Attached files
file | filename |
---|---|
EX-31.1 - EX-31.1 - PSYCHIATRIC SOLUTIONS INC | g23305exv31w1.htm |
EX-32.1 - EX-32.1 - PSYCHIATRIC SOLUTIONS INC | g23305exv32w1.htm |
EX-31.2 - EX-31.2 - PSYCHIATRIC SOLUTIONS INC | g23305exv31w2.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 March 31, 2010 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 (State or Other Jurisdiction of Incorporation or Organization) |
23-2491707 (I.R.S. Employer Identification No.) |
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
May 6, 2010, 57,169,871 shares of the registrants common stock were outstanding.
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSYCHIATRIC
SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
(Unaudited, in thousands)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 32,645 | $ | 6,815 | ||||
Accounts receivable, less allowance for doubtful accounts of
$53,311 and $51,894, respectively |
263,874 | 249,439 | ||||||
Other current assets |
92,495 | 105,166 | ||||||
Total current assets |
389,014 | 361,420 | ||||||
Property and equipment, net of accumulated depreciation |
948,092 | 931,730 | ||||||
Cost in excess of net assets acquired |
1,153,111 | 1,153,111 | ||||||
Other assets |
59,967 | 60,979 | ||||||
Total assets |
$ | 2,550,184 | $ | 2,507,240 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 33,272 | $ | 35,397 | ||||
Salaries and benefits payable |
94,085 | 81,129 | ||||||
Other accrued liabilities |
55,083 | 62,036 | ||||||
Current portion of long-term debt |
10,552 | 4,940 | ||||||
Total current liabilities |
192,992 | 183,502 | ||||||
Long-term debt, less current portion |
1,175,980 | 1,182,139 | ||||||
Deferred tax liability |
84,074 | 81,137 | ||||||
Other liabilities |
31,031 | 25,790 | ||||||
Total liabilities |
1,484,077 | 1,472,568 | ||||||
Redeemable noncontrolling interests |
4,326 | 4,337 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value, 125,000 shares authorized;
57,169 and 56,226 issued and outstanding, respectively |
572 | 562 | ||||||
Additional paid-in capital |
630,699 | 627,476 | ||||||
Retained earnings |
430,510 | 402,297 | ||||||
Total stockholders equity |
1,061,781 | 1,030,335 | ||||||
Total liabilities and stockholders equity |
$ | 2,550,184 | $ | 2,507,240 | ||||
See accompanying notes.
1
Table of Contents
PSYCHIATRIC
SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except for per share amounts)
(Unaudited, in thousands, except for per share amounts)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenue |
$ | 475,956 | $ | 433,930 | ||||
Salaries, wages and employee benefits (including share-based
compensation of $3,510 and $4,819 for the three
months ended March 31, 2010 and 2009, respectively) |
259,475 | 244,286 | ||||||
Professional fees |
44,928 | 39,930 | ||||||
Supplies |
23,678 | 22,920 | ||||||
Rentals and leases |
4,835 | 5,080 | ||||||
Other operating expenses |
50,895 | 41,266 | ||||||
Provision for doubtful accounts |
11,833 | 8,462 | ||||||
Depreciation and amortization |
12,390 | 10,553 | ||||||
Interest expense |
16,498 | 16,609 | ||||||
424,532 | 389,106 | |||||||
Income from continuing operations before income taxes |
51,424 | 44,824 | ||||||
Provision for income taxes |
19,683 | 17,164 | ||||||
Income from continuing operations |
31,741 | 27,660 | ||||||
Loss from discontinued operations, net of benefit from income taxes
of $1,829 and $148 for the three months ended March 31, 2010
and 2009, respectively |
(3,496 | ) | (139 | ) | ||||
Net income |
28,245 | 27,521 | ||||||
Less: Net income attributable to noncontrolling interests |
(32 | ) | (139 | ) | ||||
Net income attributable to PSI stockholders |
$ | 28,213 | $ | 27,382 | ||||
Basic earnings per share: |
||||||||
Income from continuing operations attributable to PSI
stockholders |
$ | 0.57 | $ | 0.49 | ||||
Loss from discontinued operations, net of taxes |
(0.06 | ) | | |||||
Net income attributable to PSI stockholders |
$ | 0.51 | $ | 0.49 | ||||
Diluted earnings per share: |
||||||||
Income from continuing operations attributable to PSI
stockholders |
$ | 0.56 | $ | 0.49 | ||||
Loss from discontinued operations, net of taxes |
(0.06 | ) | | |||||
Net income attributable to PSI stockholders |
$ | 0.50 | $ | 0.49 | ||||
Shares used in computing per share amounts: |
||||||||
Basic |
55,715 | 55,495 | ||||||
Diluted |
56,386 | 55,968 | ||||||
Amounts attributable to PSI stockholders: |
||||||||
Income from continuing operations |
$ | 31,709 | $ | 27,521 | ||||
Loss from discontinued operations, net of taxes |
(3,496 | ) | (139 | ) | ||||
Net income |
$ | 28,213 | $ | 27,382 | ||||
See accompanying notes.
2
Table of Contents
PSYCHIATRIC
SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
(Unaudited, in thousands)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Operating activities: |
||||||||
Net income |
$ | 28,245 | $ | 27,521 | ||||
Adjustments to reconcile net income to
net cash provided by continuing
operating activities: |
||||||||
Depreciation and amortization |
12,390 | 10,553 | ||||||
Amortization of loan costs and bond discount/premium |
1,564 | 715 | ||||||
Share-based compensation |
3,510 | 4,819 | ||||||
Change in income tax assets and liabilities |
10,824 | 15,908 | ||||||
Loss from discontinued operations, net of taxes |
3,496 | 139 | ||||||
Changes in operating assets and liabilities,
net of effect of acquisitions: |
||||||||
Accounts receivable |
(14,435 | ) | (9,776 | ) | ||||
Other current assets |
893 | 2,296 | ||||||
Accounts payable |
(382 | ) | (2,822 | ) | ||||
Salaries and benefits payable |
12,956 | (3,391 | ) | |||||
Accrued liabilities and other liabilities |
(2,977 | ) | (6,563 | ) | ||||
Net cash provided by continuing operating activities |
56,084 | 39,399 | ||||||
Net cash (used in) provided by discontinued operating activities |
(89 | ) | 781 | |||||
Net cash provided by operating activities |
55,995 | 40,180 | ||||||
Investing activities: |
||||||||
Capital purchases of leasehold improvements,
equipment and software |
(29,553 | ) | (24,368 | ) | ||||
Other assets |
101 | (158 | ) | |||||
Net cash used in continuing investing activities |
(29,452 | ) | (24,526 | ) | ||||
Net cash used in discontinued investing activities |
(12 | ) | (321 | ) | ||||
Net cash used in investing activities |
(29,464 | ) | (24,847 | ) | ||||
Financing activities: |
||||||||
Net decrease in revolving credit facility |
| (39,333 | ) | |||||
Principal payments on long-term debt |
(1,322 | ) | (1,272 | ) | ||||
Payment of loan and issuance costs |
(6 | ) | (5,363 | ) | ||||
Distributions to noncontrolling interests |
(43 | ) | | |||||
Repurchase of common stock upon restricted stock vesting |
(490 | ) | (953 | ) | ||||
Proceeds from exercises of common stock options |
1,160 | 342 | ||||||
Net cash used in financing activities |
(701 | ) | (46,579 | ) | ||||
Net increase
(decrease) in cash and cash equivalents |
25,830 | (31,246 | ) | |||||
Cash and cash equivalents at beginning of the period |
6,815 | 51,271 | ||||||
Cash and cash equivalents at end of the period |
$ | 32,645 | $ | 20,025 | ||||
See accompanying notes.
3
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
1. Recent Developments
On November 2, 2009, we completed the sale of our employee assistance program (EAP) business for
approximately $68.5 million in cash, net of fees and expenses.
On September 30, 2009, we completed the acquisition of a 90-bed inpatient behavioral health care
facility located in Panama City, Florida. On September 1, 2009, we completed the acquisition of a
131-bed inpatient behavioral health care facility located in Fargo, North Dakota.
In May 2009, we received $106.5 million upon the issuance of $120 million of our 7 3/4% Senior
Subordinated Notes due 2015 (the 7 3/4% Notes) and used the proceeds to repay a portion of the
outstanding balance of our revolving credit facility. During 2009, our revolving credit facility
was amended to extend the maturity until December 31, 2011.
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, 2009 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. 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 2.8% of net revenue for the three months ended March 31,
2010. Operating results for the three months ended March 31, 2010 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2010. 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, 2009.
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):
4
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Numerator: |
||||||||
Basic and diluted earnings per share: |
||||||||
Income from continuing operations attributable to PSI stockholders |
$ | 31,709 | $ | 27,521 | ||||
Loss from discontinued operations, net of taxes |
(3,496 | ) | (139 | ) | ||||
Net income attributable to PSI stockholders |
$ | 28,213 | $ | 27,382 | ||||
Denominator: |
||||||||
Weighted average shares outstanding for basic earnings per share |
55,715 | 55,495 | ||||||
Effects of
dilutive stock options and restricted stock outstanding |
671 | 473 | ||||||
Shares used in computing diluted earnings per common share |
56,386 | 55,968 | ||||||
Basic earnings per share: |
||||||||
Income from continuing operations attributable to PSI stockholders |
$ | 0.57 | $ | 0.49 | ||||
Loss from discontinued operations, net of taxes |
(0.06 | ) | | |||||
Net income attributable to PSI stockholders |
$ | 0.51 | $ | 0.49 | ||||
Diluted earnings per share: |
||||||||
Income from continuing operations attributable to PSI stockholders |
$ | 0.56 | $ | 0.49 | ||||
Loss from discontinued operations, net of taxes |
(0.06 | ) | | |||||
Net income attributable to PSI stockholders |
$ | 0.50 | $ | 0.49 | ||||
4. Share-Based Compensation
We recognized approximately $3.5 million and $4.8 million in share-based compensation expense and
approximately $1.3 million and $1.8 million of related income tax benefit for the three months
ended March 31, 2010 and 2009, 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 $0.04 and $0.05 per share for the three months
ended March 31, 2010 and 2009, respectively.
Based on our stock option and restricted stock grants outstanding at March 31, 2010, we estimate
remaining unrecognized share-based compensation expense to be approximately $50.0 million with a
weighted average remaining life of 2.8 years.
Employees exercised 76,114 stock options during the three
months ended March 31, 2010. Also during 2010, 184,999 shares of restricted stock vested and 22,399 of those shares were
surrendered by our employees and cancelled in satisfaction of the employees related tax liabilities.
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
three months ended March 31, 2010 and 2009 was $4.8 million and $3.8 million, respectively.
We granted 842,750 stock options to employees during the three months ended March 31, 2010. These
options vest over four years in annual increments of 25% on each anniversary of the grant date and
each had a grant-date fair value of $7.92.
We granted 896,000 shares of restricted stock to employees during the three months ended March 31,
2010. 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 $21.00 per share.
As of March 31, 2010, we had 6,534,588 stock options outstanding
with a weighted average exercise price of $26.87 and a weighted average remaining contractual term of 6.8 years and 1,305,827 shares
of restricted stock outstanding. Also as of March 31, 2010, we had 503,817 shares available for issuance under the Psychiatric Solutions, Inc.
Equity Incentive Plan and the Psychiatric Solutions, Inc. Outside Directors Stock Incentive Plan.
5. Acquisitions
Acquiring free-standing psychiatric facilities is a key part of our business strategy.
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.
The balance of cost in excess of net assets acquired (goodwill) was $1.2 billion as of March 31,
2010 and December 31, 2009.
5
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
6. Long-term debt
Long-term debt consists of the following (in thousands):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Senior credit facility: |
||||||||
Senior secured term loan facility, expiring on July 1, 2012
and bearing interest of 2.1% and 2.0% at March 31, 2010
and December 31, 2009, respectively |
$ | 563,938 | $ | 564,875 | ||||
7 3/4% Notes |
582,899 | 582,666 | ||||||
Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.7% to 7.6% |
32,741 | 32,850 | ||||||
Other |
6,954 | 6,688 | ||||||
1,186,532 | 1,187,079 | |||||||
Less current portion |
10,552 | 4,940 | ||||||
Long-term debt |
$ | 1,175,980 | $ | 1,182,139 | ||||
Senior Credit Facility
Our Senior Credit Facility (the Credit Agreement) includes a $300 million revolving line of
credit facility administered by Bank of America, N.A. and a $575 million senior secured term loan
facility administered by Citicorp North America, Inc. During 2009, our revolving credit facility
was amended to extend the maturity 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 March 31, 2010, we had no borrowings
outstanding and $295.7 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. At March 31, 2010, our current maturities included $5.5 million of
our senior secured term loan facility for an April 2010 principal payment related to excess cash
flow, as required by our Credit Agreement. All repayments made under the senior secured term loan
facility are a permanent reduction in the amount available for future borrowings. 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 $0.6 million for the three months ended March 31, 2010.
Our Credit Agreement contains customary covenants that include: (1) a limitation on capital
expenditures and investments, sales of 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 March 31, 2010, 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% Senior Subordinated Notes due 2015 (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 operating
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% on
the $250 million issuance. We also issued $220 million of the 73/4% Notes in
2005. Interest on the 73/4% Notes is payable semi-annually in arrears on
January 15 and July 15.
6
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
Mortgage Loans
At March 31, 2010, we had approximately $32.7 million debt 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 $59.4 million at March 31, 2010.
7. Income Taxes
The provision for income taxes for continuing operations for the three months ended March 31, 2010
and 2009 reflects an effective tax rate of approximately 38.3% and 38.4%, 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 2009, we
sold our EAP business, elected to close and sell Nashville Rehabilitation Hospital, The Oaks
Treatment Center and Cumberland Hall of Chattanooga, and terminated one contract with a South
Carolina juvenile justice agency. With the exception of our EAP business that was reported in our
other segment, the results of these operations were reported in our owned and leased facilities
segment prior to the decision to discontinue.
The components of loss from discontinued operations, net of taxes, are as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Revenue |
$ | 2,446 | $ | 18,432 | ||||
Operating expenses |
5,118 | 18,719 | ||||||
Loss on disposal |
2,653 | | ||||||
7,771 | 18,719 | |||||||
Loss from discontinued operations before income taxes |
(5,325 | ) | (287 | ) | ||||
Benefit from income taxes |
(1,829 | ) | (148 | ) | ||||
Loss from discontinued operations, net of income taxes |
$ | (3,496 | ) | $ | (139 | ) | ||
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 March 31, 2010, the owned and leased facilities segment provides mental health and
behavioral health services to patients in its 86 owned and 8 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 income from continuing
operations before 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 the 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.
7
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
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
(dollars in thousands):
Three Months Ended March 31, 2010
Owned and | ||||||||||||||||
Leased | ||||||||||||||||
Facilities | Other | Corporate | Consolidated | |||||||||||||
Revenue |
$ | 442,769 | $ | 33,187 | $ | | $ | 475,956 | ||||||||
Adjusted EBITDA |
$ | 95,080 | $ | 2,236 | $ | (13,494 | ) | $ | 83,822 | |||||||
Interest expense |
7,208 | 79 | 9,211 | 16,498 | ||||||||||||
Provision for income taxes |
| | 19,683 | 19,683 | ||||||||||||
Depreciation and amortization |
10,921 | 1,052 | 417 | 12,390 | ||||||||||||
Inter-segment expenses |
13,469 | 1,211 | (14,680 | ) | | |||||||||||
Other expenses: |
||||||||||||||||
Share-based compensation |
| | 3,510 | 3,510 | ||||||||||||
Total other expenses |
| | 3,510 | 3,510 | ||||||||||||
Income (loss) from continuing operations |
63,482 | (106 | ) | (31,635 | ) | 31,741 | ||||||||||
Less: Income
attributable to noncontrolling interests |
(32 | ) | | | (32 | ) | ||||||||||
Income (loss) from continuing operations attributable to |
||||||||||||||||
PSI stockholders |
$ | 63,450 | $ | (106 | ) | $ | (31,635 | ) | $ | 31,709 | ||||||
Total assets |
$ | 2,377,041 | $ | 55,596 | $ | 117,547 | $ | 2,550,184 | ||||||||
Three Months Ended March 31, 2009
Owned and | ||||||||||||||||
Leased | ||||||||||||||||
Facilities | Other | Corporate | Consolidated | |||||||||||||
Revenue |
$ | 404,003 | $ | 29,927 | $ | | $ | 433,930 | ||||||||
Adjusted EBITDA |
$ | 84,202 | $ | 5,033 | $ | (12,430 | ) | $ | 76,805 | |||||||
Interest expense |
7,095 | (448 | ) | 9,962 | 16,609 | |||||||||||
Provision for income taxes |
| | 17,164 | 17,164 | ||||||||||||
Depreciation and amortization |
9,019 | 1,143 | 391 | 10,553 | ||||||||||||
Inter-segment expenses |
17,207 | 1,546 | (18,753 | ) | | |||||||||||
Other expenses: |
||||||||||||||||
Share-based compensation |
| | 4,819 | 4,819 | ||||||||||||
Total other expenses |
| | 4,819 | 4,819 | ||||||||||||
Income (loss) from continuing operations |
50,881 | 2,792 | (26,013 | ) | 27,660 | |||||||||||
Less: Income
attributable to noncontrolling interests |
(139 | ) | | | (139 | ) | ||||||||||
Income (loss) from continuing operations attributable to |
||||||||||||||||
PSI stockholders |
$ | 50,742 | $ | 2,792 | $ | (26,013 | ) | $ | 27,521 | |||||||
Total assets |
$ | 2,242,528 | $ | 63,862 | $ | 187,394 | $ | 2,493,784 | ||||||||
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
March 31, 2010 and December 31, 2009, and for the three months ended
8
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
March 31, 2010 and 2009. 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.
Condensed Consolidating Balance Sheet
As of March 31, 2010
(Dollars in thousands)
As of March 31, 2010
(Dollars in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 26,732 | $ | 5,740 | $ | 173 | $ | 32,645 | ||||||||||
Accounts receivable, net |
| 254,433 | 9,509 | (68 | ) | 263,874 | ||||||||||||||
Other current assets |
| 77,496 | 12,768 | 2,231 | 92,495 | |||||||||||||||
Total current assets |
| 358,661 | 28,017 | 2,336 | 389,014 | |||||||||||||||
Property and equipment, net of accumulated depreciation |
| 896,081 | 61,148 | (9,137 | ) | 948,092 | ||||||||||||||
Cost in excess of net assets acquired |
| 1,153,111 | | | 1,153,111 | |||||||||||||||
Investment in subsidiaries |
1,471,171 | (352,176 | ) | (16,266 | ) | (1,102,729 | ) | | ||||||||||||
Other assets |
16,222 | 38,216 | 24,718 | (19,189 | ) | 59,967 | ||||||||||||||
Total assets |
$ | 1,487,393 | $ | 2,093,893 | $ | 97,617 | $ | (1,128,719 | ) | $ | 2,550,184 | |||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 31,963 | $ | 1,377 | $ | (68 | ) | $ | 33,272 | |||||||||
Salaries and benefits payable |
| 92,666 | 1,419 | | 94,085 | |||||||||||||||
Other accrued liabilities |
17,539 | 37,208 | (495 | ) | 831 | 55,083 | ||||||||||||||
Current portion of long-term debt |
10,095 | | 457 | | 10,552 | |||||||||||||||
Total current liabilities |
27,634 | 161,837 | 2,758 | 763 | 192,992 | |||||||||||||||
Long-term debt, less current portion |
1,143,696 | | 32,284 | | 1,175,980 | |||||||||||||||
Deferred tax liability |
| 84,074 | | | 84,074 | |||||||||||||||
Other liabilities |
5,099 | (5,818 | ) | 35,784 | (4,034 | ) | 31,031 | |||||||||||||
Total liabilities |
1,176,429 | 240,093 | 70,826 | (3,271 | ) | 1,484,077 | ||||||||||||||
Redeemable noncontrolling interest |
| | | 4,326 | 4,326 | |||||||||||||||
Total stockholders equity |
310,964 | 1,853,800 | 26,791 | (1,129,774 | ) | 1,061,781 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,487,393 | $ | 2,093,893 | $ | 97,617 | $ | (1,128,719 | ) | $ | 2,550,184 | |||||||||
9
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
Condensed Consolidating Balance Sheet
As of December 31, 2009
(Dollars in thousands)
As of December 31, 2009
(Dollars in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 2,111 | $ | 4,704 | $ | | $ | 6,815 | ||||||||||
Accounts receivable, net |
| 241,211 | 8,296 | (68 | ) | 249,439 | ||||||||||||||
Other current assets |
| 90,259 | 16,284 | (1,377 | ) | 105,166 | ||||||||||||||
Total current assets |
| 333,581 | 29,284 | (1,445 | ) | 361,420 | ||||||||||||||
Property and equipment, net of accumulated depreciation |
| 879,453 | 61,491 | (9,214 | ) | 931,730 | ||||||||||||||
Cost in excess of net assets acquired |
| 1,153,111 | | | 1,153,111 | |||||||||||||||
Investment in subsidiaries |
1,486,852 | (368,332 | ) | (16,964 | ) | (1,101,556 | ) | | ||||||||||||
Other assets |
17,536 | 37,420 | 25,372 | (19,349 | ) | 60,979 | ||||||||||||||
Total assets |
$ | 1,504,388 | $ | 2,035,233 | $ | 99,183 | $ | (1,131,564 | ) | $ | 2,507,240 | |||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 34,467 | $ | 998 | $ | (68 | ) | $ | 35,397 | |||||||||
Salaries and benefits payable |
| 80,255 | 874 | | 81,129 | |||||||||||||||
Other accrued liabilities |
28,901 | 32,783 | 1,610 | (1,258 | ) | 62,036 | ||||||||||||||
Current portion of long-term debt |
4,490 | | 450 | | 4,940 | |||||||||||||||
Total current liabilities |
33,391 | 147,505 | 3,932 | (1,326 | ) | 183,502 | ||||||||||||||
Long-term debt, less current portion |
1,149,738 | | 32,401 | | 1,182,139 | |||||||||||||||
Deferred tax liability |
| 81,137 | | | 81,137 | |||||||||||||||
Other liabilities |
127 | (6,324 | ) | 36,069 | (4,082 | ) | 25,790 | |||||||||||||
Total liabilities |
1,183,256 | 222,318 | 72,402 | (5,408 | ) | 1,472,568 | ||||||||||||||
Redeemable
noncontrolling interests |
| | | 4,337 | 4,337 | |||||||||||||||
Total stockholders equity |
321,132 | 1,812,915 | 26,781 | (1,130,493 | ) | 1,030,335 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,504,388 | $ | 2,035,233 | $ | 99,183 | $ | (1,131,564 | ) | $ | 2,507,240 | |||||||||
Condensed Consolidating Statement of Income For the Three Months Ended March 31, 2010 (Dollars in thousands) |
||||||||||||||||||||
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Revenue |
$ | | $ | 464,855 | $ | 12,543 | $ | (1,442 | ) | $ | 475,956 | |||||||||
Salaries, wages and employee benefits |
| 253,095 | 6,380 | | 259,475 | |||||||||||||||
Professional fees |
| 43,784 | 1,733 | (589 | ) | 44,928 | ||||||||||||||
Supplies |
| 23,010 | 668 | | 23,678 | |||||||||||||||
Rentals and leases |
| 5,914 | 145 | (1,224 | ) | 4,835 | ||||||||||||||
Other operating expenses |
| 49,671 | 1,993 | (769 | ) | 50,895 | ||||||||||||||
Provision for doubtful accounts |
| 11,315 | 518 | | 11,833 | |||||||||||||||
Depreciation and amortization |
| 11,850 | 617 | (77 | ) | 12,390 | ||||||||||||||
Interest expense |
16,025 | | 473 | | 16,498 | |||||||||||||||
16,025 | 398,639 | 12,527 | (2,659 | ) | 424,532 | |||||||||||||||
(Loss) income from continuing operations before
income taxes |
(16,025 | ) | 66,216 | 16 | 1,217 | 51,424 | ||||||||||||||
(Benefit from) provision for income taxes |
(6,134 | ) | 25,345 | 6 | 466 | 19,683 | ||||||||||||||
(Loss) income from continuing operations |
(9,891 | ) | 40,871 | 10 | 751 | 31,741 | ||||||||||||||
(Loss) income from discontinued operations, net of tax |
| (3,496 | ) | | | (3,496 | ) | |||||||||||||
Net (loss) income |
(9,891 | ) | 37,375 | 10 | 751 | 28,245 | ||||||||||||||
Less: Net
income attributable to noncontrolling interests |
| | | (32 | ) | (32 | ) | |||||||||||||
Net (loss) income attributable to PSI stockholders |
$ | (9,891 | ) | $ | 37,375 | $ | 10 | $ | 719 | $ | 28,213 | |||||||||
10
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2009
(Dollars in thousands)
For the Three Months Ended March 31, 2009
(Dollars in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Revenue |
$ | | $ | 423,585 | $ | 11,639 | $ | (1,294 | ) | $ | 433,930 | |||||||||
Salaries, wages and employee benefits |
| 237,826 | 6,460 | | 244,286 | |||||||||||||||
Professional fees |
| 39,124 | 2,086 | (1,280 | ) | 39,930 | ||||||||||||||
Supplies |
| 22,347 | 573 | | 22,920 | |||||||||||||||
Rentals and leases |
| 6,129 | 24 | (1,073 | ) | 5,080 | ||||||||||||||
Other operating expenses |
| 40,233 | 1,620 | (587 | ) | 41,266 | ||||||||||||||
Provision for doubtful accounts |
| 8,200 | 262 | | 8,462 | |||||||||||||||
Depreciation and amortization |
| 10,090 | 540 | (77 | ) | 10,553 | ||||||||||||||
Interest expense |
16,193 | | 416 | | 16,609 | |||||||||||||||
16,193 | 363,949 | 11,981 | (3,017 | ) | 389,106 | |||||||||||||||
(Loss) income from continuing operations before
income taxes |
(16,193 | ) | 59,636 | (342 | ) | 1,723 | 44,824 | |||||||||||||
(Benefit from) provision for income taxes |
(6,201 | ) | 22,836 | (131 | ) | 660 | 17,164 | |||||||||||||
(Loss) income from continuing operations |
(9,992 | ) | 36,800 | (211 | ) | 1,063 | 27,660 | |||||||||||||
(Loss) income from discontinued operations, net
of tax |
| (460 | ) | 321 | | (139 | ) | |||||||||||||
Net (loss) income |
(9,992 | ) | 36,340 | 110 | 1,063 | 27,521 | ||||||||||||||
Less: Net income attributable to noncontrolling
interests |
| | | (139 | ) | (139 | ) | |||||||||||||
Net (loss) income attributable to PSI stockholders |
$ | (9,992 | ) | $ | 36,340 | $ | 110 | $ | 924 | $ | 27,382 | |||||||||
11
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2010
(Dollars in thousands)
For the Three Months Ended March 31, 2010
(Dollars in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net (loss) income |
$ | (9,891 | ) | $ | 37,375 | $ | 10 | $ | 751 | $ | 28,245 | |||||||||
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
| 11,850 | 617 | (77 | ) | 12,390 | ||||||||||||||
Amortization of loan costs and bond premium |
1,553 | | 11 | | 1,564 | |||||||||||||||
Share-based compensation |
| 3,510 | | | 3,510 | |||||||||||||||
Change in income tax assets and liabilities |
| 10,824 | | | 10,824 | |||||||||||||||
Loss (income) from discontinued operations, net of
taxes |
| 3,496 | | | 3,496 | |||||||||||||||
Changes in operating assets and liabilities, net of
effect of acquisitions: |
||||||||||||||||||||
Accounts receivable |
| (13,222 | ) | (1,213 | ) | | (14,435 | ) | ||||||||||||
Other current assets |
| (2,623 | ) | 3,516 | | 893 | ||||||||||||||
Accounts payable |
| (761 | ) | 379 | | (382 | ) | |||||||||||||
Salaries and benefits payable |
| 12,411 | 545 | | 12,956 | |||||||||||||||
Accrued liabilities and other liabilities |
| (587 | ) | (2,390 | ) | | (2,977 | ) | ||||||||||||
Net cash (used in) provided by continuing operating activities |
(8,338 | ) | 62,273 | 1,475 | 674 | 56,084 | ||||||||||||||
Net cash used in discontinued operating activities |
| (89 | ) | | | (89 | ) | |||||||||||||
Net cash (used in) provided by operating activities |
(8,338 | ) | 62,184 | 1,475 | 674 | 55,995 | ||||||||||||||
Investing activities: |
||||||||||||||||||||
Capital purchases of leasehold improvements,
equipment and software |
| (29,279 | ) | (274 | ) | | (29,553 | ) | ||||||||||||
Other assets |
| 156 | (55 | ) | | 101 | ||||||||||||||
Net cash used in continuing investing activities |
| (29,123 | ) | (329 | ) | | (29,452 | ) | ||||||||||||
Net cash used in discontinued investing activities |
| (12 | ) | | | (12 | ) | |||||||||||||
Net cash used in investing activities |
| (29,135 | ) | (329 | ) | | (29,464 | ) | ||||||||||||
Financing activities: |
||||||||||||||||||||
Principal payments on long-term debt |
(1,212 | ) | | (110 | ) | | (1,322 | ) | ||||||||||||
Payment of loan and issuance costs |
(6 | ) | | | | (6 | ) | |||||||||||||
Distributions to noncontrolling interests |
| (43 | ) | | (43 | ) | ||||||||||||||
Repurchase of common stock upon restricted stock vesting |
(490 | ) | | | | (490 | ) | |||||||||||||
Net transfers to and from members |
8,886 | (8,428 | ) | 43 | (501 | ) | | |||||||||||||
Proceeds from exercises of common stock options |
1,160 | | | | 1,160 | |||||||||||||||
Net cash provided by (used in) financing activities |
8,338 | (8,428 | ) | (110 | ) | (501 | ) | (701 | ) | |||||||||||
Net increase
in cash and cash equivalents |
| 24,621 | 1,036 | 173 | 25,830 | |||||||||||||||
Cash and cash equivalents at beginning of the period |
| 2,111 | 4,704 | | 6,815 | |||||||||||||||
Cash and cash equivalents at end of the period |
$ | | $ | 26,732 | $ | 5,740 | $ | 173 | $ | 32,645 | ||||||||||
12
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2009
(Dollars in thousands)
For the Three Months Ended March 31, 2009
(Dollars in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net (loss) income |
$ | (9,992 | ) | $ | 36,340 | $ | 110 | $ | 1,063 | $ | 27,521 | |||||||||
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
| 10,090 | 540 | (77 | ) | 10,553 | ||||||||||||||
Amortization of loan costs and bond premium |
704 | | 11 | | 715 | |||||||||||||||
Share-based compensation |
| 4,819 | | | 4,819 | |||||||||||||||
Change in income tax assets and liabilities |
| 15,908 | | | 15,908 | |||||||||||||||
Loss (income) from discontinued operations, net of
taxes |
| 460 | (321 | ) | | 139 | ||||||||||||||
Changes in operating assets and liabilities, net of
effect of acquisitions: |
||||||||||||||||||||
Accounts receivable |
| (9,016 | ) | (760 | ) | | (9,776 | ) | ||||||||||||
Other current assets |
| 2,319 | (23 | ) | | 2,296 | ||||||||||||||
Accounts payable |
| (2,923 | ) | 101 | | (2,822 | ) | |||||||||||||
Salaries and benefits payable |
| (3,190 | ) | (201 | ) | | (3,391 | ) | ||||||||||||
Accrued liabilities and other liabilities |
| (5,551 | ) | (1,012 | ) | | (6,563 | ) | ||||||||||||
Net cash (used in) provided by continuing operating activities |
(9,288 | ) | 49,256 | (1,555 | ) | 986 | 39,399 | |||||||||||||
Net cash provided by discontinued operating activities |
| 54 | 727 | | 781 | |||||||||||||||
Net cash (used in) provided by operating activities |
(9,288 | ) | 49,310 | (828 | ) | 986 | 40,180 | |||||||||||||
Investing activities: |
||||||||||||||||||||
Capital purchases of leasehold improvements, |
||||||||||||||||||||
equipment and software |
| (24,368 | ) | | | (24,368 | ) | |||||||||||||
Other assets |
| 2,370 | (2,528 | ) | | (158 | ) | |||||||||||||
Net cash used in continuing investing activities |
| (21,998 | ) | (2,528 | ) | | (24,526 | ) | ||||||||||||
Net cash used in discontinued investing activities |
| (321 | ) | | | (321 | ) | |||||||||||||
Net cash used in investing activities |
| (22,319 | ) | (2,528 | ) | | (24,847 | ) | ||||||||||||
Financing activities: |
||||||||||||||||||||
Net increase in revolving credit facility, less acquisitions |
(39,333 | ) | | | | (39,333 | ) | |||||||||||||
Principal payments on long-term debt |
(1,169 | ) | | (103 | ) | | (1,272 | ) | ||||||||||||
Payment of loan and issuance costs |
(5,363 | ) | | | | (5,363 | ) | |||||||||||||
Repurchase of common stock upon restricted stock vesting |
(953 | ) | | | | (953 | ) | |||||||||||||
Net transfers to and from members |
55,764 | (54,372 | ) | (406 | ) | (986 | ) | | ||||||||||||
Proceeds from exercises of common stock options |
342 | | | | 342 | |||||||||||||||
Net cash provided by (used in) financing activities |
9,288 | (54,372 | ) | (509 | ) | (986 | ) | (46,579 | ) | |||||||||||
Net decrease
in cash and cash equivalents |
| (27,381 | ) | (3,865 | ) | | (31,246 | ) | ||||||||||||
Cash and cash equivalents at beginning of the period |
| 39,881 | 11,390 | | 51,271 | |||||||||||||||
Cash and cash equivalents at end of the period |
$ | | $ | 12,500 | $ | 7,525 | $ | | $ | 20,025 | ||||||||||
11. Recent Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board amended guidance codified in Accounting
Standards Codification 855, Subsequent Events, to remove the requirement for SEC filers to disclose
the date through which an entity has evaluated subsequent events. We adopted this guidance in the
quarter ended March 31, 2010.
12.
Contingencies and Other
We are, from time to time, subject to various claims and legal actions that arise in the ordinary
course of our business, including claims for damages for personal injuries, medical malpractice,
breach of contract, business tort and employment related claims. In these actions, plaintiffs
request a variety of damages, including, in some instances, punitive and other types of damages
that may not be covered by insurance.
13
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010
A
stockholder lawsuit and a stockholder derivative lawsuit alleging violations of federal securities laws were filed in 2009 against us and
certain of our executives. We believe that the lawsuits are without merit and are defending them vigorously.
During the first quarter of 2010, we received a subpoena from the United States
Department of Justice (the DOJ) seeking various documents relating to compensation,
stock sales, option awards and option exercises for certain senior level executives and
a subpoena from the DOJ seeking various other stock related documents including, but not
limited to, communications with investment firms and investors. We have been cooperating,
and will continue to cooperate, with the DOJ in connection with these inquiries. The outcome
of the DOJs inquiries is uncertain, and adverse developments or outcomes can result in adverse
publicity, significant expenses, monetary damages, penalties or injunctive relief.
In the opinion of management, we are not currently a party to any proceeding that would have a
material adverse effect on our business, financial condition or results of operations.
As
previously announced, a special committee of our Board of Directors
was formed in response to approaches we received from third parties
regarding a potential sale of Psychiatric Solutions, Inc. The special
committee has retained Goldman, Sachs &
Co. and Shearman & Sterling LLP as its financial and legal
advisors and is considering possible responses. There can be no
assurance that a sale of Psychiatric Solutions, Inc. will take place.
We do not expect to make further public comments regarding these
matters unless and until we enter into an agreement with respect to a
sale or it is determined that a sale will not be pursued.
The reserve for professional and general liability was $24.0 million and 19.0 million as of March
31, 2010 and December 31, 2009, respectively, which is primarily due to new and existing claim developments in 2010.
14
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 known and unknown
risks, uncertainties and other factors, including those set forth below, which could significantly
affect our current plans and expectations and future financial condition and results.
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; | ||
| economic downturn resulting in efforts by federal and state health care programs and managed care companies to reduce reimbursement rates for our services; | ||
| implementation and effect of newly-adopted federal health care legislation and potential state health care legislation; | ||
| 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; | ||
| risks that speculation about a proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of such speculation; | ||
| fluctuations in the market value of our common stock, including fluctuations resulting from announcements by us or our competitors of significant contracts or acquisitions or other corporate events; | ||
| negative press coverage of us or our industry that may affect public opinion; and | ||
| those risks and uncertainties described from time to time in our filings with the SEC. |
15
Table of Contents
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, 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 2006, we acquired 74 inpatient behavioral health care facilities. 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 United Medical Corporation and opened Lincoln Prairie Behavioral Health
Center, an 80-bed inpatient facility in Springfield, Illinois. During 2009, we opened Rolling Hills
Hospital, an 80-bed inpatient facility in Franklin, Tennessee, acquired two inpatient behavioral
health care facilities, and completed the sale of our EAP business.
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.
Income from continuing operations before income taxes increased to $51.4 million, or 10.8% of
revenue, for the three months ended March 31, 2010 compared to $44.8 million, or 10.3% of revenue,
for the same period of 2009 primarily as a result of a 9.6% increase in revenue. Our same-facility
revenue from owned and leased inpatient facilities increased 7.0% for the three months ended March
31, 2010 compared to the same period in 2009, primarily as a result of increases in patient days
and revenue per patient day of 5.9% and 1.0%, respectively. Same-facility operating margins
improved for 2010 compared to 2009, primarily due to a decrease in salaries, wages and employee
benefits expense as a percent of revenue to 52.7% from 54.3%, partially offset by an increase in
other operating expenses as a percent of revenue to 8.7% from 8.2%. Same-facility refers to the
comparison of each inpatient facility owned during 2009 with the comparable period in 2010,
adjusted for closures and combinations for comparability purposes.
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 93.1% of our total revenue for the three months ended March 31, 2010 and
2009, respectively.
Other Revenue
Other behavioral health care services accounted for 7.0% and 6.9% of our revenue for the three
months ended March 31, 2010 and 2009, 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 and
rehabilitation 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 months ended March 31, 2010 and 2009 (dollars in thousands):
16
Table of Contents
For the Three Months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Revenue |
$ | 475,956 | 100.0 | % | $ | 433,930 | 100.0 | % | ||||||||
Salaries, wages, and employee benefits (including
share-based compensation of $3,510 and
$4,819 in 2010 and 2009, respectively) |
259,475 | 54.5 | % | 244,286 | 56.3 | % | ||||||||||
Professional fees |
44,928 | 9.4 | % | 39,930 | 9.2 | % | ||||||||||
Supplies |
23,678 | 5.0 | % | 22,920 | 5.3 | % | ||||||||||
Provision for doubtful accounts |
11,833 | 2.5 | % | 8,462 | 2.0 | % | ||||||||||
Other operating expenses |
55,730 | 11.7 | % | 46,346 | 10.7 | % | ||||||||||
Depreciation and amortization |
12,390 | 2.6 | % | 10,553 | 2.4 | % | ||||||||||
Interest expense, net |
16,498 | 3.5 | % | 16,609 | 3.8 | % | ||||||||||
Income from continuing operations before
income taxes |
51,424 | 10.8 | % | 44,824 | 10.3 | % | ||||||||||
Provision for income taxes |
19,683 | 4.1 | % | 17,164 | 3.9 | % | ||||||||||
Income from continuing operations |
31,741 | 6.7 | % | 27,660 | 6.4 | % | ||||||||||
Less: Net income attributable to
noncontrolling interest |
(32 | ) | 0.0 | % | (139 | ) | -0.1 | % | ||||||||
Income from continuing operations attributable to
PSI stockholders |
$ | 31,709 | 6.7 | % | $ | 27,521 | 6.3 | % | ||||||||
Three Months Ended March 31, 2010 Compared To Three Months Ended March 31, 2009
The following table compares key total facility statistics and same-facility statistics for
the three months ended March 31, 2010 and 2009 for our owned and leased inpatient facilities:
For the Three Months Ended March 31, | % | |||||||||||
2010 | 2009 | Change | ||||||||||
Same-facility results: |
||||||||||||
Revenue (in thousands) |
$ | 432,445 | $ | 404,003 | 7.0 | % | ||||||
Admissions |
47,487 | 43,261 | 9.8 | % | ||||||||
Patient days |
740,145 | 699,233 | 5.9 | % | ||||||||
Average length of stay (in days) |
15.6 | 16.2 | -3.7 | % | ||||||||
Revenue per patient day |
$ | 584 | $ | 578 | 1.0 | % | ||||||
Total facility results: |
||||||||||||
Revenue (in thousands) |
$ | 442,769 | $ | 404,003 | 9.6 | % | ||||||
Admissions |
48,805 | 43,261 | 12.8 | % | ||||||||
Patient days |
752,240 | 699,233 | 7.6 | % | ||||||||
Average length of stay (in days) |
15.4 | 16.2 | -4.9 | % | ||||||||
Revenue per patient day |
$ | 589 | $ | 578 | 1.9 | % |
Revenue. Revenue from continuing operations increased $42.0 million, or 9.7%, to $476.0
million for the three months ended March 31, 2010 compared to the three months ended March 31,
2009. Revenue from owned and leased inpatient facilities increased $38.8 million, or 9.6%, to
$442.8 million in 2010 compared to 2009. The increase in revenue from owned and leased inpatient
facilities relates primarily to same-facility growth in patient days of 5.9% and revenue per
patient day of 1.0% as well as revenue from two facilities acquired in 2009. Other revenue
increased $3.3 million to $33.2 million in 2010 compared to $29.9 million in 2009, primarily as a
result of an increase in covered lives in our managed care plan in Puerto Rico.
Salaries, wages, and employee benefits. Salaries, wages and employee benefits (SWB) expense
was $259.5 million for the three months ended March 31, 2010 compared to $244.3 million for the
three months ended March 31, 2009, an increase of $15.2 million, or 6.2%. SWB expense includes $3.5
million and $4.8 million of shared-based compensation expense for the quarters ended March 31, 2010
and 2009, respectively. The $1.3 million decrease in share-based compensation expense is primarily
due to actual forfeitures in excess of estimated forfeitures. Based on our stock option and restricted stock grants
outstanding at March 31, 2010, we estimate remaining unrecognized share-based compensation expense
to be approximately $50.0 million with a weighted-average remaining amortization period of 2.8
years. Excluding share-based compensation expense, SWB expense was $256.0 million, or 53.8% of
total revenue, for the three months ended March 31, 2010 compared to $239.5 million, or 55.2% of
total revenue, for the three months
17
Table of Contents
ended March 31, 2009. SWB expense for owned and leased
inpatient facilities was $233.8 million in 2010, or 52.8% of revenue. Same-facility SWB expense for
owned and leased inpatient facilities was $227.9 million in 2010, or 52.7% of revenue, compared to
$219.3 million in 2009, or 54.3% of revenue. This decrease in same-facility SWB expense as a
percent of revenue is primarily the result of an increase in same-facility patient days of 5.9%
while staffing remained relatively stable. SWB expense for other operations was $12.6 million in
2010 compared to $11.3 million in 2009. SWB expense for our corporate office was $13.1 million,
including $3.5 million in share-based compensation, for 2010 compared to $14.0 million, including
$4.8 million in shared-based compensation, for 2009.
Professional fees. Professional fees were $44.9 million for the three months ended March 31,
2010, or 9.4% of total revenue, compared to $39.9 million for the three months ended March 31,
2009, or 9.2% of total revenue. Professional fees for owned and leased inpatient facilities were
$40.3 million in 2010, or 9.1% of revenue. Same-facility professional fees for owned and leased
inpatient facilities were $39.7 million in 2010, or 9.2% of revenue, compared to $36.4 million in
2009, or 9.0% of revenue. Professional fees for other operations and our corporate office increased
to $4.7 million in 2010 compared to $3.5 million in 2009.
Supplies. Supplies expense was $23.7 million for the three months ended March 31, 2010, or
5.0% of total revenue, compared to $22.9 million for the three months ended March 31, 2009, or 5.3%
of total revenue. Supplies expense for owned and leased inpatient facilities was $23.5 million in
2010, or 5.3% of revenue. Same-facility supplies expense for owned and leased inpatient facilities
was $23.1 million in 2010, or 5.3% of revenue, compared to $22.7 million in 2009, or 5.6% of
revenue.
Provision for doubtful accounts. The provision for doubtful accounts was $11.8 million for the
three months ended March 31, 2010, or 2.5% of total revenue, compared to $8.5 million for the three
months ended March 31, 2009, 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 $55.7 million
for the three months ended March 31, 2010, or 11.7% of total revenue, compared to $46.3 million for
the three months ended March 31, 2009, or 10.7% of total revenue. Other operating expenses for
owned and leased inpatient facilities were $38.2 million in 2010, or 8.6% of revenue. Same-facility
other operating expenses for owned and leased inpatient facilities were $37.4 million in 2010, or
8.7% of revenue, compared to $33.2 million in 2009, or 8.2% of revenue. This increase in other
operating expenses as a percent of revenue is primarily a result of an increase in our self-insured
professional and general liability insurance expense as a percent of revenue compared with 2009.
Other operating expenses for other operations and our corporate office increased to $17.5 million
in 2010 compared to $13.2 million in 2009 primarily as a result of additional expenses associated
with an increase in covered lives in our managed care plan in Puerto Rico.
Depreciation and amortization. Depreciation and amortization expense increased to $12.4
million for the three months ended March 31, 2010 compared to $10.6 million for the three months
ended March 31, 2009, primarily as a result of depreciation on expansion projects at existing
inpatient facilities and the acquisition of two facilities in 2009.
Interest expense, net. Interest expense, net of interest income, decreased to $16.5 million
for the three months ended March 31, 2010 compared to $16.6 million for the three months ended
March 31, 2009.
Income attributable to noncontrolling interest. We own controlling interests in two joint
ventures that own two of our inpatient behavioral health care facilities. Income attributable to
noncontrolling interests represents the pro rata portion of the joint ventures net profit
belonging to the noncontrolling partners.
Loss from discontinued operations, net of taxes. The loss from discontinued operations, net of
income tax effect, was $3.5 million for the three months ended March 31, 2010 compared to $0.1
million for the three months ended March 31, 2009. The $3.5 million loss in 2010 includes $2.7
million for the loss on the closure of one leased facility that was previously held for sale.
During 2009, we completed the sale of our EAP business, elected to close and make The Oaks
Treatment Center and Cumberland Hall of Chattanooga available for sale, and terminated one contract
with a South Carolina juvenile justice agency. We also elected to close and make Nashville
Rehabilitation Hospital available for sale and transferred its behavioral health services to
Rolling Hills Hospital in the first quarter of 2009.
Liquidity and Capital Resources
We currently have $295.7 million available for borrowings under our $300 million revolving
credit facility. Additionally, our cash flow from continuing operating activities was $56.1 million
for the three months ended March 31, 2010 and we had $196.0 million of working capital at March 31,
2010. We believe that our cash flow from operations, revolving credit facility availability and
working capital are sufficient to fund our known future cash requirements for operations and
capital expenditures. We historically spend approximately 2% to 3% of our revenue on routine capital expenditures and currently have plans for
construction projects with expected costs of approximately $54.0 million over the next twelve
months, which will add approximately 300 new beds to our inpatient facilities as well as replace an
existing 64-bed inpatient facility.
18
Table of Contents
As part of our long-term growth strategy we are actively seeking acquisitions that fit our
corporate growth strategy and may acquire additional inpatient behavioral health care facilities
and other operations as well as incur expenditures for the expansion of our inpatient facilities.
Management continually assesses our capital needs and, should the need arise, we will seek
additional financing, including debt or equity, to fund potential acquisitions, facility
expansions, 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 expand our
facilities.
Working capital at March 31, 2010 was $196.0 million, including cash and cash equivalents of
$32.6 million, compared to working capital of $177.9 million, including cash and cash equivalents
of $6.8 million, at December 31, 2009. This increase in working capital is primarily attributable
to increases in cash of $25.8 million and accounts receivable of $14.4 million and a decrease in
accrued interest expense of $11.4 million, offset by a decrease in income tax receivable of $8.8
million, an increase in the current portion of long-term debt of $5.6 million, and an increase in
accrued salaries and benefits payable of $13.0 million. The $25.8 increase in cash and cash
equivalents is primarily a result of cash provided by continuing operations of $56.1 million offset
by cash used for capital expenditures of $29.6 million. The increase in accounts receivable is
primarily due to a 7.0% increase in same-facility revenue. Our consolidated days sales
outstanding were 50 and 49 at March 31, 2010 and December 31, 2009, respectively. The increase in
accrued salaries and benefits payable is primarily the result of six additional days of accrued
salaries at March 31, 2010 compared to December 31, 2009 due to the timing of the pay dates.
Cash provided by continuing operating activities was $56.1 million for the three months ended
March 31, 2010 compared to $39.4 million for the three months ended March 31, 2009. The increase in
cash flows from continuing operating activities was primarily the result of cash provided by
improved operating results and the timing of payment dates for payroll.
Cash used by continuing investing activities was $29.5 million for the three months ended
March 31, 2010 compared to $24.5 million for the three months ended March 31, 2009. Cash used in
investing activities for the three months ended March 31, 2010 primarily consisted of $29.6 million
paid for purchases of fixed assets. Cash used for routine and expansion capital expenditures was
approximately $10.8 million and $18.8 million, respectively, for the three months ended March 31,
2010. Planned capital expansion projects and the construction of new facilities are expected to add
approximately 300 new beds to our inpatient facilities over the next twelve months. We define
expansion capital expenditures as those that increase the capacity of our facilities or otherwise
enhance revenue. Routine or maintenance capital expenditures were 2.3% of our net revenue for the
three months ended March 31, 2010. Cash used in investing activities for the three months ended
March 31, 2009 consisted primarily of $24.4 million in cash paid for purchases of fixed assets.
Cash used in financing activities was $0.7 million for the three months ended March 31, 2010
compared to $46.6 million for the three months ended March 31, 2009. Cash used in financing
activities for the three months ended March 31, 2009 consisted primarily of $39.3 million of
payments on the balance due under our revolving credit facility and $5.4 million paid to lenders in
connection with the amendment of our revolving credit facility during February 2009.
We have filed a universal shelf registration statement on Form S-3 and an acquisition shelf
registration statement on Form S-4. The universal shelf registration statement permits us to sell,
in one or more public offerings, an indeterminate amount of our common stock, common stock
warrants, preferred stock and debt securities, or any combination of such securities, at prices and
on terms satisfactory to us. The acquisition shelf registration statement enables us to issue up to
5 million shares of our common stock in one or more business combination transactions, including
acquisitions by us of other businesses, assets, properties or securities. To date, no securities
have been issued pursuant to either registration statement.
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: |
||||||||||||||||||||
Senior secured term loan facility, expiring on July 1, 2012
and bearing interest of 2.1% at March 31, 2010 |
$ | 563,938 | $ | 9,250 | $ | 554,688 | $ | | $ | | ||||||||||
7 3/4% Senior Subordinated Notes due July 15, 2015 |
582,899 | | | | 582,899 | |||||||||||||||
Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.7% to 7.6% |
32,741 | 457 | 1,003 | 1,136 | 30,145 | |||||||||||||||
1,179,578 | 9,707 | 555,691 | 1,136 | 613,044 | ||||||||||||||||
Lease and other obligations |
79,381 | 13,639 | 18,607 | 12,114 | 35,021 | |||||||||||||||
Total contractual obligations |
$ | 1,258,959 | $ | 23,346 | $ | 574,298 | $ | 13,250 | $ | 648,065 | ||||||||||
(1) | Excludes capital lease obligations and other obligations of $7.0 million, which are included in lease and other obligations. |
19
Table of Contents
The fair value of our 73/4% Notes was approximately $599.2 million and
$565.2 million as of March 31, 2010 and December 31, 2009, respectively. The fair value of our
senior secured term loan facility was approximately $558.3 million and $536.6 million as of March
31, 2010 and December 31, 2009, respectively. The carrying value of our other long-term debt,
including current maturities, of $39.7 million and $39.5 million at March 31, 2010 and December 31,
2009, respectively, approximated fair value. We had $563.9 million of variable rate debt
outstanding under our senior secured term loan facility as of March 31, 2010. At our March 31, 2010
borrowing level, a hypothetical 10% increase in interest rates would decrease our annual net income
and cash flows by approximately $0.7 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 the 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.
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 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.
20
Table of Contents
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. | ||
GAAP requires us to make significant judgments regarding the recognition and measurement of each tax position. Changes in these judgments may materially affect the estimate of our effective tax rate and our operating results. | ||
Share-Based Compensation | ||
We record share-based compensation expense for 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 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. With
respect to our interest-bearing liabilities, approximately $615.6 million of our long-term debt
outstanding at March 31, 2010 was subject to a weighted-average fixed interest rate of 8.0%. Our
variable rate debt is comprised of our senior secured term loan facility, which had $563.9 million
outstanding at March 31, 2010 and on which interest is generally payable at LIBOR plus 1.75%.
A hypothetical 10% increase in interest rates would decrease our net income and cash flows by
approximately $0.7 million on an annual basis based upon our borrowing level at March 31, 2010. In
the event we draw on our revolving credit facility and/or interest rates change significantly, we
anticipate that we 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. Information on quantitative and qualitative disclosure about
market risk is included in Part I, Item 2 of this Quarterly Report on Form 10-Q under the caption
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
and Capital Resources.
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 Securities 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 first
quarter ended March 31, 2010 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, from time to time, subject to various claims and legal actions that arise in the
ordinary course of our business, including claims for damages for personal injuries, medical
malpractice, breach of contract, business tort and employment related claims. In these actions,
plaintiffs request a variety of damages, including, in some instances, punitive and other types of
damages that may not be covered by insurance.
21
Table of Contents
A
stockholder lawsuit and a stockholder derivative lawsuit alleging violations of federal securities laws
were filed in 2009 against us and certain of our executives. We
believe that the lawsuits are without merit and are
defending them vigorously.
During the first quarter of 2010, we received a subpoena from the
United States Department of Justice (the DOJ) seeking various
documents relating to compensation, stock sales, option awards and
option exercises for certain senior level executives and a subpoena
from the DOJ seeking various other stock related documents including,
but not limited to, communications with investment firms and investors.
We have been cooperating, and will continue to cooperate, with the DOJ in
connection with these inquiries. The outcome of the DOJs inquiries is uncertain,
and adverse developments or outcomes can result in adverse publicity, significant
expenses, monetary damages, penalties or injunctive relief.
In the opinion of management, we are not currently a party to any proceeding that would have a
material adverse effect on our business, financial condition or results of operations.
Item 1A. | Risk Factors. |
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, 2009, except for the following risk factor:
We cannot predict the effect that health care reform and other changes in government programs may
have on our business, financial condition or results of operations.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act of 2010 (collectively, the Affordable Care Act) were signed into law
by President Obama. The Affordable Care Act is intended to increase the number of insured U.S.
citizens through a combination of private sector health insurance
reforms and the expansion of public programs. Substantially all of the funding for
the expanded coverage is intended to be derived through provisions in
the law that are designated to lower health care costs, including, among other things, reducing Medicare and Medicaid payments
to health care facilities and other providers, implementing the use of value and quality-based
purchasing programs by the Medicare program, and expanding the use of recovery audit contractors to the
Medicaid program. The Affordable Care Act also contains substantial
revisions to federal health care fraud and abuse laws that both expand
the scope of activities a provider may potentially face sanction for
and lower the governments burden of proof to impose such
sanctions. Because of the complexity of
the Affordable Care Act and the fact that a number of its provisions do not take effect until 2013
or later, it is difficult to predict the impact that the Affordable Care Act will have on our
facilities. However, depending on how the Affordable Care Act is
ultimately implemented by regulation and interpreted by the courts, the Affordable Care Act could
have a material adverse effect on our business, financial condition and results of operations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Issuer Purchases of Equity Securities
The following table provides information relating to our purchase of common stock during the first
quarter of 2010:
22
Table of Contents
Total Number of | Maximum Number | |||||||||||||||
Shares Purchased | of Shares that May | |||||||||||||||
as Part of Publicly | Yet Be Purchased | |||||||||||||||
Total Number of | Average Price | Announced Plans or | Under the Plans or | |||||||||||||
Period | Shares Purchased (1) | Paid Per Share | Programs | Programs | ||||||||||||
January 1, 2010 through
January 31, 2010 |
| $ | | N/A | N/A | |||||||||||
February 1, 2010
through
February 28, 2010 |
22,399 | 21.86 | N/A | N/A | ||||||||||||
March 1, 2010 through
March 31, 2010 |
| | N/A | N/A | ||||||||||||
Total |
22,399 | $ | 21.86 | N/A | N/A |
(1) | All of the shares were surrendered by our employees in satisfaction of the employees tax liabilities related to the vesting of restricted stock. The surrender of shares by our employees was made in accordance with the terms of restricted stock agreements between the employees and us and did not involve any payments by us. We currently do not have a stock repurchase program. |
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). | |
10.1
|
Amendment to Employment Agreement, dated April 15, 2010, by and between Joey A. Jacobs and Psychiatric Solutions, Inc. (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, filed April 20, 2010). | |
10.2
|
Form of Change in Control Severance Agreement, dated April 15, 2010, by and between certain of the Companys officers and Psychiatric Solutions, Inc. (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, filed on April 20, 2010). | |
10.3
|
Psychiatric Solutions, Inc. 2010 Cash Bonus Plans (incorporated by reference to Exhibit 10 to the Companys Current Report on Form 8-K, filed on April 1, 2010). | |
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 |
23
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: May 10, 2010