10-Q 1 d407772d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-35331

 

 

ACADIA HEALTHCARE COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   45-2492228

(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.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

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 July 28, 2017, there were 87,870,122 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

ACADIA HEALTHCARE COMPANY, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.

   Financial Statements      1  
   Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2017 and December 31, 2016      1  
  

Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2017 and 2016

     2  
  

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended June 30, 2017 and 2016

     3  
   Condensed Consolidated Statement of Equity (Unaudited) for the Six Months Ended June 30, 2017      4  
   Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2017 and 2016      5  
   Notes to Condensed Consolidated Financial Statements (Unaudited)      6  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      28  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      39  

Item 4.

   Controls and Procedures      40  

PART II – OTHER INFORMATION

  

Item 1.

   Legal Proceedings      41  

Item 1A.

   Risk Factors      41  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      41  

Item 6.

   Exhibits      42  

SIGNATURES

     43  


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Acadia Healthcare Company, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

     June 30, 2017     December 31, 2016  
     (In thousands, except share
and per share amounts)
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 79,434     $ 57,063  

Accounts receivable, net of allowance for doubtful accounts of $40,992 and $38,916, respectively

     288,106       263,327  

Other current assets

     91,972       107,537  
  

 

 

   

 

 

 

Total current assets

     459,512       427,927  

Property and equipment, net

     2,866,086       2,703,695  

Goodwill

     2,710,333       2,681,188  

Intangible assets, net

     84,982       83,310  

Deferred tax assets – noncurrent

     3,719       3,780  

Derivative instruments

     43,753       73,509  

Other assets

     59,637       51,317  
  

 

 

   

 

 

 

Total assets

   $ 6,228,022     $ 6,024,726  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 34,805     $ 34,805  

Accounts payable

     81,399       80,034  

Accrued salaries and benefits

     97,819       105,068  

Other accrued liabilities

     132,944       122,958  
  

 

 

   

 

 

 

Total current liabilities

     346,967       342,865  

Long-term debt

     3,240,473       3,253,004  

Deferred tax liabilities – noncurrent

     74,467       78,520  

Other liabilities

     171,678       164,859  
  

 

 

   

 

 

 

Total liabilities

     3,833,585       3,839,248  

Redeemable noncontrolling interests

     17,577       17,754  

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; 86,991,051 and 86,688,199 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively

     870       867  

Additional paid-in capital

     2,508,064       2,496,288  

Accumulated other comprehensive loss

     (445,400     (549,570

Retained earnings

     313,326       220,139  
  

 

 

   

 

 

 

Total equity

     2,376,860       2,167,724  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,228,022     $ 6,024,726  
  

 

 

   

 

 

 

See accompanying notes.

 

1


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2017     2016     2017     2016  
     (In thousands, except per share amounts)  

Revenue before provision for doubtful accounts

   $ 725,643     $ 767,054     $ 1,414,984     $ 1,394,237  

Provision for doubtful accounts

     (9,747     (10,506     (19,894     (20,876
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     715,896       756,548       1,395,090       1,373,361  

Salaries, wages and benefits (including equity-based compensation expense of $7,436, $6,888, $14,832 and $13,844, respectively)

     383,595       408,287       760,016       749,315  

Professional fees

     46,321       50,292       89,730       90,283  

Supplies

     28,639       31,209       56,348       57,894  

Rents and leases

     19,435       20,467       38,406       35,273  

Other operating expenses

     83,122       80,955       166,833       151,202  

Depreciation and amortization

     35,201       36,752       68,814       64,727  

Interest expense, net

     43,505       48,758       86,262       86,472  

Debt extinguishment costs

     810       —       810       —  

Gain on foreign currency derivatives

     —       (98     —       (508

Transaction-related expenses

     9,052       6,074       13,171       32,372  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     649,680       682,696       1,280,390       1,267,030  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     66,216       73,852       114,700       106,331  

Provision for income taxes

     16,578       18,261       30,289       25,371  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     49,638       55,591       84,411       80,960  

Net (income) loss attributable to noncontrolling interests

     (8     854       177       1,173  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Acadia Healthcare Company, Inc.

   $ 49,630     $ 56,445     $ 84,588     $ 82,133  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings attributable to Acadia Healthcare Company, Inc. stockholders:

        

Basic

   $ 0.57     $ 0.65     $ 0.97     $ 0.97  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.57     $ 0.65     $ 0.97     $ 0.97  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding:

        

Basic

     86,954       86,553       86,859       84,748  

Diluted

     87,080       86,876       86,997       85,052  

See accompanying notes.

 

2


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2017     2016     2017     2016  
     (In thousands)  

Net income

   $ 49,638     $ 55,591     $ 84,411     $ 80,960  

Other comprehensive income (loss):

        

Foreign currency translation gain (loss)

     92,076       (213,468     119,122       (261,883

(Loss) gain on derivative instruments, net of tax of $(6.5) million, $16.5 million, $(12.1) million and $16.5 million, respectively

     (9,084     23,919       (14,952     23,919  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     82,992       (189,549     104,170       (237,964
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     132,630       (133,958     188,581       (157,004
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (gain) loss attributable to noncontrolling interests

     (8     854       177       1,173  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Acadia Healthcare Company, Inc.

   $ 132,622     $ (133,104   $ 188,758     $ (155,831
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

3


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidated Statement of Equity

(Unaudited)

 

    

 

Common Stock

     Additional
Paid-in
Capital
    Other
Comprehensive
Loss
    Retained
Earnings
(Accumulated
Deficit)
     Total  
     Shares      Amount            

Balance at December 31, 2016

     86,688      $ 867      $ 2,496,288     $ (549,570   $ 220,139      $ 2,167,724  

Common stock issued under stock incentive plans

     303        3        1,423       —       —        1,426  

Common stock withheld for minimum statutory taxes

     —        —        (5,104     —       —        (5,104

Equity-based compensation expense

     —        —        14,832       —       —        14,832  

Cumulative effect of change in accounting principle

     —        —            —       8,599      8,599  

Other comprehensive income

     —        —            104,170       —        104,170  

Other

     —        —        625       —       —        625  

Net income attributable to Acadia Healthcare Company, Inc.

     —        —            —       84,588        84,588  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2017

     86,991      $ 870      $ 2,508,064     $ (445,400   $ 313,326      $ 2,376,860  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes.

 

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Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended
June 30,
 
     2017     2016  
     (In thousands)  

Operating activities:

    

Net income

   $ 84,411     $ 80,960  

Adjustments to reconcile net income to net cash provided by continuing operating activities:

    

Depreciation and amortization

     68,814       64,727  

Amortization of debt issuance costs

     4,845       4,956  

Equity-based compensation expense

     14,832       13,844  

Deferred income tax expense

     17,096       16,821  

Debt extinguishment costs

     810       —    

Gain on foreign currency derivatives

     —         (508

Other

     6,558       704  

Change in operating assets and liabilities, net of effect of acquisitions:

    

Accounts receivable, net

     (22,404     (18,982

Other current assets

     20,457       (7,256

Other assets

     1,809       1,582  

Accounts payable and other accrued liabilities

     (4,893     29,101  

Accrued salaries and benefits

     (9,157     (3,846

Other liabilities

     5,257       3,728  
  

 

 

   

 

 

 

Net cash provided by continuing operating activities

     188,435       185,831  

Net cash used in discontinued operating activities

     (829     (2,973
  

 

 

   

 

 

 

Net cash provided by operating activities

     187,606       182,858  

Investing activities:

    

Cash paid for acquisitions, net of cash acquired

     —         (683,285

Cash paid for capital expenditures

     (117,521     (177,718

Cash paid for real estate acquisitions

     (22,850     (28,439

Settlement of foreign currency derivatives

     —         508  

Other

     (5,938     (1,084
  

 

 

   

 

 

 

Net cash used in investing activities

     (146,309     (890,018

Financing activities:

    

Borrowings on long-term debt

     —         1,480,000  

Borrowings on revolving credit facility

     —         158,000  

Principal payments revolving credit facility

     —         (166,000

Principal payments on long-term debt

     (17,275     (29,869

Repayment of assumed debt

     —         (1,348,389

Payment of debt issuance costs

     —         (35,511

Issuance of common stock, net

     —         685,097  

Common stock withheld for minimum statutory taxes, net

     (3,678     (7,365

Other

     (2,270     (823
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (23,223     735,140  

Effect of exchange rate changes on cash

     4,297       (8,479
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     22,371       19,501  

Cash and cash equivalents at beginning of the period

     57,063       11,215  
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 79,434     $ 30,716  
  

 

 

   

 

 

 

Effect of acquisitions:

    

Assets acquired, excluding cash

   $ —       $ 2,504,223  

Liabilities assumed

     —         (1,604,056

Issuance of common stock in connection with acquisition

     —         (216,882
  

 

 

   

 

 

 

Cash paid for acquisitions, net of cash acquired

   $ —       $ 683,285  
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

Acadia Healthcare Company, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(Unaudited)

1. Description of Business and Basis of Presentation

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 June 30, 2017, the Company operated 576 behavioral healthcare facilities with approximately 17,300 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.

2. Recently Issued Accounting Standards

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 ASU 2016-02, “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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Table of Contents

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 2014-09 requires 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. Although the Company continues to evaluate, 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.

3. Earnings Per Share

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.

 

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The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2017 and 2016 (in thousands except per share amounts):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2017      2016      2017      2016  

Numerator:

           

Net income attributable to Acadia Healthcare Company, Inc.

   $ 49,630      $ 56,445      $ 84,588      $ 82,133  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average shares outstanding for basic earnings per share

     86,954        86,553        86,859        84,748  

Effect of dilutive instruments

     126        323        138        304  
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares used in computing diluted earnings per common share

     87,080        86,876        86,997        85,052  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share attributable to Acadia Healthcare Company, Inc. stockholders:

           

Basic

   $ 0.57      $ 0.65      $ 0.97      $ 0.97  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.57      $ 0.65      $ 0.97      $ 0.97  
  

 

 

    

 

 

    

 

 

    

 

 

 

Approximately 1.6 million and 1.2 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 June 30, 2017 and 2016, respectively, because their effect would have been anti-dilutive. Approximately 1.1 million and 1.2 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 six months ended June 30, 2017 and 2016, respectively, because their effect would have been anti-dilutive.

4. Acquisitions

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.

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 $10.0 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”).

 

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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 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):

 

     Priory      Other      Total  

Cash

   $ 10,253      $ 2,488      $ 12,741  

Accounts receivable

     57,832        4,264        62,096  

Prepaid expenses and other current assets

     7,921        103        8,024  

Property and equipment

     1,598,156        35,400        1,633,556  

Goodwill

     679,265        96,052        775,317  

Intangible assets

     23,200        338        23,538  

Other assets

     8,862        47        8,909  
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     2,385,489        138,692        2,524,181  

Accounts payable

     24,203        749        24,952  

Accrued salaries and benefits

     39,588        918        40,506  

Other accrued expenses

     48,305        391        48,696  

Deferred tax liabilities – noncurrent

     56,462        269        56,731  

Long-term debt

     1,348,389        —          1,348,389  

Other liabilities

     61,311        30,243        91,554  
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     1,578,258        32,570        1,610,828  
  

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 807,231      $ 106,122      $ 913,353  
  

 

 

    

 

 

    

 

 

 

Other

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 and six months ended June 30, 2017 and 2016 (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2017      2016      2017      2016  

Legal, accounting and other costs

   $ 2,114      $ 4,653      $ 3,601      $ 16,101  

Severance and contract termination costs

     6,938        1,421        9,570        1,421  

Advisory and financing commitment fees

     —          —          —          14,850  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,052      $ 6,074      $ 13,171      $ 32,372  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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5. Other Intangible Assets

Other identifiable intangible assets and related accumulated amortization consisted of the following as of June 30, 2017 and December 31, 2016 (in thousands):

 

     Gross Carrying Amount      Accumulated Amortization  
     June 30,
2017
     December 31,
2016
     June 30,
2017
     December 31,
2016
 

Intangible assets subject to amortization:

           

Contract intangible assets

   $ 2,100      $ 2,100      $ (2,100    $ (2,100

Non-compete agreements

     1,147        1,147        (1,147      (1,147
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,247        3,247        (3,247      (3,247

Intangible assets not subject to amortization:

           

Licenses and accreditations

     12,250        12,228        —        —  

Trade names

     58,603        57,538        —        —  

Certificates of need

     14,129        13,544        —        —  
  

 

 

    

 

 

    

 

 

    

 

 

 
     84,982        83,310        —        —  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 88,229      $ 86,557      $ (3,247    $ (3,247
  

 

 

    

 

 

    

 

 

    

 

 

 

Amortization expense related to definite-lived intangible assets was $0.1 million and $0.2 million for the three months and six months ended June 30, 2016, respectively. As of December 31, 2016, all of the Company’s defined-lived intangible assets were 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.

6. Property and Equipment

Property and equipment consists of the following as of June 30, 2017 and December 31, 2016 (in thousands):

 

     June 30, 2017      December 31, 2016  

Land

   $ 432,988      $ 411,331  

Building and improvements

     2,189,441        2,031,819  

Equipment

     354,679        318,020  

Construction in progress

     167,731        157,114  
  

 

 

    

 

 

 
     3,144,839        2,918,284  

Less accumulated depreciation

     (278,753      (214,589
  

 

 

    

 

 

 

Property and equipment, net

   $ 2,866,086      $ 2,703,695  
  

 

 

    

 

 

 

 

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7. Long-Term Debt

Long-term debt consisted of the following (in thousands):

 

     June 30, 2017      December 31, 2016  

Amended and Restated Senior Credit Facility:

     

Senior Secured Term A Loans

   $ 390,000      $ 400,000  

Senior Secured Term B Loans

     1,428,175        1,435,450  

Senior Secured Revolving Line of Credit

     —          —    

6.125% Senior Notes due 2021

     150,000        150,000  

5.125% Senior Notes due 2022

     300,000        300,000  

5.625% Senior Notes due 2023

     650,000        650,000  

6.500% Senior Notes due 2024

     390,000        390,000  

9.0% and 9.5% Revenue Bonds

     22,175        22,175  

Less: unamortized debt issuance costs, discount and premium

     (55,072      (59,816
  

 

 

    

 

 

 
     3,275,278        3,287,809  

Less: current portion

     (34,805      (34,805
  

 

 

    

 

 

 

Long-term debt

   $ 3,240,473      $ 3,253,004  
  

 

 

    

 

 

 

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.

 

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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.

On May 10, 2017, the Company entered into a Third Repricing Amendment (the “Third Repricing Amendment”) to the Amended and Restated Credit Agreement. The Third Repricing Amendment reduced the Applicable Rate with respect to the Existing TLB Facility and the New TLB Facility from 3.0% to 2.75% in the case of Eurodollar Rate loans and from 2.0% to 1.75% in the case of Base Rate Loans. In connection with the Third Repricing Amendment, the Company recorded a debt extinguishment charge of $0.8 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.

The Company had $493.5 million of availability under the revolving line of credit and had standby letters of credit outstanding of $6.5 million related to security for the payment of claims required by its workers’ compensation insurance program as of June 30, 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 June 30, 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 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 June 30, 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 June 30, 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 June 30, 2017, the Company was in compliance with such covenants.

 

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Senior Notes

6.125% Senior Notes due 2021

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.

5.125% Senior Notes due 2022

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.

5.625% Senior Notes due 2023

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.

6.500% Senior Notes due 2024

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.

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.

9.0% and 9.5% Revenue Bonds

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 June 30, 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.

 

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8. Equity Offerings

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.

9. Equity-Based Compensation

Equity Incentive Plans

The Company issues stock-based awards, including stock options, restricted stock and restricted stock units, to certain officers, employees and non-employee directors under the Acadia Healthcare Company, Inc. Incentive Compensation Plan (the “Equity Incentive Plan”). As of June 30, 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 4,434,974 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 $6.9 million in equity-based compensation expense for the three months ended June 30, 2017 and 2016, respectively, and $14.8 million and $13.8 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, there was $61.2 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 1.3 years. As of June 30, 2017, there were no warrants outstanding. The Company recognized a deferred income tax benefit of $2.8 million and $2.5 million for the three months ended June 30, 2017 and 2016, respectively, related to equity-based compensation expense. The Company recognized a deferred income tax benefit of $5.7 million and $5.3 million for the six months ended June 30, 2017 and 2016, respectively, related to equity-based compensation expense.

Stock option activity during 2016 and 2017 was as follows (aggregate intrinsic value in thousands):

 

     Number
of
Options
     Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term (in years)
     Aggrega
teIntrinsic
Value
 

Options outstanding at January 1, 2016

     694,743      $ 42.87        7.70      $ 20,717  

Options granted

     503,850        57.98        9.28        297  

Options exercised

     (57,397      31.92        N/A        1,530  

Options cancelled

     (140,250      57.13        N/A        N/A  
  

 

 

    

 

 

    

 

 

    

 

 

 

Options outstanding at December 31, 2016

     1,000,946        49.42        7.80        8,166  

Options granted

     233,000        42.99        9.74        105  

Options exercised

     (62,617      40.17        N/A        1,172  

Options cancelled

     (158,126      55.14        N/A        N/A  
  

 

 

    

 

 

    

 

 

    

 

 

 

Options outstanding at June 30, 2017

     1,013,203      $ 48.23        7.85      $ 4,366  
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable at December 31, 2016

     288,959      $ 42.81        6.22      $ 6,111  
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable at June 30, 2017

     423,995      $ 48.29        6.42      $ 4,151  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Restricted stock activity during 2016 and 2017 was as follows:

 

     Number of
Shares
     Weighted
Average
Grant-Date
Fair Value
 

Unvested at January 1, 2016

     944,562      $ 52.74  

Granted

     387,347        55.38  

Cancelled

     (122,178      57.02  

Vested

     (365,312      47.18  
  

 

 

    

 

 

 

Unvested at December 31, 2016

     844,419      $ 55.76  

Granted

     367,124        43.12  

Cancelled

     (115,230      55.93  

Vested

     (233,532      54.26  
  

 

 

    

 

 

 

Unvested at June 30, 2017

     862,781      $ 50.77  
  

 

 

    

 

 

 

Restricted stock unit activity during 2016 and 2017 was as follows:

 

     Number of
Units
     Weighted
Average
Grant-Date
Fair Value
 

Unvested at January 1, 2016

     218,084      $ 56.97  

Granted

     230,750        56.95  

Cancelled

     —          —    

Vested

     (175,235      52.71  
  

 

 

    

 

 

 

Unvested at December 31, 2016

     273,599      $ 59.68  

Granted

     219,840        43.23  

Cancelled

     —          —    

Vested

     (132,530      58.67  
  

 

 

    

 

 

 

Unvested at June 30, 2017

     360,909      $ 50.04  
  

 

 

    

 

 

 

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 six months ended June 30, 2017 and year ended December 31, 2016:

 

     June 30, 2017     December 31, 2016  

Weighted average grant-date fair value of options

   $ 14.65     $ 18.96  

Risk-free interest rate

     2.0     1.4

Expected volatility

     33     33

Expected life (in years)

     5.5       5.5  

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.

10. Income Taxes

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.

 

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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 1.5%, for the six months ended June 30, 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 June 30, 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 June 30, 2017 and 2016 reflects effective tax rates of 25.0% and 24.7%, respectively. The provision for income taxes for the six months ended June 30, 2017 and 2016 reflects effective tax rates of 26.4% and 23.9%, respectively. The increase in the effective tax rate for the three and six months ended June 30, 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”).

11. Derivative Instruments

The Company entered into foreign currency forward contracts during the six months ended June 30, 2017 and the three and six months ended 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 and six months ended June 30, 2016 resulted in gains of $0.1 million and $0.5 million, respectively, 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-rate USD-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.

The Company has designated the cross currency swap agreements and certain forward contracts entered into during 2016 and the three and six months ended June 30, 2017 as qualifying hedging instruments and is accounting for these as net investment hedges. The fair value of these derivatives of $43.8 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.

 

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12. Fair Value Measurements

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 June 30, 2017 and December 31, 2016 were as follows (in thousands):

 

     Carrying Amount      Fair Value  
     June 30,
2017
     December 31,
2016
     June 30,
2017
     December 31,
2016
 

Amended and Restated Senior Credit Facility

   $ 1,785,919      $ 1,799,993      $ 1,785,919      $ 1,799,993  

6.125% Senior Notes due 2021

   $ 147,832      $ 147,574      $ 152,452      $ 152,186  

5.125% Senior Notes due 2022

   $ 295,803      $ 295,442      $ 305,417      $ 293,595  

5.625% Senior Notes due 2023

   $ 641,222      $ 640,574      $ 663,267      $ 640,574  

6.500% Senior Notes due 2024

   $ 381,751      $ 381,268      $ 407,519      $ 389,847  

9.0% and 9.5% Revenue Bonds

   $ 22,751      $ 22,959      $ 22,751      $ 22,959  

Derivative instruments

   $ 43,753      $ 73,509      $ 43,753      $ 73,509  

Contingent consideration liabilities

   $ —        $ 107      $ —        $ 107  

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.

13. Commitments and Contingencies

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.

Legal Proceedings

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.

14. Noncontrolling Interests

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.

 

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15. Other Current Assets

Other current assets consisted of the following (in thousands):

 

     June 30,
2017
     December 31,
2016
 

Other receivables

   $ 30,692      $ 44,975  

Prepaid expenses

     26,001        27,455  

Income taxes receivable

     11,983        11,714  

Workers’ compensation deposits – current portion

     10,000        10,000  

Insurance receivable-current portion

     6,472        6,472  

Inventory

     4,917        4,633  

Other

     1,907        2,288  
  

 

 

    

 

 

 

Other current assets

   $ 91,972      $ 107,537  
  

 

 

    

 

 

 

16. Other Accrued Liabilities

Other accrued liabilities consisted of the following (in thousands):

 

     June 30,
2017
     December 31,
2016
 

Accrued expenses

   $ 37,554      $ 37,323  

Accrued interest

     35,833        33,616  

Unearned income

     23,581        28,805  

Insurance liability – current portion

     11,675        11,672  

Income taxes payable

     10,939        527  

Accrued property taxes

     4,224        2,732  

Other

     9,138        8,283  
  

 

 

    

 

 

 

Other accrued liabilities

   $ 132,944      $ 122,958  
  

 

 

    

 

 

 

17. Segment Information

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 U.S. (the “U.S. Facilities”) and its facilities in the U.K. (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 June 30, 2017, the U.S. Facilities included 207 behavioral healthcare facilities with approximately 8,600 beds in 39 states and Puerto Rico, and the U.K. Facilities included 369 behavioral healthcare facilities with approximately 8,700 beds in the U.K.

The following tables set forth the financial information by operating segment, including a reconciliation of Segment EBITDA to income from continuing operations before income taxes (in thousands):

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  

Revenue:

           

U.S. Facilities

   $ 461,414      $ 430,209      $ 901,637      $ 838,473  

U.K. Facilities

     254,482        325,883        493,453        532,858  

Corporate and Other

     —          456        —          2,030  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 715,896      $ 756,548      $ 1,395,090      $ 1,373,361  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment EBITDA (1):

           

U.S. Facilities

   $ 128,361      $ 118,580      $ 240,506      $ 225,420  

U.K. Facilities

     52,090        72,938        96,276        117,869  

Corporate and Other

     (18,231      (19,292      (38,193      (40,051
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 162,220      $ 172,226      $ 298,589      $ 303,238  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  

Segment EBITDA (1)

   $ 162,220      $ 172,226      $ 298,589      $ 303,238  

Plus (less):

           

Equity-based compensation expense

     (7,436      (6,888      (14,832      (13,844

Gain (loss) on foreign currency derivatives

     —          98        —          508  

Debt extinguishment costs

     (810      —          (810      —    

Transaction-related expenses

     (9,052      (6,074      (13,171      (32,372

Interest expense, net

     (43,505      (48,758      (86,262      (86,472

Depreciation and amortization

     (35,201      (36,752      (68,814      (64,727
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

   $ 66,216      $ 73,852      $ 114,700      $ 106,331  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     U.S. Facilities      U.K. Facilities      Corporate
and Other
     Consolidated  

Goodwill:

           

Balance at January 1, 2017

   $ 2,041,795      $ 639,393      $ —        $ 2,681,188  

Foreign currency translation

     —          35,231        —          35,231  

Purchase price allocation and other

     797        (6,883      —          (6,086
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2017

   $ 2,042,592      $ 667,741      $ —        $ 2,710,333  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2017      December 31, 2016  

Assets (2):

     

U.S. Facilities

   $ 3,473,804      $ 3,382,167  

U.K. Facilities

     2,537,317        2,441,018  

Corporate and Other

     216,901        201,541  
  

 

 

    

 

 

 
   $ 6,228,022      $ 6,024,726  
  

 

 

    

 

 

 

 

(1) Segment EBITDA is defined as income before provision for income taxes, equity-based compensation expense, gain on foreign currency derivatives, transaction-related expenses, interest expense and depreciation and amortization. The Company uses Segment EBITDA as an analytical indicator to measure the performance of the Company’s segments and to develop strategic objectives and operating plans for those segments. Segment EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. Segment EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from Segment EBITDA are significant components in understanding and assessing financial performance. Because Segment EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Segment EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.
(2) Assets include property and equipment for the U.S. Facilities of $1.1 billion, U.K. Facilities of $1.7 billion and corporate and other of $33.6 million at June 30, 2017. Assets include property and equipment for the U.S. Facilities of $1.0 billion, U.K. Facilities of $1.7 billion and corporate and other of $27.1 million at December 31, 2016.

18. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows (in thousands):

 

     Foreign Currency
Translation
Adjustments
     Change in Fair
Value of
Derivative
Instruments
     Pension Plan      Total  

Balance at December 31, 2016

   $ (584,081    $ 40,598      $ (6,087    $ (549,570

Foreign currency translation gain

     119,451        —          (329      119,122  

Loss on derivative instruments, net of tax of $(12.1) million

     —          (14,952      —          (14,952
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2017

   $ (464,630    $ 25,646      $ (6,416    $ (445,400
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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19. Financial Information for the Company and Its Subsidiaries

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 June 30, 2017 and December 31, 2016, and for the three and six months ended June 30, 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.

Acadia Healthcare Company, Inc.

Condensed Consolidating Balance Sheets

June 30, 2017

(In thousands)

 

     Parent      Combined
Subsidiary
Guarantors
     Combined
Non-
Guarantors
     Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Current assets:

             

Cash and cash equivalents

   $ —      $ 47,823      $ 31,611      $ —     $ 79,434  

Accounts receivable, net

     —        222,522        65,584        —       288,106  

Other current assets

     —        68,130        23,842        —       91,972  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —        338,475        121,037        —       459,512  

Property and equipment, net

     —        1,006,761        1,859,325        —       2,866,086  

Goodwill

     —        1,936,057        774,276        —       2,710,333  

Intangible assets, net

     —        57,260        27,722        —       84,982  

Deferred tax assets – noncurrent

     2,192        —        4,344        (2,817     3,719  

Derivative instruments

     43,753        —        —        —       43,753  

Investment in subsidiaries

     5,129,461        —        —        (5,129,461     —  

Other assets

     489,638        48,158        8,203        (486,362     59,637  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,665,044      $ 3,386,711      $ 2,794,907      $ (5,618,640   $ 6,228,022  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities:

             

Current portion of long-term debt

   $ 34,550      $ —      $ 255      $ —     $ 34,805  

Accounts payable

     —        54,509        26,890        —       81,399  

Accrued salaries and benefits

     —        66,441        31,378        —       97,819  

Other accrued liabilities

     35,658        20,139        77,147        —       132,944  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     70,208        141,089        135,670        —       346,967  

Long-term debt

     3,217,976        —        508,859        (486,362     3,240,473  

Deferred tax liabilities – noncurrent

     —        30,148        47,136        (2,817     74,467  

Other liabilities

     —        106,540        65,138        —       171,678  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     3,288,184        277,777        756,803        (489,179     3,833,585  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Redeemable noncontrolling interests

     —        —        17,577        —       17,577  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     2,376,860        3,108,934        2,020,527        (5,129,461     2,376,860  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 5,665,044      $ 3,386,711      $ 2,794,907      $ (5,618,640   $ 6,228,022  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Acadia Healthcare Company, Inc.

Condensed Consolidating Balance Sheets

December 31, 2016

(In thousands)

 

     Parent      Combined
Subsidiary
Guarantors
     Combined
Non-
Guarantors
     Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Current assets:

             

Cash and cash equivalents

   $ —        $ 15,681      $ 41,382      $ —       $ 57,063  

Accounts receivable, net

     —          209,124        54,203        —         263,327  

Other current assets

     —          61,724        45,813        —         107,537  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —          286,529        141,398        —         427,927  

Property and equipment, net

     —          940,880        1,762,815        —         2,703,695  

Goodwill

     —          1,935,260        745,928        —         2,681,188  

Intangible assets, net

     —          56,676        26,634        —         83,310  

Deferred tax assets – noncurrent

     13,522        —          4,606        (14,348     3,780  

Derivative instruments

     73,509        —          —          —         73,509  

Investment in subsidiaries

     4,885,865        —          —          (4,885,865     —    

Other assets

     493,294        40,480        7,189        (489,646     51,317  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,466,190      $ 3,259,825      $ 2,688,570      $ (5,389,859   $ 6,024,726  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities:

             

Current portion of long-term debt

   $ 34,550      $ —        $ 255      $ —       $ 34,805  

Accounts payable

     —          49,205        30,829        —         80,034  

Accrued salaries and benefits

     —          72,835        32,233        —         105,068  

Other accrued liabilities

     33,616        24,375        64,967        —         122,958  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     68,166        146,415        128,284        —         342,865  

Long-term debt

     3,230,300        —          512,350        (489,646     3,253,004  

Deferred tax liabilities – noncurrent

     —          40,574        52,294        (14,348     78,520  

Other liabilities

     —          101,938        62,921        —         164,859  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     3,298,466        288,927        755,849        (503,994     3,839,248  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Redeemable noncontrolling interests

     —          —          17,754        —         17,754  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     2,167,724        2,970,898        1,914,967        (4,885,865     2,167,724  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 5,466,190      $ 3,259,825      $ 2,688,570      $ (5,389,859   $ 6,024,726  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended June 30, 2017

(In thousands)

 

     Parent     Combined
Subsidiary
Guarantors
    Combined
Non-
Guarantors
    Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Revenue before provision for doubtful accounts

   $ —     $ 444,718     $ 280,925     $ —     $ 725,643  

Provision for doubtful accounts

     —       (8,483     (1,264     —       (9,747
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     —       436,235       279,661       —       715,896  

Salaries, wages and benefits

     7,436       225,775       150,384       —       383,595  

Professional fees

     —       23,337       22,984       —       46,321  

Supplies

     —       19,050       9,589       —       28,639  

Rents and leases

     —       8,501       10,934       —       19,435  

Other operating expenses

     —       54,488       28,634       —       83,122  

Depreciation and amortization

     —       16,404       18,797       —       35,201  

Interest expense, net

     15,091       19,265       9,149       —       43,505  

Debt extinguishment costs

     810       —       —       —       810  

Transaction-related expenses

     —       2,570       6,482       —       9,052  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     23,337       369,390       256,953       —       649,680  

(Loss) income from continuing operations before income taxes

     (23,337     66,845       22,708       —       66,216  

Equity in earnings of subsidiaries

     61,453       —       —       (61,453     —  

(Benefit from) provision for income taxes

     (11,522     23,852       4,248       —       16,578  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     49,638       42,993       18,460       (61,453     49,638  

Net income attributable to noncontrolling interests

     —       —       (8     —       (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Acadia Healthcare Company, Inc.

   $ 49,638     $ 42,993     $ 18,452     $ (61,453   $ 49,630  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

          

Foreign currency translation gain

     —       —       92,076       —       92,076  

Loss on derivative instruments

     (9,084     —       —       —       (9,084
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (9,084     —       92,076       —       82,992  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Acadia Healthcare Company, Inc.

   $ 40,554     $ 42,993     $ 110,528     $ (61,453   $ 132,622  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended June 30, 2016

(In thousands)

 

     Parent     Combined
Subsidiary
Guarantors
    Combined
Non-
Guarantors
    Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Revenue before provision for doubtful accounts

   $ —       $ 422,232     $ 344,822     $ —       $ 767,054  

Provision for doubtful accounts

     —         (9,593     (913     —         (10,506
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     —         412,639       343,909       —         756,548  

Salaries, wages and benefits

     6,888       212,944       188,455       —         408,287  

Professional fees

     —         23,150       27,142       —         50,292  

Supplies

     —         19,527       11,682       —         31,209  

Rents and leases

     —         8,521       11,946       —         20,467  

Other operating expenses

     —         51,100       29,855       —         80,955  

Depreciation and amortization

     —         14,216       22,536       —         36,752  

Interest expense, net

     10,631       22,043       16,084       —         48,758  

Gain on foreign currency derivatives

     (98     —         —         —         (98

Transaction-related expenses

     —         4,189       1,885       —         6,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     17,421       355,690       309,585       —         682,696  

(Loss) income from continuing operations before income taxes

     (17,421     56,949       34,324       —         73,852  

Equity in earnings of subsidiaries

     67,943       —         —         (67,943     —    

(Benefit from) provision for income taxes

     (5,069     16,186       7,144       —         18,261  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     55,591       40,763       27,180       (67,943     55,591  

Net loss attributable to noncontrolling interests

     —         —         854       —         854  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Acadia Healthcare Company, Inc.

   $ 55,591     $ 40,763     $ 28,034     $ (67,943   $ 56,445  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

          

Foreign currency translation loss

     —         —         (213,468     —         (213,468

Gain on derivative instruments

     23,919       —         —         —         23,919  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     23,919       —         (213,468     —         (189,549
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Acadia Healthcare Company, Inc.

   $ 79,510     $ 40,763     $ (185,434   $ (67,943   $ (133,104
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Comprehensive Income (Loss)

Six Months Ended June 30, 2017

(In thousands)

 

     Parent     Combined
Subsidiary
Guarantors
    Combined
Non-
Guarantors
    Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Revenue before provision for doubtful accounts

   $ —       $ 871,514     $ 543,470     $ —       $ 1,414,984  

Provision for doubtful accounts

     —         (17,697     (2,197     —         (19,894
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     —         853,817       541,273       —         1,395,090  

Salaries, wages and benefits

     14,832       450,205       294,979       —         760,016  

Professional fees

     —         45,411       44,319       —         89,730  

Supplies

     —         37,659       18,689       —         56,348  

Rents and leases

     —         17,012       21,394       —         38,406  

Other operating expenses

     —         109,519       57,314       —         166,833  

Depreciation and amortization

     —         31,955       36,859       —         68,814  

Interest expense, net

     30,459       37,750       18,053       —         86,262  

Debt extinguishment costs

     810       —         —         —         810  

Transaction-related expenses

     —         4,008       9,163       —         13,171  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     46,101       733,519       500,770       —         1,280,390  

(Loss) income from continuing operations before income taxes

     (46,101     120,298       40,503       —         114,700  

Equity in earnings of subsidiaries

     108,006       —         —         (108,006     —    

(Benefit from) provision for income taxes

     (22,506     44,922       7,873       —         30,289  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     84,411       75,376       32,630       (108,006     84,411  

Net loss attributable to noncontrolling interests

     —         —         177       —         177  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Acadia Healthcare Company, Inc.

   $ 84,411     $ 75,376     $ 32,807     $ (108,006   $ 84,588  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

          

Foreign currency translation gain

     —         —         119,122       —         119,122  

Loss on derivative instruments

     (14,952     —         —         —         (14,952
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (14,952     —         119,122       —         104,170  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Acadia Healthcare Company, Inc.

   $ 69,459     $ 75,376     $ 151,929     $ (108,006   $ 188,758  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Comprehensive Income (Loss)

Six Months Ended June 30, 2016

(In thousands)

 

     Parent     Combined
Subsidiary
Guarantors
    Combined
Non-
Guarantors
    Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Revenue before provision for doubtful accounts

   $ —       $ 825,166     $ 569,071     $ —       $ 1,394,237  

Provision for doubtful accounts

     —         (18,935     (1,941     —         (20,876
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     —         806,231       567,130       —         1,373,361  

Salaries, wages and benefits

     13,844       423,977       311,494       —         749,315  

Professional fees

     —         45,827       44,456       —         90,283  

Supplies

     —         37,989       19,905       —         57,894  

Rents and leases

     —         17,098       18,175       —         35,273  

Other operating expenses

     —         99,949       51,253       —         151,202  

Depreciation and amortization

     —         26,967       37,760       —         64,727  

Interest expense, net

     24,064       38,136       24,272       —         86,472  

Gain on foreign currency derivatives

     (508     —         —         —         (508

Transaction-related expenses

     —         25,624       6,748       —         32,372  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     37,400       715,567       514,063       —         1,267,030  

(Loss) income from continuing operations before income taxes

     (37,400     90,664       53,067       —         106,331  

Equity in earnings of subsidiaries

     108,812       —         —         (108,812     —    

(Benefit from) provision for income taxes

     (9,548     23,593       11,326       —         25,371  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     80,960       67,071       41,741       (108,812     80,960  

Net loss attributable to noncontrolling interests

     —         —         1,173       —         1,173  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Acadia Healthcare Company, Inc.

   $ 80,960     $ 67,071     $ 42,914     $ (108,812   $ 82,133  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

          

Foreign currency translation loss

     —         —         (261,883     —         (261,883

Gain on derivative instruments

     23,919       —         —         —         23,919  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     23,919       —         (261,883     —         (237,964
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Acadia Healthcare Company, Inc.

   $ 104,879     $ 67,071     $ (218,969   $ (108,812   $ (155,831
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2017

(In thousands)

 

     Parent     Combined
Subsidiary
Guarantors
    Combined
Non-
Guarantors
    Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Operating activities:

          

Net income (loss)

   $ 84,411     $ 75,376     $ 32,630     $ (108,006   $ 84,411  

Adjustments to reconcile net income (loss) to net cash (used in) provided by continuing operating activities:

          

Equity in earnings of subsidiaries

     (108,006     —         —         108,006       —    

Depreciation and amortization

     —         31,955       36,859       —         68,814  

Amortization of debt issuance costs

     5,053       —         (208     —         4,845  

Equity-based compensation expense

     14,832       —         —         —         14,832  

Deferred income tax expense

     1,610       12,268       3,218       —         17,096  

Debt extinguishment costs

     810       —         —         —         810  

Other

     2,692       1,181       2,685       —         6,558  

Change in operating assets and liabilities, net of effect of acquisitions:

          

Accounts receivable, net

     —         (13,423     (8,981     —         (22,404

Other current assets

     —         (3,564     24,021       —         20,457  

Other assets

     3,397       1,705       104       (3,397     1,809  

Accounts payable and other accrued liabilities

     —         3,747       (8,640     —         (4,893

Accrued salaries and benefits

     —         (6,591     (2,566     —         (9,157

Other liabilities

     —         1,625       3,632       —         5,257  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operating activities

     4,799       104,279       82,754       (3,397     188,435  

Net cash used in discontinued operating activities

     —         (829     —         —         (829
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     4,799       103,450       82,754       (3,397     187,606  

Investing activities:

          

Cash paid for capital expenditures

     —         (71,274     (46,247     —         (117,521

Cash paid for real estate acquisitions

     —         (22,850     —         —         (22,850

Other

     —         (7,543     1,605       —         (5,938
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —         (101,667     (44,642     —         (146,309

Financing activities:

          

Principal payments on long-term debt

     (17,275     —         (3,397     3,397       (17,275

Common stock withheld for minimum statutory taxes, net

     (3,678     —         —         —         (3,678

Other

     —         (2,270     —         —         (2,270

Cash provided by (used in) intercompany activity

     16,154       32,629       (48,783     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (4,799     30,359       (52,180     3,397       (23,223
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     —         —         4,297       —         4,297  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     —         32,142       (9,771     —         22,371  

Cash and cash equivalents at beginning of the period

     —         15,681       41,382       —         57,063  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ —       $ 47,823     $ 31,611     $ —       $ 79,434  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2016

(In thousands)

 

     Parent     Combined
Subsidiary
Guarantors
    Combined
Non-
Guarantors
    Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Operating activities:

          

Net income (loss)

   $ 80,960     $ 67,071     $ 41,741     $ (108,812   $ 80,960  

Adjustments to reconcile net income (loss) to net cash (used in) provided by continuing operating activities:

          

Equity in earnings of subsidiaries

     (108,812     —         —         108,812       —    

Depreciation and amortization

     —         26,967       37,760       —         64,727  

Amortization of debt issuance costs

     5,171       —         (215     —         4,956  

Equity-based compensation expense

     13,844       —         —         —         13,844  

Deferred income tax (benefit) expense

     —         18,420       (1,599     —         16,821  

Loss from discontinued operations, net of taxes

     —         —         —         —         —    

Gain on foreign currency derivatives

     (508     —         —         —         (508

Other

     —         720       (16     —         704  

Change in operating assets and liabilities, net of effect of acquisitions:

          

Accounts receivable, net

     —         (24,072     5,090       —         (18,982

Other current assets

     —         (1,459     (5,797     —         (7,256

Other assets

     (775     1,327       255       755       1,582  

Accounts payable and other accrued liabilities

     —         21,943       7,158       —         29,101  

Accrued salaries and benefits

     —         9,230       (13,076     —         (3,846

Other liabilities

     —         7,208       (3,480     —         3,728  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by continuing operating activities

     (10,120     127,355       67,821       775       185,831  

Net cash used in discontinued operating activities

     —         (2,973     —         —         (2,973
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (10,120     124,382       67,821       775       182,858  

Investing activities:

          

Cash paid for acquisitions, net of cash acquired

     —         (103,189     (580,096     —         (683,285

Cash paid for capital expenditures

     —         (99,157     (78,561     —         (177,718

Cash paid for real estate acquisitions

     —         (16,638     (11,801     —         (28,439

Settlement of foreign currency derivatives

     —         508       —         —         508  

Other

     —         (1,084     —         —         (1,084
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —         (219,560     (670,458     —         (890,018

Financing activities:

          

Borrowings on long-term debt

     1,480,000       —         —         —         1,480,000  

Borrowings on revolving credit facility

     158,000       —         —         —         158,000  

Principal payments on revolving credit facility

     (166,000     —         —         —         (166,000

Principal payments on long-term debt

     (29,869     —         (775     775       (29,869

Repayment of assumed debt

     (1,348,389     —         —         —         (1,348,389

Payment of debt issuance costs

     (35,511     —         —         —         (35,511

Issuance of Common Stock

     685,097       —         —         —         685,097  

Common stock withheld for minimum statutory taxes, net

     (7,365     —         —         —         (7,365

Excess tax benefit from equity awards

     —         —         —         —         —    

Other

     —         (823     —         —         (823

Cash (used in) provided by intercompany activity

     (725,843     104,062       623,331       (1,550     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     10,120       103,239       622,556       (775     735,140  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     —         —         (8,479     —         (8,479
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     —         8,061       11,440       —         19,501  

Cash and cash equivalents at beginning of the period

     —         1,987       9,228       —         11,215  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ —       $ 10,048     $ 20,668     $ —       $ 30,716  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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:

 

    our significant indebtedness, our ability to meet our debt obligations, and our ability to incur substantially more debt;

 

    difficulties in successfully integrating the operations of acquired facilities, including those acquired in the Priory acquisition, or realizing the potential benefits and synergies of our acquisitions and joint ventures;

 

    our ability to implement our business strategies in the U.S. and the U.K. and adapt to the regulatory and business environment in the U.K.;

 

    potential difficulties operating our business in light of political and economic instability in the U.K. and globally following the referendum in the U.K. on June 23, 2016, in which voters approved an exit from the European Union, or Brexit;

 

    the impact of fluctuations in foreign exchange rates, including the devaluations of the GBP relative to the USD following the Brexit vote;

 

    the impact of payments received from the government and third-party payors on our revenue and results of operations including the significant dependence of our U.K. facilities on payments received from the National Health Service (the “NHS”);

 

    the occurrence of patient incidents, which could result in negative media coverage, adversely affect the price of our securities and result in incremental regulatory burdens and governmental investigations;

 

    our future cash flow and earnings;

 

    our restrictive covenants, which may restrict our business and financing activities;

 

    our ability to make payments on our financing arrangements;

 

    the impact of the economic and employment conditions in the U.S. and the U.K. on our business and future results of operations;

 

    compliance with laws and government regulations;

 

    the impact of claims brought against us or our facilities;

 

    the impact of governmental investigations, regulatory actions and whistleblower lawsuits;

 

    the impact of healthcare reform in the U.S. and abroad, including the potential repeal of the Patient Protection and Affordable Care Act;

 

    the impact of our highly competitive industry on patient volumes;

 

    our ability to recruit and retain quality psychiatrists and other physicians;

 

    the impact of competition for staffing on our labor costs and profitability;

 

    the impact of increases to our labor costs;

 

    our dependence on key management personnel, key executives and local facility management personnel;

 

    our acquisition, joint venture and de novo strategies, which expose us to a variety of operational and financial risks, as well as legal and regulatory risks;

 

    the impact of state efforts to regulate the construction or expansion of healthcare facilities on our ability to operate and expand our operations;

 

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    our potential inability to extend leases at expiration;

 

    the impact of controls designed to reduce inpatient services on our revenue;

 

    the impact of different interpretations of accounting principles on our results of operations or financial condition;

 

    the impact of environmental, health and safety laws and regulations, especially in locations where we have concentrated operations;

 

    the impact of an increase in uninsured and underinsured patients or the deterioration in the collectability of the accounts of such patients on our results of operations;

 

    the risk of a cyber-security incident and any resulting violation of laws and regulations regarding information privacy or other negative impact;

 

    the impact of laws and regulations relating to privacy and security of patient health information and standards for electronic transactions;

 

    our ability to cultivate and maintain relationships with referral sources;

 

    the impact of a change in the mix of our U.S. and U.K. earnings, adverse changes in our effective tax rate and adverse developments in tax laws generally;

 

    failure to maintain effective internal control over financial reporting;

 

    the impact of fluctuations in our operating results, quarter to quarter earnings and other factors on the price of our securities;

 

    the impact of the trend for insurance companies and managed care organizations to enter into sole source contracts on our ability to obtain patients;

 

    the impact of value-based purchasing programs on our revenue; and

 

    those risks and uncertainties described from time to time in our filings with the SEC.

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 June 30, 2017, we operated 576 behavioral healthcare facilities with approximately 17,300 beds in 39 states, the U.K. and Puerto Rico. During the six months ended June 30, 2017, we added 173 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

2016 U.S. 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.

 

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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 $10.0 million.

Priory

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.

Revenue

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.

The following table presents revenue by payor type and as a percentage of revenue before provision for doubtful accounts for the three and six months ended June 30, 2017 and 2016 (dollars in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2017     2016     2017     2016  
     Amount     %     Amount     %     Amount     %     Amount     %  

Commercial

   $ 149,493       20.6   $ 136,278       17.8   $ 288,948       20.4   $ 261,997       18.8

Medicare

     71,559       9.9     67,614       8.8     139,399       9.9     127,620       9.2

Medicaid

     197,279       27.2     181,889       23.7     388,113       27.4     360,162       25.8

NHS

     234,153       32.3     298,955       39.0     457,281       32.3     492,972       35.4

Self-Pay

     59,677       8.2     72,495       9.4     117,897       8.3     131,843       9.4

Other

     13,482       1.8     9,823       1.3     23,346       1.7     19,643       1.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue before provision for doubtful accounts

     725,643       100.0     767,054       100.0     1,414,984       100.0     1,394,237       100.0

Provision for doubtful accounts

     (9,747       (10,506       (19,894       (20,876  
  

 

 

     

 

 

     

 

 

     

 

 

   

Revenue

   $ 715,896       $ 756,548       $ 1,395,090       $ 1,373,361    
  

 

 

     

 

 

     

 

 

     

 

 

   

 

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The following tables present a summary of our aging of accounts receivable as of June 30, 2017 and December 31, 2016:

June 30, 2017

 

     Current     30-90     90-150     >150     Total  

Commercial

     17.7     7.6     3.6     5.4     34.3

Medicare

     10.8     1.9     0.7     1.2     14.6

Medicaid

     19.9     4.9     2.2     5.0     32.0

NHS

     7.8     1.6     0.5     0.0     9.9

Self-Pay

     1.1     1.4     1.6     2.8     6.9

Other

     0.9     0.4     0.3     0.7     2.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     58.2     17.8     8.9     15.1     100.0

December 31, 2016

          
     Current     30-90     90-150     >150     Total  

Commercial

     15.8     8.5     3.0     5.3     32.6

Medicare

     12.0     1.6     0.8     1.2     15.6

Medicaid

     18.7     6.5     2.9     5.5     33.6

NHS

     5.1     3.4     0.6     0.4     9.5

Self-Pay

     1.8     1.5     1.5     3.3     8.1

Other

     0.1     0.1     0.1     0.3     0.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     53.5     21.6     8.9     16.0     100.0

Results of Operations

The following table illustrates our consolidated results of operations from continuing operations for the respective periods shown (dollars in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2017     2016     2017     2016  
     Amount     %     Amount     %     Amount     %     Amount     %  

Revenue before provision for doubtful accounts

   $ 725,643       $ 767,054       $ 1,414,984       $ 1,394,237    

Provision for doubtful accounts

     (9,747       (10,506       (19,894       (20,876  
  

 

 

     

 

 

     

 

 

     

 

 

   

Revenue

     715,896       100.0     756,548       100.0     1,395,090       100.0     1,373,361       100.0

Salaries, wages and benefits

     383,595       53.6     408,287       54.0     760,016       54.5     749,315       54.6

Professional fees

     46,321       6.5     50,292       6.6     89,730       6.4     90,283       6.6

Supplies

     28,639       4.0     31,209       4.1     56,348       4.0     57,894       4.2

Rents and leases

     19,435       2.7     20,467       2.7     38,406       2.8     35,273       2.6

Other operating expenses

     83,122       11.6     80,955       10.7     166,833       12.0     151,202       11.0

Depreciation and amortization

     35,201       4.9     36,752       4.9     68,814       4.9     64,727       4.7

Interest expense

     43,505       6.1     48,758       6.4     86,262       6.2     86,472       6.3

Debt extinguishment costs

     810       0.1     —       0.0     810       0.1     —       0.0

Gain on foreign currency derivatives

     —       0.0     (98     0.0     —       0.0     (508     (0.1 )% 

Transaction-related expenses

     9,052       1.3     6,074       0.8     13,171       0.9     32,372       2.4
  

 

 

     

 

 

     

 

 

     

 

 

   

Total expenses

     649,680       90.8     682,696       90.2     1,280,390       91.8     1,267,030       92.3
  

 

 

     

 

 

     

 

 

     

 

 

   

Income before income taxes

     66,216       9.2     73,852       9.8     114,700       8.2     106,331       7.7

Provision for income taxes

     16,578       2.3     18,261       2.5     30,289       2.2     25,371       1.8
  

 

 

     

 

 

     

 

 

     

 

 

   

Net income

   $ 49,638       6.9   $ 55,591       7.3   $ 84,411       6.0   $ 80,960       5.9
  

 

 

     

 

 

     

 

 

     

 

 

   

 

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Three months ended June 30, 2017 compared to the three months ended June 30, 2016

Revenue before provision for doubtful accounts. Revenue before provision for doubtful accounts decreased $41.5 million, or 5.4%, to $725.6 million for the three months ended June 30, 2017 from $767.1 million for the three months ended June 30, 2016. The decrease related primarily to the reduction in revenue before provision for doubtful accounts related to the U.K. Divestiture of $43.1 million and the decline in the exchange rate between USD and GBP of $35.4 million offset by same facility patient day growth. Same-facility revenue before provision for doubtful accounts increased by $41.2 million, or 6.3%, for the three months ended June 30, 2017 compared to the three months ended June 30, 2016, resulting from same-facility growth in patient days of 4.6% and an increase in same-facility revenue per day of 1.8%. Consistent with the same-facility patient day growth in 2016, the growth in same-facility patient days for the three months ended June 30, 2017 compared to the three months ended June 30, 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 $9.7 million for the three months ended June 30, 2017, or 1.3% of revenue before provision for doubtful accounts, compared to $10.5 million for the three months ended June 30, 2016, or 1.4% of revenue before provision for doubtful accounts.

Salaries, wages and benefits. Salaries, wages and benefits (“SWB”) expense was $383.6 million for the three months ended June 30, 2017 compared to $408.3 million for the three months ended June 30, 2016, a decrease of $24.7 million. SWB expense included $7.4 million and $6.9 million of equity-based compensation expense for the three months ended June 30, 2017 and 2016, respectively. Excluding equity-based compensation expense, SWB expense was $376.2 million, or 52.5% of revenue, for the three months ended June 30, 2017, compared to $401.4 million, or 53.1% of revenue, for the three months ended June 30, 2016. The $25.2 million decrease in SWB expense, excluding equity-based compensation expense, was primarily attributable to the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP. Same-facility SWB expense was $342.3 million for the three months ended June 30, 2017, or 50.2% of revenue, compared to $321.3 million for the three months ended June 30, 2016, or 50.2% of revenue.

Professional fees. Professional fees were $46.3 million for the three months ended June 30, 2017, or 6.5% of revenue, compared to $50.3 million for the three months ended June 30, 2016, or 6.6% of revenue. The $4.0 million decrease was primarily attributable to the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP. Same-facility professional fees were $40.0 million for the three months ended June 30, 2017, or 5.9% of revenue, compared to $38.2 million, for the three months ended June 30, 2016, or 6.0% of revenue.

Supplies. Supplies expense was $28.6 million for the three months ended June 30, 2017, or 4.0% of revenue, compared to $31.2 million for the three months ended June 30, 2016, or 4.1% of revenue. The $2.6 million decrease was primarily attributable to the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP. Same-facility supplies expense was $26.6 million for the three months ended June 30, 2017, or 3.9% of revenue, compared to $25.8 million for the three months ended June 30, 2016, or 4.0% of revenue.

Rents and leases. Rents and leases were $19.4 million for the three months ended June 30, 2017, or 2.7% of revenue, compared to $20.5 million for the three months ended June 30, 2016, or 2.7% of revenue. The $1.1 million decrease was primarily attributable to the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP. Same-facility rents and leases were $15.9 million for the three months ended June 30, 2017, or 2.3% of revenue, compared to $15.4 million for the three months ended June 30, 2016, or 2.4% 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 $83.1 million for the three months ended June 30, 2017, or 11.6% of revenue, compared to $81.0 million for the three months ended June 30, 2016, or 10.7% of revenue. Same-facility other operating expenses were $77.2 million for the three months ended June 30, 2017, or 11.3% of revenue, compared to $69.1 million for the three months ended June 30, 2016, or 10.8% of revenue.

 

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Depreciation and amortization. Depreciation and amortization expense was $35.2 million for the three months ended June 30, 2017, or 4.9% of revenue, compared to $36.8 million for the three months ended June 30, 2016, or 4.9% of revenue. The decrease in depreciation and amortization was attributable to the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP slightly offset by depreciation associated with capital expenditures during 2016 and 2017 and real estate acquired as part of the 2016 Acquisitions.

Interest expense. Interest expense was $43.5 million for the three months ended June 30, 2017 compared to $48.8 million for the three months ended June 30, 2016. The decrease in interest expense was primarily a result of lower interest rates in connection with amendments to the Amended and Restated Senior Credit Facility.

Debt extinguishment costs. Debt extinguishment costs for the three months ended June 30, 2017 represent $0.5 million of charges and $0.3 of non-cash charges recorded in connection with the Third Repricing Amendment to the Amended and Restated Senior Credit Facility.

Gain on foreign currency derivatives. We entered into foreign currency forward contracts during the three months ended June 30, 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 $0.1 million for the three months ended June 30, 2016.

Transaction-related expenses. Transaction-related expenses were $9.1 million for the three months ended June 30, 2017 compared to $6.1 million for the three months ended June 30, 2016. Transaction-related expenses represent costs incurred in the respective periods, primarily related to the 2016 Acquisitions, the U.K. Divestiture and related integration efforts, as summarized below (in thousands):

 

     Three Months Ended June 30,  
     2017      2016  

Legal, accounting and other costs

   $ 2,114      $ 4,653  

Severance and contract termination costs

     6,938        1,421  
  

 

 

    

 

 

 
   $ 9,052      $ 6,074  
  

 

 

    

 

 

 

Provision for income taxes. For the three months ended June 30, 2017, the provision for income taxes was $16.6 million, reflecting an effective tax rate of 25.0%, compared to $18.3 million, reflecting an effective tax rate of 24.7%, for the three months ended June 30, 2016. The increase in the tax rate for the three months ended June 30, 2017 was primarily attributable to the reduction in earnings related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP.

Six months ended June 30, 2017 compared to the six months ended June 30, 2016

Revenue before provision for doubtful accounts. Revenue before provision for doubtful accounts increased $20.7 million, or 1.5%, to $1.4 billion for the six months ended June 30, 2017 from $1.4 billion for the six months ended June 30, 2016. The increase related primarily to revenue generated during the six months ended June 30, 2017 from the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory, offset by the reduction in revenue before provision for doubtful accounts related to the U.K. Divestiture of $83.7 million and the decline in the exchange rate between USD and GBP of $63.6 million. Same-facility revenue before provision for doubtful accounts increased $65.9 million, or 5.6%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016, resulting from same-facility growth in patient days of 4.4% and an increase in same-facility revenue per day of 1.2%. Consistent with the same-facility patient day growth in 2016, the growth in same-facility patient days for the six months ended June 30, 2017 compared to the six months ended June 30, 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 $19.9 million for the six months ended June 30, 2017, or 1.4% of revenue before provision for doubtful accounts, compared to $20.9 million for the six months ended June 30, 2016, or 1.5% of revenue before provision for doubtful accounts.

Salaries, wages and benefits. SWB expense was $760.0 million for the six months ended June 30, 2017 compared to $749.3 million for the six months ended June 30, 2016, an increase of $10.7 million. SWB expense included $14.8 million and $13.8 million of equity-based compensation expense for the six months ended June 30, 2017 and 2016, respectively. Excluding equity-based compensation expense, SWB expense was $745.2 million, or 53.4% of revenue, for the six months ended June 30, 2017, compared to $735.5 million, or 53.6% of revenue, for the six months ended June 30, 2016. The $9.7 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, slightly offset by the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP. Same-facility SWB expense was $615.9 million for the six months ended June 30, 2017, or 50.4% of revenue, compared to $582.2 million for the six months ended June 30, 2016, or 50.4% of revenue.

 

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Professional fees. Professional fees were $89.7 million for the six months ended June 30, 2017, or 6.4% of revenue, compared to $90.3 million for the six months ended June 30, 2016, or 6.6% of revenue. The $0.6 million decrease was primarily attributable to the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP slightly offset by professional fees incurred by the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory. Same-facility professional fees were $69.5 million for the six months ended June 30, 2017, or 5.7% of revenue, compared to $67.3 million, for the six months ended June 30, 2016, or 5.8% of revenue.

Supplies. Supplies expense was $56.3 million for the six months ended June 30, 2017, or 4.0% of revenue, compared to $57.9 million for the six months ended June 30, 2016, or 4.2% of revenue. The $1.6 million decrease was primarily attributable to the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP slightly offset by supplies expense incurred by the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory. Same-facility supplies expense was $49.2 million for the six months ended June 30, 2017, or 4.0% of revenue, compared to $47.5 million for the six months ended June 30, 2016, or 4.1 % of revenue.

Rents and leases. Rents and leases were $38.4 million for the six months ended June 30, 2017, or 2.8% of revenue, compared to $35.3 million for the six months ended June 30, 2016, or 2.6% of revenue. The $3.1 million increase was primarily attributable to rents and leases incurred by the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory, slightly offset by the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP. Same-facility rents and leases were $26.9 million for the six months ended June 30, 2017, or 2.2 % of revenue, compared to $26.3 million for the six months ended June 30, 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 $166.8 million for the six months ended June 30, 2017, or 12.0% of revenue, compared to $151.2 million for the six months ended June 30, 2016, or 11.0% of revenue. The $15.6 million increase was primarily attributable to other operating expenses incurred by the facilities acquired in our 2016 Acquisitions, particularly the acquisition of Priory, slightly offset by the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP. Same-facility other operating expenses were $142.8 million for the six months ended June 30, 2017, or 11.7% of revenue, compared to $127.8 million for the six months ended June 30, 2016, or 11.1% of revenue.

Depreciation and amortization. Depreciation and amortization expense was $68.8 million for the six months ended June 30, 2017, or 4.9% of revenue, compared to $64.7 million for the six months ended June 30, 2016, or 4.7% 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, slightly offset by the reduction in expense related to the U.K. Divestiture and the decline in the exchange rate between USD and GBP.

Interest expense. Interest expense was $86.3 million for the six months ended June 30, 2017 compared to $86.5 million for the six months ended June 30, 2016. The slight decrease in interest expense was primarily a result of the lower interest rates in connection with amendments to the Amended and Restated Senior Credit Facility offset by borrowings under the Amended and Restated Senior Credit Facility and the issuance of the 6.500% Senior Notes on February 16, 2016.

Debt extinguishment costs. Debt extinguishment costs for the six months ended June 30, 2017 represent $0.5 million of charges and $0.3 of non-cash charges recorded in connection with the Third Repricing Amendment to the Amended and Restated Senior Credit Facility.

Gain on foreign currency derivatives. We entered into foreign currency forward contracts during the six months ended June 30, 2016 in connection with (i) acquisitions in the U.K. and (ii) transfers of cash between the U.S. and the 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 $0.5 million for the six months ended June 30, 2016.

 

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Transaction-related expenses. Transaction-related expenses were $13.2 million for the six months ended June 30, 2017 compared to $32.4 million for the six months ended June 30, 2016. Transaction-related expenses represent costs incurred in the respective periods, primarily related to the 2016 Acquisitions, the U.K. Divestiture and related integration efforts, as summarized below (in thousands):

 

     Six Months Ended June 30,  
     2017      2016  

Legal, accounting and other costs

   $ 3,601      $ 16,101  

Severance and contract termination costs

     9,570        1,421  

Advisory and financing commitment fees

     —        14,850  
  

 

 

    

 

 

 
   $ 13,171      $ 32,372  
  

 

 

    

 

 

 

Provision for income taxes. For the six months ended June 30, 2017, the provision for income taxes was $30.3 million, reflecting an effective tax rate of 26.4%, compared to $25.4 million, reflecting an effective tax rate of 23.9%, for the six months ended June 30, 2016. The increase in the tax rate for the three months ended June 30, 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.

Liquidity and Capital Resources

Cash provided by continuing operating activities for the six months ended June 30, 2017 was $188.4 million compared to $185.8 million for the six months ended June 30, 2016. The increase in cash provided by continuing operating activities was primarily attributable to cash provided by operating activities from our 2016 Acquisitions offset by the U.K. Divestiture and the decline in the exchange rate between USD and GBP. Days sales outstanding were 37 as of June 30, 2017 compared to 34 as of December 31, 2016. As of June 30, 2017 and December 31, 2016, we had working capital of $112.5 million and $85.1 million, respectively.

Cash used in investing activities for the six months ended June 30, 2017 was $146.3 million compared to $890.0 million for the six months ended June 30, 2016. Cash used in investing activities for the six months ended June 30, 2017 primarily consisted of $117.5 million of cash paid for capital expenditures and $22.9 million of cash paid for real estate. Cash paid for capital expenditures for the six months ended June 30, 2017 consisted of $32.1 million of routine capital expenditures and $85.4 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 six months ended June 30, 2017. Cash used in investing activities for the six months ended June 30, 2016 primarily consisted of $683.3 million of cash paid for acquisitions, $177.7 million of cash paid for capital expenditures and $28.4 million of cash paid for real estate acquisitions.

Cash used in financing activities for the six months ended June 30, 2017 was $23.2 million compared to cash provided by financing activities of $735.1 million for the six months ended June 30, 2016. Cash used in financing activities for the six months ended June 30, 2017 primarily consisted of principal payments on long-term debt of $17.3 million and common stock withheld for minimum statutory taxes of $3.7 million. Cash provided by financing activities for the six months ended June 30, 2016 primarily consisted of borrowings on long-term debt of $1.5 billion, borrowings on our revolving credit facility of $158.0 million, issuance of common stock of $685.1 million, partially offset by repayment of assumed Priory debt of $1.3 billion, payment on revolving credit facility of $166.0 million, payment of debt issuance costs of $35.5 million, principal payments on long-term debt of $29.9 million and common stock withheld for minimum statutory taxes of $7.4 million.

We had total available cash and cash equivalents of $79.4 million and $57.1 million as of June 30, 2017 and December 31, 2016, respectively, of which approximately $31.6 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.

Amended and Restated Senior Credit Facility

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 in non-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

 

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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 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 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 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 3.00% 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.

On November 22, 2016, we entered into 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, we entered into the 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.

On May 10, 2017, we entered into the Third Repricing Amendment to the Amended and Restated Credit Agreement. The Third Repricing Amendment reduced the Applicable Rate with respect to the Existing TLB Facility and the New TLB Facility from 3.0% to 2.75% in the case of Eurodollar Rate loans and 2.0% to 1.75% in the case of Base Rate Loans. In connection with the Third Repricing Amendment, we recorded a debt extinguishment charge of $0.8 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.

We had $493.5 million of availability under the revolving line of credit and had standby letters of credit outstanding of $6.5 million related to security for the payment of claims required by our workers’ compensation insurance program as of June 30, 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 June 30, 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

 

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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 June 30, 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 June 30, 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

   Consolidated Leverage Ratio    Eurodollar Rate
Loans
    Base Rate
Loans
    Commitment
Fee
 

1

   < 3.50:1.0      1.75     0.75     0.20

2

   >3.50:1.0 but < 4.00:1.0      2.00     1.00     0.25

3

   >4.00:1.0 but < 4.50:1.0      2.25     1.25     0.30

4

   >4.50:1.0 but < 5.25:1.0      2.50     1.50     0.35

5

   >5.25:1.0      2.75     1.75     0.40

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%.

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:

 

  a) the affirmative covenants include the following: (i) delivery of financial statements and other customary financial information; (ii) notices of events of default and other material events; (iii) maintenance of existence, ability to conduct business, properties, insurance and books and records; (iv) payment of taxes; (v) lender inspection rights; (vi) compliance with laws; (vii) use of proceeds; (viii) further assurances; and (ix) additional collateral and guarantor requirements.

 

  b) the negative covenants include limitations on the following: (i) liens; (ii) debt (including guaranties); (iii) investments; (iv) fundamental changes (including mergers, consolidations and liquidations); (v) dispositions; (vi) sale leasebacks; (vii) affiliate transactions; (viii) burdensome agreements; (ix) restricted payments; (x) use of proceeds; (xi) ownership of subsidiaries; (xii) changes to line of business; (xiii) changes to organizational documents, legal name, state of formation, form of entity and fiscal year; (xiv) prepayment or redemption of certain senior unsecured debt; and (xv) amendments to certain material agreements. We are generally not permitted to issue dividends or distributions other than with respect to the following: (w) certain tax distributions; (x) the repurchase of equity held by employees, officers or directors upon the occurrence of death, disability or termination subject to cap of $500,000 in any fiscal year and compliance with certain other conditions; (y) in the form of capital stock; and (z) scheduled payments of deferred purchase price, working capital adjustments and similar payments pursuant to the merger agreement or any permitted acquisition.

 

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  c) The financial covenants include maintenance of the following:

 

    the fixed charge coverage ratio may not be less than 1.25:1.00 as of the end of any fiscal quarter;

 

    the total leverage ratio may not be greater than the following levels as of the end of each fiscal quarter listed below:

 

     March 31      June 30      September 30      December 31  

2017

     6.75x        6.75x        6.50x        6.50x  

2018

     6.50x        6.25x        6.00x        6.00x  

2019

     5.75x        5.75x        5.50x        5.50x  

2020

     5.25x        5.25x        5.25x        5.00x  

 

    the secured leverage ratio may not be greater than the following levels as of the end of each fiscal quarter listed below:

 

June 30, 2017

     4.00x  

September 30, 2017- June 30, 2018

     3.75x  

September 30, 2018 and each fiscal quarter thereafter

     3.50x  

As of June 30, 2017, we were in compliance with all of the above covenants.

Senior Notes

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.

5.125% Senior Notes due 2022

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.

5.625% Senior Notes due 2023

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.

6.500% Senior Notes due 2024

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.

 

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9.0% and 9.5% Revenue Bonds

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 June 30, 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.

Contractual Obligations

The following table presents a summary of contractual obligations as of June 30, 2017 (dollars in thousands):

 

     Payments Due by Period  
     Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
     Total  

Long-term debt (a)

   $ 196,457      $ 393,878      $ 1,557,524      $ 2,076,363      $ 4,224,222  

Operating leases

     66,682        119,663        102,749        808,333        1,097,427  

Purchase and other obligations (b)

     3,501        29,498        1,980        27,580        62,559  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations and commitments

   $ 266,640      $ 543,039      $ 1,662,253      $ 2,912,276      $ 5,384,208  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Amounts include required principal and interest payments. The projected interest payments reflect the interest rates in place on our variable-rate debt as of June 30, 2017.
(b) Amounts relate to purchase obligations, including capital lease payments.

Off-Balance Sheet Arrangements

As of June 30, 2017, we had standby letters of credit outstanding of $6.5 million related to security for the payment of claims as required by our workers’ compensation insurance program.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our interest expense is sensitive to changes in market interest rates. Our long-term debt outstanding at June 30, 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 June 30, 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 $10.8 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.

 

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Item 4. Controls and Procedures

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 June 30, 2017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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.

Item 1A. Risk Factors

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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended June 30, 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

   Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number of
Shares that May
Yet Be Purchased
Under the Plans
or Programs
 

April 1 – April 30

     —      $ —        —        —  

May 1 – May 31

     2,287        43.45        —        —  

June 1 – June 30

     4,597        46.22        —        —  
  

 

 

          

Total

     6,884           
  

 

 

          

 

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Item 6. Exhibits

 

Exhibit No.

  

Exhibit Description

    3.1    Amended and Restated Certificate of Incorporation, as filed on October 28, 2011 with the Secretary of State of the State of Delaware, as amended by the Certificate of Amendment filed on May 25, 2017. (1)
    3.2    Amended and Restated Bylaws of the Company, as amended May 25, 2017. (1)
  10.1    Third Repricing Amendment, dated May 10, 2017, to the Amended and Restated Credit Agreement. (2)
  31.1*    Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2*    Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32*    Certification of Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**    XBRL Instance Document.
101.SCH**    XBRL Taxonomy Extension Schema Document.
101.CAL**    XBRL Taxonomy Calculation Linkbase Document.
101.DEF**    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**    XBRL Taxonomy Labels Linkbase Document.
101.PRE**    XBRL Taxonomy Presentation Linkbase Document.

 

(1) Incorporated by reference to exhibits filed with the Company’s Current Report on Form 8-K filed May 25, 2017 (File No. 001-35331).
(2) Incorporated by reference to exhibits filed with the Company’s Current Report on Form 8-K filed May 10, 2017 (File No. 001-35331).
* Filed herewith.
** The XBRL related information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 

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SIGNATURES

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.

 

Acadia Healthcare Company, Inc.
By:  

/s/ David M. Duckworth

  David M. Duckworth
  Chief Financial Officer

Dated: July 28, 2017

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit No.

  

Exhibit Description

    3.1    Amended and Restated Certificate of Incorporation, as filed on October 28, 2011 with the Secretary of State of the State of Delaware, as amended by the Certificate of Amendment filed on May 25, 2017. (1)
    3.2    Amended and Restated Bylaws of the Company, as amended May 25, 2017. (1)
  10.1    Third Repricing Amendment, dated May 10, 2017, to the Amended and Restated Credit Agreement. (2)
  31.1*    Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2*    Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32*    Certification of Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**    XBRL Instance Document.
101.SCH**    XBRL Taxonomy Extension Schema Document.
101.CAL**    XBRL Taxonomy Calculation Linkbase Document.
101.DEF**    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**    XBRL Taxonomy Labels Linkbase Document.
101.PRE**    XBRL Taxonomy Presentation Linkbase Document.

 

(1) Incorporated by reference to exhibits filed with the Company’s Current Report on Form 8-K filed May 25, 2017 (File No. 001-35331).
(2) Incorporated by reference to exhibits filed with the Company’s Current Report on Form 8-K filed May 10, 2017 (File No. 001-35331).
* Filed herewith.
** The XBRL related information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.