Youth, Weight Segments Big Drag on CRC Q3 Results

Addiction Treatment Industry Newswire
11/16/2012 – ATIN- Therapeutic schools and weight loss clinics continued to drag down results of addiction treatment drug rehab alcohol rehab CRC Health Corp in the third quarter, showing that the nation’s largest rehab operator has yet to fully dig itself out of the highly undisciplined execution of the industry asset aggregation strategy of founder Barry Karlin.

Methadone Profits

Methadone clinic profits, CRC clinics treat twice as many clients per clinic than the industry average, continued to drive the Recovery segment to an outstanding performance in combination with aggressive cost cutting throughout the segment, which registered decent revenue gains and stellar operating profit increases. 3Q segment revs were $89.6M vs 3Q yr ago $86.5M for a 4 percent yr-over-yr jump. Sources tell Treatment Magazine that Bain Capital itself has been regularly micro grilling center executive directors on expenses, an effort that has obviously paid off as the jump in segment operating profit was four times as large as revenue, resulting in a 16 percent gain to $31.1M for 3Q.

The Drags

The Youth segment – Aspen Education – basically treaded water on revenues for the quarter at $20M, while operating profits fell 50 percent to less than $1M. Weight Management, a play on America’s huge obesity health issue, fell 15 percent yr-over-yr to $10.1M on a revenue basis, with a HUGE $3.1M loss registered for the quarter.

Leverage Analysis

Since CRC is an LBO and is all about debt, the adjusted cash flow numbers are all important. What the results show is that the cost cutting and revenue increases in the Recovery segment are offsetting the negatives of the other two segments so that total adjusted cash flow as a percentage of revenue could remain steady at 26 percent in Q3 vs the same period last year. The question becomes… is CRC cutting to the bone in the Recovery segment, and thus possibly damaging its most valuable assets for the long term in order to keep its debt ratios constant for the short term? Red Flag? Interest expense climbed nearly 25 percent yr-over-yr in 3Q to $12.5M, the only really significant increase in this line item in years.

A Big Payout to Bain

Bain Capital has tripled its distribution of capital to itself to $9.5M vs $3.2M last year, which resulted in a big jump in net cash used in financing on the cash flow statement to $25.M from $14.8M in the first nine months of this year. The ability to do this without increasing net borrowings largely came from a big jump in cash provided from operating activities in the fiscal year’s first nine months to $43.1.M from $35M last year. In other words, all the big focus on cost containment has largely been so Bain can goose the flows up to the parent, which have been a tiny pittance compared to the enormity of such transfers in other Bain health care investments, especially the big HCA hospital chain. Bain has borrowed billions to pay itself big dividends at HCA, a strategy that, of course, would be massively imprudent at CRC even if the market for CRC debt were deep enough to absorb such a debt flotation.

read our analysis: Is Sum of CRC Parts Now Worth More than Whole?

read how Methadone profits sustain the CRC empire: Special Report: America’s Methadone King