pro forma results assuming the 2014 and 2015 acquisitions occurred from January 1, 2014 showed pretax losses of $13.9 million in Q1 2015 and $6.7 million in Q1 2014; these are not the reported results.
Important facts for investors to verify
- How much of reported growth and EBITDA reflects acquired operations versus sustainable same-facility performance, and whether expected acquisition synergies are realized.
- Integration progress and final purchase-price allocations for CRC and QAM, including valuation of goodwill, intangibles, receivables and assumed liabilities.
- Debt repayment capacity, variable-rate exposure, covenant headroom and the effect of acquisition-related leverage on future interest expense.
- Cash conversion, working-capital trends and receivable aging, particularly collection and reimbursement risks across Medicaid, self-pay and NHS payors.
- Whether planned bed additions and subsequent U.K. acquisitions generate returns sufficient to offset capital needs, transaction costs and foreign-exchange exposure.