CRC net revenue increases 3% to $108.9M for three months ended March 31, 2012

CRC Health Corporation ("CRC" or the "Company"), a leading provider of substance abuse treatment and adolescent youth services through its wholly owned consolidated subsidiaries, announced its results for the three months ended March 31, 2012.

Three Months Ended March 31, 2012 Operating Results:

Net revenue for the three months ended March 31, 2012 increased $3.0 million, or 3%, to $108.9 million compared to the same period in 2011. For the three months ended March 31, 2012, operating income was flat compared to the same period in 2011 due to an increase of $3.1 million or 3%, in our operating expenses. Adjusted EBITDA decreased $3.5 million, or 14%, to $20.9 million compared the same period in 2011.

"Our operating performance this quarter was mixed," said Andy Eckert, Chief Executive Officer. "We achieved modest revenue growth, quarter over quarter, but our profitability declined due to planned investments in our sales force expansion and clinical quality function. We front-loaded these investments early in the fscal year so as to build momentum throughout 2012." Eckert continued, "We made good progress in the quarter deploying our enhanced sales force. We now have coverage in every major metropolitan area in the United States. In addition, we have seen meaningful improvements in our ability to convert inquiries to actual admissions across our portfolio of programs. Our clinical quality and customer satisfaction focus is taking hold as well. In the first quarter, we improved customer satisfaction in each of 35 different parameters we survey monthly."

The following table presents the Company's net revenue, operating income, Adjusted EBITDA and Adjusted EBITDA margin by division (in thousands, except for percentages):

Adjusted Operating margin is defined as Adjusted EBITDA divided by net revenue.

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Recovery:

• Net revenue increased $1.6 million, or 2%, to $87.1 million compared to the prior-year quarter. Net revenue increased due to a $2.6 million increase from CTCs, offset by a $1.0 million decrease from residential facilities. The CTCs increased due to both patient days and net revenue per patient day improvements. Residential facilities decreased primarily due to a temporary suspension of admissions at one of our residential facilities in Tennessee partially offset by an increase in revenues from our commercial payor programs. In March 2012, we received notice that the admission suspension would not be extended and we re-opened the facility in April 2012.
• Operating income decreased by $3.1 million or 11% due to an increase of $4.8 million or 8%, in operating expenses. This increase was primarily due to higher salaries and benefits resulting from higher levels of revenues as well as from investments in sales and marketing and clinical quality management.
• Adjusted EBITDA decreased $3.0 million to $27.9 million from the comparable prior-year period.

Youth:

• Net revenue increased $2.0 million, or 14% to $16.3 million, compared to the prior-year quarter. This was primarily due to a $1.0 million increase in residential facilities and a $1.0 million increase in outdoor programs. Residential program revenues increased primarily due to an improved student length of stay. Outdoor programs increased due to an increase in both patient days and net revenue per patient day primarily due to lower discounting.
• Operating income increased by $3.7 million, due to a decrease of $1.7 million, or 9% in operating expenses. This decrease was primarily due to a $1.9 million decrease in asset impairments relative to the year ago period.
• Adjusted EBITDA increased $1.2 million to $(0.9) million from the comparable prior-year period.

Weight Management:

• Net revenue decreased $0.6 million, or 11%, to $5.5 million compared to the prior-year quarter. This decrease was driven primarily driven by a drop in the net revenue per patient day.
• Operating income decreased by $1.2 million due to an increase of $0.6 million, or 11%, in operating expenses. Operating expenses increased due to an increase in salaries and benefits as well as in the provision for doubtful accounts.
• Adjusted EBITDA decreased $1.2 million to $(0.2) million from the comparable prior-year period.

Credit Agreements:

Under the terms of our borrowing arrangements, we are required to comply with various covenants, including the maintenance of certain financial ratios, the calculations of which are based on Adjusted EBITDA, as defined in our credit agreements. As of March 31, 2012, we were in compliance with all such covenants.

The computation of Adjusted EBITDA is provided below solely to provide an understanding of the impact that Adjusted EBITDA has on our ability to comply with certain covenants in our borrowing arrangements that are tied to these measures and to borrow under the credit facility. Adjusted EBITDA should not be considered as an alternative to net income (loss) or cash flows from operating activities (which are determined in accordance with GAAP) and is not being presented as an indicator of operating performance or a measure of liquidity. Other companies may define Adjusted EBITDA differently and as a result, such measures may not be comparable to our Adjusted EBITDA.

The following table reconciles our net income (loss) to our Adjusted EBITDA (in thousands).

Liquidity:

Total debt declined by $4.2 million during the three months ended March 31, 2012. The leverage ratio at March 31, 2012 was 5.79, below the covenant upper limit of 6.75. The interest coverage ratio was 2.55, above the covenant lower limit of 2.00. Cash at the end of the quarter was $9.6 million and the availability on the revolving line of credit, after giving effect to outstanding letters of credit, was $17.6 million.

On March 7, 2012, $80.9 million of Term Loans maturing on February 6, 2013 were refinanced with the cash proceeds (net of related fees and expenses) of new Term Loans. The principal amount, at March 31, 2012, of $82.6 million, net of discount of $3.4 million matures on November 16, 2015, the same date as the Company's other outstanding Term Loans.

1. Includes debt of discontinued operations of $206 and $395 at March 31, 2012 and December 31, 2011 respectively.
2. Calculated over the four trailing quarters
3. Leverage ratio is defined as the Company's total adjusted debt (total debt including discontinued operations less cash and cash equivalents in excess of $0.5 million) divided by the Adjusted EBITDA for the respective four trailing quarters. The most comparable GAAP ratio is total adjusted debt at the same date divided by earnings from continuing operations before income taxes for the respective four quarters.
4. Interest coverage ratio is defined as the Company's Adjusted EBITDA for the respective four trailing quarters divided by the cash interest expense over the same period.