American Renal Associates Holdings, Inc. Announces Fourth Quarter 2019 Results

Company Announces CEO Plans to Retire by the End of 2020

BEVERLY, Mass.--(BUSINESS WIRE)-- American Renal Associates Holdings, Inc. (NYSE: ARA) (the “Company”), a leading kidney care and dialysis provider focused on partnering with local nephrologists, today announced financial and operating results for the quarter and year ended December 31, 2019.

The Company also announced that Joseph (Joe) Carlucci has communicated his intention to retire as Chief Executive Officer of the Company by the end of 2020. The Board of Directors will initiate a process to identify a successor for Mr. Carlucci and will immediately engage an executive search firm to support the search. Mr. Carlucci plans to continue as CEO and Chairman until his successor has started and will assist in ensuring a smooth transition.

“After a 42-year career in the healthcare industry, I am announcing my intention to retire in 2020. Co-founding ARA approximately two decades ago has been the highlight of my career, and it has been a tremendous privilege to lead this organization and our exceptional team ever since. Today, we provide high quality, clinically integrated care to more than 17,300 patients in partnership with 400 physicians in 246 dialysis clinics across 27 states, and I am so proud of the growth we’ve achieved,” Carlucci said. “Now is the right time for a new leader who can build on our established foundation and further realize ARA’s growth opportunities in a way that still prioritizes our Core Values.”

Steven Silver, Senior Managing Director of Centerbridge Partners, L.P., and Member of the Company’s Board of Directors, said: “On behalf of the Board, I would like to personally thank and commend Joe for his leadership. Among his many accomplishments during his long and distinguished career, Joe co-founded ARA and pioneered the physician partnership model within the dialysis sector, establishing the Company as a differentiated physician-driven organization focused on excellent patient care. We are grateful to Joe that he will continue in his role as CEO and Chairman while we work to identify a successor to lead ARA’s next phase of growth and value creation.”

Fourth Quarter 2019 Highlights (all percentage changes compare Q4 2019 to Q4 2018 unless noted):

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

• Patient service operating revenues decreased 0.8% to $206.1 million;
• Net income attributable to American Renal Associates Holdings, Inc. was $0.1 million, as compared to a net loss of $0.6 million in Q4 2018;
• Adjusted EBITDA less noncontrolling interests (“Adjusted EBITDA-NCI”) was $23.0 million, as compared to $24.7 million in Q4 2018;
• Adjusted net income attributable to American Renal Associates Holdings, Inc. was $6.5 million, or $0.19 per share, for Q4 2019;
• Total dialysis treatments increased 4.8%, of which 3.2% was non-acquired growth. Normalized total treatment growth was 6.0%, and normalized non-acquired treatment growth was 4.4%; and
• As of December 31, 2019, the Company operated 246 outpatient dialysis clinics serving more than 17,300 patients.

Carlucci said, “We are pleased that ARA achieved our 2019 guidance. We remain encouraged by our treatment growth performance, with the fourth quarter and fiscal year 2019 normalized total treatment growth of 6.0% and 7.3%, respectively. These volume trends continue to demonstrate that more patients continue to choose ARA to receive high quality dialysis care.”

Carlucci added, “As indicated in our outlook for 2020, we expect to achieve year-over-year growth in Adjusted EBITDA-NCI despite an anticipated reduction in Calcimimetic reimbursement. We will continue to remain focused on improving our operating efficiency and strengthening our balance sheet, while strategically capturing the growth and development opportunities that remain ahead.”

Financial and operating highlights include:

Revenue: Patient service operating revenues for the fourth quarter of 2019 were $206.1 million, a decrease of 0.8%, as compared to $207.8 million for the prior-year period, which was primarily due to declines in commercial treatment rates, partially offset by an increase of 4.8% in the number of dialysis treatments. Patient service operating revenues for the year ended December 31, 2019 were $822.5 million, an increase of 2.1%, as compared to $805.8 million for the prior-year period, which was primarily due to an increase of 6.5% in the number of dialysis treatments, partially offset by adverse changes in commercial treatment rates.

Treatment Volume: Total dialysis treatments for the fourth quarter of 2019 were 628,817, representing an increase of 4.8% over the fourth quarter of 2018. Non-acquired treatment growth was 3.2%, and acquired treatment growth was 1.6% for the fourth quarter of 2019. Normalized total treatment growth was 6.0%, and non-acquired treatment growth was 4.4%, as compared to the fourth quarter of 2018. Total dialysis treatments for the year ended December 31, 2019 were 2,460,710, representing an increase of 6.5% over the prior-year period. Non-acquired treatment growth was 4.5%, and acquired treatment growth was 2.0% for the year ended December 31, 2019. Normalized total treatment growth was 7.3%, and non-acquired treatment growth was 5.3%, as compared to the prior-year period.

Clinic Activity: As of December 31, 2019, the Company provided services at 246 outpatient dialysis clinics serving 17,306 patients. During the year ended December 31, 2019, we opened seven de novo clinics, two of which were opened in the fourth quarter, acquired two clinics, and sold four clinics.

Net income, Net income attributable to noncontrolling interests, Net income (loss) attributable to American Renal Associates Holdings, Inc., Adjusted EBITDA and Adjusted EBITDA-NCI:

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Operating Expenses: Patient care costs for the fourth quarter of 2019 were $154.4 million, or 74.9% of patient service operating revenues, as compared to $148.5 million, or 71.5% of patient service operating revenues, in the prior-year period. General and administrative expenses were $22.8 million, or 11.1% of patient service operating revenues, as compared to $25.0 million, or 12.0% of patient service operating revenues, in the prior-year period.

Patient care costs for the year ended December 31, 2019 were $610.2 million, or 74.2% of patient service operating revenues, as compared to $570.0 million, or 70.7% of patient service operating revenues, in the prior-year period. General and administrative expenses during the year ended December 31, 2019 were $91.1 million, or 11.1% of patient service operating revenues, as compared to $101.1 million, or 12.5% of patient service operating revenues, in the prior-year period.

Cash Flow: Cash provided by operating activities for the fourth quarter of 2019 was $3.7 million, as compared to $22.5 million in the prior-year period. Adjusted cash used in operating activities less distributions to noncontrolling interests (see “Reconciliation of Non-GAAP Financial Measures”) for the fourth quarter of 2019 was $19.0 million, as compared to adjusted cash provided by operating activities less distributions to noncontrolling interests of $6.7 million in the prior-year period. Total capital expenditures for the fourth quarter of 2019 were $5.2 million, as compared to $15.9 million in the prior-year period. Capital expenditures for the three months ended December 31, 2019 included $2.6 million for expansions and new clinic development, as compared to $13.2 million in the prior-year period, and $2.7 million for other capital expenditures, similar to the prior-year period.

Cash provided by operating activities for the year ended December 31, 2019 was $38.8 million, as compared to $106.4 million in the prior-year period. Adjusted cash used in operating activities less distributions to noncontrolling interests (see “Reconciliation of Non-GAAP Financial Measures”) for the year ended December 31, 2019 was $24.2 million, as compared to adjusted cash provided by operating activities of $36.3 million in the prior-year period. Total capital expenditures for the year ended December 31, 2019 were $23.1 million, as compared to $45.0 million in the prior-year period. Capital expenditures for the year ended December 31, 2019 included $16.5 million for expansions and new clinic development, as compared to $33.3 million in the prior-year period, and $6.6 million for other capital expenditures, as compared to $11.7 million in the prior-year period.

Balance Sheet: At December 31, 2019, the Company’s balance sheet included consolidated cash of $34.5 million and consolidated debt of $587.6 million, including the current portion of long-term debt. Excluding clinic-level debt not guaranteed by the Company and clinic-level cash not owned by the Company, Adjusted owned net debt (see “Reconciliation of Non-GAAP Financial Measures”) was $515.2 million at December 31, 2019, as compared to $470.9 million at December 31, 2018. Adjusted owned net debt to last twelve months Adjusted EBITDA-NCI leverage ratio was 5.9x at December 31, 2019. As of December 31, 2019, net patient accounts receivable was $102.2 million.

Outlook for 2020 Adjusted EBITDA-NCI:

The Company expects 2020 Adjusted EBITDA-NCI to be in a range of $90 million and $95 million. The 2020 Adjusted EBITDA-NCI range is consistent with the Company’s preliminary outlook first established in September 2019. The Company expects its 2020 normalized total treatment growth to be in a range of 4.5% and 5.0%, and expects its 2020 revenue per treatment (“RPT”) to be in a range of flat to down 1% as compared to 2019 RPT of $334. The Company expects its leverage ratio (defined below) to improve by between 0.3x and 0.6x by year-end 2020, as compared to 5.9x at December 31, 2019. The Company’s 2020 Adjusted EBITDA-NCI outlook excludes any potential adverse financial impact resulting from the coronavirus (COVID-19) outbreak.

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

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

Conference Call

American Renal Associates Holdings, Inc. will hold a conference call to discuss this release on Monday, March 16, 2020, at 5:00 p.m. Eastern time. Investors will have the opportunity to listen to the conference call by dialing (877) 407-8029, or for international callers (201) 689-8029, or may listen over the Internet by going to the Investor Relations section at www.ir.americanrenal.com. For those who cannot listen to the live broadcast, a replay will be available and can be accessed by dialing (877) 660-6853, or for international callers (201) 612-7415. The conference ID for the live call and the replay is 13697054.

About American Renal Associates

American Renal Associates (“ARA”) is a leading provider of outpatient dialysis services in the United States. As of December 31, 2019, ARA operated 246 dialysis clinic locations in 27 states and the District of Columbia serving more than 17,300 patients with end stage renal disease. ARA operates principally through a physician partnership model, in which it partners with approximately 400 local nephrologists to develop, own and operate dialysis clinics. ARA’s Core Values emphasize taking good care of patients, providing physicians with clinical autonomy and operational support, hiring and retaining the best possible staff and providing comprehensive management services. For more information about American Renal Associates, visit www.americanrenal.com.

Forward-Looking Statements

Statements in this press release that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our outlook for Adjusted EBITDA-NCI, are based upon currently available information, operating plans and projections about future events and trends. Terminology such as “anticipate,” “believe,” “contemplate,” “estimate,” “expect,” “forecast,” “intend,” “may,” “objective,” “outlook,” “plan,” “potential,” “project,” “seek,” “should,” “strategy,” “target” or “will” or variations of such words or similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such terms.

Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. Such risks and uncertainties include, among others, the effect of the restatement of our previously issued financial results and the related securities and derivative litigation and related matters; our ability to remediate material weaknesses in our internal controls over financial reporting; continuing decline in the number of patients with commercial insurance, including as a result of changes to the healthcare exchanges or changes in regulations or enforcement of regulations regarding the healthcare exchanges and challenges from commercial payors or any regulatory or other changes leading to changes in the ability of patients with commercial insurance coverage to receive charitable premium support; decline in commercial payor reimbursement rates, including with respect to Medicare Advantage plans; the ultimate resolution of the Centers for Medicare and Medicaid Services Interim Final Rule published December 14, 2016 related to dialysis facilities Conditions for Coverage (CMS 3337-IFC), including an issuance of a different but related Final Rule; reduction of government-based payor reimbursement rates or insufficient rate increases or adjustments that do not cover all of our operating costs; our ability to successfully develop de novo clinics, acquire existing clinics and attract new nephrologist partners; our ability to compete effectively in the dialysis services industry; the performance of our joint venture subsidiaries and their ability to make distributions to us; changes to the Medicare end-stage renal disease (“ESRD”) program that could affect reimbursement rates and evaluation criteria, as well as changes in Medicaid or other non-Medicare government programs or payment rates, including the ESRD prospective payment rate system final rule for 2020 issued October 31, 2019; federal or state healthcare laws that could adversely affect us; our ability to comply with all of the complex federal, state and local government regulations that apply to our business, including those in connection with federal and state anti-kickback laws and state laws prohibiting the corporate practice of medicine or fee-splitting; heightened federal and state investigations and enforcement efforts; the impact of the SEC investigation; changes in the availability and cost of erythropoietin-stimulating agents and other pharmaceuticals used in our business; changes in the reimbursement rates of the calcimimetics pharmaceutical class reimbursed under the Medicare Transitional Drug Add-on Payment Adjustment; development of new technologies or government regulation that could decrease the need for dialysis services or decrease our in-center patient population; our ability to timely and accurately bill for our services and meet payor billing requirements; claims and losses relating to malpractice, professional liability and other matters; the sufficiency of our insurance coverage for those claims and rising insurances costs, and negative publicity or reputational damage arising from such matters; loss of any members of our senior management; damage to our reputation or our brand and our ability to maintain brand recognition; our ability to maintain relationships with our medical directors and renew our medical director agreements; shortages of qualified skilled clinical personnel, or higher than normal turnover rates; competition and consolidation in the dialysis services industry; deterioration in economic conditions, particularly in states where we operate a large number of clinics, or disruptions in the financial markets or the effects of natural or other disasters, public health crises or adverse weather events; the participation of our physician partners in material strategic and operating decisions and our ability to favorably resolve any disputes; our ability to honor obligations under the joint venture operating agreements with our physician partners were they to exercise certain put rights and other rights; unauthorized disclosure of personally identifiable, protected health or other sensitive or confidential information; our ability to meet our obligations and comply with restrictions under our substantial level of indebtedness; and the ability of our principal stockholder, whose interests may conflict with yours, to strongly influence or effectively control our corporate decisions.

For additional information and other factors that could cause ARA’s actual results to materially differ from those set forth herein, please see ARA’s filings with the SEC. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. ARA undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Use of Non-GAAP Financial Measures

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

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

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