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 September 30, 2016

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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  

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 November 2, 2016, there were 87,500,681 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 September 30, 2016 and December 31, 2015    1
  

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015

   2
  

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015

   3
   Condensed Consolidated Statement of Equity (Unaudited) for the Nine Months Ended September 30, 2016    4
  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2016 and 2015

   5
   Notes to Condensed Consolidated Financial Statements (Unaudited)    7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    31
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    43
Item 4.    Controls and Procedures    44
PART II – OTHER INFORMATION   
Item 1.    Legal Proceedings    45
Item 1A.    Risk Factors    45
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    46
Item 6.    Exhibits    46
SIGNATURES   


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Acadia Healthcare Company, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

     September 30,
2016
    December 31,
2015
 
     (In thousands, except share
and per share amounts)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 27,751      $ 11,215   

Accounts receivable, net of allowance for doubtful accounts of $37,725 and $29,332, respectively

     277,568        216,626   

Other current assets

     87,628        66,895   
  

 

 

   

 

 

 

Total current assets

     392,947        294,736   

Property and equipment, net

     2,786,646        1,709,053   

Goodwill

     2,702,009        2,128,215   

Intangible assets, net

     84,385        59,575   

Deferred tax assets – noncurrent

     3,791        49,114   

Derivative instruments

     49,903        —    

Assets held for sale

     392,483        —     

Other assets

     40,814        38,515   
  

 

 

   

 

 

 

Total assets

   $ 6,452,978      $ 4,279,208   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Current portion of long-term debt

   $ 77,598      $ 45,360   

Accounts payable

     92,819        91,341   

Accrued salaries and benefits

     105,308        80,696   

Other accrued liabilities

     104,513        72,806   
  

 

 

   

 

 

 

Total current liabilities

     380,238        290,203   

Long-term debt

     3,583,879        2,195,384   

Deferred tax liabilities – noncurrent

     81,443        23,936   

Other liabilities

     147,150        78,602   
  

 

 

   

 

 

 

Total liabilities

     4,192,710        2,588,125   

Redeemable noncontrolling interests

     18,147        8,055   

Equity:

    

Preferred stock, $0.01 par value; 10,000,000 shares authorized, no shares issued

     —          —     

Common stock, $0.01 par value; 180,000,000 and 90,000,000 shares authorized at September 30, 2016 and December 31, 2015, respectively; 86,654,021 and 70,745,746 issued and outstanding as of September 30, 2016 and December 31, 2015, respectively

     866        707   

Additional paid-in capital

     2,488,803        1,572,972   

Accumulated other comprehensive loss

     (425,869     (104,647

Retained earnings

     178,321        213,996   
  

 

 

   

 

 

 

Total equity

     2,242,121        1,683,028   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,452,978      $ 4,279,208   
  

 

 

   

 

 

 

See accompanying notes.

 

1


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     2015     2016     2015  
     (In thousands, except per share amounts)  

Revenue before provision for doubtful accounts

   $ 744,802      $ 488,746      $ 2,139,039      $ 1,324,702   

Provision for doubtful accounts

     (10,137     (9,016     (31,013     (25,529
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     734,665        479,730        2,108,026        1,299,173   

Salaries, wages and benefits (including equity-based compensation expense of $7,145, $5,327, $20,989 and $14,576, respectively)

     408,242        258,410        1,157,557        707,583   

Professional fees

     47,687        30,759        137,970        83,215   

Supplies

     30,555        21,634        88,449        58,430   

Rents and leases

     19,740        8,542        55,013        22,639   

Other operating expenses

     79,748        57,244        230,950        148,899   

Depreciation and amortization

     36,418        16,890        101,145        44,920   

Interest expense, net

     48,843        27,737        135,315        77,932   

Debt extinguishment costs

     3,411        9,979        3,411        9,979   

Loss on divestiture

     174,739        —          174,739        —     

(Gain) loss on foreign currency derivatives

     (15     1,018        (523     1,926   

Transaction-related expenses

     1,111        5,842        33,483        31,415   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     850,479        438,055        2,117,509        1,186,938   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (115,814     41,675        (9,483     112,235   

Provision for income taxes

     2,396        12,669        27,767        34,794   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (118,210     29,006        (37,250     77,441   

Income from discontinued operations, net of income taxes

     —          80        —          83   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (118,210     29,086        (37,250     77,524   

Net loss attributable to noncontrolling interests

     402        464        1,575        464   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (117,808   $ 29,550      $ (35,675   $ 77,988   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings attributable to Acadia Healthcare Company, Inc. stockholders:

        

(Loss) income from continuing operations

   $ (1.36   $ 0.42      $ (0.42   $ 1.16   

Income from discontinued operations

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (1.36   $ 0.42      $ (0.42   $ 1.16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings attributable to Acadia Healthcare Company, Inc. stockholders:

        

(Loss) income from continuing operations

   $ (1.36   $ 0.42      $ (0.42   $ 1.15   

Income from discontinued operations

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (1.36   $ 0.42      $ (0.42   $ 1.15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding:

        

Basic

     86,618        70,664        85,376        67,194   

Diluted

     86,618        71,110        85,376        67,539   

See accompanying notes.

 

2


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     2015     2016     2015  
     (In thousands)  

Net (loss) income

   $ (118,210   $ 29,086      $ (37,250   $ 77,524   

Other comprehensive (loss) income:

        

Foreign currency translation loss

     (89,645     (32,707     (351,528     (15,923

Gain on derivative instruments, net of tax of $3,613, $0, $20,153 and $0, respectively

     6,387        —          30,306        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (83,258     (32,707     (321,222     (15,923
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (201,468     (3,621     (358,472     61,601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to noncontrolling interests

     402        464        1,575        464   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (201,066   $ (3,157   $ (356,897   $ 62,065   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidated Statement of Equity

(Unaudited)

 

     Common Stock      Additional
Paid-in
Capital
    Other
Comprehensive
Loss
    Retained
Earnings
    Total  
     Shares      Amount           

Balance at December 31, 2015

     70,746       $ 707       $ 1,572,972      $ (104,647   $ 213,996      $ 1,683,028   

Common stock issued under stock incentive plans

     374         4         1,349        —          —          1,353   

Common stock withheld for minimum statutory taxes

     —           —           (9,270     —          —          (9,270

Equity-based compensation expense

     —           —           20,989        —          —          20,989   

Issuance of common stock, net

     15,534         155         901,824        —          —          901,979   

Other comprehensive loss

     —           —           —          (321,222     —          (321,222

Other

     —           —           939        —          —          939   

Net loss

     —           —           —          —          (35,675     (35,675
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

     86,654       $ 866       $ 2,488,803      $ (425,869   $ 178,321      $ 2,242,121   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2016     2015  
     (In thousands)  

Operating activities:

    

Net (loss) income

   $ (37,250   $ 77,524   

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

    

Depreciation and amortization

     101,145        44,920   

Amortization of debt issuance costs

     7,714        5,017   

Equity-based compensation expense

     20,989        14,576   

Deferred income tax expense

     25,857        28,925   

Income from discontinued operations, net of taxes

     —          (83

Debt extinguishment costs

     3,411        9,979   

Loss on divestiture

     174,739        —     

(Gain) loss on foreign currency derivatives

     (523     1,926   

Other

     731        1,122   

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

    

Accounts receivable, net

     (12,579     (28,905

Other current assets

     (12,973     (12,201

Other assets

     (1,134     (4,879

Accounts payable and other accrued liabilities

     2,067        (8,316

Accrued salaries and benefits

     (10,759     8,888   

Other liabilities

     3,746        5,071   
  

 

 

   

 

 

 

Net cash provided by continuing operating activities

     265,181        143,564   

Net cash used in discontinued operating activities

     (5,524     (1,479
  

 

 

   

 

 

 

Net cash provided by operating activities

     259,657        142,085   

Investing activities:

    

Cash paid for acquisitions, net of cash acquired

     (683,285     (391,216

Cash paid for capital expenditures

     (249,961     (200,841

Cash paid for real estate acquisitions

     (37,947     (21,976

Settlement of foreign currency derivatives

     523        (1,926

Other

     (1,135     (887
  

 

 

   

 

 

 

Net cash used in investing activities

     (971,805     (616,846

Financing activities:

    

Borrowings on long-term debt

     1,480,000        1,150,000   

Borrowings on revolving credit facility

     179,000        310,000   

Principal payments on revolving credit facility

     (166,000     (310,000

Principal payments on long-term debt

     (46,069     (23,813

Repayment of assumed debt

     (1,348,389     (904,467

Repayment of senior notes

     —          (88,331

Payment of debt issuance costs

     (35,748     (25,584

Payment of premium on senior notes

     —          (6,890

Issuance of common stock, net

     685,097        331,360   

Common stock withheld for minimum statutory taxes, net

     (7,917     (7,582

Excess tax benefit from equity awards

     —          8,020   

Other

     (1,821     (374
  

 

 

   

 

 

 

Net cash provided by financing activities

     738,153        432,339   

Effect of exchange rate changes on cash

     (9,469     (856
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     16,536        (43,278

Cash and cash equivalents at beginning of the period

     11,215        94,040   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 27,751      $ 50,762   
  

 

 

   

 

 

 

 

(continued on next page)

 

5


Table of Contents
     Nine Months Ended
September 30,
 
     2016     2015  
     (In thousands)  

Effect of acquisitions:

    

Assets acquired, excluding cash

   $ 2,505,407      $ 1,793,139   

Liabilities assumed

     (1,605,240     (1,012,549

Issuance of common stock in connection with acquisition

     (216,882     (380,210

Deposits paid for acquisitions

     —          (9,164
  

 

 

   

 

 

 

Cash paid for acquisitions, net of cash acquired

   $ 683,285      $ 391,216   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

Acadia Healthcare Company, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(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 September 30, 2016, the Company operated 589 behavioral healthcare facilities with approximately 17,900 beds in 39 states, the U.K. and Puerto Rico.

Basis of Presentation

The business of the Company is conducted through limited liability companies, C-corporations and, for the U.K. facilities, their foreign counterparts. 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, 2015 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, 2015 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2016. 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. Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with Financial Accounting Standards Board Accounting 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.

 

7


Table of Contents

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2015 (in thousands except per share amounts):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016     2015      2016     2015  

Numerator:

         

Basic and diluted earnings per share attributable to Acadia Healthcare Company, Inc.:

         

(Loss) income from continuing operations

   $ (117,808   $ 29,470       $ (35,675   $ 77,905   

Income from discontinued operations

     —          80         —          83   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

   $ (117,808   $ 29,550       $ (35,675   $ 77,988   
  

 

 

   

 

 

    

 

 

   

 

 

 

Denominator:

         

Weighted average shares outstanding for basic earnings per share

     86,618        70,664         85,376        67,194   

Effect of dilutive instruments

     —          446         —          345   
  

 

 

   

 

 

    

 

 

   

 

 

 

Shares used in computing diluted earnings per common share

     86,618        71,110         85,376        67,539   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per share:

         

(Loss) income from continuing operations

   $ (1.36   $ 0.42       $ (0.42   $ 1.16   

Income from discontinued operations

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income

   $ (1.36   $ 0.42       $ (0.42   $ 1.16   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings per share:

         

(Loss) income from continuing operations

   $ (1.36   $ 0.42       $ (0.42   $ 1.15   

Income from discontinued operations

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income

   $ (1.36   $ 0.42       $ (0.42   $ 1.15   
  

 

 

   

 

 

    

 

 

   

 

 

 

For the three and nine months ended September 30, 2016, approximately 0.2 million and 0.3 million, respectively, of the outstanding restricted stock and shares of common stock issuable upon exercise of outstanding stock option awards have been excluded from the calculation of diluted earnings per share because the net loss for the three and nine months ended September 30, 2016 causes such securities to be anti-dilutive. Approximately 0.3 million and 0.9 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 and nine months ended September 30, 2015, respectively, because their effect would have been anti-dilutive.

3. 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 total consideration of approximately $25.2 million. The Company may make a cash payment of up to $5.0 million under an earn-out agreement, contingent upon achievement by Pocono Mountain of certain operating performance targets for the one-year period ending May 31, 2017.

On May 1, 2016, the Company completed the acquisition of TrustPoint Hospital (“TrustPoint”), an inpatient psychiatric facility with 100 beds located in Murfreesboro, Tennessee, for cash consideration of approximately $62.7 million.

On April 1, 2016, the Company completed the acquisition of Serenity Knolls (“Serenity Knolls”), an inpatient psychiatric facility with 30 beds located in Forrest Knolls, California, for cash consideration of approximately $9.7 million.

Priory

On February 16, 2016, the Company completed the acquisition of Priory Group No. 1 Limited (“Priory”) for a total purchase price of approximately $2.2 billion, including total cash consideration of approximately $1.9 billion and the issuance of 4,033,561 shares of its common stock. Priory is the leading independent provider of behavioral healthcare services in the U.K. At February 16, 2016, Priory operated 324 facilities with approximately 7,100 beds.

 

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Table of Contents

Planned U.K. Divestiture

The Competition and Markets Authority (the “CMA”) in the U.K. has been reviewing the Company’s acquisition of Priory. On July 14, 2016, the CMA announced that the Company’s acquisition of Priory will be 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”). The Company’s management believes that the planned divestiture addresses the CMA’s competition concerns. The Company expects the sale to be approved by the CMA on or before November 18, 2016 and expects to complete the sale shortly thereafter. If the sale is approved by the CMA and completed, the Company will receive £320 million cash for the sale. If the sale is not approved by the CMA, the Company expects that the CMA will proceed with a phase 2 investigation.

In conjunction with the planned divestiture, the Company recorded $389.7 million as assets held for sale on the condensed consolidated balance sheet at September 30, 2016 and a loss on divestiture of $174.7 million in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016. The loss on divestiture consisted of an allocation of goodwill to the U.K. Disposal Group of $106.9 million, estimated transaction-related expenses of $25.6 million and loss on the sale of properties of $42.2 million. The Company is required to measure assets held for sale at the lower of its carrying value or fair value less cost to sell. The allocation of goodwill was based on the fair value of the U.K. Disposal Group relative to the total fair value of the Company’s U.K. Facilities segment.

The condensed consolidated statements of operations for the three and nine months ended September 30, 2016 include revenue of $45.6 million and $125.1 million, respectively, and income from continuing operations before income taxes of $3.2 million and $12.2 million, respectively, related to the U.K. Disposal Group excluding the loss on divestiture. The condensed consolidated statements of operations for the three and nine months ended September 30, 2015 include revenue of $16.6 million and $42.1 million, respectively, and income from continuing operations before income taxes of $4.6 million and $12.4 million, respectively, related to the U.K. Disposal Group.

2015 U.S. Acquisitions

On December 1, 2015, the Company completed the acquisition of certain facilities from MMO Behavioral Health Systems (“MMO”), including two acute inpatient behavioral health facilities with a total of 80 beds located in Jennings and Covington, Louisiana, for cash consideration of approximately $20.2 million.

On November 1, 2015, the Company completed the acquisitions of (i) Discovery House-Group Inc. (“Discovery House”) for cash consideration of approximately $118.3 million and (ii) Duffy’s Napa Valley Rehab (“Duffy’s”) for cash consideration of approximately $29.6 million. Discovery House operates 19 comprehensive treatment centers located in four states. Duffy’s is a substance abuse facility with 61 beds located in Calistoga, California.

On August 31, 2015, the Company completed the acquisition of a controlling interest in Southcoast Behavioral (“Southcoast”), an inpatient psychiatric facility located in Fairhaven, Massachusetts. The Company owns 75% of the equity interests in the facility. The value of the 25% noncontrolling interest approximates $9.2 million.

On July 1, 2015, the Company completed the acquisition of the assets of Belmont Behavioral Health (“Belmont”), an inpatient psychiatric facility with 147 beds located in Philadelphia, Pennsylvania for cash consideration of approximately $39.0 million which consists of $35.0 million base purchase price and a working capital settlement of $4.0 million.

On March 1, 2015, the Company acquired the stock of Quality Addiction Management, Inc. (“QAM”) for cash consideration of approximately $54.8 million. QAM operates seven comprehensive treatment centers located in Wisconsin.

On February 11, 2015, the Company completed its acquisition of CRC Health Group, Inc. (“CRC”) for total consideration of approximately $1.3 billion. As consideration for the acquisition, the Company issued 5,975,326 shares of its common stock to certain holders of CRC common stock and repaid CRC’s outstanding indebtedness of $904.5 million. CRC is a leading provider of treatment services related to substance abuse and other addiction and behavioral disorders. At the acquisition date, CRC operated 35 inpatient facilities with over 2,400 beds and 81 comprehensive treatment centers located in 30 states.

 

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2015 U.K. Acquisitions

On November 1, 2015, the Company completed the acquisition of Cleveland House (“Cleveland House”), an inpatient psychiatric facility with 32 beds located in England, for cash consideration of approximately $10.3 million.

On October 1, 2015, the Company completed the acquisition of Meadow View (“Meadow View”), an inpatient psychiatric facility with 28 beds located in England, for cash consideration of approximately $6.8 million.

On September 1, 2015, the Company completed the acquisitions of (i) three facilities from The Danshell Group (“Danshell”) for approximately $59.8 million, (ii) two facilities from Health and Social Care Partnerships (“H&SCP”) for approximately $26.2 million and (iii) Manor Hall (“Manor Hall”) for approximately $14.0 million. The inpatient psychiatric facilities acquired from Danshell have an aggregate of 73 beds and are located in England. The inpatient psychiatric facilities acquired from H&SCP have an aggregate of 50 beds and are located in England. Manor Hall has 26 beds and is located in England.

On July 1, 2015, the Company completed the acquisition of The Manor Clinic (“Manor Clinic”), a substance abuse facility with 15 beds located in England, for cash consideration of approximately $5.9 million.

On June 1, 2015, the Company completed the acquisitions of (i) one facility from Choice Lifestyles (“Choice”) for cash consideration of approximately $25.9 million and (ii) 15 facilities from Care UK Limited (“Care UK”) for approximately $88.2 million. The inpatient psychiatric facility acquired from Choice has 42 beds and is located in England. The inpatient psychiatric facilities acquired from Care UK have an aggregate of 299 beds and are located in England.

On April 1, 2015, the Company completed the acquisitions of (i) two facilities from Choice for cash consideration of approximately $37.5 million, (ii) Pastoral Care Group (“Pastoral”) for approximately $34.2 million and (iii) Mildmay Oaks f/k/a Vista Independent Hospital (“Mildmay Oaks”) for cash consideration of approximately $14.9 million. The two inpatient psychiatric facilities acquired from Choice have an aggregate of 48 beds and are located in England. Pastoral operates two inpatient psychiatric facilities with an aggregate of 65 beds located in Wales. Mildmay Oaks is an inpatient psychiatric facility with 67 beds located in England.

Summary of Acquisitions

The Company selectively seeks opportunities to expand and diversify its base of operations by acquiring additional facilities. Approximately $374.4 million of the goodwill associated with domestic acquisitions completed in 2016 and 2015 is deductible for federal income tax purposes. The fair values assigned to certain assets and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition. Specifically, the Company is further assessing the valuation of certain real property and intangible assets and certain tax matters as well as certain receivables and assumed liabilities of Pocono Mountain, TrustPoint, Serenity Knolls, Priory, MMO, Discovery House, Duffy’s, Cleveland House and Meadow View.

 

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The preliminary fair values of assets acquired and liabilities assumed, at the corresponding acquisition dates, during the nine months ended September 30, 2016 in connection with the 2016 acquisitions were as follows (in thousands):

 

     Priory      Other      Total  

Cash

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

Accounts receivable

     57,832         4,289         62,121   

Prepaid expenses and other current assets

     7,921         143         8,064   

Property and equipment(1)

     1,603,306         35,400         1,638,706   

Goodwill(1)

     669,965         95,206         765,171   

Intangible assets

     23,200         338         23,538   

Other assets

     7,760         47         7,807   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     2,380,237         137,911         2,518,148   

Accounts payable

     24,203         805         25,008   

Accrued salaries and benefits

     39,588         797         40,385   

Other accrued expenses

     48,066         390         48,456   

Deferred tax liabilities – noncurrent

     67,598         —           67,598   

Long-term debt

     1,348,389         —           1,348,389   

Other liabilities

     45,162         30,242         75,404   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     1,573,006         32,234         1,605,240   
  

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 807,231       $ 105,677       $ 912,908   
  

 

 

    

 

 

    

 

 

 

 

(1)  Priory fair values of property and equipment and goodwill do not reflect adjustments for the planned divestiture of the U.K. Disposal Group as the divestiture was not anticipated at the acquisition date.

The preliminary fair values of assets acquired and liabilities assumed, at the corresponding acquisition dates, during the year ended December 31, 2015 in connection with the 2015 acquisitions were as follows (in thousands):

 

     CRC      Other      Total  

Cash

   $ 19,599       $ 5,334       $ 24,933   

Accounts receivable

     47,035         21,264         68,299   

Prepaid expenses and other current assets

     26,945         2,555         29,500   

Property and equipment

     136,163         273,143         409,306   

Goodwill

     1,043,601         320,464         1,364,065   

Intangible assets

     37,000         204         37,204   

Deferred tax assets-noncurrent

     74,383         —           74,383   

Other assets

     6,478         51         6,529   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     1,391,204         623,015         2,014,219   

Accounts payable

     4,741         4,961         9,702   

Accrued salaries and benefits

     14,827         3,200         18,027   

Other accrued expenses

     38,873         5,047         43,920   

Deferred tax liabilities – noncurrent

     —           13,541         13,541   

Debt

     904,467         —           904,467   

Other liabilities

     34,720         10         34,730   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     997,628         26,759         1,024,387   
  

 

 

    

 

 

    

 

 

 

Redeemable noncontrolling interests

     —           9,132         9,132   
  

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 393,576       $ 587,124       $ 980,700   
  

 

 

    

 

 

    

 

 

 

Other

The qualitative factors comprising the goodwill acquired in the CRC, QAM, Choice, Pastoral, Mildmay Oaks, Care UK, The Manor Clinic, Belmont, Southcoast, Danshell, H&SCP, Manor Hall, Meadow View, Cleveland House, Duffy’s, Discovery House, MMO, Priory, Serenity Knolls, TrustPoint and Pocono Mountain acquisitions (collectively the “2015 and 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.

 

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Transaction-related expenses comprised the following costs for the three and nine months ended September 30, 2016 and 2015 (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Legal, accounting and other costs

   $ 1,111       $ 5,261       $ 17,212       $ 14,315   

Advisory and financing commitment fees

     —           —           14,850         10,337   

Severance and contract termination costs

     —           581         1,421         6,763   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,111       $ 5,842       $ 33,483       $ 31,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pro Forma Information

The condensed consolidated statements of operations for the three and nine months ended September 30, 2016 include revenue of $412.9 million and $1.1 billion, respectively, and loss from continuing operations before income taxes of $114.3 million and $68.5 million, respectively, related to the 2015 and 2016 Acquisitions. The condensed consolidated statements of operations for the three and nine months ended September 30, 2015 include revenue of $165.8 million and $375.6 million, respectively, and income from continuing operations before income taxes of $38.7 million and $156.6 million, respectively, related to acquisitions completed in 2015.

The following table provides certain pro forma financial information for the Company as if the 2015 and 2016 Acquisitions occurred as of January 1, 2015 (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Revenue

   $ 734,665       $ 737,263       $ 2,232,285       $ 2,185,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income from continuing operations, before income taxes

   $ (115,814    $ 39,130       $ (27,529    $ 110,559   
  

 

 

    

 

 

    

 

 

    

 

 

 

4. Other Intangible Assets

Other identifiable intangible assets and related accumulated amortization consisted of the following as of September 30, 2016 and December 31, 2015 (in thousands):

 

     Gross Carrying Amount      Accumulated Amortization  
     September 30,
2016
     December 31,
2015
     September 30,
2016
     December 31,
2015
 

Intangible assets subject to amortization:

           

Contract intangible assets

   $ 2,100       $ 2,100       $ (2,065    $ (1,750

Non-compete agreements

     1,247         1,247         (1,247      (1,247
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,347         3,347         (3,312      (2,997

Intangible assets not subject to amortization:

           

Licenses and accreditations

     12,382         11,479         —           —     

Trade names

     58,551         37,800         —           —     

Certificates of need

     13,417         9,946         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     84,350         59,225         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 87,697       $ 62,572       $ (3,312    $ (2,997
  

 

 

    

 

 

    

 

 

    

 

 

 

Amortization expense related to definite-lived intangible assets was $0.1 million for both the three months ended September 30, 2016 and 2015, respectively, and $0.3 million and $0.4 million for the nine months ended September 30, 2016 and 2015, respectively.

 

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Estimated amortization expense for the years ending December 31, 2016, 2017, 2018, 2019 and 2020 is $0.4 million, $0, $0, $0 and $0, respectively. The Company’s licenses and accreditations, trade names and certificate of need intangible assets have indefinite lives and are, therefore, not subject to amortization.

5. Property and Equipment

Property and equipment consists of the following as of September 30, 2016 and December 31, 2015 (in thousands):

 

     September 30, 2016      December 31, 2015  

Land

   $ 430,179       $ 214,138   

Building and improvements

     2,081,246         1,277,800   

Equipment

     320,234         141,543   

Construction in progress

     146,070         195,042   
  

 

 

    

 

 

 
     2,977,729         1,828,523   

Less accumulated depreciation

     (191,083      (119,470
  

 

 

    

 

 

 

Property and equipment, net

   $ 2,786,646       $ 1,709,053   
  

 

 

    

 

 

 

6. Long-Term Debt

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

 

     September 30, 2016      December 31, 2015  

Amended and Restated Senior Credit Facility:

     

Senior Secured Term A Loans

   $ 600,594       $ 500,750   

Senior Secured Term B Loans

     1,439,088         495,000   

Senior Secured Revolving Line of Credit

     171,000         158,000   

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         —     

9.0% and 9.5% Revenue Bonds

     22,410         22,410   

Less: unamortized debt issuance costs, discount and premium

     (61,615      (35,416
  

 

 

    

 

 

 
     3,661,477         2,240,744   

Less: current portion

     (77,598      (45,360
  

 

 

    

 

 

 

Long-term debt

   $ 3,583,879       $ 2,195,384   
  

 

 

    

 

 

 

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 Securities and Exchange Commission.

On February 6, 2015, the Company entered into a Seventh Amendment (the “Seventh Amendment”) to the Amended and Restated Credit Agreement. The Seventh Amendment added Citibank, N.A. as an “L/C Issuer” under the Amended and Restated Credit Agreement in order to permit the rollover of CRC’s existing letters of credit into the Amended and Restated Credit Agreement and increased both the Company’s Letter of Credit Sublimit and Swing Line Sublimit to $20.0 million.

On February 11, 2015, the Company entered into a First Incremental Facility Amendment (the “First Incremental Amendment”) to the Amended and Restated Credit Agreement. The First Incremental Amendment activated a new $500.0 million incremental Term Loan B facility (the “Existing TLB Facility”) that was added to the Amended and Restated Senior Credit Facility, subject to limited conditionality provisions. Borrowings under the Existing TLB Facility were used to fund a portion of the purchase price for the acquisition of CRC.

 

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On April 22, 2015, the Company entered into an Eighth Amendment (the “Eighth Amendment”) to the Amended and Restated Credit Agreement. The Eighth Amendment changed the definition of “Change of Control” in part to remove a provision whose purpose was, when calculating whether a majority of incumbent directors have approved new directors, that any incumbent director that became a director as a result of a threatened or actual proxy contest was not counted in such calculation.

On January 25, 2016, the Company entered into the Ninth Amendment (the “Ninth Amendment”) to the Amended and Restated Credit Agreement. The Ninth Amendment modifies certain definitions and provides 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 reduces 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, 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 reduces 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.

The Company had $120.6 million of availability under the revolving line of credit as of September 30, 2016. 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 $12.6 million for September 30, 2016 to December 31, 2016, $16.8 million for March 31, 2017 to December 31, 2017, and $20.9 million for March 31, 2018 to December 31, 2018, with the remaining principal balance of the TLA Facility due on the maturity date of February 13, 2019. 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 Acadia’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 3.25% for Eurodollar Rate Loans (as defined in the Amended and Restated Credit Agreement) and 2.25% for Base Rate Loans (as defined in the Amended and Restated Credit Agreement) at September 30, 2016. 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 September 30, 2016, the Pro Rata Facilities bore interest at a rate of LIBOR plus 3.25%. In addition, the Company is required to pay a commitment fee on undrawn amounts under the revolving line of credit.

 

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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 September 30, 2016, the Company was in compliance with such covenants.

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”). The 5.625% Senior Notes mature on February 15, 2023 and bear interest at a rate of 5.625% per annum, payable semi-annually in arrears on February 15 and August 15 of each year.

On September 21, 2015, the Company issued $275.0 million of additional 5.625% Senior Notes. The additional notes form a single class of debt securities with the existing 5.625% Senior Notes. Giving effect to this issuance, the Company has outstanding an aggregate of $650.0 million of 5.625% Senior Notes.

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 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 September 30, 2016 and December 31, 2015, $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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7. 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 February 11, 2015, the Company completed its acquisition of CRC for total consideration of approximately $1.3 billion. As consideration for the acquisition, the Company issued 5,975,326 shares of its common stock to certain holders of CRC common stock and repaid CRC’s outstanding indebtedness.

On May 11, 2015, the Company completed the offering of 5,175,000 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 $66.50 per share. The net proceeds to the Company from the sale of the shares, after deducting the underwriting discount of $12.0 million and additional offering-related costs of $0.8 million, were $331.3 million. The Company used the net offering proceeds to repay outstanding indebtedness and fund acquisitions.

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, which included the issuance of 4,033,561 shares of common stock to the former stockholders of Priory.

8. 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 September 30, 2016, 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 4,662,863 shares 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 $7.1 million and $5.3 million in equity-based compensation expense for the three months ended September 30, 2016 and 2015, respectively, and $21.0 million and $14.6 million for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there was $59.4 million of unrecognized compensation expense related to unvested options, restricted stock and restricted stock units, which is expected to be recognized over the remaining weighted average vesting period of 1.4 years. As of September 30, 2016, there were no warrants outstanding. The Company recognized a deferred income tax benefit of $2.9 million and $2.2 million for the three months ended September 30, 2016 and 2015, respectively, related to equity-based compensation expense. The Company recognized a deferred income tax benefit of $8.3 million and $6.0 million for the nine months ended September 30, 2016 and 2015, respectively, related to equity-based compensation expense. The actual tax benefit realized from stock options exercised during the three and nine months ended September 30, 2015 was $1.7 million and $8.0 million, respectively.

 

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Stock option activity during 2015 and 2016 was as follows (aggregate intrinsic value in thousands):

 

     Number
of
Options
     Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term (in years)
     Aggregate
Intrinsic
Value
 

Options outstanding at January 1, 2015

     737,422       $ 32.19         8.09       $ 14,512   

Options granted

     204,700         63.07         9.21         1,724   

Options exercised

     (214,079      42.75         N/A         9,890   

Options cancelled

     (33,300      46.53         N/A         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options outstanding at December 31, 2015

     694,743         42.87         7.70         20,717   

Options granted

     456,850         59.26         9.48         —     

Options exercised

     (55,808      32.40         N/A         1,541   

Options cancelled

     (79,200      56.61         N/A         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options outstanding at September 30, 2016

     1,016,585       $ 50.07         8.04       $ 9,744   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable at December 31, 2015

     106,330       $ 36.41         5.83       $ 4,968   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable at September 30, 2016

     290,884       $ 41.80         6.31       $ 7,114   
  

 

 

    

 

 

    

 

 

    

 

 

 

Restricted stock activity during 2015 and 2016 was as follows:

 

     Number of
Shares
     Weighted
Average
Grant-Date
Fair Value
 

Unvested at January 1, 2015

     722,028       $ 39.77   

Granted

     503,052         62.67   

Cancelled

     (44,900      49.55   

Vested

     (235,618      34.93   
  

 

 

    

 

 

 

Unvested at December 31, 2015

     944,562       $ 52.74   

Granted

     299,047         58.99   

Cancelled

     (87,803      57.14   

Vested

     (308,094      46.88   
  

 

 

    

 

 

 

Unvested at September 30, 2016

     847,712       $ 56.64   
  

 

 

    

 

 

 

Restricted stock unit activity during 2015 and 2016 was as follows:

 

     Number of
Units
     Weighted
Average
Grant-Date
Fair Value
 

Unvested at January 1, 2015

     125,113       $ 38.73   

Granted

     217,994         61.77   

Cancelled

     —           —     

Vested

     (125,023      32.38   
  

 

 

    

 

 

 

Unvested at December 31, 2015

     218,084       $ 56.97   

Granted

     230,750         56.95   

Cancelled

     —           —     

Vested

     (175,235      52.71   
  

 

 

    

 

 

 

Unvested at September 30, 2016

     273,599       $ 59.68   
  

 

 

    

 

 

 

 

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The grant-date fair value of the Company’s stock options is estimated using the Black-Scholes option pricing model. The following table summarizes the grant-date fair value of options and the assumptions used to develop the fair value estimates for options granted during the nine months ended September 30, 2016 and year ended December 31, 2015:

 

     September 30, 2016     December 31, 2015  

Weighted average grant-date fair value of options

   $ 19.35      $ 21.78   

Risk-free interest rate

     1.3     1.5

Expected volatility

     33     35

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 United States 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.

9. Income Taxes

The provision for income taxes for continuing operations for the three months ended September 30, 2016 and 2015 reflects effective tax rates of (2.1)% and 30.4%, respectively. The provision for income taxes for continuing operations for the nine months ended September 30, 2016 and 2015 reflects effective tax rates of (292.8)% and 31.0%, respectively. The change in the tax rate for the three and nine months ended September 30, 2016 is primarily attributable to the loss on divestiture related to our planned divestiture in the U.K.

10. Derivative Instruments

The Company entered into foreign currency forward contracts during the three and nine months ended September 30, 2016 and 2015 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 US Dollars (“USD”) and British Pounds (“GBP”) associated with cash transfers. These foreign currency forward contracts did not meet the hedge accounting criteria under Accounting Standards Codification 815, Derivatives and Hedging. As such, changes in fair value resulted in gains of $15 thousand and $0.5 million for the three and nine months ended September 30, 2016, respectively, and losses of $1.0 million and $1.9 million for the three and nine months ended September 30, 2015, respectively, which have been recorded in the 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 as qualifying hedging instruments and is accounting for these as net investment hedges. The fair value of the cross currency swap agreements of $49.9 million is recorded as an asset within derivative instruments on the condensed consolidated balance sheets. The gains and losses resulting from fair value adjustments to the cross currency swap agreements are recorded in accumulated other comprehensive income as the swaps are effective in hedging the designated risk. Cash flows related to the cross currency swaps are included in operating activities in the condensed consolidated statements of cash flows.

11. 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.

 

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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 September 30, 2016 and December 31, 2015 were as follows (in thousands):

 

     Carrying Amount      Fair Value  
     September 30,
2016
     December 31,
2015
     September 30,
2016
     December 31,
2015
 

Amended and Restated Senior Credit Facility

   $ 2,174,174       $ 1,135,861       $ 2,174,174       $ 1,135,861   

6.125% Senior Notes due 2021

   $ 147,448       $ 147,082       $ 152,240       $ 149,288   

5.125% Senior Notes due 2022

   $ 295,266       $ 294,749       $ 292,313       $ 275,590   

5.625% Senior Notes due 2023

   $ 640,257       $ 639,431       $ 649,861       $ 604,262   

6.500% Senior Notes due 2024

   $ 381,032       $ —         $ 399,131       $ —     

9.0% and 9.5% Revenue Bonds

   $ 23,300       $ 23,621       $ 23,300       $ 23,621   

Derivative instruments

   $ 49,903       $ —         $ 49,903       $ —     

Contingent consideration liabilities

   $ 667       $ 667       $ 667       $ 667   

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.

12. Commitments and Contingencies

Professional and General Liability

Effective September 1, 2016, a portion of the Company’s professional liability risks is insured through a 100% owned insurance subsidiary. Subject to a $2.0 million per occurrence self-insured retention, the Company’s 100% owned insurance subsidiary insures the Company for professional liability losses up to $50.0 million in the aggregate. The insurance subsidiary has obtained reinsurance with unrelated commercial insurers for professional liability risks generally above a retention level of $2.0 million and up to $50.0 million in the aggregate.

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.

13. 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 facility, and two noncontrolling partners each own 20%. The value of the 40% noncontrolling interests approximates $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 condensed 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.

On August 31, 2015, the Company completed the acquisition of a controlling interest in Southcoast, an inpatient psychiatric facility located in Fairhaven, Massachusetts. The Company owns 75% of the equity interests in the facility. The value of the 25%

 

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noncontrolling interest approximates $9.2 million. The Company considered an income approach and other valuation methodologies to value the noncontrolling interests. The Company consolidates the operations of the facility based on its 75% equity ownership and its control of the entity. The noncontrolling interests are reflected as redeemable noncontrolling interests on the accompanying condensed 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.

14. Other Current Assets

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

 

     September 30,
2016
     December 31,
2015
 

Prepaid expenses

   $ 32,568       $ 21,817   

Other receivables

     24,850         17,518   

Income taxes receivable

     9,790         6,540   

Workers’ compensation deposits – current portion

     7,500         7,500   

Insurance receivable – current portion

     5,290         5,290   

Inventory

     4,758         4,681   

Other

     2,872         3,549   
  

 

 

    

 

 

 

Other current assets

   $ 87,628       $ 66,895   
  

 

 

    

 

 

 

15. Other Accrued Liabilities

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

 

     September 30,
2016
     December 31,
2015
 

Accrued expenses

   $ 42,804       $ 17,921   

Unearned income

     24,516         446   

Accrued interest

     13,523         26,132   

Insurance liability – current portion

     10,490         10,490   

Accrued property taxes

     4,474         2,951   

Income taxes payable

     121         7,367   

Other current liabilities

     8,585         7,499   
  

 

 

    

 

 

 

Other accrued liabilities

   $ 104,513       $ 72,806   
  

 

 

    

 

 

 

 

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Table of Contents

16. 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 September 30, 2016, the U.S. Facilities included 211 behavioral healthcare facilities with approximately 8,500 beds in 39 states and Puerto Rico, and the U.K. Facilities included 378 behavioral healthcare facilities with approximately 9,400 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 September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  

Revenue:

        

U.S. Facilities

   $ 431,521      $ 379,857      $ 1,269,994      $ 1,037,250   

U.K. Facilities

     303,146        97,875        836,004        256,117   

Corporate and Other

     (2     1,998        2,028        5,806   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 734,665      $ 479,730      $ 2,108,026      $ 1,299,173   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA(1):

        

U.S. Facilities

   $ 108,810      $ 101,636      $ 334,230      $ 280,342   

U.K. Facilities

     67,795        23,015        185,664        62,197   

Corporate and Other

     (20,767     (16,183     (60,818     (49,556
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 155,838      $ 108,468      $ 459,076      $ 292,983   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  

Segment EBITDA(1)

   $ 155,838      $ 108,468      $ 459,076      $ 292,983   

Plus (less):

        

Equity-based compensation expense

     (7,145     (5,327     (20,989     (14,576

Debt extinguishment costs

     (3,411     (9,979     (3,411     (9,979

Loss on divestiture

     (174,739     —          (174,739     —     

Gain (loss) on foreign currency derivatives

     15        (1,018     523        (1,926

Transaction-related expenses

     (1,111     (5,842     (33,483     (31,415

Interest expense, net

     (48,843     (27,737     (135,315     (77,932

Depreciation and amortization

     (36,418     (16,890     (101,145     (44,920
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

   $ (115,814   $ 41,675      $ (9,483   $ 112,235   
  

 

 

   

 

 

   

 

 

   

 

 

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

Goodwill:

        

Balance at January 1, 2016

   $ 1,941,873      $ 186,342      $ —        $ 2,128,215   

Increase from 2016 acquisitions

     95,206        669,965        —          765,171   

Foreign currency translation

     —          (92,389     —          (92,389

Assets held for sale

     —          (106,852     —          (106,852

Other

     7,825        39        —          7,864   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

   $ 2,044,904      $ 657,105      $ —        $ 2,702,009   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     September 30, 2016      December 31, 2015  

Assets (2):

     

U.S. Facilities

   $ 3,379,195       $ 3,061,519   

U.K. Facilities

     2,907,903         1,045,922   

Corporate and Other

     165,880         171,767   
  

 

 

    

 

 

 
   $ 6,452,978       $ 4,279,208   
  

 

 

    

 

 

 

 

(1)  Segment EBITDA is defined as income from continuing operations before provision for income taxes, equity-based compensation expense, gain/loss 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 generally accepted accounting principles, 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 generally accepted accounting principles 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 $1.0 billion, U.K. Facilities of $1.7 billion and corporate and other of $33.1 million at September 30, 2016. Assets include property and equipment for the U.S. Facilities of $832.2 million, U.K. Facilities of $824.4 million and corporate and other of $52.4 million at December 31, 2015.

17. Recently Issued Accounting Standards

In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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. Additionally, ASU 2016-09 would permit both public and nonpublic organizations to adopt the new standard early. Management is evaluating the impact of ASU 2016-09 on the Company’s consolidated financial statements.

In March 2016, 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 is evaluating the impact of ASU 2016-02 on the Company’s consolidated financial statements.

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 principal 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 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). Management is evaluating the impact of ASU 2014-09 on the Company’s consolidated financial statements.

18. Subsequent Events

On October 18, 2016, the Company 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. Management believes the planned divestiture addresses the CMA’s competition concerns. The Company expects the sale to be approved by the CMA on or before November 18, 2016 and expects to complete the sale shortly thereafter. If the sale is approved by the CMA and completed, the Company will receive £320 million cash for the sale. If the sale is not approved by the CMA, the Company expects that the CMA will proceed with a phase 2 investigation.

 

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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 September 30, 2016 and December 31, 2015, and for the three and nine months ended September 30, 2016 and 2015. 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

September 30, 2016

(In thousands)

 

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

Current assets:

             

Cash and cash equivalents

   $ —         $ 5,160       $ 22,591       $ —        $ 27,751   

Accounts receivable, net

     —           211,981         65,587         —          277,568   

Other current assets

     —           65,136         22,492         —          87,628   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           282,277         110,670         —          392,947   

Property and equipment, net

     —           934,633         1,852,013         —          2,786,646   

Goodwill

     —           1,938,368         763,641         —          2,702,009   

Intangible assets, net

     —           56,653         27,732         —          84,385   

Deferred tax assets – noncurrent

     3,587         —           4,691         (4,487     3,791   

Derivative instruments

     49,903         —           —           —          49,903   

Investment in subsidiaries

     4,985,674         —           —           (4,985,674     —     

Assets held for sale

     —           —           392,483         —          392,483   

Other assets

     854,658         36,030         2,326         (852,200     40,814   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,893,822       $ 3,247,961       $ 3,153,556       $ (5,842,361   $ 6,452,978   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities:

             

Current portion of long-term debt

   $ 77,363       $ —         $ 235       $ —        $ 77,598   

Accounts payable

     —           58,984         33,835         —          92,819   

Accrued salaries and benefits

     —           70,085         35,223         —          105,308   

Other accrued liabilities

     13,524         34,912         56,077         —          104,513   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     90,887         163,981         125,370         —          380,238   

Long-term debt

     3,560,814         —           875,265         (852,200     3,583,879   

Deferred tax liabilities – noncurrent

     —           8,684         77,246         (4,487     81,443   

Other liabilities

     —           104,586         42,564         —          147,150   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     3,651,701         277,251         1,120,445         (856,687     4,192,710   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Redeemable noncontrolling interests

     —           —           18,147         —          18,147   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     2,242,121         2,970,710         2,014,964         (4,985,674     2,242,121   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 5,893,822       $ 3,247,961       $ 3,153,556       $ (5,842,361   $ 6,452,978   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Balance Sheets

December 31, 2015

(In thousands)

 

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

Current assets:

             

Cash and cash equivalents

   $ —         $ 1,987       $ 9,228       $ —        $ 11,215   

Accounts receivable, net

     —           187,546         29,080         —          216,626   

Other current assets

     —           57,968         8,927         —          66,895   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           247,501         47,235         —          294,736   

Property and equipment, net

     —           805,439         903,614         —          1,709,053   

Goodwill

     —           1,835,339         292,876         —          2,128,215   

Intangible assets, net

     —           57,024         2,551         —          59,575   

Deferred tax assets – noncurrent

     3,946         40,587         4,581         —          49,114   

Investment in subsidiaries

     3,495,067         —           —           (3,495,067     —     

Other assets

     427,270         32,947         2,322         (424,024     38,515   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,926,283       $ 3,018,837       $ 1,253,179       $ (3,919,091   $ 4,279,208   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities:

             

Current portion of long-term debt

   $ 45,125       $ —         $ 235       $ —        $ 45,360   

Accounts payable

     —           75,015         16,326         —          91,341   

Accrued salaries and benefits

     —           66,249         14,447         —          80,696   

Other accrued liabilities

     26,132         10,886         35,788         —          72,806   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     71,257         152,150         66,796         —          290,203   

Long-term debt

     2,171,998         —           447,410         (424,024     2,195,384   

Deferred tax liabilities – noncurrent

     —           —           23,936         —          23,936   

Other liabilities

     —           75,159         3,443         —          78,602   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     2,243,255         227,309         541,585         (424,024     2,588,125   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Redeemable noncontrolling interests

     —           —           8,055         —          8,055   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     1,683,028         2,791,528         703,539         (3,495,067     1,683,028   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 3,926,283       $ 3,018,837       $ 1,253,179       $ (3,919,091   $ 4,279,208   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

24


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

Three Months Ended September 30, 2016

(In thousands)

 

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

Revenue before provision for doubtful accounts

   $ —        $ 420,061      $ 324,741      $ —         $ 744,802   

Provision for doubtful accounts

     —          (9,383     (754     —           (10,137
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Revenue

     —          410,678        323,987        —           734,665   

Salaries, wages and benefits

     7,145        224,692        176,405        —           408,242   

Professional fees

     —          21,140        26,547        —           47,687   

Supplies

     —          19,467        11,088        —           30,555   

Rents and leases

     —          8,759        10,981        —           19,740   

Other operating expenses

     —          51,536        28,212        —           79,748   

Depreciation and amortization

     —          15,105        21,313        —           36,418   

Interest expense, net

     13,388        19,258        16,197        —           48,843   

Debt extinguishment costs

     3,411        —          —          —           3,411   

Loss on divestiture

     —          —          174,739        —           174,739   

Gain on foreign currency derivatives

     (15     —          —          —           (15

Transaction-related expenses

     —          —          1,111        —           1,111   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total expenses

     23,929        359,957        466,593        —           850,479   

(Loss) income from continuing operations before income taxes

     (23,929     50,721        (142,606     —           (115,814

Equity in earnings of subsidiaries

     (99,875     —          —          99,875         —     

(Benefit from) provision for income taxes

     (5,594     38,654        (30,664     —           2,396   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income from continuing operations

     (118,210     12,067        (111,942     99,875         (118,210

Income from discontinued operations, net of income taxes

     —          —          —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

     (118,210     12,067        (111,942     99,875         (118,210

Net loss attributable to noncontrolling interests

     —          —          402        —           402   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ (118,210   $ 12,067      $ (111,540   $ 99,875       $ (117,808
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive loss:

           

Foreign currency translation loss

     —          —          (89,645     —           (89,645

Gain on derivative instruments

     6,387        —          —          —           6,387   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

     6,387        —          (89,645     —           (83,258
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ (111,823   $ 12,067      $ (201,185   $ 99,875       $ (201,066
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

25


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended September 30, 2015

(In thousands)

 

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

Revenue before provision for doubtful accounts

   $ —        $ 377,582      $ 111,164      $ —        $ 488,746   

Provision for doubtful accounts

     —          (8,531     (485     —          (9,016
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     —          369,051        110,679        —          479,730   

Salaries, wages and benefits

     5,327        191,032        62,051        —          258,410   

Professional fees

     —          21,551        9,208        —          30,759   

Supplies

     —          17,349        4,285        —          21,634   

Rents and leases

     —          7,624        918        —          8,542   

Other operating expenses

     —          47,113        10,131        —          57,244   

Depreciation and amortization

     —          10,578        6,312        —          16,890   

Interest expense, net

     15,934        6,036        5,767        —          27,737   

Debt extinguishment costs

     9,979        —          —          —          9,979   

Loss on foreign currency derivatives

     1,018        —          —          —          1,018   

Transaction-related expenses

     —          2,831        3,011        —          5,842   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     32,258        304,114        101,683        —          438,055   

(Loss) income from continuing operations before income taxes

     (32,258     64,937        8,996        —          41,675   

Equity in earnings of subsidiaries

     50,840        —          —          (50,840     —     

(Benefit from) provision for income taxes

     (10,504     21,383        1,790        —          12,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     29,086        43,554        7,206        (50,840     29,006   

Income from discontinued operations, net of income taxes

     —          80        —          —          80   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     29,086        43,634        7,206        (50,840     29,086   

Net loss attributable to noncontrolling interests

     —          —          464        —          464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 29,086      $ 43,634      $ 7,670      $ (50,840   $ 29,550   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

          

Foreign currency translation gain

     —          —          (32,707     —          (32,707
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     —          —          (32,707     —          (32,707
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 29,086      $ 43,634      $ (25,037   $ (50,840   $ (3,157
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

Nine Months Ended September 30, 2016

(In thousands)

 

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

Revenue before provision for doubtful accounts

   $ —        $ 1,245,227      $ 893,812      $ —        $ 2,139,039   

Provision for doubtful accounts

     —          (28,318     (2,695     —          (31,013
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     —          1,216,909        891,117        —          2,108,026   

Salaries, wages and benefits

     20,989        648,669        487,899        —          1,157,557   

Professional fees

     —          66,967        71,003        —          137,970   

Supplies

     —          57,456        30,993        —          88,449   

Rents and leases

     —          25,857        29,156        —          55,013   

Other operating expenses

     —          151,485        79,465        —          230,950   

Depreciation and amortization

     —          42,072        59,073        —          101,145   

Interest expense, net

     37,452        57,394        40,469        —          135,315   

Debt extinguishment costs

     3,411        —          —          —          3,411   

Loss on divestiture

     —          —          174,739        —          174,739   

Gain on foreign currency derivatives

     (523     —          —          —          (523

Transaction-related expenses

     —          25,624        7,859        —          33,483   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     61,329        1,075,524        980,656        —          2,117,509   

(Loss) income from continuing operations before income taxes

     (61,329     141,385        (89,539     —          (9,483

Equity in earnings of subsidiaries

     8,937        —          —          (8,937     —     

(Benefit from) provision for income taxes

     (15,142     62,247        (19,338     —          27,767   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (37,250     79,138        (70,201     (8,937     (37,250

Income from discontinued operations, net of income taxes

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (37,250     79,138        (70,201     (8,937     (37,250

Net loss attributable to noncontrolling interests

     —          —          1,575        —          1,575   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (37,250   $ 79,138      $ (68,626   $ (8,937   $ (35,675
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss:

          

Foreign currency translation loss

     —          —          (351,528     —          (351,528

Gain on derivative instruments

     30,306        —          —          —          30,306   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     30,306        —          (351,528     —          (321,222
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (6,944   $ 79,138      $ (420,154   $ (8,937   $ (356,897
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Comprehensive Income (Loss)

Nine Months Ended September 30, 2015

(In thousands)

 

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

Revenue before provision for doubtful accounts

   $ —        $ 1,029,198      $ 295,504      $ —        $ 1,324,702   

Provision for doubtful accounts

     —          (23,516     (2,013     —          (25,529
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     —          1,005,682        293,491        —          1,299,173   

Salaries, wages and benefits

     14,576        530,221        162,786        —          707,583   

Professional fees

     —          60,615        22,600        —          83,215   

Supplies

     —          47,287        11,143        —          58,430   

Rents and leases

     —          20,143        2,496        —          22,639   

Other operating expenses

     —          122,505        26,394        —          148,899   

Depreciation and amortization

     —          29,840        15,080        —          44,920   

Interest expense, net

     46,988        17,639        13,305        —          77,932   

Debt extinguishment costs

     9,979        —          —          —          9,979   

Loss on foreign currency derivatives

     1,926        —          —          —          1,926   

Transaction-related expenses

     —          24,193        7,222        —          31,415   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     73,469        852,443        261,026        —          1,186,938   

(Loss) income from continuing operations before income taxes

     (73,469     153,239        32,465        —          112,235   

Equity in earnings of subsidiaries

     127,108        —          —          (127,108     —     

(Benefit from) provision for income taxes

     (23,885     50,634        8,045        —          34,794   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     77,524        102,605        24,420        (127,108     77,441   

Income from discontinued operations, net of income taxes

     —          83        —          —          83   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     77,524        102,688        24,420        (127,108     77,524   

Net loss attributable to noncontrolling interests

     —          —          464        —          464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 77,524      $ 102,688      $ 24,884      $ (127,108   $ 77,988   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

          

Foreign currency translation gain

     —          —          (15,923     —          (15,923
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     —          —          (15,923     —          (15,923
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 77,524      $ 102,688      $ 8,961      $ (127,108   $ 62,065   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2016

(In thousands)

 

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

Operating activities:

          

Net (loss) income

   $ (37,250   $ 79,138      $ (70,201   $ (8,937   $ (37,250

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

          

Equity in earnings of subsidiaries

     (8,937     —          —          8,937        —     

Depreciation and amortization

     —          42,072        59,073        —          101,145   

Amortization of debt issuance costs

     8,035        —          (321     —          7,714   

Equity-based compensation expense

     20,989        —          —          —          20,989   

Deferred income tax (benefit) expense

     —          26,381        (524     —          25,857   

Loss from discontinued operations, net of taxes

     —          —          —          —          —     

Debt extinguishment costs

     3,411        —          —          —          3,411   

Loss on divestiture

     —          —          174,739        —          174,739   

Gain on foreign currency derivatives

     (523     —          —          —          (523

Other

     —          826        (95     —          731   

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

          

Accounts receivable, net

     —          (26,055     13,476        —          (12,579

Other current assets

     —          (4,901     (8,072     —          (12,973

Other assets

     (2,780     (818     (316     2,780        (1,134

Accounts payable and other accrued liabilities

     —          31,633        (29,566     —          2,067   

Accrued salaries and benefits

     —          3,527        (14,286     —          (10,759

Other liabilities

     —          5,975        (2,229     —          3,746   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by continuing operating activities

     (17,055     157,778        121,678        2,780        265,181   

Net cash used in discontinued operating activities

     —          (5,524     —          —          (5,524
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (17,055     152,254        121,678        2,780        259,657   

Investing activities:

          

Cash paid for acquisitions, net of cash acquired

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

Cash paid for capital expenditures

     —          (142,626     (107,335     —          (249,961

Cash paid for real estate acquisitions

     —          (26,146     (11,801     —          (37,947

Settlement of foreign currency derivatives

     —          523        —          —          523   

Other

     —          (1,135     —          —          (1,135
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (272,573     (699,232     —          (971,805

Financing activities:

          

Borrowings on long-term debt

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

Borrowings on revolving credit facility

     179,000        —          —          —          179,000   

Principal payments on revolving credit facility

     (166,000     —          —          —          (166,000

Principal payments on long-term debt

     (46,069     —          (2,780     2,780        (46,069

Repayment of assumed debt

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

Payment of debt issuance costs

     (35,748     —          —          —          (35,748

Issuance of common stock

     685,097        —          —          —          685,097   

Common stock withheld for minimum statutory taxes, net

     (7,917     —          —          —          (7,917

Excess tax benefit from equity awards

     —          —          —          —          —     

Other

     —          (1,821     —          —          (1,821

Cash (used in) provided by intercompany activity

     (722,919     125,313        603,166        (5,560     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     17,055        123,492        600,386        (2,780     738,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     —          —          (9,469     —          (9,469
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     —          3,173        13,363        —          16,536   

Cash and cash equivalents at beginning of the period

     —          1,987        9,228        —          11,215   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ —        $ 5,160      $ 22,591      $ —        $ 27,751   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Acadia Healthcare Company, Inc.

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2015

(In thousands)

 

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

Operating activities:

          

Net income (loss)

   $ 77,524      $ 102,688      $ 24,420      $ (127,108   $ 77,524   

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

          

Equity in earnings of subsidiaries

     (127,108     —          —          127,108        —     

Depreciation and amortization

     —          29,840        15,080        —          44,920   

Amortization of debt issuance costs

     5,347        —          (330     —          5,017   

Equity-based compensation expense

     14,576        —          —          —          14,576   

Deferred income tax (benefit) expense

     (58     27,035        1,948        —          28,925   

Loss from discontinued operations, net of taxes

     —          (83     —          —          (83

Debt extinguishment costs

     9,979        —          —          —          9,979   

Loss (gain) on foreign currency derivatives

     1,926        —          —          —          1,926   

Other

     —          1,088        34        —          1,122   

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

          

Accounts receivable, net

     —          (16,535     (12,370     —          (28,905

Other current assets

     —          (14,287     2,086        —          (12,201

Other assets

     (300     (4,881     2        300        (4,879

Accounts payable and other accrued liabilities

     —          (10,510     2,194        —          (8,316

Accrued salaries and benefits

     —          7,953        935        —          8,888   

Other liabilities

     —          5,821        (750     —          5,071   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by continuing operating activities

     (18,114     128,129        33,249        300        143,564   

Net cash provided by discontinued operating activities

     —          (1,479     —          —          (1,479
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (18,114     126,650        33,249        300        142,085   

Investing activities:

          

Cash paid for acquisitions, net of cash acquired

     —          (88,308     (302,908     —          (391,216

Cash paid for capital expenditures

     —          (116,466     (84,375     —          (200,841

Cash paid for real estate acquisitions

     —          (21,976     —          —          (21,976

Settlement of foreign currency derivatives

     —          (1,926     —          —          (1,926

Other

     —          (887     —          —          (887
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (229,563     (387,283     —          (616,846

Financing activities:

          

Borrowings on long-term debt

     1,150,000        —          —          —          1,150,000   

Borrowings on revolving credit facility

     310,000        —          —          —          310,000   

Principal payments on revolving credit facility

     (310,000     —          —          —          (310,000

Principal payments on long-term debt

     (23,813     —          (300     300        (23,813

Repayment of assumed CRC debt

     (904,467     —          —          —          (904,467

Repayments of senior notes

     (88,331     —          —          —          (88,331

Payment of debt issuance costs

     (25,584     —          —          —          (25,584

Payment of premium on senior notes

     (6,890     —          —          —          (6,890

Issuance of Common Stock

     —          331,360        —          —          331,360   

Common stock withheld for minimum statutory taxes, net

     (7,582     —          —          —          (7,582

Excess tax benefit from equity awards

     8,020        —          —          —          8,020   

Other

     —          (374     —          —          (374

Cash provided by (used in) intercompany activity

     (83,239     (257,037     340,876        (600     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     18,114        73,949        340,576        (300     432,339   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     —          (856     —          —          (856
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     —          (29,820     (13,458     —          (43,278

Cash and cash equivalents at beginning of the period

     —          76,685        17,355        —          94,040   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ —        $ 46,865      $ 3,897      $ —        $ 50,762   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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:

 

    the impact of an extended review of our acquisition of Priory by the CMA, including a potential phase 2 investigation, and the resulting delay in our ability to integrate Priory’s business;

 

    our ability to divest certain of our U.K. behavioral healthcare facilities and take other actions required by the CMA on acceptable terms and within expected timeframes, and the CMA’s approval of our planned divestiture of certain of our U.K. behavioral healthcare facilities;

 

    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 recent devaluation of the GBP relative to the USD following the Brexit vote;

 

    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 and CRC acquisitions, or realizing the potential benefits and synergies of our acquisitions;

 

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

 

    the impact of payments received from the government and third-party payors on our revenues and results of operations including the significant dependence of the Priory and Partnerships in Care facilities on payments received from 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;

 

    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;

 

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

 

    our acquisition and de novo strategies, which expose us to a variety of operational and financial risks, as well as legal and regulatory risks (e.g., exposure to the new regulatory regimes such as the U.K. for Priory and Partnerships in Care and various investigations relating to CRC);

 

    the impact of state efforts to regulate the construction or expansion of healthcare facilities (including those from Priory, CRC and Partnerships in Care) on our ability to operate and expand our operations;

 

    our potential inability to extend leases at expiration;

 

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    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 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;

 

    the impact of a change in the mix of our earnings, and changes in tax rates and 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; and

 

    those risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission.

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 September 30, 2016, we operated 589 behavioral healthcare facilities with over 17,900 beds in 39 states, the U.K. and Puerto Rico. During the nine months ended September 30, 2016, we acquired 328 facilities and added approximately 688 new beds, including 548 beds to existing facilities and 140 beds added through the opening of two de novo facilities. For the year ending December 31, 2016, 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 the Company’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.

Acquisitions

On February 16, 2016, we completed the 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 our common stock. Priory is the leading independent provider of behavioral healthcare services in the U.K. At February 16, 2016, Priory operated 324 facilities with approximately 7,100 beds.

On April 1, 2016, we completed the acquisition of Serenity Knolls, an inpatient psychiatric facility with 30 beds located in Forest Knolls, California, for cash consideration of approximately $9.7 million.

On May 1, 2016, we completed the acquisition of TrustPoint, a behavioral health facility with a total of 100 beds located in Murfreesboro, Tennessee, for cash consideration of approximately $62.7 million.

 

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On June 1, 2016, we completed the acquisition of certain facilities from Pocono Mountain, an inpatient psychiatric facility with 108 beds located in Henryville, Pennsylvania, for total consideration of approximately $25.2 million. We may make cash payments of up to $5.0 million under an earn-out agreement, contingent upon achievement by Pocono Mountain of certain operating and performance targets for the one-year period ending May 31, 2017.

Planned U.K. Divestiture

The CMA in the U.K. has been reviewing our acquisition of Priory. On July 14, 2016, the CMA announced that our acquisition of Priory would be 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 will 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. We believe the planned divestiture addresses the CMA’s competition concerns. We expect the sale to be approved by the CMA on or before November 18, 2016 and we expect to complete the sale shortly thereafter. If the sale is approved by the CMA and completed, we will receive £320 million cash for the sale. If the sale is not approved by the CMA, we expect that the CMA will proceed with a phase 2 investigation.

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) the NHS (including Local Authorities) in the U.K.; 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 nine months ended September 30, 2016 and 2015 (dollars in thousands):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  
     Amount     %     Amount     %     Amount     %     Amount     %  

Commercial

   $ 136,014        18.3   $ 114,663        23.5   $ 398,011        18.6   $ 306,196        23.0

Medicare

     70,563        9.5     57,263        11.7     198,183        9.3     158,395        12.0

Medicaid

     182,432        24.5     160,337        32.8     542,594        25.4     440,865        33.3

NHS

     278,524        37.4     97,040        19.9     771,496        36.1     252,675        19.1

Self-Pay

     68,608        9.2     47,597        9.7     200,451        9.4     127,884        9.7

Other

     8,661        1.1     11,846        2.4     28,304        1.2     38,687        2.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue before provision for doubtful accounts

     744,802        100.0     488,746        100.0     2,139,039        100.0     1,324,702        100.0

Provision for doubtful accounts

     (10,137       (9,016       (31,013       (25,529  
  

 

 

     

 

 

     

 

 

     

 

 

   

Revenue

   $ 734,665        $ 479,730        $ 2,108,026        $ 1,299,173     
  

 

 

     

 

 

     

 

 

     

 

 

   

 

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The following tables present a summary of our aging of accounts receivable as of September 30, 2016 and December 31, 2015:

 

     Current     30-90     90-150     >150     Total  

September 30, 2016

          

Commercial

     17.3     6.8     3.2     4.3     31.6

Medicare

     11.3     1.6     0.6     1.1     14.6

Medicaid

     20.2     5.7     2.9     4.6     33.4

NHS

     7.2     3.4     0.2     0.2     11.0

Self-Pay

     2.2     1.5     1.5     3.2     8.4

Other

     0.5     0.1     0.1     0.3     1.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     58.7     19.1     8.5     13.7     100.0
     Current     30-90     90-150     >150     Total  

December 31, 2015

          

Commercial

     16.6     9.1     3.2     3.0     31.9

Medicare

     12.6     2.3     1.2     0.4     16.5

Medicaid

     23.4     6.7     2.8     4.2     37.1

NHS

     1.6     3.1     0.5     —       5.2

Self-Pay

     1.7     1.8     2.0     3.0     8.5

Other

     0.5     0.1     0.1     0.1     0.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     56.4     23.1     9.8     10.7     100.0

 

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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 September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  
     Amount     %     Amount     %     Amount     %     Amount     %  

Revenue before provision for doubtful accounts

   $ 744,802        $ 488,746        $ 2,139,039        $ 1,324,702     

Provision for doubtful accounts

     (10,137       (9,016       (31,013       (25,529  
  

 

 

     

 

 

     

 

 

     

 

 

   

Revenue

     734,665        100.0     479,730        100.0     2,108,026        100.0     1,299,173        100.0

Salaries, wages and benefits

     408,242        55.6     258,410        53.9     1,157,557        54.9     707,583        54.5

Professional fees

     47,687        6.5     30,759        6.4     137,970        6.5     83,215        6.4

Supplies

     30,555        4.2     21,634        4.5     88,449        4.2     58,430        4.5

Rents and leases

     19,740        2.7     8,542        1.8     55,013        2.6     22,639        1.7

Other operating expenses

     79,748        10.9     57,244        11.9     230,950        11.0     148,899        11.5

Depreciation and amortization

     36,418        5.0     16,890        3.5     101,145        4.8     44,920        3.5

Interest expense

     48,843        6.6     27,737        5.8     135,315        6.4     77,932        6.0

Debt extinguishment costs

     3,411        0.5     9,979        2.1     3,411        0.2     9,979        0.8

Loss on divestiture

     174,739        23.8     —          —       174,739        8.3     —          —  

(Gain) loss on foreign currency derivatives

     (15     (0.1 )%      1,018        0.2     (523     (0.1 )%      1,926        0.1

Transaction-related expenses

     1,111        0.1     5,842        1.2     33,483        1.6     31,415        2.4
  

 

 

     

 

 

     

 

 

     

 

 

   

Total expenses

     850,479        115.8     438,055        91.3     2,117,509        100.4     1,186,938        91.4
  

 

 

     

 

 

     

 

 

     

 

 

   

(Loss) income from continuing operations before income taxes

     (115,814     (15.8 )%      41,675        8.7     (9,483     (0.4 )%      112,235        8.6

Provision for income taxes

     2,396        0.3     12,669        2.6     27,767        1.3     34,794        2.7
  

 

 

     

 

 

     

 

 

     

 

 

   

(Loss) income from continuing operations

   $ (118,210     (16.1 )%    $ 29,006        6.1   $ (37,250     (1.7 )%    $ 77,441        5.9
  

 

 

     

 

 

     

 

 

     

 

 

   

 

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Three months ended September 30, 2016 compared to the three months ended September 30, 2015

Revenue before provision for doubtful accounts. Revenue before provision for doubtful accounts increased $256.1 million, or 52.4%, to $744.8 million for the three months ended September 30, 2016 from $488.7 million for the three months ended September 30, 2015. The increase related primarily to revenue generated during the three months ended September 30, 2016 from the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. The decrease in the GBP to USD exchange rate had an unfavorable impact on revenue before provision for doubtful accounts of $15.0 million for the three months ended September 30, 2016. Same-facility revenue before provision for doubtful accounts increased by $29.6 million, or 6.5%, for the three months ended September 30, 2016 compared to the three months ended September 30, 2015, resulting from same-facility growth in patient days of 6.3%. Consistent with the same-facility patient day growth in 2015, the growth in same-facility patient days for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 resulted from the addition of beds to our existing facilities and ongoing demand for our services.

Provision for doubtful accounts. The provision for doubtful accounts was $10.1 million for the three months ended September 30, 2016, or 1.4% of revenue before provision for doubtful accounts, compared to $9.0 million for the three months ended September 30, 2015, or 1.8% of revenue before provision for doubtful accounts.

Salaries, wages and benefits. Salaries, wages and benefits (“SWB”) expense was $408.2 million for the three months ended September 30, 2016 compared to $258.4 million for the three months ended September 30, 2015, an increase of $149.8 million. SWB expense included $7.1 million and $5.3 million of equity-based compensation expense for the three months ended September 30, 2016 and 2015, respectively. Excluding equity-based compensation expense, SWB expense was $401.1 million, or 54.6% of revenue, for the three months ended September 30, 2016, compared to $253.1 million, or 52.8% of revenue, for the three months ended September 30, 2015. The $148.0 million increase in SWB expense, excluding equity-based compensation expense, was primarily attributable to SWB expense incurred by the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. Same-facility SWB expense was $244.2 million for the three months ended September 30, 2016, or 50.9% of revenue, compared to $224.0 million for the three months ended September 30, 2015, or 49.6% of revenue.

Professional fees. Professional fees were $47.7 million for the three months ended September 30, 2016, or 6.5% of revenue, compared to $30.8 million for the three months ended September 30, 2015, or 6.4% of revenue. The $16.9 million increase was primarily attributable to professional fees incurred by the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. Same-facility professional fees were $23.7 million for the three months ended September 30, 2016, or 5.0% of revenue, compared to $25.1 million, for the three months ended September 30, 2015, or 5.6% of revenue.

Supplies. Supplies expense was $30.6 million for the three months ended September 30, 2016, or 4.2% of revenue, compared to $21.6 million for the three months ended September 30, 2015, or 4.5% of revenue. The $8.9 million increase was primarily attributable to supplies expense incurred by the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. Same-facility supplies expense was $21.1 million for the three months ended September 30, 2016, or 4.4% of revenue, compared to $19.8 million for the three months ended September 30, 2015, or 4.4% of revenue.

Rents and leases. Rents and leases were $19.7 million for the three months ended September 30, 2016, or 2.7% of revenue, compared to $8.5 million for the three months ended September 30, 2015, or 1.8% of revenue. The $11.2 million increase was primarily attributable to rents and leases incurred by the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. Same-facility rents and leases were $8.6 million for the three months ended September 30, 2016, or 1.8% of revenue, compared to $7.6 million for the three months ended September 30, 2015, or 1.7% 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 $79.7 million for the three months ended September 30, 2016, or 10.9% of revenue, compared to $57.2 million for the three months ended September 30, 2015, or 11.9% of revenue. The $22.5 million increase was primarily attributable to other operating expenses incurred by the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. Same-facility other operating expenses were $52.9 million for the three months ended September 30, 2016, or 11.0% of revenue, compared to $51.4 million for the three months ended September 30, 2015, or 11.3% of revenue.

 

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Depreciation and amortization. Depreciation and amortization expense was $36.4 million for the three months ended September 30, 2016, or 5.0% of revenue, compared to $16.9 million for the three months ended September 30, 2015, or 3.5% of revenue. The increase in depreciation and amortization was attributable to depreciation associated with capital expenditures during 2015 and 2016 and real estate acquired as part of the 2015 and 2016 Acquisitions, particularly the acquisition of Priory.

Interest expense. Interest expense was $48.8 million for the three months ended September 30, 2016 compared to $27.7 million for the three months ended September 30, 2015. The increase in interest expense was primarily a result of borrowings under the Amended and Restated Senior Credit Facility, the issuance of the 5.625% Senior Notes on September 21, 2015 and the issuance of the 6.500% Senior Notes on February 16, 2016.

Debt extinguishment costs. Debt extinguishment costs for the three months ended September 30, 2016 represent $3.4 million of charges recorded in connection with the Tranche B-2 Repricing Amendment. The debt extinguishment costs for the three months ended September 30, 2015 represent $6.9 million of cash charges and $3.1 million of noncash charges recorded in connection with the purchase of approximately $88.3 million aggregate principal amount of outstanding 12.875% Senior Notes.

Loss on divestiture. As part of our planned divestiture in the U.K., we recorded $174.7 million of loss on divestiture for the three months ended September 30, 2016, which included an allocation of goodwill to the U.K. Disposal Group of approximately $106.9 million, estimated transaction-related expenses of approximately $25.6 million and a loss on the sale of property of $42.2 million.

(Gain) loss on foreign currency derivatives. We entered into foreign currency forward contracts during the three months ended September 30, 2016 and 2015 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 $15 thousand for the three months ended September 30, 2016, compared to a loss on foreign currency derivatives of $1.0 million for the three months ended September 30, 2015.

Transaction-related expenses. Transaction-related expenses were $1.1 million for the three months ended September 30, 2016 compared to $5.8 million for the three months ended September 30, 2015. Transaction-related expenses represent costs incurred in the respective periods, primarily related to the 2015 and 2016 Acquisitions, as summarized below (in thousands):

 

     Three Months Ended September 30,  
         2016              2015      

Legal, accounting and other costs

   $ 1,111       $ 5,261   

Severance and contract termination costs

     —           581   
  

 

 

    

 

 

 
   $ 1,111       $ 5,842   
  

 

 

    

 

 

 

Provision for income taxes. For the three months ended September 30, 2016, the provision for income taxes was $2.4 million, reflecting an effective tax rate of (2.1)%, compared to $12.7 million, reflecting an effective tax rate of 30.4%, for the three months ended September 30, 2015. The change in the tax rate for the three months ended September 30, 2016 is primarily attributable to the loss on divestiture related to our planned divestiture in the U.K.

Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015

Revenue before provision for doubtful accounts. Revenue before provision for doubtful accounts increased $814.3 million, or 61.5%, to $2.1 billion for the nine months ended September 30, 2016 from $1.3 billion for the nine months ended September 30, 2015. The increase related primarily to revenue generated during the nine months ended September 30, 2016 from the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. The decrease in the GBP to USD exchange rate had an unfavorable impact on revenue before provision for doubtful accounts of $24.4 million for the nine months ended September 30, 2016. Same-facility revenue before provision for doubtful accounts increased $99.0 million, or 7.8%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2015, resulting from same-facility growth in patient days of 7.4% and an increase in same-facility revenue per day of 0.3%. Consistent with the same-facility patient day growth in 2015, the growth in same-facility patient days for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 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 $31.0 million for the nine months ended September 30, 2016, or 1.4% of revenue before provision for doubtful accounts, compared to $25.5 million for the nine months ended September 30, 2015, or 1.9% of revenue before provision for doubtful accounts.

Salaries, wages and benefits. SWB expense was $1.2 billion for the nine months ended September 30, 2016 compared to $707.6 million for the nine months ended September 30, 2015, an increase of $450.0 million. SWB expense included $21.0 million and $14.6 million of equity-based compensation expense for the nine months ended September 30, 2016 and 2015, respectively. Excluding

 

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equity-based compensation expense, SWB expense was $1.1 billion, or 53.9% of revenue, for the nine months ended September 30, 2016, compared to $693.0 million, or 53.3% of revenue, for the nine months ended September 30, 2015. The $443.6 million increase in SWB expense, excluding equity-based compensation expense, was primarily attributable to SWB expense incurred by the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. Same-facility SWB expense was $679.3 million for the nine months ended September 30, 2016, or 50.3% of revenue, compared to $626.7 million for the nine months ended September 30, 2015, or 50.0% of revenue.

Professional fees. Professional fees were $138.0 million for the nine months ended September 30, 2016, or 6.5% of revenue, compared to $83.2 million for the nine months ended September 30, 2015, or 6.4% of revenue. The $54.8 million increase was primarily attributable to professional fees incurred by the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. Same-facility professional fees were $68.8 million for the nine months ended September 30, 2016, or 5.1% of revenue, compared to $70.4 million, for the nine months ended September 30, 2015, or 5.6% of revenue.

Supplies. Supplies expense was $88.4 million for the nine months ended September 30, 2016, or 4.2% of revenue, compared to $58.4 million for the nine months ended September 30, 2015, or 4.5% of revenue. The $30.0 million increase was primarily attributable to supplies expense incurred by the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. Same-facility supplies expense was $60.3 million for the nine months ended September 30, 2016, or 4.5% of revenue, compared to $55.9 million for the nine months ended September 30, 2015, or 4.5% of revenue.

Rents and leases. Rents and leases were $55.0 million for the nine months ended September 30, 2016, or 2.6% of revenue, compared to $22.6 million for the nine months ended September 30, 2015, or 1.7% of revenue. The $32.4 million increase was primarily attributable to rents and leases incurred by the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. Same-facility rents and leases were $23.0 million for the nine months ended September 30, 2016, or 1.7% of revenue, compared to $20.9 million for the nine months ended September 30, 2015, or 1.7% 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 $231.0 million for the nine months ended September 30, 2016, or 11.0% of revenue, compared to $148.9 million for the nine months ended September 30, 2015, or 11.5% of revenue. The $82.1 million increase was primarily attributable to other operating expenses incurred by the facilities acquired in our 2015 and 2016 Acquisitions, particularly the acquisition of Priory. Same-facility other operating expenses were $148.2 million for the nine months ended September 30, 2016, or 11.0% of revenue, compared to $139.3 million for the nine months ended September 30, 2015, or 11.1% of revenue.

Depreciation and amortization. Depreciation and amortization expense was $101.1 million for the nine months ended September 30, 2016, or 4.8% of revenue, compared to $44.9 million for the nine months ended September 30, 2015, or 3.5% of revenue. The increase in depreciation and amortization was attributable to depreciation associated with capital expenditures during 2015 and 2016 and real estate acquired as part of the 2015 and 2016 Acquisitions, particularly the acquisition of Priory.

Interest expense. Interest expense was $135.3 million for the nine months ended September 30, 2016 compared to $77.9 million for the nine months ended September 30, 2015. The increase in interest expense was primarily a result of borrowings under the Amended and Restated Senior Credit Facility, the issuance of the 5.625% Senior Notes on February 11, 2015 and September 21, 2015 and the issuance of the 6.500% Senior Notes on February 16, 2016.

Debt extinguishment costs. Debt extinguishment costs for the nine months ended September 30, 2016 represent $3.4 million of charges recorded in connection with the Tranche B-2 Repricing Amendment. The debt extinguishment costs for the nine months ended September 30, 2015 represent $6.9 million of cash charges and $3.1 million of noncash charges recorded in connection with the purchase of approximately $88.3 million aggregate principal amount of outstanding 12.875% Senior Notes.

Loss on divestiture. As part of our planned divestiture in the U.K., we recorded $174.7 million of loss on divestiture for the nine months ended September 30, 2016, which included an allocation of goodwill to the U.K. Disposal Group of approximately $106.9 million, estimated transaction-related expenses of approximately $25.6 million and a loss on the sale of properties of $42.2 million.

(Gain) loss on foreign currency derivatives. We entered into foreign currency forward contracts during the nine months ended September 30, 2016 and 2015 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 nine months ended September 30, 2016, compared to a loss on foreign currency derivatives of $1.9 million for the nine months ended September 30, 2015.

 

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Transaction-related expenses. Transaction-related expenses were $33.5 million for the nine months ended September 30, 2016 compared to $31.4 million for the nine months ended September 30, 2015. Transaction-related expenses represent costs incurred in the respective periods, primarily related to the 2015 and 2016 Acquisitions, as summarized below (in thousands):

 

     Nine Months Ended September 30,  
         2016              2015      

Legal, accounting and other costs

   $ 17,212       $ 14,315   

Advisory and financing commitment fees

     14,850         10,337   

Severance and contract termination costs

     1,421         6,763   
  

 

 

    

 

 

 
   $ 33,483       $ 31,415   
  

 

 

    

 

 

 

Provision for income taxes. For the nine months ended September 30, 2016, the provision for income taxes was $27.8 million, reflecting an effective tax rate of (292.8)%, compared to $34.8 million, reflecting an effective tax rate of 31.0%, for the nine months ended September 30, 2015. The change in the tax rate for the nine months ended September 30, 2016 is primarily attributable to the loss on divestiture related to our planned divestiture in the U.K.

Liquidity and Capital Resources

Cash provided by continuing operating activities for the nine months ended September 30, 2016 was $265.2 million compared to $143.6 million for the nine months ended September 30, 2015. The increase in cash provided by continuing operating activities was primarily attributable to cash provided by continuing operating activities from the 2015 and 2016 Acquisitions and the growth in same-facility operations. Days sales outstanding was 35 as of September 30, 2016 compared to 40 as of December 31, 2015, which was primarily due to the acquisition of Priory and its shorter timing of cash collections. As of September 30, 2016 and December 31, 2015, we had working capital of $12.7 million and $4.5 million, respectively.

Cash used in investing activities for the nine months ended September 30, 2016 was $971.8 million compared to $616.8 million for the nine months ended September 30, 2015. Cash used in investing activities for the nine months ended September 30, 2016 primarily consisted of $683.3 million of cash paid for acquisitions. Cash paid for capital expenditures for the nine months ended September 30, 2016 was $250.0 million, consisting of $57.1 million of routine capital expenditures and $192.9 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 2.5% of revenue for the nine months ended September 30, 2016. Cash paid for real estate acquisitions was $37.9 million for the nine months ended September 30, 2016. Cash used in investing activities for the nine months ended September 30, 2015 primarily consisted of $391.2 million of cash paid for acquisitions, $200.8 million of cash paid for capital expenditures.

Cash provided by financing activities for the nine months ended September 30, 2016 was $738.2 million compared to $432.3 million for the nine months ended September 30, 2015. Cash provided by financing activities for the nine months ended September 30, 2016 primarily consisted of long-term debt borrowings of $1.5 billion, borrowings on our revolving credit facility of $179.0 million and an issuance of common stock of $685.1 million, partially offset by repayment of assumed Priory debt of $1.3 billion, payment on revolving credit facility of $166.0 million, payment of debt issuance costs of $35.8 million, common stock withheld for minimum statutory taxes of $7.9 million and principal payments on long-term debt of $46.1 million. Cash provided by financing activities for the nine months ended September 30, 2015 primarily consisted of borrowings on long-term debt of $1.2 billion, borrowings on our revolving credit facility of $310.0 million, issuance of common stock of $331.4 million and an excess tax benefit from equity awards of $8.0 million, partially offset by repayment of assumed CRC debt of $904.5 million, repayment of senior notes of $88.3 million, principal payments on our revolving credit facility of $310.0 million, payment of debt issuance costs of $25.6 million, principal payments on long-term debt of $23.8 million, payment of premium for purchase of senior notes of $6.9 million and common stock withheld for minimum statutory taxes of $7.6 million.

We had total available cash and cash equivalents of $27.8 million and $11.2 million as of September 30, 2016 and December 31, 2015, respectively, of which approximately $22.6 million and $9.2 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., except for cash transfers under our cross currency swap agreements and other intercompany debt agreements. 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.

 

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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 Securities and Exchange Commission.

On February 6, 2015, we entered into the Seventh Amendment to our Amended and Restated Credit Agreement. The Seventh Amendment added Citibank, N.A. as an “L/C Issuer” under the Amended and Restated Credit Agreement in order to permit the rollover of CRC’s existing letters of credit into the Amended and Restated Credit Agreement and increased both the Company’s Letter of Credit Sublimit and Swing Line Sublimit to $20.0 million.

On February 11, 2015, we entered into the First Incremental Amendment to our Amended and Restated Credit Agreement. The First Incremental Amendment activated a new $500.0 million incremental Existing TLB Facility that was added to the Amended and Restated Senior Secured Credit Facility, subject to limited conditionality provisions. Borrowings under the Existing TLB Facility were used to fund a portion of the purchase price for our acquisition of CRC.

On April 22, 2015, we entered into an Eighth Amendment to our Amended and Restated Credit Agreement. The Eighth Amendment changed the definition of “Change of Control” in part to remove a provision whose purpose was, when calculating whether a majority of incumbent directors have approved new directors, that any incumbent director that became a director as a result of a threatened or actual proxy contest was not counted in such calculation.

On January 25, 2016, we entered into the Ninth Amendment to our Amended and Restated Credit Agreement. The Ninth Amendment modifies 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. We may now invest in non-wholly owned subsidiaries and joint ventures up to 10.0% of our and our subsidiaries’ total assets in any consecutive four fiscal quarter period, and up to 12.5% of our and our subsidiaries’ total assets during the term of the Amended and Restated Credit Agreement. We may also invest in foreign subsidiaries that are not loan parties up to 10% of our and our subsidiaries’ total assets in any consecutive four fiscal quarter period, and up to 15% of our and our subsidiaries’ total assets during the term of the Amended and Restated Credit Agreement. The foregoing permitted investments are subject to an aggregate cap of 25% of our and our subsidiaries’ total assets in any fiscal year.

On February 16, 2016, we entered into the Second Incremental Facility Amendment to our Amended and Restated Credit Agreement. The Second Incremental Amendment activated a new $955.0 million incremental Term Loan B facility and added $135.0 million to the Term Loan A facility to our Amended and Restated Senior Secured Credit Facility, subject to limited conditionality provisions. Borrowings under the New TLB Facility were used to fund a portion of the purchase price for the acquisition of Priory and the fees and expenses for such acquisition and the related financing transactions. Borrowings under the TLA Facility were used to pay down the majority of our $300.0 million revolving credit facility.

On May 26, 2016, we entered into a Tranche B-1 Repricing Amendment to the Amended and Restated Credit Agreement. The Tranche B-1 Repricing Amendment reduces the Applicable Rate with respect to the Existing TLB Facility from 3.5% to 3.0% in the case of Eurodollar Rate loans and 2.5% to 2.0% in the case of Base Rate Loans.

On September 21, 2016, we entered into a Tranche B-2 Repricing Amendment to the Amended and Restated Credit Agreement. The Tranche B-2 Repricing Amendment reduces 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 consolidated statements of income.

We had $120.6 million of availability under the revolving line of credit as of September 30, 2016. 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 $12.6 million for September 30, 2016 to December 31, 2016, $16.8 million for March 31, 2017 to December 31, 2017, and $20.9 million for March 31, 2018 to December 31, 2018, with the remaining principal balance of the TLA Facility due on the maturity date of February 13, 2019. 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’

 

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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 Acadia’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 3.25% for Eurodollar Rate Loans (as defined in the Amended and Restated Credit Agreement) and 2.0% for Base Rate Loans (as defined in the Amended and Restated Credit Agreement) at September 30, 2016. 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 September 30, 2016, the Pro Rata Facilities bore interest at a rate of LIBOR plus 3.25%. 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      2.25     1.25     0.30

2

   >3.50:1.0 but < 4.00:1.0      2.50     1.50     0.35

3

   >4.00:1.0 but < 4.50:1.0      2.75     1.75     0.40

4

   >4.50:1.0 but < 5.25:1.0      3.00     2.00     0.45

5

   >5.25:1.0      3.25     2.25     0.50

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 the Company’s 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 its material debt agreements. 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

 

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  certain material agreements. The Company is 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.

 

  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  

2016

     6.75x         6.75x         6.75x         6.25x   

2017

     6.00x         6.00x         6.00x         5.50x   

2018

     5.50x         5.50x         5.50x         5.00x   

 

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

 

September 30, 2016

     3.75x   

December 31, 2016 and each fiscal quarter thereafter

     3.50x   

As of September 30, 2016, the Company was 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. The 5.625% Senior Notes mature on February 15, 2023 and bear interest at a rate of 5.625% per annum, payable semi-annually in arrears on February 15 and August 15 of each year.

On September 21, 2015, we issued $275.0 million of additional 5.625% Senior Notes. The additional notes form a single class of debt securities with the existing 5.625% Senior Notes. Giving effect to this issuance, we have outstanding an aggregate of $650.0 million of 5.625% Senior Notes.

 

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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 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 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 September 30, 2016 and December 31, 2015, $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 September 30, 2016 (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)

   $ 244,186       $ 884,649       $ 466,252       $ 3,116,145       $ 4,711,232   

Operating leases

     67,788         115,351         99,942         801,249         1,084,330   

Purchase and other obligations (b)

     4,133         31,463         1,972         28,323         65,891   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations and commitments

   $ 316,107       $ 1,031,463       $ 568,166       $ 3,945,717       $ 5,861,453   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Amounts include required principal and interest payments. The projected interest payments reflect an interest rates in place on our variable-rate debt as of September 30, 2016.
(b) Amounts relate to purchase obligations, including capital lease payments.

Off-Balance Sheet Arrangements

As of September 30, 2016, we had standby letters of credit outstanding of $8.4 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. With respect to our interest-bearing liabilities, our long-term debt outstanding at September 30, 2016 was composed of $1.5 billion of fixed-rate debt and $2.2 billion of variable-rate debt with interest based on LIBOR plus an applicable margin. A hypothetical 10% increase in interest rates would decrease our net income and cash flows by $5.2 million on an annual basis based upon our borrowing level at September 30, 2016.

 

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Foreign Currency Risk

The functional currency for our U.K. facilities is GBP. Our revenue and earnings are sensitive to changes in 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 this exchange rate would cause a change in our net income of $12.5 million for the nine months ended September 30, 2016. 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.

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 Securities and Exchange Commission’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 September 30, 2016 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.