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ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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This discussion contains management’s discussion and analysis of our financial condition and results of operations for the period covered by this Form 10-Q and should be read in conjunction with the unaudited consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2016.
The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statement, due to a number of factors, including those discussed in the section of this Form 10-Q entitled “Special Note Regarding Forward-Looking Statements” and the section entitled "Risk Factors.” in this Form 10-Q and in the Form 10-K. You should read these sections carefully.
Unless otherwise indicated or the context otherwise requires, references in this Form 10-Q to “we,” “our,” “us” and the “Company” and similar terms refer to American Renal Associates Holdings, Inc. and its consolidated entities taken together as a whole, except where these terms refer to providers of dialysis services, in which case they refer to our dialysis clinic joint ventures, in which we have a controlling interest and our physician partners have the noncontrolling interest, or to the dialysis facilities owned by such joint venture companies, as applicable. References to “ARA” refer to American Renal Associates Holdings, Inc. and not any of its consolidated entities. References to “ARH” refer to American Renal Holdings Inc., an indirect wholly owned subsidiary of ARA.
Executive Overview
We are the largest dialysis services provider in the United States focused exclusively on joint venture partnerships with physicians. We provide high-quality patient care and clinical outcomes through physicians, who specialize in treating patients suffering from end stage renal disease (“ESRD”), known as nephrologists. Our core values create a culture of clinical autonomy and operational accountability for our physician partners and staff members. We believe our joint venture model has helped us become one of the fastest-growing national dialysis services platforms, in terms of the growth rate of our non-acquired treatments since 2012.
We derive our patient service operating revenues from providing outpatient and inpatient dialysis treatments. The sources of these patient service operating revenues are principally government-based programs, including Medicare and Medicaid plans, as well as commercial insurance plans. Substantially all of our payors (both government-based and commercial) have moved toward a bundled payment system of reimbursement, with a single lump-sum per treatment covering not only the dialysis treatment itself but also the ancillary items and services provided to a patient during the treatment, such as laboratory services and pharmaceuticals.
We operate our clinics exclusively through our joint venture (“JV”) model, in which we share the ownership and operational responsibility of our dialysis clinics with our nephrologist partners and other joint venture partners, while the providers of the majority of dialysis services in the United States operate through a combination of wholly owned subsidiaries and joint ventures. Each of our clinics is maintained as a separate joint venture in which generally we have the controlling interest and our nephrologist partners and other joint venture partners have a noncontrolling interest. We believe that our exclusive focus on a JV model makes us well-positioned to increase our market share by attracting nephrologists who are not only interested in our service platform but also want greater clinical autonomy and a potential return on capital investment associated with ownership of a noncontrolling interest in a dialysis clinic. We believe our JV model best aligns our interests with those of our nephrologist partners and their patients. By owning a portion of the clinics where their patients are treated, our nephrologist partners have a vested stake in the quality, reputation and performance of the clinics. We believe that this enhances patient and staff satisfaction and retention, clinical outcomes, patient growth, and operational and financial performance.
On April 26, 2016, we completed the initial public offering (the “IPO”) of 8,625,000 shares of the common stock, par value $0.01 per share (the “Common Stock”), of the Company, for cash consideration of $22.00 per share ($20.515 per share net of underwriting discounts).
Key Factors Affecting Our Results of Operations
Clinic Growth and Start-Up Clinic Costs
Our results of operations are dependent on increases in the number of, and growth at, our de novo clinics and acquired clinics, as well as growth at our existing clinics. We have experienced significant growth since opening our first clinic in December 2000. As of
September 30, 2017
, we had developed
168
de novo clinics and
49
acquired clinics. The following table shows the number of de novo and acquired clinics over the periods indicated:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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|
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2017
|
|
2016
|
|
2017
|
|
2016
|
|
De novo clinics (1)
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1
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|
|
5
|
|
|
6
|
|
|
13
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|
|
Acquired clinics (2)
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—
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|
|
1
|
|
|
—
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|
|
2
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|
|
Sold or merged clinics (3)
|
(1
|
)
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|
—
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|
|
(3
|
)
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|
—
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Total net new clinics
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—
|
|
|
6
|
|
|
3
|
|
|
15
|
|
_____________________________
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(1)
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Clinics formed by us which began to operate and dialyze patients in the applicable period.
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(2)
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Clinics acquired by us in the applicable period.
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(3)
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Clinics sold or merged by us in the applicable period.
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De novo clinics.
We have primarily grown through de novo clinic development. A typical de novo facility requires approximately $1.3 to $2.0 million of capital for equipment purchases, leasehold improvements and initial working capital. A portion of the total capital required to develop a de novo clinic may be equity capital funded by us and our nephrologist partners in proportion to our respective ownership interests. The balance of such development cost may be funded through third-party debt financing or through intercompany loans provided by one of our wholly owned subsidiaries to the joint venture entity that, in each case, we and our nephrologist partners generally guarantee on a basis proportionate to our respective ownership interests. For the three months ended
September 30, 2017
and
September 30, 2016
our development capital expenditures were
$9.2 million
and
$9.7 million
, respectively, representing
4.9%
and
5.0%
of our net patient service operating revenues, respectively.
Our results of operations have been and will continue to be materially affected by the timing and number of openings, the timing of certifications of de novo clinic openings and the amount of de novo clinic opening costs incurred. In particular, our patient care costs on an absolute basis and as a percentage of our patient service operating revenues may fluctuate from quarter to quarter due to the timing and number of de novo clinic openings, which affect our operating income in a given quarter. Our patient care costs reflect pre-opening expenses, which primarily consist of staff expenses, including the costs of hiring and training new staff, as well as rent and utilities. In addition, a de novo clinic builds its patient volumes over time and, as a result, generally has lower revenue than our existing clinics. Newly established de novo clinics, although contributing to increased revenues, have adversely affected our results of operations in the short term due to a smaller patient base to absorb operating expenses. We consider a de novo clinic to be a “start-up clinic” until the first month it generates positive clinic-level EBITDA. We typically achieve positive clinic-level monthly EBITDA within, on average, six months after the first treatment at a clinic. However, approximately 24% of our de novo clinics have exceeded six months from first treatment to positive clinic-level monthly EBITDA, with these clinics averaging approximately 12 months to positive clinic-level monthly EBITDA. Clinic-level EBITDA differs from our consolidated EBITDA in that management fees, consisting of a percentage of the clinic’s net revenues paid to ARA for management services, are eliminated in consolidation but are reflected on a clinic-level basis.
Start-up clinic losses affect the comparability of our results from period to period and may disproportionately impact our operating margins in any given quarter, including quarters during which we have a significant number of clinics qualifying as start-up clinics. The following table sets forth the number of de novo clinics opened during the periods indicated.
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Three Months Ended
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March 31,
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|
June 30,
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September 30,
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December 31,
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Total
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|
2017
|
3
|
|
|
2
|
|
|
1
|
|
|
—
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|
|
6
|
|
|
2016
|
2
|
|
|
6
|
|
|
5
|
|
|
7
|
|
|
20
|
|
|
2015
|
1
|
|
|
5
|
|
|
6
|
|
|
4
|
|
|
16
|
|
|
2014
|
2
|
|
|
4
|
|
|
3
|
|
|
6
|
|
|
15
|
|
|
2013
|
1
|
|
|
3
|
|
|
2
|
|
|
11
|
|
|
17
|
|
Existing clinics.
Depending on demand and capacity utilization, we may have space within our existing clinics to accommodate a greater number of dialysis stations or operate additional shifts in order to increase patient volume without compromising our quality standards. Such expansions leverage the fixed cost infrastructure of our existing clinics. From January 1, 2012 to
September 30, 2017
, we added 180 dialysis stations to our existing clinics, representing the equivalent of nearly eleven de novo clinics.
Acquired clinics.
We have also grown through acquisitions of existing clinics, and our results of operations have been and will continue to be affected by the timing and number of our acquisitions. Our acquisition strategy is primarily driven by the quality of the nephrologist in the market. We opportunistically pursue select acquisitions in situations where we believe the clinic offers us an attractive opportunity to enter a new market or expand within an existing market. Acquiring an existing dialysis clinic requires a greater initial investment, but an acquired clinic contributes positively to our results of operations sooner than a de novo clinic. Acquisition integration costs are typically minimal compared with start-up costs in connection with opening de novo clinics.
Our clinic growth drives our treatment growth. The following table summarizes the sources of our treatment growth for the periods indicated:
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Three Months Ended September 30,
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Nine Months Ended September 30,
|
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Source of Treatment Growth:
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Non-acquired treatment growth(1)
|
6.8
|
%
|
|
10.2
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%
|
|
8.6
|
%
|
|
11.8
|
%
|
|
Acquired treatment growth(2)
|
—
|
%
|
|
1.2
|
%
|
|
—
|
%
|
|
0.9
|
%
|
|
Total treatment growth
|
6.8
|
%
|
|
11.4
|
%
|
|
8.6
|
%
|
|
12.7
|
%
|
_____________________________
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|
|
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(1)
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Represents net growth in treatments attributable to clinics operating at the end of the period that were also open at the end of the prior period and de novo clinics opened since the end of the prior period.
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|
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(2)
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Represents net growth in treatments attributable to clinics acquired since the end of the prior period.
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Sources of Revenues by Payor
Our patient service operating revenues are principally driven by our mix of commercial and government payor patients and commercial and government payment rates. We are generally paid more for services provided to patients covered by commercial healthcare plans than we are for patients covered by Medicare or Medicaid. ESRD patients covered by employer group health plans generally transition to Medicare coverage after a maximum of 33 months. Medicare payment rates are determined under the Medicare ESRD program's bundled payment system, which sets a base rate on an annual basis that is subject to adjustments to arrive at the actual payment rate for individual clinics. During the years ending December 31, 2014, 2015 and 2016, the Medicare ESRD PPS payment rates for our clinics were approximately $248, $247 and $247, respectively, per treatment. The ESRD PPS final rule for 2017, released on October 28, 2016, increased the base rate from $230.39 to $231.55. The Centers for Medicare and Medicaid Services (“CMS”) issues annual updates to the ESRD PPS, which may impact the base rate as well as the various adjusters. The ESRD PPS final rule for 2018 was released on October 27, 2017 by CMS (the “2018 Final Rule”). The 2018 Final Rule includes a base rate of $232.37, representing a $0.82 increase from the 2017 base rate of $231.55. CMS has estimated that the 2018 Final Rule will result in an overall increase of payments to ESRD facilities of 0.5%.
Medicare payment rates are generally insufficient to cover our total operating expenses allocable to providing dialysis treatments for Medicare patients. As a result, our ability to generate operating income is substantially dependent on revenues derived from commercial payors, which typically pay us either negotiated payment rates or a discount to our usual and customary fee schedule. Many commercial insurance programs have been moving towards a bundled payment system, which
may not reimburse us for all of our operating costs, such as the cost of erythropoietin-stimulating agents (“ESAs”) and other pharmaceuticals.
The following table summarizes our patient service operating revenues by source for the periods indicated.
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|
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|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Source of Revenues:
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Government-based and other(1)
|
63.9
|
%
|
|
54.7
|
%
|
|
63.4
|
%
|
|
55.6
|
%
|
|
Commercial and other(2)
|
36.1
|
%
|
|
45.3
|
%
|
|
36.6
|
%
|
|
44.4
|
%
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
_____________________________
|
|
|
|
(1)
|
Principally Medicare and Medicaid and also includes hospitals and patient pay, which we refer to collectively as “Government-based and other”. “Patient pay” revenues consist of payments received directly from patients who are either uninsured or self-pay a portion of the bill.
|
|
|
|
|
(2)
|
Principally commercial insurance companies and also includes the Department of Veterans Affairs (the “VA”), which we refer to collectively as “Commercial and other”.
|
The percentage of treatments by payor source does not necessarily correlate with our results of operations or margins in any given period because of a number of other factors, including the effect of the difference in rates per treatment associated with each commercial payor. For the three years and one year ended December 31, 2016, commercial payors and others, including the VA, accounted for an average of approximately 14.6% and 16.8% of the treatments we performed, respectively. The change in the mix of patients and treatments between the three-year average and the year ended December 31, 2016 was largely driven by enrollment in Affordable Care Act (“ACA”) - compliant plans (“ACA Plans”), both on-exchange and off-exchange. For the year ended December 31, 2016, we derived approximately 9% of patient service operating revenues from ACA Plans, both on-exchange and off-exchange, and these ACA plans were the source of reimbursement for approximately 4% of the treatments performed. During the nine months ended September 30, 2017, we have experienced an adverse change in the commercial treatment mix as compared to the year ended December 31, 2016, due primarily to a decline in ACA plans, as discussed below. In addition, for the year ended December 31, 2016, the percentage of treatments accounted for by commercial payors and others, including the VA, but not including ACA Plans, was 12.9%. For the nine months ended September 30, 2017, the percentage of treatments accounted for by commercial payors and others, including the VA, but not including ACA Plans, was approximately 1% below the percentage for the year ended December 31, 2016, and we expect it to remain lower.
Effective in November 2016, for patients enrolled in minimum essential Medicaid coverage, we suspended assistance in the application process for charitable premium support from the American Kidney Fund ("AKF"), which caused an adverse change in the mix of patients and treatments in 2017. This change has not affected our provision of such assistance in the application process to other patients. Prior to the 2017 ACA open enrollment period, approximately 2% of our total patients chose to enhance their pre-existing minimum essential Medicaid coverage by electing to enroll in an ACA Plan. Before we suspended assistance in the application process for charitable premium support from the AKF, this percentage had been growing. Virtually all of these low-income patients have relied on charitable premium assistance because they were ineligible for federal premium tax credits. Due to the suspension of assistance in the application process for charitable premium support from the AKF, virtually all of our patients with ACA primary insurance coverage and secondary minimum essential Medicaid coverage reverted back to Medicaid-only coverage during 2017.
In addition, prior to the 2017 ACA open enrollment period, approximately 2% of our total patients were enrolled in an ACA Plan and not enrolled in the Medicaid program. Approximately 85% of these patients relied on charitable premium assistance. These patients chose ACA Plans for a variety of reasons, including ineligibility for government programs, the shift of coverage options from the individual and/or small group markets to ACA exchanges, lack of requisite work credits to be eligible for Medicare coverage, the opportunity to consolidate family coverage under one insurance plan and the lack of Medigap policy coverage due to certain state insurance department restrictions, among other reasons. These patients enrolled in ACA plans and not enrolled in the Medicaid program have experienced insurance coverage disruptions due to payors disallowing charitable premium assistance, the lack of availability of viable ACA insurance products in some markets, and a more uncertain regulatory environment. The average revenue per treatment for ACA plans is below that of our overall average commercial revenue per treatment but above our Medicare rate.
In 2016, following an internal review, in addition to the suspension described above, the Company adopted policies and procedures to ensure that its patient insurance education program meets robust certification standards to provide broad-based information to patients about their insurance options, so that the patients are in the best possible position to choose
coverage based on their own best interests. Under this program, the Company informs patients, when appropriate, about insurance plans available under the ACA and other individual marketplace plans as alternatives or supplements to coverage under Medicare or Medicaid. The Company will continue to advise its patients about the potential availability of assistance with the payment of premiums from the AKF under the AKF Health Insurance Premium Program (“HIPP”), subject to the suspension described above, and compliance with the AKF’s policies and procedures and approved regulatory guidance from CMS.
In addition, recently there have been other significant developments in the market that may affect our business, including the withdrawal of some insurers from offering ACA and individual marketplace plans in certain states, increases in premiums for ACA plans, and continuing efforts on the part of insurers to reduce the amount paid to providers per treatment. Further, there could be additional changes in our business in the future resulting from potential regulatory actions and other third party practices following the recent CMS request for information seeking public comment on concerns relating to steering of patients eligible for Medicare and Medicaid into ACA plans, and the recent changes to the AKF HIPP program announced by the AKF.
The suspension has adversely impacted, and any CMS action relating to establishing policies to restrict or limit charitable assistance for ACA plans or other individual marketplace plans will adversely impact, the number of patients covered by ACA plans and other individual marketplace plans, the Company’s average reimbursement rate and its results of operations and cash flows, which impact may be material. Further, the other changes to the Company’s patient insurance education program, whether or not the suspension continues or CMS restricts charitable premium assistance, together with the other developments in the market, including the impact of such changes on enrollment in ACA plans and other individual marketplace plans, other insurance coverage, and/or potential regulatory changes in the future, have and are expected to continue to adversely impact the number of the Company’s patients covered by insurance, as well as the Company’s average reimbursement rate in the future.
As previously disclosed, the total estimated annual financial impact associated with a more restrictive environment for patients previously enrolled in ACA plans and enrolled in the Medicaid program who also relied on charitable premium assistance is expected to be $25 million in 2017. In arriving at this estimate, we included the anticipated effect on our results of operations of the decline in our patient service operating revenues due to patients who reverted to Medicaid-only coverage during 2017, as well as the anticipated effect of a decline in patient service operating revenues from patients who were not enrolled in Medicaid but who received lower or no charitable premium assistance during 2017. This estimate is based on our patient population enrolled in ACA plans and other factors as of December 31, 2016 and takes our weighted average dialysis facility ownership into account. Based on management’s expectations, we believe the full financial impact is likely to be realized during 2017 and will, accordingly, adversely affect our results of operations for this period.
Subsequent to December 31, 2016, the Company received letters from certain insurance companies indicating that they will not insure patients who receive premium payment assistance from third-party charitable organizations. In addition to charitable premium support for patients enrolled in ACA plans, the AKF provides charitable premium support to patients with other insurance coverage, including Medicare supplemental insurance and commercial insurance. If patients are unable to obtain or to continue to receive AKF charitable premium support due to insurance company challenges to covering patients receiving charitable premium support, legislative changes, rules or interpretations issued by HHS limiting such support or other reasons, the financial impact on our company could be substantially greater than the estimated annual financial impact described above relating to patients previously enrolled in ACA plans and, accordingly, could materially and adversely affect our results of operations. See “Part II. Item 1A. Risk Factors—If the number of patients with commercial insurance declines, our operating results and cash flows would be adversely affected” in this Form 10-Q and “Part II. Item 1A. Risk Factors—Increased government scrutiny in our industry and potential regulatory changes could adversely affect our operating results and financial condition” in our Form 10-Q for the period ended June 30, 2017.
We believe that 2017 will continue to be challenging due to the uncertainty around the ACA and the ability of our patients overall to access charitable premium assistance from non-profit organizations such as the AKF. We also believe that pressure on commercial mix and commercial rates due to more restrictive health plan benefit design will continue to create additional challenges. In addition, the efforts by the current Administration and Congress have caused the future state of the exchanges and other ACA reforms to be less certain. We are unable to predict the full effect of the foregoing factors on our business, results of operations and cash flows. See also “Part II, Item 1A. Risk Factors—If the rates paid by commercial payors decline, our operating results and cash flow would be adversely affected” in our Form 10-Q for the period ended June 30, 2017.
Clinical Staff, Pharmaceutical and Medical Supply Costs
Because our ability to influence the pricing of our services is limited, our profitability depends not only on our ability to grow but also on our ability to manage patient care costs, including clinical staff, pharmaceutical and medical supply costs.
The principal drivers of our patient care costs are clinical staff hours per treatment, salary rates and vendor pricing and utilization of pharmaceuticals, including ESAs such as Aranesp®, EPOGEN® (“EPO”) and Mircera®, and medical supplies. The Company has entered into a rebate agreement with Amgen Inc. (“Amgen”) for Aranesp and EPO, which, under certain circumstances, limits the supplier’s ability to increase the net price it charges the Company, and requires certain volume commitments by the Company, for these drugs through December 31, 2018. In September 2017, the Company entered into a purchase agreement with Vifor International AG (“Vifor”) that expires on December 31, 2022, pursuant to which it will provide our clinics with Mircera. The use of Mircera by our clinics could potentially reduce our ESA cost per treatment. Increased utilization of ESAs for patients for whom the cost of ESAs is included in a bundled reimbursement rate, including Medicare patients, could increase our operating costs without any increase in revenue. In addition, shortage of supplies could have a negative impact on our revenues, earnings and cash flows. Other cost categories, such as employee benefit costs and insurance costs, can also result in significant cost changes from period to period. Our results of operations are also affected by the start-up clinic costs described above. See also “Part II. Item 1A. Risk Factors-“Changes in the availability and cost of ESAs and other pharmaceuticals could adversely affect our operating results and financial condition as well as our ability to care for patients” and -“If our suppliers are unable to meet our needs, if there are material price increases or if we are unable to effectively access new technology, our operating results and financial condition could be adversely affected.”
Seasonality
Our treatment volumes are sensitive to seasonal fluctuations due to generally fewer treatment days during the first quarter of the calendar year. Additionally, our patients are generally responsible for a greater percentage of the cost of their treatments during the early months of the year, due to co-insurance, co-payments and deductibles, which leads to lower total net revenues and lower net revenues per treatment during the early months of the year. Our quarterly operating results may fluctuate significantly in the future depending on these and other factors.
Impact from Hurricane Harvey and Hurricane Irma
The Company currently operates 40 clinics in Florida, 17 clinics in Georgia and 22 clinics in Texas. Due to severe weather conditions in connection with Hurricanes Harvey and Irma in August and September 2017, many of the clinics and employees located in Florida, Georgia and Texas were adversely impacted. The Company has assessed the extent of damage and expected insurance proceeds and determined that the impact on the Company’s financial condition and result of operations will not be material.
Impact of the IPO and Future Charges
The completion of the IPO has had effects on our results of operations and financial conditions. In connection with the IPO, our results of operations are affected by one-time costs and recurring costs of being a public company, including increases in executive and board compensation (including equity based compensation), increased insurance, accounting, legal and investor relations costs and the costs of compliance with the Sarbanes-Oxley Act of 2002 and the costs of complying with the other rules and regulations of the SEC and the New York Stock Exchange. In addition, when the available exemptions under the Jumpstart Our Business Startups Act cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with the applicable regulatory and corporate governance requirements. In addition, we have incurred and expect to incur additional legal expenses in connection with various legal and regulatory matters described below and related matters. See “—Operating Expenses—Certain Legal Matters” and “Part II. Item 1. Legal Proceedings.”
As a result of certain modifications made to our outstanding market and performance-based stock options at the time of the IPO, the amount of unrecognized non-cash compensation costs increased by approximately $38.9 million (the “Modification Expense”). The Modification Expense was recognized over a period of approximately 12 months from the date of the IPO.
In addition, in connection with the distribution (the “Term Loan Holdings Distributions”) of membership interests in an entity holding assigned clinic loans (the “Assigned Clinic Loans”), described in “
Note 2 - Initial Public Offering
” of the notes to the consolidated financial statements, since the interest on these loans is no longer eliminated in consolidation, we now incur additional interest expense.
On April 26, 2016, we entered into an income tax receivable agreement (the “TRA”) for the benefit of our pre-IPO stockholders, which provides for the payment by us to our pre-IPO stockholders on a pro rata basis of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of the option deductions (as defined in the TRA). While the actual amount and timing of any payments under the TRA will vary depending upon a number
of factors, including the amount and timing of the taxable income we generate in the future and whether and when any relevant stock options, as defined in the TRA, are exercised and the value of our common stock at such time, we expect that during the term of the TRA the payments that we make will be material. We recorded a liability for the value of the TRA at the time of the IPO. We calculated fair value of the TRA by using a Monte Carlo simulation-based approach that relies on significant assumptions about our stock price, stock volatility and risk-free rate as well as the timing and amounts of options exercised. Changes in assumptions based on future events, including changes in the price of our common stock from our IPO price, will change the amount of the liability for the TRA, and such changes may be material. Any changes to the TRA liability will be recognized in our statement of operations as Income tax receivable agreement income (expense) in future periods. See “
Note 6 - Fair Value Measurements
” of the notes to the consolidated financial statements.
FTC Decision and Order
We were subject to a Decision and Order entered In the Matter of American Renal Associates Inc. and Fresenius Medical Care Holdings, Inc. by the Federal Trade Commission, which expired on October 17, 2017. The Decision and Order was entered in 2007 following a nonpublic investigation by the Federal Trade Commission into proposed dialysis clinic acquisition activities in Rhode Island and the execution of an Agreement Containing Consent Order by the parties. The Decision and Order prohibited us for a period of ten years through October 17, 2017, without prior notice to the Federal Trade Commission from: (1) acquiring dialysis clinics located in ZIP codes in and around the cities of Cranston and Warwick, Rhode Island, and/or (2) entering into any contract to manage or operate dialysis clinics in ZIP codes in and around the cities of Cranston and Warwick. These prohibitions were subject to a number of exceptions that permitted us to develop, own, manage or operate de novo dialysis clinics or dialysis clinics owned or operated as of the date the Decision and Order was entered, or to perform specified services, including offsite laboratory services, bookkeeping services, accounting services, billing services, supply services and purchasing and logistics services with the adherence to confidentiality requirements. We have complied with the terms of the Decision and Order, and on September 28, 2017 we submitted our final annual compliance report to the Federal Trade Commission.
Key Performance Indicators
We use a variety of financial and other information to evaluate our financial condition and operating performance. Some of this information is financial information that is prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), while other financial information, such as Adjusted EBITDA and Adjusted EBITDA-NCI, is not prepared in accordance with GAAP. The following table presents certain operating data, which we monitor as key performance indicators, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Operating Data and Other Non-GAAP Financial Data:
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Number of clinics (as of end of period)
|
217
|
|
|
207
|
|
|
217
|
|
|
207
|
|
|
Number of de novo clinics opened (during period)
|
1
|
|
|
5
|
|
|
6
|
|
|
13
|
|
|
Patients (as of end of period)
|
15,237
|
|
|
14,166
|
|
|
15,237
|
|
|
14,166
|
|
|
Number of treatments
|
551,258
|
|
|
516,043
|
|
|
1,625,227
|
|
|
1,497,077
|
|
|
Non-acquired treatment growth
|
6.8
|
%
|
|
10.2
|
%
|
|
8.6
|
%
|
|
11.8
|
%
|
|
Patient service operating revenues per treatment
|
$
|
344
|
|
|
$
|
378
|
|
|
$
|
342
|
|
|
$
|
371
|
|
|
Patient care costs per treatment
|
$
|
217
|
|
|
$
|
225
|
|
|
$
|
220
|
|
|
$
|
221
|
|
|
Adjusted patient care costs per treatment (1)
|
$
|
217
|
|
|
$
|
221
|
|
|
$
|
219
|
|
|
$
|
219
|
|
|
General and administrative expenses per treatment
|
$
|
40
|
|
|
$
|
65
|
|
|
$
|
49
|
|
|
$
|
58
|
|
|
Adjusted general and administrative expenses per treatment (2)
|
$
|
40
|
|
|
$
|
45
|
|
|
$
|
43
|
|
|
$
|
46
|
|
|
Provision for uncollectible accounts per treatment
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Adjusted EBITDA (including noncontrolling interests) (3)
|
$
|
46,838
|
|
|
$
|
56,154
|
|
|
$
|
128,306
|
|
|
$
|
156,292
|
|
|
Adjusted EBITDA-NCI (3)
|
$
|
28,149
|
|
|
$
|
32,532
|
|
|
$
|
76,967
|
|
|
$
|
91,381
|
|
_____________________________
|
|
|
|
(1)
|
Adjusted patient care costs per treatment excludes
$2.2 million
of Modification Expense during the
nine
months ended
September 30, 2017
, and
$1.9 million
and
$3.3 million
of Modification Expense during the three and
nine
months ended
September 30, 2016
. Additionally, the
nine
months ended
September 30, 2017
exclude $0.1 million severance expense and $0.5 million gain on sale of assets. Additionally the
nine
months ended
September 30, 2016
exclude $0.1 million of stock compensation expense as a result of early adoption of ASU 2016-09, as it relates to the modified options.
|
|
|
|
|
(2)
|
Adjusted general and administrative expenses per treatment excludes
$9.5 million
of Modification Expense during the
nine
months ended
September 30, 2017
, and
$10.3 million
and
$18.3 million
of Modification Expense during the three and
nine
months ended
September 30, 2016
. Additionally, the
nine
months ended
September 30, 2017
excludes $0.8 million severance expense. Additionally, the
nine
months ended
September 30, 2016
excludes $0.3 million of stock compensation expense as a result of early adoption of ASU 2016-09, as it relates to the modified options.
|
|
|
|
|
(3)
|
See “Non-GAAP Financial Measures” below.
|
Number of Clinics
We track our number of clinics as an indicator of growth. The number of clinics as of the end of the period includes all opened de novo clinics, acquired clinics and existing clinics. See “—Key Factors Affecting Our Results of Operations—Clinic Growth and Start-Up Clinic Costs” for a discussion of clinic growth and start-up costs as a factor affecting our operating performance.
Patient Volume
The number of patients as of the end of the period is an indicator we use to assess our performance. Our patient volumes are correlated with our de novo clinic openings and, to a lesser extent, our marketing efforts and certain external factors, such as the overall economic environment. We believe that patients choose to get their dialysis services at one of our clinics due to their relationship with our physicians, as well as the quality of care, comfort and amenities and convenience of location and clinic hours.
Non-Acquired Treatments
We evaluate our operating performance based on the growth in number of non-acquired treatments, or treatments performed at our existing and de novo clinics, including those de novo clinics opened during the applicable period. Accordingly, our non-acquired treatment growth rate is affected by the timing and number of de novo clinic openings. We calculate non-acquired treatment growth by dividing the number of treatments performed during the applicable period by the number of treatments performed during the corresponding prior period, excluding the number of treatments performed at clinics acquired during the applicable period, and expressing the resulting number as a percentage.
Per Treatment Metrics
We evaluate our patient service operating revenues, patient care costs, general and administrative expenses and provision for uncollectible accounts on a per treatment basis to assess our operational efficiency. We believe our disciplined revenue cycle management has contributed to the consistency of our historical results.
Non-GAAP Financial Measures
This quarterly report on Form 10-Q makes reference to certain non-GAAP measures. These non-GAAP measures are not recognized measures under GAAP and do not have a standardized meaning prescribed by GAAP. When used, these measures are defined in such terms as to allow the reconciliation to the closest GAAP measure. These measures are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those GAAP measures by providing further understanding of the Company’s results of operations from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under GAAP. We use non-GAAP measures, such as Adjusted EBITDA and Adjusted EBITDA-NCI, to provide investors with a supplemental measure of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on GAAP financial measures.
Adjusted EBITDA
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 reflect the 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.
The following table presents Adjusted EBITDA and Adjusted EBITDA-NCI for the periods indicated and the reconciliation from net income to such amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Net Income
|
$
|
26,672
|
|
|
$
|
36,046
|
|
|
$
|
55,965
|
|
|
$
|
71,645
|
|
|
Add:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
7,255
|
|
|
7,372
|
|
|
22,052
|
|
|
28,571
|
|
|
Income tax expense (benefit)
|
2,559
|
|
|
(101
|
)
|
|
(555
|
)
|
|
1,413
|
|
|
Depreciation and amortization
|
9,438
|
|
|
8,687
|
|
|
27,894
|
|
|
24,616
|
|
|
Transaction-related costs (a)
|
—
|
|
|
—
|
|
|
717
|
|
|
2,239
|
|
|
Loss on early extinguishment of debt (b)
|
—
|
|
|
—
|
|
|
526
|
|
|
4,708
|
|
|
Income tax receivable agreement income (c)
|
(3,585
|
)
|
|
(12,565
|
)
|
|
(5,461
|
)
|
|
(4,730
|
)
|
|
Certain legal matters (d)
|
3,481
|
|
|
4,042
|
|
|
11,714
|
|
|
4,042
|
|
|
Executive and management severance costs (e)
|
—
|
|
|
—
|
|
|
917
|
|
|
—
|
|
|
Stock-based compensation and related payroll taxes
|
1,054
|
|
|
12,673
|
|
|
15,090
|
|
|
23,251
|
|
|
Gain on sale of assets (f)
|
(36
|
)
|
|
—
|
|
|
(553
|
)
|
|
—
|
|
|
Management fees (g)
|
—
|
|
|
—
|
|
|
—
|
|
|
537
|
|
|
Adjusted EBITDA (including noncontrolling interests)
|
46,838
|
|
|
56,154
|
|
|
128,306
|
|
|
156,292
|
|
|
Less: Net income attributable to noncontrolling interests
|
(18,689
|
)
|
|
(23,622
|
)
|
|
(51,339
|
)
|
|
(64,911
|
)
|
|
Adjusted EBITDA –NCI
|
$
|
28,149
|
|
|
$
|
32,532
|
|
|
$
|
76,967
|
|
|
$
|
91,381
|
|
_____________________________
|
|
|
|
(a)
|
Represents costs related to debt refinancing and other transactions at the time of the IPO and the 2017 refinancing described below. See “
Note 2 - Initial Public Offering
” and “
Note 10 - Debt
” of the notes to the consolidated financial statements.
|
|
|
|
|
(b)
|
Represents costs related to debt refinancing. See “
Note 2 - Initial Public Offering
” and “
Note 10 - Debt
” of the notes to the consolidated financial statements.
|
|
|
|
|
(c)
|
Represents income associated with the change in fair value of the TRA liability. See “—Components of Earnings—Interest and Taxes” and “
Note 6 - Fair Value Measurements
” of the notes to the consolidated financial statements.
|
|
|
|
|
(d)
|
Represents costs related to the specific legal and regulatory matters described in “Part II. Item 1. Legal Proceedings” and “
Note 16 - Certain Legal Matters
” of the notes to the consolidated financial statements.
|
|
|
|
|
(e)
|
Represents executive and management severance costs.
|
|
|
|
|
(f)
|
Represents sale of clinic assets.
|
|
|
|
|
(g)
|
Represents management fees paid to Centerbridge prior to the termination of our Advisory Services Agreement in connection with our IPO. See “
Note 14 - Related Party Transactions
” of the notes to the consolidated financial statements.
|
Components of Earnings
Net Patient Service Operating Revenues
Patient service operating revenues.
The major component of our revenues, which we refer to as patient service operating revenues, is derived from dialysis services. Our patient service operating revenues primarily consist of reimbursement from government-based programs and other (Medicare, Medicaid, state workers’ compensation programs and hospitals) and commercial insurance payors and other (including the VA) for dialysis treatments and related services at our clinics. Patient service operating revenues are recognized as services are provided to patients. We maintain a usual and customary fee schedule for dialysis treatment and other patient services; however, actual collectible revenues are normally at a discount to the fee schedule. Medicare and Medicaid programs are billed at predetermined net realizable rates per treatment that are established by statute or regulation. Revenue for contracted payors is recorded at contracted rates and other payors are billed at usual and customary rates, and a contractual allowance is recorded to reflect the expected net realizable revenue for services provided.
Provision for uncollectible accounts.
Patient service operating revenues are reduced by the provision for uncollectible revenues to arrive at net patient service operating revenues. Provision for uncollectible accounts represents reserves established for amounts for which patients are primarily responsible that we believe will not be collectible.
Contractual allowances, along with provisions for uncollectible amounts, are estimated based upon contractual terms, regulatory compliance and historical collection experience. Net revenue recognition and allowances for uncollectible billings require the use of estimates of the amounts that will actually be realized. Changes in estimates are reflected in the then-current financial statements based on ongoing actual experience trends, or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies.
Operating Expenses
Patient care costs.
Patient care costs are those costs directly associated with operating and supporting our dialysis clinics. Patient care costs consist principally of salaries, wages and benefits, pharmaceuticals, medical supplies, facility costs and laboratory testing. Salaries, wages and benefits consist of compensation and benefits to staff at our clinics, including stock-based compensation expense. Salaries, wages and benefits also include certain labor costs associated with de novo clinic openings. Facility costs consist of rent and utilities and also include rent in connection with de novo clinic openings. Patient care costs also include medical director fees and insurance costs.
General and administrative expenses.
General and administrative expenses generally consist of compensation and benefits to personnel at our corporate office for clinic and corporate administration, including accounting, billing and cash collection functions, as well as regulatory compliance and legal oversight; charitable contributions; and professional fees. General and administrative expenses also include stock-based compensation expense in connection with stock awards to our corporate officers and employees.
Transaction-related costs.
Transaction-related costs represent costs associated with our debt refinancings and IPO related transactions. These costs include legal, accounting, valuation and other professional or consulting fees.
Depreciation and amortization.
Depreciation and amortization expense is primarily attributable to our clinics’ equipment and leasehold improvements and amortizing intangible assets. We calculate depreciation and amortization expense using a straight-line method over the assets’ estimated useful lives.
Certain legal matters.
Certain legal matters cost includes professional fees and other expenses associated with our handling of, and response to, the UnitedHealth Group litigation, the now-concluded SEC inquiry, the CMS request for information, the securities litigation, the subpoena from the United States Attorney's Office, District of Massachusetts, and our internal review and analysis of factual and legal issues relating to the aforementioned matters. See "Part II. Item 1. Legal Proceedings.”
Operating Income
Operating income is equal to our net patient service operating revenues minus our operating expenses. Our operating income is impacted by the factors described above and reflects the effects of losses relating to our start up clinics.
Interest and Taxes
Interest expense, net.
Interest expense represents charges for interest associated with our corporate level debt and credit facilities entered into by our dialysis clinics.
Income tax receivable agreement income/expense.
Income tax receivable agreement income/expense is the income/expense associated with the change in the fair value of the TRA from the prior quarter end.
Income tax expense (benefit).
Income tax expense relates to our share of pre-tax income from our wholly owned subsidiaries and joint ventures as these entities are pass-through entities for tax purposes. We are not taxed on the share of pre-tax income attributable to noncontrolling interests, and net income attributable to noncontrolling interests in our financial statements has not been presented net of income taxes attributable to these noncontrolling interests.
Net Income Attributable to Noncontrolling Interests
Noncontrolling interests represent the equity interests in our consolidated entities that we do not wholly own, which is primarily the equity interests of our nephrologist partners in our JV clinics. Our financial statements reflect 100% of the revenues and expenses for our joint ventures (after elimination of intercompany transactions and accounts) and 100% of the assets and liabilities of these joint ventures (after elimination of intercompany assets and liabilities), although we do not own 100% of the equity interests in these consolidated entities. Our net income attributable to noncontrolling interests may fluctuate in future periods depending on the purchases or sales by us of noncontrolling interests in our clinics from our nephrologist partners, including pursuant to put obligations as described below under “– Contractual Obligations and Commitments – Put Obligations”. The net income attributable to owners of our consolidated entities, other than us, is classified within the line item
Net income attributable to noncontrolling interests
. See also “Management's Discussion and Analysis of Financial Conditions and Results of Operations—Critical Accounting Policies and Estimates—Noncontrolling Interests” in the Company's annual report on Form 10-K and “
Note 9 - Noncontrolling Interests Subject to Put Provisions
” of the notes to the consolidated financial statements.
Results of Operations
Three Months Ended September 30, 2017
Compared With
Three Months Ended September 30, 2016
The following table summarizes our results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
2017
|
|
2016
|
|
Amount
|
|
Change
|
|
Patient service operating revenues
|
$
|
189,497
|
|
|
$
|
194,857
|
|
|
$
|
(5,360
|
)
|
|
(2.8
|
)%
|
|
Provision for uncollectible accounts
|
(1,786
|
)
|
|
(1,902
|
)
|
|
116
|
|
|
(6.1
|
)%
|
|
Net patient service operating revenues
|
187,711
|
|
|
192,955
|
|
|
(5,244
|
)
|
|
(2.7
|
)%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Patient care costs
|
119,599
|
|
|
116,115
|
|
|
3,484
|
|
|
3.0
|
%
|
|
General and administrative
|
22,292
|
|
|
33,359
|
|
|
(11,067
|
)
|
|
(33.2
|
)%
|
|
Depreciation and amortization
|
9,438
|
|
|
8,687
|
|
|
751
|
|
|
8.6
|
%
|
|
Certain legal matters
|
3,481
|
|
|
4,042
|
|
|
(561
|
)
|
|
(13.9
|
)%
|
|
Total operating expenses
|
154,810
|
|
|
162,203
|
|
|
(7,393
|
)
|
|
(4.6
|
)%
|
|
Operating income
|
32,901
|
|
|
30,752
|
|
|
2,149
|
|
|
7.0
|
%
|
|
Interest expense, net
|
(7,255
|
)
|
|
(7,372
|
)
|
|
117
|
|
|
(1.6
|
)%
|
|
Income tax receivable agreement income
|
3,585
|
|
|
12,565
|
|
|
(8,980
|
)
|
|
(71.5
|
)%
|
|
Income before income taxes
|
29,231
|
|
|
35,945
|
|
|
(6,714
|
)
|
|
(18.7
|
)%
|
|
Income tax expense (benefit)
|
2,559
|
|
|
(101
|
)
|
|
2,660
|
|
|
NM
|
|
|
Net income
|
26,672
|
|
|
36,046
|
|
|
(9,374
|
)
|
|
(26.0
|
)%
|
|
Less: Net income attributable to noncontrolling interests
|
(18,689
|
)
|
|
(23,622
|
)
|
|
4,933
|
|
|
(20.9
|
)%
|
|
Net income attributable to American Renal Associates Holdings, Inc.
|
$
|
7,983
|
|
|
$
|
12,424
|
|
|
$
|
(4,441
|
)
|
|
(35.7
|
)%
|
___________________
NM – Not Meaningful
Net Patient Service Operating Revenues
Patient service operating revenues
. Patient service operating revenues for the three months ended
September 30, 2017
were
$189.5 million
,
a decrease
of
2.8%
from
$194.9 million
for the three months ended
September 30, 2016
. The decrease in patient service operating revenues was primarily due to adverse changes in payor mix partially offset by an increase of approximately
6.8%
in the number of dialysis treatments. The increase in treatments resulted from non-acquired treatment growth from existing clinics and de novo clinics. Patient service operating revenues relating to start-up clinics for the three
months ended
September 30, 2017
were
$0.5 million
compared to
$4.3 million
for the three months ended
September 30, 2016
, a
decrease
of
$3.9 million
due to the timing of opening and certification of de novo clinics, as described under “ – Key Factors Affecting our Results of Operations – Clinic Growth and Start-Up Clinic Costs”. Patient service operating revenues per treatment for the three months ended
September 30, 2017
was
$344
compared with
$378
for the three months ended
September 30, 2016
,
a decrease
of
9.0%
, driven by adverse changes in commercial and other mix, primarily related to a decrease in patients covered by ACA and other individual marketplace plans, and due to the timing of opening and certification of de novo clinics, as described under “ – Key Factors Affecting our Results of Operations – Sources of Revenues by Payor”. As a source of revenue by payor type, government-based and other payors accounted for
63.9%
and
54.7%
, respectively, of our revenues for the three months ended
September 30, 2017
and
2016
.
Provision for uncollectible accounts.
Provision for uncollectible accounts for the three months ended
September 30, 2017
was
$1.8 million
, or
0.9%
of patient service operating revenues, as compared to
$1.9 million
, or
1.0%
of patient service operating revenues, for the same period in 2016. Our accounts receivable, net of the bad debt allowance, represented approximately 39 and 37 days of patient service operating revenues as of
September 30, 2017
and 2016, respectively.
Operating Expenses
Patient care costs.
Patient care costs for the three months ended
September 30, 2017
were
$119.6 million
,
an increase
of
3.0%
from
$116.1 million
for the three months ended
September 30, 2016
. This increase was primarily due to an increase in the number of treatments and an increase in supply expense, offset by improvements in labor productivity. As a percentage of net patient
service operating revenues, patient care costs were approximately
63.7%
for the three months ended
September 30, 2017
compared to
60.2%
(or
59.2%
excluding the Modification Expense) for the three months ended
September 30, 2016
. Patient care costs per treatment for the three months ended
September 30, 2017
were
$217
, compared to
$225
for the three months ended
September 30, 2016
. Patient care costs per treatment excluding the Modification Expense were
$221
for the three months ended September 30, 2016.
General and administrative expenses.
General and administrative expenses for the three months ended
September 30, 2017
were
$22.3 million
,
a decrease
of
33.2%
from
$33.4 million
for the three months ended
September 30, 2016
. The decrease was primarily due to a $10.3 million in Modification Expense incurred in 2016. As a percentage of net patient service operating revenues, general and administrative expenses were approximately
11.9%
for the three months ended
September 30, 2017
compared to
17.3%
(or
12.0%
excluding the Modification Expense) for the three months ended
September 30, 2016
. General and administrative expenses per treatment for the three months ended
September 30, 2017
were
$40
, compared to
$65
for the three months ended
September 30, 2016
. General and administrative expenses per treatment excluding the Modification Expense were
$45
for the three months ended
September 30, 2016
.
Depreciation and amortization.
Depreciation and amortization expense for the three months ended
September 30, 2017
was
$9.4 million
, compared to
$8.7 million
for the three months ended
September 30, 2016
. As a percentage of net patient service operating revenues, depreciation and amortization expense was approximately
5.0%
for the three months ended
September 30, 2017
compared to
4.5%
for the three months ended
September 30, 2016
.
Certain Legal Matters.
Certain legal matter costs for the three months ended
September 30, 2017
was
$3.5 million
, compared to
$4.0 million
for the three months ended September 30, 2016. See “Part II. Item 1. Legal Proceedings.”
Operating Income
Operating income for the three months ended
September 30, 2017
was
$32.9 million
,
an increase
of
$2.1 million
, or
7.0%
, from
$30.8 million
for the three months ended
September 30, 2016
. The increase was primarily due to the factors described above under “Operating Expenses”, but partially offset by the impact of the rebasing reimbursement environment for Medicare, in which Medicare rate updates are not keeping pace with annual increases to our operating costs. For the three months ended
September 30, 2017
and 2016, start-up clinics reduced operating income by
$1.6 million
and
$4.6 million
, respectively,
a decrease
of
$3.0 million
reflecting the timing of opening and certification of de novo clinics each year as described under “– Key Factors Affecting our Results of Operations – Clinic Growth and Start-Up Clinic Costs”. As a percentage of net patient service operating revenues, operating income was
17.5%
for the three months ended
September 30, 2017
compared to
15.9%
for the three months ended
September 30, 2016
, reflecting the factors described above.
Interest and Taxes
Interest expense, net.
Interest expense, net for the three months ended
September 30, 2017
was
$7.3 million
, and for the three months ended
September 30, 2016
was
$7.4 million
,
a decrease
of
1.6%
, primarily due to our debt refinancing in April 2016, offset by an increase in third-party clinic debt, including the Assigned Clinic Loans.
Income tax receivable agreement income.
Income tax receivable agreement income for the three months ended
September 30, 2017
and 2016 was
$3.6 million
and
$12.6 million
, respectively. This income represents the change in the estimated fair value of the TRA liability during each period.
Income tax expense (benefit).
The provision (benefit) for income taxes for the three months ended
September 30, 2017
and
September 30, 2016
represented an effective tax rate of
8.8%
and
(0.3)%
, respectively. The variation from the statutory federal rate of 35% on our share of pre-tax income during the three months ended
September 30, 2017
and
2016
is primarily due to the tax impact of the noncontrolling interest in the clinics as a result of our joint venture model and the change in fair value of the TRA liability, which is not deductible for income tax purposes.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the three months ended
September 30, 2017
was
$18.7 million
, representing
a decrease
of
20.9%
from
$23.6 million
for the three months ended
September 30, 2016
. The decrease was primarily due to reduced profitability in our joint ventures due to the factors described above.
Nine Months Ended September 30, 2017
Compared With
Nine Months Ended September 30, 2016
The following table summarizes our results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
2017
|
|
2016
|
|
Amount
|
|
Change
|
|
Patient service operating revenues
|
$
|
555,731
|
|
|
$
|
555,349
|
|
|
$
|
382
|
|
|
0.1
|
%
|
|
Provision for uncollectible accounts
|
(5,003
|
)
|
|
(4,696
|
)
|
|
(307
|
)
|
|
6.5
|
%
|
|
Net patient service operating revenues
|
550,728
|
|
|
550,653
|
|
|
75
|
|
|
—
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Patient care costs
|
357,959
|
|
|
331,349
|
|
|
26,610
|
|
|
8.0
|
%
|
|
General and administrative
|
79,917
|
|
|
86,800
|
|
|
(6,883
|
)
|
|
(7.9
|
)%
|
|
Transaction-related costs
|
717
|
|
|
2,239
|
|
|
(1,522
|
)
|
|
NM
|
|
|
Depreciation and amortization
|
27,894
|
|
|
24,616
|
|
|
3,278
|
|
|
13.3
|
%
|
|
Certain legal matters
|
11,714
|
|
|
4,042
|
|
|
7,672
|
|
|
NM
|
|
|
Total operating expenses
|
478,201
|
|
|
449,046
|
|
|
29,155
|
|
|
6.5
|
%
|
|
Operating income
|
72,527
|
|
|
101,607
|
|
|
(29,080
|
)
|
|
(28.6
|
)%
|
|
Interest expense, net
|
(22,052
|
)
|
|
(28,571
|
)
|
|
6,519
|
|
|
(22.8
|
)%
|
|
Loss on early extinguishment of debt
|
(526
|
)
|
|
(4,708
|
)
|
|
4,182
|
|
|
NM
|
|
|
Income tax receivable agreement income
|
5,461
|
|
|
4,730
|
|
|
731
|
|
|
15.5
|
%
|
|
Income before income taxes
|
55,410
|
|
|
73,058
|
|
|
(17,648
|
)
|
|
(24.2
|
)%
|
|
Income tax (benefit) expense
|
(555
|
)
|
|
1,413
|
|
|
(1,968
|
)
|
|
NM
|
|
|
Net income
|
55,965
|
|
|
71,645
|
|
|
(15,680
|
)
|
|
(21.9
|
)%
|
|
Less: Net income attributable to noncontrolling interests
|
(51,339
|
)
|
|
(64,911
|
)
|
|
13,572
|
|
|
(20.9
|
)%
|
|
Net income attributable to American Renal Associates Holdings, Inc.
|
$
|
4,626
|
|
|
$
|
6,734
|
|
|
$
|
(2,108
|
)
|
|
(31.3
|
)%
|
___________________
NM – Not Meaningful
Net Patient Service Operating Revenues
Patient service operating revenues
. Patient service operating revenues for the
nine
months ended
September 30, 2017
were
$555.7 million
,
an increase
of
0.1%
from
$555.3 million
for the
nine
months ended
September 30, 2016
. The increase in patient service operating revenues was primarily due to an increase of approximately 8.6% in the number of dialysis treatments, offset by adverse changes in payor mix. The increase in treatments resulted from non-acquired treatment growth of 8.6% from existing clinics and de novo clinics. Patient service operating revenues relating to start-up clinics for the
nine
months ended
September 30, 2017
were
$8.8 million
compared to
$8.3 million
for the
nine
months ended
September 30, 2016
,
an increase
of
$0.4 million
due to the timing of opening and certification of de novo clinics, as described under “ – Key Factors Affecting our Results of Operations – Clinic Growth and Start-Up Clinic Costs”. Patient service operating revenues per treatment for the
nine
months ended
September 30, 2017
was
$342
compared with
$371
for the
nine
months ended
September 30, 2016
,
a decrease
of
7.8%
, driven by adverse changes in commercial and other mix, primarily related to a decrease in patients covered by ACA and other individual marketplace plans, and due to the timing of opening and certification of de novo clinics, as described under “ – Key Factors Affecting our Results of Operations – Sources of Revenues by Payor”. As a source of revenue by payor type, government-based and other payors accounted for
63.4%
and
55.6%
, respectively, of our revenues for the
nine
months ended
September 30, 2017
and
2016
.
Provision for uncollectible accounts.
Provision for uncollectible accounts for the
nine
months ended
September 30, 2017
was
$5.0 million
, or
0.9%
of patient service operating revenues, as compared to
$4.7 million
, or
0.8%
of patient service operating revenues, for the same period in 2016. Our accounts receivable, net of the bad debt allowance, represented approximately 39 and 37 days of patient service operating revenues as of
September 30, 2017
and 2016, respectively.
Operating Expenses
Patient care costs.
Patient care costs for the
nine
months ended
September 30, 2017
were
$358.0 million
,
an increase
of
8.0%
from
$331.3 million
for the
nine
months ended
September 30, 2016
. This increase was primarily due to an increase in the number of treatments. As a percentage of net patient
service operating revenues, patient care costs were approximately
65.0%
(or
64.6%
excluding the Modification Expense) for the
nine
months ended
September 30, 2017
compared to
60.2%
(or
59.6%
excluding the Modification Expense) for the
nine
months ended
September 30, 2016
. Excluding the Modification Expense, the change was primarily attributable to lower revenues per treatment described above and by increases in start-up clinic expenses related to our de novo development program, including expenses incurred due to delays in certifications. Patient care costs per treatment for the
nine
months ended
September 30, 2017
were
$220
, compared to
$221
for the
nine
months ended
September 30, 2016
. Patient care costs per treatment excluding the Modification Expense were
$219
for both the
nine
months ended
September 30, 2017
and 2016.
General and administrative expenses.
General and administrative expenses for the
nine
months ended
September 30, 2017
were
$79.9 million
,
a decrease
of
7.9%
from
$86.8 million
for the
nine
months ended
September 30, 2016
, primarily due to a decrease of $22.2 million of Modification Expense, offset by corporate costs associated with becoming a public company and increased legal costs in addition to the legal costs relating to Certain Legal Matters described below. As a percentage of net patient service operating revenues, general and administrative expenses were approximately
14.5%
(or
12.8%
excluding the Modification Expense) for the
nine
months ended
September 30, 2017
compared to
15.8%
(or
12.4%
excluding the Modification Expense) for the
nine
months ended
September 30, 2016
. General and administrative expenses per treatment for the
nine
months ended
September 30, 2017
were
$49
, compared to
$58
for the
nine
months ended
September 30, 2016
. General and administrative expenses per treatment excluding the Modification Expense were
$43
and
$46
for the
nine
months ended
September 30, 2017
and 2016, respectively.
Transaction-related costs.
Transaction-related costs for the
nine
months ended
September 30, 2017
were
$0.7 million
associated with our 2017 debt refinancing described below. Transaction-related costs for the
nine
months ended
September 30, 2016
were
$2.2 million
associated with debt refinancing and other transactions associated with our IPO.
Depreciation and amortization.
Depreciation and amortization expense for the
nine
months ended
September 30, 2017
was
$27.9 million
, compared to
$24.6 million
for the
nine
months ended
September 30, 2016
. As a percentage of net patient service operating revenues, depreciation and amortization expense was approximately
5.1%
for the
nine
months ended
September 30, 2017
compared to
4.5%
for the
nine
months ended
September 30, 2016
.
Certain Legal Matters.
Certain legal matter costs for the
nine
months ended
September 30, 2017
was
$11.7 million
, compared to
$4.0 million
for the
nine
months ended
September 30, 2016
. See “Part II. Item 1. Legal Proceedings.”
Operating Income
Operating income for the
nine
months ended
September 30, 2017
was
$72.5 million
,
a decrease
of
$29.1 million
, or
28.6%
, from
$101.6 million
for the
nine
months ended
September 30, 2016
. The decrease was primarily due to the factors described above under “Operating Expenses”, and includes the impact of the rebasing reimbursement environment for Medicare, in which Medicare rate updates are not keeping pace with annual increases to our operating costs. In addition, for the
nine
months ended
September 30, 2017
and 2016, start-up clinics reduced operating income by
$7.2 million
and
$10.4 million
, respectively,
a decrease
of
$3.2 million
reflecting the timing of opening and certification of de novo clinics each year as described under “– Key Factors Affecting our Results of Operations – Clinic Growth and Start-Up Clinic Costs”. As a percentage of net patient service operating revenues, operating income was
13.2%
for the
nine
months ended
September 30, 2017
compared to
18.5%
for the
nine
months ended
September 30, 2016
, reflecting the factors described above. Excluding the impact of the Modification Expense, as a percentage of net patient service operating revenues, operating income was
15.3%
and
22.4%
for the
nine
months ended
September 30, 2017
and 2016, respectively.
Interest and Taxes
Interest expense, net.
Interest expense, net for the
nine
months ended
September 30, 2017
was
$22.1 million
, and for the
nine
months ended
September 30, 2016
was
$28.6 million
,
a decrease
of
22.8%
primarily due to our debt refinancing in April 2016, offset by an increase in third-party clinic debt, including the Assigned Clinic Loans.
Loss on early extinguishment of debt.
Loss on early extinguishment of debt for the
nine
months ended
September 30, 2017
was
$0.5 million
as a result of our debt refinancing in June 2017. Loss on early extinguishment of debt for the
nine
months ended
September 30, 2016
was
$4.7 million
as a result of our debt refinancing in April 2016. The losses were comprised of write-offs of unamortized debt issuance costs.
Income tax receivable agreement income.
Income tax receivable agreement income for the
nine
months ended
September 30, 2017
was
$5.5 million
, compared to
$4.7 million
for the
nine
months ended
September 30, 2016
. This income represents the change in the estimated fair value of the TRA liability during the period.
Income tax expense (benefit)
The provision (benefit) for income taxes for the
nine
months ended
September 30, 2017
and
September 30, 2016
represented an effective tax rate of
(1.0)%
and
1.9%
, respectively. The variation from the statutory federal rate of 35% on our share of pre-tax income during the
nine
months ended
September 30, 2017
and 2016 is primarily due to the tax impact of the noncontrolling interest in the clinics as a result of our joint venture model and the change in fair value of the TRA liability, which is not deductible for income tax purposes.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the
nine
months ended
September 30, 2017
was
$51.3 million
, representing
a decrease
of
20.9%
from
$64.9 million
for the
nine
months ended
September 30, 2016
. The decrease was primarily due to reduced profitability in our joint ventures due to the factors described above.
Liquidity and Capital Resources
Our primary sources of liquidity are funds generated from our operations, short-term borrowings under our revolving credit facilities and borrowings of long-term debt. Our principal needs for liquidity are to pay our operating expenses, to fund the development and acquisition of new clinics, to fund capital expenditures, to service our debt and to fund purchases of put rights held by our physician partners. In addition, a significant portion of our cash flows is used to make distributions to the noncontrolling equity interests held by our nephrologist partners in our joint venture clinics. Except as otherwise indicated, the following discussion of our liquidity and capital resources presents information on a consolidated basis, without adjusting for the effect of noncontrolling interests.
We believe our cash flows from operations, combined with availability under our revolving credit facility, provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for a period that includes the next 12 months. If existing cash and cash generated from operations and borrowings under our revolving credit facility are insufficient to satisfy our liquidity requirements, we may seek to obtain additional debt or equity financing. If additional funds are raised through the issuance of debt, this debt could contain covenants that would restrict our operations. Any financing may not be available in amounts or on terms acceptable to us. If we are unable to obtain required financing, we may be required to reduce the scope of our planned growth efforts, which could harm our financial condition and operating results.
If we decide to pursue one or more acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions.
As discussed in “Part II. Item 1. Legal Proceedings”, the Company is involved in various legal proceedings. We cannot yet assess our potential liability, if any. Any adverse outcome would have a material adverse effect on our business, financial condition and results of operations. Regardless of the outcome, we will continue to incur significant expenses in connection with these proceedings. We have incurred approximately
$11.7 million
and
$4.0 million
in legal costs during the
nine
months ended
September 30, 2017
and 2016, respectively, in connection with these matters. The potential costs that we may incur in the future will likely continue to vary from quarter to quarter, depending on the timing of proceedings. There can be no assurance that costs to defend these proceedings will not continue to be material.
Cash Flows
The following table shows a summary of our cash flows for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
(dollars in thousands)
|
2017
|
|
2016
|
|
Net cash provided by operating activities
|
$
|
97,372
|
|
|
$
|
141,903
|
|
|
Net cash used in investing activities
|
(23,705
|
)
|
|
(51,126
|
)
|
|
Net cash used in financing activities
|
(106,890
|
)
|
|
(76,616
|
)
|
|
Net (decrease) increase in cash and restricted cash
|
$
|
(33,223
|
)
|
|
$
|
14,161
|
|
Cash Flows from Operations
Net cash provided by operating activities for the
nine
months ended
September 30, 2017
was
$97.4 million
compared to
$141.9 million
for the same period in 2016,
a decrease
of
$44.5 million
, or
31.4%
, primarily attributable to decreases in stock compensation expense, the effect of changes in accrued expenses and other current liabilities and a decrease in net income.
Cash Flows from Investing Activities
Net cash used in investing activities for the
nine
months ended
September 30, 2017
was
$23.7 million
compared to
$51.1 million
for the same period in 2016,
a decrease
of
$27.4 million
, or
53.6%
, due to fluctuations in the timing and number of our de novo clinic openings, as well as the timing of acquisitions.
Cash Flows from Financing Activities
Net cash used in financing activities for the
nine
months ended
September 30, 2017
was
$106.9 million
compared to
$76.6 million
for the same period in 2016,
an increase
of
$30.3 million
. Our distributions to our partners were
$60.5 million
for the
nine
months ended
September 30, 2017
compared to
$67.0 million
for the same period in 2016. Additionally, our purchases of noncontrolling interests in existing clinics were
$27.9 million
for the
nine
months ended
September 30, 2017
compared to
$8.4 million
for the same period in 2016. Our purchases of noncontrolling interests in existing clinics for the
nine
months ended
September 30, 2017
included $22.9 million related to put obligations.
Capital Expenditures
For the
nine
months ended
September 30, 2017
and 2016, we made capital expenditures of
$24.8 million
and
$46.7 million
, respectively, of which
$19.3 million
and
$38.2 million
, respectively, were development capital expenditures, primarily incurred in connection with de novo clinic development, and
$5.4 million
and
$8.5 million
, respectively, were maintenance capital expenditures, primarily consisting of capital improvements at our existing clinics, including renovations and equipment replacement. During the calendar year 2017, we expect to spend approximately 4% to 6% of total net revenues for development capital expenditures and 1% to 2% of total net revenues on maintenance capital expenditures.
Debt Facilities
As of
September 30, 2017
, we had outstanding
$568.9 million
in aggregate principal amount of indebtedness, with an additional $100.0 million of borrowing capacity available under our 2017 Revolving Credit Facility (as defined below) (and no outstanding letters of credit). Our outstanding indebtedness included
$438.9 million
of term B loans under our 2017 Credit Agreement (as defined below) as of
September 30, 2017
. Our outstanding indebtedness included
$2.7 million
of other corporate debt as of
September 30, 2017
. Our outstanding indebtedness also included our third-party clinic-level debt, which includes term loans and lines of credit (other than assigned clinic loans) totaling
$114.6 million
as of
September 30, 2017
with maturities ranging from November 2017 to August 2024 and interest rates ranging from 3.31% to 6.74%. In addition, our clinic level debt includes our assigned clinic loans held by Term Loan Holdings of
$12.6 million
as of
September 30, 2017
with maturities ranging from
October 2017
to
July 2020
and interest rates ranging from
3.46%
to
8.08%
. See “
Note 10 - Debt
” in the notes to our unaudited consolidated financial statements.
On June 22, 2017, American Renal Holdings Inc. (“ARH”), an indirect wholly-owned subsidiary of the Company, and American Renal Holdings Intermediate Company, LLC (“ARHIC”) entered into a new credit agreement (the “2017 Credit Agreement”), to refinance the credit facilities under ARH’s then existing prior first lien credit agreement. The 2017 Credit Agreement provides for (i) a $100 million senior secured revolving credit facility (the “2017 Revolving Credit Facility”) and (ii) a $440 million senior secured term B loan facility (the “2017 Term B Loan Facility” and, together with the 2017 Revolving Credit Facility, the “2017 Facilities”). In addition, the 2017 Credit Agreement includes a feature under which maximum borrowings under the 2017 Facilities may be increased by an amount in the aggregate equal to the sum of (i) the greater of $125 million and (ii) 100% of Consolidated EBITDA (as defined in the 2017 Credit Agreement) plus an amount such that certain leverage ratios will not be exceeded after giving pro forma effect to the increase.
On June 22, 2017, ARH borrowed the full amount of the 2017 Term B Loan Facility and used such borrowings to repay outstanding balances under the then existing prior first lien credit agreement and the payment of customary fees and expenses incurred in connection with the foregoing (the “2017 Refinancing”).
The 2017 Revolving Credit Facility is scheduled to mature in June 2022 and the 2017 Term B Loan Facility is scheduled to mature in June 2024. The principal amount of the term B loans under the 2017 Term B Loan Facility will amortize in equal quarterly installments in an aggregate annual amount of 1.00% of the original principal amount of such term B loans. The maturity dates under the 2017 Revolving Credit Facility and the 2017 Term Loan Facility are subject to extension with lender consent according to the terms of the 2017 Credit Agreement. The 2017 Credit Agreement provides that certain voluntary prepayments of the 2017 Term Loan Facility prior to the six month anniversary of the closing date of the 2017 Credit Agreement will be subject to a 1.00% soft-call prepayment premium. The 2017 Credit Agreement includes provisions requiring ARH to offer to prepay term B loans in an amount equal to (i) the net cash proceeds above certain thresholds received from (a) asset sales and (b) casualty events resulting in the receipt of insurance proceeds, subject to customary provisions for the reinvestment of such proceeds, (ii) the net cash proceeds from the incurrence of debt not otherwise permitted under the 2017 Credit Agreement, and (iii) a percentage of consolidated excess cash flow retained in the business from the preceding fiscal year minus voluntary prepayments.
The interest rate on the term B loans under the 2017 Term B Loan Facility will have an applicable margin that is 0.25% less, and an interest rate floor that is 1.25% less, than the term B loans under the prior first lien credit agreement. The term B loans under the 2017 Term B Loan Facility will bear interest at a rate equal to, at ARH’s option, either (a) an alternate base rate equal to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.5% and (3) the Eurodollar rate applicable for a one-month interest period plus 1.0%, plus an applicable margin of 2.25%, (collectively, the “ABR Rate”) or (b) LIBOR, adjusted for changes in Eurodollar reserves, plus a margin of 3.25% subject to a floor of 0.00%.
Any outstanding loans under the 2017 Revolving Credit Facility will bear interest at a rate equal to at ARH’s option, the ABR Rate or LIBOR, plus, in each case, an applicable margin priced off a grid based upon the consolidated total net leverage ratio of ARH and its restricted subsidiaries and will initially be LIBOR plus 2.50%. The commitment fee applicable to undrawn revolving commitments under the 2017 Revolving Credit Facility will be priced off a grid based upon the consolidated total net leverage ratio of ARH and its restricted subsidiaries and will initially be 0.50%.
The 2017 Credit Agreement contains customary events of default, the occurrence of which would permit the lenders to accelerate payment of the full amounts outstanding. Additionally, the 2017 Credit Agreement contains customary representations and warranties, affirmative covenants and negative covenants, including restrictive financial and operating covenants.
Similar to the prior first lien credit agreement, the obligations of ARH under the 2017 Credit Agreement are guaranteed by ARHIC and all of its existing and future wholly owned domestic subsidiaries (collectively, the “Guarantors”) and secured by a pledge of all of ARH’s capital stock and substantially all of the assets of ARH and the Guarantors, including their respective interests in their joint ventures.
On April 26, 2016, the Company entered into the first amendment to the then existing prior first lien credit agreement. The Amendment increased the borrowing capacity under the then existing prior first lien revolving credit facility by $50.0 million to an aggregate amount of $100.0 million, increased the interest rate margin by 0.25% on the first lien term loans, and provided for additional borrowings of $60.0 million of incremental first lien term loans. The Company also applied $165.6 million of the net proceeds from the IPO, proceeds from the additional first lien term loans, and cash on hand to repay the outstanding balance on the second lien term loans.
Initial Public Offering
On April 26, 2016, the Company completed its initial public offering of 8,625,000 shares of Common Stock for cash consideration of $22.00 per share ($20.515 per share net of underwriting discounts). Net proceeds of $176.9 million from the initial public offering, together with borrowings under our first lien credit facility and cash on hand, were used in the April 2016 Refinancing described above to repay in full all outstanding amounts under our second lien credit facility.
Contractual Obligations and Commitments
The following is a summary of contractual obligations and commitments as of
September 30, 2017
(excluding put obligations relating to our joint ventures, dividend equivalent payments due to our pre-IPO option holders and obligations under our income tax receivable agreement, which are described separately below):
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Scheduled payments under contractual obligations (dollars in thousands)
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Total
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Less than 1
year
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1-3 years
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3-5 years
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More than 5
years
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Third-party clinic-level debt
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$
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127,262
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$
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13,945
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$
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65,400
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$
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35,648
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$
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12,269
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Term B loans(1)
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438,900
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1,100
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8,800
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|
8,800
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420,200
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Other corporate debt
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2,737
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|
137
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|
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1,143
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|
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1,240
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|
|
217
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Operating leases(2)
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183,331
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5,132
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53,542
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44,874
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79,783
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Interest payments(3)
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144,639
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6,502
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47,573
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42,199
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48,365
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Total
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$
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896,869
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$
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26,816
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$
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176,458
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$
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132,761
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$
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560,834
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_____________________________
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(1)
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Bear interest at a variable rate, with principal payments of $1.1 million and interest payments due quarterly.
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(2)
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Net of estimated sublease proceeds of approximately $1.2 million per year from 2017 through 2022 and approximately $0.1 million or less thereafter.
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(3)
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Represents interest payments on debt obligations, including the 2017 Term B Loan Facility described above. To project interest payments on floating rate debt, we have used the rate as of
September 30, 2017
.
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Put Obligations
We also have potential obligations with respect to some of our non-wholly owned subsidiaries in the form of put provisions, which are exercisable at our nephrologist partners’ future discretion at certain time periods (“time-based puts”) or upon the occurrence of certain events (“event-based puts”) as set forth in each specific put provision, which may include the sale of all or substantially all of our assets, closure of the clinic, change of control, departure of key executives and other events which could accelerate time-based vesting. The time when some of the time-based put rights were exercised was accelerated upon our IPO and may be accelerated upon the occurrence of certain events, such as a sale of all or substantially all of our assets, closure of the clinic, a change of control, or the departure of key executives and other events. If the put obligations are exercised by a physician partner, we are required to purchase, at fair market value calculated as set forth in the applicable joint venture agreements, a previously agreed upon percentage of such physician partner’s ownership interest. See “
Note 9 - Noncontrolling Interests Subject to Put Provisions
” in the notes to our unaudited consolidated financial statements for discussion of these put provisions. The table below summarizes our potential obligations as of
September 30, 2017
.
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Noncontrolling interest subject to put provisions
(dollars in thousands)
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September 30, 2017
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Time-based puts
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$
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80,195
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Event-based puts
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30,793
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Total Obligation
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$
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110,988
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As of
September 30, 2017
, $27.2 million of time-based put obligations were exercisable by our nephrologist partners, including those accelerated as a result of physician IPO put rights. The following is a summary of the estimated potential cash payments in each of the specified years under all time-based puts existing as of
September 30, 2017
and reflects the payments that would be made, assuming (a) all vested puts as
of
September 30, 2017
were exercised on October 1, 2017 and paid according to the applicable agreement and (b) all puts exercisable thereafter were exercised as soon as they vest and are paid accordingly.
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(dollars in thousands)
Year
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Amount
Exercisable
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2017
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26,319
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2018
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6,679
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2019
|
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8,722
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2020
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13,934
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2021
|
|
12,123
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Thereafter
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12,418
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Total
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$
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80,195
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The estimated fair values of the interests subject to these put provisions can also fluctuate, and the implicit multiple of earnings at which these obligations may be settled will vary depending upon clinic performance, market conditions and access to the credit and capital markets. In addition, our estimates are being subjected to challenges by our partners which could cause an increase to the amount we owe. As of
September 30, 2017
, we had recorded liabilities of approximately
$80.2 million
for all existing time-based obligations, of which we have estimated approximately $12.2 million were accelerated as a result of physicians with IPO put rights having elected to potentially exercise the puts. The physician partners have the right to decide how much of their put rights, if any, they will exercise. In addition, as of
September 30, 2017
, we had
$30.8 million
of event-based put obligations, which could be accelerated with the occurrence of an event.
Dividend Equivalent Payments
On April 26, 2016, the Company declared and paid a cash dividend to our pre-IPO stockholders equal to $1.30 per share, or $28.9 million in the aggregate. In connection with the dividend, all employees with outstanding options had their option exercise price reduced and in some cases were awarded a future dividend equivalent payment, which were paid on vested options and becomes due upon vesting for unvested options. Additionally, in connection with the cash dividend, the Company has made payments to date equal to $1.30 per share, or
$5.0 million
in the aggregate, to option holders, and, in the case of some performance and market options, as of
September 30, 2017
a future payment will be due upon vesting totaling
$1.9 million
.
In connection with the Term Loan Holdings Distribution, as described in
“
Note 2 - Initial Public Offering
” in our consolidated financial statements
, the Company also equitably adjusted the outstanding stock options by reducing exercise prices and making cash dividend equivalent payments of
$2.5 million
, all of which were paid to vested option holders as of
September 30, 2017
.
In March 2013, the Company declared and paid a dividend to holders of the Company’s common stock equal to $7.90 per share. In connection with the dividend, all employees with outstanding 2010 Plan options had their option exercise price reduced and in some cases were awarded a future dividend equivalent payment, of which becomes due upon vesting, of
$2.6 million
, all of which were paid to vested option holders as of
September 30, 2017
.
Income Tax Receivable Agreement
On April 26, 2016, upon the completion of the IPO, we entered into the TRA, which provides for the payment by us to our pre-IPO stockholders on a pro rata basis of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of any deductions (including net operating losses resulting from such deductions) attributable to the exercise of (or any payment, including any dividend equivalent right or payment, in respect of) any compensatory stock option issued by us that was outstanding (whether vested or unvested) as of the day before the date of our IPO prospectus (such stock options, “Relevant Stock Options” and such deductions, “Option Deductions”). We plan to fund the payments under the TRA with cash flows from operations and, to the extent necessary, the proceeds of borrowings under our credit facilities. The amounts and timing of our obligations under the TRA are subject to a number of factors, including the amount and timing of the taxable income we generate in the future, whether and when any Relevant Stock Options are exercised and the value of our common stock at the time of such exercise, and to uncertainty relating to the future events that could impact such obligations. Estimating the amount of payments that may be made under the TRA is by its nature imprecise given such uncertainty. However, we expect that during the term of the TRA the payments that we make will be material. Such payments will reduce the liquidity that would otherwise have been available to us.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors.
Recent Accounting Pronouncements
See “
Note 1 - Basis of Presentation and Organization
” to the consolidated financial statements.
Critical Accounting Policies and Estimates
For a description of the Company’s critical accounting policies and use of estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Critical Accounting Policies and Estimates” in the Company's Form 10-K for the year ended December 31, 2016. There have been no material changes to our critical accounting policies and use of estimates from those described in the Form 10-K.