PGND Press Ganey Holdings, Inc.

Press Ganey Holdings, Inc. (NYSE: PGND) announced financial results today for the first quarter ended March 31, 2016.

“We are pleased with our solid performance in the first quarter of 2016 driven by patient experience, caregiver engagement and consulting solutions. Press Ganey continues to execute on our shared mission to reduce suffering and improve the patient and caregiver experience with the majority of health systems in the country,” said Patrick T. Ryan, Chief Executive Officer of Press Ganey Holdings, Inc. (the “Company”).

First Quarter 2016 Results

• Revenue was $86.7 million compared to $74.9 million for the same period in the prior year, an increase of 15.8%. Revenue growth consisted of 13.0% organic growth and 2.8% acquired growth.
• Adjusted EBITDA was $33.8 million compared to $27.3 million for the same period in the prior year, an increase of 23.6%.
• Net income was $8.1 million compared to $6.0 million for the same period in the prior year. Adjusted net income was $14.5 million compared to $9.7 million for the same period in the prior year, an increase of 49.7%.
• Diluted net income per share was $0.15 compared to $0.14 for the same period in the prior year. Adjusted diluted net income per share was $0.27 compared to $0.22 for the same period in the prior year, an increase of 21.7%.

2016 Guidance

The Company currently expects 2016 revenue to be $357 million and adjusted EBITDA to be $138 million, excluding the impact of the recently announced acquisition of Avatar International Holding Company and its subsidiary Avatar International LLC (“Avatar”). The Company expects the acquisition of Avatar to contribute revenue of $6 million to $7 million in 2016 and have no material impact on adjusted EBITDA in 2016.

Conference Call Information

The Company will host a conference call on May 4, 2016 at 9:00 a.m. Eastern Time to discuss the first quarter 2016 results. To participate in the Company's live conference call and webcast, please dial 877-201-0168 (1-647-788-4901 for international participants) using conference code number 80090961, or visit investors.pressganey.com.

About Press Ganey

Press Ganey Holdings (NYSE: PGND) is a leading provider of patient experience measurement, performance analytics and strategic advisory solutions for health care organizations across the continuum of care. Celebrating 30 years of experience, Press Ganey is recognized as a pioneer and thought leader in patient experience measurement and performance improvement solutions. Our mission is to help health care organizations reduce patient suffering and improve clinical quality, safety and the patient experience. As of January 1, 2016, we served more than 26,000 health care facilities.

Forward-Looking Statements

This document includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which relate to future, not past, events and are subject to risks and uncertainties. The forward-looking statements, which address the Company's expected business and financial performance and financial condition, among other matters, contain words such as: “believe,” “could,” “opportunities,” “continue,” “expect,” “may,” “will,” or “would” and other words and terms of similar meaning.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements about expected income; earnings; revenues; and growth. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made.

Factors that could cause actual results to differ materially from these forward-looking statements, include, but are not limited to, the following:

• Because our clients are concentrated in the healthcare industry, our revenue and operating results may be adversely affected by changes in regulations, a business downturn or consolidation in the healthcare industry.
• If our clients do not continue to purchase our products and solutions, or we are unable to attract new clients, our business and operating results could be materially and adversely affected.
• The loss of several of our large clients or a significant reduction in business from such clients would adversely affect our operating results.
• We may not maintain our current rate of revenue growth.
• We may be unable to effectively execute our growth strategy which could have an adverse effect on our business and competitive position in the industry.
• We may not be able to develop new products and solutions, or enhancements to our existing products and solutions, or be able to achieve widespread acceptance of new products or solutions.
• Technological developments could render our products and solutions obsolete or uncompetitive.
• We may be unable to effectively identify, complete or integrate the operations of future acquisitions, joint ventures, collaborative arrangements or other growth investments.
• We cannot assure you that we will be able to manage our growth effectively, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
• We operate in an increasingly competitive market, which could adversely affect our revenue and market share.
• If we fail to promote and maintain awareness of our brand in a cost-effective manner, our business might suffer.
• We may not be able to maintain our certification to conduct CMS mandated surveys, and this could adversely affect our business.
• We depend on our senior management, and we may be materially harmed if we lose any member of our senior management.
• Data security and integrity are critically important to our business, and actual or attempted breaches of security, unauthorized disclosure of information, denial of service attacks or the perception that personal and/or other sensitive or confidential information in our possession is not secure, could result in a material loss of business, substantial legal liability or significant harm to our reputation.
• Our business and operating results could be adversely affected if we experience business interruptions, errors or failure in connection with our or third-party information technology and communication systems and other software and hardware products used in connection with our business.
• We may be liable to our clients and may lose clients if we are unable to collect and maintain client data or if we lose client data.
• Protection of our intellectual property may be difficult and costly, and our inability to protect our intellectual property could reduce the value of our products and solutions.
• The agreements governing our 2015 Credit Agreement impose significant operating and financial restrictions on our company and our subsidiaries, which may prevent us from capitalizing on business opportunities, and we have pledged substantially all of our assets to secure indebtedness under our 2015 Credit Agreement.
• Our internal control over financial reporting does not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act.

A further description of these uncertainties and other risks can be found in the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and its Registration Statement on Form S-1 and the accompanying prospectus filed with the Securities and Exchange Commission on May 22, 2015. These or other uncertainties may cause the Company’s actual future results to be materially different than those expressed in any forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statements.

Non-GAAP Financial Measures

The Company defines Adjusted EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization, with further adjustments to add back (i) items that were terminated in connection with the initial public offering, or the IPO, (ii) non-cash charges, (iii) non-recurring items that are not indicative of the underlying operating performance of the business and (iv) items that are solely related to changes in the Company’s capital structure, and therefore are not indicative of the underlying operating performance of the business. The Company defines Adjusted Net Income as net income adjusted for non-cash and other non-recurring items. Management uses Adjusted EBITDA and Adjusted Net Income (i) to compare the Company’s operating performance on a consistent basis, (ii) to calculate incentive compensation for the Company’s employees, (iii) for planning purposes, including the preparation of the Company’s internal annual operating budget, (iv) to evaluate the performance and effectiveness of the Company’s operational strategies and (v) to assess compliance with various metrics associated with the agreements governing the Company’s indebtedness. The Company also believes that Adjusted EBITDA and Adjusted Net Income are useful to investors in assessing the Company’s financial performance because these measures are similar to the metrics used by investors and other interested parties when comparing companies in the Company’s industry that have different capital structures, debt levels and/or income tax rates. Accordingly, the Company believes that Adjusted EBITDA and Adjusted Net Income provide useful information to investors and others in understanding and evaluating the Company’s operating performance in the same manner as the Company’s management. Adjusted EBITDA and Adjusted Net Income are not determined in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered in isolation or as an alternative to net income, income from operations, net cash provided by operating, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP. To calculate Adjusted Net Income the Company uses the following additional non-GAAP measures: (i) Adjusted Operating Expenses, which includes Adjusted Cost of Revenue, Adjusted General and Administrative, Adjusted Depreciation and Amortization and Adjusted Loss (Gain) on Disposal of Property and Equipment, (ii) Adjusted Income from Operations, (iii) Adjusted Other Income (Expense), which includes Adjusted Management Fee of Related Party, (iv) Adjusted Income before Income Taxes and (v) Adjusted Provision for Income Taxes. See “Reconciliation of Non-GAAP Items to GAAP Net Income” below for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measure and reasons why the Company believes these non-GAAP measures provide useful information to investors and others in understanding and evaluating the Company’s operating performance in the same manner as the Company’s management.

            Press Ganey Holdings, Inc. Condensed Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited)   Three Months Ended March 31, 2016 2015   Revenue $ 86,731 $ 74,891 Operating expenses: Cost of revenue 36,469 31,427 General and administrative 22,644 18,301 Depreciation and amortization 11,572 9,859 Loss (gain) on disposal of property and equipment   18   (46) Total operating expenses   70,703   59,541 Income from operations 16,028 15,350 Other income (expense): Interest expense, net (1,230) (4,579) Management fee of related party   —   (286) Total other income (expense), net   (1,230)   (4,865) Income before income taxes 14,798 10,485 Provision for income taxes   6,680   4,511 Net income $ 8,118 $ 5,974   Earnings per share: Basic $ 0.15 $ 0.14 Diluted $ 0.15 $ 0.14   Weighted average shares of common stock outstanding: Basic 52,806 43,313 Diluted 53,286 43,313  

See Supplemental Financial Data below for additional information.

  Press Ganey Holdings, Inc. Condensed Consolidated Balance Sheets (Thousands of dollars, except share amounts)             March 31, December 31, 2016 2015 (Unaudited) ASSETS Current assets: Cash $ 56,632 $ 35,235 Accounts receivable, net of allowances of $737 and $774 at March 31, 2016 and December 31, 2015, respectively 56,812 53,568 Other receivables 3,242 2,993 Prepaid expenses and other assets 5,187 4,603 Income taxes receivable   —   4,603 Total current assets 121,873 101,002 Property and equipment, net 58,102 60,262 Deferred financing fees, net 848 897 Intangible assets, net 358,269 362,465 Goodwill   411,203   411,203 Total assets $ 950,295 $ 935,829 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 9,250 $ 9,250 Current portion of capital lease obligations 4,778 4,626 Accounts payable 5,382 9,420 Accrued payroll and related liabilities 10,055 15,830 Accrued expenses and other liabilities 2,208 1,969 Income taxes payable 2,776 — Deferred revenue   43,604   31,555 Total current liabilities 78,053 72,650 Long-term debt, less current portion 169,034 171,226 Capital lease obligations, less current portion 3,611 4,165 Deferred income taxes   123,975   125,179 Total liabilities 374,673 373,220 Commitments and contingencies — — SHAREHOLDERS' EQUITY Common stock, $0.01 par value, 350,000,000 shares authorized; 52,843,986 and 52,770,722 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively 528 528 Additional paid-in capital 603,470 598,575 Accumulated deficit   (28,376)   (36,494) Total shareholders' equity   575,622   562,609 Total liabilities and shareholders' equity $ 950,295 $ 935,829     Press Ganey Holdings, Inc. Condensed Consolidated Statement of Cash Flows (Thousands of dollars) (Unaudited)       Three Months Ended March 31, 2016       2015 Operating activities Net income $ 8,118 $ 5,974 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,572 9,859 Amortization of deferred financing costs and debt discount 170 185 Equity-based compensation 6,001 1,965 Provision for doubtful accounts 101 151 Loss (gain) on disposal of property and equipment 18 (46) Deferred income taxes (1,204) 1,221 Changes in assets and liabilities: Accounts receivable (3,345) (10,691) Other receivables (249) 367 Prepaid expenses and other assets (584) (3,727) Accounts payable (3,258) (7,762) Accrued payroll and related liabilities (5,775) (4,852) Accrued expenses and other liabilities 239 41 Deferred revenue 12,049 15,818 Income taxes, net   7,379   2,896 Net cash provided by operating activities 31,232 11,399 Investing activities Purchases of property and equipment   (6,014)   (2,726) Net cash used in investing activities (6,014) (2,726) Financing activities Payments on long-term debt (2,313) (1,070) Deferred financing payments — (50) Payments on capital lease obligations (402) (1,722) Proceeds from sale of equity interests — 100 Purchases of equity interests (473) (731) Taxes paid for net settlements of restricted stock vesting   (633)   — Net cash used in financing activities   (3,821)   (3,473) Net increase in cash 21,397 5,200 Cash at beginning of period   35,235   6,962 Cash at end of period $ 56,632 $ 12,162   Press Ganey Holdings, Inc. Supplemental Financial Data (In thousands, except per share amounts) (Unaudited)   Reconciliation of Non-GAAP Items to GAAP Net Income               Three Months Ended March 31, 2016 2015 % Change   Revenue $ 86,731 $ 74,891 15.8 %   Adjusted operating expenses: Adjusted cost of revenue (1) 35,358 30,714 15.1 % Adjusted general and administrative (2) 17,582 16,837 4.4 % Adjusted depreciation and amortization (3) 7,376 5,722 28.9 % Adjusted loss (gain) on disposal of property and equipment (4)   —   — — % Total adjusted operating expenses   60,316   53,273 13.2 % Adjusted income from operations 26,415 21,618 22.2 % Adjusted other income (expense): Interest expense, net (1,230) (4,579) (73.1) % Adjusted management fee of related party (5)   —   — — % Total adjusted other income (expense), net   (1,230)   (4,579) (73.1) % Adjusted income before income taxes 25,185 17,039 47.8 % Adjusted provision for income taxes (6)   10,684   7,353 45.3 % Adjusted net income $ 14,501 $ 9,686 49.7 % Sum of Non-GAAP adjustments in Footnotes 1-5 (10,387) (6,554) Net tax impact of adjustments in Footnotes 1-5 (6)   4,004   2,842 GAAP net income $ 8,118 $ 5,974   Adjusted earnings per share: Basic $ 0.27 $ 0.22 22.8 % Diluted $ 0.27 $ 0.22 21.7 %   Weighted average shares of common stock outstanding: Basic 52,806 43,313 21.9 % Diluted 53,286 43,313 23.0 %   Adjusted percentages of revenue Cost of revenue 40.8 % 41.0 % General and administrative 20.3 % 22.5 % Income from operations 30.5 % 28.9 % Net income 16.7 % 12.9 %

See footnotes on next page.

  Press Ganey Holdings, Inc. Supplemental Financial Data (Thousands of dollars) (Unaudited)   Reconciliation of Non-GAAP Items to GAAP Net Income (continued)             Three Months Ended March 31, Excluded items: 2016 2015   (1) Equity-based compensation expense associated with equity awards granted to attract and retain employees and directors. The Company's incentive compensation plan excludes this expense. The Company has also excluded this item in order to provide consistent operating performance insight as these expenses have fluctuated period to period, are noncash, and do not necessarily reflect current period effectiveness of operational strategies. Equity-based compensation $ 1,111 $ 713     (2) Equity-based compensation charges (noted above), transaction costs incurred in connection with completed and potential acquisitions, and other non-comparable expenses which include costs incurred in connection with the Company’s IPO and capital structure and strategic corporate planning in 2015, and professional fees incurred for the preparation for compliance with Section 404 of the Sarbanes-Oxley Act and for design of the Company's equity incentive and compensation programs in 2016. The Company's incentive compensation plan excludes these expenses. The Company has also excluded acquisition expenses and other non-comparable items in order to provide consistent operating performance insight as these expenses are associated with specific acquisition targets or specific projects that are not associated with ongoing operating activities. Equity-based compensation $ 4,890 $ 1,252 Acquisition expenses 66 7 Other non-comparable items   106   205 $ 5,062 $ 1,464     (3) Amortization expense associated with acquired intangible assets from business combinations. The Company has excluded this item as analysts and investors commonly exclude this expense in assessing financial performance across companies and industries. Amortization of intangibles $ 4,196 $ 4,137     (4) Noncash gains and losses associated with disposals of property and equipment. The Company's incentive compensation plan excludes this item. Loss (gain) on disposal of property and equipment $ 18 $ (46)     (5) Fees paid to the Company’s majority owner under a management agreement prior to the Company’s IPO. The management agreement was terminated upon the closing of the IPO in May 2015. Management fee of related party $ — $ 286     (6) Provision for income taxes based on the Company’s state and federal effective tax rates, including usual non-deductible expenses.  

Press Ganey Holdings, Inc.

Supplemental Financial Data

(Thousands of dollars)

(Unaudited)

 

Reconciliation of Net Income to EBITDA and Adjusted EBITDA (Non-GAAP)

          Three Months Ended March 31, 2016 2015   Net income $ 8,118 $ 5,974 Interest expense, net 1,230 4,579 Provision for income taxes 6,680 4,511 Depreciation and amortization   11,572   9,859 EBITDA 27,600 24,923 Adjustments: Equity-based compensation (1) 6,001 1,965 Management fee of related party (2) — 286 Acquisition expenses (3) 66 7 Loss (gain) on disposal of property and equipment (4) 18 (46) Other non-comparable items (5)   106   205 Adjusted EBITDA $ 33,791 $ 27,340 Adjusted EBITDA Margin 39.0 % 36.5 %

(1) Equity-based compensation expense associated with equity awards granted to attract and retain employees and directors. The Company’s incentive compensation plan excludes this expense. The Company has also excluded this item in order to provide consistent operating performance insight as these expenses have fluctuated period to period, are noncash, and do not necessarily reflect current period effectiveness of operational strategies.

(2) Fees paid to the Company’s majority owner under a management agreement prior to the Company’s IPO. The management agreement was terminated upon the closing of the IPO in May 2015.

(3) Transaction costs incurred in connection with completed and potential acquisitions. The Company’s incentive compensation plan excludes this expense. The Company has also excluded this item in order to provide consistent operating performance insight as these expenses are associated with specific acquisition targets.

(4) Noncash gains and losses associated with disposals of property and equipment. The Company’s incentive compensation plan excludes this item.

(5) Other non-comparable items include costs incurred in connection with the Company's IPO and capital structure and strategic corporate planning in 2015 and professional fees incurred for the preparation for compliance with Section 404 of the Sarbanes-Oxley Act and for design of the Company’s equity incentive and compensation programs in 2016. The Company’s incentive compensation plan excludes these expenses. The Company has also excluded this item in order to provide consistent operating performance insight as these expenses are associated with specific projects that are not associated with ongoing operating activities.

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Investor Contact:Press Ganey Holdings, Inc.Balaji Gandhi, 781-295-0390IR@pressganey.comorMedia Contact:Aria MarketingKristina Markos, 617-332-9999 x238kmarkos@ariamarketing.com