Net patient service operating revenues increased 14% to $199.1 million;

Net income (loss) attributable to American Renal Associates Holdings, Inc. was $(7.1) million or $(0.02) per share as compared to $6.8 million or $0.30 per share in Q4 2015;

Adjusted EBITDA less noncontrolling interests (“Adjusted EBITDA-NCI”) increased 3.4% to $32.2 million;

Adjusted net income attributable to American Renal Associates Holdings, Inc. was $8.7 million or $0.26 per share for the fourth quarter of 2016;

Total dialysis treatments increased 11.4%, of which 10.3% was non-acquired growth (“NAG”); and

As of December 31, 2016, the Company operated 214 outpatient dialysis centers serving approximately 14,500 patients. 

(Unaudited)

Three Months Ended December 31,

Increase (Decrease)

(in thousands, except per share amounts)

Net income

$

 16,560

$

 27,720

$

 ( 11,160 )

(40.3)

%

Net income attributable to noncontrolling interests

 (23,679)

 (20,878)

 2,801

13.4

%

Net income (loss) attributable to ARA

 (7,119)

 6,842

 (13,961)

NM

Non-GAAP financial measures**:

Adjusted EBITDA

$

 55,880

$

 52,012

$

 3,868

7.4

%

Adjusted EBITDA less noncontrolling interests

$

 32,201

$

 31,134

$

 1,067

3.4

%

(Unaudited)

Year Ended December 31,

Increase (Decrease)

(in thousands, except per share amounts)

Net income

$

 88,205

$

 93,077

$

 ( 4,872 )

(5.2)

%

Net income attributable to noncontrolling interests

 (88,590)

 (74,232)

 14,358

19.3

%

Net income (loss) attributable to ARA

 (385)

 18,845

 (19,230)

NM

Non-GAAP financial measures**:

Adjusted EBITDA

$

 212,172

$

 188,055

$

 24,117

12.8

%

Adjusted EBITDA less noncontrolling interests

$

 123,582

$

 113,823

$

 9,759

8.6

%

*

NM – Not Meaningful

**

See reconciliation of Non-GAAP Financial Measures.

decline in the number of patients with commercial insurance, including as a result of changes to the healthcare exchanges or changes in regulations or enforcement of regulations regarding the healthcare exchanges and challenges from commercial payors or any regulatory changes leading to changes in the ability of patients with commercial insurance coverage to receive charitable premium support;

decline in commercial payor reimbursement rates;

the ultimate resolution of the Centers for Medicare and Medicaid Services’ (“CMS”) Interim Final Rule published December 14, 2016 related to dialysis facilities Conditions for Coverage (CMS 3337-IFC);

reduction of government-based payor reimbursement rates or insufficient rate increases or adjustments that do not cover all of our operating costs;

our ability to successfully develop de novo clinics, acquire existing clinics and attract new physician partners;

our ability to compete effectively in the dialysis services industry;

the performance of our joint venture subsidiaries and their ability to make distributions to us;

changes to the Medicare ESRD program that could affect reimbursement rates and evaluation criteria, as well as changes in Medicaid or other non-Medicare government programs or payment rates, including the ESRD PPS final rule for 2017 issued on October 28, 2016;

federal or state healthcare laws that could adversely affect us;

our ability to comply with all of the complex federal, state and local government regulations that apply to our business, including those in connection with federal and state anti-kickback laws and state laws prohibiting the corporate practice of medicine or fee-splitting;

heightened federal and state investigations and enforcement efforts;

the impact of the litigation by affiliates of United Health Group, Inc., the Securities and Exchange Commission inquiry, the Department of Justice inquiry, securities litigation and related matters;

changes in the availability and cost of ESAs and other pharmaceuticals used in our business;

development of new technologies that could decrease the need for dialysis services or decrease our in-center patient population;

our ability to correctly estimate the amount of revenues that we recognize in a reporting period;

our ability to timely and accurately bill for our services and meet payor billing requirements;

claims and losses relating to malpractice, professional liability and other matters; the sufficiency of our insurance coverage for those claims and rising insurances costs; and any negative publicity or reputational damage arising from such matters;

loss of any members of our senior management;

damage to our reputation or our brand and our ability to maintain brand recognition;

our ability to maintain relationships with our medical directors and renew our medical director agreements;

shortages of qualified skilled clinical personnel, or higher than normal turnover rates;

competition and consolidation in the dialysis services industry;

deteriorations in economic conditions, particularly in states where we operate a large number of clinics, or disruptions in the financial markets;

the participation of our physician partners in material strategic and operating decisions and our ability to favorably resolve any disputes;

our ability to honor obligations under the joint venture operating agreements with our physician partners were they to exercise certain put rights and other rights;

unauthorized disclosure of personally identifiable, protected health or other sensitive or confidential information;

our ability to meet our obligations and comply with restrictions under our substantial level of indebtedness; and

the ability of our principal stockholder, whose interests may conflict with yours, to strongly influence or effectively control our corporate decisions.

Three Months Ended December 31,

Year Ended December 31,

2016

2015

2016

2015

Patient service operating revenues

$

 200,980

$

 175,386

$

 756,329

$

 657,505

Provision for uncollectible accounts

 (1,866)

 (1,175)

 (6,562)

 (4,524)

Net patient service operating revenues

 199,114

 174,211

 749,767

 652,981

Operating expenses:

Patient care costs

 121,100

 102,606

 452,449

 390,949

General and administrative

 40,831

 20,587

 127,631

 77,250

Transaction-related costs

 —

 (19)

 2,239

 2,086

Depreciation and amortization

 9,246

 9,004

 33,862

 31,846

Certain legal matters

 2,737

 —

 6,779

 —

Total operating expenses

 173,914

 132,178

 622,960

 502,131

Operating income

 25,200

 42,033

 126,807

 150,850

Interest expense, net

 (7,362)

 (10,761)

 (35,933)

 (45,400)

Loss on early extinguishment of debt

 —

—

 (4,708)

 —

Income tax receivable agreement income (expense)

(3,444)

—

 1,286

 —

Income before income taxes

 14,394

 31,272

 87,452

 105,450

Income tax expense (benefit)

 (2,166)

 3,552

 (753)

 12,373

Net income

 16,560

 27,720

 88,205

 93,077

Less: Net income attributable to noncontrolling interests

 (23,679)

 (20,878)

 (88,590)

 (74,232)

Net income (loss) attributable to ARA

$

 (7,119)

$

 6,842

$

 (385)

$

 18,845

Earnings (loss) per share:

Basic

$

 (0.02)

$

 0.31

$

 (0.28)

$

 0.85

Diluted

$

 (0.02)

$

0.30

$

 (0.28)

$

 0.83

Weighted-average number of common shares outstanding

Basic

 30,889,677

 22,209,251

 28,118,673

 22,153,451

Diluted

 30,889,677

 22,790,026

 28,118,673

 22,707,874

Cash dividends declared per share*

$

 —

$

 —

$

1.30

$

 —

*

Paid to shareholders prior to the Company’s initial public offering.

December 31, 2016

December 31, 2015

Assets

Cash

$

 100,916

$

 90,988

Accounts receivable, less allowance for doubtful accounts of $8,726 and $7,435 at December 31, 2016 and 2015, respectively

 81,127

 76,919

Inventories

 4,676

 4,291

Prepaid expenses and other current assets

 18,498

 18,863

Income tax receivable

 5,163

 2,686

Total current assets

 210,380

 193,747

Property and equipment, net

 170,118

 142,701

Intangible assets, net

 25,626

 25,662

Other long-term assets

 6,753

 6,850

Goodwill

 573,147

 569,318

Total assets

$

 986,024

$

 938,278

Liabilities and Equity

Accounts payable

$

 31,127

$

 22,571

Accrued compensation and benefits

 29,103

 22,504

Accrued expenses and other current liabilities

 45,286

 26,788

Current portion of long-term debt

 48,274

 25,610

Total current liabilities

 153,790

 97,473

Long-term debt, less current portion

 522,058

 657,372

Income tax receivable agreement payable

 21,200

 —

Other long-term liabilities

 11,670

 9,483

Deferred tax liabilities

1,278

 15,029

Total liabilities

 709,996

 779,357

Commitments and contingencies

Noncontrolling interests subject to put provisions

 130,365

 108,211

Equity:

Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued

Common stock, $0.01 par value, 300,000,000 and 29,770,000 shares authorized, 30,894,962 and 22,213,967 issued and outstanding at December 31, 2016 and 2015, respectively

 184

 98

Additional paid-in capital

 95,062

 —

Receivable from noncontrolling interests

 (544)

 (529)

Accumulated deficit

 (128,646)

 (128,261)

Accumulated other comprehensive (loss) income, net of tax

 (100)

 (501)

Total American Renal Associates Holdings, Inc. deficit

 (34,044)

 (129,193)

Noncontrolling interests not subject to put provisions

 179,707

 179,903

Total equity

 145,663

 50,710

Total liabilities and equity

$

 986,024

$

 938,278

Three Months Ended 

Year Ended

December 31,

December 31,

Operating activities

2016

2015

2016

2015

Net income

$

 16,560

$

 27,720

$

 88,205

$

 93,077

Adjustments to reconcile net income to cash provided by operating activities:

Depreciation and amortization

 9,246

 9,004

 33,862

 31,846

Amortization of discounts, fees and deferred financing costs

 163

 737

 2,595

 2,888

Noncash loss on early extinguishment of debt

 —

 —

 4,708

 —

Stock-based compensation

 17,047

 391

 40,285

 1,400

Excess tax benefits from stock option exercises

 —

 (4,147)

 —

 (4,147)

Deferred taxes

 (5,510)

 1,904

 (14,018)

 5,003

Income tax receivable agreement income

3,444

 —

 (1,286)

 —

Non-cash charge related to interest rate swap

 (16)

 (746)

 473

 86

Non-cash rent charges

 427

 173

 2,191

 917

Loss on disposal of assets

 857

 —

 857

 —

             Change in operating assets and liabilities, net of acquisitions:

Accounts receivable

 (3,874)

 (270)

 (4,208)

 (5,987)

Inventories

 (208)

 431

 (385)

 538

Prepaid expenses and other current assets

 (6,055)

 (4,585)

 (7,226)

 (843)

Other assets

 (263)

 (1,066)

 (219)

 (966)

Accounts payable

 7,850

 (377)

 8,556

 519

Accrued compensation and benefits

 11

 (4,999)

 6,599

 4,032

Accrued expenses and other liabilities

 (9,371)

 4,906

 11,222

 5,232

Cash provided by operating activities

 30,308

 29,076

 172,211

 133,595

Investing activities

Purchases of property and equipment

 (14,773)

 (8,376)

 (61,432)

 (46,273)

Cash paid for acquisitions

 (40)

 (2,042)

 (4,507)

 (2,642)

Cash used in investing activities

 (14,813)

 (10,418)

 (65,939)

 (48,915)

Financing activities

Proceeds from issuance of common stock sold in initial public offering, net of underwriting discounts and offering expense

 —

 —

 175,254

 —

Proceeds from issuance of long-term debt

 —

 —

 60,000

 —

Cash paid for debt issuance and other financing costs

 —

 —

 (1,350)

 —

Proceeds from term loans, net of deferred financing costs

 15,884

 4,919

 70,590

 44,163

Payments on long-term debt

 (9,203)

 (5,844)

 (275,243)

 (24,891)

Payments on capital lease obligations

 —

 —

 —

 (5)

Dividends and dividend equivalents paid

 (18)

 —

 (30,241)

 —

Proceeds from exercise of stock options

 170

 —

 170

 124

Proceeds from issuance of common stock

 —

 —

 —

 727

Common stock repurchases for tax withholdings of net settlement equity awards

 —

 (102)

 (356)

 (193)

Excess tax benefits from stock option exercises

 —

 4,147

 —

 4,147

Payments of deferred offering costs

 —

 (5,026)

 —

 (5,026)

Distributions to noncontrolling interests

 (27,483)

 (19,477)

 (94,468)

 (79,125)

Contributions from noncontrolling interests

 894

 3,357

 7,470

 7,235

Purchases of noncontrolling interests

 —

 (833)

 (8,397)

 (4,159)

Proceeds from sales of additional noncontrolling interests

 28

 1,341

 227

 1,836

Cash used in financing activities

 (19,728)

 (17,518)

 (96,344)

 (55,167)

Increase (decrease) in cash

 (4,233)

 1,140

 9,928

 29,513

Cash at beginning of year

 105,149

 89,848

 90,988

 61,475

Cash at end of year

$

 100,916

$

 90,988

$

 100,916

$

 90,988

Supplemental Disclosure of Cash Flow Information

Cash paid for income taxes

$

 4,239

$

 1,402

$

 16,095

$

 6,915

Cash paid for interest

 6,778

 10,891

 32,499

 42,339

Supplemental Disclosure of Non-Cash Flow Information

Tax Receivable Agreement

 —

 —

 23,400

 —

Non-Cash Dividend

 —

 —

 26,232

 —

Liability for accrued dividend equivalent payments

2,296

 —

 6,688

 —

Contributions from noncontrolling interests in the form of a receivable

 —

 —

 544

 529

Deferred offering costs

 —

 —

 —

 509

Three Months Ended

Year Ended

December 31,

September 30,

December 31,

December 31,

December 31,

Dialysis Clinic Activity:

2016

2016

2015

2016

2015

Number of clinics (as of end of period)

214

207

192

214

192

Number of de novo clinics opened (during period)

7

5

4

20

16

Number of acquired clinics (during period)

 —

1

1

2

2

Signed clinics (as of end of period)

33

33

32

33

32

Patients and Treatment Volume:

Patients (as of end of period)

 14,590

 14,166

 13,151

 14,590

 13,151

Treatments

 530,346

 516,043

 476,068

 2,027,423

 1,804,910

Number of treatment days

 79

 79

 79

 314

 313

Treatments per day

 6,713

 6,532

 6,026

 6,457

 5,766

Sources of treatment growth (year over year % change):

Non-acquired growth

 10.3

%

 10.2

%

 11.2

%

 11.7

%

 11.7

%

Acquired growth

 1.1

%

 1.2

%

 3.0

%

 0.6

%

 3.7

%

Total treatment growth

 11.4

%

 11.4

%

 14.2

%

 12.3

%

 15.4

%

Revenue:

Patient service operating revenues

$

 200,980

$

 194,857

$

 175,386

$

 756,329

$

 657,505

Patient service operating revenues per treatment

$

 379

$

 378

$

 368

$

 373

$

 364

Net patient service operating revenues

$

 199,114

$

 192,955

$

 174,211

$

 749,767

$

 652,981

Expenses:

Patient care costs (1)

Amount

$

 119,221

$

 114,209

$

 102,606

$

 447,175

$

 390,949

As a % of net patient service operating revenues

 59.9

%

 59.2

%

 58.9

%

 59.6

%

 59.9

%

Per treatment

$

 225

$

 221

$

 216

$

 221

$

 217

General and administrative expenses (2)

Amount

$

 24,235

$

 23,086

$

 20,587

$

 92,499

$

 77,250

As a % of net patient service operating revenues

 12.2

%

 12.0

%

 11.8

%

 12.3

%

 11.8

%

Per treatment

$

 46

$

 45

$

 43

$

 46

$

 43

Provision for uncollectible accounts

Amount

$

 1,866

$

 1,902

$

 1,175

$

 6,562

$

 4,524

As a % of net patient service operating revenues

 0.9

%

 1.0

%

 0.7

%

 0.9

%

 0.7

%

Per treatment

$

 4

$

 4

$

 2

$

 3

$

 3

Accounts receivable DSO (days)

 37

 37

 40

 37

 40

Adjusted EBITDA*

Adjusted EBITDA including noncontrolling interests

$

 55,880

$

 56,154

$

 52,012

$

 212,172

$

 188,055

Adjusted EBITDA - NCI

$

 32,201

$

 32,532

$

 31,134

$

 123,582

$

 113,823

Clinical (quarterly averages):

Dialysis adequacy - % of patients with Kt/V > 1.2

 98

%

 98

%

 98

%

 98

%

 98

%

Vascular access - % catheter in use > 90 days

 10

%

 11

%

 11

%

 11

%

 11

%

*

See reconciliation of Non-GAAP Financial Measures.

    (1)

Excludes $1.9 million of stock-based compensation related to modification of options and other transactions at the time of the Company’s IPO during each of the three months ended December 31, 2016 and September 30, 2016, respectively.  For the year ended December 31, 2016, $5.3 million of similar stock-based compensation is excluded, which includes $0.1 million of stock-based compensation related to the early adoption of ASU 2016-09.

    (2)

Excludes $13.4 million and $10.3 million of stock-based compensation related to modification of options and other transactions at the time of the Company’s IPO during the three months ended December 31, 2016 and September 30, 2016, respectively.  For the year ended December 31, 2016, $32.0 million of similar stock-based compensation is excluded, which includes $0.3 million of stock-based compensation related to the early adoption of ASU 2016-09. The three months and year ended December 31, 2016 also exclude $1.7 million of executive severance costs and $1.5 million of stock compensation primarily related to the departure of our chief operating officer.

Three Months Ended December 31,

Year Ended December 31,

2016

2015

2016

2015

Basic

Net income (loss) attributable to ARA

$

 (7,119)

$

 6,842

$

 (385)

$

 18,845

Change in the difference between the estimated fair values of contractual noncontrolling interest put provisions and estimated fair values for accounting purposes of the related noncontrolling interests

 6,481

—

 (7,404)

—

Net income (loss) attributable to ARA for basic earnings per share calculation

$

 (638)

$

 6,842

$

 (7,789)

$

 18,845

Weighted-average common shares outstanding

 30,889,677

 22,209,251

 28,118,673

 22,153,451

Earnings (loss) per share, basic

$

 (0.02)

$

 0.31

$

 (0.28)

$

 0.85

Diluted

Net income (loss) attributable to ARA

$

 (7,119)

$

 6,842

$

 (385)

$

 18,845

Change in the difference between the estimated fair values of contractual noncontrolling interest put provisions and estimated fair values for accounting purposes of the related noncontrolling interests

 6,481

—

 (7,404)

—

Net income (loss) attributable to ARA for diluted earnings per share calculation

$

 (638)

$

 6,842

$

 (7,789)

$

 18,845

Weighted-average common shares outstanding, basic

 30,889,677

 22,209,251

 28,118,673

 22,153,451

Weighted-average effect of dilutive securities:

Effect of assumed exercise of stock options

 —

 580,776

 —

 554,423

Weighted-average common shares outstanding, diluted

 30,889,677

 22,790,026

 28,118,673

 22,707,874

Earnings (loss) per share, diluted

$

 (0.02)

$

 0.30

$

 (0.28)

$

 0.83

Outstanding options excluded as impact would be anti-dilutive

 1,277,584

 117,760

 572,097

 58,899

do not include stock-based compensation expense;

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;

do not include loss on early extinguishment of debt;

do not include costs related to certain legal matters;

beginning with the three months ended December 31, 2016, do not include executive severance costs;

do not include management fees;

do not include certain income tax payments that represent a reduction in cash available to us; and

do not reflect changes in, or cash requirements for, our working capital needs.

(Unaudited)

(Unaudited)

Reconciliation of Net income to

Three Months Ended

Year Ended

Adjusted EBITDA:

December 31,

December 31,

2016

2015

2016

2015

Net income

$

 16,560

$

 27,720

$

 88,205

$

 93,077

Interest expense, net

 7,362

 10,761

 35,933

 45,400

Income tax expense (benefit)

 (2,166)

 3,552

 (753)

 12,373

Depreciation and amortization

 9,246

 9,004

 33,862

 31,846

Transaction-related costs

 -

 (19)

 2,239

 2,086

Loss on early extinguishment of debt

 -

 -

 4,708

 -

Income tax receivable agreement income

 3,444

 -

 (1,286)

 -

Certain legal matters (1)

 2,737

 -

 6,779

 -

Executive severance costs (2)

 1,650

 -

 1,650

 -

Stock-based compensation

 17,047

 399

 40,298

 1,451

Management fee

 -

 595

 537

 1,822

Adjusted EBITDA (including noncontrolling interests)

$

 55,880

$

 52,012

$

 212,172

$

 188,055

Less: Net income attributable to noncontrolling interests

 (23,679)

 (20,878)

 (88,590)

 (74,232)

Adjusted EBITDA-NCI

$

 32,201

$

 31,134

$

 123,582

$

 113,823

(1)

Certain legal matters costs include professional fees and other expenses associated with the Company’s handling of, and response to, the UnitedHealth litigation, the SEC inquiry, the CMS request for information, the securities litigation, and the Company’s internal review and analysis of factual and legal issues relating to the aforementioned matters as described in our Form 10-K for the year ended December 31, 2016. We have excluded these costs because they represent unusual fees and expenses that we believe are not related to the usual operation of our business.

(2)

Represents executive severance costs primarily related to the departure of our chief operating officer.

(dollars in thousands, except per share data)
Reconciliation of Net Income Attributable to American Renal Associates Holdings, Inc. to Adjusted Net Income Attributable to American Renal Associates Holdings, Inc.:

(Unaudited)

Three Months

Ended

December 31,

2016

Net income (loss) attributable to ARA

$

 ( 7,119 )

Change in the difference between the estimated fair values of contractual noncontrolling interest put provisions and estimated fair values for accounting purposes of the related noncontrolling interests

 6,481

Net income attributable to ARA for basic earnings per share calculation

$

 ( 638 )

Adjustments:

Share-based compensation due to option modification and IPO transactions (1)

 16,825

Certain legal matters (2)

 2,737

Executive severance costs (3)

 1,650

Total pre-tax adjustments

$

 21,212

Tax effect

 8,797

Income tax receivable agreement expense

 3,444

Change in the difference between the estimated fair values of contractual noncontrolling interest put provisions and estimated fair values for accounting purposes of the related noncontrolling interests (4)

 6,481

Total adjustments, net

$

 9,378

Adjusted net income attributable to ARA

$

 8,740

Basic shares outstanding

 30,889,677

Adjusted effect of dilutive stock options (5)

 3,013,071

Adjusted weighted average number of diluted shares used to compute adjusted net income attributable to ARA per share (5)

 33,902,748

Adjusted net income attributable to ARA per share

$

 0.26

(1)

Share-based compensation due to option modification and other transactions at the time of the IPO which will be expensed within 12 months after the IPO have been excluded since they arose based on transactions that are not expected to occur in the future. Also includes option modification costs related to executive severance agreements.

(2)

Certain legal matters costs include professional fees and other expenses associated with the Company’s handling of, and response to, the UnitedHealth litigation, the SEC inquiry, the CMS request for information, the securities litigation, and the Company’s internal review and analysis of factual and legal issues relating to the aforementioned matters as described in our Form 10-K for the year ended December 31, 2016. We have excluded these costs because they represent unusual fees and expenses that are not related to the usual operation of our business.

(3)

Represents executive severance costs primarily related to the departure of our chief operating officer.  

(4)

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

(5)

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

Three Months Ended

Twelve Months Ended

Ended December 31,

Ended December 31,

2016

2015

2016

2015

Cash provided by operating activities

$

 30,308

$

 29,076

$

 172,211

$

 133,595

Plus:

Transaction-related costs (1)

 -

 (19)

 2,239

 2,086

Adjusted cash provided by operating activities

$

 30,308

$

 29,057

$

 174,450

$

 135,681

Distributions to noncontrolling interests

 (27,483)

 (19,477)

 (94,468)

 (79,125)

Adjusted cash provided by operating activities less distributions to NCI

$

 2,825

$

 9,580

$

 79,982

$

 56,556

Capital expenditure breakdown:

Routine and maintenance capital expenditures

$

 4,535

$

 2,788

$

 12,995

$

 10,960

Development capital expenditures

 10,238

 5,588

 48,437

 35,313

Total capital expenditures

$

 14,773

$

 8,376

$

 61,432

$

 46,273

As of December 31, 2016