Attached files
file | filename |
---|---|
EX-32.1 - EX-32.1 - PSYCHIATRIC SOLUTIONS INC | g20978exv32w1.htm |
EX-31.2 - EX-31.2 - PSYCHIATRIC SOLUTIONS INC | g20978exv31w2.htm |
EX-10.1 - EX-10.1 - PSYCHIATRIC SOLUTIONS INC | g20978exv10w1.htm |
EX-31.1 - EX-31.1 - PSYCHIATRIC SOLUTIONS INC | g20978exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended September 30, 2009
or
o | 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 0-20488
Psychiatric Solutions, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 23-2491707 | |
(State or Other Jurisdiction of Incorporation or | (I.R.S. Employer Identification No.) | |
Organization) |
6640 Carothers Parkway, Suite 500
Franklin, TN 37067
(Address of Principal Executive Offices, Including Zip Code)
Franklin, TN 37067
(Address of Principal Executive Offices, Including Zip Code)
(615) 312-5700
(Registrants Telephone Number, Including Area Code)
(Registrants 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. þ Yes o 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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). o Yes o 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. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of October 29, 2009, 56,248,972 shares of the registrants common stock were outstanding.
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 13,366 | $ | 51,271 | ||||
Accounts receivable, less allowance for doubtful accounts
of $54,093 and $48,623 for 2009 and 2008, respectively |
252,005 | 243,346 | ||||||
Prepaids and other |
175,589 | 184,364 | ||||||
Total current assets |
440,960 | 478,981 | ||||||
Property and equipment, net of accumulated depreciation |
911,174 | 825,144 | ||||||
Cost in excess of net assets acquired |
1,154,054 | 1,139,242 | ||||||
Other assets |
65,936 | 62,623 | ||||||
Total assets |
$ | 2,572,124 | $ | 2,505,990 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 35,220 | $ | 34,747 | ||||
Salaries and benefits payable |
88,308 | 83,866 | ||||||
Other accrued liabilities |
59,898 | 80,577 | ||||||
Current portion of long-term debt |
4,982 | 34,414 | ||||||
Total current liabilities |
188,408 | 233,604 | ||||||
Long-term debt, less current portion |
1,274,017 | 1,280,006 | ||||||
Deferred tax liability |
79,057 | 69,471 | ||||||
Other liabilities |
29,578 | 28,067 | ||||||
Total liabilities |
1,571,060 | 1,611,148 | ||||||
Redeemable noncontrolling interest |
4,583 | 4,957 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value, 125,000 shares authorized;
56,262 and 55,934 issued and outstanding for 2009
and 2008, respectively |
563 | 559 | ||||||
Additional paid-in capital |
622,124 | 608,341 | ||||||
Accumulated other comprehensive loss |
(828 | ) | (3,695 | ) | ||||
Retained earnings |
374,622 | 284,680 | ||||||
Total stockholders equity |
996,481 | 889,885 | ||||||
Total liabilities and stockholders equity |
$ | 2,572,124 | $ | 2,505,990 | ||||
See accompanying notes.
1
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except for per share amounts)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except for per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue |
$ | 455,310 | $ | 431,713 | $ | 1,348,534 | $ | 1,273,408 | ||||||||
Salaries, wages and employee benefits (including share-based
compensation of $4,249, $4,935,
$13,525 and
$15,013 for the
respective three and nine month periods in 2009 and 2008) |
254,333 | 238,479 | 751,878 | 705,778 | ||||||||||||
Professional fees |
42,258 | 41,117 | 125,017 | 121,964 | ||||||||||||
Supplies |
23,358 | 23,784 | 70,063 | 70,228 | ||||||||||||
Rentals and leases |
5,073 | 5,078 | 15,273 | 15,846 | ||||||||||||
Other operating expenses |
44,881 | 39,737 | 127,439 | 117,505 | ||||||||||||
Provision for doubtful accounts |
9,798 | 10,129 | 26,542 | 25,830 | ||||||||||||
Depreciation and amortization |
11,498 | 9,792 | 33,084 | 28,687 | ||||||||||||
Interest expense |
18,607 | 18,648 | 53,432 | 57,688 | ||||||||||||
409,806 | 386,764 | 1,202,728 | 1,143,526 | |||||||||||||
Income from continuing operations before income taxes |
45,504 | 44,949 | 145,806 | 129,882 | ||||||||||||
Provision for income taxes |
17,431 | 16,958 | 55,714 | 49,188 | ||||||||||||
Income from continuing operations |
28,073 | 27,991 | 90,092 | 80,694 | ||||||||||||
Income (loss) from discontinued operations, net of income tax
(benefit from) provision for of $(57), $566, $85 and $1,847 for the
respective three and nine month periods of 2009 and 2008 |
72 | (1,224 | ) | 188 | 880 | |||||||||||
Net income |
28,145 | 26,767 | 90,280 | 81,574 | ||||||||||||
Less: Net income attributable to noncontrolling interest |
7 | (390 | ) | (338 | ) | (642 | ) | |||||||||
Net income attributable to PSI stockholders |
$ | 28,152 | $ | 26,377 | $ | 89,942 | $ | 80,932 | ||||||||
Basic earnings per share: |
||||||||||||||||
Income from continuing operations attributable to PSI stockholders |
$ | 0.51 | $ | 0.50 | $ | 1.62 | $ | 1.45 | ||||||||
Income (loss) from discontinued operations, net of taxes |
| (0.02 | ) | | 0.01 | |||||||||||
Net income attributable to PSI stockholders |
$ | 0.51 | $ | 0.48 | $ | 1.62 | $ | 1.46 | ||||||||
Diluted earnings per share: |
||||||||||||||||
Income from continuing operations attributable to PSI stockholders |
$ | 0.50 | $ | 0.49 | $ | 1.60 | $ | 1.42 | ||||||||
Income (loss) from discontinued operations, net of taxes |
| (0.02 | ) | | 0.02 | |||||||||||
Net income attributable to PSI stockholders |
$ | 0.50 | $ | 0.47 | $ | 1.60 | $ | 1.44 | ||||||||
Shares used in computing per share amounts: |
||||||||||||||||
Basic |
55,579 | 55,529 | 55,545 | 55,318 | ||||||||||||
Diluted |
56,340 | 56,604 | 56,077 | 56,213 | ||||||||||||
Amounts attributable to PSI stockholders: |
||||||||||||||||
Income from continuing operations, net of taxes |
$ | 28,080 | $ | 27,601 | $ | 89,754 | $ | 80,052 | ||||||||
Income (loss) from discontinued operations, net of taxes |
72 | (1,224 | ) | 188 | 880 | |||||||||||
Net income |
$ | 28,152 | $ | 26,377 | $ | 89,942 | $ | 80,932 | ||||||||
See accompanying notes.
2
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited, in thousands)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited, in thousands)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-In | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
Balance at December 31, 2008 |
55,934 | $ | 559 | $ | 608,341 | $ | (3,695 | ) | $ | 284,680 | $ | 889,885 | ||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income attributable to PSI stockholders |
| | | | 89,942 | 89,942 | ||||||||||||||||||
Change in fair value of interest rate
swap, net of tax expense of $1,920 |
| | | 2,867 | | 2,867 | ||||||||||||||||||
Total comprehensive income |
$ | 92,809 | ||||||||||||||||||||||
Share-based compensation |
| | 13,525 | | | 13,525 | ||||||||||||||||||
Repurchase of common stock upon restricted
stock vesting |
(37 | ) | | (992 | ) | | | (992 | ) | |||||||||||||||
Exercise of stock options and
grants of restricted stock, net
of issuance costs |
365 | 4 | 1,042 | | | 1,046 | ||||||||||||||||||
Income tax effect of stock option
exercises |
| | 208 | | | 208 | ||||||||||||||||||
Balance at September 30, 2009 |
56,262 | $ | 563 | $ | 622,124 | $ | (828 | ) | $ | 374,622 | $ | 996,481 | ||||||||||||
See accompanying notes.
3
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Operating activities: |
||||||||
Net income |
$ | 90,280 | $ | 81,574 | ||||
Adjustments to reconcile net income to net cash provided by
continuing operating activities: |
||||||||
Depreciation and amortization |
33,084 | 28,687 | ||||||
Amortization of loan costs and bond discount |
3,574 | 1,660 | ||||||
Share-based compensation |
13,525 | 15,013 | ||||||
Change in income tax assets and liabilities |
15,624 | (1,611 | ) | |||||
Income from discontinued operations, net of taxes |
(188 | ) | (880 | ) | ||||
Changes in operating assets and liabilities,
net of effect of acquisitions: |
||||||||
Accounts receivable |
(4,570 | ) | (30,400 | ) | ||||
Prepaids and other current assets |
808 | 2,907 | ||||||
Accounts payable |
(1,716 | ) | 5,244 | |||||
Salaries and benefits payable |
3,383 | 4,083 | ||||||
Accrued liabilities and other liabilities |
1,057 | (21,220 | ) | |||||
Net cash provided by continuing operating activities |
154,861 | 85,057 | ||||||
Net cash provided by discontinued operating activities |
127 | 2,865 | ||||||
Net cash provided by operating activities |
154,988 | 87,922 | ||||||
Investing activities: |
||||||||
Cash paid for acquisitions, net of cash acquired |
(32,708 | ) | (118,468 | ) | ||||
Cash paid for real estate acquisition |
(18,996 | ) | | |||||
Capital purchases of property and equipment |
(95,611 | ) | (80,558 | ) | ||||
Other assets |
387 | 280 | ||||||
Net cash used in continuing investing activities |
(146,928 | ) | (198,746 | ) | ||||
Net cash used in discontinued investing activities |
| (40,741 | ) | |||||
Net cash used in investing activities |
(146,928 | ) | (239,487 | ) | ||||
Financing activities: |
||||||||
Net (decrease) increase in revolving credit facility |
(138,374 | ) | 149,333 | |||||
Borrowings on long-term debt |
106,500 | | ||||||
Principal payments on long-term debt |
(3,823 | ) | (3,963 | ) | ||||
Payment of loan and issuance costs |
(9,826 | ) | (39 | ) | ||||
Distributions to noncontrolling interests |
(723 | ) | | |||||
Excess tax benefits from share-based payment arrangements |
208 | 1,902 | ||||||
Repurchase of common stock upon restricted stock vesting |
(992 | ) | (271 | ) | ||||
Proceeds from exercises of common stock options |
1,065 | 9,593 | ||||||
Net cash (used in) provided by financing activities |
(45,965 | ) | 156,555 | |||||
Net (decrease) increase in cash |
(37,905 | ) | 4,990 | |||||
Cash and cash equivalents at beginning of the period |
51,271 | 39,970 | ||||||
Cash and cash equivalents at end of the period |
$ | 13,366 | $ | 44,960 | ||||
Effect of Acquisitions: |
||||||||
Assets acquired, net of cash acquired |
$ | 38,936 | $ | 123,231 | ||||
Liabilities assumed |
(6,228 | ) | (4,763 | ) | ||||
Cash paid for acquisitions, net of cash acquired |
$ | 32,708 | $ | 118,468 | ||||
See accompanying notes.
4
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
1. Recent Developments
In January 2009, we opened Rolling Hills Hospital, an 80-bed inpatient facility in Franklin,
Tennessee.
In May 2009, we received $106.5 million upon the issuance of $120 million of our
73/4% Senior Subordinated Notes due 2015 (the 73/4%
Notes) and used the proceeds to repay a portion of the outstanding balance of our revolving credit
facility. During February 2009, our revolving credit facility was amended to extend the maturity of
$200 million capacity to December 31, 2011. During September 2009, the maturity of the remaining
$100 million capacity under our revolving credit facility was extended to mature on December 31,
2011. At September 30, 2009, we had approximately $91.0 million in borrowings outstanding under
our revolving credit facility.
On July 31, 2009, we signed a definitive agreement to sell our employee assistance program (EAP)
business for approximately $70 million in cash. The transaction
was completed in the fourth
quarter of 2009.
On September 1, 2009, we completed the acquisition of a 131-bed inpatient behavioral health care
facility located in Fargo, North Dakota. On September 30, 2009, we completed the acquisition of a
90-bed inpatient behavioral health care facility located in Panama City, Florida.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for audited financial
statements. The condensed consolidated balance sheet at December 31, 2008 has been derived from the
audited financial statements as of that date, but does not include all of the information and
footnotes required by GAAP for complete financial statements. Certain reclassifications have been
made to the prior year to conform to current year presentation. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for fair presentation of
our financial position have been included. 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. The majority of our expenses are cost of revenue items. Costs that could be
classified as general and administrative expenses at our corporate office, excluding share-based
compensation expense, were approximately 2.5% of net revenue for the nine months ended September
30, 2009. Operating results for the three and nine months ended September 30, 2009 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2009.
We have evaluated subsequent events through November 2, 2009, the date on which this Quarterly
Report on Form 10-Q was filed with the Securities and Exchange Commission. For further information,
refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K
for the year ended December 31, 2008.
3. Earnings Per Share
GAAP requires dual presentation of basic and diluted earnings per share by entities with complex
capital structures. Basic earnings per share includes no dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share also includes the potential dilution of securities that
could share in our earnings. We have calculated earnings per share accordingly for all periods
presented.
The following table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share amounts):
5
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Numerator: |
||||||||||||||||
Basic and diluted earnings per share: |
||||||||||||||||
Income from continuing operations attributable to PSI stockholders |
$ | 28,080 | $ | 27,601 | $ | 89,754 | $ | 80,052 | ||||||||
Income (loss) from discontinued operations, net of taxes |
72 | (1,224 | ) | 188 | 880 | |||||||||||
Net income attributable to PSI stockholders |
$ | 28,152 | $ | 26,377 | $ | 89,942 | $ | 80,932 | ||||||||
Denominator: |
||||||||||||||||
Weighted average shares outstanding for basic earnings per share |
55,579 | 55,529 | 55,545 | 55,318 | ||||||||||||
Effects of dilutive stock options and restriced stock outstanding |
761 | 1,075 | 532 | 895 | ||||||||||||
Shares used in computing diluted earnings per common share |
56,340 | 56,604 | 56,077 | 56,213 | ||||||||||||
Basic earnings per share: |
||||||||||||||||
Income from continuing operations attributable to PSI stockholders |
$ | 0.51 | $ | 0.50 | $ | 1.62 | $ | 1.45 | ||||||||
Income (loss) from discontinued operations, net of taxes |
| (0.02 | ) | | 0.01 | |||||||||||
Net income attributable to PSI stockholders |
$ | 0.51 | $ | 0.48 | $ | 1.62 | $ | 1.46 | ||||||||
Diluted earnings per share: |
||||||||||||||||
Income from continuing operations attributable to PSI stockholders |
$ | 0.50 | $ | 0.49 | $ | 1.60 | $ | 1.42 | ||||||||
Income (loss) from discontinued operations, net of taxes |
| (0.02 | ) | | 0.02 | |||||||||||
Net income attributable to PSI stockholders |
$ | 0.50 | $ | 0.47 | $ | 1.60 | $ | 1.44 | ||||||||
4. Share-Based Compensation
We recognized approximately $4.2 million and $4.9 million in share-based compensation expense and
approximately $1.6 million and $1.9 million of related income tax benefit for the three months
ended September 30, 2009 and 2008, respectively. We recognized approximately $13.5 million and
$15.0 million in share-based compensation expense and approximately $5.2 million and $5.7 million
of related income tax benefit for the nine months ended September 30, 2009 and 2008, respectively.
The fair value of our stock options was estimated using the Black-Scholes option pricing model. The
impact of share-based compensation expense, net of tax, on our earnings per share was approximately
$0.05 per share for each of the three months ended September 30, 2009 and 2008. The impact of
share-based compensation expense, net of tax, on our earnings per share was approximately $0.15 and
$0.17 per share for the nine months ended September 30, 2009 and 2008, respectively. We classified
approximately $0.2 million and $1.9 million in income tax benefits in excess of share-based
compensation expense on stock options exercised and restricted stock vested in 2009 and 2008 as
cash flows from financing activities in our Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 2009 and 2008, respectively.
Based on our stock option and restricted stock grants outstanding at September 30, 2009, we
estimate remaining unrecognized share-based compensation expense to be approximately $35.7 million
with a weighted-average remaining vesting period of 2.2 years.
The total intrinsic value, which represents the difference between the underlying stocks market
price and the options exercise price, of options exercised and restricted stock vested during the
nine months ended September 30, 2009 and 2008 was approximately $4.8 million and $10.9 million,
respectively.
We granted 344,175 stock options to employees during the nine months ended September 30, 2009.
These options vest over four years in annual increments of 25% on each anniversary of the grant
date and had a weighted-average grant-date fair value of $5.71.
We granted 327,700 shares of restricted stock to employees and non-employee members of our board of
directors during the nine months ended September 30, 2009. These shares of restricted stock vest
over four years in annual increments of 25% on each anniversary of the grant date and had a
weighted-average grant-date fair value of $17.14 per share.
5. Acquisitions
Acquiring free-standing psychiatric facilities is a key part of our business strategy.
6
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
On September 1, 2009, we completed the acquisition of a 131-bed inpatient behavioral health care
facility located in Fargo, North Dakota. On September 30, 2009, we completed the acquisition of a
90-bed inpatient behavioral health care facility located in Panama City, Florida.
In January 2009, we opened Rolling Hills Hospital, an 80-bed inpatient facility in Franklin,
Tennessee.
Effective March 1, 2008, we completed the acquisition of five inpatient behavioral health care
facilities from United Medical Corporation (UMC) for $120 million. These facilities, located in
Florida and Kentucky, include approximately 400 beds. During the second quarter of 2008, we opened
Lincoln Prairie Behavioral Health Center, a 120-bed inpatient facility in Springfield, Illinois.
The balance of cost in excess of net assets acquired (goodwill) was approximately $1.15 billion and
$1.14 billion as of September 30, 2009 and December 31, 2008, respectively.
6. Long-term debt
Long-term debt consists of the following (in thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Senior credit facility: |
||||||||
Revolving line of credit facility, expiring on December 31, 2011
and bearing interest of 5.6% and 3.4% at September 30, 2009
and December 31, 2008, respectively |
$ | 90,959 | $ | 229,333 | ||||
Senior secured term loan facility, expiring on July 1, 2012
and bearing interest of 2.0% and 3.1% at September 30, 2009
and December 31, 2008, respectively |
565,812 | 568,625 | ||||||
7 3/4% Notes |
582,442 | 475,841 | ||||||
Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.7% to 7.6% |
32,959 | 33,273 | ||||||
Other |
6,827 | 7,348 | ||||||
1,278,999 | 1,314,420 | |||||||
Less current portion |
4,982 | 34,414 | ||||||
Long-term debt |
$ | 1,274,017 | $ | 1,280,006 | ||||
Senior Credit Facility
Our Senior Credit Facility (the Credit Agreement) includes a $300 million revolving line of
credit facility with Bank of America, N.A. (Bank of America) and a $575 million senior secured
term loan facility with Citicorp North America, Inc. During February 2009, our revolving credit
facility was amended to extend the maturity of $200 million capacity to December 31, 2011. During
September 2009, the maturity of the remaining $100 million capacity under our revolving credit
facility was extended to December 31, 2011. Quarterly principal payments of $0.9 million
are due on our senior secured term loan facility and the balance of our senior secured term loan
facility is payable in full on July 1, 2012.
Our Credit Agreement is secured by substantially all of the personal property owned by us or our
subsidiaries, substantially all real property owned by us or our subsidiaries that has a value in
excess of $5.0 million and the stock of substantially all of our operating subsidiaries. In
addition, the Credit Agreement is fully and unconditionally guaranteed by substantially all of our
operating subsidiaries. The revolving credit facility and senior secured term loan facility accrue
interest at our choice of the Base Rate or the Eurodollar Rate (as defined in the Credit
Agreement). The Base Rate and Eurodollar Rate fluctuate based upon market rates and
certain leverage ratios, as defined in the Credit Agreement. At September 30, 2009, we had
approximately $91.0 million in borrowings outstanding and $204.3 million available for future
borrowings under the revolving credit facility. Until December 31, 2011, we may borrow, repay and
re-borrow an amount not to exceed $300 million on our revolving credit facility. All repayments
made under the senior secured term loan facility are a permanent and may not be re-borrowed in the
future. We pay a quarterly commitment fee on the unused portion of our revolving credit facility
that fluctuates, based upon certain leverage ratios, between 0.75% and 1.0% per annum. Commitment
fees were approximately $0.9 million for the nine months ended September 30, 2009.
Our Credit Agreement contains customary covenants that include: (1) a limitation on capital
expenditures and investments, sales of
7
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
assets, mergers, changes of ownership, new principal lines
of business, indebtedness, transactions with affiliates, dividends and redemptions; (2) various
financial covenants; and (3) cross-default covenants triggered by a default of any other
indebtedness of at least $5.0 million. As of September 30, 2009, we were in compliance with all
debt covenant requirements. If we violate one or more of these covenants, amounts outstanding under
the revolving credit facility, senior secured term loan facility and the majority of our other debt
arrangements could become immediately payable and additional borrowings could be restricted.
73/4% Notes
The 73/4% Notes mature on July 15, 2015 and are fully and unconditionally
guaranteed on a senior subordinated basis by substantially all of our existing subsidiaries. In May
2009, we issued $120 million of the 73/4% Notes at a discount of 11.25%. This
discount is being amortized over the remaining life of the 73/4% Notes using
the effective interest rate method, which results in an effective interest rate of 10.2% per annum
on the $120 million issuance. We received a premium of 2.75% plus accrued interest from the sale of
$250 million of 73/4% Notes in 2007. This premium is being amortized over the
remaining life of the 73/4% Notes using the effective interest method, which
results in an effective interest rate of 7.3% per annum on the $250 million issuance. We also
issued $220 million of the 73/4% Notes in 2005. Interest on the
73/4% Notes accrues at the rate of 73/4% per annum and
is payable semi-annually in arrears on January 15 and July 15.
Mortgage Loans
At September 30, 2009, we had $33.0 million outstanding under mortgage loan agreements insured by
the U.S. Department of Housing and Urban Development (HUD). The mortgage loans insured by HUD are
secured by real estate located at Holly Hill Hospital in Raleigh, North Carolina, West Oaks
Hospital in Houston, Texas, Riveredge Hospital near Chicago, Illinois, Canyon Ridge Hospital in
Chino, California and MeadowWood Behavioral Health in New Castle, Delaware. Interest accrues on the
Holly Hill, West Oaks, Riveredge, Canyon Ridge and MeadowWood HUD loans at 6.0%, 5.9%, 5.7%, 7.6%
and 7.0%, respectively, and principal and interest are payable in 420 monthly installments through
December 2037, September 2038, December 2038, January 2036 and October 2036, respectively. The
carrying amount of assets held as collateral for the HUD loans approximated $49.2 million at
September 30, 2009.
Interest Rate Swap Agreement
We periodically enter into interest rate swap agreements to manage our exposure to fluctuations in
interest rates. During 2007, we entered into an agreement with Merrill Lynch Capital Services, Inc.
to exchange the interest payments associated with a face value amount of $225 million of
LIBOR-indexed variable rate debt related to our senior secured term loan facility for a fixed
interest rate of 3.8%. The agreement matures on November 30, 2009. The interest payments
associated with this agreement are settled on a net basis and are included in interest expense. The
fair value of our interest rate swap at September 30, 2009 is recorded in other accrued liabilities
on our condensed consolidated balance sheet at $1.4 million, which represents an estimate of the
fixed interest payments in excess of the LIBOR-indexed variable payments to be made until November
30, 2009. Changes in the net fair value are included on our statement of stockholders equity in
other comprehensive income, net of the income tax effect.
7. Income Taxes
The provision for income taxes from continuing operations for the nine months ended September 30,
2009 and 2008 reflects an effective tax rate of approximately 38.3% and 38.1%, respectively.
8. Discontinued Operations
GAAP requires that all components of an entity that have been disposed of (by sale, by abandonment
or in a distribution to owners) or are held for sale and whose cash flows can be clearly
distinguished from the rest of the entity be presented as discontinued operations. During the third
quarter of 2009, we entered into a definitive agreement to sell our EAP business, elected to make
The Oaks Treatment Center available for sale, and terminated one contract with a South Carolina
juvenile justice agency. During the second quarter of 2009, we elected to make Nashville
Rehabilitation Hospital available for sale. This facilitys behavioral health services were
transferred to Rolling Hills Hospital in the first quarter of 2009. During 2008, we elected to
sell one facility. Additionally, two contracts with a juvenile justice agency in Puerto Rico to
manage inpatient facilities were terminated in 2008. Prepaids and other assets include assets held
for sale of $89.2 million and $88.6 million as of September 30, 2009 and December 31, 2008,
respectively.
The components of income (loss) from discontinued operations, net of taxes, are as follows (in
thousands):
8
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue |
$ | 15,294 | $ | 18,563 | $ | 47,996 | $ | 59,285 | ||||||||
Operating expenses |
15,279 | 17,739 | 47,723 | 54,697 | ||||||||||||
Loss on disposal and assets held for sale |
| 1,482 | | 1,861 | ||||||||||||
15,279 | 19,221 | 47,723 | 56,558 | |||||||||||||
Income (loss) from discontinued operations before income taxes |
15 | (658 | ) | 273 | 2,727 | |||||||||||
(Benefit from) provision for income taxes |
(57 | ) | 566 | 85 | 1,847 | |||||||||||
Income (loss) from discontinued operations, net of income taxes |
$ | 72 | $ | (1,224 | ) | $ | 188 | $ | 880 | |||||||
We have
elected to allocate interest expense to discontinued operations based
on the ratio of net assets to be sold or discontinued less debt that
is required to be paid as a result of the disposal transaction to the
sum of our total net assets plus consolidated debt. Interest
allocated to discontinued operations was $0.7 million,
$0.7 million, $2.0 million and $1.8 million for the
three and nine months ended September 30, 2009 and 2008,
respectively.
9. Disclosures About Reportable Segments
In accordance with GAAP, our owned and leased behavioral health care facilities segment is our only
reportable segment. Our chief operating decision maker regularly reviews the operating results of
our inpatient facilities on a combined basis, which represent more than 90% of our consolidated
revenue. As of September 30, 2009, the owned and leased facilities segment provides mental health
and behavioral health services to patients in its 88 owned and 6 leased inpatient facilities in 32
states, Puerto Rico and the U.S. Virgin Islands. The column entitled Other in the schedules below
includes management contracts to provide inpatient psychiatric management and development services
to inpatient behavioral health units in hospitals and clinics and a managed care plan in Puerto
Rico. The operations included in the Other column do not qualify as reportable segments.
Activities classified as Corporate in the following schedules relate primarily to unallocated
home office expenses and discontinued operations.
Adjusted EBITDA is a non-GAAP financial measure and is defined as net income (loss) before
discontinued operations, interest expense (net of interest income), income taxes, depreciation,
amortization, stock compensation and other items included in the caption labeled Other expenses.
These other expenses may occur in future periods, but the amounts recognized can vary significantly
from period to period and do not directly relate to ongoing operations of our health care
facilities. Our management relies on adjusted EBITDA as the primary measure to review and assess
the operating performance of our inpatient facilities and their management teams. We believe it is
useful to investors to provide disclosures of our operating results on the same basis as that used
by management. Management and investors also review adjusted EBITDA to evaluate our overall
performance and to compare our current operating results with corresponding periods and with other
companies in the health care industry. You should not consider adjusted EBITDA in isolation or as a
substitute for net income, operating cash flows or other cash flow statement data determined in
accordance with GAAP. Because adjusted EBITDA is not a measure of financial performance under GAAP
and is susceptible to varying calculations, it may not be comparable to similarly titled measures
of other companies. The following is a financial summary by reportable segment for the periods
indicated (in thousands):
9
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
Three Months Ended September 30, 2009
Owned and | ||||||||||||||||
Leased | ||||||||||||||||
Facilities | Other | Corporate | Consolidated | |||||||||||||
Revenue |
$ | 422,544 | $ | 32,766 | $ | | $ | 455,310 | ||||||||
Adjusted EBITDA |
$ | 86,724 | $ | 2,856 | $ | (9,722 | ) | $ | 79,858 | |||||||
Interest expense |
7,138 | 79 | 11,390 | 18,607 | ||||||||||||
Provision for income taxes |
| | 17,431 | 17,431 | ||||||||||||
Depreciation and amortization |
10,077 | 1,014 | 407 | 11,498 | ||||||||||||
Inter-segment expenses |
12,974 | 1,182 | (14,156 | ) | | |||||||||||
Other expenses: |
||||||||||||||||
Share-based compensation |
| | 4,249 | 4,249 | ||||||||||||
Income (loss) from continuing operations |
56,535 | 581 | (29,043 | ) | 28,073 | |||||||||||
Less: Income attributable to noncontrolling interest |
7 | | | 7 | ||||||||||||
Income (loss) from continuing operations attributable to
PSI stockholders |
$ | 56,542 | $ | 581 | $ | (29,043 | ) | $ | 28,080 | |||||||
Total assets |
$ | 2,329,700 | $ | 60,184 | $ | 182,240 | $ | 2,572,124 | ||||||||
Three Months Ended September 30, 2008
Owned and | ||||||||||||||||
Leased | ||||||||||||||||
Facilities | Other | Corporate | Consolidated | |||||||||||||
Revenue |
$ | 401,321 | $ | 30,392 | $ | | $ | 431,713 | ||||||||
Adjusted EBITDA |
$ | 84,184 | $ | 5,550 | $ | (11,410 | ) | $ | 78,324 | |||||||
Interest expense |
7,078 | (453 | ) | 12,023 | 18,648 | |||||||||||
Provision for income taxes |
| (844 | ) | 17,802 | 16,958 | |||||||||||
Depreciation and amortization |
8,241 | 1,159 | 392 | 9,792 | ||||||||||||
Inter-segment expenses |
15,850 | 1,445 | (17,295 | ) | | |||||||||||
Other expenses: |
||||||||||||||||
Share-based compensation |
| | 4,935 | 4,935 | ||||||||||||
Income (loss) from continuing operations |
53,015 | 4,243 | (29,267 | ) | 27,991 | |||||||||||
Less: Income attributable to noncontrolling interest |
(390 | ) | | | (390 | ) | ||||||||||
Income (loss) from continuing operations attributable to
PSI stockholders |
$ | 52,625 | $ | 4,243 | $ | (29,267 | ) | $ | 27,601 | |||||||
Total assets |
$ | 2,203,581 | $ | 70,929 | $ | 179,392 | $ | 2,453,902 | ||||||||
10
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
Nine Months Ended September 30, 2009
Owned and | ||||||||||||||||
Leased | ||||||||||||||||
Facilities | Other | Corporate | Consolidated | |||||||||||||
Revenue |
$ | 1,254,444 | $ | 94,090 | $ | | $ | 1,348,534 | ||||||||
Adjusted EBITDA |
$ | 267,702 | $ | 11,897 | $ | (33,752 | ) | $ | 245,847 | |||||||
Interest expense |
21,486 | (866 | ) | 32,812 | 53,432 | |||||||||||
Provision for income taxes |
| (1,229 | ) | 56,943 | 55,714 | |||||||||||
Depreciation and amortization |
28,624 | 3,260 | 1,200 | 33,084 | ||||||||||||
Inter-segment expenses |
44,793 | 3,994 | (48,787 | ) | | |||||||||||
Other expenses: |
||||||||||||||||
Share-based compensation |
| | 13,525 | 13,525 | ||||||||||||
Income (loss) from continuing operations |
172,799 | 6,738 | (89,445 | ) | 90,092 | |||||||||||
Less: Income attributable to noncontrolling interest |
(338 | ) | | | (338 | ) | ||||||||||
Income (loss) from continuing operations attributable to
PSI stockholders |
$ | 172,461 | $ | 6,738 | $ | (89,445 | ) | $ | 89,754 | |||||||
Total assets |
$ | 2,329,700 | $ | 60,184 | $ | 182,240 | $ | 2,572,124 | ||||||||
Nine Months Ended September 30, 2008
Owned and | ||||||||||||||||
Leased | ||||||||||||||||
Facilities | Other | Corporate | Consolidated | |||||||||||||
Revenue |
$ | 1,180,209 | $ | 93,199 | $ | | $ | 1,273,408 | ||||||||
Adjusted EBITDA |
$ | 250,401 | $ | 17,154 | $ | (36,285 | ) | $ | 231,270 | |||||||
Interest expense |
21,067 | (948 | ) | 37,569 | 57,688 | |||||||||||
Provision for income taxes |
| (2,106 | ) | 51,294 | 49,188 | |||||||||||
Depreciation and amortization |
24,119 | 3,435 | 1,133 | 28,687 | ||||||||||||
Inter-segment expenses |
47,407 | 4,409 | (51,816 | ) | | |||||||||||
Other expenses: |
||||||||||||||||
Share-based compensation |
| | 15,013 | 15,013 | ||||||||||||
Income (loss) from continuing operations |
157,808 | 12,364 | (89,478 | ) | 80,694 | |||||||||||
Less: Income attributable to noncontrolling interest |
(642 | ) | | | (642 | ) | ||||||||||
Income (loss) from continuing operations attributable to
PSI stockholders |
$ | 157,166 | $ | 12,364 | $ | (89,478 | ) | $ | 80,052 | |||||||
Total assets |
$ | 2,203,581 | $ | 70,929 | $ | 179,392 | $ | 2,453,902 | ||||||||
10. Financial Information for the Company and Its Subsidiaries
We conduct substantially all of our business through our subsidiaries. Presented below is
consolidated financial information for Psychiatric Solutions, Inc. and its subsidiaries as of
September 30, 2009 and December 31, 2008, and for the three and nine months ended September 30,
2009 and 2008. The information segregates the parent company (Psychiatric Solutions, Inc.), the
combined wholly-owned subsidiary guarantors, the combined non-guarantors and eliminations. All of
the subsidiary guarantees are both full and unconditional and joint and several.
11
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
Condensed Consolidating Balance Sheet
As of September 30, 2009
(in thousands)
As of September 30, 2009
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 3,801 | $ | 9,565 | $ | | $ | 13,366 | ||||||||||
Accounts receivable, net |
| 243,833 | 8,172 | | 252,005 | |||||||||||||||
Prepaids and other |
| 160,424 | 19,251 | (4,086 | ) | 175,589 | ||||||||||||||
Total current assets |
| 408,058 | 36,988 | (4,086 | ) | 440,960 | ||||||||||||||
Property and equipment, net of accumulated depreciation |
| 858,710 | 61,755 | (9,291 | ) | 911,174 | ||||||||||||||
Cost in excess of net assets acquired |
| 1,154,054 | | | 1,154,054 | |||||||||||||||
Investment in subsidiaries |
1,607,232 | (485,154 | ) | (21,330 | ) | (1,100,748 | ) | | ||||||||||||
Other assets |
19,002 | 39,626 | 26,644 | (19,336 | ) | 65,936 | ||||||||||||||
Total assets |
$ | 1,626,234 | $ | 1,975,294 | $ | 104,057 | $ | (1,133,461 | ) | $ | 2,572,124 | |||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 34,280 | $ | 1,008 | $ | (68 | ) | $ | 35,220 | |||||||||
Salaries and benefits payable |
| 86,771 | 1,537 | | 88,308 | |||||||||||||||
Other accrued liabilities |
18,392 | 40,903 | 6,759 | (6,156 | ) | 59,898 | ||||||||||||||
Current portion of long-term debt |
4,539 | | 443 | | 4,982 | |||||||||||||||
Total current liabilities |
22,931 | 161,954 | 9,747 | (6,224 | ) | 188,408 | ||||||||||||||
Long-term debt, less current portion |
1,274,017 | | | | 1,274,017 | |||||||||||||||
Deferred tax liability |
| 79,057 | | | 79,057 | |||||||||||||||
Other liabilities |
2,296 | (38,362 | ) | 67,210 | (1,566 | ) | 29,578 | |||||||||||||
Total liabilities |
1,299,244 | 202,649 | 76,957 | (7,790 | ) | 1,571,060 | ||||||||||||||
Redeemable noncontrolling interest |
| | | 4,583 | 4,583 | |||||||||||||||
Total stockholders equity |
326,990 | 1,772,645 | 27,100 | (1,130,254 | ) | 996,481 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,626,234 | $ | 1,975,294 | $ | 104,057 | $ | (1,133,461 | ) | $ | 2,572,124 | |||||||||
Condensed Consolidating Balance Sheet
As of December 31, 2008
(in thousands)
As of December 31, 2008
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 39,881 | $ | 11,390 | $ | | $ | 51,271 | ||||||||||
Accounts receivable, net |
| 235,623 | 7,792 | (69 | ) | 243,346 | ||||||||||||||
Prepaids and other |
| 169,204 | 15,595 | (435 | ) | 184,364 | ||||||||||||||
Total current assets |
| 444,708 | 34,777 | (504 | ) | 478,981 | ||||||||||||||
Property and equipment, net of accumulated depreciation |
| 777,021 | 57,647 | (9,524 | ) | 825,144 | ||||||||||||||
Cost in excess of net assets acquired |
| 1,139,242 | | | 1,139,242 | |||||||||||||||
Investment in subsidiaries |
1,665,813 | (545,345 | ) | (23,526 | ) | (1,096,942 | ) | | ||||||||||||
Other assets |
12,633 | (1,046 | ) | 27,971 | 23,065 | 62,623 | ||||||||||||||
Total assets |
$ | 1,678,446 | $ | 1,814,580 | $ | 96,869 | $ | (1,083,905 | ) | $ | 2,505,990 | |||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 33,951 | $ | 865 | $ | (69 | ) | $ | 34,747 | |||||||||
Salaries and benefits payable |
| 82,139 | 1,727 | | 83,866 | |||||||||||||||
Other accrued liabilities |
28,786 | 51,524 | 3,798 | (3,531 | ) | 80,577 | ||||||||||||||
Current portion of long-term debt |
33,991 | | 423 | | 34,414 | |||||||||||||||
Total current liabilities |
62,777 | 167,614 | 6,813 | (3,600 | ) | 233,604 | ||||||||||||||
Long-term debt, less current portion |
1,247,156 | | 32,850 | | 1,280,006 | |||||||||||||||
Deferred tax liability |
| 69,471 | | | 69,471 | |||||||||||||||
Other liabilities |
12,433 | (62,056 | ) | 31,688 | 46,002 | 28,067 | ||||||||||||||
Total liabilities |
1,322,366 | 175,029 | 71,351 | 42,402 | 1,611,148 | |||||||||||||||
Redeemable noncontrolling interest |
| | | 4,957 | 4,957 | |||||||||||||||
Total stockholders equity |
356,080 | 1,639,551 | 25,518 | (1,131,264 | ) | 889,885 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,678,446 | $ | 1,814,580 | $ | 96,869 | $ | (1,083,905 | ) | $ | 2,505,990 | |||||||||
12
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2009
(in thousands)
For the Three Months Ended September 30, 2009
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Revenue |
$ | | $ | 443,134 | $ | 17,009 | $ | (4,833 | ) | $ | 455,310 | |||||||||
Salaries, wages and employee benefits |
| 247,171 | 7,162 | | 254,333 | |||||||||||||||
Professional fees |
| 40,275 | 2,021 | (38 | ) | 42,258 | ||||||||||||||
Supplies |
| 22,783 | 575 | | 23,358 | |||||||||||||||
Rentals and leases |
| 6,031 | 125 | (1,083 | ) | 5,073 | ||||||||||||||
Other operating expenses |
| 43,927 | 3,948 | (2,994 | ) | 44,881 | ||||||||||||||
Provision for doubtful accounts |
| 9,477 | 321 | | 9,798 | |||||||||||||||
Depreciation and amortization |
| 11,009 | 566 | (77 | ) | 11,498 | ||||||||||||||
Interest expense |
18,157 | | 450 | | 18,607 | |||||||||||||||
18,157 | 380,673 | 15,168 | (4,192 | ) | 409,806 | |||||||||||||||
(Loss) income from continuing operations before income taxes |
(18,157 | ) | 62,461 | 1,841 | (641 | ) | 45,504 | |||||||||||||
(Benefit from) provision for income taxes |
(6,955 | ) | 23,927 | 705 | (246 | ) | 17,431 | |||||||||||||
(Loss) income from continuing operations |
(11,202 | ) | 38,534 | 1,136 | (395 | ) | 28,073 | |||||||||||||
Income from discontinued operations, net of tax benefit |
| 72 | | | 72 | |||||||||||||||
Net (loss) income |
(11,202 | ) | 38,606 | 1,136 | (395 | ) | 28,145 | |||||||||||||
Less: Net income attributable to noncontrolling interest |
| | | 7 | 7 | |||||||||||||||
Net (loss) income attributable to PSI stockholders |
$ | (11,202 | ) | $ | 38,606 | $ | 1,136 | $ | (388 | ) | $ | 28,152 | ||||||||
Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2008
(in thousands)
For the Three Months Ended September 30, 2008
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Revenue |
$ | | $ | 417,663 | $ | 16,987 | $ | (2,937 | ) | $ | 431,713 | |||||||||
Salaries, wages and employee benefits |
| 231,365 | 7,114 | | 238,479 | |||||||||||||||
Professional fees |
| 39,304 | 1,839 | (26 | ) | 41,117 | ||||||||||||||
Supplies |
| 23,156 | 628 | | 23,784 | |||||||||||||||
Rentals and leases |
| 6,022 | 100 | (1,044 | ) | 5,078 | ||||||||||||||
Other operating expenses |
| 38,166 | 2,686 | (1,115 | ) | 39,737 | ||||||||||||||
Provision for doubtful accounts |
| 9,773 | 356 | | 10,129 | |||||||||||||||
Depreciation and amortization |
| 9,358 | 511 | (77 | ) | 9,792 | ||||||||||||||
Interest expense |
18,760 | | (112 | ) | | 18,648 | ||||||||||||||
18,760 | 357,144 | 13,122 | (2,262 | ) | 386,764 | |||||||||||||||
(Loss) income from continuing operations before income taxes |
(18,760 | ) | 60,519 | 3,865 | (675 | ) | 44,949 | |||||||||||||
(Benefit from) provision for income taxes |
(7,078 | ) | 22,833 | 1,458 | (255 | ) | 16,958 | |||||||||||||
(Loss) income from continuing operations |
(11,682 | ) | 37,686 | 2,407 | (420 | ) | 27,991 | |||||||||||||
Loss from discontinued operations, net of tax benefit |
| (1,224 | ) | | | (1,224 | ) | |||||||||||||
Net (loss) income |
(11,682 | ) | 36,462 | 2,407 | (420 | ) | 26,767 | |||||||||||||
Less: Net income attributable to noncontrolling interest |
| | | (390 | ) | (390 | ) | |||||||||||||
Net (loss) income attributable to PSI stockholders |
$ | (11,682 | ) | $ | 36,462 | $ | 2,407 | $ | (810 | ) | $ | 26,377 | ||||||||
13
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2009
(in thousands)
For the Nine Months Ended September 30, 2009
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Revenue |
$ | | $ | 1,311,759 | $ | 45,839 | $ | (9,064 | ) | $ | 1,348,534 | |||||||||
Salaries, wages and employee benefits |
| 731,152 | 20,726 | | 751,878 | |||||||||||||||
Professional fees |
| 119,420 | 8,598 | (3,001 | ) | 125,017 | ||||||||||||||
Supplies |
| 68,280 | 1,783 | | 70,063 | |||||||||||||||
Rentals and leases |
| 17,982 | 491 | (3,200 | ) | 15,273 | ||||||||||||||
Other operating expenses |
| 124,257 | 7,994 | (4,812 | ) | 127,439 | ||||||||||||||
Provision for doubtful accounts |
| 25,804 | 738 | | 26,542 | |||||||||||||||
Depreciation and amortization |
| 31,657 | 1,659 | (232 | ) | 33,084 | ||||||||||||||
Interest expense |
52,143 | | 1,290 | (1 | ) | 53,432 | ||||||||||||||
52,143 | 1,118,552 | 43,279 | (11,246 | ) | 1,202,728 | |||||||||||||||
(Loss) income from continuing operations before income taxes |
(52,143 | ) | 193,207 | 2,560 | 2,182 | 145,806 | ||||||||||||||
(Benefit from) provision for income taxes |
(19,924 | ) | 73,826 | 978 | 834 | 55,714 | ||||||||||||||
(Loss) income from continuing operations |
(32,219 | ) | 119,381 | 1,582 | 1,348 | 90,092 | ||||||||||||||
Income from discontinued operations, net of tax benefit |
| 188 | | | 188 | |||||||||||||||
Net (loss) income |
(32,219 | ) | 119,569 | 1,582 | 1,348 | 90,280 | ||||||||||||||
Less: Net income attributable to noncontrolling interest |
| | | (338 | ) | (338 | ) | |||||||||||||
Net (loss) income attributable to PSI stockholders |
$ | (32,219 | ) | $ | 119,569 | $ | 1,582 | $ | 1,010 | $ | 89,942 | |||||||||
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2008
(in thousands)
For the Nine Months Ended September 30, 2008
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Revenue |
$ | | $ | 1,234,439 | $ | 46,240 | $ | (7,271 | ) | $ | 1,273,408 | |||||||||
Salaries, wages and employee benefits |
| 684,328 | 21,450 | | 705,778 | |||||||||||||||
Professional fees |
| 116,279 | 5,741 | (56 | ) | 121,964 | ||||||||||||||
Supplies |
| 68,393 | 1,835 | | 70,228 | |||||||||||||||
Rentals and leases |
| 18,733 | 298 | (3,185 | ) | 15,846 | ||||||||||||||
Other operating expenses |
| 113,387 | 6,932 | (2,814 | ) | 117,505 | ||||||||||||||
Provision for doubtful accounts |
| 25,033 | 797 | | 25,830 | |||||||||||||||
Depreciation and amortization |
| 27,172 | 1,745 | (230 | ) | 28,687 | ||||||||||||||
Interest expense |
56,771 | | 917 | | 57,688 | |||||||||||||||
56,771 | 1,053,325 | 39,715 | (6,285 | ) | 1,143,526 | |||||||||||||||
(Loss) income from continuing operations before income taxes |
(56,771 | ) | 181,114 | 6,525 | (986 | ) | 129,882 | |||||||||||||
(Benefit from) provision for income taxes |
(21,500 | ) | 68,590 | 2,471 | (373 | ) | 49,188 | |||||||||||||
(Loss) income from continuing operations |
(35,271 | ) | 112,524 | 4,054 | (613 | ) | 80,694 | |||||||||||||
Income from discontinued operations, net of tax (benefit) provision |
| 880 | | | 880 | |||||||||||||||
Net (loss) income |
(35,271 | ) | 113,404 | 4,054 | (613 | ) | 81,574 | |||||||||||||
Less: Net income attributable to noncontrolling interest |
| | | (642 | ) | (642 | ) | |||||||||||||
Net (loss) income attributable to PSI stockholders |
$ | (35,271 | ) | $ | 113,404 | $ | 4,054 | $ | (1,255 | ) | $ | 80,932 | ||||||||
14
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2009
(in thousands)
For the Nine Months Ended September 30, 2009
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net (loss) income |
$ | (32,219 | ) | $ | 119,569 | $ | 1,582 | $ | 1,348 | $ | 90,280 | |||||||||
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities: |
| |||||||||||||||||||
Depreciation and amortization |
| 31,657 | 1,659 | (232 | ) | 33,084 | ||||||||||||||
Amortization of loan costs and bond discount |
3,574 | | | | 3,574 | |||||||||||||||
Share-based compensation |
| 13,525 | | | 13,525 | |||||||||||||||
Change in income tax assets and liabilities |
| 15,624 | | | 15,624 | |||||||||||||||
Income from discontinued operations, net of taxes |
| (188 | ) | | | (188 | ) | |||||||||||||
Changes in operating assets and liabilities, net of
effect of acquisitions: |
||||||||||||||||||||
Accounts receivable |
| (4,923 | ) | 353 | | (4,570 | ) | |||||||||||||
Prepaids and other current assets |
| 354 | 454 | | 808 | |||||||||||||||
Accounts payable |
| (1,632 | ) | (84 | ) | | (1,716 | ) | ||||||||||||
Salaries and benefits payable |
| 3,718 | (335 | ) | | 3,383 | ||||||||||||||
Accrued liabilities and other liabilities |
| 4,242 | (3,185 | ) | | 1,057 | ||||||||||||||
Net cash (used in) provided by continuing operating activities |
(28,645 | ) | 181,946 | 444 | 1,116 | 154,861 | ||||||||||||||
Net cash provided by discontinued operating activities |
| 127 | | | 127 | |||||||||||||||
Net cash (used in) provided by operating activities |
(28,645 | ) | 182,073 | 444 | 1,116 | 154,988 | ||||||||||||||
Investing activities: |
||||||||||||||||||||
Cash paid for acquisitions, net of cash acquired |
(32,708 | ) | | | | (32,708 | ) | |||||||||||||
Cash paid for real estate acquisition |
| (18,996 | ) | | | (18,996 | ) | |||||||||||||
Capital purchases of property and equipment |
| (104,694 | ) | 9,083 | | (95,611 | ) | |||||||||||||
Other assets |
| (18,294 | ) | 18,681 | | 387 | ||||||||||||||
Net cash (used in) provided by investing activities |
(32,708 | ) | (141,984 | ) | 27,764 | | (146,928 | ) | ||||||||||||
Financing activities: |
||||||||||||||||||||
Net decrease in revolving credit facility |
(138,374 | ) | | | | (138,374 | ) | |||||||||||||
Borrowings on long-term debt |
106,500 | | | | 106,500 | |||||||||||||||
Principal payments on long-term debt |
(3,510 | ) | | (313 | ) | | (3,823 | ) | ||||||||||||
Payment of loan and issuance costs |
(9,826 | ) | | | | (9,826 | ) | |||||||||||||
Distributions to noncontrolling interests |
(723 | ) | | | | (723 | ) | |||||||||||||
Excess tax benefits from share-based payment arrangements |
208 | | | | 208 | |||||||||||||||
Repurchase of common stock upon restricted stock vesting |
(992 | ) | | | | (992 | ) | |||||||||||||
Net transfers to and from members |
107,005 | (76,169 | ) | (29,720 | ) | (1,116 | ) | | ||||||||||||
Proceeds from exercises of common stock options |
1,065 | | | | 1,065 | |||||||||||||||
Net cash provided by (used in) financing activities |
61,353 | (76,169 | ) | (30,033 | ) | (1,116 | ) | (45,965 | ) | |||||||||||
Net decrease in cash |
| (36,080 | ) | (1,825 | ) | | (37,905 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
| 39,881 | 11,390 | | 51,271 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | | $ | 3,801 | $ | 9,565 | $ | | $ | 13,366 | ||||||||||
15
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2008
(in thousands)
For the Nine Months Ended September 30, 2008
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net (loss) income |
$ | (35,271 | ) | $ | 113,404 | $ | 4,054 | $ | (613 | ) | $ | 81,574 | ||||||||
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
| 27,172 | 1,745 | (230 | ) | 28,687 | ||||||||||||||
Amortization of loan costs and bond discount |
1,626 | | 34 | | 1,660 | |||||||||||||||
Share-based compensation |
| 15,013 | | | 15,013 | |||||||||||||||
Change in income tax assets and liabilities |
| (1,611 | ) | | | (1,611 | ) | |||||||||||||
Income from discontinued operations, net of taxes |
| (880 | ) | | | (880 | ) | |||||||||||||
Changes in operating assets and liabilities, net of
effect of acquisitions: |
||||||||||||||||||||
Accounts receivable |
| (29,600 | ) | (800 | ) | | (30,400 | ) | ||||||||||||
Prepaids and other current assets |
| 19,318 | (16,411 | ) | | 2,907 | ||||||||||||||
Accounts payable |
| 5,424 | (180 | ) | | 5,244 | ||||||||||||||
Salaries and benefits payable |
| 4,245 | (162 | ) | | 4,083 | ||||||||||||||
Accrued liabilities and other liabilities |
2,589 | (23,035 | ) | (774 | ) | | (21,220 | ) | ||||||||||||
Net cash (used in) provided by continuing operating activities |
(31,056 | ) | 129,450 | (12,494 | ) | (843 | ) | 85,057 | ||||||||||||
Net cash provided by discontinued operating activities |
| 2,865 | | | 2,865 | |||||||||||||||
Net cash (used in) provided by operating activities |
(31,056 | ) | 132,315 | (12,494 | ) | (843 | ) | 87,922 | ||||||||||||
Investing activities: |
||||||||||||||||||||
Cash paid for acquisitions, net of cash acquired |
(118,468 | ) | | | | (118,468 | ) | |||||||||||||
Capital purchases of property and equipment |
| (79,036 | ) | (1,522 | ) | | (80,558 | ) | ||||||||||||
Other assets |
| 727 | (447 | ) | | 280 | ||||||||||||||
Net cash used in continuing investing activities |
(118,468 | ) | (78,309 | ) | (1,969 | ) | | (198,746 | ) | |||||||||||
Net cash used in discontinued investing activities |
| (40,741 | ) | | | (40,741 | ) | |||||||||||||
Net cash used in investing activities |
(118,468 | ) | (119,050 | ) | (1,969 | ) | | (239,487 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Net increase in revolving credit facility |
149,333 | | | | 149,333 | |||||||||||||||
Principal payments on long-term debt |
(3,668 | ) | | (295 | ) | | (3,963 | ) | ||||||||||||
Payment of loan and issuance costs |
(39 | ) | | | | (39 | ) | |||||||||||||
Excess tax benefits from share-based payment arrangements |
1,902 | | | | 1,902 | |||||||||||||||
Repurchase of common stock upon restricted stock vesting |
(271 | ) | | | | (271 | ) | |||||||||||||
Net transfers to and from members |
(7,326 | ) | 2,993 | 3,490 | 843 | | ||||||||||||||
Proceeds from exercises of common stock options |
9,593 | | | | 9,593 | |||||||||||||||
Net cash provided by financing activities |
149,524 | 2,993 | 3,195 | 843 | 156,555 | |||||||||||||||
Net increase (decrease) in cash |
| 16,258 | (11,268 | ) | | 4,990 | ||||||||||||||
Cash and cash equivalents at beginning of period |
| 19,154 | 20,816 | | 39,970 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | | $ | 35,412 | $ | 9,548 | $ | | $ | 44,960 | ||||||||||
11. Fair Value Measurements
Our interest rate swap is required to be measured at fair value on a recurring basis. Our interest
rate swap agreement is with a private party and is not traded on a public exchange. The fair value
of our interest rate swap agreement is determined based on inputs that are readily available in
public markets or can be derived from information available in publicly quoted markets. Therefore,
we have categorized the inputs to value our interest rate swap agreement, which are consistently
applied, as Level 2, under applicable GAAP.
12. Recent Accounting Pronouncements
In the quarter ended September 30, 2009, we adopted the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (the Codification). The Codification was established
as the source of authoritative accounting principles to be applied to nongovernmental entities in
the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC
registrants.
In May 2009, the FASB issued guidance establishing standards for accounting and disclosure of
events that occur after the balance sheet date, but before financial statements are issued. This
guidance is largely similar to guidance that previously existed only in auditing literature. This
guidance requires the disclosure of the date through which an entity has evaluated subsequent
events and
whether that date represents the date the financial statements were issued or were available to be
issued. We adopted this guidance in the quarter ending June 30, 2009.
16
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
In March 2008, the FASB issued guidance that requires enhanced disclosures about derivative and
hedging activities. We adopted this guidance on January 1, 2009.
In December 2007, the FASB issued guidance requiring the use of the acquisition method of
accounting, defining the acquirer, establishing the acquisition date, requiring acquisition-related
costs to be expensed as incurred and broadening the scope of a business combination to include
transactions and other events in which one entity obtains control over one or more other
businesses. We adopted this guidance on January 1, 2009.
In December 2007, the FASB issued guidance establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the retained interest and gain or loss when a
subsidiary is deconsolidated. We adopted this guidance on January 1, 2009.
13. Contingencies
We are subject to various claims and legal actions that arise in the ordinary course of our
business. A stockholder lawsuit alleging violation of federal securities laws was filed during the
third quarter of 2009. We believe the lawsuit is without merit and intend to defend it vigorously.
In the opinion of management, we are not currently a party to any proceeding that would have a
material adverse effect on our financial condition or results of operations.
14.
Subsequent Event
On July
31, 2009, we signed a definitive agreement to sell our EAP business
for approximately $70 million in cash. The transaction was
completed in the fourth quarter of 2009.
17
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Forward-Looking Statements
This Quarterly Report on Form 10-Q and other materials we have filed or may file with the
Securities and Exchange Commission (the SEC), as well as information included in oral statements
or other written statements made, or to be made, by our senior management, contain, or will
contain, disclosures that are forward-looking statements. Forward-looking statements include all
statements that do not relate solely to historical or current facts and can be identified by the
use of words such as may, will, expect, believe, intend, plan, estimate, project,
continue, should and other comparable terms. These forward-looking statements are based on the
current plans and expectations of management and are subject to a number of risks and
uncertainties, including those set forth below, which could significantly affect our current plans
and expectations and future financial condition and results of operations.
We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Stockholders and investors are
cautioned not to unduly rely on such forward-looking statements when evaluating the information
presented in our filings and reports.
While it is not possible to identify all these factors, we continue to face many risks
and uncertainties that could cause actual results to differ from those forward-looking statements,
including:
| risks inherent to the health care industry, including the impact of unforeseen changes in regulation and the potential adverse impact of government investigations, liabilities and other claims asserted against us; | ||
| uncertainty as to changes in U.S. general economic activity and the impact of these changes on our business; | ||
| health care reform proposals that, if adopted, could adversely impact reimbursement rates for our services; | ||
| economic downturn resulting in efforts by federal and state health care programs and managed care companies to reduce reimbursement rates for our services; | ||
| potential competition that alters or impedes our acquisition strategy by decreasing our ability to acquire additional inpatient facilities on favorable terms; | ||
| our ability to comply with applicable licensure and accreditation requirements; | ||
| our ability to comply with extensive laws and government regulations related to billing, physician relationships, adequacy of medical care and licensure; | ||
| our ability to retain key employees who are instrumental to our operations; | ||
| our ability to successfully integrate and improve the operations of acquired inpatient facilities; | ||
| our ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act; | ||
| our substantial indebtedness and adverse changes in credit markets impacting our ability to receive timely additional financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs; | ||
| our ability to maintain favorable and continuing relationships with physicians and other health care professionals who use our inpatient facilities; | ||
| our ability to ensure confidential information is not inappropriately disclosed and that we are in compliance with federal and state health information privacy standards; | ||
| our ability to comply with federal and state governmental regulation covering health care-related products and services on-line, including the regulation of medical devices and the practice of medicine and pharmacology; | ||
| our ability to obtain adequate levels of general and professional liability insurance; | ||
| future trends for pricing, margins, revenue and profitability that remain difficult to predict in the industries that we serve; | ||
| fluctuations in the market value of our common stock; | ||
| negative press coverage of us or our industry that may affect public opinion; and |
18
Table of Contents
| those risks and uncertainties described from time to time in our filings with the SEC. |
We caution you that the factors listed above, as well as the risk factors included in our
Annual Report on Form 10-K for the year ended December 31, 2008, and our Quarterly Report on Form
10-Q for the quarter ended June 30, 2009, may not be exhaustive. We operate in a continually
changing business environment, and new risk factors emerge from time to time. We cannot predict
such new risk factors nor can we assess the impact, if any, of such new risk factors on our
businesses or the extent to which any factor or combination of factors may cause actual results to
differ materially from those expressed or implied by any forward-looking statements.
Overview
Our business strategy is to acquire inpatient behavioral health care facilities and improve
operating results within our inpatient facilities and our other behavioral health care operations.
From 2001 to 2004, we acquired 34 inpatient behavioral health care facilities. During 2005, we
acquired 20 inpatient behavioral health care facilities in the acquisition of Ardent Health
Services, Inc. and one other inpatient facility. During 2006, we acquired 19 inpatient behavioral
health care facilities, including nine inpatient facilities with the acquisition of the capital
stock of Alternative Behavioral Services, Inc. on December 1, 2006. During 2007, we acquired 16
inpatient behavioral health care facilities, including 15 inpatient facilities in the acquisition
of Horizon Health Corporation. During 2008, we acquired five inpatient behavioral health care
facilities from UMC and opened Lincoln Prairie Behavioral Health Center, a 120-bed inpatient
facility in Springfield, Illinois. In January 2009, we opened Rolling Hills Hospital, an 80-bed
inpatient facility in Franklin, Tennessee. In September 2009, we acquired two inpatient behavioral
health care facilities.
On July 31, 2009, we signed a definitive agreement to sell our EAP business for approximately
$70 million in cash. Accordingly, the results of operations of our EAP business have been
classified as discontinued operations and its assets and liabilities have been classified as held
for sale. The transaction was completed in the fourth quarter of 2009.
We strive to improve the operating results of our inpatient behavioral health care operations
by providing the highest quality service, expanding referral networks and marketing initiatives and
meeting increased demand for behavioral health care services by expanding our services and
developing new services. We also attempt to improve operating results by maintaining appropriate
staffing ratios, controlling contract labor costs and reducing supply costs through group
purchasing. Our same-facility revenue from owned and leased inpatient facilities increased 4.7% and
5.0% for the three and nine months ended September 30, 2009, respectively, compared to the same
periods in 2008. Our same-facility revenue growth was primarily the result of increases in
same-facility patient days and same-facility revenue per patient day. Same-facility patient days
increased 3.3% and 2.7% for the three and nine months ended September 30, 2009, respectively,
compared to the same periods in 2008. Same-facility revenue per patient day increased 1.6% and 2.3%
for the three and nine months ended September 30, 2009, respectively, compared to the same periods
in 2008. Same-facility growth refers to the comparison of each inpatient facility owned during 2008
with the comparable period in 2009, adjusted for closures and combinations for comparability
purposes.
Income from continuing operations before income taxes was $45.5 million and $145.8 million, or
10.0% and 10.8% of revenue, for the three and nine months ended September 30, 2009, respectively,
compared to $44.9 million and $129.9 million, or 10.4% and 10.2% of revenue, during the same
periods of 2008, respectively. The $0.6 million and $15.9 million increase in income from
continuing operations before income taxes for the three and nine months ended September 30, 2009,
respectively, compared to the same period of 2008 was primarily the result of the following:
| same-facility revenue growth at our behavioral health care facilities of 4.7% and 5.0% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008; | ||
| a reduction in interest expense as a percentage of revenue to 4.0% for the nine months ended September 30, 2009 compared to 4.5% in the same period of 2008 due primarily to a decrease in interest rates on our variable rate debt; and | ||
| a decrease in share-based compensation expense of $0.7 million and $1.5 million for the three and nine months ended September 30, 2009, respectively, compared to the same periods of 2008. |
Our operating results for 2009 were adversely affected by the following items:
19
Table of Contents
| charity care provided by our inpatient behavioral health care facilities increased $4.2 million for the three months ended September 30, 2009 compared to the same period of 2008, which was concentrated in two markets that we serve; | ||
| the non-renewal of several contracts and start up losses on new contracts within our contract management business negatively affected our operating results. We expect the contract management business to stabilize in future quarters; | ||
| a new at-risk contract within our managed care plan in Puerto Rico contributed higher other operating expenses and lower profitability for our other operations. This contract was renegotiated to an administration services only contract in the fourth quarter of 2009; and | ||
| an increase in salaries, wages and employee benefits expense as a percentage of revenue for our same-facility owned and leased inpatient facilities to 54.7% for the three months ended September 30, 2009 compared to 53.4% in the same period of 2008, due primarily to an increase in health insurance claims for health insurance coverage of our employees and their dependents. |
Sources of Revenue
Patient Service Revenue
Patient service revenue is generated by our inpatient facilities for services provided to
patients on an inpatient and outpatient basis within the inpatient behavioral health care facility
setting. Patient service revenue is recorded at our established billing rates less contractual
adjustments. Contractual adjustments are recorded to state our patient service revenue at the
amount we expect to collect for the services provided 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. Patient service revenue comprised
approximately 93.0% and 92.7% of our total revenue for the nine months ended September 30, 2009 and
2008, respectively.
Other Revenue
Other behavioral health care services accounted for 7.0% and 7.3% of our revenue for the
nine months ended September 30, 2009 and 2008, respectively. This portion of our business primarily
consists of our contract management business and a managed care plan in Puerto Rico. Our contract
management business involves the development, organization and management of behavioral health care
programs within medical/surgical hospitals. Services provided are recorded as revenue at
contractually determined rates in the period the services are rendered, provided that
collectability of such amounts is reasonably assured.
Results of Operations
The following table illustrates our consolidated results of operations from continuing
operations for the three and nine months ended September 30, 2009 and 2008 (dollars in thousands):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
Revenue |
$ | 455,310 | 100.0 | % | $ | 431,713 | 100.0 | % | $ | 1,348,534 | 100.0 | % | $ | 1,273,408 | 100.0 | % | ||||||||||||||||
Salaries, wages, and employee benefits (including share-
based compensation of $4,249, $4,935, $13,525, and
$
15,013 for the respective three and nine month periods
in 2009 and 2008) |
254,333 | 55.8 | % | 238,479 | 55.2 | % | 751,878 | 55.7 | % | 705,778 | 55.4 | % | ||||||||||||||||||||
Professional fees |
42,258 | 9.3 | % | 41,117 | 9.5 | % | 125,017 | 9.3 | % | 121,964 | 9.6 | % | ||||||||||||||||||||
Supplies |
23,358 | 5.1 | % | 23,784 | 5.6 | % | 70,063 | 5.2 | % | 70,228 | 5.5 | % | ||||||||||||||||||||
Provision for doubtful accounts |
9,798 | 2.2 | % | 10,129 | 2.3 | % | 26,542 | 2.0 | % | 25,830 | 2.0 | % | ||||||||||||||||||||
Other operating expenses |
49,954 | 11.0 | % | 44,815 | 10.4 | % | 142,712 | 10.6 | % | 133,351 | 10.5 | % | ||||||||||||||||||||
Depreciation and amortization |
11,498 | 2.5 | % | 9,792 | 2.3 | % | 33,084 | 2.4 | % | 28,687 | 2.3 | % | ||||||||||||||||||||
Interest expense, net |
18,607 | 4.1 | % | 18,648 | 4.3 | % | 53,432 | 4.0 | % | 57,688 | 4.5 | % | ||||||||||||||||||||
Income from continuing operations before
income taxes |
45,504 | 10.0 | % | 44,949 | 10.4 | % | 145,806 | 10.8 | % | 129,882 | 10.2 | % | ||||||||||||||||||||
Provision for income taxes |
17,431 | 3.8 | % | 16,958 | 3.9 | % | 55,714 | 4.1 | % | 49,188 | 3.9 | % | ||||||||||||||||||||
Income from continuing operations |
28,073 | 6.2 | % | 27,991 | 6.5 | % | 90,092 | 6.7 | % | 80,694 | 6.3 | % | ||||||||||||||||||||
Less: Net income attributable to noncontrolling interest |
7 | 0.0 | % | (390 | ) | -0.1 | % | (338 | ) | 0.0 | % | (642 | ) | 0.0 | % | |||||||||||||||||
Income from continuing operations attributable to
PSI stockholders |
$ | 28,080 | 6.2 | % | $ | 27,601 | 6.4 | % | $ | 89,754 | 6.7 | % | $ | 80,052 | 6.3 | % | ||||||||||||||||
Three Months Ended September 30, 2009 Compared To Three Months Ended September 30, 2008
The following table compares key total facility statistics and same-facility statistics for
the three months ended September 30, 2009 and 2008 for our owned and leased inpatient facilities:
20
Table of Contents
Three Months Ended September 30, | % | |||||||||||
2009 | 2008 | Change | ||||||||||
Same-facility results: |
||||||||||||
Revenue (in thousands) |
$ | 420,292 | $ | 401,321 | 4.7 | % | ||||||
Admissions |
44,694 | 41,631 | 7.4 | % | ||||||||
Patient days |
719,024 | 696,317 | 3.3 | % | ||||||||
Average length of stay (in days) |
16.1 | 16.7 | -3.6 | % | ||||||||
Revenue per patient day |
$ | 585 | $ | 576 | 1.6 | % | ||||||
Total facility results: |
||||||||||||
Revenue (in thousands) |
$ | 422,544 | $ | 401,321 | 5.3 | % | ||||||
Admissions |
44,914 | 41,631 | 7.9 | % | ||||||||
Patient days |
721,465 | 696,317 | 3.6 | % | ||||||||
Average length of stay (in days) |
16.1 | 16.7 | -3.6 | % | ||||||||
Revenue per patient day |
$ | 586 | $ | 576 | 1.7 | % |
Revenue. Revenue from continuing operations increased $23.6 million, or 5.5%, to $455.3
million for the three months ended September 30, 2009 compared to the three months ended
September 30, 2008. Revenue from owned and leased inpatient facilities increased $21.2 million, or
5.3%, to $422.5 million in 2009 compared to 2008. The increase in revenue from owned and leased
inpatient facilities relates primarily to same-facility growth in patient days of 3.3% and revenue
per patient day of 1.6%, offset by a $4.2 million increase in charity care provided. Other revenue
was $32.8 million in 2009 compared to $30.4 million in 2008.
Salaries, wages, and employee benefits. Salaries, wages and employee benefits (SWB)
expense was $254.3 million for the three months ended September 30, 2009 compared to $238.5 million
for the three months ended September 30, 2008, an increase of $15.8 million, or 6.6%. SWB expense
includes $4.2 million and $4.9 million of share-based compensation expense for the quarters ended
September 30, 2009 and 2008, respectively. Based on our stock option and restricted stock grants
outstanding at September 30, 2009, we estimate remaining unrecognized share-based compensation
expense to be approximately $35.7 million with a weighted-average remaining vesting period of 2.2
years. Excluding share-based compensation expense, SWB expense was $250.1 million, or 54.9% of
total revenue, for the three months ended September 30, 2009 compared to $233.5 million, or 54.1%
of total revenue, for the three months ended September 30, 2008. SWB expense for owned and leased
inpatient facilities was $231.3 million in 2009, or 54.7% of revenue. Same-facility SWB expense for
owned and leased inpatient facilities was $229.9 million in 2009, or 54.7% of revenue, compared to
$214.3 million in 2008, or 53.4% of revenue. This increase in same-facility SWB expense for owned
and leased inpatient facilities is primarily the result of an increase in health insurance claims
for health insurance coverage of our employees and their dependents and shift from utilization of
contract labor that is a component of professional fees to the utilization of employees. SWB
expense for other operations was $12.3 million in 2009 and 2008. SWB expense for our corporate
office was $10.7 million, including $4.2 million in share-based compensation, for 2009 compared to
$11.9 million, including $4.9 million in share-based compensation, for 2008.
Professional fees. Professional fees were $42.3 million for the three months ended
September 30, 2009, or 9.3% of total revenue, compared to $41.1 million for the three months ended
September 30, 2008, or 9.5% of total revenue. Professional fees for owned and leased inpatient
facilities were $38.0 million in 2009, or 9.0% of revenue. Same-facility professional fees for
owned and leased inpatient facilities were $37.9 million in 2009, or 9.0% of revenue, compared to
$36.2 million in 2008, or 9.0% of revenue. Professional fees for other operations and our corporate
office decreased to $4.3 million in 2009 compared to $4.9 million in 2008.
Supplies. Supplies expense was $23.4 million for the three months ended September 30,
2009, or 5.1% of total revenue, compared to $23.8 million for the three months ended September 30,
2008, or 5.6% of total revenue. Supplies expense for owned and leased inpatient facilities was
$23.2 million in 2009, or 5.5% of revenue. Same-facility supplies expense for owned and leased
inpatient facilities was $23.1 million in 2009, or 5.6% of revenue, compared to $23.6 million in
2008, or 5.9% of revenue. Supplies expense for other operations as well as our corporate office is
negligible to our supplies expense overall.
Provision for doubtful accounts. The provision for doubtful accounts was $9.8 million for
the three months ended September 30, 2009, or 2.2% of total revenue, compared to $10.1 million for
the three months ended September 30, 2008, or 2.3% of total revenue. The provision for doubtful
accounts at owned and leased inpatient facilities comprised substantially all of our provision for
doubtful accounts.
Other operating expenses. Other operating expenses consist primarily of rent, utilities,
insurance, travel and repairs and
maintenance expenses. Other operating expenses were $50.0 million for the three months ended
September 30, 2009, or 11.0% of total revenue, compared to $44.8 million for the three months ended
September 30, 2008, or 10.4% of total revenue. Other operating expenses for owned and leased
inpatient facilities were $33.5 million in 2009, or 7.9% of revenue. Same-facility other operating
expenses for owned and leased inpatient facilities were $33.4 million in 2009, or 7.9% of revenue,
compared to $32.9 million in 2008,
21
Table of Contents
or 8.2% of revenue. Other operating expenses for other
operations and our corporate office increased to $16.4 million in 2009 compared to $11.9 million in
2008. This increase in other operating expenses for other operations and our corporate office was
primarily the result of claims expense from a new at-risk contract within our managed care plan in
Puerto Rico.
Depreciation and amortization. Depreciation and amortization expense increased to
$11.5 million for the three months ended September 30, 2009 compared to $9.8 million for the three
months ended September 30, 2008, primarily as a result of expansion projects at existing inpatient
facilities and development of new inpatient facilities during 2008 and 2009.
Interest expense, net. Interest expense, net of interest income, was $18.6 million for
the three months ended September 30, 2009 and 2008.
Income attributable to noncontrolling interest. We own a controlling interest in two
joint ventures that own two of our inpatient behavioral health care facilities. Income attributable
to noncontrolling interest represents the pro rata portion of each joint ventures net profit
belonging to the noncontrolling partner.
Income (loss) from discontinued operations, net of taxes. The income from discontinued
operations, net of income tax effect, was $0.1 million for the three months ended September 30,
2009 compared to a loss from discontinued operations, net of income tax effect of $1.2 million for
the three months ended September 30, 2008. During the third quarter of 2009, we entered a
definitive agreement to sell our EAP business, elected to make The Oaks Treatment Center available
for sale, and terminated one contract with a South Carolina juvenile justice agency. During the
second quarter of 2009, we elected to make Nashville Rehabilitation Hospital available for sale.
This facilitys behavioral health services were transferred to Rolling Hills Hospital in the first
quarter of 2009. During the year ended December 31, 2008, we elected to dispose of a leased
inpatient facility. Additionally, two contracts with a Puerto Rican juvenile justice agency to
manage inpatient facilities were terminated in 2008. Accordingly, these operations are included in
discontinued operations.
Nine Months Ended September 30, 2009 Compared To Nine Months Ended September 30, 2008
The following table compares key total facility statistics and same-facility statistics for
the nine months ended September 30, 2009 and 2008 for our owned and leased inpatient facilities:
Nine Months Ended September 30, | % | |||||||||||
2009 | 2008 | Change | ||||||||||
Same-facility results: |
||||||||||||
Revenue (in thousands) |
$ | 1,239,720 | $ | 1,180,209 | 5.0 | % | ||||||
Admissions |
131,303 | 124,263 | 5.7 | % | ||||||||
Patient days |
2,133,338 | 2,076,905 | 2.7 | % | ||||||||
Average length of stay (in days) |
16.2 | 16.7 | -3.0 | % | ||||||||
Revenue per patient day |
$ | 581 | $ | 568 | 2.3 | % | ||||||
Total facility results: |
||||||||||||
Revenue (in thousands) |
$ | 1,254,444 | $ | 1,180,209 | 6.3 | % | ||||||
Admissions |
133,232 | 124,263 | 7.2 | % | ||||||||
Patient days |
2,157,856 | 2,076,905 | 3.9 | % | ||||||||
Average length of stay (in days) |
16.2 | 16.7 | -3.0 | % | ||||||||
Revenue per patient day |
$ | 581 | $ | 568 | 2.3 | % |
Revenue. Revenue from continuing operations increased $75.1 million, or 5.9%, to $1,348.5
million for the nine months ended September 30, 2009 compared to the nine months ended
September 30, 2008. Revenue from owned and leased inpatient facilities increased $74.2 million, or
6.3%, to $1,254.4 million in 2009 compared to 2008. The increase in revenue from owned and leased
inpatient facilities relates primarily to the acquisition of five inpatient facilities from UMC in
2008 and to same-facility growth in patient days of 2.7% and revenue per patient day of 2.3%. Other
revenue was $94.1 million in 2009 compared to $93.2 million in 2008, an increase of $0.9 million.
Salaries, wages, and employee benefits. Salaries, wages and employee benefits (SWB)
expense was $751.9 million for the nine
months ended September 30, 2009 compared to $705.8 million for the nine months ended September 30,
2008, an increase of $46.1 million, or 6.5%. SWB expense includes $13.5 million and $15.0 million
of share-based compensation expense for the nine months ended September 30, 2009 and 2008,
respectively. Excluding share-based compensation expense, SWB expense was $738.4 million, or 54.8%
of total revenue, for the nine months ended September 30, 2009 compared to $690.8 million, or 54.2%
of total revenue, for the nine months ended September 30, 2008. SWB expense for owned and leased
inpatient facilities was $678.2 million in 2009, or 54.1% of revenue. Same-facility SWB expense for
owned and leased inpatient facilities was $670.3 million in 2009, or 54.1% of revenue, compared to
$631.2 million in 2008, or 53.5% of revenue. This increase in same-facility SWB expense for owned
and leased
22
Table of Contents
inpatient facilities was primarily the result of a shift from utilization of contract
labor that is a component of professional fees to the utilization of employees. SWB expense for
other operations was $35.9 million in 2009 compared to $36.7 million in 2008. SWB expense for our
corporate office was $37.7 million, including $13.5 million in share-based compensation, for 2009
compared to $37.3 million, including $15.0 million in share-based compensation, for 2008.
Professional fees. Professional fees were $125.0 million for the nine months ended
September 30, 2009, or 9.3% of total revenue, compared to $122.0 million for the nine months ended
September 30, 2008, or 9.6% of total revenue. Professional fees for owned and leased inpatient
facilities were $113.3 million in 2009, or 9.0% of revenue. Same-facility professional fees for
owned and leased inpatient facilities were $111.9 million in 2009, or 9.0% of revenue, compared to
$108.4 million in 2008, or 9.2% of revenue. Professional fees for other operations and our
corporate office decreased to $11.7 million in 2009 compared to $13.5 million in 2008.
Supplies. Supplies expense was $70.1 million for the nine months ended September 30,
2009, or 5.2% of total revenue, compared to $70.2 million for the nine months ended September 30,
2008, or 5.5% of total revenue. Supplies expense for owned and leased inpatient facilities was
$69.6 million in 2009, or 5.5% of revenue. Same-facility supplies expense for owned and leased
inpatient facilities was $68.6 million in 2009, or 5.5% of revenue, compared to $69.6 million in
2008, or 5.9% of revenue. Supplies expense for other operations as well as our corporate office is
negligible to our supplies expense overall.
Provision for doubtful accounts. The provision for doubtful accounts was $26.5 million
for the nine months ended September 30, 2009, or 2.0% of total revenue, compared to $25.8 million
for the nine months ended September 30, 2008, or 2.0% of total revenue. The provision for doubtful
accounts at owned and leased inpatient facilities comprised substantially all of our provision for
doubtful accounts.
Other operating expenses. Other operating expenses consist primarily of rent, utilities,
insurance, travel and repairs and maintenance expenses. Other operating expenses were
$142.7 million for the nine months ended September 30, 2009, or 10.6% of total revenue, compared to
$133.4 million for the nine months ended September 30, 2008, or 10.5% of total revenue. Other
operating expenses for owned and leased inpatient facilities were $99.1 million in 2009, or 7.9% of
revenue. Same-facility other operating expenses for owned and leased inpatient facilities were
$98.1 million in 2009, or 7.9% of revenue, compared to $93.9 million in 2008, or 8.0% of revenue.
Other operating expenses for other operations and our corporate office increased to $43.6 million
in 2009 compared to $39.2 million in 2008. This increase in other operating expenses for other
operations and our corporate office was primarily the result of claims expense from a new at-risk
contract within our managed care plan in Puerto Rico.
Depreciation and amortization. Depreciation and amortization expense increased to
$33.1 million for the nine months ended September 30, 2009 compared to $28.7 million for the nine
months ended September 30, 2008, primarily as a result of the acquisitions of inpatient facilities,
expansion projects at existing inpatient facilities and development of new inpatient facilities
during 2008 and 2009.
Interest expense, net. Interest expense, net of interest income, decreased to
$53.4 million for the nine months ended September 30, 2009 compared to $57.7 million for the nine
months ended September 30, 2008 primarily as a result of a reduction in interest rates on our
variable rate debt.
Income attributable to noncontrolling interest. We own a controlling interest in two
joint ventures that own two of our inpatient behavioral health care facilities. Income attributable
to noncontrolling interest represents the pro rata portion of each joint ventures net profit
belonging to the noncontrolling partner.
Income from discontinued operations, net of taxes. The income from discontinued
operations, net of income tax effect, was $0.2 million for the nine months ended September 30, 2009
compared to $0.9 million for the nine months ended September 30, 2008. During the third quarter of
2009, we entered a definitive agreement to sell our EAP business, elected to make The Oaks
Treatment Center available for sale, and terminated one contract with a South Carolina juvenile
justice agency. During the second quarter of 2009, we elected to make Nashville Rehabilitation
Hospital available for sale. This facilitys behavioral health services were transferred to Rolling
Hills Hospital in the first quarter of 2009. During the year ended December 31, 2008, we elected
to dispose of a leased inpatient facility. Additionally, two contracts with a Puerto Rican juvenile
justice agency to manage inpatient facilities were terminated in 2008. Accordingly, these
operations are included in discontinued operations.
Liquidity and Capital Resources
Working capital at September 30, 2009 was $252.6 million, including cash and cash
equivalents of $13.4 million, compared to working capital of $245.4 million, including cash and
cash equivalents of $51.3 million, at December 31, 2008. The decrease in cash and cash equivalents
in 2009 was largely the result of using excess cash to reduce the outstanding balance on our
revolving credit facility, $29.3 million of which was classified as a current liability at December
31, 2008, as well as $19.0 million paid to purchase the real estate of a hospital that was
previously leased. Another significant change in working capital in 2009 was a decrease in income
tax receivable of $11.9 million.
23
Table of Contents
Cash provided by continuing operating activities was $154.9 million for the nine months
ended September 30, 2009 compared to $85.1 million for the nine months ended September 30, 2008.
The increase in cash flows from continuing operating activities was primarily the result of cash
provided by improved operating results, improved collections on accounts receivable and a reduction
in payments for income taxes and interest. Income tax payments decreased $12.1 million to $38.9
million for the nine months ended September 30, 2009 compared to $51.0 million for the nine months
ended September 30, 2008, primarily as a result of applying income tax overpayments for 2008 to
income taxes due for 2009. Interest payments decreased $11.8 million to $57.2 million for the nine
months ended September 30, 2009 compared to $69.0 million for the nine months ended September 30,
2008. This decrease in interest payments is primarily due to decreasing interest rates on our
variable rate debt and timing of interest payments. During the nine months ended September 30,
2009, the balance of accounts receivable increased $4.6 million, net of acquisitions, compared to
an increase of $30.4 million, net of acquisitions, during the nine months ended September 30, 2008,
primarily as a result of improved collections on our accounts receivables as well as
post-acquisition receivables generated in 2008 from the five facilities acquired from UMC in March
2008, for which no accounts receivable were purchased. Our consolidated days sales outstanding were
50 and 51 at September 30, 2009 and December 31, 2008, respectively.
Cash used in continuing investing activities was $146.9 million for the nine months ended
September 30, 2009 compared to $198.7 million for the nine months ended September 30, 2008. Cash
used in continuing investing activities for the nine months ended September 30, 2009 primarily
consisted of $95.6 million paid for purchases of fixed assets, $32.7 million paid for acquisitions
and $19.0 million paid for the acquisition of the real estate of a previously leased facility. Cash
used for routine capital expenditures was approximately $36.6 million and cash used for expansion
capital expenditures was approximately $59.0 million for the nine months ended September 30, 2009.
We expect additional expenditures during 2009 as a result of planned capital expansion projects,
which are expected to add approximately 200 new beds to our inpatient facilities during the
remainder of 2009. We define expansion capital expenditures as those that increase the capacity of
our facilities or otherwise enhance revenue. Cash used in continuing investing activities for the
nine months ended September 30, 2008 consisted primarily of $118.5 million in cash paid for
acquisitions and $80.6 million paid for purchases of fixed assets. Acquisitions in 2008 consisted
primarily of five inpatient behavioral health care facilities acquired from UMC. Cash used in
discontinued investing activities for the three months ended September 30, 2008 of $40.7 million
consisted primarily of cash paid for acquisitions of EAP businesses.
Cash used in financing activities was $46.0 million for the nine months ended September
30, 2009 compared to cash provided by financing activities of $156.6 million for the nine months
ended September 30, 2008. Cash used in financing activities for the nine months ended September 30,
2009 consisted primarily of $138.4 million of net payments on the balance due under our revolving
credit facility, $9.8 million paid for loan and issuance costs and $3.8 million principal payments
on long-term debt, offset by $106.5 million received from the issuance of $120 million of our
73/4% Notes at a discount of 11.25%. Cash provided by financing activities
for the nine months ended September 30, 2008 primarily resulted from $149.3 million borrowed under
our revolving credit facility used to finance the acquisition of five inpatient behavioral health
care facilities from UMC and certain EAP acquisitions, capital expenditures and other general
corporate purposes.
We have a universal shelf registration statement on Form S-3 under which we may sell an
indeterminate amount of our common stock, common stock warrants, preferred stock and debt
securities. We may from time to time offer these securities in one or more series, in amounts, at
prices and on terms satisfactory to us. The universal shelf registration statement will expire on
November 30, 2009. We plan to file a new universal shelf registration statement to register an
indeterminate amount of our securities prior to the expiration of our current universal shelf
registration statement.
During the fourth quarter of 2007, we entered into an interest rate swap agreement with
Merrill Lynch Capital Services, Inc. to manage our exposure to fluctuations in interest rates.
Pursuant to this interest rate swap agreement, we exchange the interest payments associated with a
face value amount of $225 million of LIBOR-indexed variable rate debt related to our senior secured
term loan facility for a fixed interest rate. This interest rate swap agreement matures on November
30, 2009. The fair value of our interest rate swap agreement at September 30, 2009 is recorded in
other accrued liabilities on our condensed consolidated balance sheet at $1.4 million.
We are actively seeking acquisitions that fit our corporate growth strategy and may acquire
additional inpatient psychiatric facilities and other operations, and we will incur continued
expenditures on expansion projects. Management continually assesses our capital needs, and, should
the need arise, we will seek additional financing, including debt or equity, to fund potential
acquisitions, for facility expansions, for repayment of indebtedness or for other corporate
purposes. In negotiating such financing, there can be no assurance that we will be able to raise
additional capital on terms satisfactory to us. Failure to obtain additional financing on
reasonable terms could have a negative effect on our plans to acquire additional inpatient
psychiatric facilities or make capital expenditures.
24
Table of Contents
Contractual Obligations
Payments Due by Period (in thousands) | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
Long-term debt (1): |
||||||||||||||||||||
Senior Credit Facility: |
||||||||||||||||||||
Revolving line of credit facility, expiring on December 31, 2011
and bearing interest of 5.6% at September 30, 2009 |
$ | 90,959 | $ | | $ | 90,959 | $ | | $ | | ||||||||||
Senior secured term loan facility, expiring on July 1, 2012
and bearing interest of 2.04% at September 30, 2009 |
565,812 | 3,750 | 562,062 | | | |||||||||||||||
73/4% Senior Subordinated Notes due July 15, 2015 |
582,442 | | | | 582,442 | |||||||||||||||
Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.7% to 7.6% |
32,959 | 443 | 973 | 1,101 | 30,442 | |||||||||||||||
1,272,172 | 4,193 | 653,994 | 1,101 | 612,884 | ||||||||||||||||
Lease and other obligations |
90,396 | 16,279 | 21,539 | 14,074 | 38,504 | |||||||||||||||
Total contractual obligations |
$ | 1,362,568 | $ | 20,472 | $ | 675,533 | $ | 15,175 | $ | 651,388 | ||||||||||
(1) | Excludes capital lease obligations and other obligations of $6.8 million, which are included in lease and other obligations. |
The fair value of the $470.0 million in principal amount of 73/4%
Notes outstanding at December 31, 2008 was approximately $452.4 million and $343.7 million as of
September 30, 2009 and December 31, 2008, respectively. The fair value of our $120.0 million in
principal amount of 73/4% Notes issued in May 2009 was approximately $110.4
million as of September 30, 2009. The fair values of our revolving credit facility and senior
secured term loan facility were approximately $88.2 million and $543.2 million, respectively, as of
September 30, 2009. The fair values of our revolving credit facility and senior secured term loan
facility were approximately $195.5 million and $446.4 million, respectively, as of December 31,
2008. The carrying value of our other long-term debt, including current maturities, of $40.1
million and $40.6 million at September 30, 2009 and December 31, 2008, respectively, approximated
fair value. We had $91.0 million and $565.8 million of variable rate debt outstanding under our
revolving credit facility and senior secured term loan facility, respectively, as of September 30,
2009. As a result of our interest rate swap agreement to exchange interest rate payments associated
with a face value amount of $225 million of LIBOR-indexed variable rate debt for a fixed rate, the
variable rate debt outstanding under our senior secured term loan facility was effectively $340.8
million as of September 30, 2009. At our September 30, 2009 borrowing level, a hypothetical 10%
increase in interest rates would decrease our annual net income and cash flows by approximately
$0.8 million.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with GAAP. In
preparing our financial statements, we are required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, and expenses included in our financial
statements. Estimates are based on historical experience and other information currently available,
the results of which form the basis of such estimates. While we believe our estimation processes
are reasonable, actual results could differ from our estimates. The following represent the
estimates considered most critical to our operating performance and involve the most subjective and
complex assumptions and assessments.
Allowance for Doubtful Accounts
Our ability to collect outstanding patient receivables from third-party payors is
critical to our operating performance and cash flows.
The primary collection risk with regard to patient receivables lies with uninsured
patient accounts or patient accounts for which primary insurance has paid, but the portion owed by
the patient remains outstanding. We estimate the allowance for doubtful accounts primarily based
upon the age of the accounts since the patient discharge date. We continually monitor our accounts
receivable balances and utilize cash collection data to support our estimates of the provision for
doubtful accounts. Significant changes in payor
mix or business office operations could have a significant impact on our results of operations and
cash flows.
The primary collection risk with regard to receivables due under our inpatient management
contracts is attributable to contractual disputes. We estimate the allowance for doubtful accounts
for these receivables based primarily upon the specific identification of potential collection
issues. As with our patient receivables, we continually monitor our accounts receivable balances
and utilize cash collection data to support our estimates of the provision for doubtful accounts.
25
Table of Contents
Allowances for Contractual Discounts
The Medicare and Medicaid regulations are complex and various managed care contracts may
include multiple reimbursement mechanisms for different types of services provided in our inpatient
facilities and cost settlement provisions requiring complex calculations and assumptions subject to
interpretation. We estimate the allowance for contractual discounts on a payor-specific basis by
comparing our established billing rates with the amount we determine to be reimbursable given our
interpretation of the applicable regulations or contract terms. Most payments are determined based
on negotiated per-diem rates. While the services authorized and provided and related reimbursement
are often subject to interpretation that could result in payments that differ from our estimates,
these differences are deemed immaterial. Additionally, updated regulations and contract
renegotiations occur frequently necessitating continual review and assessment of the estimation
process by our management. We periodically compare the contractual rates on our patient accounting
systems with the Medicare and Medicaid reimbursement rates or the third-party payor contract for
accuracy. We also monitor the adequacy of our contractual adjustments using financial measures such
as comparing cash receipts to net patient revenue adjusted for bad debt expense.
Professional and General Liability
We are subject to medical malpractice and other lawsuits due to the nature of the
services we provide. Our operations have professional and general liability insurance in umbrella
form for claims in excess of $3.0 million with an insured excess limit of $75.0 million. The
self-insured reserves for professional and general liability risks are estimated based on
historical claims, demographic factors, industry trends, severity factors, and other actuarial
assumptions calculated by an independent third-party actuary. This self-insurance reserve is
discounted to its present value using a 5% discount rate. This estimated accrual for professional
and general liabilities could be significantly affected should current and future occurrences
differ from historical claim trends and expectations. We have utilized our captive insurance
company to manage the self-insured retention. While claims are monitored closely when estimating
professional and general liability accruals, the complexity of the claims and wide range of
potential outcomes often limits timely adjustments to the assumptions used in these estimates.
Income Taxes
As part of our process for preparing our consolidated financial statements, our
management is required to compute income taxes in each of the jurisdictions in which we operate.
This process involves estimating the current tax benefit or expense of future deductible and
taxable temporary differences. The tax effects of future deductible and taxable temporary
differences are recorded as deferred tax assets and liabilities, which are components of our
balance sheet. Management then assesses our ability to realize the deferred tax assets based on
reversals of deferred tax liabilities and, if necessary, estimates of future taxable income. A
valuation allowance for deferred tax assets is established when we believe that it is more likely
than not that the deferred tax asset will not be realized. Management must also assess the impact
of our acquisitions on the realization of deferred tax assets subject to a valuation allowance to
determine if all or a portion of the valuation allowance will be offset by reversing taxable
differences or future taxable income of the acquired entity. To the extent the valuation allowance
can be reversed due to the estimated future taxable income of an acquired entity, then our
valuation allowance is reduced accordingly as an adjustment to income tax expense.
The recognition and measurement of uncertain tax positions require the development and
application of significant judgments. Changes in these judgments may materially affect the
estimate of our effective tax rate and our operating results.
Share-Based Compensation
We measure and recognize the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of such awards. We utilize the Black-Scholes
option pricing model to estimate the grant-date fair value of our stock options. The Black-Scholes
model includes certain variables and assumptions that require judgment, such as the expected
volatility of our stock price and the expected term of our stock options. Additionally, we are
required us to use judgment in the estimation of forfeitures over the vesting period of share-based
awards.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Our interest expense is sensitive to changes in the general level of interest rates, and we
have entered into an interest rate swap
agreement with Merrill Lynch Capital Services, Inc. to manage our exposure to such fluctuations.
Our interest rate swap agreement exchanges the interest payments associated with a face value
amount of $225 million of LIBOR-indexed variable rate debt for a fixed rate. Our interest rate
swap agreement exposes us to credit risk in the event of non-performance by Merrill Lynch Capital
Services, Inc., however, we do not anticipate such non-performance.
With respect to our interest-bearing liabilities and including our interest rate swap,
approximately $848.0 million of our long-term debt outstanding at September 30, 2009 was subject to
a weighted-average fixed interest rate of 7.1%. Our variable rate debt is comprised of our senior
secured term loan facility, which had $340.8 million outstanding at September 30, 2009 (excluding
$225 million associated with our interest rate swap) and on which interest is generally payable at
LIBOR plus 1.75%, and our $300.0
26
Table of Contents
million revolving credit facility, which had a $91.0 million
balance outstanding at September 30, 2009 and on which interest is generally payable at LIBOR plus
5.0% to 5.75% (depending on a certain leverage ratio).
A hypothetical 10% increase in interest rates would decrease our net income and cash flows by
approximately $0.8 million on an annual basis based upon our borrowing level at September 30, 2009.
In the event we draw on our revolving credit facility and/or interest rates change significantly,
we expect management would take actions intended to further mitigate our exposure to such change by
targeting a portion of our debt portfolio to be maintained at fixed rates and periodically entering
into interest rate swap agreements.
Item 4. | Controls and Procedures. |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of
management, including our Chief Executive Officer and Chief Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as of the end
of the period covered by this report pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure
controls and procedures were effective in ensuring that information required to be disclosed by us
(including our consolidated subsidiaries) in reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported on a timely
basis.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the
third quarter ended September 30, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
We are subject to various claims and legal actions that arise in the ordinary course of
our business. A stockholder lawsuit alleging violation of federal securities laws was filed during
the third quarter of 2009. We believe the lawsuit is without merit and intend to defend it
vigorously. In the opinion of management, we are not currently a party to any proceeding that would
have a material adverse effect on our financial condition or results of operations.
Item 1A. | Risk Factors. |
There have been no material changes to the risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008 and Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009.
Item 6. | Exhibits. |
Exhibit | ||
Number | Description | |
3.1
|
Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on March 9, 1998 (incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K for the fiscal year ended April 30, 1998). | |
3.2
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on August 5, 2002 (incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended July 31, 2002). | |
3.3
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on March 21, 2003 (incorporated by reference to Appendix A to the Companys Definitive Proxy Statement, filed on January 22, 2003). | |
3.4
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on December 15, 2005 (incorporated by reference to Exhibit 3.4 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005). | |
3.5
|
By-laws (incorporated by reference to Exhibit 3 to the Companys Current Report on Form 8-K filed on November 6, 2007). |
27
Table of Contents
Exhibit | ||
Number | Description | |
10.1*
|
Fourth Amendment, dated as of September 25, 2009, to the Second Amended and Restated Credit Agreement, as amended, by and among Psychiatric Solutions, Inc., BHC Holdings, Inc., Premier Behavioral Solutions, Inc., Alternative Behavioral Services, Inc., Horizon Health Corporation, Community Cornerstones, Inc., First Corrections Puerto Rico, Inc., First Hospital Panamericano, Inc., FHCHS of Puerto Rico, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, the incremental revolving credit lenders party thereto, Citicorp North America, Inc. as term loan facility administrative agent, and Bank of America, N.A., as revolving credit facility administrative agent. | |
31.1*
|
Certification of the Chief Executive Officer of Psychiatric Solutions, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of the Chief Accounting Officer of Psychiatric Solutions, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*
|
Certifications of the Chief Executive Officer and Chief Accounting Officer of Psychiatric Solutions, Inc. pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed or furnished herewith |
28
Table of Contents
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Psychiatric Solutions, Inc. |
||||
By: | /s/ Jack E. Polson | |||
Jack E. Polson | ||||
Executive Vice President, Chief Accounting Officer | ||||
Dated: November 2, 2009