On February 6, 2006, investment funds managed by Bain Capital Partners, LLC ("Bain") completed the acquisition of CRC for approximately $723 million. As part of the transaction certain members of the CRC management team partnered with Bain by retaining an equity stake in CRC. The acquisition resulted in several large expenses for merger-related costs in the first quarter. CRC's pro forma results excluding these unusual items can be derived from the Reconciliation of non-GAAP "EBITDA" to non-GAAP "Adjusted Pro Forma EBITDA", presented below. CRC refers to the February 6, 2006 Bain acquisition, the related mergers and related financings as the "Transactions."
Historical Financial Results
First Quarter Financial Results
The date of the Bain acquisition was February 6, 2006, but for accounting purposes and to coincide with its normal financial closing CRC has utilized January 31, 2006, as the effective date of the Bain acquisition. As a result, CRC has reported operating results and financial position for all periods presented prior to January 31, 2006 as those of the Predecessor Company and for all periods from and after February 1, 2006 as those of the Successor Company due to the resulting change in the basis of accounting. CRC's operating results for the quarter ended March 31, 2006 are presented as the mathematical addition of CRC's operating results for the period ending January 2006 to the operating results for February and March 2006. This approach is not consistent with accounting principals generally accepted in the United States of America ("GAAP") and may yield results that are not strictly comparable on a period-to-period basis primarily due to the impact of purchase accounting entries recorded as a result of the Transactions. However, CRC's management believes that it is a meaningful way to present CRC's results of operations for the quarter ended March 31, 2006. In addition, due to differences in the basis of accounting, results for the quarter ended March 31, 2006 are not comparable to results of the quarter ended March 31, 2005.
Consolidated net revenue increased $14.0 million, or 31.4%, to $58.5 million in the quarter ended March 31, 2006 from $44.5 million in the quarter ended March 31, 2005. This increase was attributable to increases of $12.6 million, or 52.1%, in residential treatment net revenue, and $1.2 million, or 6.1%, in opiate treatment net revenue. The growth in residential treatment net revenue was in part attributable to a $1.8 million, or 7.6%, increase in same- facility net revenue, and in part to the $9.8 million and $1.1 million of net revenue generated by Sierra Tucson and Wellness Resource Center, which CRC acquired in May 2005 and September 2005, respectively. During the quarter ended March 31, 2006, CRC's consolidated same-facility net revenue increased 5.9% compared to the same period last year. Results for Sierra Tucson and Wellness Resource Center are not included in CRC's results for the first quarter of 2005, nor in the same-facility comparisons. Excluding the one-time effect of the unearned revenue adjustment (see note #1 to Reconciliation of non-GAAP "EBITDA" to non-GAAP "Adjusted Pro Forma EBITDA" below), CRC's growth in consolidated same-facility net revenue was 7.6%. "Same-facility" refers to the comparison of each facility owned during 2005 with the results for the comparable period in 2006. CRC's same-facility residential growth was driven in part by a 7.5% increase in patient census and a 0.1% increase in revenue per patient day (including the effect of the unearned revenue adjustment). Opiate treatment same-facility net revenue increased 3.9%. This increase was primarily attributable to an increase in the number of patients receiving treatment at our opiate treatment clinics. On a same-facility basis, opiate treatment clinic census increased 3.2% from an average daily census of 20,157 patients in the first quarter of 2005 to an average daily census of 20,799 patients in the first quarter of 2006.
CRC's consolidated operating margins declined to -52.8% in the quarter ended March 31, 2006 from 22.2% in the quarter ended March 31, 2005, due primarily to the one-time expenses of $43.7 million related to the Bain acquisition (primarily due to $17.7 million in stock option compensation charges, and transaction fees and expenses of $26.0 million incurred by the Company) and a non-cash charge of $0.6 million relating to option-based employee compensation expense. Excluding these charges, consolidated operating margins were 23.0% in the first quarter of 2006, due primarily to the impact of higher operating margins, relative to the Company average, at Sierra Tucson and improved operating leverage from corporate and divisional administrative expenses, which were partially offset by an increase in amortization expense from the increase in intangible assets related to the Bain acquisition. The decline in residential treatment same-facility income from operations before divisional administrative expenses was -0.7% in the first quarter of 2006 compared to the first quarter of 2005. Excluding the $0.6 million impact of the one-time unearned revenue adjustment related to the application of purchase accounting due to the Bain acquisition, residential treatment same-facility income from operations increased 10.5%. Opiate treatment same-facility income from operations before divisional administrative expenses increased 2.3% in the first quarter of 2006 compared to the first quarter of 2005.
Consolidated income (loss) from operations before income taxes decreased $56.1 million in the first quarter of 2006 compared to the first quarter of 2005, due primarily to the above factors. Other income increased $0.6 million in the first quarter of 2006 due primarily to a gain recognized on the fair value of CRC's interest rate swap. Interest expense and other financing costs increased $16.0 million, or 458.6%, to $19.5 million in the first quarter of 2006 from $3.5 million in the first quarter of 2005. This increase is attributable to the issuance of new senior and subordinated debt related to the Bain acquisition and to the write-off of capitalized financing costs in the amount of $7.2 million from prior senior and subordinated debt that was refinanced as part of the Bain acquisition. Income tax expense (benefit) decreased $14.4 million to a benefit of $11.7 million in the first quarter of 2006 from $2.7 million expense in the first quarter of 2005 due to the loss incurred in the first quarter of 2006 due primarily to one-time expenses of $43.7 million related to the Bain acquisition. The effective tax rate declined from 42.4% for the first quarter of 2005 to 23.6% for the first quarter of 2006. This reduction relates primarily to the deduction of one-time costs in January 2006. Such one-time deductions include: payments for stock options and management bonuses; sellers' fees paid at the closing of the Bain acquisition; and write-offs of debt discount and capitalized financing costs. Without such one-time deductions, the effective tax rate for the first quarter of 2006 would have been 41.1%.
Pro Forma Financial Results
Adjusted pro forma EBITDA was $17.1 million for the quarter ended March 31, 2006, compared to $16.4 million for the quarter ended March 31, 2005, an increase of $0.7 million, or 4.0%.
In order to supplement its condensed consolidated financial statements presented in accordance with GAAP, CRC is providing a summary to show the computation of earnings before interest, taxes, depreciation and amortization ("EBITDA"), as well as adjusted pro forma EBITDA. Adjusted pro forma EBITDA takes into account certain adjustments which are excluded from EBITDA for purposes of various covenants in the indenture governing CRC's 103/4% senior subordinated notes due 2016 and its credit agreement dated February 6, 2006. CRC believes that the adjusted pro forma EBITDA information presented provides useful information to both management and investors concerning its ability to meet its future debt service and to comply with certain covenants in its borrowing arrangements that are tied to these measures. CRC also believes that including the effect of these items allows management and investors to better compare CRC's financial performance from period-to-period, and to better compare CRC's financial performance with that of its competitors. The presentation of this additional information is not meant to be considered in isolation of, or as a substitute for, results prepared in accordance with GAAP.
The unaudited adjusted pro forma EBITDA for the periods presented give effect to the Sierra Tucson acquisition and the other 2005 acquisitions as if CRC had owned such facilities as of January 1, 2005. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. The pro forma adjusted EBITDA is for informational purposes only and does not purport to represent what CRC's results of operations or financial position would actually be if the Sierra Tucson acquisition and the other 2005 acquisitions occurred at any date, nor does such information purport to project the results of operations for any future period.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWO MONTHS ENDED MARCH 31, 2006 (SUCCESSOR) AND ONE MONTH ENDED JANUARY 31, 2006 (PREDECESSOR) AND THREE MONTHS ENDED MARCH 31, 2005 (PREDECESSOR) (In thousands) (unaudited) Successor Predecessor Combined Predecessor Two One Three Three Months Month Months Months Ended Ended Ended Ended March 31, January 31, March 31, March 31, 2006 2006 2006 2005 NET REVENUE: Net client service revenue $37,810 $19,360 $57,170 $44,094 Other revenue 792 490 1,282 384 Net revenue 38,602 19,850 58,452 44,478 OPERATING EXPENSES: Salaries and benefits 17,866 9,265 27,131 21,606 Supplies and facilities cost 10,522 4,803 15,325 10,805 Insurance 428 201 629 626 Provision for bad debts 837 285 1,122 723 Depreciation and amortization 1,459 361 1,820 836 Acquisition related costs 0 43,268 43,268 0 Total operating expenses 31,112 58,183 89,295 34,596 INCOME (LOSS) FROM OPERATIONS 7,490 (38,333) (30,843) 9,882 INTEREST EXPENSE (6,324) (2,509) (8,833) (3,489) OTHER FINANCING COSTS (10,655) (10,655) OTHER INCOME 577 60 637 8 INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 1,743 (51,437) (49,694) 6,401 INCOME TAX EXPENSE (BENEFIT) 718 (12,444) (11,726) 2,714 NET INCOME (LOSS) $1,025 $(38,993) $(37,968) $3,687 Reconciliation of GAAP "Cash Flows (Used In) Provided By Operating Activities" to non-GAAP "EBITDA" and Reconciliation of non-GAAP "EBITDA" to GAAP "Net Income" (In thousands) (unaudited) Successor Predecessor Combined Predecessor Two One Three Three Months Month Months Months Ended Ended Ended Ended March 31, January 31, March 31, March 31, 2006 2006 2006 2005 Cash flows (used in) provided by operating activities $(18,938) $1,297 $(17,641) $4,870 Write-off of debt discount - (3,544) (3,544) - Acquisition and financing related costs - (24,445) (24,445) - Noncash interest and other financing costs (535) (7,273) (7,808) (377) Stock-based compensation (628) (17,666) (18,294) - Deferred income taxes 258 - 258 - Net effect of changes in non-current net assets (81) (1,331) (1,412) (37) Net effect of working capital changes 22,408 14,330 36,738 67 Interest expense and other financing costs 6,324 13,164 19,488 3,489 Income tax expense (benefit) 718 (12,444) (11,726) 2,714 EBITDA 9,526 (37,912) (28,386) 10,726 Interest expense and other financing costs (6,324) (13,164) (19,488) (3,489) Income tax expense (benefit) (718) 12,444 11,726 (2,714) Depreciation and amortization (1,459) (361) (1,820) (836) Net income (loss) $1,025 $(38,993) $(37,968) $3,687 Reconciliation of non-GAAP "EBITDA" to non-GAAP "Adjusted Pro Forma EBITDA" (In thousands) (unaudited) Combined Predecessor Three Three Months Months Ended Ended March 31, March 31, 2006 2005 EBITDA $(28,386) $10,726 Pre-acquisition EBITDA from Sierra Tucson acquisition 4,215 Pre-acquisition EBITDA from other 2005 acquisitions 847 Expenses of prior owners of acquired businesses 198 Expenses incurred related to the Bain acquisition 43,707 Unrecognized profit on deferred revenue from the Bain acquisition (note 1) 1,474 Management fees to Triod 110 Option-based employee compensation expense 628 Gain on interest rate swap (623) Loss on fixed asset disposals (2) 9 Management fees to sponsors 298 330 Adjusted pro forma EBITDA $17,096 $16,435 Note 1 -- In accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, consolidated unearned revenue of $3.5 million was recorded at fair value on February 6, 2006, the date of the closing of the Transactions. Accordingly, $1.5 million of profit ($1.4 million and $0.1 million, relating to CRC's residential treatment division and opiate treatment division, respectively) associated with the unearned revenue was not carried forward and was not recognized as revenue by CRC during the two months ended March 31, 2006 ("unearned revenue adjustment"). CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2006 AND DECEMBER 31, 2005 (In thousands, except share amounts) (unaudited) Successor Predecessor March 31, December 31, 2006 2005 ASSETS CURRENT ASSETS: Cash $1,255 $5,077 Accounts receivable, net of allowance for doubtful accounts of $5,074 in 2006 and $4,459 in 2005 25,338 23,418 Prepaid expenses 4,888 4,510 Other current assets 1,663 2,832 Income taxes receivable 8,252 Deferred income taxes 4,271 4,264 Total current assets 45,667 40,101 PROPERTY AND EQUIPMENT -- Net 65,067 49,074 GOODWILL 454,042 265,977 OTHER INTANGIBLE ASSETS -- Net 285,560 60,008 OTHER ASSETS 22,550 8,994 TOTAL ASSETS $872,886 $424,154 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $2,782 $5,348 Accrued liabilities 15,552 14,400 Income taxes payable 3,384 Current portion of long-term debt 2,450 11,550 Other current liabilities 3,546 3,135 Total current liabilities 24,330 37,817 LONG-TERM DEBT -- Less current portion 439,622 248,381 OTHER LONG-TERM LIABILITIES 255 469 DEFERRED INCOME TAXES 112,551 9,877 Total liabilities 576,758 296,544 Predecessor Company -- Mandatorily redeemable stock -- 324,731,796 shares authorized; 262,399,056 shares issued and outstanding at December 31, 2005 115,625 STOCKHOLDERS' EQUITY: Predecessor Company -- Series A common stock, $0.000001 par value -- 378,090,843 shares authorized; 8,652,429 shares issued and outstanding at December 31, 2005 Successor Company -- Common stock, $0.001 par value -- 1,000 shares authorized; 1,000 shares issued and outstanding at March 31, 2006 Additional paid-in capital 295,103 215 Retained earnings 1,025 11,770 Total stockholders' equity 296,128 11,985 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $872,886 $424,154 CRC Health Corporation (formerly CRC Health Group, Inc.) Selected Statistics Successor Predecessor Three Months Three Months Ended Ended March 31, March 31, 2006 2005 Residential treatment facilities data Number of inpatient facilities -- end of period 21 18 Number of outpatient facilities -- end of period 18 16 Available beds -- end of period 1,371 1,137 Average daily census 1,210.2 990.2 Occupancy rate 89.3% 87.3% Net revenue per patient day $337.85 $271.46 Opiate treatment clinics data Number of opiate treatment clinics -- end of period 50 49 Average daily census 21,738.1 20,629.6 Net revenue per patient day $11.00 $10.92Reports and Conference Call
Per the requirements of the indenture governing CRC's 10 3/4% senior subordinated notes due 2016, CRC has filed its first quarter 2006 financial statements and associated management's discussion and analysis of financial condition and results of operations with the indenture trustee. Note holders wishing to review these documents should contact the trustee directly (Richard Prokosch, U.S. Bank, RICHARD.PROKOSCH@usbank.com).
CRC will host a conference call, open to all interested parties, on Monday, May 22, 2006 beginning at 10:00 AM Pacific Time. The number to call within the United States is (800) 841-5343. Participants outside the United States should call (706) 643-0468. The conference ID is 9511538. A replay of the conference call will be available starting two hours after completion of the call until midnight May 29, 2006 and can be accessed by dialing (800)-642-1687 from within the United States or (706)-645-9291 from outside the United States and entering conference ID 9511538.
This press release includes or may include "forward-looking statements." All statements included herein, other than statements of historical fact, may constitute forward-looking statements. Although CRC believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following factors: changes in government reimbursement for CRC's services; changes in applicable regulations or a government investigation or assertion that CRC has violated applicable regulations; the potentially difficult, unsuccessful or costly integration of recently acquired operations and future acquisitions; the potentially difficult, unsuccessful or costly opening and operating of new treatment facilities; the possibility that commercial payors for CRC's services may undertake future cost containment initiatives; the limited number of national suppliers of methadone used in CRC's opiate treatment clinics; the failure to maintain established relationships or cultivate new relationships with patient referral sources; shortages in qualified healthcare workers; natural disasters such as hurricanes, earthquakes and floods; competition that limits CRC's ability to grow; the potentially costly implementation of new information systems to comply with federal and state initiatives relating to patient privacy, security of medical information and electronic Bain acquisition; the potentially costly implementation of accounting and other management systems and resources in response to financial reporting and other requirements; the loss of key members of CRC's management; claims asserted against CRC or lack of adequate available insurance; CRC's substantial indebtedness; and certain restrictive covenants in CRC's debt documents.
CONTACT: Bob Weiner or Rebecca VanderLinde, +1-301-283-0821, or +1-202-329-1700, both for CRC Health Corporation.
Source: Robert Weiner Associates/CRC Health Corp.