CRC Health repaid $17 million of debt in Q2, says leverage ratio, interest coverage metrics better

By Paul Deckelman

New York, Aug. 18 - CRC Health Corp. slid to a second-quarter operating loss versus a year-ago profit, mostly due to non-cash impairment charges linked to an expected downturn in one of its two main divisions. But the Cupertino, Calif.-based operator of substance abuse, behavioral disorder, weight-loss and eating disorder treatment programs pointed to gains in revenue and adjusted EBITDA, as well as free cash flow.

Company executives told analysts on a Wednesday conference call following release of the numbers that key credit metrics like leverage ratio and interest coverage improved year over year and CRC repaid $17 million of debt.

The company's chief financial officer, Kevin Hogge, said that "essentially all" of the repaid debt was on CRC's revolving credit facility.

As of the end of the quarter on June 30, the company had $58.1 million of remaining availability on its $100 million revolver.

In good shape on covenants

Hogge noted that CRC's leverage and coverage tests under the covenants of its lending agreements "are well below our debt requirements."

The company is required to have a ratio of debt versus 12-month trailing EBITDA of no greater than 6.7 times - and during the quarter, it brought that leverage ratio down to 5.8 times from 6.61 times a year ago. At next year's second quarter, the company will see the final step-down in its ratio requirement, to 6.25 times - so with the ratio down to 5.8 times already, the CFO declared that "we're well below what that minimum requirement is for [debt to] EBITDA, a year out."

Likewise, he said, the ratio of CRC's earnings versus its interest obligations improved to 2.57 times versus 2.07 times a year ago, "certainly well up from where it has been in the past."

The company is required to maintain an interest coverage ratio of 2.0 times, "so there are really no issues - [we have] lots more cushion against our covenants at this point in time. We're in very good shape on that front," he said.

As of the end of the quarter, CRC had total debt of about $608 million, including about $177 million of 10¾% senior subordinated notes due 2016 remaining outstanding from the $200 million which came to market in January 2006. It also had $398 million of term loan debt and its revolver balance had been lowered to $32 million, with another $9.9 million in letters of credit against the facility.

The company stated in its 10-Q report filed with the Securities and Exchange Commission that it anticipates that cash generated by operations, the remaining revolver availability and existing cash and cash equivalents "will be sufficient to meet working capital requirements, service our debt and finance capital expenditures over the next 12 months."

Charges against earnings

CRC had an operating loss of $41.2 million for the second quarter, mostly due to an $18 million non-cash asset-impairment charge and a $43.7 million non-cash goodwill-impairment charge that the company recognized for both the quarter and the 2010 first half.

The company took those charges after it cut its estimate of anticipated future cash flows, compared with a forecast prepared last year, for its Healthy Living division, which provides programs and treatment services for adolescent youth with academic, emotional, and behavioral issues, as well as treatment services for eating disorders, obesity, and weight management for all age groups.

Hogge said this was based upon the company's recent reassessment of economic conditions, with a slower-than-expected recovery, and the lack of available credit from lenders for families of potential students, which both affect admissions and pricing.

But he said that while CRC cut its projection for Healthy Living's future expected cash flows, "our view for the overall company has not changed significantly, as we believe a strengthened Recovery division," which provides substance abuse and behavioral disorder treatment services through residential treatment facilities and outpatient treatment clinics, "will offset the impact of this revision to the Healthy Living forecast."

The company reported that net revenue increased 5.3% to $114.7 million in the quarter from $108.9 million last year. Adjusted EBITDA rose 9.3% to $28.1 million, versus $25.7 million last year, while free cash flow improved during the quarter to $25.5 million from $23.7 million in the year-earlier period.

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