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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, 2017.
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, known as nephrologists, who specialize in treating patients suffering from end stage renal disease (“ESRD”). 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 2013.
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 principally 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. Substantially all of our clinics are maintained as separate joint ventures 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.
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, 2018
, we had developed
184
de novo clinics and
51
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,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
De novo clinics (1)
|
2
|
|
|
1
|
|
|
8
|
|
|
6
|
|
|
Acquired clinics (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Sold or merged clinics (3)
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(3
|
)
|
|
Total net new clinics
|
2
|
|
|
—
|
|
|
7
|
|
|
3
|
|
_____________________________
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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)
|
Clinics acquired by us in the applicable period.
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(3)
|
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 $1.7 to $2.1 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, 2018
and
September 30, 2017
, our development capital expenditures were
$6.6 million
and
$9.2 million
, respectively, representing 3.1% and 4.9% of our 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 27% 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,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
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Total
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|
2018
|
1
|
|
|
5
|
|
|
2
|
|
|
—
|
|
|
8
|
|
|
2017
|
3
|
|
|
2
|
|
|
1
|
|
|
9
|
|
|
15
|
|
|
2016
|
2
|
|
|
6
|
|
|
5
|
|
|
7
|
|
|
20
|
|
|
2015
|
1
|
|
|
5
|
|
|
6
|
|
|
4
|
|
|
16
|
|
|
2014
|
2
|
|
|
4
|
|
|
3
|
|
|
6
|
|
|
15
|
|
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, 2013 to
September 30, 2018
, we added 169 dialysis stations to our existing clinics, representing the equivalent of nearly ten 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,
|
|
Nine Months Ended September 30,
|
|
Source of Treatment Growth:
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Non-acquired treatment growth(1)
|
3.9
|
%
|
|
6.8
|
%
|
|
4.2
|
%
|
|
8.6
|
%
|
|
Acquired treatment growth(2)
|
1.1
|
%
|
|
—
|
%
|
|
1.1
|
%
|
|
—
|
%
|
|
Total treatment growth
|
5.0
|
%
|
|
6.8
|
%
|
|
5.3
|
%
|
|
8.6
|
%
|
_____________________________
|
|
|
|
(1)
|
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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|
|
|
|
(2)
|
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 prospective payment rate system (“PPS”), a 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 ended December 31, 2017, 2016 and 2015, the Medicare ESRD PPS payment rates for our clinics were approximately $248, $247 and $247, respectively, per treatment. The ESRD PPS final rule for 2018, released on October 27, 2017, increased the base rate from $231.55 to $232.37. 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 2019 was released on November 1, 2018 by CMS (the “2019 Final Rule”). The 2019 Final Rule includes a base rate of $235.27, representing a $2.90 increase from the 2018 base rate of $232.37. CMS has estimated that the 2019 Final Rule will result in an overall increase of payments to ESRD facilities of 1.6%.
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 at 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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Source of Revenues:
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Medicare and Medicare Advantage
|
65
|
%
|
|
59
|
%
|
|
64
|
%
|
|
59
|
%
|
|
Commercial and other (1)
|
30
|
%
|
|
36
|
%
|
|
32
|
%
|
|
37
|
%
|
|
Medicaid and Managed Medicaid
|
4
|
%
|
|
4
|
%
|
|
4
|
%
|
|
4
|
%
|
|
Other (2)
|
1
|
%
|
|
1
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
_____________________________
|
|
|
|
(1)
|
Principally commercial insurance companies and also includes the U.S. Department of Veterans Affairs (the “VA”), which we refer to collectively as “Commercial and other.”
|
|
|
|
|
(2)
|
Other sources of revenues include hospitals and patient pay. “Patient pay
”
revenues consist of payments received directly from patients who are either uninsured or self-pay a portion of the bill.
|
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, 2017, commercial payors and others, including the VA, accounted for an average of approximately 14.8% and 13.0%, respectively, of the treatments we performed. The change in the mix of patients and treatments between the three-year average and the year ended December 31, 2017 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, 2017, we derived approximately 2% 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 1% of the treatments performed. During the year ended December 31, 2017, we 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, 2017, the percentage of treatments accounted for by commercial payors and others, including the VA, but not including ACA plans, was 11.8%. For the year ended December 31, 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 Medicare supplemental insurance 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, 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 dialysis 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 2016 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, including the expansion of funding for patients under age 65 who must pay higher premiums for Medicare supplemental insurance.
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 could 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 has been and may continue to 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 adversely impacted 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.
During 2017, 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 the U.S. Department of Health and Human Services 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 I. Item 1A. Risk Factors—Risks Related to Our Business—If the number of patients with commercial insurance declines, our operating results and cash flows would be adversely affected” and “—Increased scrutiny in our industry and potential regulatory changes could adversely affect our operating results and financial condition” in our Form 10-K for the year ended December 31, 2017.]
We believe that the operating environment 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, actions 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 I. Item 1A. Risk Factors—Risks Related to Our Business—If the rates paid by commercial payors decline, our operating results and cash flow would be adversely affected” in our Form 10-K for the year ended December 31, 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 and medical supplies. The Company has entered into a rebate agreement with Amgen Inc. (“Amgen”) for the ESAs Aranesp and Epogen, 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 the ESAs Mircera and Retacrit. The use of Mircera and Retacrit 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 I. Item 1A. Risk Factors—Risks Related to Our Business—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” in our Form 10-K for the year ended December 31, 2017.
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 may lead 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 of the IPO and Future Charges
The completion of our initial public offering (“IPO”) of common stock in April 2016 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 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 and related matters. See “—Operating Expenses—Certain Legal Matters.”
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 the 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 13 - Related Party Transactions
” of the notes to the unaudited consolidated financial statements, since the interest on these loans is no longer eliminated in consolidation, we now incur additional interest expense. These Assigned Clinic Loans have maturities ranging from November 2018 to July 2020.
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 and changes to the income tax rate, 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 5 - Fair Value Measurements
” of the notes to the unaudited consolidated financial statements.
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:
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Number of clinics (as of end of period)
|
235
|
|
|
217
|
|
|
235
|
|
|
217
|
|
|
Number of de novo clinics opened (during period)
|
2
|
|
|
1
|
|
|
8
|
|
|
6
|
|
|
Patients (as of end of period)
|
16,092
|
|
|
15,237
|
|
|
16,092
|
|
|
15,237
|
|
|
Number of treatments
|
578,982
|
|
|
551,258
|
|
|
1,710,847
|
|
|
1,625,227
|
|
|
Non-acquired treatment growth
|
3.9
|
%
|
|
6.8
|
%
|
|
4.2
|
%
|
|
8.6
|
%
|
|
Patient service operating revenues per treatment
|
$
|
364
|
|
|
$
|
341
|
|
|
$
|
364
|
|
|
$
|
339
|
|
|
Patient care costs per treatment
|
$
|
251
|
|
|
$
|
217
|
|
|
$
|
245
|
|
|
$
|
220
|
|
|
Adjusted patient care costs per treatment (1)
|
$
|
251
|
|
|
$
|
217
|
|
|
$
|
245
|
|
|
$
|
219
|
|
|
General and administrative expenses per treatment
|
$
|
43
|
|
|
$
|
40
|
|
|
$
|
45
|
|
|
$
|
49
|
|
|
Adjusted general and administrative expenses per treatment (2)
|
$
|
43
|
|
|
$
|
40
|
|
|
$
|
45
|
|
|
$
|
43
|
|
|
Adjusted EBITDA (including noncontrolling interests) (3)
|
$
|
42,435
|
|
|
$
|
46,838
|
|
|
$
|
131,589
|
|
|
$
|
128,306
|
|
|
Adjusted EBITDA-NCI (3)
|
$
|
26,631
|
|
|
$
|
28,149
|
|
|
$
|
80,877
|
|
|
$
|
76,967
|
|
_____________________________
|
|
|
|
(1)
|
Adjusted patient care costs per treatment excludes
$2.2 million
of Modification Expense during the nine months ended
September 30, 2017
. Additionally, the nine months ended
September 30, 2017
exclude
$0.1
million of severance expense and
$0.6
million of gains on sale of assets.
|
|
|
|
|
(2)
|
Adjusted general and administrative expenses per treatment excludes
$9.5 million
of Modification Expense during the nine months ended
September 30, 2017
. Additionally, the nine months ended
September 30, 2017
exclude
$0.8
million of severance expense.
|
|
|
|
|
(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, and general and administrative expenses 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 Form 10-Q makes reference to certain non-GAAP financial measures. These non-GAAP financial 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 financial 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 and other non-income based tax, 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, 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;
|
|
|
|
|
•
|
do not include executive and management severance costs;
|
|
|
|
|
•
|
do not include income tax expense or benefit and other non-income based taxes; and
|
|
|
|
|
•
|
do not reflect the gain on sale of assets.
|
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)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Net income
|
$
|
18,294
|
|
|
$
|
26,672
|
|
|
$
|
34,284
|
|
|
$
|
55,965
|
|
|
Add:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
8,241
|
|
|
7,255
|
|
|
23,829
|
|
|
22,052
|
|
|
Income tax (benefit) expense and other non-income based tax
|
71
|
|
|
2,559
|
|
|
(1,638
|
)
|
|
(555
|
)
|
|
Depreciation and amortization
|
10,023
|
|
|
9,438
|
|
|
29,460
|
|
|
27,894
|
|
|
Transaction-related costs (a)
|
—
|
|
|
—
|
|
|
856
|
|
|
717
|
|
|
Loss on early extinguishment of debt (b)
|
—
|
|
|
—
|
|
|
—
|
|
|
526
|
|
|
Income tax receivable agreement expense (income) (c)
|
3,480
|
|
|
(3,585
|
)
|
|
2,765
|
|
|
(5,461
|
)
|
|
Certain legal matters (d)
|
1,028
|
|
|
3,481
|
|
|
37,677
|
|
|
11,714
|
|
|
Executive and management severance costs (e)
|
—
|
|
|
—
|
|
|
—
|
|
|
917
|
|
|
Stock-based compensation and related payroll taxes
|
1,298
|
|
|
1,054
|
|
|
4,356
|
|
|
15,090
|
|
|
Gain on sale of assets (f)
|
|
|
|
(36
|
)
|
|
—
|
|
|
(553
|
)
|
|
Adjusted EBITDA (including noncontrolling interests)
|
$
|
42,435
|
|
|
$
|
46,838
|
|
|
$
|
131,589
|
|
|
$
|
128,306
|
|
|
Less: Net income attributable to noncontrolling interests
|
(15,804
|
)
|
|
(18,689
|
)
|
|
(50,712
|
)
|
|
(51,339
|
)
|
|
Adjusted EBITDA –NCI
|
$
|
26,631
|
|
|
$
|
28,149
|
|
|
$
|
80,877
|
|
|
$
|
76,967
|
|
_____________________________
|
|
|
|
(a)
|
For the nine months ended
September 30, 2018
, includes costs incurred related to our registration statement, which was declared effective on March 19, 2018, and the secondary offering that was withdrawn on March 28, 2018. For the nine months ended
September 30, 2017
, represents costs related to debt refinancing. See “
Note 9 - Debt
” of the notes to the unaudited consolidated financial statements.
|
|
|
|
|
(b)
|
Represents costs related to debt refinancing. See “
Note 9 - Debt
” of the notes to the unaudited 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 5 - Fair Value Measurements
” of the notes to the unaudited consolidated financial statements.
|
|
|
|
|
(d)
|
Represents costs related to the specific legal and regulatory matters described in “
Note 15 - Certain Legal Matters
” of the notes to the unaudited consolidated financial statements.
|
|
|
|
|
(e)
|
Represents executive and management severance costs.
|
|
|
|
|
(f)
|
Represents sale of clinic assets.
|
Components of Earnings
Patient Service Operating Revenues
Patient service operating revenues.
The major component of our revenues, which is included in patient service operating revenues, is derived from dialysis treatments and related services. Our patient service operating revenues primarily consist of reimbursement for dialysis treatments and related services. Sources of revenues are principally from government-based programs, including Medicare, Medicaid and state workers' compensation programs, commercial insurance payors and other sources such as the VA, hospitals as well as patient pay. Patient service operating revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing dialysis treatments and related services. These amounts are due from third-party payors, including government-based programs and commercial insurance payors, patients and others and may include variable consideration for discounts, price concessions and retroactive revenue adjustments due to new information obtained, such as actual payment receipt, as well as settlement of audits, reviews, and investigations. Third-party payors, patients and other payors are generally billed at least monthly, typically in the month the dialysis treatment is performed. Revenue is recognized as performance obligations are satisfied.
A usual and customary fee schedule is maintained for dialysis treatment and other related services; however, the transaction price is typically at a discount to the fee schedule. The transaction prices for Medicare and Medicaid programs are based on predetermined net realizable rates per treatment that are established by statutes or regulation. The transaction prices for contracted payors are based on contracted rates. For other payors, the Company determines the transaction price based on usual and customary rates for services provided, reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients in accordance with the Company’s policy, and/or implicit price concessions. The Company determines its estimates of contractual allowances and discounts based on contractual agreements, regulatory compliance, and historical collection experience. The Company determines its estimate of implicit price concessions based on its historical collection experience with each patient. Amounts billed that have not yet been collected and that meet the conditions for unconditional right to payment are presented as patient receivables.
Contractual adjustments result from differences between the rates charged for services performed and expected reimbursements from third-party payors and is largely comprised of balances relating to services billed to non-contracted providers. Contractual adjustments and discounts with third-party payors are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. In assessing the probability of these claim payments, the Company reviews previous payment history and records a reserve that results in an estimate of expected revenue such that it is probable that a significant revenue reversal will not occur in future periods, at the patient level. This constraint on variable consideration is based on the probability of a reversal of an amount that is significant relative to the cumulative revenue recognized for the contract.
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, patient insurance education, 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 registration statement and the secondary offering that was withdrawn in March 2018. 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 costs include legal fees and other expenses associated with matters outside the ordinary course of our business, including, but not limited to, our handling of, and response to, the UnitedHealth Group Incorporated ("United") litigation and settlement, a now-concluded SEC inquiry relating to the subject matter covered by the United litigation, the CMS request for information, the securities and derivative 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 "
Note 15 - Certain Legal Matters
” of the notes to the unaudited consolidated financial statements.
Operating Income
Operating income is equal to our 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, Loss on Early Extinguishment of Debt, 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.
Loss on early extinguishment of debt
. Loss on early extinguishment of debt represents the write-off of unamortized debt issuance costs.
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 benefit/expense.
Income tax benefit/expense is recorded on 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 “Liquidity and Capital Resources—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 “Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Opertions—Critical Accounting Policies and Estimates—Noncontrolling Interests” in our Form 10-K and “
Note 8 - Noncontrolling Interests Subject to Put Provisions
” of the notes to the unaudited consolidated financial statements.
Results of Operations
Three Months Ended September 30, 2018
Compared With
Three Months Ended September 30, 2017
The following table summarizes our results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
Percentage
|
|
(in thousands)
|
2018
|
|
2017
|
|
Amount
|
|
Change
|
|
Patient service operating revenues
|
$
|
211,019
|
|
|
$
|
187,711
|
|
|
$
|
23,308
|
|
|
12.4
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Patient care costs
|
145,300
|
|
|
119,599
|
|
|
25,701
|
|
|
21.5
|
%
|
|
General and administrative
|
24,619
|
|
|
22,292
|
|
|
2,327
|
|
|
10.4
|
%
|
|
Depreciation and amortization
|
10,023
|
|
|
9,438
|
|
|
585
|
|
|
6.2
|
%
|
|
Certain legal matters
|
1,028
|
|
|
3,481
|
|
|
(2,453
|
)
|
|
(70.5
|
)%
|
|
Total operating expenses
|
180,970
|
|
|
154,810
|
|
|
26,160
|
|
|
16.9
|
%
|
|
Operating income
|
30,049
|
|
|
32,901
|
|
|
(2,852
|
)
|
|
(8.7
|
)%
|
|
Interest expense, net
|
(8,241
|
)
|
|
(7,255
|
)
|
|
(986
|
)
|
|
13.6
|
%
|
|
Income tax receivable agreement (expense) income
|
(3,480
|
)
|
|
3,585
|
|
|
(7,065
|
)
|
|
(197.1
|
)%
|
|
Income before income taxes
|
18,328
|
|
|
29,231
|
|
|
(10,903
|
)
|
|
(37.3
|
)%
|
|
Income tax expense
|
34
|
|
|
2,559
|
|
|
(2,525
|
)
|
|
(98.7
|
)%
|
|
Net income
|
18,294
|
|
|
26,672
|
|
|
(8,378
|
)
|
|
(31.4
|
)%
|
|
Less: Net income attributable to noncontrolling interests
|
(15,804
|
)
|
|
(18,689
|
)
|
|
2,885
|
|
|
(15.4
|
)%
|
|
Net income attributable to American Renal Associates Holdings, Inc.
|
$
|
2,490
|
|
|
$
|
7,983
|
|
|
$
|
(5,493
|
)
|
|
(68.8
|
)%
|
Patient Service Operating Revenues
Patient service operating revenues
. Patient service operating revenues for the three months ended
September 30, 2018
were
$211.0 million
,
an increase
of
12.4%
from
$187.7 million
for the three months ended
September 30, 2017
. The increase in patient service operating revenues was primarily due to an increase of approximately
5.0%
in the number of dialysis treatments and reimbursement of certain pharmaceuticals under the Medicare ESRD PPS Transitional Drug Add-on Payment Adjustment (“TDAPA”), which became effective January 1, 2018. Non-acquired treatment growth was
3.9%
and acquired treatment growth was
1.1%
. Normalized total treatment growth was 6.1% and non-acquired treatment growth was 5.0% for the three months ended
September 30, 2018
. Patient service operating revenues relating to start-up clinics for the three months ended
September 30, 2018
were
$2.8 million
compared to
$0.5 million
for the three months ended
September 30, 2017
,
an increase
of
$2.4 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 three months ended
September 30, 2018
was
$364
compared with
$341
for the three months ended
September 30, 2017
,
an increase
of
6.7%
. As a source of revenue by payor type, government-based and other payors accounted for
69.5%
and
63.9%
, respectively, of our revenues for the three months ended
September 30, 2018
and
2017
.
Operating Expenses
Patient care costs.
Patient care costs for the three months ended
September 30, 2018
were
$145.3 million
,
an increase
of
21.5%
from
$119.6 million
for the three months ended
September 30, 2017
. This increase was primarily due to an increase in the number of treatments and an increase in supply expense in connection with the TDAPA program referenced above. As a percentage of patient
service operating revenues, patient care costs were approximately
68.9%
for the three months ended
September 30, 2018
compared to
63.7%
for the three months ended
September 30, 2017
. Patient care costs per treatment for the three months ended
September 30, 2018
were
$251
, compared to
$217
for the three months ended
September 30, 2017
.
General and administrative expenses.
General and administrative expenses for the three months ended
September 30, 2018
were
$24.6 million
,
an increase
of
10.4%
from
$22.3 million
for the three months ended
September 30, 2017
. As a percentage of patient service operating revenues, general and administrative expenses were approximately
11.7%
for the three months ended
September 30, 2018
compared to
11.9%
for the three months ended
September 30, 2017
. General and administrative expenses per treatment for the three months ended
September 30, 2018
were
$43
, compared to
$40
for the three months ended
September 30, 2017
.
Depreciation and amortization.
Depreciation and amortization expense for the three months ended
September 30, 2018
was
$10.0 million
, compared to
$9.4 million
for the three months ended
September 30, 2017
. As a percentage of patient service operating revenues, depreciation and amortization expense was approximately
4.7%
for the three months ended
September 30, 2018
compared to
5.0%
for the three months ended
September 30, 2017
.
Certain legal matters.
Certain legal matter costs for the three months ended
September 30, 2018
were
$1.0 million
, compared to
$3.5 million
for the three months ended
September 30, 2017
. See "
Note 15 - Certain Legal Matters
" of the notes to unaudited consolidated financial statements.
Operating Income
Operating income for the three months ended
September 30, 2018
was
$30.0 million
,
a decrease
of
$2.9 million
, or
8.7%
, from
$32.9 million
for the three months ended
September 30, 2017
. The decrease was primarily due to the factors described above under “ – Operating Expenses.” For the three months ended
September 30, 2018
and 2017, start-up clinics reduced operating income by
$2.5 million
and
$1.6 million
, respectively,
an increase
of
$0.8 million
reflecting 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.” As a percentage of patient service operating revenues, operating income was
14.2%
for the three months ended
September 30, 2018
compared to
17.5%
for the three months ended
September 30, 2017
, reflecting the factors described above.
Interest and Taxes
Interest expense, net.
Interest expense, net for the three months ended
September 30, 2018
was
$8.2 million
, and for the three months ended
September 30, 2017
was
$7.3 million
,
an increase
of
13.6%
. The increase is primarily attributable to rising interest rates.
Income tax receivable agreement (expense) income.
Income tax receivable agreement (expense) income for the three months ended
September 30, 2018
and 2017 was
$(3.5) million
and
$3.6 million
, respectively. This (expense) income represents the change in the estimated fair value of the TRA liability during each period.
Income tax expense.
The expense for income taxes for the three months ended
September 30, 2018
and
September 30, 2017
represented an effective tax rate of
0.2%
and
8.8%
, respectively. The variation from the statutory federal rate of 21% and 35% on our share of pre-tax income during the three months ended
September 30, 2018
and
2017
, respectively, is primarily due to the tax impact of the noncontrolling interest in the clinics as a result of our joint venture model, the valuation allowance and the change in fair value of the TRA liability, which is not deductible for income tax purposes and also other non-deductible expenses.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the three months ended
September 30, 2018
was
$15.8 million
, representing
a decrease
of
15.4%
from
$18.7 million
for the three months ended
September 30, 2017
. The decrease was primarily due to decreased profitability in our joint ventures.
Nine Months Ended September 30, 2018
Compared With
Nine Months Ended September 30, 2017
The following table summarizes our results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
Percentage
|
|
(in thousands)
|
2018
|
|
2017
|
|
Amount
|
|
Change
|
|
Patient service operating revenues
|
$
|
622,869
|
|
|
$
|
550,728
|
|
|
$
|
72,141
|
|
|
13.1
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Patient care costs
|
419,593
|
|
|
357,959
|
|
|
61,634
|
|
|
17.2
|
%
|
|
General and administrative
|
76,382
|
|
|
79,917
|
|
|
(3,535
|
)
|
|
(4.4
|
)%
|
|
Transaction-related costs
|
856
|
|
|
717
|
|
|
139
|
|
|
19.4
|
%
|
|
Depreciation and amortization
|
29,460
|
|
|
27,894
|
|
|
1,566
|
|
|
5.6
|
%
|
|
Certain legal matters
|
37,677
|
|
|
11,714
|
|
|
25,963
|
|
|
221.6
|
%
|
|
Total operating expenses
|
563,968
|
|
|
478,201
|
|
|
85,767
|
|
|
17.9
|
%
|
|
Operating income
|
58,901
|
|
|
72,527
|
|
|
(13,626
|
)
|
|
(18.8
|
)%
|
|
Interest expense, net
|
(23,829
|
)
|
|
(22,052
|
)
|
|
(1,777
|
)
|
|
8.1
|
%
|
|
Loss on early extinguishment of debt
|
—
|
|
|
(526
|
)
|
|
526
|
|
|
NM
|
|
|
Income tax receivable agreement (expense) income
|
(2,765
|
)
|
|
5,461
|
|
|
(8,226
|
)
|
|
(150.6
|
)%
|
|
Income before income taxes
|
32,307
|
|
|
55,410
|
|
|
(23,103
|
)
|
|
(41.7
|
)%
|
|
Income tax benefit
|
(1,977
|
)
|
|
(555
|
)
|
|
(1,422
|
)
|
|
256.2
|
%
|
|
Net income
|
34,284
|
|
|
55,965
|
|
|
(21,681
|
)
|
|
(38.7
|
)%
|
|
Less: Net income attributable to noncontrolling interests
|
(50,712
|
)
|
|
(51,339
|
)
|
|
627
|
|
|
(1.2
|
)%
|
|
Net (loss) income attributable to American Renal Associates Holdings, Inc.
|
$
|
(16,428
|
)
|
|
$
|
4,626
|
|
|
$
|
(21,054
|
)
|
|
(455.1
|
)%
|
___________________
NM – Not Meaningful
Patient Service Operating Revenues
Patient service operating revenues
. Patient service operating revenues for the
nine
months ended
September 30, 2018
were
$622.9 million
,
an increase
of
13.1%
from
$550.7 million
for the
nine
months ended
September 30, 2017
. The increase in patient service operating revenues was primarily due to an increase of approximately
5.3%
in the number of dialysis treatments and reimbursement of certain pharmaceuticals under the TDAPA program, which became effective January 1, 2018. Non-acquired treatment growth was
4.2%
and acquired treatment growth was
1.1%
. Patient service operating revenues relating to start-up clinics for the
nine
months ended
September 30, 2018
were
$8.0 million
compared to
$8.7 million
for the
nine
months ended
September 30, 2017
, a
decrease
of
$0.6 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, 2018
was
$364
compared with
$339
for the
nine
months ended
September 30, 2017
,
an increase
of
7.4%
. As a source of revenue by payor type, government-based and other payors accounted for
68.0%
and
63.4%
, respectively, of our revenues for the
nine
months ended
September 30, 2018
and
2017
.
Operating Expenses
Patient care costs.
Patient care costs for the
nine
months ended
September 30, 2018
were
$419.6 million
,
an increase
of
17.2%
from
$358.0 million
for the
nine
months ended
September 30, 2017
. This increase was primarily due to an increase in the number of treatments and an increase in supply expense in connection with the TDAPA program referenced above. As a percentage of patient
service operating revenues, patient care costs were approximately
67.4%
for the
nine
months ended
September 30, 2018
compared to
65.0%
(or
64.6%
excluding the Modification Expense) for the
nine
months ended
September 30, 2017
. Patient care costs per treatment for the
nine
months ended
September 30, 2018
were
$245
, compared to
$220
for the
nine
months ended
September 30, 2017
. Patient care costs per treatment excluding the Modification Expense were
$219
for the
nine
months ended
September 30, 2017
.
General and administrative expenses.
General and administrative expenses for the
nine
months ended
September 30, 2018
were
$76.4 million
,
a decrease
of
4.4%
from
$79.9 million
for the
nine
months ended
September 30, 2017
. The decrease was primarily due to
$9.5 million
in Modification Expense incurred in 2017. As a percentage of patient service operating revenues, general and administrative expenses were approximately
12.3%
for the
nine
months ended
September 30, 2018
compared to
14.5%
(or
12.8%
excluding the Modification Expense) for the
nine
months ended
September 30, 2017
. General and administrative expenses per treatment for the
nine
months ended
September 30, 2018
were
$45
, compared to
$49
for the
nine
months ended
September 30, 2017
. General and administrative expenses per treatment excluding the Modification Expense were
$43
for the
nine
months ended
September 30, 2017
.
Transaction-related costs
. Transaction-related costs for the
nine
months ended
September 30, 2018
were
$0.9 million
. These represent costs associated with our registration statement and the withdrawn secondary offering. They include legal, accounting, valuation and other professional or consulting fees. Transaction-related costs for the nine months ended
September 30, 2017
were
$0.7 million
associated with our 2017 debt refinancing described below.
Depreciation and amortization.
Depreciation and amortization expense for the
nine
months ended
September 30, 2018
was
$29.5 million
, compared to
$27.9 million
for the
nine
months ended
September 30, 2017
. As a percentage of patient service operating revenues, depreciation and amortization expense was approximately
4.7%
for the
nine
months ended
September 30, 2018
compared to
5.1%
for the
nine
months ended
September 30, 2017
.
Certain legal matters.
Certain legal matter costs for the
nine
months ended
September 30, 2018
were
$37.7 million
, compared to
$11.7 million
for the
nine
months ended
September 30, 2017
. The
nine
months ended
September 30, 2018
include
$29.6 million
related to the United litigation settlement. See “
Note 15 - Certain Legal Matters
.”
Operating Income
Operating income for the
nine
months ended
September 30, 2018
was
$58.9 million
,
a decrease
of
$13.6 million
, or
18.8%
, from
$72.5 million
for the
nine
months ended
September 30, 2017
. The decrease was primarily due to the United settlement described under “
Note 15 - Certain Legal Matters
,” offset by the factors described above under “ – Patient service operating revenues.” For the
nine
months ended
September 30, 2018
and 2017, start-up clinics reduced operating income by
$8.5 million
and
$7.2 million
, respectively,
an increase
of
$1.3 million
reflecting 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.” As a percentage of patient service operating revenues, operating income was
9.5%
for the
nine
months ended
September 30, 2018
compared to
13.2%
for the
nine
months ended
September 30, 2017
, reflecting the factors described above.
Interest and Taxes
Interest expense, net.
Interest expense, net for the
nine
months ended
September 30, 2018
was
$23.8 million
, and for the
nine
months ended
September 30, 2017
was
$22.1 million
,
an increase
of
8.1%
.
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. The loss was comprised of write-offs of unamortized debt issuance costs.
Income tax receivable agreement income/(expense).
Income tax receivable agreement income/(expense) for the
nine
months ended
September 30, 2018
and 2017 was
$(2.8) million
and
$5.5 million
, respectively. This income/(expense) represents the change in the estimated fair value of the TRA liability during each period.
Income tax benefit.
The benefit for income taxes for the
nine
months ended
September 30, 2018
and
September 30, 2017
represented an effective tax rate of
(6.1)%
and
(1.0)%
, respectively. The variation from the statutory federal rate of 21% and 35% on our share of pre-tax income during the
nine
months ended
September 30, 2018
and
2017
, respectively, is primarily due to the tax impact of the noncontrolling interest in the clinics as a result of our joint venture model, the valuation allowance and the change in fair value of the TRA liability, which is not deductible for income tax purposes and also other non-deductible expenses.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the
nine
months ended
September 30, 2018
was
$50.7 million
, representing
a decrease
of
1.2%
from
$51.3 million
for the
nine
months ended
September 30, 2017
. The decrease was primarily due to decreased profitability in our joint ventures.
Liquidity and Capital Resources
Our primary sources of liquidity are funds generated from our operations, short-term borrowings under our revolving credit facility 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.
Cash Flows
The following table shows a summary of our cash flows for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
Net cash provided by operating activities
|
$
|
83,871
|
|
|
$
|
97,372
|
|
|
Net cash used in investing activities
|
(26,572
|
)
|
|
(23,705
|
)
|
|
Net cash used in financing activities
|
(66,948
|
)
|
|
(106,890
|
)
|
|
Net decrease in cash and restricted cash
|
$
|
(9,649
|
)
|
|
$
|
(33,223
|
)
|
Cash Flows from Operations
Net cash provided by operating activities for the
nine
months ended
September 30, 2018
was
$83.9 million
compared to
$97.4 million
for the same period in 2017,
a decrease
of
$13.5 million
, or
13.9%
, primarily attributable to the $10.0 million installment payment related to the United litigation settlement, described below.
Days sales outstanding was
40
days as of
September 30, 2018
compared to
39
days as of September 30, 2017.
Cash Flows from Investing Activities
Net cash used in investing activities for the
nine
months ended
September 30, 2018
was
$26.6 million
compared to
$23.7 million
for the same period in 2017,
an increase
of
$2.9 million
, or
12.1%
, due to maintenance of existing clinics.
Cash Flows from Financing Activities
Net cash used in financing activities for the
nine
months ended
September 30, 2018
was
$66.9 million
compared to
$106.9 million
for the same period in 2017,
a decrease
of
$39.9 million
due to our debt refinancing in 2017. Our distributions to our partners were
$55.1 million
for the
nine
months ended
September 30, 2018
compared to
$60.5 million
for the same period in 2017. Additionally, our purchases of noncontrolling interests in existing clinics were
$8.7 million
for the
nine
months ended
September 30, 2018
compared to
$27.9 million
for the same period in 2017.
Capital Expenditures
For the
nine
months ended
September 30, 2018
and 2017, we made capital expenditures of
$29.1 million
and
$24.8 million
, respectively, of which
$20.1 million
and
$19.3 million
, respectively, were development capital expenditures, primarily incurred in connection with de novo clinic development, and
$8.9 million
and
$5.4 million
, respectively, were maintenance capital expenditures, primarily consisting of capital improvements at our existing clinics, including renovations and equipment replacement. During the calendar year 2018, we expect to spend approximately 3% to 5% of total revenues for development capital expenditures and 1% to 2% of total revenues on maintenance capital expenditures.
Debt Facilities
As of
September 30, 2018
, we had outstanding
$562.4 million
in aggregate principal amount of indebtedness, with an additional $96.5 million of borrowing capacity available under our 2017 Revolving Credit Facility (as defined below) (and no outstanding letters of credit). Our outstanding indebtedness included
$434.5 million
of term B loans under our 2017 Credit Agreement (as defined below), $3.5 million of borrowings under our 2017 Revolving Credit Facility and
$2.2 million
of other corporate debt as of
September 30, 2018
. Our outstanding indebtedness also included our third-party clinic-level debt, which includes term loans and lines of credit (other than Assigned Clinic Loans (as defined below)), totaling
$119.4 million
as of
September 30, 2018
with maturities ranging from November 2018 to June 2026 and interest rates ranging from 3.31% to 6.55%. In addition, our clinic level debt includes our assigned clinic loans (the “Assigned Clinic Loans”) held by Term Loan Holdings of
$6.4 million
as of
September 30, 2018
with maturities ranging from
November 2018
to
July 2020
and interest rates ranging from
4.25%
to
8.08%
. See
Note 9 - Debt
of the notes to the consolidated financial statements for further information about our debt and
Note 13 - Related Party Transactions
of the notes to the consolidated financial statements for a description of the Assigned Clinic Loans.
On June 22, 2017, ARH 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 100% of Consolidated EBITDA (as defined in the 2017 Credit Agreement) plus (ii) 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 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 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 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 term B loans under the 2017 Term B Loan Facility 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% or (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%. As of
September 30, 2018
, the interest payable quarterly was
5.49%
.
Outstanding loans under the 2017 Revolving Credit Facility 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. There were $3.5 million of borrowings outstanding under the 2017 Revolving Credit Facility as of
September 30, 2018
which had an interest rate of 7.00%. The commitment fee applicable to undrawn revolving commitments under the 2017 Revolving Credit Facility is also priced off a grid based upon the consolidated total net leverage ratio of ARH and its restricted subsidiaries and, as of
September 30, 2018
, was 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. As of
September 30, 2018
, the Company was in compliance with these covenants.
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.
Tax Cuts and Jobs Act
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “2017 Tax Act”), resulting in significant modifications to existing law. Our financial statements for the
three and nine
months ended
September 30, 2018
reflect certain effects of the 2017 Tax Act, which includes a reduction in the corporate tax rate from 35% to 21%. Consistent with Staff Accounting Bulletin No. 118 issued by the Securities and Exchange Commission (“SEC”), which provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act, we provisionally recorded an income tax benefit of $1.5 million related to the 2017 Tax Act for the year ended December 31, 2017. In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from, and interpretations by, U.S. regulatory and standard-setting bodies, and changes in assumptions. In subsequent periods, provisional amounts will be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017 by the U.S. Department of the Treasury. The effects of the 2017 Tax Act may be subject to changes for items that were previously reported as provisional amounts, as well as any element of the 2017 Tax Act for which a provisional estimate could not be made, and such changes could be material.
Contractual Obligations and Commitments
The following is a summary of contractual obligations and commitments as of
September 30, 2018
(excluding put obligations relating to our joint ventures, dividend equivalent payments due to our pre-IPO option holders, obligations under our income tax receivable agreement, and obligations related to our settlement with United, which are described separately below):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled payments under contractual obligations
(in thousands)
|
|
Total
|
|
Less than 1
year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5
years
|
|
Third-party clinic-level debt
|
|
$
|
125,749
|
|
|
$
|
10,562
|
|
|
$
|
66,367
|
|
|
$
|
36,367
|
|
|
$
|
12,453
|
|
|
Term B loans(1)
|
|
434,500
|
|
|
1,100
|
|
|
8,800
|
|
|
8,800
|
|
|
415,800
|
|
|
Other corporate debt
|
|
2,181
|
|
|
142
|
|
|
1,191
|
|
|
848
|
|
|
—
|
|
|
Operating leases(2)
|
|
196,702
|
|
|
7,791
|
|
|
58,138
|
|
|
49,492
|
|
|
81,281
|
|
|
Interest payments(3)
|
|
150,218
|
|
|
7,647
|
|
|
56,512
|
|
|
50,675
|
|
|
35,384
|
|
|
Purchase obligation(4)
|
|
116,616
|
|
|
12,991
|
|
|
52,325
|
|
|
51,300
|
|
|
—
|
|
|
Total
|
|
$
|
1,025,966
|
|
|
$
|
40,233
|
|
|
$
|
243,333
|
|
|
$
|
197,482
|
|
|
$
|
544,918
|
|
_____________________________
|
|
|
|
(1)
|
Bear interest at a variable rate, with principal payments of $1.1 million and interest payments due quarterly.
|
|
|
|
|
(2)
|
Net of estimated sublease proceeds of approximately $1.3 million per year from 2018 through 2022 and approximately $0.2 million or less thereafter.
|
|
|
|
|
(3)
|
Represents interest payments on debt obligations, including the 2017 Term B Loan Facility described above under the 2017 Credit Agreement. To project interest payments on floating rate debt, we have used the rate as of
September 30, 2018
.
|
|
|
|
|
(4)
|
Reflects amounts payable pursuant to minimum purchase commitments under our agreements with certain suppliers of pharmaceuticals. In the event of a shortfall, we are required to pay in cash a portion or all of the amount of such shortfall or may, under certain circumstances, be subject to a price increase or other fee.
|
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”). Additionally, we have certain put agreements that are exercisable upon the occurrence of certain events (“event-based puts”), including the sale of all or substantially all of our assets, closure of the clinic, change of control, departure of key executives, third-party members’ death, disability, bankruptcy, retirement, or if third-party members are dissolved and other events, which could accelerate time-based vesting. Some of these puts accelerated as a result of the Company's IPO, of which some were exercised during the
nine
months ended
September 30, 2018
. If the put obligations are exercised by a physician partner, we are required to purchase, at the estimated fair 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 8 - Noncontrolling Interests Subject to Put Provisions
” in the notes to the unaudited consolidated financial statements for discussion of these put provisions. The table below summarizes our potential obligations as of
September 30, 2018
.
|
|
|
|
|
|
|
|
|
Noncontrolling interest subject to put provisions
(dollars in thousands)
|
|
September 30, 2018
|
|
Time-based puts
|
|
$
|
118,260
|
|
|
Event-based puts
|
|
31,892
|
|
|
Total Obligation
|
|
$
|
150,152
|
|
As of
September 30, 2018
, $45.7 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, 2018
and reflects the payments that would be made, assuming (a) all vested puts as
of
September 30, 2018
were exercised on
October 1, 2018
and paid according to the applicable agreement and (b) all puts exercisable thereafter were exercised as soon as they vest and are paid accordingly.
|
|
|
|
|
|
|
|
|
(dollars in thousands)
Year
|
|
Amount
Exercisable
|
|
2018
|
|
38,588
|
|
|
2019
|
|
13,301
|
|
|
2020
|
|
23,268
|
|
|
2021
|
|
21,732
|
|
|
2022
|
|
13,269
|
|
|
Thereafter
|
|
8,102
|
|
|
Total
|
|
$
|
118,260
|
|
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 in two instances being challenged by physician partners which, if successful, could cause an increase to the amount we owe. As of
September 30, 2018
, we had recorded liabilities of approximately
$118.3 million
for all existing time-based obligations, of which we have estimated approximately $11.2 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, up to specified limits, of their put rights, if any, they will exercise. In addition, as of
September 30, 2018
, we had
$31.9 million
of event-based put obligations.
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 was 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
$5.3 million
in the aggregate, to option holders, and, in the case of some performance and market options, as of
September 30, 2018
a future payment will be due upon vesting totaling
$1.4 million
.
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. The amount of cash savings for 2017 is estimated to be $7.6 million as of
September 30, 2018
.
United Settlement
On July 2, 2018, the Company executed a binding Settlement Term Sheet with the plaintiffs with respect to a settlement to resolve all ongoing litigation between the Company and United, and on August 1, 2018, the parties entered into a final settlement agreement (the "Settlement Agreement") on substantially the terms provided in the Settlement Term Sheet. The Settlement Agreement includes a release of all claims that were asserted or that could have been asserted against the Company or against the nephrologists or other healthcare providers who have entered into joint venture arrangements or medical directorships with the Company (the “Joint Venture Providers”) and the joint venture entities without any admission of liability or wrongdoing. Pursuant to the Settlement Agreement, the Company will make total settlement payments of
$32.0 million
, inclusive of administrative fees and fees for plaintiffs’ counsel, in five installments, with an initial present value of
$29.6 million
, which is included in Certain legal matters in the Statement of Operations for the
nine
months ended
September 30, 2018
. The Company paid the first installment in the amount of
$10.0 million
on August 1, 2018, and expects to pay
$8.0 million
on August 1, 2019,
$7.0 million
on August 1, 2020,
$3.5 million
on August 1, 2021 and
$3.5 million
on August 1, 2022. As of
September 30, 2018
,
$7.6 million
is classified as Accrued expenses and other current liabilities and
$12.0 million
is classified in Other long-term liabilities. The Company also agreed to share certain information with United and to follow certain procedures with respect to patients covered by United. Subject to the mutual releases provided in the Settlement Agreement, United also agreed to renew, reinstate, and/or not to terminate the network agreements for any Joint Venture Providers whose network agreements United terminated or chose not to renew from August 1, 2017 through the date of the Settlement Agreement. The Settlement Agreement includes customary terms and conditions. In connection with the Settlement Agreement, the Company also entered into a three-year national network agreement with United on August 1, 2018 that provides for specified reimbursement rates for patients covered by Medicare Advantage, Medicaid HMO and commercial insurance products over the term of the agreement.
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 “Part II. Item 7. 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, 2017.
Refer to Note 1 and Note 2 to the unaudited consolidated financial statements included elsewhere in this Form 10-Q for an update to the accounting policy for revenue recognition as a result of adoption of ASU 2014-09,
Revenue with Contracts from Customers
, on January 1, 2018.