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American Renal Associates Holdings, Inc. Announces Second Quarter 2017 Results

16:15 EDT 8 Aug 2017 | Businesswire
American Renal Associates Holdings, Inc.

American Renal Associates Holdings, Inc. (NYSE: ARA) (“ARA” or the “Company”), a leading provider of outpatient dialysis services, today announced financial and operating results for the second quarter ended June 30, 2017.

Certain metrics, including those expressed on an adjusted basis, are Non-GAAP financial measures (See “Use of Non-GAAP Financial Measures” and the reconciliation tables further below).

Second Quarter 2017 Highlights (all percentage changes compare Q2 2017 to Q2 2016 unless noted):

  • Net patient service operating revenues increased 0.2% to $186.0 million;
  • Net loss attributable to American Renal Associates Holdings, Inc. was $2.1 million as compared to $9.4 million in Q2 2016;
  • Adjusted EBITDA less noncontrolling interests (“Adjusted EBITDA-NCI”) was $27.4 million as compared to $31.6 million in Q2 2016;
  • Adjusted net income attributable to American Renal Associates Holdings, Inc. was $5.6 million, or $0.16 per share, for the second quarter of 2017;
  • Total dialysis treatments increased 8.9%, of which 8.6% was non-acquired growth; and
  • As of June 30, 2017, the Company operated 217 outpatient dialysis centers serving approximately 15,000 patients.

Joseph (Joe) Carlucci, Chairman and Chief Executive Officer, said, “In coordination with our physician partners, ARA’s dedicated staff has remained focused on delivering the highest quality patient care, while also executing well on the operational initiatives we outlined earlier this year. Our second quarter financial performance validates that the actions our organization has taken thus far in 2017 are yielding positive results.”

“During the second quarter of 2017, we opened two new de novo clinics and ended the period with a pipeline of 32 signed clinics at June 30, 2017. Our pipeline continues to be strong and reflects the growing acceptance of our operating philosophy within the nephrology community. Our pipeline also reflects the high satisfaction rates ARA enjoys among existing nephrology groups, many of which continue to build on their relationship with ARA through additional de novo development,” continued Carlucci.

Financial and operating highlights include:

Revenue: Net patient service operating revenues for the second quarter of 2017 were $186.0 million, an increase of 0.2% as compared to $185.6 million for the prior-year period due to treatment growth and offset by adverse changes in payor mix. Net patient service operating revenues for the six months ending June 30, 2017 were $363.0 million, an increase of 1.5% as compared to $357.7 million for the prior-year period.

Treatment Volume: Total dialysis treatments for the second quarter of 2017 were 542,749 representing an increase of 8.9% over the second quarter of 2016. Non-acquired treatment growth was 8.6%, and acquired treatment growth was 0.3% for the second quarter of 2017.

Center Activity: As of June 30, 2017, the Company provided services at 217 outpatient dialysis centers serving 15,023 patients. During the second quarter of 2017, we opened two de novo centers, sold one center and merged one center into another. As of June 30, 2017, we had 32 signed de novo clinics scheduled to open in the future.

Net income, Net income attributable to noncontrolling interests, Net loss attributable to American Renal Associates Holdings, Inc., Adjusted EBITDA and Adjusted EBITDA less noncontrolling interests:

           
(Unaudited)
Three Months Ended
June 30,
Increase (Decrease)
(in thousands, except per share amounts) 2017     2016 Amount

Percentage
Change

Net income $ 16,391 $ 13,042 $ 3,349 25.7 %
Net income attributable to noncontrolling interests (18,497 ) (22,488 ) 3,991 (17.7

)%

Net loss attributable to American Renal Associates Holdings, Inc.

$

(2,106 ) $ (9,446 ) 7,340

NM*

Non-GAAP financial measures**:
Adjusted EBITDA $ 45,900 $ 54,118 $ (8,218

)

(15.2 )%
Adjusted EBITDA less noncontrolling interests $ 27,403 $ 31,630

$

(4,227 ) (13.4 )%
 

(Unaudited)

 

Six Months Ended
June 30,

 

Increase (Decrease)

(in thousands, except per share amounts)

2017

 

2016

 

Amount

Percentage
Change

Net income

$

29,293

$

35,599

$

(6,306

)

(17.7

)%

Net income attributable to noncontrolling interests

 

(32,650

)

 

(41,289

)

8,639

(20.9

)%

Net loss attributable to American Renal Associates Holdings, Inc.

$

(3,357

)

$

(5,690

)

 

2,333

NM*

Non-GAAP financial measures**:

Adjusted EBITDA

$

81,468

$

100,138

$

(18,670

)

(18.6

)%

Adjusted EBITDA less noncontrolling interests

$

48,818

$

58,849

$

(10,031

)

(17.0

)%

 

_______________________________________________________

* NM – Not Meaningful

** See reconciliation of Non-GAAP Financial Measures.

Operating Expenses: Patient care costs for the second quarter of 2017 were $118.1 million or 63.5% (or 63.4% excluding the Modification Expense, severance costs and gain on sale of assets described below) of net patient service operating revenues as compared to $109.8 million or 59.2% (or 58.4% excluding the Modification Expense described below) of net patient service operating revenues in the prior-year period. General and administrative expenses were $26.4 million or 14.2% (or 12.6% excluding the Modification Expense and severance costs described below) of net patient service operating revenues as compared to $31.9 million or 17.2% (or 12.7% excluding the Modification Expense described below) of net patient service operating revenues in the prior-year period. Patient care costs include $0.5 million and $1.4 million for the second quarter of 2017 and 2016, respectively, of stock-based compensation related to modification of options at the time of the Company’s initial public offering (the “Modification Expense”). Patient care costs also include $0.1 million of severance costs and $0.5 million gain on sale of assets for the second quarter of 2017. General and administrative expenses include $2.1 million and $8.0 million for the second quarter of 2017 and 2016, respectively, of Modification Expense. General and administrative expenses also include $0.8 million of severance costs for the second quarter of 2017.

Patient care costs for the six months ended June 30, 2017 were $238.4 million or 65.7% (or 65.1% excluding the Modification Expense, severance costs and gain on sale of assets) of net patient service operating revenues as compared to $215.2 million or 60.2% (or 59.8% excluding the Modification Expense) of net patient service operating revenues in the prior-year period. Patient care costs include $2.2 million and $1.4 million for the six months ended June 30, 2017 and 2016, respectively, of Modification Expense. Patient care costs also include $0.1 million of severance costs and $0.5 million gain on sale of assets for the six months ended June 30, 2017. General and administrative expenses during the six months ended June 30, 2017, were $57.6 million or 15.9% (or 13.0% excluding the Modification Expense) of net patient service operating revenues as compared to $53.4 million or 14.9% (or 12.7% excluding the Modification Expense) of net patient service operating revenues in the prior-year period. General and administrative expenses include $9.5 million and $8.0 million for the six months ended June 30, 2017 and 2016, respectively, of Modification Expense. General and administrative expenses also include $0.8 million in severance costs for the six months ended June 30, 2017.

Cash Flow: Cash provided by operating activities for the second quarter of 2017 was $35.8 million as compared to $52.7 million in the prior-year period. Adjusted cash provided by operating activities less distributions to noncontrolling interests (see reconciliation of Non-GAAP Financial Measures) for the second quarter of 2017 was $17.1 million as compared to $32.3 million in the prior-year period. Total capital expenditures for the second quarter of 2017 were $7.6 million as compared to $17.8 million in the prior-year period. Capital expenditures for the three months ended June 30, 2017 included $2.0 million for maintenance and $5.7 million for expansions and new clinic development.

Cash provided by operating activities for the six months ended June 30, 2017 were $52.4 million as compared to $89.2 million in the prior-year period. Adjusted cash provided by operating activities less distributions to noncontrolling interests (see reconciliation of Non-GAAP Financial Measure) for the six months ended June 30, 2017 were $14.5 million as compared to $47.5 million in the prior-year period. Total capital expenditures for the six months ended June 30, 2017 were $14.1 million as compared to $34.2 million in the prior-year period. Capital expenditures for the six months ended June 30, 2017 included $3.9 million for maintenance and $10.1 million for expansions and new clinic development.

Balance Sheet: At June 30, 2017, the Company’s balance sheet included consolidated cash of $74.9 million and consolidated debt of $562.2 million, including the current portion of long-term debt. Excluding clinic-level debt not guaranteed by ARA and clinic-level cash not owned by ARA, Adjusted owned net debt (see reconciliation of Non-GAAP Financial Measures) was $457.0 million at June 30, 2017, as compared to $438.1 million at December 31, 2016. Adjusted owned net debt to last twelve months Adjusted EBITDA less NCI leverage ratio was 4.0x at June 30, 2017. As of June 30, 2017, net patient accounts receivable was $77.8 million, and DSO for the period was 38 days as compared to 39 days for the three months ended March 31, 2017.

2017 Outlook for Adjusted EBITDA less NCI:

The Company is reiterating its prior guidance for 2017 Adjusted EBITDA less NCI to be in a range of $100 million and $106 million.

The Company’s 2017 Adjusted EBITDA less NCI Outlook excludes severance costs, certain legal costs, and other future potential costs, which could include potential closure and consolidation costs, to the extent they occur during 2017.

We are not providing a quantitative reconciliation of our Non-GAAP outlook to the corresponding GAAP information because the GAAP measures that we exclude from our Non-GAAP outlook are not available without unreasonable effort on a forward-looking basis due to their unpredictability, high variability, complexity and low visibility. These excluded GAAP measures include noncontrolling interests, interest expense, income taxes, and other charges. We expect the variability of these charges to have a potentially unpredictable, and potentially significant, impact on our future GAAP financial results.

Please see the “Forward-Looking Statements” section of this release for a discussion of certain risks to our outlook.

Conference Call

American Renal Associates Holdings, Inc. will hold a conference call to discuss this release on Wednesday, August 9, 2017, at 9:00 a.m. Eastern time. Investors will have the opportunity to listen to the conference call by dialing (877) 407-8029, or for international callers (201) 689-8029, or may listen over the Internet by going to the Investor Relations section at www.ir.americanrenal.com. For those who cannot listen to the live broadcast, a replay will be available and can be accessed by dialing (877) 660-6853, or for international callers (201) 612-7415. The conference ID for the live call and the replay is 13664401.

About American Renal Associates

American Renal Associates Holdings, Inc. (NYSE: ARA) is a leading provider of outpatient dialysis services in the United States. As of June 30, 2017, ARA operated 217 dialysis clinic locations in 25 states and the District of Columbia serving approximately 15,000 patients with end stage renal disease. ARA operates exclusively through a physician joint venture model, in which it partners with approximately 386 local nephrologists to develop, own and operate dialysis clinics. ARA’s Core Values emphasize taking good care of patients, providing physicians with clinical autonomy and operational support, hiring and retaining the best possible staff and providing best practices management services. For more information about American Renal Associates, visit www.americanrenal.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements, which have been included in reliance of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, involve risks and uncertainties and assumptions relating to our operations, financial condition, business, prospects, growth strategy and liquidity, which may cause our actual results to differ materially from those projected by such forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. You can identify forward-looking statements because they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

The forward-looking statements appear in a number of places throughout this press release and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties, including but not limited to those risks and uncertainties described in “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in our Annual Report on Form 10-K for the year ended December 31, 2016, our 10-Q for the quarter ended March 31, 2017 and our 10-Q for the quarter ended June 30, 2017 filed or to be filed with the SEC that may cause actual results to differ materially from those that we expected.

Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, among others, the following:

  • decline in the number of patients with commercial insurance, including as a result of changes to the healthcare exchanges or changes in regulations or enforcement of regulations regarding the healthcare exchanges and challenges from commercial payors or any other regulatory changes leading to changes in the ability of patients with commercial insurance coverage to receive charitable premium support;
  • decline in commercial payor reimbursement rates;
  • the ultimate resolution of the Centers for Medicare & Medicaid Services (“CMS”) Interim Final Rule published December 14, 2016 related to dialysis facilities Conditions for Coverage (CMS 3337-IFC), including an issuance of a different but related Final Rule;
  • reduction of government-based payor reimbursement rates or insufficient rate increases or adjustments that do not cover all of our operating costs;
  • our ability to successfully develop de novo clinics, acquire existing clinics and attract new physician partners;
  • our ability to compete effectively in the dialysis services industry;
  • the performance of our joint venture subsidiaries and their ability to make distributions to us;
  • changes to the Medicare ESRD program that could affect reimbursement rates and evaluation criteria, as well as changes in Medicaid or other non-Medicare government programs or payment rates, including the ESRD PPS final rule for 2017 issued on October 28, 2016 and the ESRD PPS proposed rule for 2018 issued on June 29, 2017;
  • federal or state healthcare laws that could adversely affect us;
  • our ability to comply with all of the complex federal, state and local government regulations that apply to our business, including those in connection with federal and state anti-kickback laws and state laws prohibiting the corporate practice of medicine or fee-splitting;
  • heightened federal and state investigations and enforcement efforts;
  • the impact of the litigation by affiliates of UnitedHealth Group, Inc., the Department of Justice inquiry, securities litigation and related matters;
  • changes in the availability and cost of erythropoietin-stimulating agents (“ESAs”) and other pharmaceuticals used in our business;
  • development of new technologies that could decrease the need for dialysis services or decrease our in-center patient population;
  • our ability to timely and accurately bill for our services and meet payor billing requirements;
  • claims and losses relating to malpractice, professional liability and other matters; the sufficiency of our insurance coverage for those claims and rising insurances costs; and any negative publicity or reputational damage arising from such matters;
  • loss of any members of our senior management;
  • damage to our reputation or our brand and our ability to maintain brand recognition;
  • our ability to maintain relationships with our medical directors and renew our medical director agreements;
  • shortages of qualified skilled clinical personnel, or higher than normal turnover rates;
  • competition and consolidation in the dialysis services industry;
  • deteriorations in economic conditions, particularly in states where we operate a large number of clinics, or disruptions in the financial markets;
  • the participation of our physician partners in material strategic and operating decisions and our ability to favorably resolve any disputes;
  • our ability to honor obligations under the joint venture operating agreements with our physician partners were they to exercise certain put rights and other rights;
  • unauthorized disclosure of personally identifiable, protected health or other sensitive or confidential information;
  • our ability to meet our obligations and comply with restrictions under our substantial level of indebtedness; and
  • the ability of our principal stockholder, whose interests may conflict with yours, to strongly influence or effectively control our corporate decisions.

The forward-looking statements made in this press release are made only as of the date of the hereof. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information or otherwise. More information about potential factors that could affect our business and financial results is included in our filings with the SEC.

Use of Non-GAAP Financial Measures

In addition to the results prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) provided throughout this press release, the Company has presented the following Non-GAAP financial measures: EBITDA, Adjusted EBITDA, Adjusted EBITDA less noncontrolling interests (NCI), Adjusted net income (loss) attributable to American Renal Associates Holdings, Inc., Adjusted cash provided (used) by operating activities and Adjusted owned net debt, which exclude various items detailed in the attached “Reconciliation of Non-GAAP Financial Measures.”

These Non-GAAP financial measures are not intended to replace financial performance and liquidity measures determined in accordance with GAAP. Rather, they are presented as supplemental measures of the Company's performance and liquidity that management believes may enhance the evaluation of the Company's ongoing operating results. Please see “Reconciliation of Non-GAAP Financial Measures” for additional reasons for why these measures are provided.

       

American Renal Associates Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

(dollars in thousands except per share amounts)

 
Three Months Ended June 30, Six Months Ended June 30,
2017     2016 2017     2016
Patient service operating revenues $ 187,602 $ 186,938 $ 366,234 $ 360,492
Provision for uncollectible accounts (1,610 ) (1,371 ) (3,217 ) (2,794 )
Net patient service operating revenues 185,992 185,567 363,017 357,698
Operating expenses:
Patient care costs 118,059 109,779 238,360 215,234
General and administrative 26,381 31,942 57,625 53,441
Transaction-related costs 717 2,215 717 2,239
Depreciation and amortization 9,382 8,252 18,456 15,929
Certain legal matters 4,297     8,233    
Total operating expenses 158,836   152,188   323,391   286,843  
Operating income 27,156 33,379 39,626 70,855
Interest expense, net (7,188 ) (8,941 ) (14,797 ) (21,199 )
Loss on early extinguishment of debt (526 ) (4,708 ) (526 ) (4,708 )
Income tax receivable agreement (expense) income (2,641 ) (7,835 ) 1,876   (7,835 )
Income before income taxes 16,801 11,895 26,179 37,113
Income tax expense (benefit) 410   (1,147 ) (3,114 ) 1,514  
Net income 16,391 13,042 29,293 35,599
Less: Net income attributable to noncontrolling interests (18,497 ) (22,488 ) (32,650 ) (41,289 )
Net loss attributable to American Renal Associates Holdings, Inc. (2,106 ) (9,446 ) (3,357 ) (5,690 )
Less: Change in the difference between the redemption value and estimated fair values for accounting purposes of the related noncontrolling interests (2,527 ) (12,133 ) (13,610 ) (12,133 )
Net loss attributable to common shareholders $ (4,633 ) $ (21,579 ) $ (16,967 ) $ (17,823 )
Loss per share:
Basic $ (0.15 ) $ (0.76 ) $ (0.55 ) $ (0.70 )
Diluted (0.15 ) (0.76 ) (0.55 ) (0.70 )

Weighted-average number of common shares outstanding:

Basic 30,986,689 28,406,999 30,947,304 25,344,510
Diluted 30,986,689 28,406,999 30,947,304 25,344,510
Cash dividends declared per share* $ $ 1.30 $ $ 1.30
 

* Paid to shareholders prior to the Company's initial public offering.

       

American Renal Associates Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands except per share data)

 
June 30, 2017 December 31, 2016
Assets (Unaudited)
Cash $ 74,933 $ 100,916
Accounts receivable, less allowance for doubtful accounts of $9,144 and $8,726, respectively 77,841 81,127
Inventories 4,960 4,676
Prepaid expenses and other current assets 23,150 18,498
Income tax receivable 10,254   5,163  
Total current assets 191,138 210,380
Property and equipment, net of accumulated depreciation of $138,033 and $121,242, respectively 165,495 170,118
Intangible assets, net of accumulated amortization of $23,149 and $23,489, respectively 25,638 25,626
Other long-term assets 8,885 6,753
Goodwill 573,147   573,147  
Total assets $ 964,303   $ 986,024  
Liabilities and Equity
Accounts payable $ 28,184 $ 31,127
Accrued compensation and benefits 28,654 29,103
Accrued expenses and other current liabilities 60,663 45,286
Current portion of long-term debt 45,711   48,274  
Total current liabilities 163,212 153,790
Long-term debt, less current portion 516,442 522,058
Income tax receivable agreement payable 15,600 21,200
Other long-term liabilities 13,859 11,670
Deferred tax liabilities 1,128   1,278  
Total liabilities 710,241 709,996
Commitments and contingencies
Noncontrolling interests subject to put provisions 113,925 130,365
Equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued
Common stock, $0.01 par value; 300,000,000 shares authorized; 31,283,812 and 30,894,962 issued and outstanding at June 30, 2017 and December 31, 2016, respectively 185 184
Additional paid-in capital 95,369 95,062
Receivable from noncontrolling interests (415 ) (544 )
Accumulated deficit (132,003 ) (128,646 )
Accumulated other comprehensive loss, net of tax (1,420 ) (100 )
Total American Renal Associates Holdings, Inc. deficit (38,284 ) (34,044 )
Noncontrolling interests not subject to put provisions 178,421   179,707  
Total equity 140,137   145,663  
Total liabilities and equity $ 964,303   $ 986,024  
       

American Renal Associates Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(dollars in thousands)

 
Three Months Ended June 30, Six Months Ended June 30,
Operating activities 2017     2016 2017     2016
Net income $ 16,391 $ 13,042 $ 29,293 $ 35,599
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 9,382 8,252 18,456 15,929
Amortization of discounts, fees and deferred financing costs 535 1,010 1,065 1,807
Loss on extinguishment of debt 526 4,708 526 4,708
Stock-based compensation 3,643 10,179 13,731 10,565
Premium paid for interest rate cap agreements (1,186 )
Deferred taxes 56 (7,836 ) 729 (7,769 )
Income tax receivable agreement income 2,641 7,835 (1,876 ) 7,835
Payment related to tax receivable agreement (878 ) (878 )
Non-cash charge related to interest rate swap 227 173 850
Non-cash rent charges 142 408 431 920
Loss on disposal of assets 133 190
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable (346 ) (1,073 ) 3,286 15
Inventories (312 ) 725 (284 ) (499 )
Prepaid expenses and other current assets (5,767 ) 1,457 (9,637 ) 1,305
Other assets (489 ) 710 (552 ) 692
Accounts payable 3,579 (342 ) (2,943 ) 944
Accrued compensation and benefits 2,562 3,973 (449 ) 2,965
Accrued expenses and other liabilities 4,040   9,378   2,285   13,363  
Cash provided by operating activities 35,838 52,653 52,360 89,229
Investing activities
Purchases of property, equipment and intangible assets (7,647 ) (17,825 ) (14,053 ) (34,221 )
Cash paid for acquisitions   (800 )   (800 )
Cash used in investing activities (7,647 ) (18,625 ) (14,053 ) (35,021 )
 
Financing activities
Proceeds from issuance of common stock sold in initial public offering, net of underwriting discounts and offering expense 175,378 175,378
Proceeds from issuance of long-term debt 7,401 60,000 7,401 60,000
Cash paid for debt issuance and other financing costs (8,542 ) (1,350 ) (8,542 ) (1,350 )
Proceeds from term loans, net of deferred financing costs 7,110 27,482 11,991 39,764
Payments on long-term debt (12,045 ) (248,344 ) (21,734 ) (255,806 )
Dividends and dividend equivalents paid (8,409 ) (30,176 ) (8,680 ) (30,176 )
Proceeds from exercise of stock options 506 536
Payments of deferred offering costs 467
Common stock repurchases for tax withholdings of net settlement equity awards (71 ) (71 )
Distributions to noncontrolling interests (19,498 ) (22,533 ) (38,542 ) (43,973 )
Contributions from noncontrolling interests 1,177 2,557 2,887 4,441
Purchases of noncontrolling interests (4,961 ) (277 ) (9,507 ) (277 )
Proceeds from sales of additional noncontrolling interests       142     142  
Cash used in financing activities (37,261 ) (36,725 ) (64,190 ) (51,928 )
 
(Decrease) increase in cash (9,070 ) (2,697 ) (25,883 ) 2,280
Cash and restricted cash at beginning of period 84,103       95,965   100,916   90,988  
Cash and restricted cash at end of period $ 75,033       $ 93,268   $ 75,033   $ 93,268  
 
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes $ 1,193 $ 5,183 $ 1,320 $ 5,376
Cash paid for interest 6,603 8,019 13,435 18,600
Supplemental Disclosure of Non-Cash Financing Activities
Accrued offering expense 314 314
Tax Receivable Agreement 23,400 23,400
Non-Cash Dividend 26,232 26,232
Accrued purchases of noncontrolling interests 16,500 16,500
Liability for accrued dividend equivalent payments 710 1,540 2,544 1,540
 
   

American Renal Associates Holdings, Inc. and Subsidiaries

Unaudited GAAP, Non-GAAP, and Other Supplemental Business Metrics

(dollars in thousands except per treatment amounts)

 
 
Three Months Ended
Dialysis Clinic Activity: June 30, 2017     March 31, 2017     June 30, 2016
Number of clinics (as of end of period) 217 217 201
Number of de novo clinics opened (during period) 2 3 6
Number of acquired clinics (during period) 1
Signed clinics (as of end of period) 32 32 36
Patients and Treatment Volume:
Patients (as of end of period) 15,023 14,735 13,755
Treatments 542,749 531,220 498,368
Number of treatment days 78 77 78
Treatments per day 6,958 6,899 6,389
Sources of treatment growth (year over year % change):
Non-acquired growth 8.6 % 9.2 % 10.8 %
Acquired growth 0.3 % 0.9 % 1.0 %
Total treatment growth 8.9 % 10.1 % 11.8 %
Revenue:
Patient service operating revenues $ 187,602 $ 178,632 $ 186,938
Patient service operating revenues per treatment $ 346 $ 336 $ 375
Net patient service operating revenues $ 185,992 $ 177,025 $ 185,567
Expenses:
Adjusted Patient care costs (1)
Amount $ 117,913 $ 118,582 $ 108,290
As a % of net patient service operating revenues 63.4 % 67.0 % 58.4 %
Per treatment $ 217 $ 223 $ 217
Adjusted General and administrative expenses (2)
Amount $ 23,483 $ 23,859 $ 23,629
As a % of net patient service operating revenues 12.6 % 13.5 % 12.7 %
Per treatment $ 43 $ 45 $ 47
Provision for uncollectible accounts
Amount $ 1,610 $ 1,607 $ 1,371
As a % of net patient service operating revenues 0.9 % 0.9 % 0.7 %
Per treatment $ 3 $ 3 $ 3
Accounts receivable DSO (days) 38 39 37
Adjusted EBITDA*
Adjusted EBITDA including noncontrolling interests $ 45,900 $ 35,568 $ 54,118
Adjusted EBITDA - NCI $ 27,403 $ 21,415 $ 31,630
Clinical (quarterly averages):
Dialysis adequacy - % of patients with Kt/V > 1.2 98 % 99 % 98 %
Vascular access - % catheter in use > 90 days 11 % 11 % 10 %
 

* See reconciliation of Non-GAAP Financial Measures.

(1) Adjusted patient care costs exclude $0.5 million, $1.7 million and $1.4 million of stock-based compensation related to modification of options at the time of the Company’s IPO during the three months ended June 30, 2017, March 31, 2017 and June 30, 2016, respectively. The three months ended June 30, 2017 also excludes $0.1 million severance expense and $0.5 million gain on sale of assets. The three months ended June 30, 2016 excludes $0.1 million of stock-based compensation related to the early adoption of ASU 2016-09, as the stock compensation relates to the modified options referenced above.

(2) Adjusted general and administrative expenses exclude $2.1 million, $7.4 million and $8.0 million of stock-based compensation related to modification of options at the time of the Company’s IPO during the three months ended June 30, 2017, March 31, 2017 and June 30, 2016, respectively. The three months ended June 30, 2017 also excludes $0.8 million severance expense. The three months ended June 30, 2016 excludes $0.3 million of stock-based compensation related to the early adoption of ASU 2016-09, as the stock compensation relates to the modified options referenced above.

       

American Renal Associates Holdings, Inc. and Subsidiaries

Net (Loss) Income per Share Reconciliation

(Unaudited)

(dollars in thousands except per share data)

 

Three Months Ended
June 30,

Six Months Ended June
30,

2017     2016 2017     2016
Basic
Net loss attributable to American Renal Associates Holdings, Inc. $ (2,106 ) $ (9,446 ) $ (3,357 ) $ (5,690 )
Change in the difference between the redemption value and estimated fair values for accounting purposes of the related noncontrolling interests (2,527 ) (12,133 ) (13,610 ) (12,133 )
Net loss attributable to common shareholders for basic earnings per share calculation $ (4,633 ) $ (21,579 ) $ (16,967 ) $ (17,823 )
Weighted-average common shares outstanding 30,986,689   28,406,999   30,947,304   25,344,510  
Loss per share, basic $ (0.15 ) $ (0.76 ) $ (0.55 ) $ (0.70 )
Diluted
Net loss attributable to American Renal Associates Holdings, Inc. $ (2,106 ) $ (9,446 ) $ (3,357 ) $ (5,690 )
Change in the difference between the redemption value and estimated fair values for accounting purposes of the related noncontrolling interests (2,527 ) (12,133 ) (13,610 ) (12,133 )
Net loss attributable to common shareholders for diluted earnings per share calculation $ (4,633 ) $ (21,579 ) $ (16,967 ) $ (17,823 )
Weighted-average common shares outstanding, basic 30,986,689 28,406,999 30,947,304 25,344,510
Weighted-average effect of dilutive securities:
Effect of assumed exercise of stock options        
Weighted-average common shares outstanding, diluted 30,986,689   28,406,999   30,947,304   25,344,510  
Loss per share, diluted $ (0.15 ) $ (0.76 ) $ (0.55 ) $ (0.70 )
Outstanding options excluded as impact would be anti-dilutive 3,291,722 555,329 2,303,407 336,133
 

American Renal Associates Holdings, Inc. and Subsidiaries
Reconciliation of Non-GAAP Financial Measures:
(Unaudited)
(dollars in thousands)

We use Adjusted EBITDA and Adjusted EBITDA-NCI to track our performance. “Adjusted EBITDA” is defined as net income before income taxes, interest expense, net, depreciation and amortization, as adjusted for stock-based compensation and associated payroll taxes, loss on early extinguishment of debt, transaction-related costs, certain legal matters costs, executive and management severance costs, income tax receivable agreement income and expense, management fees and gain on sale of assets. “Adjusted EBITDA-NCI” is defined as Adjusted EBITDA less net income attributable to noncontrolling interests. We believe Adjusted EBITDA and Adjusted EBITDA-NCI provide information useful for evaluating our business and a further understanding of the Company's results of operations from management's perspective. We believe Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the results of actions that are outside the operational control of management, but can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We believe Adjusted EBITDA-NCI is helpful in highlighting the amount of Adjusted EBITDA that is available to us after reflecting the interests of our joint venture partners. Adjusted EBITDA and Adjusted EBITDA-NCI are not measures of operating performance computed in accordance with GAAP and should not be considered as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in conformity with GAAP, or as measures of profitability or liquidity. In addition, Adjusted EBITDA and Adjusted EBITDA-NCI may not be comparable to similarly titled measures of other companies. Adjusted EBITDA and Adjusted EBITDA-NCI may not be indicative of historical operating results, and we do not mean for these items to be predictive of future results of operations or cash flows. Adjusted EBITDA and Adjusted EBITDA-NCI have limitations as analytical tools, and you should not consider these items in isolation, or as substitutes for an analysis of our results as reported under GAAP. Some of these limitations are that Adjusted EBITDA and Adjusted EBITDA-NCI:

  • do not include stock-based compensation expense, and beginning with the quarter ended June 30, 2017, do not include associated payroll taxes;
  • do not include transaction-related costs;
  • do not include depreciation and amortization—because construction and operation of our dialysis clinics requires significant capital expenditures, depreciation and amortization are a necessary element of our costs and ability to generate profits;
  • do not include interest expense—as we have borrowed money for general corporate purposes, interest expense is a necessary element of our costs and ability to generate profits and cash flows;
  • do not include income tax receivable agreement income and expense;
  • do not include loss on early extinguishment of debt;
  • do not include costs related to certain legal matters;
  • beginning with the quarter ended December 31, 2016, do not include executive and management severance costs;
  • do not include management fees;
  • do not include certain income tax payments that represent a reduction in cash available to us;
  • do not include changes in, or cash requirements for, our working capital needs; and
  • do not include gain on sale of assets.

In addition, Adjusted EBITDA is not adjusted for the portion of earnings that we distribute to our joint venture partners.

You should not consider Adjusted EBITDA and Adjusted EBITDA-NCI as alternatives to income from operations or net income, determined in accordance with GAAP, as an indicator of our operating performance, or as alternatives to cash provided by operating activities, determined in accordance with GAAP, as an indicator of cash flows or as a measure of liquidity. This presentation of Adjusted EBITDA and Adjusted EBITDA-NCI may not be directly comparable to similarly titled measures of other companies, since not all companies use identical calculations.

We use Adjusted net income attributable to American Renal Associates Holdings, Inc. because it is a useful measure to evaluate our performance by excluding the impact of certain items that we believe are not related to our normal business operations and/or are a result of changes in our liabilities from period to period. See the notes to the tables below for further explanation of the exclusion of certain items. By excluding these items, we believe Adjusted net income allows us and investors to evaluate our net income on a more consistent basis. “Adjusted net income attributable to American Renal Associates Holdings, Inc.” is defined as Net income (loss) attributable to American Renal Associates Holdings, Inc. plus or minus, as applicable, income tax receivable agreement income/expense, accounting changes in fair value of non-controlling interest puts, certain legal matter costs, and stock-based compensation due to option modifications and other transactions at the time of the Company’s initial public offering, net of taxes. We use Adjusted weighted average number of diluted shares to calculate Adjusted net income attributable to American Renal Associates Holdings, Inc. per share. Adjusted weighted average number of diluted shares outstanding is calculated using the treasury method as if certain unvested in-the-money options subject to a contingency are treated as being vested to provide investors with a calculation of the fully-diluted number of shares assuming certain pre-IPO options vested prior to their actual vesting on April 21, 2017.

We use Adjusted cash provided (used) by operating activities less distributions to NCI because it is a useful measure to evaluate the cash flow that is available to the Company for investment in property, plant and equipment, debt service, growth and other general corporate purposes. “Adjusted cash provided (used) by operating activities less distributions to noncontrolling interests” is defined as cash provided by operating activities plus transaction-related expenses less distributions to noncontrolling interests.

We use Adjusted owned net debt because it is a useful metric to evaluate the Company’s share of interests in the cash on our consolidated balance sheet and the debt of the Company. “Adjusted owned net debt” is defined as Debt (other than clinic-level debt) plus Clinic-level debt guaranteed by our wholly owned subsidiaries of American Renal Associates Holdings, Inc. less Cash (other than clinic-level cash) less the Company’s pro rata interest in Clinic-level cash. “Owned Net Leverage” is defined as the ratio of Owned Net Debt to our trailing twelve months Adjusted EBITDA less NCI.

The following table presents the reconciliation from net income to Adjusted EBITDA and Adjusted EBITDA-NCI for the periods indicated:

       

 

 

(Unaudited)

 
Reconciliation of Net income to Adjusted EBITDA

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

LTM (1) as of
June 30, 2017

2017     2016 2017     2016
Net income $ 16,391 $ 13,042 $ 29,293 $ 35,599 $ 81,899
Interest expense, net 7,188 8,941 14,797 21,199 29,531
Income tax expense (benefit) 410 (1,147 ) (3,114 ) 1,514 (5,381 )
Depreciation and amortization 9,382 8,252 18,456 15,929 36,389
Transaction-related costs 717 2,215 717 2,239 717
Loss on early extinguishment of debt 526 4,708 526 4,708 526
Income tax receivable agreement expense (income) 2,641 7,835 (1,876 ) 7,835 (10,997 )
Certain legal matters (2) 4,297 8,233 15,012
Executive and management severance costs (3) 917 917 2,567
Stock-based compensation and related payroll taxes 3,948 10,192 14,036 10,578 43,756
Gain on sale of assets (517 ) (517 ) (517 )
Management fees   80     537    
Adjusted EBITDA (including noncontrolling interests) $ 45,900 $ 54,118 $ 81,468 $ 100,138 $ 193,502
Less: Net income attributable to noncontrolling interests (18,497 ) (22,488 ) (32,650 ) (41,289 ) (79,951 )
Adjusted EBITDA-NCI $ 27,403   $ 31,630   $ 48,818   $ 58,849   $ 113,551  
 

__________________________________

(1) Last twelve months (“LTM”) is the period beginning July 1, 2016 through June 30, 2017.

(2) Certain legal matters costs include professional fees and other expenses associated with the Company’s handling of, and response to, the UnitedHealth litigation, the now-concluded SEC inquiry, the CMS request for information, the securities litigation, and the Company’s internal review and analysis of factual and legal issues relating to the aforementioned matters as described in our Form 10-Q for the period ended June 30, 2017. We have excluded these costs because they represent unusual fees and expenses that are not related to the usual operation of our business.

(3) Represents executive and management severance costs.

The following table presents the reconciliation from Net loss attributable to American Renal Associates Holdings, Inc. to Adjusted net income attributable to American Renal Associates Holdings, Inc. for the periods indicated:

(dollars in thousands, except per share data)

Reconciliation of Net Loss Attributable to American Renal Associates Holdings, Inc.
to Adjusted Net Income Attributable to American Renal Associates Holdings, Inc.:

    (Unaudited)
 

Three Months Ended June
30,

2017     2016
Net loss attributable to American Renal Associates Holdings, Inc. (2,106 ) (9,446 )
Change in the difference between the redemption value and estimated fair values for accounting purposes of the related noncontrolling interests (1)   (2,527 )   (12,133 )
Net loss attributable to common shareholders $ (4,633 ) $ (21,579 )
 
Adjustments:
Stock-based compensation due to option modification and IPO transactions (2) 2,644 9,448
Certain legal matters (3) 4,297
Loss on early extinguishment of debt 526 4,708
Transaction-related costs 717 2,215
Executive and management severance costs 917
Gain on sale of assets (517 )  
Total pre-tax adjustments $ 8,584 $ 16,371
Tax effect 3,560 6,789
Income tax receivable agreement expense 2,641 7,835
Change in the difference between the redemption value and estimated fair values for accounting purposes of the related noncontrolling interests (1)   (2,527 )     (12,133 )
Total adjustments, net $ 10,192 $ 29,550
Adjusted net income attributable to American Renal Associates Holdings, Inc. $ 5,559 $ 7,971
 
Basic shares outstanding 30,986,689 28,406,999
Adjusted effect of dilutive stock options (4)   2,957,728       3,322,325  
Adjusted weighted average number of diluted shares used to compute adjusted net income attributable to American Renal Associates Holdings, Inc. per share (4)   33,944,417       31,729,324  
Adjusted net income attributable to American Renal Associates Holdings, Inc. per share   $ 0.16       $ 0.25  
 

__________________________

(1) Changes in fair values of contractual noncontrolling interest put provisions are related to certain put rights that may be accelerated as a result of the IPO.

(2) Stock-based compensation due to option modification and other transactions at the time of the IPO which were expensed within 12 months after the IPO have been excluded since they arose based on transactions that are not expected to occur in the future.

(3) Certain legal matters costs include professional fees and other expenses associated with the Company’s handling of, and response to, the UnitedHealth litigation, the now-concluded SEC inquiry, the CMS request for information, the securities litigation, and the Company’s internal review and analysis of factual and legal issues relating to the aforementioned matters as described in our Form 10-Q for the period ended June 30, 2017. We have excluded these costs because they represent unusual fees and expenses that are not related to the usual operation of our business.

(4) Adjusted weighted average number of diluted shares outstanding calculated using the treasury method as if 2.5 million shares related to unvested in-the-money options subject to a contingency are vested.

       

American Renal Associates Holdings, Inc. and Subsidiaries

Unaudited Supplemental Cash Flow

(dollars in thousands)

 
 
Three Months Ended June 30, Six Months Ended June 30,
2017     2016 2017     2016
Cash provided by operating activities $ 35,838 $ 52,653 $ 52,360 $ 89,229
Plus:
Transaction-related costs (1) 717   2,215   717   2,239  
Adjusted cash provided by operating activities $ 36,555 $ 54,868 $ 53,077 $ 91,468
Distributions to noncontrolling interests (19,498 ) (22,533 ) (38,542 ) (43,973 )
Adjusted cash provided by operating activities less distributions to NCI $ 17,057 $ 32,335 $ 14,535 $ 47,495
Capital expenditure breakdown:
Routine and maintenance capital expenditures $ 1,996 $ 2,890 $ 3,914 $ 5,748
Development capital expenditures 5,651   14,935   10,139   28,473  
Total capital expenditures $ 7,647 $ 17,825 $ 14,053 $ 34,221
 
   

American Renal Associates Holdings, Inc. and Subsidiaries

Unaudited Supplemental Leverage Statistics

(dollars in thousands)

 
As of June 30, 2017
Total ARA     ARA "Owned"
Cash (other than clinic-level cash) $ 8,407 $ 8,407
Clinic-level cash 66,526   34,403  
Total cash $ 74,933 $ 42,810
Debt (other than clinic-level debt) $ 442,872 $ 442,872
Clinic-level debt 129,541 67,247
Unamortized debt discounts and fees (10,260 ) (10,260 )
Total debt $ 562,153 $ 499,859
Adjusted owned net debt (total debt - total cash) $ 457,049
Adjusted EBITDA less NCI, LTM $ 113,551
Leverage ratio (2) 4.0x
 

_________________________

(1) Transaction-related costs due to the IPO and debt refinancing in the three and six months ended June 30, 2016 and the debt refinancing in the three and six months ended June 30, 2017, including accounting, valuation, legal and other consulting and professional fees.

(2) Leverage ratio calculated as follows: Adjusted owned net debt divided by Adjusted EBITDA less NCI, last twelve months.

American Renal Associates Holdings, Inc. Contact:
Darren Lehrich, 978-522-6063
SVP Strategy & Investor Relations
dlehrich@americanrenal.com

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