PSYCHIATRIC SOLUTIONS INC - FORM 10-Q

Attached files

file	filename
EX-31.1 - EX-31.1 - PSYCHIATRIC SOLUTIONS INC	g23305exv31w1.htm
EX-32.1 - EX-32.1 - PSYCHIATRIC SOLUTIONS INC	g23305exv32w1.htm
EX-31.2 - EX-31.2 - PSYCHIATRIC SOLUTIONS INC	g23305exv31w2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2010 or


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

Commission file number 0-20488

Psychiatric Solutions, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		23-2491707 (I.R.S. Employer Identification No.)

6640 Carothers Parkway, Suite 500
Franklin, TN 37067
(Address of Principal Executive Offices, Including Zip Code)

(615) 312-5700
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller Reporting Company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

As of May 6, 2010, 57,169,871 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS


	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (Unaudited)		1
Condensed Consolidated Statements of Income for the three month periods ended March 31, 2010 and 2009 (Unaudited)		2
Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2010 and 2009 (Unaudited)		3
Notes to Condensed Consolidated Financial Statements (Unaudited)		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		21
Item 4. Controls and Procedures		21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		21
Item 1A. Risk Factors		22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 6. Exhibits		23
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)


	March 31,		December 31,
	2010		2009
ASSETS
Current assets:
Cash and cash equivalents	$	32,645	$	6,815
Accounts receivable, less allowance for doubtful accounts of $53,311 and $51,894, respectively		263,874		249,439
Other current assets		92,495		105,166

Total current assets		389,014		361,420
Property and equipment, net of accumulated depreciation		948,092		931,730
Cost in excess of net assets acquired		1,153,111		1,153,111
Other assets		59,967		60,979

Total assets	$	2,550,184	$	2,507,240


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	33,272	$	35,397
Salaries and benefits payable		94,085		81,129
Other accrued liabilities		55,083		62,036
Current portion of long-term debt		10,552		4,940

Total current liabilities		192,992		183,502
Long-term debt, less current portion		1,175,980		1,182,139
Deferred tax liability		84,074		81,137
Other liabilities		31,031		25,790

Total liabilities		1,484,077		1,472,568
Redeemable noncontrolling interests		4,326		4,337
Stockholders’ equity:
Common stock, $0.01 par value, 125,000 shares authorized; 57,169 and 56,226 issued and outstanding, respectively		572		562
Additional paid-in capital		630,699		627,476
Retained earnings		430,510		402,297

Total stockholders’ equity		1,061,781		1,030,335

Total liabilities and stockholders’ equity	$	2,550,184	$	2,507,240

See accompanying notes.

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except for per share amounts)


	Three Months Ended March 31,
	2010			2009

Revenue	$	475,956		$	433,930

Salaries, wages and employee benefits (including share-based compensation of $3,510 and $4,819 for the three months ended March 31, 2010 and 2009, respectively)		259,475			244,286
Professional fees		44,928			39,930
Supplies		23,678			22,920
Rentals and leases		4,835			5,080
Other operating expenses		50,895			41,266
Provision for doubtful accounts		11,833			8,462
Depreciation and amortization		12,390			10,553
Interest expense		16,498			16,609

		424,532			389,106

Income from continuing operations before income taxes		51,424			44,824
Provision for income taxes		19,683			17,164

Income from continuing operations		31,741			27,660
Loss from discontinued operations, net of benefit from income taxes of $1,829 and $148 for the three months ended March 31, 2010 and 2009, respectively		(3,496	)		(139	)

Net income		28,245			27,521
Less: Net income attributable to noncontrolling interests		(32	)		(139	)

Net income attributable to PSI stockholders	$	28,213		$	27,382


Basic earnings per share:
Income from continuing operations attributable to PSI stockholders	$	0.57		$	0.49
Loss from discontinued operations, net of taxes		(0.06	)		—

Net income attributable to PSI stockholders	$	0.51		$	0.49


Diluted earnings per share:
Income from continuing operations attributable to PSI stockholders	$	0.56		$	0.49
Loss from discontinued operations, net of taxes		(0.06	)		—

Net income attributable to PSI stockholders	$	0.50		$	0.49


Shares used in computing per share amounts:
Basic		55,715			55,495
Diluted		56,386			55,968

Amounts attributable to PSI stockholders:
Income from continuing operations	$	31,709		$	27,521
Loss from discontinued operations, net of taxes		(3,496	)		(139	)

Net income	$	28,213		$	27,382

See accompanying notes.

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)


	Three Months Ended March 31,
	2010			2009
Operating activities:
Net income	$	28,245		$	27,521
Adjustments to reconcile net income to net cash provided by continuing operating activities:
Depreciation and amortization		12,390			10,553
Amortization of loan costs and bond discount/premium		1,564			715
Share-based compensation		3,510			4,819
Change in income tax assets and liabilities		10,824			15,908
Loss from discontinued operations, net of taxes		3,496			139
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(14,435	)		(9,776	)
Other current assets		893			2,296
Accounts payable		(382	)		(2,822	)
Salaries and benefits payable		12,956			(3,391	)
Accrued liabilities and other liabilities		(2,977	)		(6,563	)

Net cash provided by continuing operating activities		56,084			39,399
Net cash (used in) provided by discontinued operating activities		(89	)		781

Net cash provided by operating activities		55,995			40,180

Investing activities:
Capital purchases of leasehold improvements, equipment and software		(29,553	)		(24,368	)
Other assets		101			(158	)

Net cash used in continuing investing activities		(29,452	)		(24,526	)
Net cash used in discontinued investing activities		(12	)		(321	)

Net cash used in investing activities		(29,464	)		(24,847	)

Financing activities:
Net decrease in revolving credit facility		—			(39,333	)
Principal payments on long-term debt		(1,322	)		(1,272	)
Payment of loan and issuance costs		(6	)		(5,363	)
Distributions to noncontrolling interests		(43	)		—
Repurchase of common stock upon restricted stock vesting		(490	)		(953	)
Proceeds from exercises of common stock options		1,160			342

Net cash used in financing activities		(701	)		(46,579	)

Net increase (decrease) in cash and cash equivalents		25,830			(31,246	)
Cash and cash equivalents at beginning of the period		6,815			51,271

Cash and cash equivalents at end of the period	$	32,645		$	20,025

See accompanying notes.

PSYCHIATRIC SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010

1. Recent Developments

On November 2, 2009, we completed the sale of our employee assistance program (“EAP”) business for approximately $68.5 million in cash, net of fees and expenses.

On September 30, 2009, we completed the acquisition of a 90-bed inpatient behavioral health care facility located in Panama City, Florida. On September 1, 2009, we completed the acquisition of a 131-bed inpatient behavioral health care facility located in Fargo, North Dakota.

In May 2009, we received $106.5 million upon the issuance of $120 million of our 7 ³/4% Senior Subordinated Notes due 2015 (the “7 ³/4% Notes”) and used the proceeds to repay a portion of the outstanding balance of our revolving credit facility. During 2009, our revolving credit facility was amended to extend the maturity until December 31, 2011.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. The condensed consolidated balance sheet at December 31, 2009 has been derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation of our financial position have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The majority of our expenses are “cost of revenue” items. Costs that could be classified as general and administrative expenses at our corporate office, excluding share-based compensation expense, were approximately 2.8% of net revenue for the three months ended March 31, 2010. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

3. Earnings Per Share

GAAP requires dual presentation of basic and diluted earnings per share by entities with complex capital structures. Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share also includes the potential dilution of securities that could share in our earnings. We have calculated earnings per share accordingly for all periods presented.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010


	Three Months Ended
	March 31,
	2010			2009
Numerator:
Basic and diluted earnings per share:
Income from continuing operations attributable to PSI stockholders	$	31,709		$	27,521
Loss from discontinued operations, net of taxes		(3,496	)		(139	)

Net income attributable to PSI stockholders	$	28,213		$	27,382


Denominator:
Weighted average shares outstanding for basic earnings per share		55,715			55,495
Effects of dilutive stock options and restricted stock outstanding		671			473

Shares used in computing diluted earnings per common share		56,386			55,968


Basic earnings per share:
Income from continuing operations attributable to PSI stockholders	$	0.57		$	0.49
Loss from discontinued operations, net of taxes		(0.06	)		—

Net income attributable to PSI stockholders	$	0.51		$	0.49


Diluted earnings per share:
Income from continuing operations attributable to PSI stockholders	$	0.56		$	0.49
Loss from discontinued operations, net of taxes		(0.06	)		—

Net income attributable to PSI stockholders	$	0.50		$	0.49

4. Share-Based Compensation

We recognized approximately $3.5 million and $4.8 million in share-based compensation expense and approximately $1.3 million and $1.8 million of related income tax benefit for the three months ended March 31, 2010 and 2009, respectively. The fair value of our stock options was estimated using the Black-Scholes option pricing model. The impact of share-based compensation expense, net of tax, on our earnings per share was approximately $0.04 and $0.05 per share for the three months ended March 31, 2010 and 2009, respectively.

Based on our stock option and restricted stock grants outstanding at March 31, 2010, we estimate remaining unrecognized share-based compensation expense to be approximately $50.0 million with a weighted average remaining life of 2.8 years.

Employees exercised 76,114 stock options during the three months ended March 31, 2010. Also during 2010, 184,999 shares of restricted stock vested and 22,399 of those shares were surrendered by our employees and cancelled in satisfaction of the employees’ related tax liabilities. The total intrinsic value, which represents the difference between the underlying stock’s market price and the option’s exercise price, of options exercised and restricted stock vested during the three months ended March 31, 2010 and 2009 was $4.8 million and $3.8 million, respectively.

We granted 842,750 stock options to employees during the three months ended March 31, 2010. These options vest over four years in annual increments of 25% on each anniversary of the grant date and each had a grant-date fair value of $7.92.

We granted 896,000 shares of restricted stock to employees during the three months ended March 31, 2010. These shares of restricted stock vest over four years in annual increments of 25% on each anniversary of the grant date and had a weighted-average grant-date fair value of $21.00 per share.

As of March 31, 2010, we had 6,534,588 stock options outstanding with a weighted average exercise price of $26.87 and a weighted average remaining contractual term of 6.8 years and 1,305,827 shares of restricted stock outstanding. Also as of March 31, 2010, we had 503,817 shares available for issuance under the Psychiatric Solutions, Inc. Equity Incentive Plan and the Psychiatric Solutions, Inc. Outside Directors’ Stock Incentive Plan.

5. Acquisitions

Acquiring free-standing psychiatric facilities is a key part of our business strategy.

On September 1, 2009, we completed the acquisition of a 131-bed inpatient behavioral health care facility located in Fargo, North Dakota. On September 30, 2009, we completed the acquisition of a 90-bed inpatient behavioral health care facility located in Panama City, Florida.

The balance of cost in excess of net assets acquired (goodwill) was $1.2 billion as of March 31, 2010 and December 31, 2009.

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010

6. Long-term debt

Long-term debt consists of the following (in thousands):


	March 31,		December 31,
	2010		2009
Senior credit facility:
Senior secured term loan facility, expiring on July 1, 2012 and bearing interest of 2.1% and 2.0% at March 31, 2010 and December 31, 2009, respectively	$	563,938	$	564,875
7 3/4% Notes		582,899		582,666
Mortgage loans on facilities, maturing in 2036, 2037 and 2038 bearing fixed interest rates of 5.7% to 7.6%		32,741		32,850
Other		6,954		6,688

		1,186,532		1,187,079
Less current portion		10,552		4,940

Long-term debt	$	1,175,980	$	1,182,139

Senior Credit Facility

Our Senior Credit Facility (the “Credit Agreement”) includes a $300 million revolving line of credit facility administered by Bank of America, N.A. and a $575 million senior secured term loan facility administered by Citicorp North America, Inc. During 2009, our revolving credit facility was amended to extend the maturity to December 31, 2011. Quarterly principal payments of $0.9 million are due on our senior secured term loan facility and the balance of our senior secured term loan facility is payable in full on July 1, 2012.

Our Credit Agreement is secured by substantially all of the personal property owned by us or our subsidiaries, substantially all real property owned by us or our subsidiaries that has a value in excess of $5.0 million and the stock of substantially all of our operating subsidiaries. In addition, the Credit Agreement is fully and unconditionally guaranteed by substantially all of our operating subsidiaries. The revolving credit facility and senior secured term loan facility accrue interest at our choice of the “Base Rate” or the “Eurodollar Rate” (as defined in the Credit Agreement). The “Base Rate” and “Eurodollar Rate” fluctuate based upon market rates and certain leverage ratios, as defined in the Credit Agreement. At March 31, 2010, we had no borrowings outstanding and $295.7 million available for future borrowings under the revolving credit facility. Until December 31, 2011, we may borrow, repay and re-borrow an amount not to exceed $300 million on our revolving credit facility. At March 31, 2010, our current maturities included $5.5 million of our senior secured term loan facility for an April 2010 principal payment related to excess cash flow, as required by our Credit Agreement. All repayments made under the senior secured term loan facility are a permanent reduction in the amount available for future borrowings. We pay a quarterly commitment fee on the unused portion of our revolving credit facility that fluctuates, based upon certain leverage ratios, between 0.75% and 1.0% per annum. Commitment fees were approximately $0.6 million for the three months ended March 31, 2010.

Our Credit Agreement contains customary covenants that include: (1) a limitation on capital expenditures and investments, sales of assets, mergers, changes of ownership, new principal lines of business, indebtedness, transactions with affiliates, dividends and redemptions; (2) various financial covenants; and (3) cross-default covenants triggered by a default of any other indebtedness of at least $5.0 million. As of March 31, 2010, we were in compliance with all debt covenant requirements. If we violate one or more of these covenants, amounts outstanding under the revolving credit facility, senior secured term loan facility and the majority of our other debt arrangements could become immediately payable and additional borrowings could be restricted.

7³/₄% Notes

The 7³/₄% Senior Subordinated Notes due 2015 (the “7³/₄% Notes”) mature on July 15, 2015 and are fully and unconditionally guaranteed on a senior subordinated basis by substantially all of our existing operating subsidiaries. In May 2009, we issued $120 million of the 7³/₄% Notes at a discount of 11.25%. This discount is being amortized over the remaining life of the 7³/₄% Notes using the effective interest rate method, which results in an effective interest rate of 10.2% per annum on the $120 million issuance. We received a premium of 2.75% plus accrued interest from the sale of $250 million of 7³/₄% Notes in 2007. This premium is being amortized over the remaining life of the 7³/₄% Notes using the effective interest method, which results in an effective interest rate of 7.3% on the $250 million issuance. We also issued $220 million of the 7³/₄% Notes in 2005. Interest on the 7³/₄% Notes is payable semi-annually in arrears on January 15 and July 15.

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010

Mortgage Loans

At March 31, 2010, we had approximately $32.7 million debt outstanding under mortgage loan agreements insured by the U.S. Department of Housing and Urban Development (“HUD”). The mortgage loans insured by HUD are secured by real estate located at Holly Hill Hospital in Raleigh, North Carolina, West Oaks Hospital in Houston, Texas, Riveredge Hospital near Chicago, Illinois, Canyon Ridge Hospital in Chino, California and MeadowWood Behavioral Health in New Castle, Delaware. Interest accrues on the Holly Hill, West Oaks, Riveredge, Canyon Ridge and MeadowWood HUD loans at 6.0%, 5.9%, 5.7%, 7.6% and 7.0%, respectively, and principal and interest are payable in 420 monthly installments through December 2037, September 2038, December 2038, January 2036 and October 2036, respectively. The carrying amount of assets held as collateral for the HUD loans approximated $59.4 million at March 31, 2010.

7. Income Taxes

The provision for income taxes for continuing operations for the three months ended March 31, 2010 and 2009 reflects an effective tax rate of approximately 38.3% and 38.4%, respectively.

8. Discontinued Operations

GAAP requires that all components of an entity that have been disposed of (by sale, by abandonment or in a distribution to owners) or are held for sale and whose cash flows can be clearly distinguished from the rest of the entity be presented as discontinued operations. During 2009, we sold our EAP business, elected to close and sell Nashville Rehabilitation Hospital, The Oaks Treatment Center and Cumberland Hall of Chattanooga, and terminated one contract with a South Carolina juvenile justice agency. With the exception of our EAP business that was reported in our other segment, the results of these operations were reported in our owned and leased facilities segment prior to the decision to discontinue.

The components of loss from discontinued operations, net of taxes, are as follows (in thousands):


	Three Months Ended
	March 31,
	2010			2009
Revenue	$	2,446		$	18,432

Operating expenses		5,118			18,719
Loss on disposal		2,653			—

		7,771			18,719

Loss from discontinued operations before income taxes		(5,325	)		(287	)
Benefit from income taxes		(1,829	)		(148	)

Loss from discontinued operations, net of income taxes	$	(3,496	)	$	(139	)

9. Disclosures About Reportable Segments

In accordance with GAAP, our owned and leased behavioral health care facilities segment is our only reportable segment. Our chief operating decision maker regularly reviews the operating results of our inpatient facilities on a combined basis, which represent more than 90% of our consolidated revenue. As of March 31, 2010, the owned and leased facilities segment provides mental health and behavioral health services to patients in its 86 owned and 8 leased inpatient facilities in 32 states, Puerto Rico and the U.S. Virgin Islands. The column entitled “Other” in the schedules below includes management contracts to provide inpatient psychiatric management and development services to inpatient behavioral health units in hospitals and clinics and a managed care plan in Puerto Rico. The operations included in the “Other” column do not qualify as reportable segments. Activities classified as “Corporate” in the following schedules relate primarily to unallocated home office expenses and discontinued operations.

Adjusted EBITDA is a non-GAAP financial measure and is defined as income from continuing operations before interest expense (net of interest income), income taxes, depreciation, amortization, stock compensation and other items included in the caption labeled “Other expenses.” These other expenses may occur in future periods, but the amounts recognized can vary significantly from period to period and do not directly relate to the ongoing operations of our health care facilities. Our management relies on adjusted EBITDA as the primary measure to review and assess the operating performance of our inpatient facilities and their management teams. We believe it is useful to investors to provide disclosures of our operating results on the same basis as that used by management.

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010

Management and investors also review adjusted EBITDA to evaluate our overall performance and to compare our current operating results with corresponding periods and with other companies in the health care industry. You should not consider adjusted EBITDA in isolation or as a substitute for net income, operating cash flows or other cash flow statement data determined in accordance with GAAP. Because adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, it may not be comparable to similarly titled measures of other companies. The following is a financial summary by reportable segment for the periods indicated (dollars in thousands):

Three Months Ended March 31, 2010


	Owned and
	Leased
	Facilities			Other			Corporate			Consolidated
Revenue	$	442,769		$	33,187		$	—		$	475,956

Adjusted EBITDA	$	95,080		$	2,236		$	(13,494	)	$	83,822
Interest expense		7,208			79			9,211			16,498
Provision for income taxes		—			—			19,683			19,683
Depreciation and amortization		10,921			1,052			417			12,390
Inter-segment expenses		13,469			1,211			(14,680	)		—
Other expenses:
Share-based compensation		—			—			3,510			3,510

Total other expenses		—			—			3,510			3,510

Income (loss) from continuing operations		63,482			(106	)		(31,635	)		31,741
Less: Income attributable to noncontrolling interests		(32	)		—			—			(32	)

Income (loss) from continuing operations attributable to
PSI stockholders	$	63,450		$	(106	)	$	(31,635	)	$	31,709

Total assets	$	2,377,041		$	55,596		$	117,547		$	2,550,184

Three Months Ended March 31, 2009


	Owned and
	Leased
	Facilities			Other			Corporate			Consolidated
Revenue	$	404,003		$	29,927		$	—		$	433,930

Adjusted EBITDA	$	84,202		$	5,033		$	(12,430	)	$	76,805
Interest expense		7,095			(448	)		9,962			16,609
Provision for income taxes		—			—			17,164			17,164
Depreciation and amortization		9,019			1,143			391			10,553
Inter-segment expenses		17,207			1,546			(18,753	)		—
Other expenses:
Share-based compensation		—			—			4,819			4,819

Total other expenses		—			—			4,819			4,819

Income (loss) from continuing operations		50,881			2,792			(26,013	)		27,660
Less: Income attributable to noncontrolling interests		(139	)		—			—			(139	)

Income (loss) from continuing operations attributable to
PSI stockholders	$	50,742		$	2,792		$	(26,013	)	$	27,521

Total assets	$	2,242,528		$	63,862		$	187,394		$	2,493,784

10. Financial Information for the Company and Its Subsidiaries

We conduct substantially all of our business through our subsidiaries. Presented below is consolidated financial information for Psychiatric Solutions, Inc. and its subsidiaries as of March 31, 2010 and December 31, 2009, and for the three months ended

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010

March 31, 2010 and 2009. The information segregates the parent company (Psychiatric Solutions, Inc.), the combined wholly-owned subsidiary guarantors, the combined non-guarantors and eliminations. All of the subsidiary guarantees are both full and unconditional and joint and several.

Condensed Consolidating Balance Sheet
As of March 31, 2010
(Dollars in thousands)


			Combined
			Subsidiary			Combined Non-			Consolidating			Total Consolidated
	Parent		Guarantors			Guarantors			Adjustments			Amounts
Current assets:
Cash and cash equivalents	$	—	$	26,732		$	5,740		$	173		$	32,645
Accounts receivable, net		—		254,433			9,509			(68	)		263,874
Other current assets		—		77,496			12,768			2,231			92,495

Total current assets		—		358,661			28,017			2,336			389,014
Property and equipment, net of accumulated depreciation		—		896,081			61,148			(9,137	)		948,092
Cost in excess of net assets acquired		—		1,153,111			—			—			1,153,111
Investment in subsidiaries		1,471,171		(352,176	)		(16,266	)		(1,102,729	)		—
Other assets		16,222		38,216			24,718			(19,189	)		59,967

Total assets	$	1,487,393	$	2,093,893		$	97,617		$	(1,128,719	)	$	2,550,184


Current liabilities:
Accounts payable	$	—	$	31,963		$	1,377		$	(68	)	$	33,272
Salaries and benefits payable		—		92,666			1,419			—			94,085
Other accrued liabilities		17,539		37,208			(495	)		831			55,083
Current portion of long-term debt		10,095		—			457			—			10,552

Total current liabilities		27,634		161,837			2,758			763			192,992
Long-term debt, less current portion		1,143,696		—			32,284			—			1,175,980
Deferred tax liability		—		84,074			—			—			84,074
Other liabilities		5,099		(5,818	)		35,784			(4,034	)		31,031

Total liabilities		1,176,429		240,093			70,826			(3,271	)		1,484,077
Redeemable noncontrolling interest		—		—			—			4,326			4,326
Total stockholders’ equity		310,964		1,853,800			26,791			(1,129,774	)		1,061,781

Total liabilities and stockholders’ equity	$	1,487,393	$	2,093,893		$	97,617		$	(1,128,719	)	$	2,550,184

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010

Condensed Consolidating Balance Sheet
As of December 31, 2009
(Dollars in thousands)


				Combined
				Subsidiary			Combined Non-			Consolidating			Total Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Current assets:
Cash and cash equivalents	$	—		$	2,111		$	4,704		$	—		$	6,815
Accounts receivable, net		—			241,211			8,296			(68	)		249,439
Other current assets		—			90,259			16,284			(1,377	)		105,166

Total current assets		—			333,581			29,284			(1,445	)		361,420
Property and equipment, net of accumulated depreciation		—			879,453			61,491			(9,214	)		931,730
Cost in excess of net assets acquired		—			1,153,111			—			—			1,153,111
Investment in subsidiaries		1,486,852			(368,332	)		(16,964	)		(1,101,556	)		—
Other assets		17,536			37,420			25,372			(19,349	)		60,979

Total assets	$	1,504,388		$	2,035,233		$	99,183		$	(1,131,564	)	$	2,507,240


Current liabilities:
Accounts payable	$	—		$	34,467		$	998		$	(68	)	$	35,397
Salaries and benefits payable		—			80,255			874			—			81,129
Other accrued liabilities		28,901			32,783			1,610			(1,258	)		62,036
Current portion of long-term debt		4,490			—			450			—			4,940

Total current liabilities		33,391			147,505			3,932			(1,326	)		183,502
Long-term debt, less current portion		1,149,738			—			32,401			—			1,182,139
Deferred tax liability		—			81,137			—			—			81,137
Other liabilities		127			(6,324	)		36,069			(4,082	)		25,790

Total liabilities		1,183,256			222,318			72,402			(5,408	)		1,472,568
Redeemable noncontrolling interests		—			—			—			4,337			4,337
Total stockholders’ equity		321,132			1,812,915			26,781			(1,130,493	)		1,030,335

Total liabilities and stockholders’ equity	$	1,504,388		$	2,035,233		$	99,183		$	(1,131,564	)	$	2,507,240


Condensed Consolidating Statement of Income For the Three Months Ended March 31, 2010 (Dollars in thousands)

				Combined
				Subsidiary			Combined Non-			Consolidating			Total Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Revenue	$	—		$	464,855		$	12,543		$	(1,442	)	$	475,956
Salaries, wages and employee benefits		—			253,095			6,380			—			259,475
Professional fees		—			43,784			1,733			(589	)		44,928
Supplies		—			23,010			668			—			23,678
Rentals and leases		—			5,914			145			(1,224	)		4,835
Other operating expenses		—			49,671			1,993			(769	)		50,895
Provision for doubtful accounts		—			11,315			518			—			11,833
Depreciation and amortization		—			11,850			617			(77	)		12,390
Interest expense		16,025			—			473			—			16,498

		16,025			398,639			12,527			(2,659	)		424,532
(Loss) income from continuing operations before income taxes		(16,025	)		66,216			16			1,217			51,424
(Benefit from) provision for income taxes		(6,134	)		25,345			6			466			19,683

(Loss) income from continuing operations		(9,891	)		40,871			10			751			31,741
(Loss) income from discontinued operations, net of tax		—			(3,496	)		—			—			(3,496	)

Net (loss) income		(9,891	)		37,375			10			751			28,245
Less: Net income attributable to noncontrolling interests		—			—			—			(32	)		(32	)

Net (loss) income attributable to PSI stockholders	$	(9,891	)	$	37,375		$	10		$	719		$	28,213

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010

Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2009
(Dollars in thousands)


				Combined
				Subsidiary			Combined Non-			Consolidating			Total Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Revenue	$	—		$	423,585		$	11,639		$	(1,294	)	$	433,930
Salaries, wages and employee benefits		—			237,826			6,460			—			244,286
Professional fees		—			39,124			2,086			(1,280	)		39,930
Supplies		—			22,347			573			—			22,920
Rentals and leases		—			6,129			24			(1,073	)		5,080
Other operating expenses		—			40,233			1,620			(587	)		41,266
Provision for doubtful accounts		—			8,200			262			—			8,462
Depreciation and amortization		—			10,090			540			(77	)		10,553
Interest expense		16,193			—			416			—			16,609

		16,193			363,949			11,981			(3,017	)		389,106
(Loss) income from continuing operations before income taxes		(16,193	)		59,636			(342	)		1,723			44,824
(Benefit from) provision for income taxes		(6,201	)		22,836			(131	)		660			17,164

(Loss) income from continuing operations		(9,992	)		36,800			(211	)		1,063			27,660
(Loss) income from discontinued operations, net of tax		—			(460	)		321			—			(139	)

Net (loss) income		(9,992	)		36,340			110			1,063			27,521
Less: Net income attributable to noncontrolling interests		—			—			—			(139	)		(139	)

Net (loss) income attributable to PSI stockholders	$	(9,992	)	$	36,340		$	110		$	924		$	27,382

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010

Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2010
(Dollars in thousands)


				Combined
				Subsidiary			Combined Non-			Consolidating			Total Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Operating activities:
Net (loss) income	$	(9,891	)	$	37,375		$	10		$	751		$	28,245
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			11,850			617			(77	)		12,390
Amortization of loan costs and bond premium		1,553			—			11			—			1,564
Share-based compensation		—			3,510			—			—			3,510
Change in income tax assets and liabilities		—			10,824			—			—			10,824
Loss (income) from discontinued operations, net of taxes		—			3,496			—			—			3,496
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		—			(13,222	)		(1,213	)		—			(14,435	)
Other current assets		—			(2,623	)		3,516			—			893
Accounts payable		—			(761	)		379			—			(382	)
Salaries and benefits payable		—			12,411			545			—			12,956
Accrued liabilities and other liabilities		—			(587	)		(2,390	)		—			(2,977	)

Net cash (used in) provided by continuing operating activities		(8,338	)		62,273			1,475			674			56,084
Net cash used in discontinued operating activities		—			(89	)		—			—			(89	)

Net cash (used in) provided by operating activities		(8,338	)		62,184			1,475			674			55,995
Investing activities:
Capital purchases of leasehold improvements, equipment and software		—			(29,279	)		(274	)		—			(29,553	)
Other assets		—			156			(55	)		—			101

Net cash used in continuing investing activities		—			(29,123	)		(329	)		—			(29,452	)
Net cash used in discontinued investing activities		—			(12	)		—			—			(12	)

Net cash used in investing activities		—			(29,135	)		(329	)		—			(29,464	)
Financing activities:
Principal payments on long-term debt		(1,212	)		—			(110	)		—			(1,322	)
Payment of loan and issuance costs		(6	)		—			—			—			(6	)
Distributions to noncontrolling interests					—			(43	)		—			(43	)
Repurchase of common stock upon restricted stock vesting		(490	)		—			—			—			(490	)
Net transfers to and from members		8,886			(8,428	)		43			(501	)		—
Proceeds from exercises of common stock options		1,160			—			—			—			1,160

Net cash provided by (used in) financing activities		8,338			(8,428	)		(110	)		(501	)		(701	)

Net increase in cash and cash equivalents		—			24,621			1,036			173			25,830
Cash and cash equivalents at beginning of the period		—			2,111			4,704			—			6,815

Cash and cash equivalents at end of the period	$	—		$	26,732		$	5,740		$	173		$	32,645

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010

Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2009
(Dollars in thousands)


				Combined
				Subsidiary			Combined Non-			Consolidating			Total Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Operating activities:
Net (loss) income	$	(9,992	)	$	36,340		$	110		$	1,063		$	27,521
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			10,090			540			(77	)		10,553
Amortization of loan costs and bond premium		704			—			11			—			715
Share-based compensation		—			4,819			—			—			4,819
Change in income tax assets and liabilities		—			15,908			—			—			15,908
Loss (income) from discontinued operations, net of taxes		—			460			(321	)		—			139
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		—			(9,016	)		(760	)		—			(9,776	)
Other current assets		—			2,319			(23	)		—			2,296
Accounts payable		—			(2,923	)		101			—			(2,822	)
Salaries and benefits payable		—			(3,190	)		(201	)		—			(3,391	)
Accrued liabilities and other liabilities		—			(5,551	)		(1,012	)		—			(6,563	)

Net cash (used in) provided by continuing operating activities		(9,288	)		49,256			(1,555	)		986			39,399
Net cash provided by discontinued operating activities		—			54			727			—			781

Net cash (used in) provided by operating activities		(9,288	)		49,310			(828	)		986			40,180
Investing activities:
Capital purchases of leasehold improvements,
equipment and software		—			(24,368	)		—			—			(24,368	)
Other assets		—			2,370			(2,528	)		—			(158	)

Net cash used in continuing investing activities		—			(21,998	)		(2,528	)		—			(24,526	)
Net cash used in discontinued investing activities		—			(321	)		—			—			(321	)

Net cash used in investing activities		—			(22,319	)		(2,528	)		—			(24,847	)
Financing activities:
Net increase in revolving credit facility, less acquisitions		(39,333	)		—			—			—			(39,333	)
Principal payments on long-term debt		(1,169	)		—			(103	)		—			(1,272	)
Payment of loan and issuance costs		(5,363	)		—			—			—			(5,363	)
Repurchase of common stock upon restricted stock vesting		(953	)		—			—			—			(953	)
Net transfers to and from members		55,764			(54,372	)		(406	)		(986	)		—
Proceeds from exercises of common stock options		342			—			—			—			342

Net cash provided by (used in) financing activities		9,288			(54,372	)		(509	)		(986	)		(46,579	)

Net decrease in cash and cash equivalents		—			(27,381	)		(3,865	)		—			(31,246	)
Cash and cash equivalents at beginning of the period		—			39,881			11,390			—			51,271

Cash and cash equivalents at end of the period	$	—		$	12,500		$	7,525		$	—		$	20,025

11. Recent Accounting Pronouncements

In February 2010, the Financial Accounting Standards Board amended guidance codified in Accounting Standards Codification 855, Subsequent Events, to remove the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events. We adopted this guidance in the quarter ended March 31, 2010.

12. Contingencies and Other

We are, from time to time, subject to various claims and legal actions that arise in the ordinary course of our business, including claims for damages for personal injuries, medical malpractice, breach of contract, business tort and employment related claims. In these actions, plaintiffs request a variety of damages, including, in some instances, punitive and other types of damages that may not be covered by insurance.

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2010

A stockholder lawsuit and a stockholder derivative lawsuit alleging violations of federal securities laws were filed in 2009 against us and certain of our executives. We believe that the lawsuits are without merit and are defending them vigorously.

During the first quarter of 2010, we received a subpoena from the United States Department of Justice (the “DOJ”) seeking various documents relating to compensation, stock sales, option awards and option exercises for certain senior level executives and a subpoena from the DOJ seeking various other stock related documents including, but not limited to, communications with investment firms and investors. We have been cooperating, and will continue to cooperate, with the DOJ in connection with these inquiries. The outcome of the DOJ’s inquiries is uncertain, and adverse developments or outcomes can result in adverse publicity, significant expenses, monetary damages, penalties or injunctive relief.

In the opinion of management, we are not currently a party to any proceeding that would have a material adverse effect on our business, financial condition or results of operations.

As previously announced, a special committee of our Board of Directors was formed in response to approaches we received from third parties regarding a potential sale of Psychiatric Solutions, Inc. The special committee has retained Goldman, Sachs & Co. and Shearman & Sterling LLP as its financial and legal advisors and is considering possible responses. There can be no assurance that a sale of Psychiatric Solutions, Inc. will take place. We do not expect to make further public comments regarding these matters unless and until we enter into an agreement with respect to a sale or it is determined that a sale will not be pursued.

The reserve for professional and general liability was $24.0 million and 19.0 million as of March 31, 2010 and December 31, 2009, respectively, which is primarily due to new and existing claim developments in 2010.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission (the “SEC”), as well as information included in oral statements or other written statements made, or to be made, by our senior management, contain, or will contain, disclosures that are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “project,” “continue,” “should” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of known and unknown risks, uncertainties and other factors, including those set forth below, which could significantly affect our current plans and expectations and future financial condition and results.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports.

While it is not possible to identify all these factors, we continue to face many risks and uncertainties that could cause actual results to differ from those forward-looking statements, including:

	•		risks inherent to the health care industry, including the impact of unforeseen changes in regulation and the potential adverse impact of government investigations, liabilities and other claims asserted against us;

	•		uncertainty as to changes in U.S. general economic activity and the impact of these changes on our business;

	•		economic downturn resulting in efforts by federal and state health care programs and managed care companies to reduce reimbursement rates for our services;

	•		implementation and effect of newly-adopted federal health care legislation and potential state health care legislation;

	•		potential competition that alters or impedes our acquisition strategy by decreasing our ability to acquire additional inpatient facilities on favorable terms;

	•		our ability to comply with applicable licensure and accreditation requirements;

	•		our ability to comply with extensive laws and government regulations related to billing, physician relationships, adequacy of medical care and licensure;

	•		our ability to retain key employees who are instrumental to our operations;

	•		our ability to successfully integrate and improve the operations of acquired inpatient facilities;

	•		our ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act;

	•		our substantial indebtedness and adverse changes in credit markets impacting our ability to receive timely additional financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs;

	•		our ability to maintain favorable and continuing relationships with physicians and other health care professionals who use our inpatient facilities;

	•		our ability to ensure confidential information is not inappropriately disclosed and that we are in compliance with federal and state health information privacy standards;

	•		our ability to comply with federal and state governmental regulation covering health care-related products and services on-line, including the regulation of medical devices and the practice of medicine and pharmacology;

	•		our ability to obtain adequate levels of general and professional liability insurance;

	•		future trends for pricing, margins, revenue and profitability that remain difficult to predict in the industries that we serve;

	•		risks that speculation about a proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of such speculation;

	•		fluctuations in the market value of our common stock, including fluctuations resulting from announcements by us or our competitors of significant contracts or acquisitions or other corporate events;

	•		negative press coverage of us or our industry that may affect public opinion; and

	•		those risks and uncertainties described from time to time in our filings with the SEC.

We caution you that the factors listed above, as well as the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2009, may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statements.

Overview

Our business strategy is to acquire inpatient behavioral health care facilities and improve operating results within our inpatient facilities and our other behavioral health care operations. From 2001 to 2006, we acquired 74 inpatient behavioral health care facilities. During 2007, we acquired 16 inpatient behavioral health care facilities, including 15 inpatient facilities in the acquisition of Horizon Health Corporation. During 2008, we acquired five inpatient behavioral health care facilities from United Medical Corporation and opened Lincoln Prairie Behavioral Health Center, an 80-bed inpatient facility in Springfield, Illinois. During 2009, we opened Rolling Hills Hospital, an 80-bed inpatient facility in Franklin, Tennessee, acquired two inpatient behavioral health care facilities, and completed the sale of our EAP business.

We strive to improve the operating results of our inpatient behavioral health care operations by providing the highest quality service, expanding referral networks and marketing initiatives and meeting increased demand for behavioral health care services by expanding our services and developing new services. We also attempt to improve operating results by maintaining appropriate staffing ratios, controlling contract labor costs and reducing supply costs through group purchasing.

Income from continuing operations before income taxes increased to $51.4 million, or 10.8% of revenue, for the three months ended March 31, 2010 compared to $44.8 million, or 10.3% of revenue, for the same period of 2009 primarily as a result of a 9.6% increase in revenue. Our same-facility revenue from owned and leased inpatient facilities increased 7.0% for the three months ended March 31, 2010 compared to the same period in 2009, primarily as a result of increases in patient days and revenue per patient day of 5.9% and 1.0%, respectively. Same-facility operating margins improved for 2010 compared to 2009, primarily due to a decrease in salaries, wages and employee benefits expense as a percent of revenue to 52.7% from 54.3%, partially offset by an increase in other operating expenses as a percent of revenue to 8.7% from 8.2%. Same-facility refers to the comparison of each inpatient facility owned during 2009 with the comparable period in 2010, adjusted for closures and combinations for comparability purposes.

Sources of Revenue

Patient Service Revenue

Patient service revenue is generated by our inpatient facilities for services provided to patients on an inpatient and outpatient basis within the inpatient behavioral health care facility setting. Patient service revenue is recorded at our established billing rates less contractual adjustments. Contractual adjustments are recorded to state our patient service revenue at the amount we expect to collect for the services provided based on amounts reimbursable by Medicare or Medicaid under provisions of cost or prospective reimbursement formulas or amounts due from other third-party payors at contractually determined rates. Patient service revenue comprised approximately 93.0% and 93.1% of our total revenue for the three months ended March 31, 2010 and 2009, respectively.

Other Revenue

Other behavioral health care services accounted for 7.0% and 6.9% of our revenue for the three months ended March 31, 2010 and 2009, respectively. This portion of our business primarily consists of our contract management business and a managed care plan in Puerto Rico. Our contract management business involves the development, organization and management of behavioral health and rehabilitation programs within medical/surgical hospitals. Services provided are recorded as revenue at contractually determined rates in the period the services are rendered, provided that collectability of such amounts is reasonably assured.

Results of Operations

The following table illustrates our consolidated results of operations from continuing operations for the three months ended March 31, 2010 and 2009 (dollars in thousands):


	For the Three Months Ended March 31,
	2010						2009
	Amount			%			Amount			%
Revenue	$	475,956			100.0	%	$	433,930			100.0	%
Salaries, wages, and employee benefits (including share-based compensation of $3,510 and $4,819 in 2010 and 2009, respectively)		259,475			54.5	%		244,286			56.3	%
Professional fees		44,928			9.4	%		39,930			9.2	%
Supplies		23,678			5.0	%		22,920			5.3	%
Provision for doubtful accounts		11,833			2.5	%		8,462			2.0	%
Other operating expenses		55,730			11.7	%		46,346			10.7	%
Depreciation and amortization		12,390			2.6	%		10,553			2.4	%
Interest expense, net		16,498			3.5	%		16,609			3.8	%

Income from continuing operations before income taxes		51,424			10.8	%		44,824			10.3	%
Provision for income taxes		19,683			4.1	%		17,164			3.9	%

Income from continuing operations		31,741			6.7	%		27,660			6.4	%
Less: Net income attributable to noncontrolling interest		(32	)		0.0	%		(139	)		-0.1	%

Income from continuing operations attributable to PSI stockholders	$	31,709			6.7	%	$	27,521			6.3	%

Three Months Ended March 31, 2010 Compared To Three Months Ended March 31, 2009

The following table compares key total facility statistics and same-facility statistics for the three months ended March 31, 2010 and 2009 for our owned and leased inpatient facilities:


	For the Three Months Ended March 31,				%
	2010		2009		Change
Same-facility results:
Revenue (in thousands)	$	432,445	$	404,003		7.0	%
Admissions		47,487		43,261		9.8	%
Patient days		740,145		699,233		5.9	%
Average length of stay (in days)		15.6		16.2		-3.7	%
Revenue per patient day	$	584	$	578		1.0	%

Total facility results:
Revenue (in thousands)	$	442,769	$	404,003		9.6	%
Admissions		48,805		43,261		12.8	%
Patient days		752,240		699,233		7.6	%
Average length of stay (in days)		15.4		16.2		-4.9	%
Revenue per patient day	$	589	$	578		1.9	%

Revenue. Revenue from continuing operations increased $42.0 million, or 9.7%, to $476.0 million for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. Revenue from owned and leased inpatient facilities increased $38.8 million, or 9.6%, to $442.8 million in 2010 compared to 2009. The increase in revenue from owned and leased inpatient facilities relates primarily to same-facility growth in patient days of 5.9% and revenue per patient day of 1.0% as well as revenue from two facilities acquired in 2009. Other revenue increased $3.3 million to $33.2 million in 2010 compared to $29.9 million in 2009, primarily as a result of an increase in covered lives in our managed care plan in Puerto Rico.

Salaries, wages, and employee benefits. Salaries, wages and employee benefits (“SWB”) expense was $259.5 million for the three months ended March 31, 2010 compared to $244.3 million for the three months ended March 31, 2009, an increase of $15.2 million, or 6.2%. SWB expense includes $3.5 million and $4.8 million of shared-based compensation expense for the quarters ended March 31, 2010 and 2009, respectively. The $1.3 million decrease in share-based compensation expense is primarily due to actual forfeitures in excess of estimated forfeitures. Based on our stock option and restricted stock grants outstanding at March 31, 2010, we estimate remaining unrecognized share-based compensation expense to be approximately $50.0 million with a weighted-average remaining amortization period of 2.8 years. Excluding share-based compensation expense, SWB expense was $256.0 million, or 53.8% of total revenue, for the three months ended March 31, 2010 compared to $239.5 million, or 55.2% of total revenue, for the three months

ended March 31, 2009. SWB expense for owned and leased inpatient facilities was $233.8 million in 2010, or 52.8% of revenue. Same-facility SWB expense for owned and leased inpatient facilities was $227.9 million in 2010, or 52.7% of revenue, compared to $219.3 million in 2009, or 54.3% of revenue. This decrease in same-facility SWB expense as a percent of revenue is primarily the result of an increase in same-facility patient days of 5.9% while staffing remained relatively stable. SWB expense for other operations was $12.6 million in 2010 compared to $11.3 million in 2009. SWB expense for our corporate office was $13.1 million, including $3.5 million in share-based compensation, for 2010 compared to $14.0 million, including $4.8 million in shared-based compensation, for 2009.

Professional fees. Professional fees were $44.9 million for the three months ended March 31, 2010, or 9.4% of total revenue, compared to $39.9 million for the three months ended March 31, 2009, or 9.2% of total revenue. Professional fees for owned and leased inpatient facilities were $40.3 million in 2010, or 9.1% of revenue. Same-facility professional fees for owned and leased inpatient facilities were $39.7 million in 2010, or 9.2% of revenue, compared to $36.4 million in 2009, or 9.0% of revenue. Professional fees for other operations and our corporate office increased to $4.7 million in 2010 compared to $3.5 million in 2009.

Supplies. Supplies expense was $23.7 million for the three months ended March 31, 2010, or 5.0% of total revenue, compared to $22.9 million for the three months ended March 31, 2009, or 5.3% of total revenue. Supplies expense for owned and leased inpatient facilities was $23.5 million in 2010, or 5.3% of revenue. Same-facility supplies expense for owned and leased inpatient facilities was $23.1 million in 2010, or 5.3% of revenue, compared to $22.7 million in 2009, or 5.6% of revenue.

Provision for doubtful accounts. The provision for doubtful accounts was $11.8 million for the three months ended March 31, 2010, or 2.5% of total revenue, compared to $8.5 million for the three months ended March 31, 2009, or 2.0% of total revenue. The provision for doubtful accounts at owned and leased inpatient facilities comprised substantially all of our provision for doubtful accounts.

Other operating expenses. Other operating expenses consist primarily of rent, utilities, insurance, travel and repairs and maintenance expenses. Other operating expenses were $55.7 million for the three months ended March 31, 2010, or 11.7% of total revenue, compared to $46.3 million for the three months ended March 31, 2009, or 10.7% of total revenue. Other operating expenses for owned and leased inpatient facilities were $38.2 million in 2010, or 8.6% of revenue. Same-facility other operating expenses for owned and leased inpatient facilities were $37.4 million in 2010, or 8.7% of revenue, compared to $33.2 million in 2009, or 8.2% of revenue. This increase in other operating expenses as a percent of revenue is primarily a result of an increase in our self-insured professional and general liability insurance expense as a percent of revenue compared with 2009. Other operating expenses for other operations and our corporate office increased to $17.5 million in 2010 compared to $13.2 million in 2009 primarily as a result of additional expenses associated with an increase in covered lives in our managed care plan in Puerto Rico.

Depreciation and amortization. Depreciation and amortization expense increased to $12.4 million for the three months ended March 31, 2010 compared to $10.6 million for the three months ended March 31, 2009, primarily as a result of depreciation on expansion projects at existing inpatient facilities and the acquisition of two facilities in 2009.

Interest expense, net. Interest expense, net of interest income, decreased to $16.5 million for the three months ended March 31, 2010 compared to $16.6 million for the three months ended March 31, 2009.

Income attributable to noncontrolling interest. We own controlling interests in two joint ventures that own two of our inpatient behavioral health care facilities. Income attributable to noncontrolling interests represents the pro rata portion of the joint venture’s net profit belonging to the noncontrolling partners.

Loss from discontinued operations, net of taxes. The loss from discontinued operations, net of income tax effect, was $3.5 million for the three months ended March 31, 2010 compared to $0.1 million for the three months ended March 31, 2009. The $3.5 million loss in 2010 includes $2.7 million for the loss on the closure of one leased facility that was previously held for sale. During 2009, we completed the sale of our EAP business, elected to close and make The Oaks Treatment Center and Cumberland Hall of Chattanooga available for sale, and terminated one contract with a South Carolina juvenile justice agency. We also elected to close and make Nashville Rehabilitation Hospital available for sale and transferred its behavioral health services to Rolling Hills Hospital in the first quarter of 2009.

Liquidity and Capital Resources

We currently have $295.7 million available for borrowings under our $300 million revolving credit facility. Additionally, our cash flow from continuing operating activities was $56.1 million for the three months ended March 31, 2010 and we had $196.0 million of working capital at March 31, 2010. We believe that our cash flow from operations, revolving credit facility availability and working capital are sufficient to fund our known future cash requirements for operations and capital expenditures. We historically spend approximately 2% to 3% of our revenue on routine capital expenditures and currently have plans for construction projects with expected costs of approximately $54.0 million over the next twelve months, which will add approximately 300 new beds to our inpatient facilities as well as replace an existing 64-bed inpatient facility.

As part of our long-term growth strategy we are actively seeking acquisitions that fit our corporate growth strategy and may acquire additional inpatient behavioral health care facilities and other operations as well as incur expenditures for the expansion of our inpatient facilities. Management continually assesses our capital needs and, should the need arise, we will seek additional financing, including debt or equity, to fund potential acquisitions, facility expansions, repayment of indebtedness or for other corporate purposes. In negotiating such financing, there can be no assurance that we will be able to raise additional capital on terms satisfactory to us. Failure to obtain additional financing on reasonable terms could have a negative effect on our plans to acquire additional inpatient psychiatric facilities or expand our facilities.

Working capital at March 31, 2010 was $196.0 million, including cash and cash equivalents of $32.6 million, compared to working capital of $177.9 million, including cash and cash equivalents of $6.8 million, at December 31, 2009. This increase in working capital is primarily attributable to increases in cash of $25.8 million and accounts receivable of $14.4 million and a decrease in accrued interest expense of $11.4 million, offset by a decrease in income tax receivable of $8.8 million, an increase in the current portion of long-term debt of $5.6 million, and an increase in accrued salaries and benefits payable of $13.0 million. The $25.8 increase in cash and cash equivalents is primarily a result of cash provided by continuing operations of $56.1 million offset by cash used for capital expenditures of $29.6 million. The increase in accounts receivable is primarily due to a 7.0% increase in same-facility revenue. Our consolidated day’s sales outstanding were 50 and 49 at March 31, 2010 and December 31, 2009, respectively. The increase in accrued salaries and benefits payable is primarily the result of six additional days of accrued salaries at March 31, 2010 compared to December 31, 2009 due to the timing of the pay dates.

Cash provided by continuing operating activities was $56.1 million for the three months ended March 31, 2010 compared to $39.4 million for the three months ended March 31, 2009. The increase in cash flows from continuing operating activities was primarily the result of cash provided by improved operating results and the timing of payment dates for payroll.

Cash used by continuing investing activities was $29.5 million for the three months ended March 31, 2010 compared to $24.5 million for the three months ended March 31, 2009. Cash used in investing activities for the three months ended March 31, 2010 primarily consisted of $29.6 million paid for purchases of fixed assets. Cash used for routine and expansion capital expenditures was approximately $10.8 million and $18.8 million, respectively, for the three months ended March 31, 2010. Planned capital expansion projects and the construction of new facilities are expected to add approximately 300 new beds to our inpatient facilities over the next twelve months. We define expansion capital expenditures as those that increase the capacity of our facilities or otherwise enhance revenue. Routine or maintenance capital expenditures were 2.3% of our net revenue for the three months ended March 31, 2010. Cash used in investing activities for the three months ended March 31, 2009 consisted primarily of $24.4 million in cash paid for purchases of fixed assets.

Cash used in financing activities was $0.7 million for the three months ended March 31, 2010 compared to $46.6 million for the three months ended March 31, 2009. Cash used in financing activities for the three months ended March 31, 2009 consisted primarily of $39.3 million of payments on the balance due under our revolving credit facility and $5.4 million paid to lenders in connection with the amendment of our revolving credit facility during February 2009.

We have filed a universal shelf registration statement on Form S-3 and an acquisition shelf registration statement on Form S-4. The universal shelf registration statement permits us to sell, in one or more public offerings, an indeterminate amount of our common stock, common stock warrants, preferred stock and debt securities, or any combination of such securities, at prices and on terms satisfactory to us. The acquisition shelf registration statement enables us to issue up to 5 million shares of our common stock in one or more business combination transactions, including acquisitions by us of other businesses, assets, properties or securities. To date, no securities have been issued pursuant to either registration statement.

Contractual Obligations


	Payments Due by Period (in thousands)
			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
Long-term debt (1):
Senior Credit Facility:
Senior secured term loan facility, expiring on July 1, 2012 and bearing interest of 2.1% at March 31, 2010	$	563,938	$	9,250	$	554,688	$	—	$	—
7 3/4% Senior Subordinated Notes due July 15, 2015		582,899		—		—		—		582,899
Mortgage loans on facilities, maturing in 2036, 2037 and 2038 bearing fixed interest rates of 5.7% to 7.6%		32,741		457		1,003		1,136		30,145

		1,179,578		9,707		555,691		1,136		613,044

Lease and other obligations		79,381		13,639		18,607		12,114		35,021

Total contractual obligations	$	1,258,959	$	23,346	$	574,298	$	13,250	$	648,065


(1)		Excludes capital lease obligations and other obligations of $7.0 million, which are included in lease and other obligations.

The fair value of our 7³/₄% Notes was approximately $599.2 million and $565.2 million as of March 31, 2010 and December 31, 2009, respectively. The fair value of our senior secured term loan facility was approximately $558.3 million and $536.6 million as of March 31, 2010 and December 31, 2009, respectively. The carrying value of our other long-term debt, including current maturities, of $39.7 million and $39.5 million at March 31, 2010 and December 31, 2009, respectively, approximated fair value. We had $563.9 million of variable rate debt outstanding under our senior secured term loan facility as of March 31, 2010. At our March 31, 2010 borrowing level, a hypothetical 10% increase in interest rates would decrease our annual net income and cash flows by approximately $0.7 million.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with GAAP. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses included in the financial statements. Estimates are based on historical experience and other information currently available, the results of which form the basis of such estimates. While we believe our estimation processes are reasonable, actual results could differ from our estimates. The following represent the estimates considered most critical to our operating performance and involve the most subjective and complex assumptions and assessments.

Allowance for Doubtful Accounts

Our ability to collect outstanding patient receivables from third-party payors is critical to our operating performance and cash flows.

The primary collection risk with regard to patient receivables lies with uninsured patient accounts or patient accounts for which primary insurance has paid, but the portion owed by the patient remains outstanding. We estimate the allowance for doubtful accounts primarily based upon the age of the accounts since the patient discharge date. We continually monitor our accounts receivable balances and utilize cash collection data to support our estimates of the provision for doubtful accounts. Significant changes in payor mix or business office operations could have a significant impact on our results of operations and cash flows.

The primary collection risk with regard to receivables due under our inpatient management contracts is attributable to contractual disputes. We estimate the allowance for doubtful accounts for these receivables based primarily upon the specific identification of potential collection issues. As with our patient receivables, we continually monitor our accounts receivable balances and utilize cash collection data to support our estimates of the provision for doubtful accounts.

Allowances for Contractual Discounts

The Medicare and Medicaid regulations are complex and various managed care contracts may include multiple reimbursement mechanisms for different types of services provided in our inpatient facilities and cost settlement provisions requiring complex calculations and assumptions subject to interpretation. We estimate the allowance for contractual discounts on a payor-specific basis by comparing our established billing rates with the amount we determine to be reimbursable given our interpretation of the applicable regulations or contract terms. Most payments are determined based on negotiated per-diem rates. While the services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from our estimates, these differences are deemed immaterial. Additionally, updated regulations and contract renegotiations occur frequently necessitating continual review and assessment of the estimation process by our management. We periodically compare the contractual rates on our patient accounting systems with the Medicare and Medicaid reimbursement rates or the third-party payor contract for accuracy. We also monitor the adequacy of our contractual adjustments using financial measures such as comparing cash receipts to net patient revenue adjusted for bad debt expense.

Professional and General Liability

We are subject to medical malpractice and other lawsuits due to the nature of the services we provide. Our operations have professional and general liability insurance in umbrella form for claims in excess of $3.0 million with an insured excess limit of $75.0 million. The self-insured reserves for professional and general liability risks are estimated based on historical claims, demographic factors, industry trends, severity factors, and other actuarial assumptions calculated by an independent third-party actuary. This estimated accrual for professional and general liabilities could be significantly affected should current and future occurrences differ from historical claim trends and expectations. We have utilized our captive insurance company to manage the self-insured retention. While claims are monitored closely when estimating professional and general liability accruals, the complexity of the claims and wide range of potential outcomes often limits timely adjustments to the assumptions used in these estimates.

		Income Taxes

		As part of our process for preparing our consolidated financial statements, our management is required to compute income taxes in each of the jurisdictions in which we operate. This process involves estimating the current tax benefit or expense of future deductible and taxable temporary differences. The tax effects of future deductible and taxable temporary differences are recorded as deferred tax assets and liabilities which are components of our balance sheet. Management then assesses our ability to realize the deferred tax assets based on reversals of deferred tax liabilities and, if necessary, estimates of future taxable income. A valuation allowance for deferred tax assets is established when we believe that it is more likely than not that the deferred tax asset will not be realized. Management must also assess the impact of our acquisitions on the realization of deferred tax assets subject to a valuation allowance to determine if all or a portion of the valuation allowance will be offset by reversing taxable differences or future taxable income of the acquired entity. To the extent the valuation allowance can be reversed due to the estimated future taxable income of an acquired entity, then our valuation allowance is reduced accordingly as an adjustment to income tax expense.

		GAAP requires us to make significant judgments regarding the recognition and measurement of each tax position. Changes in these judgments may materially affect the estimate of our effective tax rate and our operating results.

		Share-Based Compensation

		We record share-based compensation expense for the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of such awards. We utilize the Black-Scholes option pricing model to estimate the grant-date fair value of our stock options. The Black-Scholes model includes certain variables and assumptions that require judgment, such as the expected volatility of our stock price and the expected term of our stock options. Additionally, we use judgment in the estimation of forfeitures over the vesting period of share-based awards.


Item 3.		Quantitative and Qualitative Disclosures About Market Risk.

Our interest expense is sensitive to changes in the general level of interest rates. With respect to our interest-bearing liabilities, approximately $615.6 million of our long-term debt outstanding at March 31, 2010 was subject to a weighted-average fixed interest rate of 8.0%. Our variable rate debt is comprised of our senior secured term loan facility, which had $563.9 million outstanding at March 31, 2010 and on which interest is generally payable at LIBOR plus 1.75%.

A hypothetical 10% increase in interest rates would decrease our net income and cash flows by approximately $0.7 million on an annual basis based upon our borrowing level at March 31, 2010. In the event we draw on our revolving credit facility and/or interest rates change significantly, we anticipate that we would take actions intended to further mitigate our exposure to such change by targeting a portion of our debt portfolio to be maintained at fixed rates and periodically entering into interest rate swap agreements. Information on quantitative and qualitative disclosure about market risk is included in Part I, Item 2 of this Quarterly Report on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”


Item 4.		Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us (including our consolidated subsidiaries) in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported on a timely basis.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the first quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.		Legal Proceedings.

In the opinion of management, we are not currently a party to any proceeding that would have a material adverse effect on our business, financial condition or results of operations.


Item 1A.		Risk Factors.

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, except for the following risk factor:

We cannot predict the effect that health care reform and other changes in government programs may have on our business, financial condition or results of operations.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act”) were signed into law by President Obama. The Affordable Care Act is intended to increase the number of insured U.S. citizens through a combination of private sector health insurance reforms and the expansion of public programs. Substantially all of the funding for the expanded coverage is intended to be derived through provisions in the law that are designated to lower health care costs, including, among other things, reducing Medicare and Medicaid payments to health care facilities and other providers, implementing the use of value and quality-based purchasing programs by the Medicare program, and expanding the use of recovery audit contractors to the Medicaid program. The Affordable Care Act also contains substantial revisions to federal health care fraud and abuse laws that both expand the scope of activities a provider may potentially face sanction for and lower the government’s burden of proof to impose such sanctions. Because of the complexity of the Affordable Care Act and the fact that a number of its provisions do not take effect until 2013 or later, it is difficult to predict the impact that the Affordable Care Act will have on our facilities. However, depending on how the Affordable Care Act is ultimately implemented by regulation and interpreted by the courts, the Affordable Care Act could have a material adverse effect on our business, financial condition and results of operations.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table provides information relating to our purchase of common stock during the first quarter of 2010:

Total Number of

Maximum Number

Shares Purchased

of Shares that May

as Part of Publicly

Yet Be Purchased

Total Number of

Average Price

Announced Plans or

Under the Plans or

Period

Shares Purchased (1)

Paid Per Share

Programs

January 1, 2010 through January 31, 2010

—

N/A

February 1, 2010 through February 28, 2010

22,399

21.86

N/A

March 1, 2010 through March 31, 2010

—

N/A

Total

22,399

21.86

N/A


(1)		All of the shares were surrendered by our employees in satisfaction of the employees’ tax liabilities related to the vesting of restricted stock. The surrender of shares by our employees was made in accordance with the terms of restricted stock agreements between the employees and us and did not involve any payments by us. We currently do not have a stock repurchase program.


Item 6.		Exhibits.


Exhibit
Number		Description
3.1		Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on March 9, 1998 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 1998).

3.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on August 5, 2002 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2002).

3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on March 21, 2003 (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement, filed on January 22, 2003).

3.4		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on December 15, 2005 (incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005).

3.5		By-laws (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K filed on November 6, 2007).

10.1		Amendment to Employment Agreement, dated April 15, 2010, by and between Joey A. Jacobs and Psychiatric Solutions, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed April 20, 2010).

10.2		Form of Change in Control Severance Agreement, dated April 15, 2010, by and between certain of the Company’s officers and Psychiatric Solutions, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on April 20, 2010).

10.3		Psychiatric Solutions, Inc. 2010 Cash Bonus Plans (incorporated by reference to Exhibit 10 to the Company’s Current Report on Form 8-K, filed on April 1, 2010).

31.1*		Certification of the Chief Executive Officer of Psychiatric Solutions, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Chief Accounting Officer of Psychiatric Solutions, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certifications of the Chief Executive Officer and Chief Accounting Officer of Psychiatric Solutions, Inc. pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Filed or furnished herewith

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Psychiatric Solutions, Inc.
	By:	/s/ Jack E. Polson
		Jack E. Polson
		Executive Vice President, Chief Accounting Officer

Dated: May 10, 2010

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