UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2017
or
For the transition period from to
Commission File Number: 001-35331
ACADIA HEALTHCARE COMPANY, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
6100 Tower Circle, Suite 1000
Franklin, Tennessee 37067
(Address, including zip code, of registrant’s principal executive offices)
(615) 861-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 26, 2017, there were 87,817,913 shares of the registrant’s common stock outstanding.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2017 and December 31, 2016
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
SIGNATURES
Acadia Healthcare Company, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $41,121 and $38,916, respectively
Other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Deferred tax assets – noncurrent
Derivative instruments
Other assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued salaries and benefits
Other accrued liabilities
Total current liabilities
Long-term debt
Deferred tax liabilities – noncurrent
Other liabilities
Total liabilities
Redeemable noncontrolling interests
Equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized, no shares issued
Common stock, $0.01 par value; 180,000,000 shares authorized; 86,916,624 and 86,688,199 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total equity
Total liabilities and equity
See accompanying notes.
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Condensed Consolidated Statements of Income
Revenue before provision for doubtful accounts
Provision for doubtful accounts
Revenue
Salaries, wages and benefits (including equity-based compensation expense of $7,396 and $6,956, respectively)
Professional fees
Supplies
Rents and leases
Other operating expenses
Depreciation and amortization
Interest expense, net
Gain on foreign currency derivatives
Transaction-related expenses
Total expenses
Income before income taxes
Provision for income taxes
Net income
Net loss attributable to noncontrolling interests
Net income attributable to Acadia Healthcare Company, Inc.
Earnings per share attributable to Acadia Healthcare Company, Inc. stockholders:
Basic
Diluted
Weighted-average shares outstanding:
2
Condensed Consolidated Statements of Comprehensive Income (Loss)
Other comprehensive income (loss):
Foreign currency translation gain (loss)
Loss on derivative instruments, net of tax of $(5.6) million and $0, respectively
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive loss attributable to noncontrolling interests
Comprehensive income (loss) attributable to Acadia Healthcare Company, Inc.
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Condensed Consolidated Statement of Equity
(In thousands)
Balance at December 31, 2016
Common stock issued under stock incentive plans
Common stock withheld for minimum statutory taxes
Equity-based compensation expense
Other comprehensive income
Cumulative effect of change in accounting principle
Other
Balance at March 31, 2017
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Condensed Consolidated Statements of Cash Flows
Operating activities:
Adjustments to reconcile net income to net cash provided by continuing operating activities:
Amortization of debt issuance costs
Deferred income tax expense
Change in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net
Accounts payable and other accrued liabilities
Net cash provided by continuing operating activities
Net cash used in discontinued operating activities
Net cash provided by operating activities
Investing activities:
Cash paid for acquisitions, net of cash acquired
Cash paid for capital expenditures
Cash paid for real estate acquisitions
Settlement of foreign currency derivatives
Net cash used in investing activities
Financing activities:
Borrowings on long-term debt
Borrowings on revolving credit facility
Principal payments on revolving credit facility
Principal payments on long-term debt
Repayment of assumed debt
Payment of debt issuance costs
Issuance of common stock, net
Common stock withheld for minimum statutory taxes, net
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
(continued on next page)
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Condensed Consolidated Statements of Cash Flows (continued)
Effect of acquisitions:
Assets acquired, excluding cash
Liabilities assumed
Issuance of common stock in connection with acquisition
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Notes to Condensed Consolidated Financial Statements
March 31, 2017
Description of Business
Acadia Healthcare Company, Inc. (the “Company”) develops and operates inpatient psychiatric facilities, residential treatment centers, group homes, substance abuse facilities and facilities providing outpatient behavioral healthcare services to serve the behavioral health and recovery needs of communities throughout the United States (“U.S.”), the United Kingdom (“U.K.”) and Puerto Rico. At March 31, 2017, the Company operated 575 behavioral healthcare facilities with over 17,200 beds in 39 states, the U. K. and Puerto Rico.
Basis of Presentation
The business of the Company is conducted through limited liability companies, partnerships and C-corporations. The Company’s consolidated financial statements include the accounts of the Company and all subsidiaries controlled by the Company through its’ direct or indirect ownership of majority interests and exclusive rights granted to the Company as the controlling member of an entity. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation of our financial position and results of operations have been included. The Company’s fiscal year ends on December 31 and interim results are not necessarily indicative of results for a full year or any other interim period. The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements as of that date. The information contained in these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2017. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Certain reclassifications have been made to prior years to conform to the current year presentation.
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the measurement of goodwill by eliminating the requirement to calculate the implied fair value of goodwill (step 2 of the current impairment test) to measure the goodwill impairment charge. Instead, entities will record impairment charges based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. Management is evaluating the impact of ASU 2017-04 on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company adopted ASU 2016-09 as of January 1, 2017 as described in Note 10 – Income Taxes.
In March 2016, the FASB issued ASU2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02’s core principle is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Additionally, ASU 2016-02 would permit both public and nonpublic organizations to adopt the new standard early. Management believes the primary effect of adopting the new standard will be to record right-of-use assets and obligations for current operating leases.
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In May 2014, the FASB and the International Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires companies to exercise more judgment and recognize revenue in accordance with the standard’s core principle by applying the following five steps:
Step 1: Identify the contract with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
ASU 2014-09 also includes a cohesive set of quantitative and qualitative disclosure requirements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers.
ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Additionally, ASU 2014-09 would permit both public and nonpublic organizations to adopt the new revenue standard early, but not before the original public organization effective date (that is, annual periods beginning after December 15, 2016). ASU 2014-09requires retrospective application using either a full retrospective adoption or a modified retrospective adoption approach. Full retrospective adoption requires entities to apply the standard as if it had been in effect since the inception of all its contracts with customers presented in the financial statements. Modified retrospective adoption requires entities to apply the standard retrospectively to the most current period presented in the financial statements, requiring the cumulative effect of the retrospective application as an adjustment to the opening balance of retained earnings at the date of adoption. Management anticipates that the Company will adopt the full retrospective method and does not plan to early adopt ASU 2014-09.
Additionally, the Company anticipates that, as a result of certain changes required by ASU 2014-09, the majority of its provision for doubtful accounts will be recorded as a direct reduction to revenue instead of being presented as a separate line item. Management is continuing to evaluate the impact of ASU 2014-09 on the Company’s consolidated financial statements.
Basic and diluted earnings per share are calculated in accordance with the FASB Standards Codification Topic 260, “Earnings Per Share,” based on the weighted-average number of shares outstanding in each period and dilutive stock options, unvested shares and warrants, to the extent such securities have a dilutive effect on earnings per share.
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2017 and 2016 (in thousands, except per share amounts):
Numerator:
Denominator:
Weighted average shares outstanding for basic earnings per share
Effect of dilutive instruments
Shares used in computing diluted earnings per common share
Approximately 1.2 million and 0.8 million shares of common stock issuable upon exercise of outstanding stock option awards were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2017 and 2016, respectively, because their effect would have been anti-dilutive.
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2016 U.S. Acquisitions
On June 1, 2016, the Company completed the acquisition of Pocono Mountain Recovery Center (“Pocono Mountain”), an inpatient psychiatric facility with 108 beds located in Henryville, Pennsylvania, for cash consideration of approximately $25.4 million. In addition, the Company may be required to make a cash payment of up to $5.0 million under an earn-out agreement, contingent upon achievement by Pocono Mountain of certain operating performance targets for the one-year period ending May 31, 2017.
On May 1, 2016, the Company completed the acquisition of TrustPoint Hospital (“TrustPoint”), an inpatient psychiatric facility with 100 beds located in Murfreesboro, Tennessee, for cash consideration of approximately $62.7 million.
On April 1, 2016, the Company completed the acquisition of Serenity Knolls (“Serenity Knolls”), an inpatient psychiatric facility with 30 beds located in Forest Knolls, California, for cash consideration of approximately $9.7 million.
Priory
On February 16, 2016, the Company completed the acquisition of Priory Group No. 1 Limited (“Priory”) for a total purchase price of approximately $2.2 billion, including cash consideration of approximately $1.9 billion and the issuance of 4,033,561 shares of its common stock to shareholders of Priory. Priory was the leading independent provider of behavioral healthcare services in the U.K. operating 324 facilities with approximately 7,100 beds at the acquisition date.
The Competition and Markets Authority (the “CMA”) in the U.K. reviewed the Company’s acquisition of Priory. On July 14, 2016, the CMA announced that the Company’s acquisition of Priory was referred for a phase 2 investigation unless the Company offered acceptable undertakings to address the CMA’s competition concerns relating to the provision of behavioral healthcare services in certain markets. On July 28, 2016, the CMA announced that the Company had offered undertakings to address the CMA’s concerns and that, in lieu of a phase 2 investigation, the CMA would consider the Company’s undertakings.
On October 18, 2016, the Company signed a definitive agreement with BC Partners (“BC Partners”) for the sale of 21 existing U.K. behavioral health facilities and one de novo behavioral health facility with an aggregate of approximately 1,000 beds (collectively, the “U.K. Disposal Group”). On November 10, 2016, the CMA accepted the Company’s undertakings to sell the U.K. Disposal Group to BC Partners and confirmed that the divestiture satisfied the CMA’s concerns about the impact of the Company’s acquisition of Priory on competition for the provision of behavioral healthcare services in certain markets in the U.K. As a result of the CMA’s acceptance of the undertakings, the Company’s acquisition of Priory was not referred for a phase 2 investigation. On November 30, 2016, the Company completed the sale of the U.K. Disposal Group to BC Partners for £320 million cash (the “U.K. Divestiture”).
Summary of Acquisitions
The Company selectively seeks opportunities to expand and diversify its base of operations by acquiring additional facilities. Approximately $31.5 million of the goodwill associated with domestic acquisitions completed in 2016 is deductible for federal income tax purposes. The fair values assigned to certain assets and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition. Specifically, the Company is further assessing the valuation of certain real property and intangible assets and certain tax matters as well as certain receivables and assumed liabilities of Pocono Mountain, TrustPoint and Serenity Knolls.
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The preliminary fair values of assets acquired and liabilities assumed, at the corresponding acquisition dates, during the year ended December 31, 2016 in connection with the Priory, Serenity Knolls. TrustPoint and Pocono Mountain acquisitions (collectively the “2016 Acquisitions”) were as follows (in thousands):
Cash
Accounts receivable
Prepaid expenses and other current assets
Property and equipment
Intangible assets
Total assets acquired
Other accrued expenses
Debt
Total liabilities assumed
Net assets acquired
The qualitative factors comprising the goodwill acquired in the 2016 Acquisitions include efficiencies derived through synergies expected by the elimination of certain redundant corporate functions and expenses, the ability to leverage call center referrals to a broader provider base, coordination of services provided across the combined network of facilities, achievement of operating efficiencies by benchmarking performance, and applying best practices throughout the combined companies.
Transaction-related expenses comprised the following costs for the three months ended March 31, 2017 and 2016 (in thousands):
Legal, accounting and other costs
Severance and contract termination costs
Advisory and financing commitment fees
10
Other identifiable intangible assets and related accumulated amortization consisted of the following as of March 31, 2017 and December 31, 2016 (in thousands):
Intangible assets subject to amortization:
Contract intangible assets
Non-compete agreements
Intangible assets not subject to amortization:
Licenses and accreditations
Trade names
Certificates of need
Total
Amortization expense related to definite-lived intangible assets was $0.1 million for the three months ended March 31, 2016. As of December 31, 2016, all the Company’s defined-lived intangible assets are fully amortized. The Company’s licenses and accreditations, trade names and certificate of need intangible assets have indefinite lives and are, therefore, not subject to amortization.
Property and equipment consists of the following as of March 31, 2017 and December 31, 2016 (in thousands):
Land
Building and improvements
Equipment
Construction in progress
Less accumulated depreciation
Long-term debt consisted of the following (in thousands):
Amended and Restated Senior Credit Facility:
Senior Secured Term A Loans
Senior Secured Term B Loans
Senior Secured Revolving Line of Credit
6.125% Senior Notes due 2021
5.125% Senior Notes due 2022
5.625% Senior Notes due 2023
6.500% Senior Notes due 2024
9.0% and 9.5% Revenue Bonds
Less: unamortized debt issuance costs, discount and premium
Less: current portion
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Amended and Restated Senior Credit Facility
The Company entered into a senior secured credit facility (the “Senior Secured Credit Facility”) on April 1, 2011. On December 31, 2012, the Company entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) which amended and restated the Senior Secured Credit Facility (the “Amended and Restated Senior Credit Facility”). The Company has amended the Amended and Restated Credit Agreement from time to time as described in the Company’s prior filings with the SEC.
On January 25, 2016, the Company entered into the Ninth Amendment (the “Ninth Amendment”) to the Amended and Restated Credit Agreement. The Ninth Amendment modified certain definitions and provided increased flexibility to the Company in terms of its financial covenants. The Company’s baskets for permitted investments were also increased to provide increased flexibility for it to invest in non-wholly owned subsidiaries, joint ventures and foreign subsidiaries. The Company may now invest in non-wholly owned subsidiaries and joint ventures up to 10.0% of the Company and its subsidiaries’ total assets in any four consecutive fiscal quarter period, and up to 12.5% of the Company and its subsidiaries’ total assets during the term of the Amended and Restated Credit Agreement. The Company may also invest in foreign subsidiaries that are not loan parties up to 10% of the Company and its subsidiaries’ total assets in any consecutive four fiscal quarter period, and up to 15% of the Company and its subsidiaries’ total assets during the term of the Amended and Restated Credit Agreement. The foregoing permitted investments are subject to an aggregate cap of 25% of the Company and its subsidiaries’ total assets in any fiscal year.
On February 16, 2016, the Company entered into a Second Incremental Facility Amendment (the “Second Incremental Amendment”) to the Amended and Restated Credit Agreement. The Second Incremental Amendment activated a new $955.0 million incremental Term Loan B facility (the “New TLB Facility”) and added $135.0 million to the Term Loan A facility (the “TLA Facility”) to the Amended and Restated Senior Credit Facility, subject to limited conditionality provisions. Borrowings under the New TLB Facility were used to fund a portion of the purchase price for the acquisition of Priory and the fees and expenses for such acquisition and the related financing transactions. Borrowings under the TLA Facility were used to pay down the majority of our $300.0 million revolving credit facility.
On May 26, 2016, the Company entered into a Tranche B-1 Repricing Amendment (the “Tranche B-1 Repricing Amendment”) to the Amended and Restated Credit Agreement. The Tranche B-1 Repricing Amendment reduced the Applicable Rate with respect to the $500.0 million incremental Term Loan B facility (the “Existing TLB Facility”) from 3.5% to 3.0% in the case of Eurodollar Rate loans and 2.5% to 2.0% in the case of Base Rate Loans.
On September 21, 2016, the Company entered into a Tranche B-2 Repricing Amendment (the “Tranche B-2 Repricing Amendment”) to the Amended and Restated Credit Agreement. The Tranche B-2 Repricing Amendment reduced the Applicable Rate with respect to the New TLB Facility from 3.75% to 3.0% in the case of Eurodollar Rate loans and 2.75% to 2.0% in the case of Base Rate Loans. In connection with the Tranche B-2 Repricing Amendment, the Company recorded a debt extinguishment charge of $3.4 million, including the discount and write-off of deferred financing costs, which was recorded in debt extinguishment costs in the condensed consolidated statements of income.
On November 22, 2016, the Company entered into a Tenth Amendment (the “Tenth Amendment”) to the Amended and Restated Credit Agreement. The Tenth Amendment, among other things, (i) amended the negative covenant regarding dispositions, (ii) modified the collateral package to release any real property with a fair market value of less than $5.0 million and (iii) changed certain investment, indebtedness and lien baskets.
On November 30, 2016, the Company entered into a Refinancing Facilities Amendment (the “Refinancing Amendment”) to the Amended and Restated Credit Agreement. The Refinancing Amendment increased the Company’s line of credit on its revolving credit facility to $500.0 million from $300.0 million and reduced its TLA Facility to $400.0 million from $600.6 million (together, the “Refinancing Facilities”). In addition, the Refinancing Amendment extended the maturity date for the Refinancing Facilities to November 30, 2021 from February 13, 2019, and lowered the Company’s effective interest rate on the line of credit on its revolving credit facility and TLA Facility by 50 basis points. In connection with the Refinancing Amendment, the Company recorded a debt extinguishment charge of $0.8 million, including the write-off of deferred financing costs, which was recorded in debt extinguishment in the condensed consolidated statements of income.
The Company had $493.4 million of availability under the revolving line of credit and had standby letters of credit outstanding of $6.6 million related to security for the payment of claims required by its workers’ compensation insurance program as of March 31, 2017. Borrowings under the revolving line of credit are subject to customary conditions precedent to borrowing. The Amended and Restated Credit Agreement requires quarterly term loan principal repayments of our TLA Facility of $5.0 million for March 31, 2017 to December 31, 2019, $7.5 million for March 31, 2020 to December 31, 2020, and $10.0 million for March 31, 2021 to September 30, 2021, with the remaining principal balance of the TLA Facility due on the maturity date of November 30, 2021. The Company is required to repay the Existing TLB Facility in equal quarterly installments of $1.3 million on the last business day of each
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March, June, September and December, with the outstanding principal balance of the Existing TLB Facility due on February 11, 2022. The Company is required to repay the New TLB Facility in equal quarterly installments of approximately $2.4 million on the last business day of each March, June, September and December, with the outstanding principal balance of the TLB Facility due on February 16, 2023.
Borrowings under the Amended and Restated Senior Credit Facility are guaranteed by each of the Company’s wholly-owned domestic subsidiaries (other than certain excluded subsidiaries) and are secured by a lien on substantially all of the assets of the Company and such subsidiaries. Borrowings with respect to the TLA Facility and the Company’s revolving credit facility (collectively, “Pro Rata Facilities”) under the Amended and Restated Credit Agreement bear interest at a rate tied to the Company’s Consolidated Leverage Ratio (defined as consolidated funded debt net of up to $40.0 million of unrestricted and unencumbered cash to consolidated EBITDA, in each case as defined in the Amended and Restated Credit Agreement). The Applicable Rate (as defined in the Amended and Restated Credit Agreement) for the Pro Rata Facilities was 2.75% for Eurodollar Rate Loans (as defined in the Amended and Restated Credit Agreement) and 1.75% for Base Rate Loans (as defined in the Amended and Restated Credit Agreement) at March 31, 2017. Eurodollar Rate Loans with respect to the Pro Rata Facilities bear interest at the Applicable Rate plus the Eurodollar Rate (as defined in the Amended and Restated Credit Agreement) (based upon the LIBOR Rate (as defined in the Amended and Restated Credit Agreement) prior to commencement of the interest rate period). Base Rate Loans with respect to the Pro Rata Facilities bear interest at the Applicable Rate plus the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate and (iii) the Eurodollar Rate plus 1.0%. As of March 31, 2017, the Pro Rata Facilities bore interest at a rate of LIBOR plus 2.75%. In addition, the Company is required to pay a commitment fee on undrawn amounts under the revolving line of credit.
The Amended and Restated Credit Agreement requires the Company and its subsidiaries to comply with customary affirmative, negative and financial covenants, including a fixed charge coverage ratio, consolidated leverage ratio and senior secured leverage ratio. The Company may be required to pay all of its indebtedness immediately if it defaults on any of the numerous financial or other restrictive covenants contained in any of its material debt agreements. As of March 31, 2017, the Company was in compliance with such covenants.
Senior Notes
On March 12, 2013, the Company issued $150.0 million of 6.125% Senior Notes due 2021 (the “6.125% Senior Notes”). The 6.125% Senior Notes mature on March 15, 2021 and bear interest at a rate of 6.125% per annum, payable semi-annually in arrears on March 15 and September 15 of each year.
On July 1, 2014, the Company issued $300.0 million of 5.125% Senior Notes due 2022 (the “5.125% Senior Notes”). The 5.125% Senior Notes mature on July 1, 2022 and bear interest at a rate of 5.125% per annum, payable semi-annually in arrears on January 1 and July 1 of each year.
On February 11, 2015, the Company issued $375.0 million of 5.625% Senior Notes due 2023 (the “5.625% Senior Notes”). On September 21, 2015, the Company issued $275.0 million of additional 5.625% Senior Notes. The additional notes formed a single class of debt securities with the 5.625% Senior Notes issued in February 2015. Giving effect to this issuance, the Company has outstanding an aggregate of $650.0 million of 5.625% Senior Notes. The 5.625% Senior Notes mature on February 15, 2023 and bear interest at a rate of 5.625% per annum, payable semi-annually in arrears on February 15 and August 15 of each year.
On February 16, 2016, the Company issued $390.0 million of 6.500% Senior Notes due 2024 (the “6.500% Senior Notes”). The 6.500% Senior Notes mature on March 1, 2024 and bear interest at a rate of 6.500% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2016.
The indentures governing the 6.125% Senior Notes, 5.125% Senior Notes, 5.625% Senior Notes and 6.500% Senior Notes (together, the “Senior Notes”) contain covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to: (i) pay dividends, redeem stock or make other distributions or investments; (ii) incur additional debt or issue certain preferred stock; (iii) transfer or sell assets; (iv) engage in certain transactions with affiliates; (v) create restrictions on dividends or other payments by the restricted subsidiaries; (vi) merge, consolidate or sell substantially all of the Company’s assets; and (vii) create liens on assets.
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The Senior Notes issued by the Company are guaranteed by each of the Company’s subsidiaries that guarantee the Company’s obligations under the Amended and Restated Senior Credit Facility. The guarantees are full and unconditional and joint and several.
The Company may redeem the Senior Notes at its option, in whole or part, at the dates and amounts set forth in the indentures.
On November 11, 2012, in connection with the acquisition of The Pavilion at HealthPark, LLC (“Park Royal”), the Company assumed debt of $23.0 million. The fair market value of the debt assumed was $25.6 million and resulted in a debt premium balance being recorded as of the acquisition date. The debt consisted of $7.5 million and $15.5 million of Lee County (Florida) Industrial Development Authority Healthcare Facilities Revenue Bonds, Series 2010 with stated interest rates of 9.0% and 9.5% (“9.0% and 9.5% Revenue Bonds”), respectively. The 9.0% bonds in the amount of $7.5 million have a maturity date of December 1, 2030 and require yearly principal payments beginning in 2013. The 9.5% bonds in the amount of $15.5 million have a maturity date of December 1, 2040 and require yearly principal payments beginning in 2031. The principal payments establish a bond sinking fund to be held with the trustee and shall be sufficient to redeem the principal amounts of the 9.0% and 9.5% Revenue Bonds on their respective maturity dates. As of March 31, 2017 and December 31, 2016, $2.3 million was recorded within other assets on the condensed consolidated balance sheets related to the debt service reserve fund requirements. The yearly principal payments, which establish a bond sinking fund, will increase the debt service reserve fund requirements. The bond premium amount of $2.6 million is amortized as a reduction of interest expense over the life of the revenue bonds using the effective interest method.
Common Stock
On March 3, 2016, the Company held a Special Meeting of Stockholders, where the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 90,000,000 to 180,000,000 (the “Amendment”). On March 3, 2016, the Company filed the Amendment with the Secretary of State of the State of Delaware.
Equity Offerings
On January 12, 2016, the Company completed the offering of 11,500,000 shares of common stock (including shares sold pursuant to the exercise of the over-allotment option that the Company granted to the underwriters as part of the offering) at a price of $61.00 per share. The net proceeds to the Company from the sale of the shares, after deducting the underwriting discount of $15.8 million and additional offering-related costs of $0.7 million, were $685.0 million. The Company used the net offering proceeds to fund a portion of the purchase price for the acquisition of Priory.
On February 16, 2016, the Company completed its acquisition of Priory for a total purchase price of approximately $2.2 billion, including total cash consideration of approximately $1.9 billion and the issuance of 4,033,561 shares of common stock.
Equity Incentive Plans
The Company issues stock-based awards, including stock options, restricted stock and restricted stock units, to certain officers, employees andnon-employee directors under the Acadia Healthcare Company, Inc. Incentive Compensation Plan (the “Equity Incentive Plan”). As of March 31, 2017, a maximum of 8,200,000 shares of the Company’s common stock were authorized for issuance as stock options, restricted stock and restricted stock units or other share-based compensation under the Equity Incentive Plan, of which 4,281,213 were available for future grant. Stock options may be granted for terms of up to ten years. The Company recognizes expense on all share-based awards on a straight-line basis over the requisite service period of the entire award. Grants to employees generally vest in annual increments of 25% each year, commencing one year after the date of grant. The exercise prices of stock options are equal to the most recent closing price of the Company’s common stock on the date of grant.
The Company recognized $7.4 million and $7.0 million in equity-based compensation expense for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, there was $65.2 million of unrecognized compensation expense related to unvested options, restricted stock and restricted stock units, which is expected to be recognized over the remaining weighted average vesting period of 1.4 years. The Company recognized a deferred income tax benefit of $2.9 million and $2.8 million for the three months ended March 31, 2017 and 2016, respectively, related to equity-based compensation expense.
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Stock option activity during 2016 and 2017 was as follows (aggregate intrinsic value in thousands):
Options outstanding at January 1, 2016
Options granted
Options exercised
Options cancelled
Options outstanding at December 31, 2016
Options outstanding at March 31, 2017
Options exercisable at December 31, 2016
Options exercisable at March 31, 2017
Restricted stock activity during 2016 and 2017 was as follows:
Unvested at January 1, 2016
Granted
Cancelled
Vested
Unvested at December 31, 2016
Unvested at March 31, 2017
Restricted stock unit activity during 2016 and 2017 was as follows:
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The grant-date fair value of the Company’s stock options is estimated using the Black-Scholes option pricing model. The following table summarizes the grant-date fair value of options and the assumptions used to develop the fair value estimates for options granted during the three months ended March 31, 2017 and year ended December 31, 2016:
Weighted average grant-date fair value of options
Risk-free interest rate
Expected volatility
Expected life (in years)
The Company’s estimate of expected volatility for stock options is based upon the volatility of guideline companies given the lack of sufficient historical trading experience of the Company’s common stock. The risk-free interest rate is the approximate yield on U. S. Treasury Strips having a life equal to the expected option life on the date of grant. The expected life is an estimate of the number of years an option will be held before it is exercised.
The Company adopted ASU 2016-09 as of January 1, 2017, which changes how the Company accounts for share-based awards for tax purposes. Income tax effects of share-based awards are now recognized in the income statement, instead of through equity, when the awards vest.
Excess tax benefits/deficiencies are generated when the deduction for tax purposes is greater/less than the compensation cost for financial reporting purposes. Upon adoption of ASU 2016-09, the Company no longer records excess tax benefits/deficiencies in additional paid-in capital as a component of equity. Instead, excess tax benefits/deficiencies are included in the provision for income taxes on the condensed consolidated statements of income. These changes are recorded prospectively as of January 1, 2017, which resulted in an increase in our income tax provision of $1.7 million, or an increase in the effective tax rate of 3.6%, for the three months ended March 31, 2017. Prior periods have not been adjusted. An adjustment for prior period excess tax benefits of $8.6 million is recorded as a cumulative-effect adjustment in retained earnings at March 31, 2017 as the Company adopted this amendment using the modified transition method. Excess tax benefits were previously required to be included in financing activities on the condensed consolidated statement of cash flows and are now required to be included in operating activities. The changes to the condensed consolidated statement of cash flows are recorded prospectively as of January 1, 2017. Additionally, the Company has elected not to adjust its policy on accounting for forfeitures and will continue to estimate forfeiture rates.
The provision for income taxes for the three months ended March 31, 2017 and 2016 reflects effective tax rates of 28.3% and 21.9%, respectively. The increase in the effective tax rate for the three months ended March 31, 2017 was primarily attributable to the adoption of ASU 2016-09, the reduction in earnings related to the U.K. Divestiture and the decline in the exchange rate between U.S. dollars (“USD”) and British pounds (“GBP”).
The Company entered into foreign currency forward contracts during the three months ended March 31, 2017 and 2016 in connection with (i) acquisitions in the U.K. and (ii) transfers of cash between the U.S. and U.K. under the Company’s cash management and foreign currency risk management programs. Foreign currency forward contracts limit the economic risk of changes in the exchange rate between USD and GBP associated with cash transfers.
The foreign currency forward contracts entered into during the three months ended March 31, 2016 resulted in gains of $0.4 million for the three months ended March 31, 2016, which have been recorded in the condensed consolidated statements of income.
In May 2016, the Company entered into multiple cross currency swap agreements with an aggregate notional amount of $650.0 million to manage foreign currency risk by effectively converting a portion of its fixed-rateUSD-denominated senior notes, including the semi-annual interest payments thereunder, to fixed-rate GBP-denominated debt of £449.3 million. The senior notes effectively converted include $150.0 million aggregate principal amount of 6.125% Senior Notes, $300.0 million aggregate principal amount of 5.125% Senior Notes and $200.0 million aggregate principal amount of 5.625% Senior Notes. During the term of the swap agreements, the Company will receive semi-annual interest payments in USD from the counterparties at fixed interest rates, and the Company will make semi-annual interest payments in GBP to the counterparties at fixed interest rates. The interest payments under the cross-currency swap agreements result in £24.7 million of annual cash flows, from the Company’s U.K. business being converted to $35.8 million (at a 1.45 exchange rate). The interest rates applicable to the GBP interest payments are substantially the same as the interest rates in place for the existing USD-denominated debt. At maturity, the Company will repay the principal amounts listed above in GBP and receive the principal amount in USD.
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The Company has designated the cross currency swap agreements and certain forward contracts entered into during 2016 and the three months ended March 31, 2017 as qualifying hedging instruments and is accounting for these as net investment hedges. The fair value of these derivatives of $59.3 million is recorded as derivative instruments on the condensed consolidated balance sheets. The gains and losses resulting from fair value adjustments to these derivatives are recorded in accumulated other comprehensive loss as the swaps are effective in hedging the designated risk. Cash flows related to these derivatives are included in operating activities in the condensed consolidated statements of cash flows.
The carrying amounts reported for cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities approximate fair value because of the short-term maturity of these instruments.
The carrying amounts and fair values of the Company’s Amended and Restated Senior Credit Facility, 6.125% Senior Notes, 5.125% Senior Notes, 5.625% Senior Notes, 6.500% Senior Notes, 9.0% and 9.5% Revenue Bonds, derivative instruments and contingent consideration liabilities as of March 31, 2017 and December 31, 2016 were as follows (in thousands):
Contingent consideration liabilities
The Company’s Amended and Restated Senior Credit Facility, 6.125% Senior Notes, 5.125% Senior Notes, 5.625% Senior Notes, 6.500% Senior Notes and 9.0% and 9.5% Revenue Bonds were categorized as Level 2 in the GAAP fair value hierarchy. Fair values were based on trading activity among the Company’s lenders and the average bid and ask price as determined using published rates.
The fair values of the derivative instruments were categorized as Level 2 in the GAAP fair value hierarchy and were based on observable market inputs including applicable exchange rates and interest rates.
The fair value of the contingent consideration liabilities were categorized as Level 3 in the GAAP fair value hierarchy. The contingent consideration liabilities were valued using a probability-weighted discounted cash flow method. This analysis reflected the contractual terms of the purchase agreements and utilized assumptions with regard to future earnings, probabilities of achieving such future earnings and a discount rate.
Professional and General Liability
Effective September 1, 2016, a portion of the Company’s professional liability risks is insured through a wholly-owned insurance subsidiary. The Company’s wholly-owned insurance subsidiary insures the Company for professional liability losses up to $52.0 million in the aggregate. The insurance subsidiary has obtained reinsurance with unrelated commercial insurers for professional liability risks of $50.0 million in excess of a retention level of $2.0 million.
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The Company is, from time to time, subject to various claims and legal actions that arise in the ordinary course of the Company’s business, including claims for damages for personal injuries, medical malpractice, breach of contract, tort and employment related claims. In these actions, plaintiffs request a variety of damages, including, in some instances, punitive and other types of damages that may not be covered by insurance. In the opinion of management, the Company is not currently a party to any proceeding that would individually or in the aggregate have a material adverse effect on the Company’s business, financial condition or results of operations.
On May 2, 2016, the Company opened Crestwyn Behavioral Health, a de novo inpatient psychiatric facility located in Memphis, Tennessee. The Company owns 60% of the equity interests in the entity that owns this facility, and two noncontrolling partners each own 20%. The value of the 40% noncontrolling interests is approximately $6.0 million and is based on the fair value of contributions. The Company consolidates the operations of the facility based on its 60% equity ownership and its control of the entity. The noncontrolling interests are reflected as redeemable noncontrolling interests on the accompanying consolidated balance sheets based on a put right that could require the Company to purchase the noncontrolling interests upon the occurrence of a change in control.
Other current assets consisted of the following (in thousands):
Other receivables
Prepaid expenses
Workers’ compensation deposits – current portion
Income taxes receivable
Insurance receivable-current portion
Inventory
Other accrued liabilities consisted of the following (in thousands):
Accrued expenses
Unearned income
Accrued interest
Insurance liability – current portion
Income taxes payable
Accrued property taxes
The Company operates in one line of business, which is operating acute inpatient psychiatric facilities, specialty treatment facilities, residential treatment centers and facilities providing outpatient behavioral healthcare services. As management reviews the operating results of its facilities in the United States (the “U.S. Facilities”) and its facilities in the United Kingdom (the “U.K. Facilities”) separately to assess performance and make decisions, the Company’s operating segments include its U.S. Facilities and U.K. Facilities. At March 31, 2017, the U.S. Facilities included 208 behavioral healthcare facilities with approximately 8,500 beds in 39 states and Puerto Rico, and the U.K. Facilities included 367 behavioral healthcare facilities with approximately 8,700 beds in the U.K.
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The following tables set forth the financial information by operating segment, including a reconciliation of Segment EBITDA to income before income taxes (in thousands):
Revenue:
U.S. Facilities
U.K. Facilities
Corporate and Other
Segment EBITDA (1):
Segment EBITDA (1)
Plus (less):
Goodwill:
Balance at January 1, 2017
Foreign currency translation gain
Prior year purchase price adjustments
Assets (2):
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The components of accumulated other comprehensive loss are as follows (in thousands):
Loss on derivative instruments, net of tax of $(5.6) million
The Company conducts substantially all of its business through its subsidiaries. The 6.125% Senior Notes, 5.125% Senior Notes, 5.625% Senior Notes and 6.500% Senior Notes are jointly and severally guaranteed on an unsecured senior basis by all of the Company’s subsidiaries that guarantee the Company’s obligations under the Amended and Restated Senior Credit Facility. Presented below is condensed consolidating financial information for the Company and its subsidiaries as of March 31, 2017 and December 31, 2016, and for the three months ended March 31, 2017 and 2016. The information segregates the parent company (Acadia Healthcare Company, Inc.), the combined wholly-owned subsidiary guarantors, the combined non-guarantor subsidiaries and eliminations.
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Condensed Consolidating Balance Sheets
Investment in subsidiaries
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December 31, 2016
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Condensed Consolidating Statement of Comprehensive Income (Loss)
Three Months Ended March 31, 2017
Salaries, wages and benefits
(Loss) income before income taxes
Equity in earnings of subsidiaries
(Benefit from) provision for income taxes
Net income (loss)
Net income (loss) attributable to Acadia HealthcareCompany, Inc.
Loss on derivative instruments
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Three Months Ended March 31, 2016
Other comprehensive loss:
Foreign currency translation loss
Other comprehensive loss
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Condensed Consolidating Statement of Cash Flows
Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operating activities:
Deferred income tax (benefit) expense
Net cash provided by (used in) continuing operating activities
Net cash provided by (used in) operating activities
Cash provided by (used in) intercompany activity
Net (used in) provided by in financing activities
Net decrease in cash and cash equivalents
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Adjustments to reconcile net income (loss) to net cash (used in) provided by continuing operating activities:
Net cash (used in) provided by continuing operating activities
Net cash (used in) provided by operating activities
Issuance of common stock
Cash (used in) provided by intercompany activity
Net cash provided by financing activities
Net increase in cash and cash equivalents
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This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statements that address future results or occurrences. In some cases you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “would,” “should,” “could” or the negative thereof. Generally, the words “anticipate,” “believe,” “continue,” “expect,” “intend,” “estimate,” “project,” “plan” and similar expressions identify forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained are forward-looking statements.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors, many of which are outside of our control, which could cause our actual results, performance or achievements to differ materially from any results, performance or achievements expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to:
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Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. These forward-looking statements are made only as of the date of this Quarterly Report on Form 10-Q. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.
Overview
Our business strategy is to acquire and develop behavioral healthcare facilities and improve our operating results within our facilities and our other behavioral healthcare operations. We strive to improve the operating results of our facilities by providing high-quality services, expanding referral networks and marketing initiatives while meeting the increased demand for behavioral healthcare services through expansion of our current locations as well as developing new services within existing locations. At March 31, 2017, we operated 575 behavioral healthcare facilities with over 17,200 beds in 39 states, the U.K. and Puerto Rico. During the three months ended March 31, 2017, we added 82 new beds to existing facilities. For the year ending December 31, 2017, we expect to add approximately 800 total beds exclusive of acquisitions.
We are the leading publicly traded pure-play provider of behavioral healthcare services, with operations in the U.S. and the U.K. Management believes that we are positioned as a leading platform in a highly fragmented industry under the direction of an experienced management team that has significant industry expertise. Management expects to take advantage of several strategies that are more accessible as a result of our increased size and geographic scale, including continuing a national marketing strategy to attract new patients and referral sources, increasing our volume of out-of-state referrals, providing a broader range of services to new and existing patients and clients and selectively pursuing opportunities to expand our facility and bed count in the U.S and U.K.
Acquisitions
On June 1, 2016, we completed the acquisition of Pocono Mountain, an inpatient psychiatric facility with 108 beds located in Henryville, Pennsylvania, for cash consideration of approximately $25.4 million. In addition, we may be required to make a cash payment of up to $5.0 million under an earn-out agreement, contingent upon achievement by Pocono Mountain of certain operating performance targets for the one-year period ending May 31, 2017.
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On May 1, 2016, we completed the acquisition of TrustPoint, an inpatient psychiatric facility with 100 beds located in Murfreesboro, Tennessee, for cash consideration of approximately $62.7 million.
On April 1, 2016, we completed the acquisition of Serenity Knolls, an inpatient psychiatric facility with 30 beds located in Forest Knolls, California, for cash consideration of approximately $9.7 million.
On February 16, 2016, we completed the acquisition of Priory for a total purchase price of approximately $2.2 billion, including cash consideration of approximately $1.9 billion and the issuance of 4,033,561 shares of our common stock to shareholders of Priory. Priory was the leading independent provider of behavioral healthcare services in the U.K. operating 324 facilities with approximately 7,100 beds at the acquisition date.
The CMA in the U.K. reviewed our acquisition of Priory. On July 14, 2016, the CMA announced that our acquisition of Priory was referred for a phase 2 investigation unless we offered acceptable undertakings to address the CMA’s competition concerns relating to the provision of behavioral healthcare services in certain markets. On July 28, 2016, the CMA announced that we had offered undertakings to address the CMA’s concerns and that, in lieu of a phase 2 investigation, the CMA would consider our undertakings.
On October 18, 2016, we signed a definitive agreement with BC Partners for the sale of 21 existing U.K. behavioral health facilities and one de novo behavioral health facility with an aggregate of approximately 1,000 beds. On November 10, 2016, the CMA accepted our undertakings to sell the U.K. Disposal Group to BC Partners and confirmed that the divestiture satisfied the CMA’s concerns about the impact of our acquisition of Priory on competition for the provision of behavioral healthcare services in certain markets in the U.K. As a result of the CMA’s acceptance of our undertakings, our acquisition of Priory was not referred for a phase 2 investigation. On November 30, 2016, we completed the sale of the U.K. Disposal Group to BC Partners for £320 million cash.
Our revenue is primarily derived from services rendered to patients for inpatient psychiatric and substance abuse care, outpatient psychiatric care and adolescent residential treatment. We receive payments from the following sources for services rendered in our facilities: (i) state governments under their respective Medicaid and other programs; (ii) commercial insurers; (iii) the federal government under the Medicare program administered by CMS; (iv) publicly funded sources in the U.K. (including the NHS, Clinical Commissioning Groups and local authorities in England, Scotland and Wales) and (v) individual patients and clients. Revenue is recorded in the period in which services are provided at established billing rates less contractual adjustments based on amounts reimbursable by Medicare or Medicaid under provisions of cost or prospective reimbursement formulas or amounts due from other third-party payors at contractually determined rates.
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The following table presents revenue by payor type and as a percentage of revenue before provision for doubtful accounts for the three months ended March 31, 2017 and 2016 (dollars in thousands):
Commercial
Medicare
Medicaid
U.K. public funded sources
Self-Pay
The following tables present a summary of our aging of accounts receivable as of March 31, 2017 and December 31, 2016:
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Results of Operations
The following table illustrates our consolidated results of operations for the respective periods shown (dollars in thousands):
Interest expense
Three months ended March 31, 2017 compared to the three months ended March 31, 2016
Revenue before provision for doubtful accounts. Revenue before provision for doubtful accounts increased $62.1 million, or 9.9%, to $689.3 million for the three months ended March 31, 2017 from $627.2 million for the three months ended March 31, 2016. The increase related primarily to revenue generated during the three months ended March 31, 2017 from the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory. The decrease in the GBP to USD exchange rate had an unfavorable impact on revenue before provision for doubtful accounts of $37.5 million for the three months ended March 31, 2017. Same-facility revenue before provision for doubtful accounts increased by $25.1 million, or 4.7%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, resulting from same-facility growth in patient days of 3.7% and an increase in same-facility revenue per day of 1.0%. Consistent with the same-facility patient day growth in 2016, the growth in same-facility patient days for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 resulted from the addition of beds to our existing facilities and ongoing demand for our services.
Provision for doubtful accounts. The provision for doubtful accounts was $10.1 million for the three months ended March 31, 2017, or 1.5% of revenue before provision for doubtful accounts, compared to $10.4 million for the three months ended March 31, 2016, or 1.7% of revenue before provision for doubtful accounts.
Salaries, wages and benefits. Salaries, wages and benefits (“SWB”) expense was $376.4 million for the three months ended March 31, 2017 compared to $341.0 million for the three months ended March 31, 2016, an increase of $35.4 million. SWB expense included $7.4 million and $7.0 million of equity-based compensation expense for the three months ended March 31, 2017 and 2016, respectively. Excluding equity-based compensation expense, SWB expense was $369.0 million, or 54.3% of revenue, for the three months ended March 31, 2017, compared to $334.0 million, or 54.2% of revenue, for the three months ended March 31, 2016. The $35.0 million increase in SWB expense, excluding equity-based compensation expense, was primarily attributable to SWB expense incurred by the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory. Same-facility SWB expense was $278.5 million for the three months ended March 31, 2017, or 50.8% of revenue, compared to $266.1 million for the three months ended March 31, 2016, or 50.9% of revenue.
Professional fees. Professional fees were $43.4 million for the three months ended March 31, 2017, or 6.4% of revenue, compared to $40.0 million for the three months ended March 31, 2016, or 6.5% of revenue. The $3.4 million increase was primarily attributable to professional fees incurred by the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory. Same-facility professional fees were $30.4 million for the three months ended March 31, 2017, or 5.5% of revenue, compared to $29.3 million, for the three months ended March 31, 2016, or 5.6% of revenue.
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Supplies. Supplies expense was $27.7 million for the three months ended March 31, 2017, or 4.1% of revenue, compared to $26.7 million for the three months ended March 31, 2016, or 4.3% of revenue. The $1.0 million increase was primarily attributable to supplies expense incurred by the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory. Same-facility supplies expense was $23.0 million for the three months ended March 31, 2017, or 4.2% of revenue, compared to $22.2 million for the three months ended March 31, 2016, or 4.2% of revenue.
Rents and leases. Rents and leases were $19.0 million for the three months ended March 31, 2017, or 2.8% of revenue, compared to $14.8 million for the three months ended March 31, 2016, or 2.4% of revenue. The $4.2 million increase was primarily attributable to rents and leases incurred by the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory. Same-facility rents and leases were $11.9 million for the three months ended March 31, 2017, or 2.2% of revenue, compared to $11.8 million for the three months ended March 31, 2016, or 2.3% of revenue.
Other operating expenses. Other operating expenses consisted primarily of purchased services, utilities, insurance, travel and repairs and maintenance expenses. Other operating expenses were $83.7 million for the three months ended March 31, 2017, or 12.3% of revenue, compared to $70.2 million for the three months ended March 31, 2016, or 11.4% of revenue. The $13.5 million increase was primarily attributable to other operating expenses incurred by the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory. Same-facility other operating expenses were $66.3 million for the three months ended March 31, 2017, or 12.0% of revenue, compared to $59.6 million for the three months ended March 31, 2016, or 11.4% of revenue.
Depreciation and amortization. Depreciation and amortization expense was $33.6 million for the three months ended March 31, 2017, or 4.9% of revenue, compared to $28.0 million for the three months ended March 31, 2016, or 4.5% of revenue. The increase in depreciation and amortization was attributable to depreciation associated with capital expenditures during 2016 and 2017 and real estate acquired as part of the 2016 Acquisitions, particularly the acquisition of Priory.
Interest expense.Interest expense was $42.8 million for the three months ended March 31, 2017 compared to $37.7 million for the three months ended March 31, 2016. The increase in interest expense was primarily a result of borrowings under the Amended and Restated Senior Credit Facility and the issuance of the 6.500% Senior Notes on February 16, 2016.
Gain on foreign currency derivatives. We entered into foreign currency forward contracts during the three months ended March 31, 2016 in connection with (i) acquisitions in the U.K. and (ii) transfers of cash between the U.S. and U.K. under our cash management and foreign currency risk management programs. Exchange rate changes between the contract date and the settlement date resulted in a gain on foreign currency derivatives of $0.4 million for the three months ended March 31, 2016.
Transaction-related expenses. Transaction-related expenses were $4.1 million for the three months ended March 31, 2017 compared to $26.3 million for the three months ended March 31, 2016. Transaction-related expenses represent costs incurred in the respective periods, as summarized below (in thousands):
Provision for income taxes. For the three months ended March 31, 2017, the provision for income taxes was $13.7 million, reflecting an effective tax rate of 28.3%, compared to $7.1 million, reflecting an effective tax rate of 21.9%, for the three months ended March 31, 2016. The increase in the tax rate for the three months ended March 31, 2017 was primarily attributable to the adoption of ASU 2016-09, the reduction in earnings related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP.
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Liquidity and Capital Resources
Cash provided by continuing operating activities for the three months ended March 31, 2017 was $57.4 million compared to $59.3 million for the three months ended March 31, 2016. The decrease in cash provided by continuing operating activities was primarily attributable to the U.K. Divestiture and the decline in the exchange rate between USD and GBP. Days sales outstanding were 37 days at March 31, 2017 compared to 34 days at December 31, 2016. As of March 31, 2017 and December 31, 2016, we had working capital of $88.2 million and $85.1 million, respectively.
Cash used in investing activities for the three months ended March 31, 2017 was $58.1 million compared to $685.4 million for the three months ended March 31, 2016. Cash used in investing activities for the three months ended March 31, 2017 primarily consisted of $50.5 million of cash paid for capital expenditures and $2.5 million of cash paid for real estate. Cash paid for capital expenditures for the three months ended March 31, 2017 consisted of $15.8 million of routine capital expenditures and $34.7 million of expansion capital expenditures. We define expansion capital expenditures as those that increase the capacity of our facilities or otherwise enhance revenue. Routine or maintenance capital expenditures were 2.3% of revenue for the three months ended March 31, 2017. Cash used in investing activities for the three months ended March 31, 2016 primarily consisted of $580.1 million of cash paid for acquisitions, $90.1 million of cash paid for capital expenditures and $14.8 million of cash paid for real estate acquisitions.
Cash used in financing activities for the three months ended March 31, 2017 was $13.7 million compared to cash provided by financing activities of $654.0 million for the three months ended March 31, 2016. Cash used in financing activities for the three months ended March 31, 2017 primarily consisted of principal payments on long-term debt of $8.6 million and common stock withheld for minimum statutory taxes of $4.2 million. Cash provided by financing activities for the three months ended March 31, 2016 primarily consisted of borrowings on long-term debt borrowings of $1.5 billion, borrowings on our revolving credit facility of $58.0 million and an issuance of common stock of $685.1 million, partially offset by repayment of assumed Priory debt of $1.3 billion, payment of revolving credit facility of $166.0 million, payment of debt issuance costs of $34.2 million, principal payments on long-term debt of $13.7 million and common stock withheld for minimum statutory taxes of $6.7 million.
We had total available cash and cash equivalents of $43.1 million and $57.1 million as of March 31, 2017 and December 31, 2016, respectively, of which approximately $40.2 million and $41.4 million was held by our foreign subsidiaries, respectively. Our strategic plan does not require the repatriation of foreign cash in order to fund our operations in the U.S., and it is our current intention to permanently reinvest our foreign cash and cash equivalents outside of the U.S. If we were to repatriate foreign cash to the U.S., we would be required to accrue and pay U.S. taxes in accordance with applicable U.S. tax rules and regulations as a result of the repatriation.
We entered into the Senior Secured Credit Facility on April 1, 2011. On December 31, 2012, we entered into the Amended and Restated Credit Agreement which amended and restated the Senior Secured Credit Facility. We have amended the Amended and Restated Credit Agreement from time to time as described in our prior filings with the SEC.
On January 25, 2016, we entered into the Ninth Amendment to our Amended and Restated Credit Agreement. The Ninth Amendment modified certain definitions and provides increased flexibility to us in terms of our financial covenants. Our baskets for permitted investments were also increased to provide increased flexibility for us to invest innon-wholly owned subsidiaries, joint ventures and foreign subsidiaries. As a result of the Ninth Amendment, we may invest in non-wholly owned subsidiaries and joint ventures up to 10.0% of our and our subsidiaries’ total assets in any consecutive four fiscal quarter period, and up to 12.5% of our and our subsidiaries’ total assets during the term of the Amended and Restated Credit Agreement. We may also invest in foreign subsidiaries that are not loan parties up to 10% of our and our subsidiaries’ total assets in any consecutive four fiscal quarter period, and up to 15% of our and our subsidiaries’ total assets during the term of the Amended and Restated Credit Agreement. The foregoing permitted investments are subject to an aggregate cap of 25% of our and our subsidiaries’ total assets in any fiscal year.
On February 16, 2016, we entered into the Second Incremental Facility Amendment to our Amended and Restated Credit Agreement. The Second Incremental Amendment activated a new $955.0 million incremental Term Loan B facility and added $135.0 million to the Term Loan A facility to our Amended and Restated Senior Secured Credit Facility, subject to limited conditionality provisions. Borrowings under the New TLB Facility were used to fund a portion of the purchase price for the acquisition of Priory and the fees and expenses for such acquisition and the related financing transactions. Borrowings under the TLA Facility were used to pay down the majority of our $300.0 million revolving credit facility.
On May 26, 2016, we entered into a Tranche B-1 Repricing Amendment to the Amended and Restated Credit Agreement. The Tranche B-1 Repricing Amendment reduced the Applicable Rate with respect to the Existing TLB Facility from 3.5% to 3.0% in the case of Eurodollar Rate loans and 2.5% to 2.0% in the case of Base Rate Loans.
On September 21, 2016, we entered into a Tranche B-2 Repricing Amendment to the Amended and Restated Credit Agreement. The Tranche B-2 Repricing Amendment reduced the Applicable Rate with respect to the New TLB Facility from 3.75% to 3.00% in the case of Eurodollar Rate loans and 2.75% to 2.00% in the case of Base Rate Loans. In connection with the Tranche B-2 Repricing Amendment, we recorded a debt extinguishment charge of $3.4 million, including the discount and write-off of deferred financing costs, which was recorded in debt extinguishment costs in the condensed consolidated statements of income.
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On November 22, 2016, we entered into a Tenth Amendment to the Amended and Restated Credit Agreement. The Tenth Amendment, among other things, (i) amended the negative covenant regarding dispositions, (ii) modified the collateral package to release any real property with a fair market value of less than $5.0 million and (iii) changed certain investment, indebtedness and lien baskets.
On November 30, 2016, we entered into a Refinancing Facilities Amendment to the Amended and Restated Credit Agreement. The Refinancing Amendment increased our line of credit on our revolving credit facility to $500.0 million from $300.0 million and reduced our TLA Facility to $400.0 million from $600.6 million. In addition, the Refinancing Amendment extended the maturity date for the Refinancing Facilities to November 30, 2021 from February 13, 2019, and lowered our effective interest rate on our line of credit on our revolving credit facility and TLA Facility by 50 basis points. In connection with the Refinancing Amendment, we recorded a debt extinguishment charge of $0.8 million, including the write-off of deferred financing costs, which was recorded in debt extinguishment costs in the condensed consolidated statements of income.
We had $493.4 million of availability under the revolving line of credit and had standby letters of credit outstanding of $6.6 million related to security for the payment of claims required by our workers’ compensation insurance program as of March 31, 2017. Borrowings under the revolving line of credit are subject to customary conditions precedent to borrowing. The Amended and Restated Credit Agreement requires quarterly term loan principal repayments of our TLA Facility of $5.0 million for March 31, 2017 to December 31, 2019, $7.5 million for March 31, 2020 to December 31, 2020, and $10.0 million for March 31, 2021 to September 30, 2021, with the remaining principal balance of the TLA Facility due on the maturity date of November 30, 2021. We are required to repay the Existing TLB Facility in equal quarterly installments of $1.3 million on the last business day of each March, June, September and December, with the outstanding principal balance of the Existing TLB Facility due on February 11, 2022. We are required to repay the New TLB Facility in equal quarterly installments of approximately $2.4 million on the last business day of each March, June, September and December, with the outstanding principal balance of the New TLB Facility due on February 16, 2023.
Borrowings under the Amended and Restated Credit Agreement are guaranteed by each of our wholly-owned domestic subsidiaries (other than certain excluded subsidiaries) and are secured by a lien on substantially all of our and such subsidiaries’ assets. Borrowings with respect to the TLA Facility and our revolving credit facility (collectively, “Pro Rata Facilities”) under the Amended and Restated Credit Agreement bear interest at a rate tied to our Consolidated Leverage Ratio (defined as consolidated funded debt net of up to $40.0 million of unrestricted and unencumbered cash to consolidated EBITDA, in each case as defined in the Amended and Restated Credit Agreement). The Applicable Rate (as defined in the Amended and Restated Credit Agreement) for the Pro Rata Facilities was 2.75% for Eurodollar Rate Loans (as defined in the Amended and Restated Credit Agreement) and 1.75% for Base Rate Loans (as defined in the Amended and Restated Credit Agreement) at March 31, 2017. Eurodollar Rate Loans with respect to the Pro Rata Facilities bear interest at the Applicable Rate plus the Eurodollar Rate (as defined in the Amended and Restated Credit Agreement) (based upon the LIBOR Rate (as defined in the Amended and Restated Credit Agreement) prior to commencement of the interest rate period). Base Rate Loans with respect to the Pro Rata Facilities bear interest at the Applicable Rate plus the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate and (iii) the Eurodollar Rate plus 1.0%. As of March 31, 2017, the Pro Rata Facilities bore interest at a rate of LIBOR plus 2.75%. In addition, we are required to pay a commitment fee on undrawn amounts under our revolving credit facility.
The interest rates and the unused line fee on unused commitments related to the Pro Rata Facilities are based upon the following pricing tiers:
Pricing Tier
Eurodollar Rate Loans with respect to the Existing TLB Facility bear interest at the Existing TLB Applicable Rate (as defined below) plus the Eurodollar Rate (subject to a floor of 0.75% and based upon the LIBOR Rate prior to commencement of the interest rate period). Base Rate Loans bear interest at the Existing TLB Applicable Rate plus the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate and (iii) the Eurodollar Rate plus 1.0%. As used herein, the term “Existing TLB Applicable Rate” means, with respect to Eurodollar Rate Loans, 3.0%, and with respect to Base Rate Loans, 2.0%. The New TLB Facility bears interest as follows: Eurodollar Rate Loans bear interest at the Applicable Rate (as defined in the Amended and Restated Credit Agreement) plus the Eurodollar Rate (subject to a floor of 0.75% and based upon the LIBOR Rate prior to commencement of the interest rate period) and Base Rate Loans bear interest at the Applicable Rate plus the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate and (iii) the Eurodollar Rate plus 1.0%. As used herein, the term “Applicable Rate” means, with respect to Eurodollar Rate Loans, 3.0%, and with respect to Base Rate Loans, 2.0%.
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The lenders who provided the Existing TLB Facility and New TLB Facility are not entitled to benefit from our maintenance of its financial covenants under the Amended and Restated Credit Agreement. Accordingly, if we fail to maintain its financial covenants, such failure shall not constitute an event of default under the Amended and Restated Credit Agreement with respect to the Existing TLB Facility or the New TLB Facility until and unless the Amended and Restated Senior Credit Facility is accelerated or the commitment of the lenders to make further loans is terminated.
The Amended and Restated Credit Agreement requires us and our subsidiaries to comply with customary affirmative, negative and financial covenants, including a fixed charge coverage ratio, consolidated leverage ratio and consolidated senior secured leverage ratio. We may be required to pay all of our indebtedness immediately if we default on any of the numerous financial or other restrictive covenants contained in any of our material debt agreements. Set forth below is a brief description of such covenants, all of which are subject to customary exceptions, materiality thresholds and qualifications:
June 30, 2017
September 30, 2017- June 30, 2018
September 30, 2018 and each fiscal quarter thereafter
As of March 31, 2017, we were in compliance with all of the above covenants.
6.125% Senior Notes Due 2021
On March 12, 2013, we issued $150.0 million of 6.125% Senior Notes due 2021. The 6.125% Senior Notes mature on March 15, 2021 and bear interest at a rate of 6.125% per annum, payable semi-annually in arrears on March 15 and September 15 of each year.
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On July 1, 2014, we issued $300.0 million of 5.125% Senior Notes due 2022. The 5.125% Senior Notes mature on July 1, 2022 and bear interest at a rate of 5.125% per annum, payable semi-annually in arrears on January 1 and July 1 of each year.
On February 11, 2015, we issued $375.0 million of 5.625% Senior Notes due 2023. On September 21, 2015, we issued $275.0 million of additional 5.625% Senior Notes. The additional notes formed a single class of debt securities with the 5.625% Senior Notes issued in February 2015. Giving effect to this issuance, we have outstanding an aggregate of $650.0 million of 5.625% Senior Notes. The 5.625% Senior Notes mature on February 15, 2023 and bear interest at a rate of 5.625% per annum, payable semi-annually in arrears on February 15 and August 15 of each year.
On February 16, 2016, we issued $390.0 million of 6.500% Senior Notes due 2024. The 6.500% Senior Notes mature on March 1, 2024 and bear interest at a rate of 6.500% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2016.
The indentures governing the Senior Notes contain covenants that, among other things, limit our ability and the ability of its restricted subsidiaries to: (i) pay dividends, redeem stock or make other distributions or investments; (ii) incur additional debt or issue certain preferred stock; (iii) transfer or sell assets; (iv) engage in certain transactions with affiliates; (v) create restrictions on dividends or other payments by the restricted subsidiaries; (vi) merge, consolidate or sell substantially all of our assets; and (vii) create liens on assets.
The Senior Notes issued by us are guaranteed by each of our subsidiaries that guarantee our obligations under the Amended and Restated Senior Credit Facility. The guarantees are full and unconditional and joint and several.
We may redeem the Senior Notes at its option, in whole or part, at the dates and amounts set forth in the indentures.
On November 11, 2012, in connection with the acquisition of Park Royal, we assumed debt of $23.0 million. The fair market value of the debt assumed was $25.6 million and resulted in a debt premium balance being recorded as of the acquisition date. The debt consisted of $7.5 million and $15.5 million of Lee County (Florida) Industrial Development Authority Healthcare Facilities Revenue Bonds, Series 2010 with stated interest rates of 9.0% and 9.5%, respectively. The 9.0% bonds in the amount of $7.5 million have a maturity date of December 1, 2030 and require yearly principal payments beginning in 2013. The 9.5% bonds in the amount of $15.5 million have a maturity date of December 1, 2040 and require yearly principal payments beginning in 2031. The principal payments establish a bond-sinking fund to be held with the trustee and shall be sufficient to redeem the principal amounts of the 9.0% and 9.5% Revenue Bonds on their respective maturity dates. As of March 31, 2017 and December 31, 2016, $2.3 million was recorded within other assets on the condensed consolidated balance sheets related to the debt service reserve fund requirements. The yearly principal payments, which establish a bond sinking fund, will increase the debt service reserve fund requirements. The bond premium amount of $2.6 million is amortized as a reduction of interest expense over the life of the 9.0% and 9.5% Revenue Bonds using the effective interest method.
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Contractual Obligations
The following table presents a summary of contractual obligations as of March 31, 2017 (dollars in thousands):
Long-term debt (a)
Operating leases
Purchase and other obligations (b)
Total obligations and commitments
Off-Balance Sheet Arrangements
As of March 31, 2017, we had standby letters of credit outstanding of $6.6 million related to security for the payment of claims as required by our workers’ compensation insurance program.
Our interest expense is sensitive to changes in market interest rates. Our long-term debt outstanding at March 31, 2017 was composed of $1.5 billion of fixed-rate debt and $1.8 billion of variable-rate debt with interest based on LIBOR plus an applicable margin. A hypothetical 10% increase in interest rates (which would equate to a 0.39% higher rate on our variable rate debt) would decrease our net income and cash flows by $4.5 million on an annual basis based upon our borrowing level at March 31, 2017.
The functional currency for our U.K. facilities is the British pound or GBP. Our revenue and earnings are sensitive to changes in the GBP to USD exchange rate from the translation of our earnings into USD at exchange rates that may fluctuate. Based upon the level of our U.K. operations relative to the Company as a whole, a hypothetical 10% change in the exchange rate (which would equate to an increase or decrease in the exchange rate of 0.13) would cause a change in our net income of $11.3 million on an annual basis. In May 2016, we entered into multiple cross currency swap agreements with an aggregate notional amount of $650.0 million to manage foreign currency exchange risk by effectively converting a portion of our fixed-rate USD denominated senior notes, including the semi-annual interest payments thereunder, to fixed-rate, GBP-denominated debt of £449.3 million. The cross currency swap agreements limit the impact of changes in the exchange rate on our cash flows and leverage. Following the Brexit vote, the GBP dropped to its lowest level against the USD in more than 30 years. If the exchange rate remains low, our results of operations will be negatively impacted in future periods.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management conducted an evaluation, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended March 31, 2017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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We are, from time to time, subject to various claims and legal actions that arise in the ordinary course of our business, including claims for damages for personal injuries, medical malpractice, breach of contract, tort and employment related claims. In these actions, plaintiffs request a variety of damages, including, in some instances, punitive and other types of damages that may not be covered by insurance. In the opinion of management, we are not currently a party to any proceeding that would have a material adverse effect on our business, financial condition or results of operations.
In addition to the other information set forth in this report, an investor should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The risks, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems immaterial also may materially, adversely affect the Company’s business, financial condition, operating results or cash flows.
During the three months ended March 31, 2017, the Company withheld shares of Company common stock to satisfy employee minimum statutory tax withholding obligations payable upon the vesting of restricted stock, as follows:
Period
January 1 – January 31
February 1 – February 28
March 1 – March 31
Exhibit No.
Exhibit Description
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Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ David M. Duckworth
Dated: April 26, 2017
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EXHIBIT INDEX