Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

For the Quarterly Period Ended September 30, 2012

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-14106

 

 

DAVITA INC.

 

 

2000 16th Street

Denver, CO 80202

Telephone number (303) 405-2100

Delaware   51-0354549
(State of incorporation)  

(I.R.S. Employer

Identification No.)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 26, 2012, the number of shares of the Registrant’s common stock outstanding was approximately 95.4 million shares and the aggregate market value of the common stock outstanding held by non-affiliates based upon the closing price of these shares on the New York Stock Exchange was approximately $10.6 billion.

 

 

 


Table of Contents

DAVITA INC.

INDEX

 

         Page No.  
 

PART I. FINANCIAL INFORMATION

  
Item 1.  

Condensed Consolidated Financial Statements:

  
 

Consolidated Statements of Income for the three and nine months ended September 30, 2012 and September 30, 2011

     1   
 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and September 30, 2011

     2   
 

Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

     3   
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and September 30,  2011

     4   
 

Consolidated Statements of Equity for the nine months ended September 30, 2012 and for the year ended December 31, 2011

     5   
 

Notes to Condensed Consolidated Financial Statements

     6   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     30   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     47   
Item 4.  

Controls and Procedures

     48   
 

PART II. OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     50   
Item 1A.  

Risk Factors

     50   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     68   
Item 6.  

Exhibits

     69   
 

Signature

     70   

 

Note: Items 3, 4 and 5 of Part II are omitted because they are not applicable.

 

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Table of Contents

DAVITA INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars in thousands, except per share data)

 

     Three months  ended
September 30,
    Nine months  ended
September 30,
 
     2012     2011     2012     2011  

Dialysis patient service operating revenues

   $ 1,838,363      $ 1,669,086      $ 5,410,200      $ 4,749,469   

Less: Provision for uncollectible accounts related to patient service operating revenues

     (59,803     (50,039     (167,227     (138,520
  

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service operating revenues

     1,778,560        1,619,047        5,242,973        4,610,949   

Other revenues

     184,406        138,783        516,368        370,427   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating revenues

     1,962,966        1,757,830        5,759,341        4,981,376   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses and charges:

        

Patient care costs

     1,340,918        1,189,638        3,916,324        3,466,860   

General and administrative

     201,198        182,638        623,208        498,033   

Depreciation and amortization

     80,586        67,558        234,368        193,641   

Provision for uncollectible accounts

     2,469        1,903        6,294        4,727   

Equity investment income

     (3,064     (2,619     (8,314     (6,555

Legal proceeding contingency accrual and related expenses

     —          —          78,000        —     

Goodwill impairment charge

     —          —          —          24,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses and charges

     1,622,107        1,439,118        4,849,880        4,180,706   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     340,859        318,712        909,461        800,670   

Debt expense

     (70,494     (60,848     (192,584     (179,340

Other income

     819        798        2,698        2,195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     271,184        258,662        719,575        623,525   

Income tax expense

     98,634        94,204        262,138        224,034   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     172,550        164,458        457,437        399,491   

Discontinued operations:

        

Income from operations of discontinued operations, net of tax

     —          1,076        —          1,460   

Loss on disposal of discontinued operations, net of tax

     —          (3,688     —          (3,688
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     172,550        161,846        457,437        397,263   

Less: Net income attributable to noncontrolling interests

     (27,829     (26,485     (77,259     (67,385
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita Inc.

   $ 144,721      $ 135,361      $ 380,178      $ 329,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic income from continuing operations per share attributable to DaVita Inc.

   $ 1.52      $ 1.48      $ 4.03      $ 3.50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share attributable to DaVita Inc.

   $ 1.52      $ 1.45      $ 4.03      $ 3.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income from continuing operations per share attributable to DaVita Inc.

   $ 1.50      $ 1.45      $ 3.96      $ 3.43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share attributable to DaVita Inc.

   $ 1.50      $ 1.42      $ 3.96      $ 3.40   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares for earnings per share:

        

Basic

     94,979,858        93,441,620        94,309,099        95,053,339   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     96,634,620        95,171,225        96,124,226        97,057,773   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to DaVita Inc.:

        

Income from continuing operations

   $ 144,721      $ 138,192      $ 380,178      $ 332,325   

Discontinued operations

     —          (2,831     —          (2,447
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 144,721      $ 135,361      $ 380,178      $ 329,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

DAVITA INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands, except per share data)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Net income

   $ 172,550      $ 161,846      $ 457,437      $ 397,263   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

        

Unrealized losses on interest rate swap and cap agreements:

        

Unrealized losses on interest rate swap and cap agreements

     (1,741     (10,869     (6,104     (27,839

Less: Reclassifications of net swap and cap agreements realized losses into net income

     2,530        2,702        7,586        7,124   

Unrealized gains (losses) on investments:

        

Unrealized gains (losses) on investments

     445        (902     1,387        (587

Less: Reclassification of net investment realized gains into net income

     —          —          (75     (57

Foreign currency translation adjustments

     (135     —          (1,593     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     1,099        (9,069     1,201        (21,359
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     173,649        152,777        458,638        375,904   

Less: Comprehensive income attributable to the noncontrolling interests

     (27,829     (26,485     (77,259     (67,385
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to DaVita Inc.

   $ 145,820      $ 126,292      $ 381,379      $ 308,519   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


Table of Contents

DAVITA INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except per share data)

 

     September 30,
2012
    December 31,
2011
 

ASSETS

    

Cash and cash equivalents

   $ 382,194      $ 393,752   

Short-term investments

     5,836        17,399   

Accounts receivable, less allowance of $232,127 and $250,343

     1,248,050        1,195,163   

Inventories

     78,322        75,731   

Other receivables

     207,439        269,832   

Other current assets

     46,989        49,349   

Income tax receivable

     33,625        —     

Deferred income taxes

     323,219        280,382   
  

 

 

   

 

 

 

Total current assets

     2,325,674        2,281,608   

Property and equipment, net

     1,654,657        1,432,651   

Amortizable intangibles, net

     177,542        159,491   

Equity investments

     28,705        27,325   

Long-term investments

     13,249        9,890   

Other long-term assets

     30,558        34,231   

Restricted cash

     1,268,767        —     

Goodwill

     5,324,960        4,946,976   
  

 

 

   

 

 

 
   $ 10,824,112      $ 8,892,172   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Accounts payable

   $ 272,627      $ 289,653   

Other liabilities

     416,897        325,734   

Accrued compensation and benefits

     529,492        412,972   

Current portion of long-term debt

     117,821        87,345   

Income tax payable

     —          37,412   
  

 

 

   

 

 

 

Total current liabilities

     1,336,837        1,153,116   

Long-term debt

     5,620,716        4,417,624   

Other long-term liabilities

     145,246        132,006   

Alliance and product supply agreement, net

     15,990        19,987   

Deferred income taxes

     484,918        423,098   
  

 

 

   

 

 

 

Total liabilities

     7,603,707        6,145,831   

Commitments and contingencies

    

Noncontrolling interests subject to put provisions

     550,020        478,216   

Equity:

    

Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued)

    

Common stock ($0.001 par value, 450,000,000 shares authorized; 134,862,283 shares issued; 95,346,980 and 93,641,363 shares outstanding)

     135        135   

Additional paid-in capital

     543,751        596,300   

Retained earnings

     3,575,996        3,195,818   

Treasury stock, at cost (39,515,303 and 41,220,920 shares)

     (1,564,178     (1,631,694

Accumulated other comprehensive loss

     (18,283     (19,484
  

 

 

   

 

 

 

Total DaVita Inc. shareholders’ equity

     2,537,421        2,141,075   

Noncontrolling interests not subject to put provisions

     132,964        127,050   
  

 

 

   

 

 

 

Total equity

     2,670,385        2,268,125   
  

 

 

   

 

 

 
   $ 10,824,112      $ 8,892,172   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

DAVITA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

     Nine months ended
September 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 457,437      $ 397,263   

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

    

Depreciation and amortization

     234,368        194,328   

Stock-based compensation expense

     34,857        36,392   

Tax benefits from stock award exercises

     60,252        35,096   

Excess tax benefits from stock award exercises

     (39,346     (19,640

Deferred income taxes

     (1,374     38,377   

Equity investment income, net

     10        238   

Other non-cash charges and loss on disposal of assets

     17,244        16,398   

Goodwill impairment charge

     —          24,000   

Changes in operating assets and liabilities, other than from acquisitions and divestitures:

    

Accounts receivable

     (51,349     (61,483

Inventories

     1,958        11,767   

Other receivables and other current assets

     65,047        81,737   

Other long-term assets

     3,429        2,408   

Accounts payable

     (18,200     56,652   

Accrued compensation and benefits

     113,101        121,631   

Other current liabilities

     87,223        (8,733

Income taxes

     (69,108     88,454   

Other long-term liabilities

     5,064        14,502   
  

 

 

   

 

 

 

Net cash provided by operating activities

     900,613        1,029,387   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions of property and equipment, net

     (378,949     (251,879

Acquisitions

     (419,114     (927,124

Proceeds from asset sales

     2,118        51,623   

Purchase of investments available for sale

     (3,452     (2,118

Purchase of investments held-to-maturity

     (5,257     (29,740

Proceeds from sale of investments available for sale

     6,796        1,149   

Proceeds from maturities of investments held-to-maturity

     12,375        29,747   

Purchase of equity investments and other assets

     (1,276     (5,005

Distributions received on equity investments

     2        340   
  

 

 

   

 

 

 

Net cash used in investing activities

     (786,757     (1,133,007
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings

     26,992,105        27,506,051   

Payments on long-term debt

     (25,799,807     (27,350,513

Restricted cash

     (1,268,767     —     

Interest rate cap premiums and other deferred financing costs

     (22,189     (17,863

Purchase of treasury stock

     —          (323,348

Distributions to noncontrolling interests

     (81,978     (67,408

Stock award exercises and other share issuances, net

     8,395        9,886   

Excess tax benefits from stock award exercises

     39,346        19,640   

Contributions from noncontrolling interests

     19,368        14,779   

Proceeds from sales of additional noncontrolling interests

     1,844        2,675   

Purchases from noncontrolling interests

     (13,774     (9,190
  

 

 

   

 

 

 

Net cash used in financing activities

     (125,457     (215,291

Effect of exchange rate changes on cash and cash equivalents

     43        —     
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (11,558     (318,911

Cash and cash equivalents at beginning of period

     393,752        860,117   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 382,194      $ 541,206   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


Table of Contents

DAVITA INC.

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

(dollars and shares in thousands)

 

    Non-
controlling
interests
subject to
put
provisions
    DaVita Inc. Shareholders’ Equity     Non-  
      Common stock     Additional
paid-in
capital
    Retained
earnings
    Treasury stock     Accumulated
other
comprehensive
income (loss)
    Total     controlling
interests
not
subject to
put
provisions
 

Balance at December 31, 2010

  $ 383,052        134,862      $ 135      $ 620,546      $ 2,717,817        (38,861   $ (1,360,579   $ 503      $ 1,978,422      $ 58,712   

Comprehensive income:

                   

Net income

    59,135              478,001              478,001        36,259   

Other comprehensive loss

                  (19,987     (19,987  

Stock purchase shares issued

          4,268          175        6,554          10,822     

Stock unit shares issued

          (2,866       78        2,866          —       

Stock options and SSARs exercised

          (37,370       1,182        42,813          5,443     

Stock-based compensation expense

          48,718                48,718     

Excess tax benefits from stock awards exercised

          20,834                20,834     

Distributions to noncontrolling interests

    (61,343                     (39,310

Contributions from noncontrolling interests

    12,547                        8,463   

Sales and assumptions of additional noncontrolling interests

    49,343            (1,299             (1,299     55,566   

Purchases from noncontrolling interests

    (2,103         (9,486             (9,486     (2,100

Changes in fair value of noncontrolling interests

    63,762            (63,762             (63,762  

Expired put provision

    (26,177         16,717                16,717        9,460   

Purchase of treasury stock

              (3,795     (323,348       (323,348  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

  $ 478,216        134,862      $ 135      $ 596,300      $ 3,195,818        (41,221   $ (1,631,694   $ (19,484   $ 2,141,075      $ 127,050   

Comprehensive income:

                   

Net income

    49,522              380,178              380,178        27,737   

Other comprehensive income

                  1,201        1,201     

Stock unit shares issued

          (8,148       206        8,148          —       

Stock options and SSARs exercised

          (57,194       1,500        59,368          2,174     

Stock-based compensation expense

          34,857                34,857     

Excess tax benefits from stock awards exercised

          39,346                39,346     

Distributions to noncontrolling interests

    (50,668                     (31,310

Contributions from noncontrolling interests

    11,447                        7,921   

Sales and assumptions of additional noncontrolling interests

    13,805            62                62        1,566   

Purchases from noncontrolling interests

    (3,071         (10,703             (10,703  

Changes in fair value of noncontrolling interests

    50,769            (50,769             (50,769  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

  $ 550,020        134,862      $ 135      $ 543,751      $ 3,575,996        (39,515   $ (1,564,178   $ (18,283   $ 2,537,421      $ 132,964   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

5


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars and shares in thousands, except per share data)

Unless otherwise indicated in this Quarterly Report on Form 10-Q “the Company”, “we”, “us”, “our” and similar terms refer to DaVita Inc. and its consolidated subsidiaries.

1. Condensed consolidated interim financial statements

The condensed consolidated interim financial statements included in this report are prepared by the Company without audit. In the opinion of management, all adjustments consisting only of normal recurring items necessary for a fair presentation of the results of operations are reflected in these consolidated interim financial statements. All significant intercompany accounts and transactions have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve revenue recognition and provisions for uncollectible accounts, impairments and valuation adjustments, fair value estimates, accounting for income taxes, variable compensation accruals, purchase accounting valuation estimates and stock-based compensation. The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the operating results for the full year. The consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Prior year balances and amounts have been reclassified to conform to the current year presentation. The Company has evaluated subsequent events through the date these condensed consolidated financial statements were issued and has included all necessary disclosures.

2. Earnings per share

Basic net income per share is calculated by dividing net income attributable to the Company, net of the (increase) decrease in noncontrolling interests redemption rights in excess of fair value, by the weighted average number of common shares and vested stock units outstanding. Diluted net income per share includes the dilutive effect of outstanding stock-settled stock appreciation rights, stock options and unvested stock units (under the treasury stock method).

The reconciliations of the numerators and denominators used to calculate basic and diluted earnings per share are as follows:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012      2011     2012      2011  

Basic:

          

Income from continuing operations attributable to
DaVita Inc.

   $ 144,721       $ 138,192      $ 380,178       $ 332,325   

(Increase) decrease in noncontrolling interests redemption rights in excess of fair value

     —           (17     —           103   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from continuing operations for basic earnings per share calculation

   $ 144,721       $ 138,175      $ 380,178       $ 332,428   

Discontinued operations attributable to DaVita Inc.

     —           (2,831     —           (2,447
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to DaVita Inc. for basic earnings per share calculation

   $ 144,721       $ 135,344      $ 380,178       $ 329,981   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average shares outstanding during the period

     94,977         93,439        94,306         95,050   

Vested stock units

     3         3        3         3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average shares for basic earnings per share calculation

     94,980         93,442        94,309         95,053   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic income from continuing operations per share attributable to DaVita Inc.

   $ 1.52       $ 1.48      $ 4.03       $ 3.50   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic net income per share attributable to DaVita Inc.

   $ 1.52       $ 1.45      $ 4.03       $ 3.47   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

6


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012      2011     2012      2011  

Diluted:

          

Income from continuing operations attributable to DaVita Inc.

   $ 144,721       $ 138,192      $ 380,178       $ 332,325   

(Increase) decrease in noncontrolling interests redemption rights in excess of fair value

     —           (17     —           103   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from continuing operations for diluted earnings per share calculation

   $ 144,721       $ 138,175      $ 380,178       $ 332,428   

Discontinued operations attributable to DaVita Inc.

     —           (2,831     —           (2,447
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to DaVita Inc. for diluted earnings per share calculation

   $ 144,721       $ 135,344      $ 380,178       $ 329,981   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average shares outstanding during the period

     94,977         93,439        94,306         95,050   

Vested stock units

     3         3        3         3   

Assumed incremental shares from stock plans

     1,655         1,729        1,815         2,005   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average shares for diluted earnings per share calculation

     96,635         95,171        96,124         97,058   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted income from continuing operations per share attributable to DaVita Inc.

   $ 1.50       $ 1.45      $ 3.96       $ 3.43   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted net income per share attributable to DaVita Inc.

   $ 1.50       $ 1.42      $ 3.96       $ 3.40   
  

 

 

    

 

 

   

 

 

    

 

 

 

Anti-dilutive stock-settled awards excluded from calculation (1)

     236         2,834        1,641         1,777   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Shares associated with stock-settled stock appreciation rights and stock options that are excluded from the diluted denominator calculation because they are anti-dilutive under the treasury stock method.

3. Stock-based compensation and other common stock transactions

Stock-based compensation recognized in a period represents the amortization during that period of the estimated grant-date fair value of current and prior stock-based awards over their vesting terms, adjusted for expected forfeitures. Shares issued upon exercise of stock awards are generally issued from shares in treasury. The Company has used the Black-Scholes-Merton valuation model for estimating the grant-date fair value of stock-settled stock appreciation rights granted in all periods. During the nine months ended September 30, 2012, the Company granted 462 stock-settled stock appreciation rights with an aggregate grant-date fair value of $8,959 and a weighted-average expected life of approximately 3.5 years, and also granted 14 stock units with an aggregate grant-date fair value of $1,261 and a weighted-average expected life of approximately 1.6 years.

For the nine months ended September 30, 2012 and 2011, the Company recognized $34,857 and $36,392, respectively, in stock-based compensation expense for stock appreciation rights, stock units and discounted employee stock plan purchases, which are primarily included in general and administrative expenses. The estimated tax benefits recorded for stock-based compensation through September 30, 2012 and 2011 was $12,992 and $13,766, respectively. As of September 30, 2012, there was $67,623 of total estimated unrecognized compensation cost related to unvested stock-based compensation arrangements under the Company’s equity compensation and stock purchase plans. The Company expects to recognize this cost over a weighted average remaining period of 1.2 years.

During the nine months ended September 30, 2012 and 2011, the Company received $2,174 and $5,443, respectively, in cash proceeds from stock option exercises and $60,252 and $35,096, respectively, in actual tax benefits upon the exercise of stock awards.

 

7


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

4. Accounts receivable

Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the ultimate collectability of the Company’s accounts receivable, the Company analyzes its historical cash collection experience and trends for each of its government payors and commercial payors to estimate the adequacy of the allowance for doubtful accounts and the amount of the provision for uncollectible accounts. Management regularly updates its analysis based upon the most recent information available to determine its current provision for uncollectible accounts and the adequacy of its allowance for doubtful accounts. For receivables associated with services provided to patients covered by Medicare, the Company receives 80% of the payment directly from Medicare as established under the governments bundled payment system and determines an appropriate allowance for doubtful accounts and provision for uncollectible accounts on the remaining balance due depending upon the Company’s estimate of the amounts ultimately collectible from other secondary coverage sources or from the patients. For receivables associated with services to patients covered by commercial payors and other non-Medicare government payors that are either based upon contractual terms or for non-contracted health plan coverage, the Company provides an allowance for doubtful accounts and a provision for uncollectible accounts based upon its historical collection experience, potential inefficiencies in its billing processes and for which collectability is determined to be unlikely. Less than 1% of the Company’s accounts receivable are associated with patient pay and it is the Company’s policy to reserve 100% of these outstanding accounts receivable balances when the amounts due are outstanding for more than four months.

During the nine months ended September 30, 2012, the Company’s allowance for doubtful accounts decreased by approximately $18,216. This was primarily as a result of the amount of write-offs that occurred during the quarter associated with acquired accounts receivable balances that were previously reserved. There were no unusual transactions impacting the allowance for doubtful accounts.

5. Goodwill

Each of the Company’s operating segments described in Note 13 to these condensed consolidated financial statements represents an individual reporting unit for goodwill impairment testing purposes, except that our new direct primary care segment is comprised of two reporting units and each sovereign jurisdiction within our new international operations segment is considered a separate reporting unit.

Within the U.S. dialysis and related lab services operating segment, the Company considers each of its dialysis centers to constitute an individual business for which discrete financial information is available. However, since these dialysis centers have similar operating and economic characteristics and resource allocation, and significant investment decisions concerning these businesses are highly centralized and the benefits broadly distributed, the Company has aggregated these centers and deemed them to constitute a single reporting unit.

The Company has applied a similar aggregation to the infusion therapy branches in its infusion therapy services reporting unit, to the consolidated vascular access service centers in its vascular access services reporting unit, and to the physician practices in its physician services reporting unit. For the Company’s additional operating segments, no component below the level of the operating segment is considered a discrete business and therefore these operating segments directly constitute individual reporting units.

During the third quarter of 2012, the Company did not record any goodwill impairment charges and, as of September 30, 2012, none of the goodwill associated with the Company’s various reporting units was considered at risk of impairment. Since the date of the Company’s last annual goodwill impairment test, there have been no

 

8


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

material developments, events, changes in operating performance or other changes in circumstances that would cause management to believe it is more likely than not that the fair value of any of its reporting units would be less than its carrying amount.

6. Long-term debt

Long-term debt was comprised of the following:

 

     September 30,
2012
    December 31,
2011
 

Senior Secured Credit Facilities:

    

Term Loan A

   $ 912,500      $ 950,000   

Term Loan A-2

     198,000        199,500   

Term Loan B

     1,719,375        1,732,500   

Senior notes

     2,800,000        1,550,000   

Acquisition obligations and other notes payable

     37,676        37,447   

Capital lease obligations

     77,585        43,364   
  

 

 

   

 

 

 

Total debt principal outstanding

     5,745,136        4,512,811   

Discount on long-term debt

     (6,599     (7,842
  

 

 

   

 

 

 
     5,738,537        4,504,969   

Less current portion

     (117,821     (87,345
  

 

 

   

 

 

 
   $ 5,620,716      $ 4,417,624   
  

 

 

   

 

 

 

Scheduled maturities of long-term debt at September 30, 2012 were as follows:

 

2012 (remainder of the year)

     19,153   

2013

     130,897   

2014

     180,834   

2015

     680,765   

2016

     1,864,207   

2017

     8,496   

Thereafter

     2,860,784   

In August 2012 the Company entered into amendments to its existing credit agreements (Senior Secured Credit Facilities) to permit additional borrowings under the Senior Secured Credit Facilities in an aggregate principal amount of $3,000,000 comprised of a new five year Term Loan A-3 facility in an aggregate principal amount of $1,350,000 and a new seven year Term Loan B-2 facility in an aggregate principal amount of $1,650,000. In addition, the Company also amended certain financial covenants and various other provisions to accommodate additional borrowings and the acquisition of HealthCare Partners Holdings, LLC (HCP), as well as provide additional operating and financial flexibility. The Company has obtained commitments for the new five year Term Loan A-3; however, such commitments as well as the effectiveness of the amendment are subject to various conditions, including the receipt of commitments for the new seven year Term Loan B-2 and the consummation of the acquisition of HCP. Unless such conditions are satisfied, the amendment will terminate on November 30, 2012, subject to up to three one month extensions if certain conditions are met. See Note 12 to the condensed consolidated financial statements for further details.

 

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Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

On August 28, 2012, the Company issued $1,250,000 aggregate principal amount of 5 3/4% senior notes due 2022 (New Senior Notes). The New Senior Notes will pay interest on February 15 and August 15 of each year, beginning February 15, 2013. The New Senior Notes are unsecured senior obligations and rank equally to other unsecured senior indebtedness. The New Senior Notes are guaranteed by certain domestic subsidiaries of the Company. The Company may redeem some or all of the New Senior Notes at any time on or after August 15, 2017 at certain redemption prices and prior to such date at a “make-whole” redemption price. The Company may also redeem up to 35% of the New Senior Notes at any time prior to August 15, 2015 at certain redemption prices with the proceeds of one or more equity offerings.

All of the proceeds from the issuance of the New Senior Notes along with related fees and interest through November 30, 2012, were deposited into escrow pending the consummation of the HCP acquisition. The proceeds and interest are included in restricted cash in the consolidated balance sheet. If the acquisition of HCP and certain other conditions are not satisfied on or prior to November 30, 2012, subject to up to three one-month extensions (escrow end date), the amount deposited in escrow will be applied to redeem all of the New Senior Notes at a price equal to 100% of the issue price of the notes plus accrued interest from August 28, 2012 through the escrow end date. However, if the acquisition of HCP is completed and certain other conditions are satisfied on or before the escrow end date then the amounts deposited into escrow will be released to the Company to be used to finance a portion of the HCP acquisition.

During the first nine months of 2012, the Company made mandatory principal payments under its Senior Secured Credit Facilities totaling $37,500 on the Term Loan A, $1,500 on the Term Loan A-2 and $13,125 on the Term Loan B.

The Company has entered into several interest rate swap agreements as a means of hedging its exposure to and volatility from variable-based interest rate changes as part of its overall interest rate risk management strategy. These agreements are not held for trading or speculative purposes and have the economic effect of converting the LIBOR variable component of the Company’s interest rate to a fixed rate. These swap agreements are designated as cash flow hedges, and as a result, hedge-effective gains or losses resulting from changes in the fair values of these swaps are reported in other comprehensive income until such time as each specific swap tranche is realized, at which time the amounts are reclassified into net income. Net amounts paid or received for each specific swap tranche that have settled have been reflected as adjustments to debt expense. In addition, the Company has entered into several interest rate cap agreements that have the economic effect of capping the Company’s maximum exposure to LIBOR variable interest rate changes on specific portions of the Company’s Term Loan B debt, as described below. These cap agreements are also designated as cash flow hedges and as a result changes in the fair values of these cap agreements are reported in other comprehensive income. The amortization of the original cap premium is recognized as a component of debt expense on a straight line basis over the term of the cap agreements. The swap and cap agreements do not contain credit-risk contingent features.

As of September 30, 2012, the Company maintained a total of nine interest rate swap agreements with amortizing notional amounts totaling $912,500. These agreements had the economic effect of modifying the LIBOR variable component of the Company’s interest rate on an equivalent amount of the Company’s Term Loan A to fixed rates ranging from 1.59% to 1.64%, resulting in an overall weighted average effective interest rate of 4.11%, including the Term Loan A margin of 2.50%. The swap agreements expire by September 30, 2014 and require monthly interest payments. The Company estimates that approximately $11,395 of existing unrealized pre-tax losses in other comprehensive income at September 30, 2012 will be reclassified into income over the next twelve months.

 

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Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

As of September 30, 2012, the Company maintained five interest rate cap agreements with notional amounts totaling $1,250,000. These agreements have the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 4.00% on an equivalent amount of the Company’s Term Loan B debt. The cap agreements expire on September 30, 2014.

The following table summarizes the Company’s derivative instruments as of September 30, 2012 and December 31, 2011:

 

     September 30, 2012      December 31, 2011  

Derivatives designated as hedging

instruments

   Balance sheet
location
   Fair value      Balance sheet
location
   Fair value  

Interest rate swap agreements

   Other long-
term liabilities
   $ 22,189       Other long-
term liabilities
   $ 23,145   
     

 

 

       

 

 

 

Interest rate cap agreements

   Other long-
term assets
   $ 158       Other long-
term assets
   $ 1,381   
     

 

 

       

 

 

 

The following table summarizes the effects of the Company’s interest rate swap and cap agreements for the nine months ended September 30, 2012 and 2011:

 

    Amount of gains
(losses) recognized in
OCI on interest rate  swap
and cap agreements
    Location of
gains (losses)
reclassified
from
accumulated
OCI into
income
    Amount of gains
(losses) reclassified
from accumulated
OCI into  income
 
    Three months
ended
September 30,
    Nine months
ended
September 30,
      Three months
ended
September 30,
    Nine months
ended
September 30,
 

Derivatives designated as cash flow hedges

  2012     2011     2012     2011       2012     2011     2012     2011  

Interest rate swap agreements

  $ (2,729   $ (13,907   $ (8,766   $ (33,897     Debt expense      $ (3,244   $ (3,525   $ (9,723   $ (9,268

Interest rate cap agreements

    (121     (3,882     (1,224     (11,666     Debt expense        (897     (897     (2,691     (2,392

Tax benefit

    1,109        6,920        3,886        17,724          1,611        1,720        4,828        4,536   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (1,741   $ (10,869   $ (6,104   $ (27,839     $ (2,530   $ (2,702   $ (7,586   $ (7,124
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2012, interest rates on the Company’s Term Loan A-2 and Term Loan B debt are effectively fixed because of an embedded LIBOR floor which is higher than actual LIBOR as of such date. Furthermore, interest rates on the $1,250,000 of the Company’s Term Loan B is subject to interest rate caps if LIBOR should rise above 4.00%. Interest rates on the Company’s senior notes are fixed by their terms. Interest rates on the Company’s Term Loan A are economically fixed as a result of interests rate swaps.

As a result of the swap and cap agreements, the Company’s overall weighted average effective interest rate on the Senior Secured Credit Facilities was 4.61%, based upon the current margins in effect of 2.50% for the Term loan A, 3.50% for the Term Loan A-2 and 3.00% for the Term Loan B, as of September 30, 2012.

The Company’s overall weighted average effective interest rate during the third quarter of 2012 was 5.31% and as of September 30, 2012 was 5.38%.

As of September 30, 2012, the Company had undrawn revolving credit facilities totaling $350,000 of which approximately $87,953 was committed for outstanding letters of credit.

 

11


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

7. Contingencies

The majority of the Company’s revenues are from government programs and may be subject to adjustment as a result of: (1) examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (2) differing interpretations of government regulations by different Medicare contractors or regulatory authorities; (3) differing opinions regarding a patient’s medical diagnosis or the medical necessity of services provided; and (4) retroactive applications or interpretations of governmental requirements. In addition, the Company’s revenues from commercial payors may be subject to adjustment as a result of potential claims for refunds, as a result of government actions or as a result of other claims by commercial payors.

Inquiries by the Federal Government and Certain Related Civil Proceedings

2005 U.S. Attorney Investigation: In March 2005, the Company received a subpoena from the U.S. Attorney’s Office for the Eastern District of Missouri in St. Louis. The subpoena required production of a wide range of documents relating to the Company’s operations, including documents related to, among other things, pharmaceutical and other services provided to patients, relationships with pharmaceutical companies, and financial relationships with physicians and joint ventures. The subpoena covers the period from December 1, 1996 through March 2005. In October 2005, the Company received a follow-up request for additional documents related to specific medical director and joint venture arrangements. In February 2006, the Company received an additional subpoena for documents, including certain patient records relating to the administration and billing of Epogen® (EPO). In May 2007, the Company received a request for documents related to durable medical equipment and supply companies owned and operated by the Company. The Company cooperated with the inquiry and has produced the requested documents. The subpoenas were issued in connection with a joint civil and criminal investigation. It was possible that criminal proceedings could be initiated against the Company in connection with this investigation. Until recently, the Company had not received a communication from the St. Louis U.S. Attorney’s Office on this matter for nearly three years. In early October 2012, the Company announced that the government closed its investigation without filing any charges, without demanding any payments and without seeking any changes in Company policies.

Woodard Private Civil Suit: In February 2007, the Company received a request for information from the Office of Inspector General, U.S. Department of Health and Human Services, or OIG, for documents relating to EPO claims submitted to Medicare. In August 2007, the Company received a subpoena from the OIG seeking similar documents. The requested documents relate to services provided from 2001 to 2004 by a number of the Company’s centers. The request and subpoena were sent from the OIG’s offices in Houston and Dallas, Texas. The Company cooperated with the inquiry and has produced all previously requested documents to date. The Company was contacted by the U.S. Attorney’s Office for the Eastern District of Texas, which stated that this was a civil investigation related to EPO claims. On July 6, 2009, the U.S. District Court for the Eastern District of Texas lifted the seal on the civil qui tam complaint related to these previous requests for information. The Company was subsequently served with a complaint by the relator, Ivey Woodard, purportedly on behalf of the federal government, under the qui tam provisions of the federal False Claims Act. The government did not intervene and is not actively pursuing this matter. The relator has been pursuing the claims independently and the parties have been engaged in active litigation. The complaint contains allegations relating to the Company’s EPO practices for the period from 1992 through 2010 and seeks monetary damages and civil penalties as well as costs and expenses. The court has ruled that claims earlier than 1996 are beyond the statute of limitations. The Company believes that there is some overlap between the subject of this complaint and the review of EPO utilization in the 2005 U.S. Attorney investigation described above. The Company publicly disclosed on July 3,

 

12


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

2012 that it had reached an agreement in principle to settle all allegations relating to claims arising out of this matter. In connection with this settlement, the Company accrued a charge of $78,000 in the second quarter of 2012, that consists of $55,000 for the settlement plus attorney fees and related expenses. The Company expects that the settlement will resolve federal program claims regarding EPO raised in the complaint relating to historical EPO practices dating back to 1997. The settlement is subject to certain conditions, such as court approval. Until the conditions and documentation are completed, there can be no assurance that this matter will in fact be resolved pursuant to the terms of the agreement in principle to settle.

Vainer Private Civil Suit: In December 2008, the Company received a subpoena for documents from the OIG relating to the pharmaceutical products Zemplar, Hectorol, Venofer, Ferrlecit and EPO, as well as other related matters. The subpoena covered the period from January 2003 to December 2008. The Company was in contact with the U.S. Attorney’s Office for the Northern District of Georgia and the U.S. Department of Justice in Washington, DC, since November 2008 relating to this matter, and were advised that this was a civil inquiry. On June 17, 2009, the Company learned that the allegations underlying this inquiry were made as part of a civil complaint filed by individuals and brought pursuant to the qui tam provisions of the federal False Claims Act. On April 1, 2011, the U.S. District Court for the Northern District of Georgia ordered the case to be unsealed. At that time, the Department of Justice and U.S. Attorney’s Office filed a notice of declination stating that the U.S. would not be intervening and not pursuing the relators’ allegation in litigation. On July 25, 2011, the relators, Daniel Barbir and Dr. Alon Vainer, filed their amended complaint in the U.S. District Court for the Northern District of Georgia, purportedly on behalf of the federal government. The allegations in the complaint relate to the Company’s drug administration practices for Vitamin D and iron agents for a period from 2003 through 2010. The complaint seeks monetary damages and civil penalties as well as costs and expenses. The Company is vigorously defending this matter and intends to continue to do so. The Company can make no assurances as to the time or resources that will be needed to devote to this litigation or its final outcome.

2010 U.S. Attorney Physician Relationship Investigation: In May 2010, the Company received a subpoena from the OIG’s office in Dallas, Texas. The civil subpoena covers the period from January 1, 2005 to May 2010, and seeks production of a wide range of documents relating to the Company’s operations, including documents related to, among other things, financial relationships with physicians and joint ventures. Some of the requested documents overlap with documents requested pursuant to the subpoena in the 2011 U.S. Attorney Physician Relationship Investigation described below. The Company is cooperating with the government and is producing the requested documents. The Company can make no assurances as to the time or resources that will be needed to devote to this litigation or its final outcome.

2011 U.S. Attorney Physician Relationship Investigation: In August 2011, the Company announced it had learned that the U.S. Attorney’s Office for the District of Colorado would be looking into certain activities of the Company in connection with information being provided to a grand jury. The Company announced further that it understood that this investigation was at a very preliminary stage, and while its precise scope was unclear, it appeared to overlap, at least in part, with the 2010 U.S. Attorney Physician Relationship Investigation described above. Subsequent to the Company’s announcement of this 2011 U.S. Attorney Physician Relationship Investigation, it received a subpoena for documents which substantially overlaps with the subpoena in the 2010 U.S. Attorney Physician Relationship Investigation described above and covers the period from January 2006 to September 2011. The Company is cooperating with the government and is producing the requested documents. Certain current and former members of the Board and executives received subpoenas in November 2011 and thereafter to testify before the grand jury. The Company has received additional subpoenas for documents, and a number of other individuals have received subpoenas to testify before the grand jury. It is possible that criminal

 

13


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

proceedings may be initiated against the Company in connection with this investigation. The Company can make no assurances as to the time or resources that will be needed to devote to this litigation or its final outcome.

2011 U.S. Attorney Medicaid Investigation: In October 2011, the Company announced that it would be receiving a request for documents, which could include an administrative subpoena from the Office of Inspector General for the U.S. Department of Health and Human Services. Subsequent to the Company’s announcement of this 2011 U.S. Attorney Medicaid Investigation, the Company received a request for documents in connection with the inquiry by the U.S. Attorney’s Office for the Eastern District of New York. The request relates to payments for infusion drugs covered by Medicaid composite payments for dialysis. The Company believes this inquiry is civil in nature. The Company does not know the time period or scope. The Company understands that certain other providers that operate dialysis clinics in New York may be receiving or have received a similar request for documents. The Company is cooperating with the government and is producing the requested documents.

Clark Shareholder Derivative Civil Suit: As the Company previously disclosed, on August 7, 2012, a shareholder derivative lawsuit was filed in the U.S. District Court for the District of Colorado against certain current and former directors and executives of the Company and against the Company, as nominal defendant. The complaint alleges, among other things, that certain of the Company’s current and past officers and directors breached fiduciary duties to the Company relating to the previously disclosed inquiries by the federal government and qui tam proceedings described above. On October 12, 2012, the parties filed a joint motion to stay the case for an indefinite period as in the best interests of the Company and to conserve judicial resources. On October 19, 2012, the Court denied the stay motion but ordered that the case be administratively closed, subject to being reopened upon a showing of good cause by any party.

Except for the private civil complaints filed by the relators as described above, to the Company’s knowledge, no proceedings have been initiated against the Company at this time in connection with any of the inquiries by the federal government. Although the Company cannot predict whether or when proceedings might be initiated or when these matters may be resolved, it is not unusual for inquiries such as these to continue for a considerable period of time through the various phases of document and witness requests and on-going discussions with regulators. Responding to the subpoenas or inquiries and defending the Company in the relator proceedings will continue to require management’s attention and significant legal expense. Any negative findings in the inquiries or relator proceedings could result in substantial financial penalties or awards against the Company, exclusion from future participation in the Medicare and Medicaid programs and, to the extent criminal proceedings may be initiated against the Company, possible criminal penalties. At this time, the Company cannot predict the ultimate outcome of these inquiries, or the potential outcome of the relators’ claims (except as described above), or the potential range of damages, if any.

Other

The Company has received several notices of claims from commercial payors and other third parties related to historical billing practices and claims against DVA Renal Healthcare (formerly known as Gambro Healthcare), a subsidiary of the Company, related to historical Gambro Healthcare billing practices and other matters covered by its 2004 settlement agreement with the Department of Justice and certain agencies of the U.S. government. The Company has received no further indication that any of these claims are active, and some of them may be barred by applicable statutes of limitations. To the extent any of these claims might proceed, the Company intends to defend against them vigorously; however, the Company may not be successful and these claims may

 

14


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DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

lead to litigation and any such litigation may be resolved unfavorably. At this time, the Company cannot predict the ultimate outcome of this matter or the potential range of damages, if any.

A wage and hour claim, which has been styled as a class action, is pending against the Company in the Superior Court of California. The Company was served with the complaint in this lawsuit in April 2008, and it has been amended since that time. The lawsuit, as amended, alleges that the Company failed to provide meal periods, failed to pay compensation in lieu of providing rest or meal periods, failed to pay overtime, and failed to comply with certain other California Labor Code requirements. In September 2011, the court denied the plaintiffs’ motion for class certification. Plaintiffs have appealed that decision. The Company intends to continue to vigorously defend against these claims. Any potential settlement of these claims is not anticipated to be material to the Company’s consolidated financial statements.

In October 2007, the Company was contacted by the Attorney General’s Office for the State of Nevada. The Attorney General’s Office informed the Company that it was conducting a civil and criminal investigation of the Company’s operations in Nevada and that the investigation related to the billing of pharmaceuticals, including EPO. In February 2008, the Attorney General’s Office informed the Company that the civil and criminal investigation had been discontinued. The Attorney General’s Office further advised the Company that Nevada Medicaid intended to conduct audits of end stage renal disease (ESRD) dialysis providers in Nevada and such audits would relate to the issues that were the subjects of the investigation. To the Company’s knowledge, no court proceedings have been initiated against the Company at this time. Any negative audit findings could result in a substantial repayment by the Company. At this time, the Company cannot predict the ultimate outcome of this matter or the potential range of damages, if any.

In June 2004, DVA Renal Healthcare was served with a complaint filed in the Superior Court of California by one of its former employees who worked for its California acute services program. The complaint, which is styled as a class action, alleges, among other things, that DVA Renal Healthcare failed to provide overtime wages, defined rest periods and meal periods, or compensation in lieu of such provisions and failed to comply with certain other California Labor Code requirements. The parties reached an agreement last year to fully resolve this matter for an amount that did not materially impact the Company’s financial results. That settlement has now received final approval from the court. Settlement payments have been made to the class members. On September 18, 2012, the court found that the conditions in its order approving the settlement had been met, and that the matter is concluded.

In addition to the foregoing, the Company is subject to claims and suits, including from time to time, contractual disputes and professional and general liability claims, as well as audits and investigations by various government entities, in the ordinary course of business. The Company believes that the ultimate resolution of any such pending proceedings, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on its financial condition, results of operations or cash flows.

8. Investments in debt and equity securities

Based on the Company’s intentions and strategy involving investments in debt and equity securities, the Company classifies certain debt securities as held-to-maturity and records them at amortized cost. Equity securities that have readily determinable fair values and certain other debt securities classified as available for sale are recorded at fair value.

 

15


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

The Company’s investments consist of the following:

 

     September 30, 2012      December 31, 2011  
     Held to
maturity
     Available
for sale
     Total      Held to
maturity
     Available
for sale
     Total  

Certificates of deposit, money market funds and U.S. treasury notes due within one year

   $ 4,636       $ —         $ 4,636       $ 11,754       $ —         $ 11,754   

Investments in mutual funds

     —           14,449         14,449         —           15,535         15,535   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,636       $ 14,449       $ 19,085       $ 11,754       $ 15,535       $ 27,289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

   $ 4,636       $ 1,200       $ 5,836       $ 11,754       $ 5,645       $ 17,399   

Long-term investments

     —           13,249         13,249         —           9,890         9,890   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,636       $ 14,449       $ 19,085       $ 11,754       $ 15,535       $ 27,289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The cost of the certificates of deposit and money market funds at September 30, 2012 and in addition, U.S. treasury notes at December 31, 2011, approximates their fair value. As of September 30, 2012 and December 31, 2011, the available for sale investments include $1,893 and $(255) of gross pre-tax gains (loss), respectively. During the nine months ended September 30, 2012, the Company recorded gross pre-tax unrealized gains of $2,271, or $1,387 after tax, in other comprehensive income associated with changes in the fair value of these investments. During the nine months ended September 30, 2012, the Company sold investments in mutual funds and its shares of NxStage Medical, Inc. common stock for net proceeds of $6,796, and recognized a pre-tax gain of $124, or $75 after tax, that was previously recorded in other comprehensive income. During the nine months ended September 30, 2011, the Company sold equity securities in mutual funds for net proceeds of $1,149, and recognized a pre-tax gain of $93, or $57 after tax, that was previously recorded in other comprehensive income.

During the nine months ended September 30, 2012, the Company received a total of $7,100 in capital deposits released from various state regulatory agencies that had previously been held by those agencies to maintain certain regulatory capital requirements of the special needs plans of VillageHealth, which plans were discontinued in 2009. Therefore, the Company has received the majority of funds that have previously been held by the various state regulatory agencies.

The investments in mutual funds classified as available for sale are held within a trust to fund existing obligations associated with several of the Company’s non-qualified deferred compensation plans.

9. Fair value of financial instruments

The Company measures the fair value of certain assets, liabilities and noncontrolling interests subject to put provisions (temporary equity) based upon certain valuation techniques that include observable or unobservable inputs and assumptions that market participants would use in pricing these assets, liabilities, temporary equity and commitments. The Company also has classified certain assets, liabilities and temporary equity that are measured at fair value into the appropriate fair value hierarchy levels.

 

16


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

The following table summarizes the Company’s assets, liabilities and temporary equity measured at fair value on a recurring basis as of September 30, 2012:

 

     Total      Quoted prices in
active markets for
identical assets
(Level 1)
     Significant other
observable inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

Assets

           

Available for sale securities

   $ 14,449       $ 14,449       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate cap agreements

   $ 158       $ —         $ 158       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Interest rate swap agreements

   $ 22,189       $ —         $ 22,189       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Temporary equity

           

Noncontrolling interests subject to put provisions

   $ 550,020       $ —         $ —         $ 550,020   
  

 

 

    

 

 

    

 

 

    

 

 

 

The available for sale securities represent investments in various open-ended registered investment companies, or mutual funds, and are recorded at fair value based upon quoted prices reported by each mutual fund. See Note 8 to the condensed consolidated financial statements for further discussion.

The interest rate swap and cap agreements are recorded at fair value based upon valuation models utilizing the income approach and commonly accepted valuation techniques that use inputs from closing prices for similar assets and liabilities in active markets as well as other relevant observable market inputs at quoted intervals such as current interest rates, forward yield curves, implied volatility and credit default swap pricing. The Company does not believe the ultimate amount that could be realized upon settlement of these interest rate swap and cap agreements would be materially different than the fair values as currently reported. See Note 6 to the condensed consolidated financial statements for further discussion.

See Note 10 to the condensed consolidated financial statements for a discussion of the Company’s methodology for estimating the fair value of noncontrolling interests subject to put provisions.

The Company has other financial instruments in addition to the above that consist primarily of cash, accounts receivable, accounts payable, other accrued liabilities, and debt. The balances of the non-debt financial instruments are presented in the condensed consolidated financial statements at September 30, 2012 at their approximate fair values due to the short-term nature of their settlements. The carrying amount of the Company’s Senior Secured Credit Facilities totaled $2,823,276 as of September 30, 2012 and the fair value was $2,831,133 based upon quoted market prices. The fair value of the Company’s senior notes was approximately $2,901,680 at September 30, 2012, based upon quoted market prices, as compared to the carrying amount of $2,800,000.

10. Noncontrolling interests subject to put provisions and other commitments

The Company has potential obligations to purchase the noncontrolling interests held by third parties in several of its joint ventures and non-wholly-owned subsidiaries. These obligations are in the form of put provisions and are exercisable at the third-party owners’ discretion within specified periods as outlined in each specific put provision. If these put provisions were exercised, the Company would be required to purchase the

 

17


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

third-party owners’ noncontrolling interests at either the appraised fair market value or a predetermined multiple of earnings or cash flow attributable to the noncontrolling interests put to the Company, which is intended to approximate fair value. The methodology the Company uses to estimate the fair values of noncontrolling interests subject to put provisions assumes either the higher of a liquidation value of net assets or an average multiple of earnings, based on historical earnings, patient mix and other performance indicators, as well as other factors. The estimated fair values of the noncontrolling interests subject to put provisions can fluctuate and the implicit multiple of earnings at which these noncontrolling interests obligations may be settled will vary significantly depending upon market conditions including potential purchasers’ access to the capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses, the economic performance of these businesses and the restricted marketability of the third-party owners’ noncontrolling interests. The amount of noncontrolling interests subject to put provisions that contractually employ a predetermined multiple of earnings rather than fair value are immaterial.

Additionally, the Company has certain other potential commitments to provide operating capital to several dialysis centers that are wholly-owned by third parties or centers in which the Company owns a minority equity investment as well as to physician-owned vascular access clinics that the Company operates under management and administrative services agreements of approximately $3,000.

Certain consolidated joint ventures are contractually scheduled to dissolve after terms ranging from ten to fifty years. Accordingly, the noncontrolling interests in these joint ventures are considered mandatorily redeemable instruments for which the classification and measurement requirements have been indefinitely deferred. Future distributions upon dissolution rather than sale of these entities would be valued below the related noncontrolling interests carrying balances in the condensed consolidated balance sheet.

11. Income taxes

As of September 30, 2012, the Company’s total liability for unrecognized tax benefits relating to tax positions that do not meet the more-likely-than-not threshold is $10,059, all of which would impact the Company’s effective tax rate if recognized. This balance represents an increase of $1,116 from the December 31, 2011 balance of $8,943 due to the addition of 2012 liabilities.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. At September 30, 2012 and December 31, 2011, the Company had approximately $4,119 and $3,420, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefits.

12. Acquisitions

Acquisition of HealthCare Partners Holdings, LLC

On May 20, 2012, the Company entered into a definitive merger agreement to acquire HCP, one of the country’s largest operators of medical groups and physician networks. HCP is a patient- and physician-focused integrated health care delivery and management company providing coordinated, outcomes-based medical care in a cost-effective manner. For the year ended December 31, 2011, HCP generated approximately $2,400,000 in revenues and approximately $488,000 in operating income.

The total purchase price to be paid by the Company will consist of $3,660,000 in cash and 9,380,312 in actual shares of the Company’s common stock, subject to post-close adjustments. In addition to the total merger

 

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Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

consideration payable at close, the Company will pay to the owners of HCP a total of up to $275,000 of additional cash consideration in the form of two separate earn-out payments if certain financial performance targets are achieved by HCP in 2012 and 2013. The Company expects the transaction to close early in November 2012. The Company anticipates that the operating results of HCP will be incorporated into the Company’s consolidated operating results beginning in November 2012.

Dialysis and other acquisitions

During the first nine months of 2012, the Company acquired dialysis businesses consisting of 71 dialysis centers located in the U.S., three dialysis centers located outside the U.S. and one direct primary care business for a total of $419,114 in cash and deferred purchase price obligations totaling $4,137. The assets and liabilities for all acquisitions were recorded at their estimated fair values at the dates of the acquisitions and are included in the Company’s financial statements and operating results from the designated effective dates of the acquisitions.

The following table summarizes the assets acquired and liabilities assumed in these transactions and recognized at their acquisition dates at estimated fair values, as well as the estimated fair value of the noncontrolling interests assumed in these transactions:

 

     Nine months ended
September 30, 2012
 

Tangible assets, principally leasehold improvements and equipment

   $ 35,750   

Amortizable intangible and other long-term assets

     25,498   

Goodwill

     379,766   

Liabilities assumed

     (4,139

Noncontrolling interests assumed

     (13,624
  

 

 

 
   $ 423,251   
  

 

 

 

Amortizable intangible assets acquired during the first nine months of 2012 had weighted-average estimated useful lives of 9.6 years. The total amount of goodwill deductible for tax purposes associated with these acquisitions is approximately $358 million.

13. Segment reporting

The Company operates principally as a dialysis and related lab services business but also operates other ancillary services and strategic initiatives. These ancillary services and strategic initiatives consist primarily of pharmacy services, infusion therapy services, disease management services, vascular access services, ESRD clinical research programs, physician services, direct primary care and the Company’s international dialysis operations. For internal management reporting, the U.S. dialysis and related lab services business and each of the ancillary services and strategic initiatives have been defined as separate operating segments by management since separate financial information is regularly produced and reviewed by the Company’s chief operating decision maker in making decisions about allocating resources and assessing financial results. The Company’s chief operating decision maker is its Chief Executive Officer. The U.S. dialysis and related lab services business qualifies as a separately reportable segment and all references to dialysis and related lab services continue to refer only to the Company’s U.S. dialysis and related lab services business. All of the other ancillary services and

 

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Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

strategic initiatives operating segments, including the Company’s international dialysis operations, have been combined and disclosed in the other segments category.

The Company’s operating segment financial information is prepared on an internal management reporting basis that the Chief Executive Officer uses to allocate resources and analyze the performance of operating segments. For internal management reporting, segment operations include direct segment operating expenses with the exception of stock-based compensation expense, certain corporate-level general and administrative expenses and equity investment income.

The following is a summary of segment operating revenues, segment operating margin (loss), and a reconciliation of segment operating margin to consolidated income before income taxes:

 

     Three months  ended
September 30,
     Nine months  ended
September 30,
 
     2012      2011      2012     2011  

Segment operating revenues:

          

Dialysis and related lab services

          

Patient service operating revenues:

          

External sources

   $ 1,838,363       $ 1,669,086       $ 5,410,200      $ 4,749,469   

Intersegment revenues

     4,090         2,937         12,580        7,164   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total dialysis and related lab services patient service operating revenues

     1,842,453         1,672,023         5,422,780        4,756,633   

Less: Provision for uncollectible accounts related to patient service revenues

     (59,803      (50,039      (167,227     (138,520
  

 

 

    

 

 

    

 

 

   

 

 

 

Net dialysis and related lab services patient service operating revenues

     1,782,650         1,621,984         5,255,553        4,618,113   

Other revenues (1)

     2,600         2,837         8,358        8,210   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total net dialysis and related lab services operating revenues

     1,785,250         1,624,821         5,263,911        4,626,323   
  

 

 

    

 

 

    

 

 

   

 

 

 

Other—Ancillary services and strategic initiatives

          

Net patient service operating revenues

   $ 4,490       $ 1,885       $ 11,899      $ 5,253   

External sources

     177,316         134,061         496,111        356,964   

Intersegment revenues

     2,583         1,334         7,028        4,161   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total ancillary services and strategic initiatives operating revenues

     184,389         137,280         515,038        366,378   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total net segment operating revenues

     1,969,639         1,762,101         5,778,949        4,992,701   

Elimination of intersegment revenues

     (6,673      (4,271      (19,608     (11,325
  

 

 

    

 

 

    

 

 

   

 

 

 

Consolidated net operating revenues

   $ 1,962,966       $ 1,757,830       $ 5,759,341      $ 4,981,376   
  

 

 

    

 

 

    

 

 

   

 

 

 

Consolidated operating revenues before provision for uncollectible accounts

   $ 2,022,769       $ 1,807,869       $ 5,926,568      $ 5,119,896   
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment operating margin (loss) (2):

          

Dialysis and related lab services

   $ 361,170       $ 332,287       $ 1,001,844      $ 871,999   

Other—Ancillary services and strategic initiatives

     (11,527      (2,861      (48,069     (41,492
  

 

 

    

 

 

    

 

 

   

 

 

 

Total segment margin

     349,643         329,426         953,775        830,507   

 

20


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

     Three months  ended
September 30,
    Nine months  ended
September 30,
 
     2012     2011     2012     2011  

Reconciliation of segment operating margin to consolidated income before income taxes:

        

Stock-based compensation

     (10,513     (13,333     (34,857     (36,392

Other corporate-level general and administrative expenses

     (1,335     —          (17,771     —     

Equity investment income

     3,064        2,619        8,314        6,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

     340,859        318,712        909,461        800,670   

Debt expense

     (70,494     (60,848     (192,584     (179,340

Other income

     819        798        2,698        2,195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated income from continuing operations before income taxes

   $ 271,184      $ 258,662      $ 719,575      $ 623,525   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes management fees for providing management and administrative services to dialysis centers that are wholly-owned by third parties or centers in which the Company owns a minority equity investment.

(2) 

Certain costs associated with our international operations that were previously reported in the dialysis and related lab services have been reclassified to the ancillary services and strategic initiatives to conform to the current year presentation.

Depreciation and amortization expense for the dialysis and related lab services for the three and nine months ended September 30, 2012 was $78,318 and $227,608, respectively, and was $2,268 and $6,760, respectively, for the ancillary services and strategic initiatives.

Depreciation and amortization expense for the dialysis and related lab services for the three and nine months ended September 30, 2011 was $65,894 and $188,585, respectively, and was $1,664 and $5,056, respectively, for the ancillary services and strategic initiatives.

Summary of assets by segment is as follows:

 

     September 30,
2012
     December 31,
2011
 

Segment assets

     

Dialysis and related lab services

   $ 10,471,586       $ 8,588,671   

Other—Ancillary services and strategic initiatives

     323,821         276,176   

Equity investments

     28,705         27,325   
  

 

 

    

 

 

 

Consolidated assets

   $ 10,824,112       $ 8,892,172   
  

 

 

    

 

 

 

For the three and nine months ended September 30, 2012, the total amount of expenditures for property and equipment excluding capital leases for the dialysis and related lab services were $124,554 and $362,393, respectively, and were $3,887 and $16,556, respectively, for the ancillary services and strategic initiatives.

For the three and nine months ended September 30, 2011, the total amount of expenditures for property and equipment, excluding capital leases, for the dialysis and related lab services were $93,232 and $244,654, respectively, and were $3,718 and $7,225, respectively, for the ancillary services and strategic initiatives.

 

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Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

As of September 30, 2012, there was $5,215,026 and $109,934 of goodwill associated with the dialysis and related lab services business and the ancillary services and strategic initiatives, respectively.

As of December 31, 2011, there was $4,865,864 and $81,112 of goodwill associated with the dialysis and related lab services business and the ancillary services and strategic initiatives, respectively.

14. Changes in DaVita Inc.’s ownership interest in consolidated subsidiaries

The effects of changes in DaVita Inc.’s ownership interest on the Company’s equity are as follows:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Net income attributable to DaVita Inc.

   $ 144,721      $ 135,361      $ 380,178      $ 329,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in paid-in capital for sales of noncontrolling interests

     (55     69        (62     238   

Decrease in paid-in capital for the purchase of noncontrolling interests

     (3,034     (248     (10,703     (6,049
  

 

 

   

 

 

   

 

 

   

 

 

 

Net transfer to noncontrolling interests

     (3,089     (179     (10,765     (5,811
  

 

 

   

 

 

   

 

 

   

 

 

 

Change from net income attributable to DaVita Inc. and transfers to noncontrolling interests

   $ 141,632      $ 135,182      $ 369,413      $ 324,067   
  

 

 

   

 

 

   

 

 

   

 

 

 

15. Variable interest entities

The Company is required to consolidate each entity determined to be a variable interest entity for which the Company is the primary beneficiary. Variable interest entities (VIEs) typically include those for which the entity’s equity is not sufficient to finance its activities without additional subordinated financial support; those for which the equity holders as a group lack the power to direct the activities that most significantly influence the entity’s economic performance, lack the obligation to absorb the entity’s expected losses, or lack the right to receive the entity’s expected returns; or those for which the voting rights of some investors are not proportional to their obligations to absorb the entity’s losses.

The Company is deemed to be the primary beneficiary of all the VIE’s it is associated with. These VIEs are principally operating subsidiaries owned by related party nominee owners for the Company’s benefit in jurisdictions in which the Company does not qualify for direct ownership under applicable regulations or joint ventures that require subordinated support in addition to their equity capital to finance operations. These include both dialysis operations and physician practice management entities.

Under the terms of the applicable arrangement, the Company bears substantially all of the economic risks and rewards of ownership for these operating VIEs. In some cases, the Company has contractual arrangements with its respective related party nominee owners which indemnify them from the economic losses, and entitle the Company to the economic benefits, that may result from ownership of these VIEs. The Company manages these VIEs and provides operating and capital funding as necessary to accomplish their operational and strategic objectives.

Accordingly, as the primary beneficiary the Company bears the majority of the risks and rewards attendant to their ownership. The Company consolidates these VIEs as their primary beneficiary. Total assets of these

 

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Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

consolidated operating VIEs were approximately $21,000 and their liabilities to unrelated third parties were approximately $18,000 at September 30, 2012.

The Company also sponsors certain deferred compensation plans whose trusts qualify as VIEs and as their primary beneficiary the Company consolidates each of these plans. The assets of these plans are recorded in short-term or long-term investments with matching offsetting liabilities in accrued compensation and benefits and other long-term liabilities. See Note 8 for disclosures on the assets of these consolidated non-qualified deferred compensation plans.

16. Significant new accounting standards

On January 1, 2012, the Company adopted the Financial Accounting Standards Board’s, or FASB, Accounting Standard Update (ASU) No. 2011-08, Intangibles—Goodwill and Other. This standard amends the two-step goodwill impairment test required under the prior accounting guidance. This amendment allows reporting entities the option to first assess certain qualitative factors to ascertain whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount to determine if the two-step impairment test is necessary. If an entity concludes that certain events or circumstances demonstrate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity is required to proceed to step one of the two-step goodwill impairment test. This standard was effective on January 1, 2012. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2012, the Company adopted FASB’s ASU No. 2011-07, Health Care Entities-Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts. This standard amends the prior presentation and disclosure requirements for Health Care Entities that recognize significant amounts of patient service revenues at the time the services are rendered without assessing the patient’s ability to pay. This standard requires health care entities to reclassify the provision for bad debts from an operating expense to a deduction from patient service revenues. In addition, this standard requires more disclosure on the policies for recognizing revenue, assessing bad debts, as well as quantitative and qualitative information regarding changes in the allowance for doubtful accounts. This standard was applied retrospectively to all prior periods presented and was effective on January 1, 2012. Upon adoption of this standard, the Company changed its presentation of its provision for uncollectible accounts related to patient service revenues as a deduction from its patient service operating revenues and enhanced its disclosures as indicated above. See Note 4 to the condensed consolidated financial statements for further details.

On January 1, 2012, the Company adopted FASB’s ASU No. 2011-05 as amended by ASU No. 2011-12, Comprehensive Income—Presentation of Comprehensive Income. This standard amends the prior presentation requirements for comprehensive income by eliminating the presentation of the components of other comprehensive income within the statement of equity. This standard allows two options on how to present the various components of comprehensive income. These options are either to report the components of comprehensive income separately on the income statement or to present total other comprehensive income and the components of other comprehensive income in a separate statement. This standard does not change the items that must be reported in other comprehensive income or when an item must be reclassified into net income. The FASB temporarily deferred the requirement to present separate line items on the statement of income for the amounts that would be realized and reclassified out of accumulated other comprehensive income into net income. No timetable has been set for FASB’s reconsideration of this item. This standard, except for the requirements that were deferred, as stated above, was applied retrospectively and was effective on January 1, 2012. Upon

 

23


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

adoption of this standard, the Company presented total other comprehensive income and the components of other comprehensive income in a separate statement of comprehensive income.

On January 1, 2012, the Company adopted FASB’s ASU No. 2011-04, Fair Value Measurement. This standard amends the current fair value measurement and disclosure requirements to improve comparability between U.S. GAAP and International Financial Reporting Standards (IFRS). The intent of this standard is to update the disclosures that describe several of the requirements in U.S. GAAP for measuring fair value and to enhance disclosures about fair value measurements which will improve consistency between U.S. GAAP and IFRS. This standard does not change the application of the requirements on fair value measurements and disclosures. This was applied prospectively and was effective on January 1, 2012. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

17. Condensed consolidating financial statements

The following information is presented in accordance with Rule 3-10 of Regulation S-X. The operating and investing activities of the separate legal entities included in the Company’s consolidated financial statements are fully interdependent and integrated. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other administrative services. The Company issued senior notes on October 20, 2010 and on August 28, 2012, which are guaranteed by substantially all of its direct and indirect domestic wholly-owned subsidiaries. Each of the guarantor subsidiaries has guaranteed the notes on a joint and several basis. However, the guarantor subsidiaries can be released from their obligations in the event of a sale or other disposition of all or substantially all of the assets of such subsidiary, if such subsidiary guarantor is designated as an unrestricted subsidiary or otherwise ceases to be a restricted subsidiary, and if such subsidiary guarantor no longer guaranties any other indebtedness of the Company. Non-wholly-owned subsidiaries, certain wholly-owned subsidiaries, foreign subsidiaries, joint ventures, partnerships and third parties are not guarantors of these obligations.

 

24


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

Condensed Consolidating Statements of Income

 

For the three months ended September 30, 2012

  DaVita Inc.     Guarantor
subsidiaries
    Non-Guarantor
subsidiaries
    Consolidating
adjustments
    Consolidated
total
 

Dialysis patient service operating revenues

  $ —        $ 1,349,105      $ 506,837      $ (17,579   $ 1,838,363   

Less: Provision for uncollectible accounts

    —          (37,798     (22,005     —          (59,803
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service operating revenues

    —          1,311,307        484,832        (17,579     1,778,560   

Other revenues

    130,059        173,117        23,690        (142,460     184,406   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating revenues

    130,059        1,484,424        508,522        (160,039     1,962,966   

Operating expenses

    83,227        1,293,491        405,428        (160,039     1,622,107   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    46,832        190,933        103,094        —          340,859   

Debt (expense)

    (70,829     (51,098     (6,458     57,891        (70,494

Other income

    57,840        617        253        (57,891     819   

Income tax expense

    13,750        78,517        6,367        —          98,634   

Equity earnings in subsidiaries

    124,628        62,786        —          (187,414     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    144,721        124,721        90,522        (187,414     172,550   

Discontinued operations

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    144,721        124,721        90,522        (187,414     172,550   

Less: Net income attributable to noncontrolling interests

    —          —          —          (27,829     (27,829
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita Inc.

  $ 144,721      $ 124,721      $ 90,522      $ (215,243   $ 144,721   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2011

                             

Dialysis patient service operating revenues

  $ —        $ 1,302,690      $ 379,777      $ (13,381   $ 1,669,086   

Less: Provision for uncollectible accounts

    —          (41,241     (8,798     —          (50,039
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service operating revenues

    —          1,261,449        370,979        (13,381     1,619,047   

Other revenues

    116,752        129,989        17,587        (125,545     138,783   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating revenues

    116,752        1,391,438        388,566        (138,926     1,757,830   

Operating expenses

    83,459        1,204,382        290,203        (138,926     1,439,118   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    33,293        187,056        98,363        —          318,712   

Debt (expense)

    (61,123     (57,129     (598     58,002        (60,848

Other income

    58,073        596        131        (58,002     798   

Income tax expense

    12,303        85,110        (3,209     —          94,204   

Equity earnings in subsidiaries

    117,421        75,400        —          (192,821     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    135,361        120,813        101,105        (192,821     164,458   

Discontinued operations

    —          (3,431     819        —          (2,612
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    135,361        117,382        101,924        (192,821     161,846   

Less: Net income attributable to noncontrolling interests

    —          —          —          (26,485     (26,485
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita Inc.

  $ 135,361      $ 117,382      $ 101,924      $ (219,306   $ 135,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

Condensed Consolidating Statements of Income (continued)

 

For the nine months ended September 30, 2012

  DaVita Inc.     Guarantor
subsidiaries
    Non-Guarantor
subsidiaries
    Consolidating
adjustments
    Consolidated
total
 

Dialysis patient service operating revenues

  $ —        $ 4,022,250      $ 1,438,496      $ (50,546   $ 5,410,200   

Less: Provision for uncollectible accounts

    —          (84,762     (82,465     —          (167,227
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service operating revenues

    —          3,937,488        1,356,031        (50,546     5,242,973   

Other revenues

    381,069        483,551        69,626        (417,878     516,368   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating revenues

    381,069        4,421,039        1,425,657        (468,424     5,759,341   

Operating expenses

    269,394        3,880,256        1,168,654        (468,424     4,849,880   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    111,675        540,783        257,003        —          909,461   

Debt (expense)

    (194,697     (152,939     (19,466     174,518        (192,584

Other income

    174,380        1,942        894        (174,518     2,698   

Income tax expense

    37,274        223,309        1,555        —          262,138   

Equity earnings in subsidiaries

    326,094        159,719        —          (485,813     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    380,178        326,196        236,876        (485,813     457,437   

Discontinued operations

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    380,178        326,196        236,876        (485,813     457,437   

Less: Net income attributable to noncontrolling interests

    —          —          —          (77,259     (77,259
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita Inc.

  $ 380,178      $ 326,196      $ 236,876      $ (563,072   $ 380,178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2011

                             

Dialysis patient service operating revenues

  $ —        $ 3,753,014      $ 1,032,159      $ (35,704   $ 4,749,469   

Less: Provision for uncollectible accounts

    —          (91,776     (46,744     —          (138,520
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service operating revenues

    —          3,661,238        985,415        (35,704     4,610,949   

Other revenues

    335,255        345,692        50,540        (361,060     370,427   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating revenues

    335,255        4,006,930        1,035,955        (396,764     4,981,376   

Operating expenses

    223,299        3,504,338        849,833        (396,764     4,180,706   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    111,956        502,592        186,122        —          800,670   

Debt (expense)

    (180,428     (168,189     (1,161     170,438        (179,340

Other income

    171,046        1,094        493        (170,438     2,195   

Income tax expense

    41,235        183,418        (619     —          224,034   

Equity earnings in subsidiaries

    268,539        144,377        —          (412,916     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    329,878        296,456        186,073        (412,916     399,491   

Discontinued operations

    —          (3,321     1,093        —          (2,228
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    329,878        293,135        187,166        (412,916     397,263   

Less: Net income attributable to noncontrolling interests

    —          —          —          (67,385     (67,385
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita Inc.

  $ 329,878      $ 293,135      $ 187,166      $ (480,301   $ 329,878   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

Condensed Consolidating Statements of Comprehensive Income

 

For the three months ended September 30, 2012

   DaVita Inc.     Guarantor
subsidiaries
     Non-Guarantor
subsidiaries
     Consolidating
adjustments
    Consolidated
total
 

Net income

   $ 144,721      $ 124,721       $ 90,522       $ (187,414   $ 172,550   

Other comprehensive income

     1,099        —           —           —          1,099   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     145,820        124,721         90,522         (187,414     173,649   

Less: comprehensive income attributable to the noncontrolling interests

     —          —           —           (27,829     (27,829
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita Inc.

   $ 145,820      $ 124,721       $ 90,522       $ (215,243   $ 145,820   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

For the nine months ended September 30, 2012

                                

Net income

   $ 380,178      $ 326,196       $ 236,876       $ (485,813   $ 457,437   

Other comprehensive income

     1,201        —           —           —          1,201   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     381,379        326,196         236,876         (485,813     458,638   

Less: comprehensive income attributable to the noncontrolling interests

     —          —           —           (77,259     (77,259
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita Inc.

   $ 381,379      $ 326,196       $ 236,876       $ (563,072   $ 381,379   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

For the three months ended September 30, 2011

                                

Net income

   $ 135,361      $ 117,382       $ 101,924       $ (192,821   $ 161,846   

Other comprehensive loss

     (9,069     —           —           —          (9,069
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     126,292        117,382         101,924         (192,821     152,777   

Less: comprehensive income attributable to the noncontrolling interests

     —          —           —           (26,485     (26,485
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita Inc.

   $ 126,292      $ 117,382       $ 101,924       $ (219,306   $ 126,292   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

For the nine months ended September 30, 2011

                                

Net income

   $ 329,878      $ 293,135       $ 187,166       $ (412,916   $ 397,263   

Other comprehensive loss

     (21,359     —           —           —          (21,359
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     308,519        293,135         187,166         (412,916     375,904   

Less: comprehensive income attributable to the noncontrolling interests

     —          —           —           (67,385     (67,385
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita Inc.

   $ 308,519      $ 293,135       $ 187,166       $ (480,301   $ 308,519   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

27


Table of Contents

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

Condensed Consolidating Balance Sheets

 

As of September 30, 2012

   DaVita Inc.      Guarantor
subsidiaries
     Non-Guarantor
subsidiaries
     Consolidating
adjustments
    Consolidated
total
 

Cash and cash equivalents

   $ 359,835       $ —         $ 22,359       $ —        $ 382,194   

Accounts receivable, net

     —           957,298         290,752         —          1,248,050   

Other current assets

     9,127         612,119         74,184         —          695,430   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     368,962         1,569,417         387,295         —          2,325,674   

Property and equipment, net

     128,883         1,074,675         451,099         —          1,654,657   

Amortizable intangibles, net

     64,948         98,199         14,395         —          177,542   

Investments in subsidiaries

     7,254,183         1,242,178         —           (8,496,361     —     

Intercompany receivables

     —           714,101         361,830         (1,075,931     —     

Other long-term assets and investments

     1,282,275         55,047         3,957         —          1,341,279   

Goodwill

     —           4,173,048         1,151,912         —          5,324,960   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 9,099,251       $ 8,926,665       $ 2,370,488       $ (9,572,292   $ 10,824,112   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 153,435       $ 1,065,787       $ 117,615       $ —        $ 1,336,837   

Intercompany payables

     528,956         —           546,975         (1,075,931     —     

Long-term debt and other long-term liabilities

     5,523,683         663,183         80,004         —          6,266,870   

Noncontrolling interests subject to put provisions

     355,756         —           —           194,264        550,020   

Total DaVita Inc. shareholders’ equity

     2,537,421         7,197,695         1,298,666         (8,496,361     2,537,421   

Noncontrolling interests not subject to put provisions

     —           —           327,228         (194,264     132,964   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     2,537,421         7,197,695         1,625,894         (8,690,625     2,670,385   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 9,099,251       $ 8,926,665       $ 2,370,488       $ (9,572,292   $ 10,824,112   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2011

                                 

Cash and cash equivalents

   $ 365,276       $ —         $ 28,476       $ —        $ 393,752   

Accounts receivable, net

     —           926,041         269,122         —          1,195,163   

Other current assets

     14,665         598,721         79,307         —          692,693   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     379,941         1,524,762         376,905         —          2,281,608   

Property and equipment, net

     78,038         971,867         382,746         —          1,432,651   

Amortizable intangibles, net

     53,276         95,900         10,315         —          159,491   

Investments in subsidiaries

     6,696,039         1,089,920         —           (7,785,959     —     

Intercompany receivables

     —           472,200         253,447         (725,647     —     

Other long-term assets and investments

     11,388         56,134         3,924         —          71,446   

Goodwill

     —           3,903,542         1,043,434         —          4,946,976   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 7,218,682       $ 8,114,325       $ 2,070,771       $ (8,511,606   $ 8,892,172   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 148,994       $ 889,172       $ 114,950       $ —        $ 1,153,116   

Intercompany payables

     271,890         —           453,757         (725,647     —     

Long-term debt and other long-term liabilities

     4,351,346         585,675         55,694         —          4,992,715   

Noncontrolling interests subject to put provisions

     305,377         —           —           172,839        478,216   

Total DaVita Inc. shareholders’ equity

     2,141,075         6,639,478         1,146,481         (7,785,959     2,141,075   

Noncontrolling interests not subject to put provisions

     —           —           299,889         (172,839     127,050   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     2,141,075         6,639,478         1,446,370         (7,958,798     2,268,125   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 7,218,682       $ 8,114,325       $ 2,070,771       $ (8,511,606   $ 8,892,172   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

 

Condensed Consolidating Statements of Cash Flows

 

For the nine months ended September 30, 2012

  DaVita Inc.     Guarantor
subsidiaries
    Non-Guarantor
subsidiaries
    Consolidating
adjustments
    Consolidated
total
 

Cash flows from operating activities:

         

Net income

  $ 380,178      $ 326,196      $ 236,876      $ (485,813   $ 457,437   

Changes in operating assets and liabilities and non-cash items included in net income

    (345,397     256,045        46,715        485,813        443,176   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    34,781        582,241        283,591        —          900,613   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Additions of property and equipment, net

    (54,952     (200,547     (123,450     —          (378,949

Acquisitions

    —          (373,386     (45,728     —          (419,114

Proceeds from asset sales

    —          2,118        —          —          2,118   

Proceeds from investment sales and other items

    3,328        (1,274     7,134        —          9,188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (51,624     (573,089     (162,044     —          (786,757
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Long-term debt and related financing costs, net

    1,175,896        (15,059     9,261        —          1,170,098   

Intercompany borrowing

    56,521        17,837        (74,358     —          —     

Other items

    (1,221,015     (11,930     (62,610     —          (1,295,555
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    11,402        (9,152     (127,707     —          (125,457

Effect of exchange rate changes on cash

    —          —          43        —          43   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (5,441     —          (6,117     —          (11,558

Cash and cash equivalents at beginning of period

    365,276        —          28,476        —          393,752   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 359,835      $ —        $ 22,359      $ —        $ 382,194   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2011

         

Cash flows from operating activities:

         

Net income

  $ 329,878      $ 293,135      $ 187,166      $ (412,916   $ 397,263   

Changes in operating assets and liabilities and non-cash items included in net income

    (116,688     355,867        (19,971     412,916        632,124   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    213,190        649,002        167,195        —          1,029,387   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Additions of property and equipment, net

    (34,061     (147,392     (70,426     —          (251,879

Acquisitions

    —          (927,124     —          —          (927,124

Proceeds from asset sales

    —          51,623        —          —          51,623   

Proceeds from investment sales and other items

    (970     343        (5,000     —          (5,627
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (35,031     (1,022,550     (75,426     —          (1,133,007
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Long-term debt and related financing costs, net

    96,233        13,493        28,048        —          137,774   

Intercompany borrowing

    (316,622     366,570        (49,948     —          —     

Other items

    (293,921     (6,515     (52,629     —          (353,065
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (514,310     373,548        (74,529     —          (215,291
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

    (336,151     —          17,240        —          (318,911

Cash and cash equivalents at beginning of period

    856,803        —          3,314        —          860,117   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 520,652      $ —        $ 20,554      $ —        $ 541,206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements that do not concern historical facts are forward-looking statements and include, among other things, statements about our expectations, beliefs, intentions and/or strategies for the future. These forward-looking statements include statements regarding our future operations, financial condition and prospects, expectations for treatment growth rates, revenue per treatment, expense growth, levels of the provision for uncollectible accounts receivable, operating income, cash flow, operating cash flow, estimated tax rates, capital expenditures, the development of new centers and center acquisitions, government and commercial payment rates, revenue estimating risk and the impact of our related level of indebtedness on our financial performance, including earnings per share and the anticipated timing of the closing of the HCP acquisition and incorporation of HCP’s operating results into the Company’s consolidated operating results. These statements involve substantial known and unknown risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements, including, but not limited to, risks resulting from the concentration of profits generated from commercial payor plans, continued downward pressure on average realized payment rates from commercial payors, which may result in the loss of revenues or patients, a reduction in the number of patients under higher-paying commercial plans, a reduction in government payment rates under the Medicare End Stage Renal Disease program or other government-based programs, the impact of health care reform legislation that was enacted in the United States in March 2010, changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing, our ability to maintain contracts with physician medical directors, legal compliance risks, including our continued compliance with complex government regulations, current or potential investigations by various government entities and related government or private-party proceedings, continued increased competition from large and medium-sized dialysis providers that compete directly with us, the emergence of new models of care introduced by the government or private sector, such as accountable care organizations, independent practice association and integrated delivery systems, and changing affiliation models for physicians plans, such as employment by hospitals, that may erode our patient base and reimbursement rates, our ability to complete any acquisitions or mergers, including the consummation of the HCP transaction, dispositions that we might be considering or announce, or to integrate and successfully operate any business we may acquire, including the HCP business, or to expand our operations and services to markets outside the United States, or to businesses outside of dialysis, variability of DaVita’s cash flows, risks arising from the use of accounting estimates in our financial statements, loss of key HCP employees following the HCP transaction, potential disruption from the HCP transaction making it more difficult to maintain business and operational relationships with customers, partners, affiliated physicians and physician groups and others, the risk that the cost of providing services under HCP’s agreements will exceed HCP’s compensation, the risk that laws regulating the corporate practice of medicine could restrict the manner in which HCP conducts its business, the risk that reductions in reimbursement rates and future regulations may negatively impact HCP’s business, revenue and profitability, the risk that HCP may not be able to successfully establish a presence in new geographic regions, the risk that reductions in the quality ratings of health maintenance organization plan customers of HCP could have an adverse effect on HCP’s business, the fact that HCP faces certain competitive threats that could reduce its profitability, or the risk that a disruption in HCP’s healthcare provider networks could have an adverse effect on HCP’s operations and profitability, and the other risk factors set forth in Part II, Item 1A. of this Quarterly Report on Form 10-Q. We base our forward-looking statements on information currently available to us, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in underlying factors, new information, future events or otherwise.

The following should be read in conjunction with our condensed consolidated financial statements.

 

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Results of operations

We operate principally as a dialysis and related lab services business in the U.S. but also operate other ancillary services and strategic initiatives. These ancillary services and strategic initiatives consist of pharmacy services, infusion therapy services, disease management services, vascular access services, ESRD clinical research programs and physician services, direct primary care and our international dialysis operations. The U.S. dialysis and related lab services business qualifies as a separately reportable segment and all references to dialysis and related lab services continue to refer only to our U.S. dialysis and related lab services business. All of the other ancillary services and strategic initiatives operating segments, including our international dialysis operations, have been combined and disclosed in the other segments category.

Our consolidated operating results for the third quarter of 2012 compared with the prior sequential quarter and the same quarter of 2011 as well as the nine months ended September 30, 2012 compared to the same periods in 2011 were as follows:

 

    Three months ended     Nine months ended  
    September 30,
2012
    June 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 
    (dollar amounts rounded to nearest million)  

Total net operating revenues

  $ 1,963        $ 1,930        $ 1,758        $ 5,759        $ 4,981     

Add: Provision for uncollectible accounts related to patient service revenues

    60          54          50          167          139     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Consolidated operating revenues

  $ 2,023        100   $ 1,984        100   $ 1,808        100   $ 5,927        100   $ 5,120        100
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Patient service operating revenues

  $ 1,839        $ 1,809        $ 1,669        $ 5,411        $ 4,749     

Less: Provision for uncollectible accounts related to patient service revenues

    (60     3     (54     3     (50     3