ACADIA HEALTHCARE COMPANY, INC. 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 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 the recent outbreak of the COVID-19 pandemic on our inpatient
and outpatient volumes, or disruptions caused by other pandemics, epidemics
and highly contagious infectious diseases;
• increases in the amount and risk of collectability of patient accounts
receivable, particularly as the unemployment rate and number of
underinsured and uninsured patients increases as a result of the COVID-19
pandemic;
• costs of providing care to our patients, including increased staffing,
equipment and supply expenses resulting from the COVID-19 pandemic;
• our significant indebtedness, our ability to meet our debt obligations, and
our ability to incur substantially more debt;
• our ability to implement our business strategies in the
• potential difficulties operating our business in light of political and
economic instability in the U.K. and globally relating to the U.K.'s
departure from the European Union ;
• the impact of fluctuations in foreign exchange rates, including the
devaluations of the GBP relative to the USD;
• our ability to enter into and successfully complete any strategic
transaction related to our U.K. operations;
• the impact of payments received from the government and third-party payors
on our revenue and results of operations including the significant
dependence of our U.K. Facilities on payments received from the NHS ;
• difficulties in successfully integrating the operations of acquired
facilities or realizing the potential benefits and synergies of our
acquisitions and joint ventures;
• our ability to recruit and retain quality psychiatrists and other
physicians, nurses, counselors and other medical support personnel;
• the impact of competition for staffing on our labor costs and profitability;
• the impact of increases to our labor costs in theU.S. and theU.K. ;
• 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.K. on our business and future results of operations; • the impact of adverse weather conditions, including the effects of hurricanes; • compliance with laws and government regulations;
• the impact of claims brought against us or our facilities including claims
for damages for personal injuries, medical malpractice, overpayments,
breach of contract, securities law violations, tort and employee related
claims;
• the impact of governmental investigations, regulatory actions and
whistleblower lawsuits;
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• any failure to comply with the terms of the corporate integrity agreement;
• the impact of healthcare reform in the
potential repeal, replacement or modification of the Patient Protection and
Affordable Care Act;
• the impact of our highly competitive industry on patient volumes;
• our dependence on key management personnel, key executives and local
facility management personnel;
• our acquisition, joint venture and de novo strategies, which expose us to a
variety of operational and financial risks, as well as legal and regulatory
risks;
• the impact of state efforts to regulate the construction or expansion of
healthcare facilities on our ability to operate and expand our operations;
• our potential inability to extend leases at expiration;
• the impact of controls designed to reduce inpatient services on our revenue;
• the impact of different interpretations of accounting principles on our
results of operations or financial condition;
• the impact of environmental, health and safety laws and regulations,
especially in locations where we have concentrated operations;
• the impact of an increase in uninsured and underinsured patients or the
deterioration in the collectability of the accounts of such patients on our
results of operations;
• the risk of a cyber-security incident and any resulting violation of laws
and regulations regarding information privacy or other negative impact;
• the impact of laws and regulations relating to privacy and security of
patient health information and standards for electronic transactions;
• our ability to cultivate and maintain relationships with referral sources;
• the impact of a change in the mix of our
changes in our effective tax rate and adverse developments in tax laws
generally;
• changes in interpretations, assumptions and expectations regarding recent
tax legislation, including provisions of the CARES Act, and additional
guidance that may be issued by federal and state taxing authorities;
• 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 careorganizations to enter into sole source contracts on our ability to obtain
patients;
• the impact of value-based purchasing programs on our revenue; and
• those risks and uncertainties described from time to time in our filings
with the
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. AtMarch 31, 2020 , we operated 588 behavioral healthcare facilities with approximately 18,200 beds in 40 states, theU.K. andPuerto Rico . During the 31
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three months endedMarch 31, 2020 , we added 80 beds to existing facilities. For the year endingDecember 31, 2020 , we expect to add between 500 and 600 total beds exclusive of acquisitions. We are the leading publicly traded pure-play provider of behavioral healthcare services, with operations in theU.S. and theU.K. Management believes that we are positioned as a leading platform in a highly fragmented industry under the direction of an experienced management team that has significant industry expertise. Management expects to take advantage of several strategies that are more accessible as a result of our increased size and geographic scale, including continuing a national marketing strategy to attract new patients and referral sources, increasing our volume of out-of-state referrals, providing a broader range of services to new and existing patients and clients and selectively pursuing opportunities to expand our facility and bed count in theU.S. through acquisitions, de novo facilities, joint ventures and bed additions in existing facilities. During 2019, we commenced a review of strategic alternatives including those related to ourU.K. operations and a potential sale of such operations. InJanuary 2020 , we launched a formal process regarding the sale of ourU.K. business. Consistent with market practice forU.K. transactions of this nature, and in conjunction with our advisors, we solicited and have received initial, non-binding offers to acquire ourU.K. business from multiple bidders. During the first quarter of 2020, we began the second phase of the sale process, during which interested bidders would receive proposed transaction documents and complete their confirmatory due diligence. While the interest from potential buyers has been strong, given evolving market dynamics related to the COVID-19 pandemic, we temporarily suspended the sale process inmid-March 2020 until market conditions recover.
COVID-19
DuringMarch 2020 , the global pandemic of COVID-19 began to affect our facilities, employees, patients, communities, business operations and financial performance, as well as the broaderU.S. andU.K. economies and financial markets. At a limited number of our facilities, employees and/or patients have tested positive for COVID-19. We are committed to protecting the health of our communities and have been responding to the evolving COVID-19 situation while taking steps to provide quality care and protect the health and safety of patients and employees. All of our facilities are closely following infectious disease protocols, as well as recommendations by theCDC and local health officials. We have established an internal COVID-19 taskforce, developed additional supply chain management processes, expanded telehealth capabilities and implemented emergency planning in directly impacted markets.
We have taken steps across our facilities to help minimize the impact of the virus. For example, we:
• have instituted social distancing practices and protective measures
throughout our facilities, which includes restricting or suspending
visitor access, limiting group therapy, and screening patients and staff
who enter our facilities based on criteria established by the CDC ;
• have cancelled all non-essential business travel; and
• have implemented work-from-home policies for certain administrative
employees, to the extent practicable, and suspended in-person trainings
and conferences.
COVID-19 is adversely impacting our business and likely will have an impact on
our financial results that we are not currently able to quantify. For example,
due in part to local, state and federal guidelines as well as recommendations
from medical officials regarding stay-at-home orders, social distancing
practices and self-quarantine in response to the COVID-19 pandemic, we have seen
a decline in referrals, particularly from emergency rooms and medical
professionals. In addition, restrictive measures adopted or encouraged by
federal, state and local governments, such as travel bans and stay-at-home
orders, have reduced patient volume at our facilities more generally. As a
result, many of our facilities are experiencing significantly lower average
daily census ("ADC"). The impact on our facilities varies based on the market in
which the facility operates and the type of facility. For the month of April
2020 , ADC at our U.S. Facilities declined approximately 7% compared to the same
period in the prior year, reflecting continuing deterioration in the first two
weeks with signs of stabilization and improvement during the last two weeks. For
the month of April 2020 , we have seen stability in ADC at our U.K. Facilities
ending the month at an approximately 5% decline compared to the same period in
the prior year. It is difficult to predict the impact of COVID-19 on our patient
volume, and, once restrictions are eased, we cannot predict the timing of
returning to pre-COVID volumes, if at all.
We have developed additional supply chain management processes, which includes
extensive tracking and delivery of key personal protective equipment ("PPE") and
supplies and sharing resources across all facilities. However, we are also
experiencing supply chain disruptions and could experience significant price
increases in equipment, pharmaceuticals and medical supplies, particularly PPE.
Pandemic-related staffing difficulties and equipment, pharmaceutical and medical
supplies shortages may impact our
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ability to treat patients at our facilities. Such shortages could lead to us paying higher prices for supplies, equipment and labor and an increase in overtime hours paid to our employees.
AtMarch 31, 2020 , we had approximately$81.0 million of cash and cash equivalents and approximately$485.0 million of available borrowing capacity under our revolving line of credit. In earlyApril 2020 , we borrowed$100.0 million on our revolving line of credit to enhance our cash position in response to the potential impact of COVID-19 on our future liquidity. In response to the estimated financial impact of the COVID-19 pandemic, we are pursuing various actions intended to enhance our financial flexibility including, among other things, the benefits described in the "CARES Act and other Regulatory Developments" herein. In addition, we are evaluating and undertaking certain additional steps to mitigate the financial impact, including:
• reducing maintenance and expansion capital expenditures;
• managing corporate and facility-level staffing costs by reducing hours,
implementing employee furloughs and implementing a hiring freeze for
non-clinical staff;
• cancelling all non-essential business travel;
• reducing discretionary expenditures and temporarily reducing marketing
spending;
• negotiating with our vendors and lessors for discounts and/or revised
payment terms; and
• closely managing our working capital as our facilities continue to bill and
collect for services rendered and extend payments on traditional accounts
payables.
Although we are reviewing potential liquidity and intend to seek any available benefits under the CARES Act, including those described herein, we cannot predict the manner in which such benefits will be allocated or administered and we cannot assure you we will be able to access such benefits in a timely manner or at all. In addition, procuring these benefits and otherwise responding to the global pandemic is likely to require us to dedicate additional management resources. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources" and "Risk Factors-Risks Related to Our Business-The COVID-19 global pandemic is affecting our operations, business and financial condition, and our liquidity could be negatively impacted, particularly if theU.S. andU.K. economies remain unstable for a significant amount of time or if patient volumes at our facilities do not recover quickly."
CARES Act and Other Regulatory Developments
OnMarch 27, 2020 , the CARES Act was signed into law. The CARES Act is intended to provide over$2 trillion in stimulus benefits for theU.S. economy. Among other things, the CARES Act includes additional support for small businesses, expands unemployment benefits, makes forgivable loans available to small businesses, provides for certain federal income tax changes, and provides$500 billion for loans, loan guarantees, and other investments for or inU.S. businesses. In addition, the CARES Act contains a number of provisions that are intended to assist healthcare providers as they combat the effects of the COVID-19 pandemic. Those provisions include, among others:
• an appropriation of
grants or other mechanisms, eligible healthcare providers and other
approved entities for COVID-19-related expenses or lost revenues;
• the expansion of CMS' Accelerated and Advance Payment Program;
• the temporary suspension of Medicare sequestration from
December 31, 2020 ; and • waivers or temporary suspension of certain regulatory requirements. As noted above, theU.S. government initially announced it would offer$100 billion of relief to eligible healthcare providers through thePHSSE Fund . OnApril 24, 2020 ,President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act (the "New PPP Act"). Among other things, the New PPP Act allocates$75 billion to eligible healthcare providers to help offset COVID-19 related losses and expenses. The$75 billion allocated under the New PPP Act is in addition to the$100 billion allocated to healthcare providers for the same purposes in the CARES Act and will likely be disbursed to providers under terms and conditions similar to the CARES Act funds. We have received approximately$20 million of the initial PHSSE funds distributed inApril 2020 . 33
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Using existing authority and certain expanded authority under the CARES Act, HHS has expanded CMS' Accelerated and Advance Payment Program to a broader group of Medicare Part A and Part B providers for the duration of the COVID-19 pandemic. Under the program, our facilities may request up to 100% of their Medicare payment amount for a three-month period. The repayment of these accelerated/advanced payments does not begin until 120 days after the date of the issuance of the payment. Once the repayment period starts, the amounts previously advanced to the provider or supplier will be recouped from the provider's or supplier's new Medicare claims. Our facilities will generally have 210 days from the date the accelerated or advance payment was made to repay the amounts that they owe. We applied for and received approximately$45 million inApril 2020 from this program, which we expect to repay over a three-month period from August toNovember 2020 .
Also under the CARES Act, we anticipate a 2% increase in our facilities'
Medicare reimbursement rate as a result of the temporary suspension of Medicare
sequestration from
The CARES Act also provides for certain federal income tax changes, including an increase in the interest expense tax deduction limitation, the deferral of the employer portion ofSocial Security payroll taxes, refundable payroll tax credits, net operating loss carryback periods, alternative minimum tax credit refunds and bonus depreciation of qualified improvement property. The federal income tax changes brought about by the CARES Act are complex and further guidance is expected. We are still reviewing and determining the extent to which the tax provisions of the CARES Act will affect the Company. We expect a cash benefit of approximately$39 million for 2020 relating to the delay of payment of the employer portion ofSocial Security payroll taxes. Within the CARES Act, the interest expense deduction threshold was increased to 50% of Adjusted Taxable Income for 2019 and 2020 tax years, making our interest expense fully deductible. As a result, we expect a cash benefit in the form of refunds and/or lower tax payments of approximately$16 million related to our 2019 interest expense and between$15 million and$20 million related to our 2020 interest expense. In addition to the financial and other relief that has been provided by the federal government through the CARES Act and other legislation passed byCongress , CMS and many state governments have also issued waivers and temporary suspensions of healthcare facility licensure, certification, and reimbursement requirements in order to provide hospitals, physicians, and other healthcare providers with increased flexibility to meet the challenges presented by the COVID-19 pandemic. For example, CMS and many state governments have temporarily eased regulatory requirements and burdens for delivering and being reimbursed for healthcare services provided remotely through telemedicine. CMS has also temporarily waived many provisions of the Stark law, including many of the provisions affecting our relationships with physicians. Many states have also suspended the enforcement of certain regulatory requirements to ensure that healthcare providers have sufficient capacity to treat COVID-19 patients. These regulatory changes are temporary, with most slated to expire at the end of the declared COVID-19 public health emergency.
We are evaluating the terms and conditions and financial impact of funds received under the CARES Act and other government relief programs.
OnApril 24, 2020 President Trump signed into law the New PPP Act. Among other things, the New PPP Act allocates$75 billion to Medicare and Medicaid participating hospitals and other healthcare providers to help offset COVID-19 related losses and expenses. The$75 billion dollars allocated under the New PPP Act is in addition to the$100 billion allocated to healthcare providers for the same purposes in the CARES Act, and will likely be disbursed to providers under terms and conditions similar to the CARES Act funds.
Acquisitions
OnApril 1, 2019 , the Company completed the acquisition ofBradford , a specialty treatment facility with 46 beds located inMillerton, Pennsylvania , for cash consideration of approximately$4.5 million . OnFebruary 15, 2019 , the Company completed the acquisition ofWhittier , an inpatient psychiatric facility with 71 beds located inHaverhill, Massachusetts , for cash consideration of approximately$17.9 million . Also onFebruary 15, 2019 , the Company completed the acquisition of Mission Treatment for cash consideration of approximately$22.5 million . Mission Treatment operates nine comprehensive treatment centers inCalifornia ,Nevada ,Arizona andOklahoma . 34
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The following table illustrates our consolidated results of operations for the respective periods shown (dollars in thousands):
Three Months Ended
March 31,
2020 2019
Amount % Amount %
Revenue $ 782,810 100.0 % $ 760,617 100.0 %
Salaries, wages and benefits 440,316 56.2 % 429,579 56.5 %
Professional fees 63,300 8.1 % 57,007 7.5 %
Supplies 31,971 4.1 % 29,957 3.9 %
Rents and leases 20,824 2.7 % 20,307 2.7 %
Other operating expenses 98,529 12.6 % 93,865 12.3 %
Depreciation and amortization 41,680 5.3 % 40,580 5.3 %
Interest expense 42,785 5.5 % 48,130 6.3 %
Transaction-related expenses 3,549 0.4 % 4,321 0.6 %
Total expenses 742,954 94.9 % 723,746 95.1 %
Income before income taxes 39,856 5.1 % 36,871 4.9 %
Provision for income taxes 5,789 0.7 % 7,360 1.0 %
Net income 34,067 4.4 % 29,511 3.9 %
Net income attributable to noncontrolling
interests (604 ) -0.1 % (40 ) 0.0 %
Net income attributable to Acadia Healthcare
Company, Inc. $ 33,463 4.3 % $ 29,471 3.9 %
Segments
At
The following table sets forth percent changes in same facility operating data for ourU.S. Facilities for the three months endedMarch 31, 2020 compared to the same period in 2019:U.S. Same Facility Results (a) Revenue growth 4.1% Patient days growth 2.9% Admissions growth 0.9% Average length of stay change (b) 1.9% Revenue per patient day growth 1.2% EBITDA margin change (c) -90 bps (a) Results for the periods presented include facilities we have operated more than one year and exclude certain closed services.
(b) Average length of stay is defined as patient days divided by admissions.
(c) Segment EBITDA is defined as income before provision for income taxes,
equity-based compensation expense, transaction-related expenses, interest
expense and depreciation and amortization. Management uses Segment EBITDA as an
analytical indicator to measure the performance of our segments and to develop
strategic objectives and operating plans for those segments. Segment EBITDA is
commonly used as an analytical indicator within the health care industry, and
also serves as a measure of leverage capacity and debt service ability. Segment
EBITDA should not be considered as a measure of financial performance under
GAAP, and the items excluded from Segment EBITDA are significant components in
understanding and assessing financial performance. Because Segment EBITDA is not
a measurement determined in accordance with GAAP and is thus susceptible to
varying calculations, Segment EBITDA, as presented, may not be comparable to
other similarly titled measures of other companies.
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Results in ourU.S. Facilities for the three months endedMarch 31 2020 , were affected by actions taken to curtail the spread of COVID-19. Volumes declined in lateMarch 2020 as a result of the impact of the pandemic on traditional referral sources, such as emergency rooms and medical professionals; the stay-at-home orders implemented by many states; and the effects of the travel restrictions on certain facilities with national referral networks. Same facility patient days increased more than 4% through the first two months of 2020 compared to the same period in the prior year. The COVID-19 pandemic affected our business starting in lateMarch 2020 and caused same facility patient day volumes to decline approximately 3% in the last two weeks of the month relative to the same period in the prior year. The following table sets forth percent changes in same facility operating data for ourU.K. Facilities for the three months endedMarch 31, 2020 compared to the same period in 2019:U.K. Same Facility Results (a,c) Revenue growth 1.9% Patient days growth -1.0% Admissions growth -7.6% Average length of stay change (b) 7.2% Revenue per patient day growth 3.0% EBITDA margin change (d) -140 bps (a) Results for the periods presented include facilities we have operated more than one year and exclude the elderly care division and certain closed services.
(b) Average length of stay is defined as patient days divided by admissions.
(c) Revenue and revenue per patient day for the three months ended
March 31, 2019 is adjusted to reflect the foreign currency
exchange rate for the comparable periods of 2020 in order to
eliminate the effect of changes in the exchange rate.
(d) See definition of Segment EBITDA in U.S. Same Facility Results
table above.
Results in our U.K. Facilities for the three months ended March 31 2020 were
also affected by actions taken to curtail the spread of COVID-19. Beginning in
late March 2020 , our U.K. operations faced temporary disruptions from the
stay-at-home orders implemented in the U.K. on the referral and commissioning
process. While the volume impact in the U.K. has been limited due to the longer
length of stay for many of our service lines, certain services with a shorter
length of stay have been impacted. In our U.K. Facilities, same facility patient
days were flat through the first two months of 2020 and then declined
approximately 3% in the last two weeks of March 2020 compared to the same period
in the prior year.
Three months ended
Revenue. Revenue increased$22.2 million , or 2.9%, to$782.8 million for the three months endedMarch 31, 2020 from$760.6 million for the three months endedMarch 31, 2019 resulting from same facility revenue growth of 3.4% offset by$4.6 million as a result of the decrease in the exchange rate between USD and GBP. During the three months endedMarch 31, 2020 , we generated$509.2 million of revenue, or 65.0% of our total revenue, from ourU.S. Facilities and$273.6 million of revenue, or 35.0% of our total revenue, from ourU.K. Facilities. During the three months endedMarch 31, 2019 , we generated$488.0 million of revenue, or 64.2% of our total revenue, from ourU.S. Facilities and$272.7 million of revenue, or 35.8% of our total revenue, from ourU.K. Facilities.U.S. same facility revenue increased by$19.7 million , or 4.1%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , resulting from same facility growth in patient days of 2.9% and an increase in same facility revenue per day of 1.2%. Consistent with the same facility patient day growth in 2019, the growth in same facility patient days for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , resulted from the addition of beds to our existing facilities and ongoing demand for our services.U.K. same facility revenue increased by$4.7 million , or 1.9%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , resulting from an increase in same facility revenue per day of 3.0% offset by a decline in same facility patient days of 1.0%. Salaries, wages and benefits. Salaries, wages and benefits ("SWB") expense was$440.3 million for the three months endedMarch 31, 2020 compared to$429.6 million for the three months endedMarch 31, 2019 , an increase of$10.7 million . SWB expense included$5.0 million and$6.1 million of equity-based compensation expense for the three months endedMarch 31, 2020 and 2019, respectively. Excluding equity-based compensation expense, SWB expense was$435.3 million , or 55.6% of revenue, for the three months endedMarch 31, 2020 , compared to$423.5 million , or 55.7% of revenue, for the three months endedMarch 31, 2019 . Same facility SWB expense was$396.3 million for the three months endedMarch 31, 2020 , or 52.8% of revenue, compared to$383.1 million for the three months endedMarch 31, 2019 , or 52.8% of revenue. 36
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Professional fees. Professional fees were$63.3 million for the three months endedMarch 31, 2020 , or 8.1% of revenue, compared to$57.0 million for the three months endedMarch 31, 2019 , or 7.5% of revenue. The increase in professional fees was primarily the result of higher cost agency labor required in certain markets, which was partially attributable to COVID-19. Same facility professional fees were$55.9 million for the three months endedMarch 31, 2020 , or 7.4% of revenue, compared to$49.8 million , for the three months endedMarch 31, 2019 , or 6.8% of revenue. Supplies. Supplies expense was$32.0 million for the three months endedMarch 31, 2020 , or 4.1% of revenue, compared to$30.0 million for the three months endedMarch 31, 2019 , or 3.9% of revenue. The increase in supplies was primarily the result of COVID-19 related supply purchases, particularly PPE. Same facility supplies expense was$30.2 million for the three months endedMarch 31, 2020 , or 4.0% of revenue, compared to$28.2 million for the three months endedMarch 31, 2019 , or 3.9% of revenue. Rents and leases. Rents and leases were$20.8 million for the three months endedMarch 31, 2020 , or 2.7% of revenue compared to$20.3 million for the three months endedMarch 31, 2019 , or 2.7% of revenue. Same facility rents and leases were$17.1 million for the three months endedMarch 31, 2020 , or 2.3% of revenue, compared to$16.3 million for the three months endedMarch 31, 2019 , or 2.2% 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$98.5 million for the three months endedMarch 31, 2020 , or 12.6% of revenue, compared to$93.9 million for the three months endedMarch 31, 2019 , or 12.3% of revenue. Same facility other operating expenses were$93.2 million for the three months endedMarch 31, 2020 , or 12.4% of revenue, compared to$88.3 million for the three months endedMarch 31, 2019 , or 12.1% of revenue. Depreciation and amortization. Depreciation and amortization expense was$41.7 million for the three months endedMarch 31, 2020 , or 5.3% of revenue, compared to$40.6 million for the three months endedMarch 31, 2019 , or 5.3% of revenue. Interest expense. Interest expense was$42.8 million for the three months endedMarch 31, 2020 compared to$48.1 million for the three months endedMarch 31, 2019 . The decrease in interest expense was primarily a result of lower interest rates applicable to our variable rate debt. Transaction-related expenses. Transaction-related expenses were$3.5 million for the three months endedMarch 31, 2020 compared to$4.3 million for the three months endedMarch 31, 2019 . Transaction-related expenses primarily relate to termination, restructuring,U.K. sale, strategic review, management transition and other similar costs incurred in the respective periods, as summarized below (in thousands): Three Months EndedMarch 31, 2020 2019
Termination, restructuring, sale and strategic review costs
$ 2,221 $ 2,282 Legal, accounting and other acquisition-related costs 1,328 796 Management transition costs - 1,243$ 3,549 $ 4,321 Provision for income taxes. For the three months endedMarch 31, 2020 , the provision for income taxes was$5.8 million , reflecting an effective tax rate of 14.5%, compared to$7.4 million , reflecting an effective tax rate of 20.0%, for the three months endedMarch 31, 2019 . The decrease in the effective tax rate for the three months endedMarch 31, 2020 was primarily attributable to the application of the CARES Act. We recorded a discrete benefit during the three months endedMarch 31, 2020 resulting from a change in our valuation allowance related to a decrease in the deferred tax asset on carried forward interest. As we continue to monitor tax implications of the CARES Act and other state, federal and foreign stimulus and tax legislation, we may make adjustments to our estimates and record additional amounts for tax assets and liabilities. Additionally, market disruption due to COVID-19 may affect the Company's ability to realize our deferred tax assets. Any adjustments to our tax assets and liabilities could materially impact our provision for income taxes and our effective tax rate in the periods in which they are made.
Revenue
Our revenue is primarily derived from services rendered to patients for inpatient psychiatric and substance abuse care, outpatient psychiatric care and adolescent residential treatment. We receive payments from the following sources for services rendered in our facilities: (i) state governments under their respective Medicaid and other programs; (ii) commercial insurers; (iii) the federal government under the Medicare program administered by CMS; (iv) publicly funded sources in theU.K. (including theNHS , CCGs 37
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and local authorities inEngland ,Scotland andWales ) and (v) individual patients and clients. We determine the transaction price based on established billing rates reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients and implicit price concessions. Contractual adjustments and discounts are based on contractual agreements, discount policies and historical experience. Implicit price concessions are based on historical collection experience.
The following table presents revenue by payor type and as a percentage of
revenue in our
Three Months Ended
March 31,
2020 2019
Amount % Amount %
Commercial $ 143,142 28.1 % $ 139,427 28.6 %
Medicare 72,271 14.2 % 72,616 14.9 %
Medicaid 260,044 51.1 % 239,191 49.0 %
Self-Pay 27,034 5.3 % 31,732 6.5 %
Other 6,726 1.3 % 4,994 1.0 %
Revenue $ 509,217 100.0 % $ 487,960 100.0 %
The following table presents revenue by payor type and as a percentage of
revenue in our
Three Months Ended
March 31,
2020 2019
Amount % Amount %
U.K. public funded sources $ 246,136 90.0 % $ 245,413 90.0 %
Self-Pay 26,915 9.8 % 26,814 9.8 %
Other 542 0.2 % 430 0.2 %
Revenue $ 273,593 100.0 % $ 272,657 100.0 %
The following tables present a summary of our aging of accounts receivable at
March 31, 2020 Current 30-90 90-150 >150 Total Commercial 16.1 % 5.7 % 2.8 % 6.6 % 31.2 % Medicare 10.4 % 2.0 % 0.6 % 1.3 % 14.3 % Medicaid 23.6 % 5.2 % 3.3 % 6.6 % 38.7 % U.K. public funded sources 4.7 % 2.9 % 0.0 % 0.0 % 7.6 % Self-Pay 1.6 % 1.7 % 1.2 % 2.8 % 7.3 % Other 0.5 % 0.2 % 0.1 % 0.1 % 0.9 % Total 56.9 % 17.7 % 8.0 % 17.4 % 100.0 % December 31, 2019 Current 30-90 90-150 >150 Total Commercial 15.2 % 6.2 % 3.9 % 6.3 % 31.6 % Medicare 10.3 % 1.4 % 0.4 % 0.9 % 13.0 % Medicaid 23.3 % 5.9 % 3.4 % 6.8 % 39.4 % U.K. public funded sources 6.3 % 1.6 % 0.0 % 0.0 % 7.9 % Self-Pay 1.8 % 1.4 % 1.4 % 2.5 % 7.1 % Other 0.6 % 0.2 % 0.1 % 0.1 % 1.0 % Total 57.5 % 16.7 % 9.2 % 16.6 % 100.0 % 38
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Liquidity and Capital Resources
Cash provided by operating activities for the three months endedMarch 31, 2020 was$45.5 million compared to$43.7 million for the three months endedMarch 31, 2019 . Days sales outstanding were 39 days atMarch 31, 2020 compared to 40 atDecember 31, 2019 . Cash used in investing activities for the three months endedMarch 31, 2020 was$74.2 million compared to$110.1 million for the three months endedMarch 31, 2019 . Cash used in investing activities for the three months endedMarch 31, 2020 primarily consisted of$69.5 million of cash paid for capital expenditures,$3.1 million of cash paid for real estate and other of$1.7 million , offset by proceeds from sale of property and equipment of$0.2 million . Cash paid for capital expenditures for the three months endedMarch 31, 2020 consisted of$24.1 million of routine capital expenditures and$45.4 million of expansion capital expenditures. We define expansion capital expenditures as those that increase the capacity of our facilities or otherwise enhance revenue. Routine or maintenance capital expenditures were 3.1% of revenue for the three months endedMarch 31, 2020 . Cash used in investing activities for the three months endedMarch 31, 2019 primarily consisted of cash paid for acquisitions of$40.4 million ,$69.2 million of cash paid for capital expenditures and$1.1 million of cash paid for real estate and other of$0.3 million offset by proceeds from sale of property and equipment of$0.9 million . Cash paid for capital expenditures for the three months endedMarch 31, 2019 consisted of$18.5 million of cash paid for routine capital expenditures and$50.7 million of expansion capital expenditures. Cash used in financing activities for the three months endedMarch 31, 2020 was$13.4 million compared to cash provided by financing activities of$58.5 million for the three months endedMarch 31, 2019 . Cash used in financing activities for the three months endedMarch 31, 2020 consisted of principal payments of long-term debt of$10.6 million , common stock withheld for minimum statutory taxes of$1.4 million , distributions to noncontrolling interests of$0.3 million and other of$1.1 million . Cash provided by financing activities for the three months endedMarch 31, 2019 primarily consisted of borrowings on revolving credit facility of$71.6 million offset by principal payments of long-term debt of$8.2 million , common stock withheld for minimum statutory taxes of$1.3 million and other of$3.5 million . We had total available cash and cash equivalents of$81.0 million and$124.2 million atMarch 31, 2020 andDecember 31, 2019 , respectively, of which approximately$26.1 million and$23.2 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 theU.S. , and it is our current intention to permanently reinvest our foreign cash and cash equivalents outside of theU.S. InApril 2020 we were able to take advantage of certain relief programs offered through the CARES Act, including receipt of approximately$20 million relating to the initial portions of the PHSSE funds and approximately$45 million of payments from the CMS' Accelerated and Advance Payment Program. We anticipate receiving additionalPHSSE Fund grants in future disbursements. We further anticipate a 2% increase in our facilities' Medicare reimbursement rate as a result of the temporary suspension of Medicare sequestration provided for in the CARES Act. We believe existing cash on hand, cash flows from operations, the availability under our revolving line of credit and cash from additional financing would be sufficient to meet our expected liquidity needs during the next 12 months.
Amended and Restated Senior Credit Facility
We entered into the Senior Secured Credit Facility onApril 1, 2011 . OnDecember 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 theSEC . OnFebruary 6, 2019 , we entered into the Eleventh Amendment to the Amended and Restated Credit Agreement. The Eleventh Amendment, among other things, amended the definition of "Consolidated EBITDA" to remove the cap on non-cash charges, losses and expenses related to the impairment of goodwill, which in turn provided increased flexibility to us in terms of our financial covenants. OnFebruary 27, 2019 , we entered into the Twelfth Amendment to the Amended and Restated Credit Agreement. The Twelfth Amendment, among other things, modified certain definitions, including "Consolidated EBITDA", and increased our permitted Maximum Consolidated Leverage Ratio, thereby providing increased flexibility to us in terms of our financial covenants. OnApril 21, 2020 , we entered into the Thirteenth Amendment to the Amended and Restated Credit Agreement. The Thirteenth Amendment amended the Consolidated Leverage Ratio in the existing covenant to increase the leverage ratio for the rest of 2020. 39
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We had$485.0 million of availability under the revolving line of credit and had standby letters of credit outstanding of$15.0 million related to security for the payment of claims required by our workers' compensation insurance program atMarch 31, 2020 . In earlyApril 2020 , we borrowed$100.0 million on the revolving line of credit to enhance our cash position in response to the potential impact of COVID-19 on our future liquidity. 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$7.1 million forSeptember 30, 2020 toDecember 31, 2020 , and$9.5 million forMarch 31, 2021 toSeptember 30, 2021 , with the remaining principal balance of the TLA Facility due on the maturity date ofNovember 30, 2021 . We are required to repay the Tranche B-3 Facility in equal quarterly installments of$1.2 million on the last business day of each March, June, September and December, with the outstanding principal balance of the Tranche B-3 Facility of$447.3 million due onFebruary 11, 2022 . We are required to repay the Tranche B-4 Facility in equal quarterly installments of approximately$2.3 million on the last business day of each March, June, September and December, with the outstanding principal balance of the Tranche B-4 Facility of$854.4 million due onFebruary 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 the Company and such subsidiaries' assets. Borrowings with respect to the TLA Facility and our revolving credit facility (collectively, "Pro Rata Facilities") under the Amended and Restated Credit Agreement bear interest at a rate tied to our Consolidated Leverage Ratio (defined as consolidated funded debt net of up to$50.0 million of unrestricted and unencumbered cash to consolidated EBITDA, in each case as defined in the Amended and Restated Credit Agreement). The Applicable Rate (as defined in the Amended and Restated Credit Agreement) for the Pro Rata Facilities was 2.50% for Eurodollar Rate Loans (as defined in the Amended and Restated Credit Agreement) and 1.50% for Base Rate Loans (as defined in the Amended and Restated Credit Agreement) atMarch 31, 2020 . 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%. AtMarch 31, 2020 , the Pro Rata Facilities bore interest at a rate of LIBOR plus 2.50%. 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:
Consolidated Eurodollar Rate Base Rate Commitment
Pricing Tier Leverage Ratio Loans Loans Fee
1 < 3.50:1.0 1.50 % 0.50 % 0.20 %
2 >3.50:1.0 but <
4.00:1.0 1.75 % 0.75 % 0.25 %
3 >4.00:1.0 but <
4.50:1.0 2.00 % 1.00 % 0.30 %
4 >4.50:1.0 but <
5.25:1.0 2.25 % 1.25 % 0.35 %
5 >5.25:1.0 2.50 % 1.50 % 0.40 %
Eurodollar Rate Loans with respect to the Tranche B-3 Facility bear interest at
the Tranche B-3 Facility 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
Tranche B-3 Facility 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 "Tranche B-3 Facility Applicable Rate" means, with respect
to Eurodollar Rate Loans, 2.50%, and with respect to Base Rate Loans, 1.50%. The
Tranche B-4 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, 2.50%, and with respect to Base Rate Loans, 1.50%.
The lenders who provided the Tranche B-3 Facility and Tranche B-4 Facility are
not entitled to benefit from our maintenance of the financial covenants under
the Amended and Restated Credit Agreement. Accordingly, if we fail to maintain
the financial covenants, such failure shall not constitute an event of default
under the Amended and Restated Credit Agreement with respect to the Tranche B-3
Facility or Tranche B-4 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.
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The Amended and Restated Credit Agreement requires us and our subsidiaries to comply with customary affirmative, negative and financial covenants, including a fixed charge coverage ratio, consolidated leverage ratio and consolidated senior secured leverage ratio. We may be required to pay all of our indebtedness immediately if we default on any of the numerous financial or other restrictive covenants contained in any of our material debt agreements. Set forth below is a brief description of such covenants, all of which are subject to customary exceptions, materiality thresholds and qualifications:
a) the affirmative covenants include the following: (i) delivery of financial
statements and other customary financial information; (ii) notices of
events of default and other material events; (iii) maintenance of
existence, ability to conduct business, properties, insurance and books
and records; (iv) payment of taxes; (v) lender inspection rights;
(vi) compliance with laws; (vii) use of proceeds; (viii) furtherassurances; 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 ofbusiness; (xiii) changes to organizational documents, legal name, state of
formation, form of entity and fiscal year; (xiv) prepayment or redemption
of certain senior unsecured debt; and (xv) amendments to certain material
agreements. We are generally not permitted to issue dividends or
distributions other than with respect to the following: (w) certain tax
distributions; (x) the repurchase of equity held by employees, officers or
directors upon the occurrence of death, disability or termination subject
to cap of
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 consolidated 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
2020 5.75x 6.50x 6.50x 6.25x
2021 5.25x 5.25x 5.00x 5.00x
• the consolidated senior secured leverage ratio may not be greater than
3.50x as of the end of each fiscal quarter.
At
Senior Notes
6.125% Senior Notes Due 2021
OnMarch 12, 2013 , we issued$150.0 million of 6.125% Senior Notes due 2021. The 6.125% Senior Notes mature onMarch 15, 2021 and bear interest at a rate of 6.125% per annum, payable semi-annually in arrears onMarch 15 andSeptember 15 of each year. AtMarch 31, 2020 , the 6.125% Senior Notes are included in current portion of debt on the condensed consolidated balance sheet.
5.125% Senior Notes due 2022
OnJuly 1, 2014 , we issued$300.0 million of 5.125% Senior Notes due 2022. The 5.125% Senior Notes mature onJuly 1, 2022 and bear interest at a rate of 5.125% per annum, payable semi-annually in arrears onJanuary 1 andJuly 1 of each year. 5.625% Senior Notes due 2023 OnFebruary 11, 2015 , we issued$375.0 million of 5.625% Senior Notes due 2023. OnSeptember 21, 2015 , we issued$275.0 million of additional 5.625% Senior Notes. The additional notes formed a single class of debt securities with the 5.625% Senior Notes issued inFebruary 2015 . Giving effect to this issuance, we have outstanding an aggregate of$650.0 million of 5.625% Senior Notes. The 5.625% Senior Notes mature onFebruary 15, 2023 and bear interest at a rate of 5.625% per annum, payable semi-annually in arrears onFebruary 15 andAugust 15 of each year. 41
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Table of contents 6.500% Senior Notes due 2024 OnFebruary 16, 2016 , we issued$390.0 million of 6.500% Senior Notes due 2024. The 6.500% Senior Notes mature onMarch 1, 2024 and bear interest at a rate of 6.500% per annum, payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, beginning onSeptember 1, 2016 . The indentures governing the Senior Notes contain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: (i) pay dividends, redeem stock or make other distributions or investments; (ii) incur additional debt or issue certain preferred stock; (iii) transfer or sell assets; (iv) engage in certain transactions with affiliates; (v) create restrictions on dividends or other payments by the restricted subsidiaries; (vi) merge, consolidate or sell substantially all of our assets; and (vii) create liens on assets. The Senior Notes issued by us are guaranteed by each of our subsidiaries that guarantee our obligations under the Amended and Restated Senior Credit Facility. The guarantees are full and unconditional and joint and several.
We may redeem the Senior Notes at our option, in whole or part, at the dates and amounts set forth in the indentures.
Contractual Obligations
The following table presents a summary of contractual obligations at
Payments Due by Period
Less Than More Than
1 Year 1-3 Years 3-5 Years 5 Years Total
Long-term debt (a) $ 342,681 $ 2,812,016 $ 415,366 $ - $ 3,570,063
Operating lease liabilities (b) 60,759 108,659 93,414 639,780 902,612
Finance lease liabilities 7,292 37,314
2,432 24,817 71,855
Total obligations and commitments
(a) Amounts include required principal and interest payments. The projected
interest payments reflect the interest rates in place on our variable-rate
debt at
(b) Amounts exclude variable components of lease payments.
Off-Balance Sheet Arrangements
At
Critical Accounting Policies
Our goodwill and other indefinite-lived intangible assets, which consist of licenses and accreditations, trade names and certificates of need intangible assets that are not amortized, are evaluated for impairment annually during the fourth quarter or more frequently if events indicate the carrying value of a reporting unit may not be recoverable. We have two operating segments for segment reporting purposes,U.S. Facilities andU.K. Facilities, each of which represents a reporting unit for purposes of the Company's goodwill impairment test. Our annual goodwill impairment and other indefinite-lived intangible assets test performed as ofOctober 1, 2019 resulted in no impairment charges. During lateMarch 2020 , results in ourU.S. Facilities andU.K. Facilities were affected by actions taken to curtail the spread of COVID-19. Based on recent financial performance and current forecasts, we believe it is more likely than not that the fair values of each of our reporting units exceeds the carrying values of each reporting unit. AtMarch 31, 2020 , no impairment indicators were present. Therefore, a quantitative impairment test was not required. We will continue to monitor our business, financial performance and forecasts for indicators of impairment prior to our annual impairment test onOctober 1, 2020 . Continued disruptions to our business as a result of COVID-19 pandemic could have a material adverse effect on our results of operations, financial condition, cash flows and ability to service our indebtedness and may affect the amounts reported in the consolidated financial statements including those related to the potential impairment of goodwill and long-lived assets. 42
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There have been no material changes in our critical accounting policies atMarch 31, 2020 from those described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 .
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