Acadia Healthcare Company, Inc. (ACHC) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations with our audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statements that address future results or occurrences. In some cases you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “would,” “should,” “could” or the negative thereof. Generally, the words “anticipate,” “believe,” “continue,” “expect,” “intend,” “estimate,” “project,” “plan” and similar expressions identify forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained are forward-looking statements.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors, many of which are outside of our control, which could cause our actual results, performance or achievements to differ materially from any results, performance or achievements expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, the following:
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| • | the impact of the COVID-19 pandemic on our inpatient and outpatient volumes, or disruptions caused by other pandemics, epidemics or outbreaks of infectious diseases; |
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| • | the impact of vaccine and other pandemic-related mandates imposed by local, state and federal authorities on our business; |
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| • | costs of providing care to our patients, including increased staffing, equipment and supply expenses resulting from the COVID-19 pandemic; |
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| • | our ability to identify and integrate a new chief executive officer; |
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| • | our significant indebtedness, our ability to meet our debt obligations, and our ability to incur substantially more debt; |
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| • | our ability to implement our business strategies, especially in light of the COVID-19 pandemic; |
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| • | the impact of payments received from the government and third-party payors on our revenue and results of operations; |
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| • | the impact of an increase in uninsured or underinsured patients or the deterioration in the collectability of patient accounts receivables; |
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| • | difficulties in successfully integrating the operations of acquired facilities or realizing the potential benefits and synergies of our acquisitions and joint ventures; |
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| • | our ability to recruit and retain quality psychiatrists and other physicians, nurses, counselors and other medical support personnel; |
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| • | the impact of competition for staffing on our labor costs and profitability; |
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| • | the impact of increases to our labor costs; |
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| • | the impact of the economic and employment conditions on our business and future results of operations; |
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| • | the occurrence of patient incidents, which could result in negative media coverage, adversely affect the price of our securities and result in incremental regulatory burdens and governmental investigations; |
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| • | our future cash flow and earnings; |
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| • | our restrictive covenants, which may restrict our business and financing activities; |
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| • | the impact of adverse weather conditions, including the effects of hurricanes, wildfires and other natural disasters; |
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| • | compliance with laws and government regulations; |
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| • | the impact of claims brought against us or our facilities including claims for damages for personal injuries, medical malpractice, overpayments, breach of contract, securities law violations, tort and employee related claims; |
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| • | the impact of governmental investigations, regulatory actions and whistleblower lawsuits; |
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| • | any failure to comply with the terms of the Company’s corporate integrity agreement with the OIG; |
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| • | the impact of healthcare reform in the U.S.; |
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| • | the risk of a cyber-security incident and any resulting adverse impact on our operations or violation of laws and regulations regarding information privacy; |
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| • | the impact of our highly competitive industry on patient volumes; |
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| • | our dependence on key management personnel, key executives and local facility management personnel; |
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| • | our acquisition, joint venture and wholly-owned de novo strategies, which expose us to a variety of operational and financial risks, as well as legal and regulatory risks; |
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| • | the impact of state efforts to regulate the construction or expansion of healthcare facilities on our ability to operate and expand our operations; |
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| • | our potential inability to extend leases at expiration; |
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| • | the impact of controls designed to reduce inpatient services on our revenue; |
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| • | the impact of different interpretations of accounting principles on our results of operations or financial condition; |
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| • | the impact of environmental, health and safety laws and regulations, especially in locations where we have concentrated operations; |
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| • | the impact of laws and regulations relating to privacy and security of patient health information and standards for electronic transactions; |
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| • | our ability to cultivate and maintain relationships with referral sources; |
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| • | the impact of a change in the mix of our earnings, adverse changes in our effective tax rate and adverse developments in tax laws generally; |
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| • | changes in interpretations, assumptions and expectations regarding recent tax legislation, including provisions of the CARES Act and additional guidance that may be issued by federal and state taxing authorities; |
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| • | failure to maintain effective internal control over financial reporting; |
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| • | the impact of fluctuations in our operating results, quarter to quarter earnings and other factors on the price of our securities; |
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| • | the impact of the trend for insurance companies and managed care organizations to enter into sole source contracts on our ability to obtain patients; |
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| • | the impact of value-based purchasing programs on our revenue; and |
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| • | those risks and uncertainties described from time to time in our filings with the SEC. |
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. These forward-looking statements are made only as of the date of this Annual Report on Form 10-K. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.
Overview
Our business strategy is to acquire and develop behavioral healthcare facilities and improve our operating results within our facilities and our other behavioral healthcare operations. We strive to improve the operating results of our facilities by providing high-quality services, expanding referral networks and marketing initiatives while meeting the increased demand for behavioral healthcare services through expansion of our current locations as well as developing new services within existing locations. At December 31, 2021, we operated 238 behavioral healthcare facilities with approximately 10,500 beds in 40 states and Puerto Rico. During the year ended December 31, 2021, we added 375 beds in the U.S., consisting of 295 added to existing facilities and 80 added through the opening of one wholly-owned facility, and opened 10 CTCs. On January 19, 2021, we completed the sale of the U.K. operations, which included 345 facilities and approximately 8,200 beds. For the year ending December 31, 2022, we expect to add approximately 300 beds to existing facilities, and 350 beds through the opening of two wholly-owned facilities and two joint venture facilities and expect to open at least six CTCs.
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We are the leading publicly traded pure-play provider of behavioral healthcare services in the U.S. Management believes that we are positioned as a leading platform in a highly fragmented industry under the direction of an experienced management team that has significant industry expertise. Management expects to take advantage of several strategies that are more accessible as a result of our increased size and geographic scale, including continuing a national marketing strategy to attract new patients and referral sources, increasing our volume of out-of-state referrals, providing a broader range of services to new and existing patients and clients and selectively pursuing opportunities to expand our facility and bed count in the U.S. through acquisitions, de novo facilities, joint ventures and bed additions in existing facilities.
On January 19, 2021, we completed the U.K. Sale pursuant to a Share Purchase Agreement in which we sold all of the securities of AHC-WW Jersey Limited, a private limited liability company incorporated in Jersey and a subsidiary of the Company, which constituted the entirety of our U.K. operations. The U.K. Sale resulted in approximately $1,525 million of gross proceeds before deducting the settlement of existing foreign currency hedging liabilities of $85 million based on the current GBP to USD exchange rate, cash retained by the buyer and transaction costs. We used the net proceeds of approximately $1,425 million (excluding cash retained by the buyer) along with cash from the balance sheet to reduce debt by $1,640 million during the first quarter of 2021. As a result of the U.K. Sale, we reported, for all periods presented, results of operations and cash flows of the U.K. operations as discontinued operations in the accompanying financial statements.
Acquisitions
On December 31, 2021, we acquired the equity of CenterPointe for cash consideration of approximately $139 million. The acquisition was funded through a combination of cash on hand and a $70.0 million draw on the Revolving Facility. CenterPointe operates four acute inpatient hospitals with 306 beds and ten outpatient locations primarily in Missouri.
On April 1, 2019, we completed the acquisition of Bradford Recovery Center, a specialty treatment facility with 46 beds located in Millerton, Pennsylvania, for cash consideration of approximately $4.5 million.
On February 15, 2019, we completed the acquisition of Whittier Pavilion, an inpatient psychiatric facility with 71 beds located in Haverhill, Massachusetts, for cash consideration of approximately $17.9 million. Also on February 15, 2019, we completed the acquisition of Mission Treatment for cash consideration of approximately $22.5 million. Mission Treatment operates nine comprehensive treatment centers in California, Nevada, Arizona and Oklahoma.
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Results of Operations
The following table illustrates our consolidated results of operations for the respective periods shown (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
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| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Revenue | 2,314,394 | 100.0 | % | 2,089,929 | 100.0 | % | 2,008,381 | 100.0 | % | |||||||||||||||
| Salaries, wages and benefits | 1,243,804 | 53.7 | % | 1,154,522 | 55.2 | % | 1,107,357 | 55.1 | % | |||||||||||||||
| Professional fees | 136,739 | 5.9 | % | 120,489 | 5.8 | % | 118,451 | 5.9 | % | |||||||||||||||
| Supplies | 90,702 | 3.9 | % | 87,241 | 4.2 | % | 85,534 | 4.3 | % | |||||||||||||||
| Rents and leases | 38,519 | 1.7 | % | 37,362 | 1.8 | % | 35,486 | 1.8 | % | |||||||||||||||
| Other operating expenses | 301,339 | 13.0 | % | 262,272 | 12.5 | % | 259,536 | 12.9 | % | |||||||||||||||
| Income from provider relief fund | (17,900 | ) | (0.8 | )% | (32,819 | ) | (1.6 | )% | — | 0.0 | % | |||||||||||||
| Depreciation and amortization | 106,717 | 4.6 | % | 95,256 | 4.6 | % | 87,923 | 4.4 | % | |||||||||||||||
| Interest expense, net | 76,993 | 3.3 | % | 158,105 | 7.6 | % | 187,325 | 9.3 | % | |||||||||||||||
| Debt extinguishment costs | 24,650 | 1.1 | % | 7,233 | 0.3 | % | — | 0.0 | % | |||||||||||||||
| Loss on impairment | 24,293 | 1.0 | % | 4,751 | 0.2 | % | 27,217 | 1.4 | % | |||||||||||||||
| Transaction-related expenses | 12,778 | 0.6 | % | 11,720 | 0.6 | % | 21,157 | 1.1 | % | |||||||||||||||
| 2,038,634 | 88.0 | % | 1,906,132 | 91.2 | % | 1,929,986 | 96.2 | % | ||||||||||||||||
| Income from continuing operations before income taxes | 275,760 | 12.0 | % | 183,797 | 8.8 | % | 78,395 | 3.8 | % | |||||||||||||||
| Provision for income taxes | 67,557 | 2.9 | % | 40,606 | 1.9 | % | 25,085 | 1.2 | % | |||||||||||||||
| Income from continuing operations | 208,203 | 8.9 | % | 143,191 | 6.8 | % | 53,310 | 2.6 | % | |||||||||||||||
| (Loss) income from discontinued operations, net of taxes | (12,641 | ) | (0.5 | )% | (812,390 | ) | (38.9 | )% | 56,812 | 2.8 | % | |||||||||||||
| Net income (loss) | 195,562 | 8.4 | % | (669,199 | ) | (32.0 | )% | 110,122 | 5.5 | % | ||||||||||||||
| Net income attributable to noncontrolling interest | (4,927 | ) | (0.2 | )% | (2,933 | ) | (0.1 | )% | (1,199 | ) | (0.1 | )% | ||||||||||||
| Net income (loss) attributable to Acadia Healthcare Company, Inc. | 190,635 | 8.2 | % | (672,132 | ) | (32.2 | )% | 108,923 | 5.4 | % |
At December 31, 2021, we operated 238 behavioral healthcare facilities with approximately 10,500 beds in 40 states and Puerto Rico. For all periods presented, results of operations and cash flows of the U.K. are presented as discontinued operations in the accompanying financial statements.
We are encouraged by the favorable trends in our business and believe we are well positioned to capitalize on the expected growth in demand for behavioral health services. As with many other healthcare providers and other industries across the country, we are currently dealing with a tight labor market. However, we believe the diversity of our markets and service lines and our proactive focus helps us manage through this environment. Generally, the challenges that we have faced are temporary and market specific. We remain focused on ensuring that we have the level of staff to meet the demand in our markets across our 40 states.
The following table sets forth percent changes in same facility operating data for our U.S. Facilities for the years ended December 31, 2021 and 2020 compared to the previous years:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| U.S. Same Facility Results (a) | ||||||
| Revenue growth | 10.9% | 3.9% | ||||
| Patient days growth | 4.3% | 2.5% | ||||
| Admissions growth | 3.5% | (0.6)% | ||||
| Average length of stay change (b) | 0.8% | 3.2% | ||||
| Revenue per patient day growth | 6.3% | 1.4% | ||||
| Adjusted EBITDA margin change (c) | 150 bps | 250 bps | ||||
| Adjusted EBITDA margin excluding income from provider relief fund | 220 bps | — |
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| (a) | Results for the periods presented include facilities we have operated more than one year and exclude certain closed services. |
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| (b) | Average length of stay is defined as patient days divided by admissions. |
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| (c) | Adjusted EBITDA is defined as income before provision for income taxes, equity-based compensation expense, debt extinguishment costs, loss on impairment, transaction-related expenses, interest expense and depreciation and amortization. Management uses Adjusted EBITDA as an analytical indicator to measure performance and to develop strategic objectives and operating plans. Adjusted EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. Adjusted EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. For the years ended December 31, 2021 and 2020, Adjusted EBIDTA includes income from provider relief fund of $17.9 million and $32.8 million, respectively. |
Year Ended December 31, 2021 compared to the Year Ended December 31, 2020
Revenue. Revenue increased $224.5 million, or 10.7%, to $2,314.4 million for the year ended December 31, 2021 from $2,089.9 million for the year ended December 31, 2020. Same facility revenue increased by $225.6 million, or 10.9%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, resulting from same facility growth in patient days of 4.3% and an increase in same facility revenue per day of 6.3%. Consistent with the same facility patient day growth in 2020, the growth in same facility patient days for the year ended December 31, 2021 compared to the year ended December 31, 2020 resulted from the addition of beds to our existing facilities and ongoing demand for our services.
Salaries, wages and benefits. Salaries, wages and benefits (“SWB”) expense was $1,243.8 million for the year ended December 31, 2021 compared to $1,154.5 million for the year ended December 31, 2020, an increase of $89.3 million. SWB expense included $37.5 million and $22.5 million of equity-based compensation expense for the years ended December 31, 2021 and 2020, respectively. Excluding equity-based compensation expense, SWB expense was $1,206.3 million, or 52.1% of revenue, for the year ended December 31, 2021, compared to $1,132.0 million, or 54.2% of revenue, for the year ended December 31, 2020. Same facility SWB expense was $1,115.0 million for the year ended December 31, 2021, or 48.5% of revenue, compared to $1,049.0 million for the year ended December 31, 2020, or 50.6% of revenue.
Professional fees. Professional fees were $136.7 million for the year ended December 31, 2021, or 5.9% of revenue, compared to $120.5 million for the year ended December 31, 2020, or 5.8% of revenue. Same facility professional fees were $123.3 million for the year ended December 31, 2021, or 5.4% of revenue, compared to $108.0 million, for the year ended December 31, 2020, or 5.2% of revenue.
Supplies. Supplies expense was $90.7 million for the year ended December 31, 2021, or 3.9% of revenue, compared to $87.2 million for the year ended December 31, 2020, or 4.2% of revenue. Same facility supplies expense was $89.7 million for the year ended December 31, 2021, or 3.9% of revenue, compared to $86.6 million for the year ended December 31, 2020, or 4.2% of revenue.
Rents and leases. Rents and leases were $38.5 million for the year ended December 31, 2021, or 1.7% of revenue, compared to $37.4 million for the year ended December 31, 2020, or 1.8% of revenue. Same facility rents and leases were $34.5 million for the year ended December 31, 2021, or 1.5% of revenue, compared to $34.1 million for the year ended December 31, 2020, or 1.6% of revenue.
Other operating expenses. Other operating expenses consisted primarily of purchased services, utilities, insurance, travel and repairs and maintenance expenses. Other operating expenses were $301.3 million for the year ended December 31, 2021, or 13.0% of revenue, compared to $262.3 million for the year ended December 31, 2020, or 12.5% of revenue. Same facility other operating expenses were $286.2 million for the year ended December 31, 2021, or 12.4% of revenue, compared to $256.0 million for the year ended December 31, 2020, or 12.3% of revenue.
Income from provider relief fund. For the year ended December 31, 2021, we recorded $17.9 million in income from provider relief fund related to PHSSE funds received in 2021. For the year ended December 31, 2020, we recorded $32.8 million of income from provider relief fund related to $34.9 million of PHSSE funds received from April through December 2020. Our recognition of this income in the fourth quarter of 2020 was based on revised guidance in the CAA enacted in December 2020.
Depreciation and amortization. Depreciation and amortization expense was $106.7 million for the year ended December 31, 2021, or 4.6% of revenue, compared to $95.3 million for the year ended December 31, 2020, or 4.6% of revenue.
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Interest expense. Interest expense was $77.0 million for the year ended December 31, 2021 compared to $158.1 million for the year ended December 31, 2020. The decrease in interest expense was primarily due to debt repayments in connection with the U.K. Sale.
Debt extinguishment costs. Debt extinguishment costs were $24.7 million for the year ended December 31, 2021 and represented $6.3 million of cash charges and $18.4 million of non-cash charges in connection with the redemption of the 5.625% Senior Notes and the 6.500% Senior Notes and the termination of the Prior Credit Facility. Debt extinguishment costs were $7.2 million for the year ended December 31, 2020 and represented $1.4 million of cash charges and $5.8 million of non-cash charges recorded in connection with the redemption of the 6.125% Senior Notes and the 5.125% Senior Notes, the issuance of the 5.000% Senior Notes and the Fourth Repricing Facilities Amendment.
Loss on impairment. Loss on impairment was $24.3 million for the year ended December 31, 2021. During the second quarter of 2021, we opened a 260-bed replacement facility in Pennsylvania and recorded a non-cash property impairment charge of $23.2 million for the existing facility. Additionally, during the third quarter of 2021, we recorded a $1.1 million non-cash property impairment charge for one facility in Louisiana resulting from hurricane damage. Loss on impairment of $4.8 million for the year end December 31, 2020 represents a non-cash long-lived asset impairment charge of $4.2 million and $0.6 million related to indefinite-lived asset impairment related to closed facilities in the U.S.
Transaction-related expenses. Transaction-related expenses were $12.8 million for the year ended December 31, 2021 compared to $11.7 million for the year ended December 31, 2020. Transaction-related expenses represent legal, accounting, termination, restructuring, strategic review and other similar costs incurred in the respective periods, as summarized below (in thousands):
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| Legal, accounting and other acquisition-related costs | $ | 8,315 | $ | 8,252 | |||
| Termination, restructuring and strategic review costs | 4,463 | 3,468 | |||||
| $ | 12,778 | $ | 11,720 |
Discontinued Operations. Loss from discontinued operations for the year ended December 31, 2021 was $12.6 million compared to loss from discontinued operations of $812.4 million for the year ended December 31, 2020. The year ended December 31, 2020 included a loss on sale of $867.3 million and a non-cash long-lived asset impairment charge of $20.2 million related to the decision to close certain U.K. elderly care facilities.
Provision for income taxes. For the year ended December 31, 2021, the provision for income taxes was $67.6 million, reflecting an effective tax rate of 24.5%, compared to $40.6 million, reflecting an effective tax rate of 22.1%, for the year ended December 31, 2020. The increase in the effective tax rate for the year ended December 31, 2021 was primarily attributable to our recognition of a deferred tax liability as a result of a change in our previous permanent reinvestment assertion and non-recurring impacts of U.S. and U.K. tax legislation enacted in 2020.
Year Ended December 31, 2020 compared to the Year Ended December 31, 2019
Revenue. Revenue increased $81.5 million, or 4.1%, to $2,089.9 million for the year ended December 31, 2020 from $2,008.4 million for the year ended December 31, 2019. Same facility revenue increased by $78.5 million, or 3.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, resulting from same facility growth in patient days of 2.5% and an increase in same facility revenue per day of 1.4%. Consistent with the same facility patient day growth in 2019, the growth in same facility patient days for the year ended December 31, 2020 compared to the year ended December 31, 2019 resulted from the addition of beds to our existing facilities and ongoing demand for our services.
Salaries, wages and benefits. SWB expense was $1,154.5 million for the year ended December 31, 2020 compared to $1,107.4 million for the year ended December 31, 2019, an increase of $47.2 million. SWB expense included $22.5 million and $17.3 million of equity-based compensation expense for the years ended December 31, 2020 and 2019, respectively. Excluding equity-based compensation expense, SWB expense was $1,132.0 million, or 54.2% of revenue, for the year ended December 31, 2020, compared to $1,090.1 million, or 54.3% of revenue, for the year ended December 31, 2019. Same facility SWB expense was $1,047.7 million for the year ended December 31, 2020, or 50.5% of revenue, compared to $1,018.3 million for the year ended December 31, 2019, or 51.0% of revenue.
Professional fees. Professional fees were $120.5 million for the year ended December 31, 2020, or 5.8% of revenue, compared to $118.5 million for the year ended December 31, 2019, or 5.9% of revenue. Same facility professional fees were $171.9 million for
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the year ended December 31, 2020, or 8.3% of revenue, compared to $171.2 million, for the year ended December 31, 2019, or 8.6% of revenue.
Supplies. Supplies expense was $87.2 million for the year ended December 31, 2020, or 4.2% of revenue, compared to $85.5 million for the year ended December 31, 2019, or 4.3% of revenue. Same facility supplies expense was $86.2 million for the year ended December 31, 2020, or 4.2% of revenue, compared to $84.6 million for the year ended December 31, 2019, or 4.2% of revenue.
Rents and leases. Rents and leases were $37.4 million for the year ended December 31, 2020, or 1.8% of revenue, compared to $35.5 million for the year ended December 31, 2019, or 1.8% of revenue. Same facility rents and leases were $33.8 million for the year ended December 31, 2020, or 1.6% of revenue, compared to $32.3 million for the year ended December 31, 2019, or 1.6% of revenue.
Other operating expenses. Other operating expenses consisted primarily of purchased services, utilities, insurance, travel and repairs and maintenance expenses. Other operating expenses were $262.3 million for the year ended December 31, 2020, or 12.5% of revenue, compared to $259.5 million for the year ended December 31, 2019, or 12.9% of revenue. Same facility other operating expenses were $189.7 million for the year ended December 31, 2020, or 9.1% of revenue, compared to $184.1 million for the year ended December 31, 2019, or 9.2% of revenue.
Income from provider relief fund. For the year ended December 31, 2020, we recorded $32.8 million of income from provider relief fund related to $34.9 million of PHSSE funds received from April through December 2020. Our recognition of this income in the fourth quarter of 2020 was based on revised guidance in the CAA enacted in December 2020.
Depreciation and amortization. Depreciation and amortization expense was $95.3 million for the year ended December 31, 2020, or 4.6% of revenue, compared to $87.9 million for the year ended December 31, 2019, or 4.4% of revenue.
Interest expense. Interest expense was $158.1 million for the year ended December 31, 2020 compared to $187.3 million for the year ended December 31, 2019. The decrease in interest expense was primarily a result of lower interest rates applicable to our variable-rate debt.
Debt extinguishment costs. Debt extinguishment costs were $7.2 million for the year ended December 31, 2020 and represented $1.4 million of cash charges and $5.8 million of non-cash charges recorded in connection with the redemption of the 6.125% Senior Notes and the 5.125% Senior Notes, the issuance of the 5.000% Senior Notes and the Fourth Repricing Facilities Amendment.
Loss on impairment. Loss on impairment of $4.8 million for the year ended December 31, 2020 represents a non-cash long-lived asset impairment charge of $4.2 million and $0.6 million related to indefinite-lived asset impairment related to closed facilities in the U.S. Loss on impairment of $27.2 million for the year ended December 31, 2019 represents a non-cash long-lived asset impairment charge of $27.2 million related to two closed U.S. Facilities.
Transaction-related expenses. Transaction-related expenses were $11.7 million for the year ended December 31, 2020 compared to $21.2 million for the year ended December 31, 2019. Transaction-related expenses represent legal, accounting, termination, restructuring, strategic review, management transition and other similar costs incurred in the respective periods, as summarized below (in thousands):
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||
| Legal, accounting and other acquisition-related costs | $ | 8,252 | $ | 3,030 | |||
| Termination, restructuring and strategic review costs | 3,468 | 12,598 | |||||
| Management transition costs | — | 5,529 | |||||
| $ | 11,720 | $ | 21,157 |
Discontinued Operations. Loss from discontinued operations for the year ended December 31, 2020 was $812.4 million compared to income from discontinued operations of $56.8 million for the year ended December 31, 2019. The year ended December 31, 2020 included a loss on sale of $867.3 million and a non-cash long-lived asset impairment charge of $20.2 million related to the decision to close certain U.K. elderly care facilities. The year ended December 31, 2019 included a non-cash long-lived asset impairment charge of $27.2 million related to the closure of certain U.K. facilities.
Provision for income taxes. For the year ended December 31, 2020, the provision for income taxes was $40.6 million, reflecting an effective tax rate of 22.1%, compared to $25.1 million, reflecting an effective tax rate of 32.0%, for the year ended December 31, 2019. The decrease in the effective tax rate for the year ended December 31, 2020 was primarily attributable to the release of a state
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valuation allowance and benefits generated from the application of federal net operating loss carryback provisions within the CARES Act. The federal net operating loss legislation within the CARES Act allows net operating losses generated in tax years 2018 through 2020 to be carried back at a 35% tax rate to offset income in tax years prior to 2018 (21% for tax years after 2017), resulting in a permanent benefit.
Liquidity and Capital Resources
Cash provided by continuing operating activities for the year ended December 31, 2021 was $374.2 million compared to $502.8 million for the year ended December 31, 2020. Operating cash flows for the year ended December 31, 2021 included net government relief funds paid of approximately $38.1 million, which consisted of $19.4 million of payroll tax deferral payments and repayment of $25.0 million of Medicare advance payments offset by receipt of $24.2 million of PHSSE Fund payments, of which $17.9 million was recognized as income from provider relief funds during 2021. Operating cash flows were impacted by an increase in earnings, a reduction in cash paid for interest and an increase in tax payments during the year ended December 31, 2021. Operating cash flows for the year ended December 31, 2020 included government relief funds received of approximately $86.6 million, which consisted of Medicare advance payments of $45.2 million, payroll tax deferrals of $39.3 million and $34.9 million of PHSSE Fund payments, of which $32.8 million was recognized as income from provider relief funds during 2020. Days sales outstanding at December 31, 2021 was 42 compared to 47 at December 31, 2020.
Cash provided by continuing investing activities for the year ended December 31, 2021 was $1,017.6 million compared to cash used in continuing investing activities of $238.2 million for the year ended December 31, 2020. Cash provided by continuing investing activities for the year ended December 31, 2021 primarily consisted of proceeds from the U.K. Sale of $1,511.0 million, proceeds from the sale of property and equipment of $3.5 million and other of $3.1 million offset by $244.8 million of cash paid for capital expenditures, $139.0 million of cash paid for acquisitions, $84.8 million of settlement of foreign currency derivatives and $31.4 million of cash paid for purchase of finance lease. Cash paid for capital expenditures for the year ended December 31, 2021 consisted of $41.8 million of routine capital expenditures and $203.0 million of expansion capital expenditures. We define expansion capital expenditures as those that increase the capacity of our facilities or otherwise enhance revenue. Routine or maintenance capital expenditures were approximately 2% of revenue for the year ended December 31, 2021. Cash used in continuing investing activities for the year ended December 31, 2020 primarily consisted of $225.0 million of cash paid for capital expenditures and other of $13.4 million offset by $0.1 million of proceeds from sale of property and equipment. Cash paid for capital expenditures for the year ended December 31, 2020 consisted of $40.7 million of routine capital expenditures and $175.9 million of expansion capital expenditures.
Cash used in continuing financing activities for the year ended December 31, 2021 was $1,641.1 million compared to $48.2 million for the year ended December 31, 2020. Cash used in continuing financing activities for the year ended December 31, 2021 primarily consisted of repayment of long-term debt of $2,227.9 million, principal payments on revolving credit facility of $330.0 million, principal payments on long-term debt of $8.0 million, payment of debt issuance costs of $8.0 million, other of $6.9 million and distributions to noncontrolling interests of $1.6 million offset by borrowing on long-term debt of $425.0 million, borrowings on revolving credit facility of $500.0 million and common stock withheld for minimum statutory taxes of $16.3 million. Cash used in continuing financing activities for the year ended December 31, 2020 primarily consisted of repayment of long-term debt of $909.8 million, principal payments on revolving credit facility of $100.0 million, principal payments on long-term debt of $41.3 million, payment of debt issuance costs of $18.3 million, other of $3.1 million and distributions to noncontrolling interests of $0.9 million offset by borrowing on long-term debt of $925.0 million, borrowings on revolving credit facility of $100.0 million and common stock withheld for minimum statutory taxes of $0.2 million.
We had total available cash and cash equivalents of $133.8 million, $378.7 million and $99.5 million at December 31, 2021, 2020 and 2019, respectively, of which approximately $20.1 million, $17.0 million and $4.2 million was held by our foreign subsidiaries, respectively. Our strategic plan does not require the repatriation of foreign cash in order to fund our operations in the U.S.
New Credit Facility
We entered into the New Credit Facility on March 17, 2021. The New Credit Facility provides for a $600.0 million Revolving Facility and a $425.0 million Term Loan Facility with each maturing on March 17, 2026 unless extended in accordance with the terms of the New Credit Facility. The Revolving Facility further provides for (i) up to $20.0 million to be utilized for the issuance of letters of credit and (ii) the availability of a swingline facility under which we may borrow up to $20.0 million.
As a part of the closing of the New Credit Facility on March 17, 2021, we (i) refinanced and terminated the Prior Credit Facility and (ii) financed the redemption of all of the outstanding 5.625% Senior Notes.
We had $426.9 million of availability under the Revolving Facility and had standby letters of credit outstanding of $3.1 million related to security for the payment of claims required by our workers’ compensation insurance program at December 31, 2021.
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During the third quarter of 2021, we repaid $60.0 million of the initial $160.0 million balance outstanding on the Revolving Facility. During the fourth quarter of 2021, we had a draw of $70.0 million on the Revolving Facility related to the CenterPointe acquisition.
The New Credit Facility requires quarterly principal repayments for the Term Loan Facility of $2.7 million for March 31, 2022, $5.3 million for June 30, 2022 to March 31, 2024, $8.0 million for June 30, 2024 to March 31, 2025, $10.6 million for June 30, 2025 to December 31, 2025, with the remaining principal balance of the Term Loan Facility due on the maturity date of March 17, 2026.
We have the ability to increase the amount of the Senior Facilities, which may take the form of increases to the Revolving Facility or the Term Loan Facility or the issuance of one or more Incremental Facilities, upon obtaining additional commitments from new or existing lenders and the satisfaction of customary conditions precedent for such Incremental Facilities. Such Incremental Facilities may not exceed the sum of (i) the greater of $480.0 million and an amount equal to 100% of the Consolidated EBITDA (as defined in the New Credit Facility) of the Company and its Restricted Subsidiaries (as defined in the New Credit Facility) (as determined for the four fiscal quarter period most recently ended for which financial statements are available), and (ii) additional amounts so long as, after giving effect thereto, the Consolidated Senior Secured Net Leverage Ratio (as defined in the New Credit Facility) does not exceed 3.5 to 1.0.
Subject to certain exceptions, substantially all of our existing and subsequently acquired or organized direct or indirect wholly-owned U.S. subsidiaries are required to guarantee the repayment of our obligations under the New Credit Facility. Borrowings under the Senior Facilities bear interest at a floating rate, which will initially be, at our option, either (i) adjusted LIBOR plus 1.50% or (ii) an alternative base rate plus 0.50% (in each case, subject to adjustment based on the Company’s consolidated total net leverage ratio). An unused fee initially set at 0.20% per annum (subject to adjustment based on the Company’s consolidated total net leverage ratio) is payable quarterly in arrears based on the actual daily undrawn portion of the commitments in respect of the Revolving Facility.
The interest rates and the unused line fee on unused commitments related to the Senior Facilities are based upon the following pricing tiers:
| Pricing Tier | Consolidated Leverage Ratio | Eurodollar Rate Loans | Base Rate Loans | Commitment Fee | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | ≥ 4.50:1.0 | 2.250 | % | 1.250 | % | 0.350 | % | |||||||
| 2 | 4.50:1.0 but ≥ 3.75:1.0 | 2.000 | % | 1.000 | % | 0.300 | % | |||||||
| 3 | 3.75:1.0 but ≥ 3.00:1.0 | 1.750 | % | 0.750 | % | 0.250 | % | |||||||
| 4 | 3.00:1.0 but ≥ 2.25:1.0 | 1.500 | % | 0.500 | % | 0.200 | % | |||||||
| 5 | 2.25:1.0 | 1.375 | % | 0.375 | % | 0.200 | % |
The New Credit Facility contains customary representations and affirmative and negative covenants, including limitations on the Company’s and its subsidiaries’ ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay junior indebtedness and enter into affiliate transactions, in each case, subject to customary exceptions. In addition, the New Credit Facility contains financial covenants requiring the Company on a consolidated basis to maintain, as of the last day of any consecutive four fiscal quarter period, a consolidated total net leverage ratio of not more than 5.0 to 1.0 and an interest coverage ratio of at least 3.0 to 1.0. The New Credit Facility also includes events of default customary for facilities of this type and upon the occurrence of such events of default, among other things, all outstanding loans under the Senior Facilities may be accelerated and/or the lenders’ commitments terminated. At December 31, 2021, the Company was in compliance with such covenants.
Prior Credit Facility
We entered into the Senior Secured Credit Facility on April 1, 2011. On December 31, 2012, we entered into the Prior Credit Facility which amended and restated the Senior Secured Credit Facility. We amended the Prior Credit Facility from time to time as described in our prior filings with the SEC.
On April 21, 2020, we entered into the Thirteenth Amendment to the Prior Credit Facility. The Thirteenth Amendment amended the Consolidated Leverage Ratio in the prior covenant to increase such leverage ratio for the rest of 2020.
On November 13, 2020, we entered into the Fourth Repricing Facilities Amendment to the Prior Credit Facility. The Fourth Repricing Facilities Amendment extended the maturity date of each of the prior revolving line of credit and the prior TLA Facility from November 30, 2021 to November 30, 2022. The Fourth Repricing Facilities Amendment also (1) replaced the revolving line of credit in an aggregate committed amount of $500.0 million with an aggregate committed amount of approximately $459.0 million and (2) replaced the TLA Facility aggregate outstanding principal amount of approximately $352.4 million with an aggregate principal amount of approximately $318.9 million. The interest rate margin applicable to both facilities remained unchanged from the prior
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facilities, and the commitment fee applicable to the new revolving line of credit also remained unchanged from the prior revolving line of credit. In connection with the Fourth Repricing Facilities Amendment, we recorded a debt extinguishment charge of $1.0 million, including the write-off of discount and deferred financing costs, which was recorded in debt extinguishment costs in the consolidated statement of operations at December 31, 2020.
On January 5, 2021, we made a voluntary payment of $105.0 million on the Tranche B-4 Facility. On January 19, 2021, we used a portion of the net proceeds from the U.K. Sale to repay the outstanding balances of $311.7 million of the TLA Facility and $767.9 million of the Tranche B-4 Facility of the Prior Credit Facility. At March 31, 2021, in connection with the termination of the Prior Credit Facility, we recorded a debt extinguishment charge of $10.9 million, including the write-off of discount and deferred financing costs, which was recorded in debt extinguishment costs in the consolidated statement of operations.
Senior Notes
5.500% Senior Notes due 2028
On June 24, 2020, we issued $450.0 million of the 5.500% Senior Notes due 2028. The 5.500% Senior Notes mature on July 1, 2028 and bear interest at a rate of 5.500% per annum, payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021.
5.000% Senior Notes due 2029
On October 14, 2020, we issued $475.0 million of the 5.000% Senior Notes. The 5.000% Senior Notes mature on April 15, 2029 and bear interest at a rate of 5.000% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2021. We used the net proceeds of the 5.000% Senior Notes to prepay approximately $453.3 million of the outstanding borrowings on the Tranche B-3 Facility and used the remaining net proceeds for general corporate purposes and to pay related fees and expenses in connection with the offering. In connection with the 5.000% Senior Notes, we recorded a debt extinguishment charge of $2.9 million, including the write-off of discount and deferred financing costs of the Tranche B-3 Facility, which was recorded in debt extinguishment costs in the consolidated statement of operations for the year ended December 31, 2020.
The indentures governing the Senior Notes contain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: (i) pay dividends, redeem stock or make other distributions or investments; (ii) incur additional debt or issue certain preferred stock; (iii) transfer or sell assets; (iv) engage in certain transactions with affiliates; (v) create restrictions on dividends or other payments by the restricted subsidiaries; (vi) merge, consolidate or sell substantially all of our assets; and (vii) create liens on assets.
The Senior Notes issued by us are guaranteed by each of our subsidiaries that guaranteed our obligations under the New Credit Facility. The guarantees are full and unconditional and joint and several.
We may redeem the Senior Notes at our option, in whole or part, at the dates and amounts set forth in the indentures.
5.625% Senior Notes due 2023
On February 11, 2015, we issued $375.0 million of the 5.625% Senior Notes. On September 21, 2015, we issued $275.0 million of additional 5.625% Senior Notes. The additional notes formed a single class of debt securities with the 5.625% Senior Notes issued in February 2015. Giving effect to this issuance, we had outstanding an aggregate of $650.0 million of the 5.625% Senior Notes. The 5.625% Senior Notes were to mature on February 15, 2023 and bear interest at a rate of 5.625% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. On March 17, 2021, we redeemed the 5.625% Senior Notes.
6.500% Senior Notes due 2024
On February 16, 2016, we issued $390.0 million of the 6.500% Senior Notes. The 6.500% Senior Notes were to mature on March 1, 2024 and bear interest at a rate of 6.500% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2016. On March 1, 2021, we redeemed the 6.500% Senior Notes.
Redemption of 5.625% Senior Notes and 6.500% Senior Notes
On January 29, 2021, we issued conditional notices of full redemption providing for the redemption in full of $650 million of the 5.625% Senior Notes and $390 million of the 6.500% Senior Notes to the holders of such notes.
On March 1, 2021, we satisfied and discharged the indentures governing the 6.500% Senior Notes. In connection with the redemption of the 6.500% Senior Notes, we recorded debt extinguishment costs of $10.5 million, including $6.3 million cash paid for breakage costs and the write-off of deferred financing costs of $4.2 million in the consolidated statement of operations.
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On March 17, 2021, we satisfied and discharged the indentures governing the 5.625% Senior Notes. In connection with the redemption of the 5.625% Senior Notes, we recorded debt extinguishment costs of $3.3 million, including the write-off of deferred financing and premiums costs in the consolidated statement of operations.
6.125% Senior Notes due 2021
On March 12, 2013, we issued $150.0 million of the 6.125% Senior Notes. The 6.125% Senior Notes were to mature on March 15, 2021 and bear interest at a rate of 6.125% per annum, payable semi-annually in arrears on March 15 and September 15 of each year. On June 24, 2020, we redeemed the 6.125% Senior Notes.
5.125% Senior Notes due 2022
On July 1, 2014, we issued $300.0 million of the 5.125% Senior Notes. The 5.125% Senior Notes were to mature on July 1, 2022 and bear interest at a rate of 5.125% per annum, payable semi-annually in arrears on January 1 and July 1 of each year. On June 24, 2020, we redeemed the 5.125% Senior Notes.
Redemption of 6.125% Senior Notes and 5.125% Senior Notes
On June 10, 2020, we issued conditional notices of full redemption providing for the redemption in full of the 6.125% Senior Notes and the 5.125% Senior Notes on the Redemption Date, in each case at the Redemption Price. On June 24, 2020, we satisfied and discharged the indentures governing the 6.125% Senior Notes and the 5.125% Senior Notes by irrevocably depositing with a trustee sufficient funds equal to the Redemption Price for the 6.125% Senior Notes and the 5.125% Senior Notes and otherwise complying with the terms in the indentures relating to the satisfaction and discharge of the 6.125% Senior Notes and the 5.125% Senior Notes. In connection with the redemption of the 6.125% Senior Notes and the 5.125% Senior Notes, we recorded a debt extinguishment charge of $3.3 million, including the write-off of the deferred financing and other costs in the consolidated statement of operations for the year ended December 31, 2020.
Other long-term debt
During the year ended December 31, 2021, we repaid other long-term debt of $3.3 million, which is reflected in financing activities in the consolidated statement of cash flows.
Contractual Obligations
The following table presents a summary of contractual obligations (dollars in thousands):
| Payments Due by Period | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | Total | |||||||||||||||
| Long-term debt (a) | $ | 77,142 | $ | 166,492 | $ | 624,605 | $ | 1,021,500 | $ | 1,889,739 | |||||||||
| Operating lease liabilities (b) | 29,973 | 49,581 | 34,230 | 68,428 | 182,212 | ||||||||||||||
| Finance lease liabilities | 990 | 1,997 | 2,178 | 22,911 | 28,076 | ||||||||||||||
| Total obligations and commitments | $ | 108,105 | $ | 218,070 | $ | 661,013 | $ | 1,112,839 | $ | 2,100,027 |
| Column 1 | Column 2 |
|---|---|
| (a) | Amounts include required principal and interest payments. The projected interest payments reflect interest rates in place on our variable-rate debt at December 31, 2021. |
| Column 1 | Column 2 |
|---|---|
| (b) | Amounts exclude variable components of lease payments. |
Off-Balance Sheet Arrangements
At December 31, 2021, we had standby letters of credit outstanding of $3.1 million related to security for the payment of claims as required by our workers’ compensation insurance program.
Market Risk
Our interest expense is sensitive to changes in market interest rates. Our long-term debt outstanding at December 31, 2021 was composed of $912.8 million of fixed-rate debt and $584.4 million of variable-rate debt with interest based on LIBOR plus an applicable margin. A hypothetical 10% increase in interest rates (which would equate to a 0.16% higher rate on our variable-rate debt) would decrease our net income and cash flows by $0.7 million on an annual basis based upon our borrowing level at December 31, 2021.
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Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses included in the financial statements. Estimates are based on historical experience and other available information, the results of which form the basis of such estimates. While management believes our estimation processes are reasonable, actual results could differ from our estimates. The following accounting policies are considered critical to the portrayal of our financial condition and operating performance and involve highly subjective and complex assumptions and assessments:
Revenue and Accounts Receivable
Our revenue is primarily derived from services rendered to patients for inpatient psychiatric and substance abuse care, outpatient psychiatric care and adolescent residential treatment. We receive payments from the following sources for services rendered in our facilities: (i) state governments under their respective Medicaid and other programs; (ii) commercial insurers; (iii) the federal government under the Medicare program administered by CMS; and (iv) individual patients and clients. We determine the transaction price based on established billing rates reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients and implicit price concessions. Contractual adjustments and discounts are based on contractual agreements, discount policies and historical experience. Implicit price concessions are based on historical collection experience.
We derive a significant portion of our revenue from Medicare, Medicaid and other payors that receive discounts from established billing rates. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided in the Company’s inpatient facilities and cost settlement provisions. Management estimates the transaction price on a payor-specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from our estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.
Settlements under cost reimbursement agreements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. Final determination of amounts earned under the Medicare and Medicaid programs often occurs in subsequent years because of audits by such programs, rights of appeal and the application of numerous technical provisions. In the opinion of management, adequate provision has been made for any adjustments and final settlements. However, there can be no assurance that any such adjustments and final settlements will not have a material effect on the Company’s financial condition or results of operations. Our cost report payables were $6.5 million for the year ended December 31, 2021 and were included in other current liabilities on the consolidated balance sheet. Our cost report receivables were $5.8 million at December 31, 2020 and were included in other current assets in the consolidated balance sheets. Management believes that these receivables are properly stated and are not likely to be settled for a significantly different amount. The net adjustments to estimated cost report settlements resulted in decreases to revenue of $5.4 million, $1.3 million $0.4 million for the year ended December 31, 2021, 2020 and 2019, respectively.
The following table presents revenue by payor type and as a percentage of revenue in our U.S. Facilities for the years ended December 31, 2021, 2020 and 2019 (in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Commercial | $ | 684,292 | 29.6 | % | $ | 596,698 | 28.5 | % | $ | 565,350 | 28.2 | % | ||||||||||||
| Medicare | 364,598 | 15.8 | % | 330,070 | 15.8 | % | 294,691 | 14.7 | % | |||||||||||||||
| Medicaid | 1,147,884 | 49.6 | % | 1,037,852 | 49.7 | % | 1,007,102 | 50.1 | % | |||||||||||||||
| Self-Pay | 93,425 | 4.0 | % | 98,302 | 4.7 | % | 118,716 | 5.9 | % | |||||||||||||||
| Other | 24,195 | 1.0 | % | 27,007 | 1.3 | % | 22,522 | 1.1 | % | |||||||||||||||
| Revenue | $ | 2,314,394 | 100.0 | % | $ | 2,089,929 | 100.0 | % | $ | 2,008,381 | 100.0 | % |
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The following tables present a summary of our aging of accounts receivable at December 31, 2021 and 2020:
December 31, 2021
| Current | 30-90 | 90-150 | 150 | Total | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial | 20.1 | % | 6.2 | % | 2.6 | % | 8.2 | % | 37.1 | % | ||||||||||
| Medicare | 11.3 | % | 1.7 | % | 0.5 | % | 2.0 | % | 15.5 | % | ||||||||||
| Medicaid | 28.6 | % | 3.5 | % | 2.0 | % | 5.6 | % | 39.7 | % | ||||||||||
| Self-Pay | 1.3 | % | 1.4 | % | 1.4 | % | 3.0 | % | 7.1 | % | ||||||||||
| Other | 0.1 | % | 0.1 | % | 0.2 | % | 0.2 | % | 0.6 | % | ||||||||||
| Total | 61.4 | % | 12.9 | % | 6.7 | % | 19.0 | % | 100.0 | % |
December 31, 2020
| Current | 30-90 | 90-150 | 150 | Total | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial | 19.8 | % | 5.6 | % | 2.2 | % | 6.3 | % | 33.9 | % | ||||||||||
| Medicare | 12.0 | % | 1.2 | % | 0.6 | % | 1.5 | % | 15.3 | % | ||||||||||
| Medicaid | 27.4 | % | 4.7 | % | 2.7 | % | 8.6 | % | 43.4 | % | ||||||||||
| Self-Pay | 1.5 | % | 1.4 | % | 1.3 | % | 2.5 | % | 6.7 | % | ||||||||||
| Other | 0.0 | % | 0.3 | % | 0.1 | % | 0.3 | % | 0.7 | % | ||||||||||
| Total | 60.7 | % | 13.2 | % | 6.9 | % | 19.2 | % | 100.0 | % |
Insurance
We are subject to medical malpractice and other lawsuits due to the nature of the services we provide. A portion of our professional liability risks are insured through a wholly-owned insurance subsidiary. We are self-insured for professional liability claims up to $3 million per claim through August 31, 2021 and $10.0 million thereafter, and have obtained reinsurance coverage from a third party to cover claims in excess of the retention limit. The reinsurance policy has a coverage limit of $60.0 million in the aggregate. Our reinsurance receivables are recognized consistent with the related liabilities and include known claims and any incurred but not reported claims that are covered by current insurance policies in place. The reserve for professional and general liability risks was estimated based on historical claims, demographic factors, industry trends, severity factors, and other actuarial assumptions. The estimated accrual for professional and general liabilities could be significantly affected should current and future occurrences differ from historical claim trends and expectations. While claims are monitored closely when estimating professional and general liability accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in these estimates. The professional and general liability reserve was $87.8 million at December 31, 2021, of which $11.9 million was included in other accrued liabilities and $75.9 million was included in other long-term liabilities. The professional and general liability reserve was $77.5 million at December 31, 2020, of which $9.7 million was included in other accrued liabilities and $67.8 million was included in other long-term liabilities. We estimate receivables for the portion of professional and general liability reserves that are recoverable under our insurance policies. Such receivable was $37.9 million at December 31, 2021, of which $10.8 million was included in other current assets and $27.1 million was included in other assets, and such receivable was $27.2 million at December 31, 2020, of which $6.8 million was included in other current assets and $20.4 million was included in other assets.
Our statutory workers’ compensation program is fully insured with a $0.5 million deductible per accident. The workers’ compensation liability was $23.6 million at December 31, 2021, of which $12.0 million was included in accrued salaries and benefits and $11.6 million was included in other long-term liabilities, and such liability was $23.0 million at December 31, 2020, of which $12.0 million was included in accrued salaries and benefits and $11.0 million was included in other long-term liabilities. The reserve for workers compensation claims was based upon independent actuarial estimates of future amounts that will be paid to claimants. Management believes that adequate provisions have been made for workers’ compensation and professional and general liability risk exposures.
Property and Equipment and Other Long-Lived Assets
Property and equipment are recorded at cost. Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets, which typically range from 10 to 50 years for buildings and improvements, three to seven years for equipment and the shorter of the lease term or estimated useful lives for leasehold improvements. When assets are sold or retired, the corresponding cost and accumulated depreciation are removed from the related accounts and any gain or loss is recorded in the period of sale or retirement. Repair and maintenance costs are expensed as incurred. Depreciation expense was $106.7 million, $95.3 million and $87.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The carrying values of long-lived assets are reviewed for possible impairment whenever events, circumstances or operating results indicate that the carrying amount of an asset may not be recoverable. If this review indicates that the asset will not be
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recoverable, as determined based upon the undiscounted cash flows of the operating asset over the remaining useful life, the carrying value of the asset will be reduced to its estimated fair value. Fair value estimates are based on independent appraisals, market values of comparable assets or internal evaluations of future net cash flows. During the second quarter of 2021, we opened a 260-bed replacement facility in Pennsylvania and recorded a non-cash property impairment charge of $23.2 million for the existing facility. Additionally, during the third quarter of 2021, we recorded a $1.1 million non-cash property impairment charge for one facility in Louisiana resulting from hurricane damage.
We performed an impairment review of long-lived assets in the fourth quarter of 2021 and recorded no impairment. The impairment review of long-lived assets in the fourth quarters of 2020 and 2019, indicated the carrying amounts of certain of our long-lived assets in the U.S. Facilities may not be recoverable. This created a non-cash impairment of $4.2 million and $27.2 million for the years ended December 31, 2020 and 2019, respectively. These items were recorded in loss on impairment on our consolidated statements of operations.
Goodwill and Indefinite-Lived Intangible Assets
Our goodwill and other indefinite-lived intangible assets, which consist of licenses and accreditations, trade names and certificates of need intangible assets that are not amortized, are evaluated for impairment annually during the fourth quarter or more frequently if events indicate the carrying value of a reporting unit may not be recoverable.
Subsequent to the U.K. Sale, as of our annual impairment test on October 1, 2021, we had one reporting unit, behavioral health services. The fair value of our behavioral health services reporting unit substantially exceeded its carrying value, and therefore no impairment was recorded. Additionally, during the second quarter of 2021, we sold one outpatient facility for $4.3 million and recorded a write down of $1.8 million of goodwill and $0.2 million of intangible assets related to the disposition. During the fourth quarter of 2021, we sold one outpatient facility for $1.5 million and recorded a write down of $0.7 million of goodwill and $0.1 million of intangibles related to the disposition.
As of our annual impairment test on October 1, 2020, we had two operating segments for segment reporting purposes, U.S. Facilities and U.K. Facilities, each of which represented a reporting unit for purposes of our goodwill impairment test.
Our annual goodwill impairment and other indefinite-lived intangible assets test performed as of October 1, 2020 considered recent financial performance, including the impacts of COVID-19 on certain portions of the U.K. business. The 2020 impairment test of the U.K. Facilities indicated carrying value of the reporting unit exceeded the estimated fair value and resulted in a non-cash loss on impairment of the remaining goodwill of the U.K. Facilities of $356.2 million. The non-cash loss on impairment is included in loss on sale within discontinued operations in the consolidated statement of operations. As of our impairment test on October 1, 2020, the fair value of our U.S Facilities reporting unit substantially exceeded its carrying value, and therefore no impairment was recorded. Additionally, for the year ended December 31, 2020, we recorded a non-cash impairment charge of $0.6 million related to indefinite-lived assets related to closed facilities in the U.S., which is included in loss on impairment in the consolidated statement of operations.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss and tax credit carryforwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply in the period when the asset is realized or the liability is settled, as applicable, based on tax rates and laws in the respective tax jurisdiction enacted as of the balance sheet date.
We review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, applicable tax strategies, and the expected timing of the reversals of existing temporary differences. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
We also have accruals for taxes and associated interest that may become payable in future years as a result of audits by tax authorities. We accrue for tax contingencies when it is more likely than not that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. Although we believe that the positions taken on previously filed tax returns are reasonable, we nevertheless have established tax and interest reserves in recognition that various taxing authorities may challenge the positions taken by us resulting in additional liabilities for taxes and interest. These amounts are reviewed as circumstances warrant and adjusted as events occur that affect our potential liability for additional taxes, such as lapsing of applicable
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statutes of limitations, conclusion of tax audits, additional exposure based on current calculations, identification of new issues, release of administrative guidance, or rendering of a court decision affecting a particular tax issue.