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ACHC > SEC Filings for ACHC > Form 10-K on 1-Mar-2013All Recent SEC Filings

Show all filings for ACADIA HEALTHCARE COMPANY, INC.

Form 10-K for ACADIA HEALTHCARE COMPANY, INC.


1-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations with our audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Forward-Looking Statements

This Annual Report on Form 10-K 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:

negative media coverage relating to patient incidents, which could adversely affect the price of our common stock and result in incremental regulatory burdens and governmental investigations;

the impact of payments received from the government and third-party payors on our revenues and results of operations;

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

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 United States on our business and future results of operations;

compliance with laws and government regulations;

the impact of claims brought against our facilities;

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

the impact of recent healthcare reform;

the impact of our highly competitive industry on patient volumes;

the impact of the trend by insurance companies and managed care organizations entering into sole source contracts;

the impact of recruitment and retention of quality psychiatrists and other physicians on our performance;

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

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

our acquisition strategy, which exposes us to a variety of operational and financial risk;

difficulties in successfully integrating the operations of acquired facilities or realizing the potential benefits and synergies of these acquisitions;

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

our potential inability to extend leases at expiration;

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

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 states 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 impact of legislative and regulatory initiatives relating to privacy and security of patient health information and standards for electronic transactions;

failure to achieve and 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 common stock;

the cessation of our status as a "controlled company";

the impact of our sponsor's rights over certain company matters;

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

the other risks described under the heading "Risk Factors" in Item 1A.

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 Annual Report on Form 10-K. 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.


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Overview

Our business strategy is to acquire and develop inpatient behavioral healthcare facilities and improve our operating results within our inpatient 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. During 2012, we acquired 13 facilities with approximately 1,000 licensed beds in eight states. At December 31, 2012, we operated 42 behavioral healthcare facilities with over 3,100 licensed beds in 21 states. During the year ended December 31, 2012, we added 281 beds to our existing facilities, and we expect to add approximately 200 beds to existing facilities during 2013 (exclusive of acquisitions).

We are the leading publicly traded pure-play provider of inpatient behavioral healthcare services based upon number of licensed beds in the United States. Management believes that Acadia's recent acquisitions position the Company 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.

2012 Acquisitions and Financing Transactions

On December 31, 2012, we completed the acquisition of BCA for total cash consideration of $143.7 million, which included estimated net working capital receivables of $0.3 million and excluded severance costs of $0.7 million recorded in transaction-related expenses in the consolidated statements of operations. We used the net proceeds from the December 2012 sale of Acadia common stock and borrowings under our Amended and Restated Senior Credit Facility dated December 31, 2012 to fund the acquisition. In the BCA acquisition, we acquired three inpatient psychiatric facilities and one psychiatric hospital within a hospital. The facilities are located in Ohio, Michigan and Texas and have an aggregate of 278 licensed inpatient beds.

On December 31, 2012, we completed the acquisition of AmiCare for total cash consideration of $111.5 million, which included estimated net working capital payments of $0.9 million and excluded severance costs of $2.1 million recorded in transaction-related expenses in the consolidated statements of operations. We used the net proceeds from the December 2012 sale of Acadia common stock and borrowings under our Amended and Restated Senior Credit Facility to fund the acquisition. In the AmiCare acquisition, we acquired four inpatient psychiatric facilities in Arkansas that have an aggregate of 330 licensed inpatient beds.

On December 31, 2012, we amended and restated our existing senior secured credit agreement, to provide a revolving line of credit of $100.0 million and term loans of $300.0 million. We used $151.1 million of the term loans partially to fund the acquisition of BCA and AmiCare on December 31, 2012. We did not borrow under the revolving line of credit to fund the acquisitions and, as of December 31, 2012, had $99.6 million of availability under the revolving line of credit. Borrowings under the revolving line of credit are subject to customary conditions precedent to borrowing. The amended term loans require quarterly principal payments of $1.9 million for March 31, 2013 to December 31, 2013, $3.8 million for March 31, 2014 to December 31, 2014, $5.6 million for March 31, 2015 to December 31, 2015, $7.5 million for March 31, 2016 to December 31, 2016, and $9.4 million for March 31, 2017 to September 30, 2017, with the remaining principal balance due on the maturity date of December 31, 2017. The Amended and Restated Senior Credit Facility also provides for a $50.0 million incremental credit facility, subject to customary conditions precedent to borrowing.

On December 12, 2012, we completed the offering of 7,000,000 shares of Acadia common stock and on December 24, 2012, we completed the offering of 1,050,000 shares of Acadia common stock 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 $22.50 per share. The net proceeds to us from the sale of the shares, after deducting the underwriting discount of $6.3 million and additional offering-related expenses of $1.0 million, were $172.8 million. We used the net proceeds principally to fund the acquisitions of AmiCare and BCA on December 31, 2012 with the remaining amount included in our cash balance at December 31, 2012.

On November 11, 2012, we purchased 100% of the membership interests of Park Royal, an inpatient psychiatric facility with 76 licensed beds located in Fort Myers, Florida, for cash consideration of $10.6 million and the assumption of debt with a fair value of $25.6 million. Also, we may make additional payments of up to $7.0 million, contingent upon achievement of certain financial targets over the four-year period ending December 31, 2016.

On August 31, 2012, we completed the acquisition of the assets of Timberline Knolls, an inpatient behavioral health facility with 122 licensed beds located outside of Chicago in Lemont, Illinois. The total consideration of $75.5 million paid for the business and related assets represents total payments of $89.8 million less amounts paid for transactions that were deemed to be separate from the business combination. Additionally, in connection with this acquisition, we funded an employment retention bonus of $1.2 million.


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On May 21, 2012, we completed the offering of 9,487,500 shares of Acadia 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 $15.50 per share. The net proceeds to us from the sale of the shares, after deducting the underwriting discount of $6.4 million and additional offering-related expenses of $0.7 million, were $139.0 million. We used the net offering proceeds to fund the acquisition of Timberline Knolls and acquisitions of certain facilities previously leased.

On March 1, 2012, we completed the acquisition of the Haven Facilities with a combined 166 licensed beds at the acquisition date for $90.5 million of cash consideration. Also on March 1, 2012, we amended our Senior Secured Credit Facility to provide an incremental $25.0 million of term loans and increase the revolving line of credit by $45.0 million, from $30.0 million to $75.0 million. We used the net proceeds from the December 2011 sale of our common stock, the incremental term loans of $25.0 million and a $5.0 million borrowing under the revolving line of credit to fund the acquisition of the Haven Facilities.

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, including managed care plans; (iii) the federal government under the Medicare program administered by CMS and the Tricare program; and (iv) 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.

Results of Operations

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

                                                                  Year Ended December 31,
                                                2012                       2011                        2010
                                         Amount          %         Amount           %           Amount         %
Revenue before provision for doubtful
accounts                                $ 413,850                 $ 219,704                    $ 64,342
Provision for doubtful accounts            (6,389 )                  (3,206 )                    (2,239 )

Revenue                                   407,461       100.0 %     216,498        100.0 %       62,103       100.0 %
Salaries, wages and benefits              239,639        58.8 %     152,609         70.5 %       38,661        62.3 %
Professional fees                          19,019         4.7 %       8,896          4.1 %        1,675         2.7 %
Supplies                                   19,496         4.8 %      11,349          5.2 %        3,699         6.0 %
Rents and leases                            7,838         1.9 %       5,576          2.6 %        1,288         2.1 %
Other operating expenses                   42,777        10.5 %      20,171          9.3 %        6,870        11.0 %
Depreciation and amortization               7,982         2.0 %       4,278          2.0 %          976         1.5 %
Interest expense                           29,769         7.3 %       9,191          4.3 %          738         1.2 %
Sponsor management fees                        -           -  %       1,347          0.6 %          120         0.2 %
Transaction related expenses                8,112         2.0 %      41,547         19.2 %          918         1.5 %

                                          374,632        92.0 %     254,964        117.8 %       54,945        88.5 %
Income (loss) from continuing
operations, before income taxes            32,829         8.0 %     (38,466 )      (17.8 )%       7,158        11.5 %
Provision for (benefit from) income
taxes                                      12,325         3.0 %      (5,272 )       (2.5 )%         477         0.7 %

Income (loss) from continuing
operations                              $  20,504         5.0 %   $ (33,194 )      (15.3 )%    $  6,681        10.8 %

Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Revenue before provision for doubtful accounts. Revenue before provision for doubtful accounts increased $194.1 million,

or 88.4%, to $413.9 million for the year ended December 31, 2012 from $219.7 million for the year ended December 31, 2011. The increase related primarily to the revenue generated during the year ended December 31, 2012 from the YFCS facilities acquired on April 1, 2011, PHC facilities acquired on November 1, 2011, the Haven Facilities acquired on March 1, 2012, Timberline Knolls acquired on August 31, 2012 and Park Royal acquired on November 11, 2012, which were not included in our results for periods prior to the acquisitions. Same-facility revenue before provision for doubtful accounts for the year ended December 31, 2012 increased by $20.5 million, or 9.3%, compared to the year ended December 31, 2011, primarily resulting from same-facility growth in patient days of 9.3%.


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Provision for doubtful accounts. The provision for doubtful accounts was $6.4 million for the year ended December 31,

2012, or 1.5% of revenue before provision for doubtful accounts, compared to $3.2 million for the year ended December 31, 2011, or 1.5% of revenue before provision for doubtful accounts. The same-facility provision for doubtful accounts was $3.5 million for the year ended December 31, 2012, or 1.4% of revenue before provision for doubtful accounts, compared to $3.2 million for the year ended December 31, 2011, or 1.5% of revenue before provision for doubtful accounts. The increase related primarily to the provision for doubtful accounts recorded during the year ended December 31, 2012 from the YFCS facilities acquired on April 1, 2011, PHC facilities acquired on November 1, 2011, the Haven Facilities acquired on March 1, 2012, Timberline Knolls acquired on August 31, 2012 and Park Royal acquired on November 11, 2012, which were not included in our results for periods prior to the acquisitions.

Salaries, wages and benefits. Salaries, wages and benefits ("SWB") expense was $239.6 million for the year ended December 31, 2012 compared to $152.6 million for the year ended December 31, 2011, an increase of $87.0 million. SWB expense included $2.3 million and $17.3 million of equity-based compensation expense for the year ended December 31, 2012 and 2011, respectively. Excluding equity-based compensation expense, SWB expense was $237.4 million, or 58.3% of revenue, for the year ended December 31, 2012, compared to $135.3 million, or 62.5% of revenue, for the year ended December 31, 2011. The $102.1 million increase in SWB expense, excluding equity-based compensation expense, was primarily attributable to the hiring of additional employees in connection with the acquisition of the PHC facilities on November 1, 2011, the Haven Facilities on March 1, 2012, Timberline Knolls on August 31, 2012 and Park Royal on November 11, 2012. The decrease in SWB expense, excluding equity-based compensation expense, as a percentage of revenue was primarily the result of savings in employee benefit costs and lower SWB expense incurred by the PHC facilities acquired on November 1, 2011, the Haven Facilities acquired on March 1, 2012 and Timberline Knolls acquired on August 31, 2012. Same-facility SWB expense was $133.0 million for the year ended December 31, 2012, or 56.2% of revenue, compared to $127.1 million for the year ended December 31, 2011, or 58.7% of revenue.

Professional fees. Professional fees were $19.0 million for the year ended December 31, 2012, or 4.7% of revenue, compared to $8.9 million for the year ended December 31, 2011, or 4.1% of revenue. The increase in professional fees as a percentage of revenue was primarily attributable to the higher professional fees incurred by our corporate office after becoming a public company on November 1, 2011 and higher professional fees associated with the PHC facilities acquired on November 1, 2011 and Timberline Knolls acquired on August 31, 2012. Same-facility professional fees were $7.2 million for the year ended December 31, 2012, or 3.1% of revenue, compared to $7.6 million, for the year ended December 31, 2011, or 3.5% of revenue.

Supplies. Supplies expense was $19.5 million for the year ended December 31, 2012, or 4.8% of revenue, compared to $11.3 million for the year ended December 31, 2011, or 5.2% of revenue. The $8.1 million increase in supplies expense was primarily attributable to the acquisitions of YFCS on April 1, 2011, PHC on November 1, 2011, the Haven Facilities on March 1, 2012, Timberline Knolls on August 31, 2012 and Park Royal on November 11, 2012. Same-facility supplies expense was $11.4 million for the year ended December 31, 2012, or 4.8% of revenue, compared to $11.3 million for the year ended December 31, 2011, or 5.2% of revenue.

Rents and leases. Rents and leases were $7.8 million for the year ended December 31, 2012, or 1.9% of revenue, compared to $5.6 million for the year ended December 31, 2011, or 2.6% of revenue. The decrease in rents and leases as a percentage of revenue was primarily attributable to the acquisition of the Haven Facilities, which are owned facilities, on March 1, 2011, the purchase of the property previously leased by Timberline Knolls and the purchase of six facilities that we previously leased during 2012. Same-facility rents and leases were $4.2 million for the year ended December 31, 2012, or 1.8% of revenue, compared to $5.1 million for the year ended December 31, 2011, or 2.4% of revenue.

Other operating expenses. Other operating expenses consist primarily of purchased services, utilities, insurance, travel and

repairs and maintenance expenses. Other operating expenses were $42.8 million for the year ended December 31, 2012, or 10.5% of revenue, compared to $20.2 million for the year ended December 31, 2011, or 9.3% of revenue. The increase in other operating expenses as a percentage of revenue was primarily attributable to slight increases in various components of other operating expenses. Same-facility other operating expenses were $24.0 million for the year ended December 31, 2012, or 10.1% of revenue, compared to $19.5 million for the year ended December 31, 2011, or 9.0% of revenue.

Depreciation and amortization. Depreciation and amortization expense was $8.0 million for the year ended December 31, 2012, or 2.0% of revenue, compared to $4.3 million for the year ended December 31, 2011, or 2.0% of revenue. The increase in depreciation and amortization was attributable to an increase in depreciation associated with real estate purchases of $53.2 million during 2012 and the acquisitions of PHC on November 1, 2011, the Haven Facilities on March 1, 2012, Timberline Knolls on August 31, 2012 and Park Royal on November 11, 2012.

Interest expense. Interest expense was $29.8 million for the year ended December 31, 2012 compared to $9.2 million for the year ended December 31, 2011. The increase in interest expense was primarily a result of borrowings under our Amended and Restated Senior Credit Facility and interest on the $150.0 million of Senior Notes issued in November of 2011.


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Sponsor management fees. Sponsor management fees were $1.3 million for the year ended December 31, 2011, which related to our professional services agreement with Waud Capital Partners.

Transaction-related expenses. Transaction-related expenses were $8.1 million for the year ended December 31, 2012 compared to $41.6 million for the year ended December 31, 2011. Transaction-related expenses represented costs incurred in the respective periods primarily related to the acquisitions of YFCS on April 1, 2011, PHC on November 1, 2011, the Haven Facilities on March 1, 2012, Timberline Knolls on August 31, 2012, Park Royal on November 11, 2012 and AmiCare and BCA on December 31, 2012 and the termination of the professional services agreement with Waud Capital Partners, as summarized below (in thousands):

                                                               Year Ended December 31,
                                                              2012                2011
Legal, accounting and other fees                           $     4,161        $       7,301
Severance and contract termination costs                         3,951                1,702
Fee paid to equity sponsor for termination of
professional services agreement                                     -                20,559
Investment banking advisory and bridge commitment fees              -                 8,385
Advisory fees paid to equity sponsor                                -                 3,600

                                                           $     8,112        $      41,547

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

Revenue before provision for doubtful accounts. Revenue before provision for doubtful accounts increased $155.4 million, or 241.5%, to $219.7 million for the year ended December 31, 2011 compared to $64.3 million for the year ended December 31, 2010. The increase related primarily to the $147.7 million of revenue generated during 2011 from the YFCS facilities acquired on April 1, 2011 and the PHC facilities acquired on November 1, 2011. The remainder of the increase in revenue before provision for doubtful accounts was attributable to same-facility revenue before provision for doubtful accounts growth of $7.7 million, or 12.0%, on same-facility growth in patient days of 13.3%.

Provision for doubtful accounts. The provision for doubtful accounts was $3.2 million for the year ended December 31, 2011, or 1.5% of revenue before provision for doubtful accounts, compared to $2.2 million for the year ended December 31, 2010, or 3.5% of revenue before provision for doubtful accounts. The decrease in the provision for doubtful accounts as a percentage of revenue before provision for doubtful accounts was attributable to the lower volumes of self-pay admissions and bad debts associated with the facilities acquired from YFCS on April 1, 2011. The same-facility provision for doubtful accounts was $2.3 million for the year ended December 31, 2011, or 3.2% of revenue before provision for doubtful accounts, compared to $2.2 million for the year ended December 31, 2010, or 3.5% of revenue before provision for doubtful accounts.

Salaries, wages and benefits. SWB expense was $152.6 million for the year ended December 31, 2011 compared to $38.7 million for the year ended December 31, 2010, an increase of $113.9 million. SWB expense includes $17.3 million of equity-based compensation expense for the year ended December 31, 2011. This equity-based compensation primarily related to the incentive equity units issued by Acadia Healthcare Holdings, LLC, our former parent company, prior to its liquidation on November 1, 2011. There was no equity-based compensation expense during the year ended December 31, 2010. Excluding equity-based compensation expense, SWB expense was $135.3 million, or 62.5% of revenue, for the year ended December 31, 2011, compared to 62.3% of revenue for the year ended December 31, 2010. The increase in SWB expense, excluding equity-based compensation expense, as a percentage of revenue was attributable to the higher SWB expense associated with the facilities acquired from YFCS on April 1, 2011. Same-facility SWB expense was $39.2 million for the year ended December 31, 2011, or 56.2% of revenue, compared to $35.7 million for the year ended December 31, 2010, or 57.4% of revenue. SWB expense, excluding equity-based compensation expense, for . . .

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