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, 2013

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-14106

 

 

DAVITA HEALTHCARE PARTNERS 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 31, 2013, the number of shares of the Registrant’s common stock outstanding was approximately 212.7 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 $12.0 billion.

 

 

 


Table of Contents

DAVITA HEALTHCARE PARTNERS 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, 2013 and September 30, 2012      1   
  Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and September 30, 2012      2   
  Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012      3   
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and September 30, 2012      4   
  Consolidated Statements of Equity for the nine months ended September 30, 2013 and for the year ended December 31, 2012      5   
  Notes to Condensed Consolidated Financial Statements      6   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      59   
Item 4.   Controls and Procedures      62   
  PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings      63   
Item 1A.   Risk Factors      63   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      96   
Item 6.   Exhibits      97   
  Signature      98   

 

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

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars in thousands, except per share data)

 

    Three months ended
September 30,
    Nine months ended
September 30,
 
    2013     2012     2013     2012  

Patient service revenues

  $ 2,126,699      $ 1,842,853      $ 6,155,223      $ 5,422,100   

Less: Provision for uncollectible accounts

    (74,477     (59,822     (216,725     (167,268
 

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

    2,052,222        1,783,031        5,938,498        5,254,832   

Capitated revenues

    747,264        16,362        2,219,953        44,894   

Other revenues

    200,100        146,495        542,390        408,701   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    2,999,586        1,945,888        8,700,841        5,708,427   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses and charges:

       

Patient care costs and other costs

    2,095,334        1,327,373        6,070,545        3,876,090   

General and administrative

    305,138        197,912        857,658        616,106   

Depreciation and amortization

    132,765        80,100        389,263        232,691   

Provision for uncollectible accounts

    1,498        1,390        3,636        3,534   

Equity investment income

    (9,223     (3,064     (26,239     (8,314

Loss contingency reserve and other legal settlements

    97,000        1,292        397,000        79,292   

Contingent earn-out obligation adjustment

    —          —          (56,977     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses and charges

    2,622,512        1,605,003        7,634,886        4,799,399   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    377,074        340,885        1,065,955        909,028   

Debt expense

    (108,421     (70,494     (322,334     (192,584

Other income, net

    2,113        819        1,337        2,698   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    270,766        271,210        744,958        719,142   

Income tax expense

    100,930        98,647        245,266        261,943   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    169,836        172,563        499,692        457,199   

Discontinued operations:

       

(Loss) income from operations of discontinued operations, net of tax

    —          (13     (139     238   

Gain on disposal of discontinued operations, net of tax

    —          —          13,375        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    169,836        172,550        512,928        457,437   

Less: Net income attributable to noncontrolling interests

    (33,208     (27,829     (91,760     (77,259
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

  $ 136,628      $ 144,721      $ 421,168      $ 380,178   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

       

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

  $ 0.65      $ 0.76      $ 1.95      $ 2.01   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share attributable to DaVita HealthCare Partners Inc.

  $ 0.65      $ 0.76      $ 2.01      $ 2.02   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 0.64      $ 0.75      $ 1.90      $ 1.98   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share attributable to DaVita HealthCare Partners Inc.

  $ 0.64      $ 0.75      $ 1.96      $ 1.98   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares for earnings per share:

       

Basic

    210,394,560        189,959,716        209,725,439        188,618,198   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    214,902,860        193,269,240        214,631,587        192,248,452   
 

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to DaVita HealthCare Partners Inc.:

       

Income from continuing operations

  $ 136,628      $ 144,726      $ 407,919      $ 379,953   

Discontinued operations

    —          (5     13,249        225   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 136,628      $ 144,721      $ 421,168      $ 380,178   
 

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013     2012     2013     2012  

Net income

   $ 169,836      $ 172,550      $ 512,928      $ 457,437   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Unrealized gain (loss) on interest rate swap and cap agreements:

        

Unrealized (loss) gain on interest rate swap and cap agreements

     (7,733     (1,741     1,583        (6,104

Reclassifications of net swap and cap agreements realized loss into net income

     3,464        2,530        9,433        7,586   

Unrealized gains on investments:

        

Unrealized gain on investments

     648        445        1,367        1,387   

Reclassification of net investment realized gains into net income

     —          —          (94     (75

Foreign currency translation adjustments

     2,741        (135     (1,206     (1,593
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (880     1,099        11,083        1,201   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     168,956        173,649        524,011        458,638   

Less: Comprehensive income attributable to noncontrolling interests

     (33,208     (27,829     (91,760     (77,259
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 135,748      $ 145,820      $ 432,251      $ 381,379   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except per share data)

 

     September 30,
2013
    December 31,
2012
 

ASSETS

    

Cash and cash equivalents

   $ 970,694      $ 533,748   

Short-term investments

     6,796        7,138   

Accounts receivable, less allowance of $221,602 and $245,122

     1,404,050        1,424,303   

Inventories

     84,899        78,126   

Other receivables

     295,540        265,671   

Other current assets

     156,940        201,572   

Income tax receivable

     64,351        55,454   

Deferred income taxes

     398,138        315,782   
  

 

 

   

 

 

 

Total current assets

     3,381,408        2,881,794   

Property and equipment, net of accumulated depreciation of $1,699,441 and $1,522,183

     2,048,235        1,872,370   

Intangibles, net of accumulated amortization of $438,611 and $304,323

     2,059,568        2,128,118   

Equity investments

     41,465        35,150   

Long-term investments

     72,568        59,341   

Other long-term assets

     79,833        79,854   

Goodwill

     9,144,242        8,952,987   
  

 

 

   

 

 

 
   $ 16,827,319      $ 16,009,614   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Accounts payable

   $ 358,402      $ 414,143   

Other liabilities

     481,840        568,616   

Accrued compensation and benefits

     685,352        566,911   

Medical payables

     270,762        238,964   

Loss contingency reserve

     397,000        —    

Current portion of long-term debt

     259,770        227,791   
  

 

 

   

 

 

 

Total current liabilities

     2,453,126        2,016,425   

Long-term debt

     8,181,434        8,326,534   

Other long-term liabilities

     353,723        443,743   

Alliance and product supply agreement, net

     10,660        14,657   

Deferred income taxes

     769,713        710,638   
  

 

 

   

 

 

 

Total liabilities

     11,768,656        11,511,997   

Commitments and contingencies

    

Noncontrolling interests subject to put provisions

     621,232        580,692   

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; 212,671,800 shares issued and outstanding at September 30, 2013; 269,724,566 shares issued and 210,997,150 shares outstanding at December 31, 2012)

     213        270   

Additional paid-in capital

     1,120,276        1,208,665   

Retained earnings

     3,151,711        3,731,835   

Treasury stock, at cost (58,727,416 shares at December 31, 2012)

     —          (1,162,336

Accumulated other comprehensive loss

     (4,214     (15,297
  

 

 

   

 

 

 

Total DaVita HealthCare Partners Inc. shareholders’ equity

     4,267,986        3,763,137   

Noncontrolling interests not subject to put provisions

     169,445        153,788   
  

 

 

   

 

 

 

Total equity

     4,437,431        3,916,925   
  

 

 

   

 

 

 
   $ 16,827,319      $ 16,009,614   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

     Nine months ended
September 30,
 
     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 512,928      $ 457,437   

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

    

Loss contingency reserve

     397,000        —     

Depreciation and amortization

     389,387        234,368   

Stock-based compensation expense

     47,095        34,857   

Tax benefits from stock award exercises

     40,870        60,252   

Excess tax benefits from stock award exercises

     (31,722     (39,346

Deferred income taxes

     (52,085     (1,374

Equity investment income, net

     1,074        10   

Other non-cash (income) charges and loss on disposal of assets

     (54,203     17,244   

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

    

Accounts receivable

     20,856        (51,349

Inventories

     (5,494     1,958   

Other receivables and other current assets

     (35,757     65,047   

Other long-term assets

     17,861        3,429   

Accounts payable

     (71,581     (18,200

Accrued compensation and benefits

     114,877        113,101   

Other current liabilities

     91,503        87,223   

Income taxes

     (15,212     (69,108

Other long-term liabilities

     51,757        5,064   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,419,154        900,613   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions of property and equipment, net

     (399,527     (378,949

Acquisitions

     (234,802     (419,114

Proceeds from asset and business sales

     62,282        2,118   

Purchase of investments available for sale

     (6,630     (3,452

Purchase of investments held-to-maturity

     (1,034     (5,257

Proceeds from sale of investments available for sale

     1,091        6,796   

Proceeds from maturities of investments held-to-maturity

     1,376        12,375   

Purchase of intangible assets

     (53     (1,276

Distributions received on equity investments

     211        2   
  

 

 

   

 

 

 

Net cash used in investing activities

     (577,086     (786,757
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings

     49,941,883        26,992,105   

Payments on long-term debt, contingent obligations and other financing costs

     (50,326,174     (25,821,996

Restricted cash

     —          (1,268,767

Distributions to noncontrolling interests

     (99,736     (81,978

Stock award exercises and other share issuances, net

     12,432        8,395   

Excess tax benefits from stock award exercises

     31,722        39,346   

Contributions from noncontrolling interests

     30,041        19,368   

Proceeds from sales of additional noncontrolling interests

     6,083        1,844   

Purchases from noncontrolling interests

     (474     (13,774
  

 

 

   

 

 

 

Net cash used in financing activities

     (404,223     (125,457

Effect of exchange rate changes on cash and cash equivalents

     (899     43   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     436,946        (11,558

Cash and cash equivalents at beginning of period

     533,748        393,752   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 970,694      $ 382,194   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

(dollars and shares in thousands)

 

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

Balance at December 31, 2011

  $ 478,216        269,725      $ 270      $ 596,165      $ 3,195,818        (82,442   $ (1,631,694   $ (19,484   $ 2,141,075      $ 127,050   

Comprehensive income:

                   

Net income

    66,456              536,017              536,017        38,764   

Other comprehensive income

                  4,187        4,187     

Stock purchase shares issued

          4,311          203        4,011          8,322     

Stock unit shares issued

          (8,303       419        8,303          —      

Stock options and SSARs exercised

          (83,558       4,332        85,733          2,175     

Stock-based compensation expense

          45,384                45,384     

Excess tax benefits from stock awards exercised

          62,036                62,036     

Issuance of common stock associated with the HCP acquisition

          684,161          18,761        371,311          1,055,472     

Assumption of noncontrolling interests associated with the HCP acquisition

                      29,850   

Distributions to noncontrolling interests

    (70,133                     (43,371

Contributions from noncontrolling interests

    26,371                        11,024   

Sales and assumptions of additional noncontrolling interests

    20,124            1,064                1,064        2,432   

Purchases from noncontrolling interests

    (5,229         (20,694             (20,694     (838

Changes in fair value of noncontrolling interests

    71,901            (71,901             (71,901  

Held for sale reclassification

    (7,014                  

Purchase accounting adjustments

                      (11,123
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

  $ 580,692        269,725      $ 270      $ 1,208,665      $ 3,731,835        (58,727   $ (1,162,336   $ (15,297   $ 3,763,137      $ 153,788   

Comprehensive income:

                   

Net income

    59,605              421,168              421,168        32,155   

Other comprehensive income

                  11,083        11,083     

Stock unit shares issued

      2        —          (3,247       164        3,247          —       

Stock-settled SAR shares issued

      65        —          (28,561       1,443        28,561          —      

Stock-based compensation expense

          47,095                47,095     

Excess tax benefits from stock awards exercised

          31,722                31,722     

Distributions to noncontrolling interests

    (58,049                     (41,687

Contributions from noncontrolling interests

    19,973                        10,068   

Sales and assumptions of additional noncontrolling interests

    21,273            (866             (866     7,980   

Purchases from noncontrolling interests

          (474             (474  

Expiration of put option and other reclassification

    (7,141                     7,141   

Changes in fair value of noncontrolling interests

    4,879            (4,879             (4,879  

Treasury stock retirement

      (57,120     (57     (129,179     (1,001,292     57,120        1,130,528          —       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

  $ 621,232        212,672      $ 213      $ 1,120,276      $ 3,151,711        —        $ —        $ (4,214   $ 4,267,986      $ 169,445   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS 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 HealthCare Partners 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 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 the accrual of an estimated loss contingency reserve and its impact on the Company’s income taxes, revenue recognition and accounts receivable, impairments of long-lived assets, fair value estimates, accounting for income taxes, variable compensation accruals, consolidation of variable interest entities, purchase accounting valuation estimates, long-term incentive program compensation and medical liability claims. The results of operations for the nine months ended September 30, 2013 are not necessarily indicative of the operating results for the full year. The condensed 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, 2012. Prior year balances and amounts have been reclassified to conform to the current year presentation and retrospectively revised to reflect purchase accounting entries. 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, adjusted for any change 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).

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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,
 
     2013     2012     2013     2012  

Basic:

        

Income from continuing operations attributable to DaVita HealthCare Partners Inc.

   $ 136,628      $ 144,726      $ 407,919      $ 379,953   

Change in noncontrolling interests redemption rights in excess of fair value

     259        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations for basic earnings per share calculation

   $ 136,887      $ 144,726      $ 407,919      $ 379,953   

Discontinued operations attributable to DaVita HealthCare Partners Inc.

     —          (5     13,249        225   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 136,887      $ 144,721      $ 421,168      $ 380,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding during the period

     212,584        189,954        211,914        188,612   

Vested stock units

     5        6        5        6   

Contingently returnable shares held in escrow for the DaVita HealthCare Partners merger

     (2,194     —          (2,194     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares for basic earnings per share calculation

     210,395        189,960        209,725        188,618   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.65      $ 0.76      $ 1.95      $ 2.01   

Basic income from discontinued operations per share attributable to DaVita HealthCare Partners Inc.

   $ —        $ —        $ 0.06      $ 0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share attributable to DaVita HealthCare Partners Inc.

   $ 0.65      $ 0.76      $ 2.01      $ 2.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Income from continuing operations attributable to DaVita HealthCare Partners Inc.

   $ 136,628      $ 144,726      $ 407,919      $ 379,953   

Change in noncontrolling interests redemption rights in excess of fair value

     259        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations for diluted earnings per share calculation

   $ 136,887      $ 144,726      $ 407,919      $ 379,953   

Discontinued operations attributable to DaVita HealthCare Partners Inc.

     —          (5     13,249        225   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 136,887      $ 144,721      $ 421,168      $ 380,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding during the period

     212,584        189,954        211,914        188,612   

Vested stock units

     5        6        5        6   

Assumed incremental shares from stock plans

     2,314        3,309        2,713        3,630   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares for diluted earnings per share calculation

     214,903        193,269        214,632        192,248   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.64      $ 0.75      $ 1.90      $ 1.98   

Diluted income from discontinued operations per share attributable to DaVita HealthCare Partners Inc.

   $ —        $ —        $ 0.06      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share attributable to DaVita HealthCare Partners Inc.

   $ 0.64      $ 0.75      $ 1.96      $ 1.98   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     4,908        472        3,871        3,282   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

3. Stock-based compensation and other common stock transactions

The Company’s stock-based compensation awards are measured at their estimated fair values on the date of grant if settled in shares or at their estimated fair values at the end of each reporting period if settled in cash. The value of stock-based awards so measured is recognized as compensation expense on a cumulative straight-line basis over the vesting terms of the awards, adjusted for expected forfeitures.

During the nine months ended September 30, 2013, the Company granted 3,377 stock-settled stock appreciation rights with an aggregate grant-date fair value of $45,440 and a weighted-average expected life of approximately 4.1 years, and also granted 33 stock units with an aggregate grant-date fair value of $1,978 and a weighted-average expected life of approximately 2.1 years.

For the nine months ended September 30, 2013 and 2012, the Company recognized $47,095 and $34,857, 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, 2013 and 2012 was $17,466 and $12,992, respectively. As of September 30, 2013, there was $104,293 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 1.3 years.

Beginning in 2013, the Company no longer has stock options outstanding and did not receive any cash proceeds from stock option exercises during the first nine months of 2013. During the nine months ended September 30, 2012, the Company received $2,174 in cash proceeds from stock option exercises. In addition, for the nine months ended September 30, 2013 and 2012 the Company received $40,870 and $60,252, respectively, in actual tax benefits upon the exercise of stock awards.

On June 17, 2013, the stockholders of the Company approved an amendment to the DaVita HealthCare Partners Inc. 2011 Incentive Award Plan to increase the number of shares of common stock available for issuance under the Plan by 8,500 shares.

In the third quarter of 2013, the Board of Directors approved a two-for-one stock split of the Company’s common stock in the form of a stock dividend payable on September 6, 2013 to stockholders of record on August 23, 2013. The Company’s common stock began trading on a post-split basis on September 9, 2013. All share and per share data for all periods presented have been adjusted to reflect the effects of the stock split.

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 dialysis patient services covered by government payors, primarily Medicare, the Company receives 80% of the payment directly from Medicare as established under the government’s bundled payment system and determines an appropriate allowance for doubtful accounts and provision for uncollectible accounts on the

 

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DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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 that are either based upon contractual terms or for non-contracted health plan coverage, the Company provides an allowance for doubtful accounts by recording 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. Approximately 3% of the Company’s net accounts receivable are associated with patient pay and it is the Company’s policy with respect to its dialysis operations 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, 2013, the Company’s allowance for doubtful accounts decreased by approximately $23,520. This was primarily due to continued higher non-covered Medicare write-offs during the period in the Company’s U.S. dialysis business. There were no unusual transactions impacting the allowance for doubtful accounts.

5. Goodwill

Changes in goodwill by reportable segments were as follows:

 

     Nine months ended September 30, 2013  
     U.S. dialysis and
related lab services
    HCP      Other-ancillary
services and
strategic initiatives
     Consolidated total  

Balance at January 1, 2013

   $ 5,309,152      $ 3,506,808       $ 137,027       $ 8,952,987   

Acquisitions

     146,140        16,994         29,688         192,822   

Divestitures

     (2,728     —          —          (2,728

Other adjustments

     12        —          1,149         1,161   
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance at September 30, 2013

   $ 5,452,576      $ 3,523,802       $ 167,864       $ 9,144,242   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

     Year ended December 31, 2012  
     U.S. dialysis and
related lab services
    HCP     Other-ancillary
services and
strategic initiatives
    Consolidated total  

Balance at January 1, 2012

   $ 4,865,864      $ —        $ 81,112      $ 4,946,976   

Acquisitions

     443,997        3,518,790        88,611        4,051,398   

Divestitures

     (709     —         —         (709

Held for sale

     —          —         (31,853     (31,853

Other adjustments

     —          —         (843     (843
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012 as previously reported

   $ 5,309,152      $ 3,518,790      $ 137,027      $ 8,964,969   

HCP purchase accounting adjustments

     —          (11,982     —         (11,982
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012 as adjusted

   $ 5,309,152      $ 3,506,808      $ 137,027      $ 8,952,987   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 each sovereign jurisdiction within our international operations segments is considered a separate reporting unit.

 

9


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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 the allocation of resources 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 HCP operations in each region, to the vascular access service centers in its vascular access services reporting unit, to the physician practices in its physician services reporting unit, and to the dialysis centers in each sovereign international jurisdiction. For the Company’s additional operating segments, no component below the operating segment level is considered a discrete business and therefore these operating segments directly constitute individual reporting units.

During the first nine months of 2013, the Company did not record any goodwill impairment charges and, as of September 30, 2013, none of the goodwill associated with the Company’s various reporting units was considered at risk of impairment. Since the dates of the Company’s last annual goodwill impairment tests, there have been no 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,
2013
    December 31,
2012
 

Senior Secured Credit Facilities:

    

Term Loan A

   $ 825,000      $ 900,000   

Term Loan A-3

     1,299,375        1,350,000   

Term Loan B

     1,701,875        1,715,000   

Term Loan B-2

     1,637,625        1,650,000   

Senior notes

     2,800,000        2,800,000   

Acquisition obligations and other notes payable

     57,770        64,276   

Capital lease obligations

     138,198        96,594   
  

 

 

   

 

 

 

Total debt principal outstanding

     8,459,843        8,575,870   

Discount on long-term debt

     (18,639     (21,545
  

 

 

   

 

 

 
     8,441,204        8,554,325   

Less current portion

     (259,770     (227,791
  

 

 

   

 

 

 
   $ 8,181,434      $ 8,326,534   
  

 

 

   

 

 

 

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

Scheduled maturities of long-term debt at September 30, 2013 were as follows:

 

2013 (remainder of the year)

     60,943   

2014

     267,108   

2015

     843,928   

2016

     1,895,122   

2017

     908,124   

2018

     804,715   

Thereafter

     3,679,903   

During the first nine months of 2013, the Company made mandatory principal payments under its Senior Secured Credit Facilities totaling $75,000 on the Term Loan A, $50,625 on the Term Loan A-3, $13,125 on the Term Loan B and $12,375 on the Term Loan B-2.

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 London Interbank Offered Rate (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 and Term Loan B-2 debt, as described below. Certain 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. Certain other cap agreements are designated as ineffective cash flow hedges, and as a result, changes in the fair value of these cap agreements are reported in net 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.

In July 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. This standard amends the acceptable benchmark interest rates to permit the inclusion of the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes in addition to U.S. government (UST) and LIBOR. The amendment also removes the restriction on using different benchmark rates for similar hedges. This standard is applied prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

As of September 30, 2013, the Company maintains several interest rate swap agreements that were entered into in March 2013 with amortizing notional amounts of these swap agreements totaling $1,299,375. These agreements have 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-3 to fixed rates ranging from 0.49% to 0.52%, resulting in an overall weighted average effective interest rate of 3.01%, including the Term Loan A-3 margin of

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

2.50%. The swap agreements expire on September 30, 2016 and require monthly interest payments. During the nine months ended September 30, 2013, the Company recognized debt expense of $2,145 from these swaps. As of September 30, 2013, the total fair value of these swap agreements was a net asset of approximately $3,909. The Company estimates that approximately $3,511 of existing unrealized pre-tax losses in other comprehensive income at September 30, 2013 will be reclassified into income over the next twelve months.

In addition, as of September 30, 2013, the Company also maintains several forward interest rate swap agreements that were entered into in March 2013 with amortizing notional amounts totaling $600,000. These forward swap agreements will be effective September 30, 2014 and will have the economic effect of modifying the LIBOR variable component of the Company’s interest rate on an equivalent amount of the Company’s outstanding debt to fixed rates ranging from 0.72% to 0.75%. These swap agreements expire on September 30, 2016 and will require monthly interest payments beginning in October 2014. Any unrealized gains or losses resulting from changes in the fair value of these swaps will be recorded in other comprehensive income. As of September 30, 2013, the total fair value of these swap agreements was a net asset of approximately $1,676.

As of September 30, 2013, the Company maintains several interest rate cap agreements that were entered into in March 2013 with notional amounts totaling $1,250,000 on the Company’s Term Loan B debt and $1,485,000 on the Company’s Term Loan B-2 debt. These agreements have the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 2.50% on an equivalent amount of the Company’s Term Loan B and Term Loan B-2 debt. During the nine months ended September 30, 2013, the Company recognized debt expense of $1,220 from these caps. The cap agreements expire on September 30, 2016. As of September 30, 2013, the total fair value of these cap agreements was an asset of approximately $8,838. During the nine months ended September 30, 2013, the Company recorded a gain of $302 in other comprehensive income due to an increase in the unrealized fair value of these cap agreements.

As of September 30, 2013, the Company also maintains a total of nine other interest rate swap agreements with amortizing notional amounts totaling $825,000. 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 4.36%, including the Term Loan A margin of 2.75%. The swap agreements expire on September 30, 2014 and require monthly interest payments. During the nine months ended September 30, 2013, the Company recognized debt expense of $9,383 from these swaps. As of September 30, 2013, the total fair value of these swap agreements was a liability of approximately $10,759. The Company estimates that approximately $10,759 of existing unrealized pre-tax losses in other comprehensive income at September 30, 2013 will be reclassified into income over the next twelve months.

As of September 30, 2013, the Company also maintains 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 our interest rate at a maximum of 4.00% on an equivalent amount of our Term Loan B debt. However, as a result of the new interest rate cap agreements that were entered into in March 2013, as described above, these interest rate cap agreements became ineffective cash flow hedges and as a result any changes in the fair value associated with these interest rate cap agreements will be charged to income. During the nine months ended September 30, 2013, the Company recognized debt expense of $2,691 from these caps. The cap agreements expire on September 30, 2014. As of September 30, 2013, the total fair value of these cap agreements was an asset of approximately $4. During the first quarter of 2013, the Company recorded a loss of $3 in other comprehensive income when these caps were designated as effective cash flow hedges due to a decrease in the

 

12


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

unrealized fair value of these cap agreements. In late first quarter of 2013, these caps were redesignated as ineffective cash flow hedges and as a result the Company realized a loss of $59 related to a decrease in the fair value of these cap agreements during the second and third quarters of 2013.

The following table summarizes the Company’s derivative instruments as of September 30, 2013 and December 31, 2012:

 

    

September 30, 2013

    

December 31, 2012

 

Derivatives designated as hedging

instruments

  

Balance sheet
location

   Fair value     

Balance sheet
location

   Fair value  

Interest rate swap agreements

   Other short-term liabilities    $ 14,270       Other long-term liabilities    $ 18,994   
     

 

 

       

 

 

 

Interest rate swap agreements

   Other long-term assets    $ 9,096          $ —    
     

 

 

       

 

 

 

Interest rate cap agreements

   Other long-term assets    $ 8,842       Other long-term assets    $ 65   
     

 

 

       

 

 

 

The following table summarizes the effects of the Company’s interest rate swap and cap agreements for the three and nine months ended September 30, 2013 and 2012:

 

    Amount of gains
(losses) recognized in
OCI on interest rate  swap
and cap agreements
    Location of
losses reclassified
from accumulated
OCI into income
    Amount of
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

  2013     2012     2013     2012       2013     2012     2013     2012  

Interest rate swap agreements

  $ (10,010   $ (2,729   $ 2,292      $ (8,766     Debt expense      $ (4,162   $ (3,244   $ (11,528   $ (9,723

Interest rate cap agreements

    (2,646     (121     299        (1,224     Debt expense        (1,507     (897     (3,911     (2,691

Tax (expense) benefit

    4,923        1,109        (1,008     3,886          2,205        1,611        6,006        4,828   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (7,733   $ (1,741   $ 1,583      $ (6,104     $ (3,464   $ (2,530   $ (9,433   $ (7,586
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2013, interest rates on the Company’s Term Loan B and Term Loan B-2 debt are effectively fixed because of an embedded LIBOR floor which is higher than actual LIBOR as of such date. Furthermore, interest rates on $1,250,000 of the Company’s Term Loan B and $1,485,000 of the Company’s Term Loan B-2 are subject to interest rate caps if LIBOR should rise above 2.50%. Interest rates on the Company’s senior notes are fixed by their terms. The LIBOR variable component of the Company’s interest rates on the Company’s Term Loan A and the Term Loan A-3 are economically fixed as a result of interest rate swaps.

As a result of embedded LIBOR floors in some of the Company’s debt agreements and the swap and cap agreements, the Company’s overall weighted average effective interest rate on the Senior Secured Credit Facilities was 4.18%, based upon the current margins in effect of 2.75% for the Term Loan A, 2.50% for the Term Loan A-3 and 3.00% for both the Term Loan B and for the Term Loan B-2, as of September 30, 2013.

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

The Company’s overall weighted average effective interest rate during the third quarter of 2013 was 4.87% and as of September 30, 2013 was 4.86%.

As of September 30, 2013, the Company had undrawn revolving credit facilities totaling $350,000 of which approximately $99,000 was committed for outstanding letters of credit. In addition, HCP has an outstanding letter of credit of approximately $1,000 that is secured by a certificate of deposit.

7. Contingencies

The majority of the Company’s revenues are from government programs and may be subject to adjustment as a result of: (i) examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (ii) differing interpretations of government regulations by different Medicare contractors or regulatory authorities; (iii) differing opinions regarding a patient’s medical diagnosis or the medical necessity of services provided; and (iv) 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

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 has been 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 has been 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 the Company’s dialysis operations 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 2005 to May 2010, and seeks production of a wide range of documents relating to the Company’s dialysis operations, including documents related to, among other things, financial relationships with physicians and joint ventures, and whether those relationships and joint ventures comply with the federal anti-kickback statute and the False Claims Act. The Company has been advised by the attorneys conducting this civil investigation that they believe that some or all of the Company’s joint ventures do not comply with the anti-kickback statute and the False Claims Act. The Company disagrees that its joint venture structure generally, which the Company believes is widely used in the

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

dialysis industry and other segments of the healthcare industry substantially in the form that the Company uses it, violates the federal anti-kickback statute or the False Claims Act. As to individual transactions, the Company made significant effort to ensure that its joint venture structures and process complied with the rules, but the Company is talking with the government about addressing its concerns. The focus of this investigation overlaps substantially with the 2011 U.S. Attorney Physician Relationship Investigation described below. The Company is engaged in good faith discussions with the attorneys from the United States Attorney’s Office for the District of Colorado, the Civil Division of the United States Department of Justice and the Office of the Inspector General in an effort to find a mutually acceptable resolution to this matter and the 2011 U.S. Attorney Physician Relationship Investigation. Discussions have advanced to a point where the Company believed it was appropriate to accrue an estimated loss contingency reserve of $300,000 in the first quarter of 2013 and an additional $97,000 in the third quarter of 2013 in connection with offers to settle the related civil, administrative and criminal matters. However, the discussions are ongoing, and until concluded, there can be no certainty about the timing or likelihood of a definitive resolution or the scope of any potential restrictions or impact on future operations that may be agreed upon in connection with a settlement. As these discussions proceed and additional information becomes available to us, the amount of the estimated loss contingency reserve may need to be adjusted further to reflect this new information. This matter will continue to require management’s attention and significant legal expense, and the Company can make no assurances as to the 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 investigating certain activities of its dialysis business in connection with information being provided to a grand jury. This investigation relates to the Company’s relationships with physicians, including its joint ventures, and whether those relationships and joint ventures comply with the federal anti-kickback statute, and overlaps substantially with the 2010 U.S. Attorney Physician Relationship Investigation described above. The Company has received a number of subpoenas for documents covering the period from January 2006 to November 2012, and the Company has produced documents in response to those subpoenas and other requests. In addition, certain current and former members of the Board, executives and other teammates have received subpoenas to testify before the grand jury. It is possible that criminal proceedings may be initiated against the Company in connection with this investigation. As noted above, the Company is engaged in good faith discussions in an effort to find a mutually acceptable resolution of both this matter and the 2010 U.S. Attorney Physician Relationship Investigation. As also noted above, the discussions are ongoing, and until concluded, there can be no certainty about the timing or likelihood of a definitive resolution, or the scope of any potential restrictions or impact on future operations that may be agreed upon in connection with a settlement. This matter will continue to require management’s attention and significant legal expense, and the Company can make no assurances as to the 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

Swoben Private Civil Suit: In April 2013, the Company’s HealthCare Partners (HCP) subsidiary was served with a civil complaint filed by a former employee of SCAN Health Plan (SCAN), a health maintenance organization (HMO). On July 13, 2009, pursuant to the qui tam provisions of the federal False Claims Act and the California False Claims Act, James M. Swoben, as relator, filed a qui tam action in the United States District Court for the Central District of California purportedly on behalf of the United States of America and the State of California against SCAN, and certain other defendants whose identities were under seal. The allegations in the complaint relate to alleged overpayments received from government healthcare programs. In or about August 2012, SCAN entered into a settlement agreement with the United States of America and the State of California. The United States and the State of California partially intervened in the action for the purpose of settlement with and dismissal of the action against SCAN. In or about November 2011, the relator filed his Third Amended Complaint under seal alleging violations of the federal False Claims Act and the California False Claims Act, which named additional defendants, including HCP and certain health insurance companies (the defendant HMOs). The allegations in the complaint against HCP relate to patient diagnosis coding to determine reimbursement in the Medicare Advantage program, referred to as Hierarchical Condition Coding (HCC) and Risk Adjustment Factor (RAF) scores. The complaint sought monetary damages and civil penalties as well as costs and expenses. The United States Department of Justice reviewed these allegations and in January 2013 declined to intervene in the case. On June 26, 2013, HCP and the defendant HMOs filed their respective motions to dismiss the Third Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), challenging the legal sufficiency of the claims asserted in the complaint. On July 30, 2013, the court granted HCP’s motion and dismissed with prejudice all of the claims in the Third Amended Complaint and judgment was entered in September 2013. The court specifically determined that further amendments to the complaint would be futile because, in part, the allegations were publicly disclosed in reports and other sources relating to audits conducted by the Centers of Medicare & Medicaid Services. In October 2013, the plaintiff appealed to the United States Court of Appeals for the Ninth Circuit and the court’s disposition of the appeal is pending.

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.

Haverhill Retirement System Shareholder Derivative Civil Suit: On May 17, 2013, Haverhill Retirement System (Haverhill), a shareholder of the Company, filed a shareholder derivative lawsuit in the U.S. District Court for the District of Colorado against the directors of the Company and against the Company, as nominal defendant. The complaint alleges, among other things, that the Company’s directors breached fiduciary duties to the Company relating to the inquiries by the federal government described above, the Vainer qui tam private civil suit described above and the Woodard qui tam private civil suit for which the Company previously announced a settlement in July 2012. No response by the Company or the directors is required in this action until the court

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

determines certain preliminary procedural matters that are pending. (See description of the Clark matter below for a description of how the Haverhill and Clark civil suits are related and certain pending procedural matters that will determine whether these cases will proceed separately or on a consolidated basis.)

Clark Shareholder Derivative Civil Suit: As we 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 of our current and former directors and executives and against the Company, as nominal defendant. The complaint alleged, among other things, that such officers and directors breached fiduciary duties to the Company relating to substantially the same matters that are now the subject of the Haverhill shareholder derivative civil suit described above. As we also previously disclosed, on October 19, 2012, the court ordered that the Clark case be administratively closed, subject to being reopened upon a showing of good cause by any party. Subsequent to the filing of the Haverhill derivative civil suit described above, Haverhill filed a motion seeking to consolidate the Clark civil suit with the Haverhill civil suit and to be appointed lead plaintiff. Clark has opposed the motion and, upon request of the parties, the court has reopened the Clark case. Clark has filed an amended complaint and its own motion to be named lead plaintiff if the Haverhill and Clark civil suits are consolidated. The outcome of these procedural matters is pending, and after the court enters its ruling, the Company will be required to respond to the allegations in either a consolidated action or separate actions.

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 lead to litigation and any such litigation may be resolved unfavorably. At this time, the Company cannot predict the ultimate outcome of these matters 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 complaint, 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 appealed that decision. In January 2013, the Court of Appeals affirmed the trial court’s decision on some claims, but remanded the case to the trial court for clarification of its decision on one of the claims. The Company has reached an agreement with the plaintiffs to settle the claim that was remanded to the trial court, and the court has preliminarily approved that settlement. The amount of the settlement is not material to the Company’s condensed consolidated financial statements. The Company intends to continue to vigorously defend against these claims. Any potential settlement of the remaining 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 by the

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

Company’s dialysis business, 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 that such audits would relate to the issues that were the subject 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 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 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, including those of mutual funds, as well as other debt securities, are classified as available-for-sale and recorded at fair value.

The Company’s investments in securities consist of the following:

 

     September 30, 2013      December 31, 2012  
     Held to
maturity
     Available
for sale
     Total      Held to
maturity
     Available
for sale
     Total  

Certificates of deposit and money market funds due within one year

   $ 5,596       $ —        $ 5,596       $ 5,938       $ —        $ 5,938   

Investments in mutual funds

     —          20,158         20,158         —          15,185         15,185   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,596       $ 20,158       $ 25,754       $ 5,938       $ 15,185       $ 21,123   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

   $ 5,596       $ 1,200       $ 6,796       $ 5,938       $ 1,200       $ 7,138   

Long-term investments

     —          18,958         18,958         —          13,985         13,985   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,596       $ 20,158       $ 25,754       $ 5,938       $ 15,185       $ 21,123   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The cost of the certificates of deposit and money market funds at September 30, 2013 approximates their fair value. As of September 30, 2013 and December 31, 2012, the available-for-sale investments include $4,227 and $2,146 of gross pre-tax unrealized gains, respectively. During the nine months ended September 30, 2013, the Company recorded gross pre-tax unrealized gains of $2,236, or $1,367 after tax, in other comprehensive income associated with changes in the fair value of these investments. During the nine months ended September 30, 2013, the Company sold investments in mutual funds for net proceeds of $1,091 and recognized a pre-tax gain of $155, or $94 after-tax, which was previously recorded in other comprehensive income. 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 recorded in other comprehensive income.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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.

Certain entities of HCP are required to maintain minimum cash balances in order to comply with regulatory requirements in conjunction with medical claim reserves. As of September 30, 2013, this minimum cash balance was approximately $49,000.

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 as defined by the FASB.

The following table summarizes the Company’s assets, liabilities and temporary equity measured at fair value on a recurring basis as of September 30, 2013:

 

 

     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

   $ 20,158       $ 20,158       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate cap agreements

   $ 8,842       $ —        $ 8,842       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap agreements

   $ 9,096       $ —        $ 9,096       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Funds on deposit with third parties

   $ 77,163       $ 77,163       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent earn-out obligations

   $ 25,628       $ —        $ —        $ 25,628   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap agreements

   $ 14,270       $ —        $ 14,270       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Temporary equity

           

Noncontrolling interests subject to put provisions

   $ 621,232       $ —        $ —        $ 621,232   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

agreements would be materially different from the fair values as currently reported. See Note 6 to the condensed consolidated financial statements for further discussion.

The funds on deposit with third parties represent funds held with a third party as required by regulation or contract and invested by those parties in various investments, which are measured at estimated fair value based primarily on quoted close or bid market prices of the same or similar assets.

The estimated fair value measurements of contingent earn-out obligations are primarily based on unobservable inputs including projected EBITDA of acquired businesses, estimated probabilities of achieving gross margin of certain medical procedures and the estimated probability of earn-out payments being made using an option pricing technique and a simulation model for expected EBITDA and operating income. In addition, a probability-adjusted model was used to estimate the fair values of the quality results amounts. The estimated fair value of these contingent earn-out obligations will be remeasured as of each reporting date and could fluctuate based upon any significant changes in key assumptions, such as changes in the Company credit risk-adjusted rate that is used to discount obligations to present value.

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.

Other financial instruments consist primarily of cash, accounts receivable, life insurance contracts, 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, 2013 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 $5,445,236 as of September 30, 2013, and the fair value was $5,478,476 based upon quoted market prices. The fair value of the Company’s senior notes was approximately $2,863,375 at September 30, 2013, 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, non-owned and minority-owned entities. 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 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 that can affect future results, as well as other factors. The estimated fair values of the noncontrolling interests subject to put provisions is a critical accounting estimate that involves significant judgments and assumptions and may not be indicative of the actual values at which the noncontrolling interests may ultimately be settled, which could vary significantly from the Company’s current estimates. 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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 or medical practices that the Company operates under management and administrative services agreements of approximately $2,000.

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, 2013, the Company’s total liability for unrecognized tax benefits relating to tax positions that do not meet the more-likely-than-not threshold is $61,151, of which $34,947 would impact the Company’s effective tax rate if recognized. This balance represents a decrease of $6,395 from the December 31, 2012 balance of $67,546 primarily due to statute lapses.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. At September 30, 2013 and December 31, 2012, the Company had approximately $10,722 and $12,073, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefits.

As of September 30, 2013, it is reasonably possible that $26,204 of unrecognized tax benefits may be recognized within the next 12 months, primarily related to the filing of tax accounting method changes.

In connection with the acquisition of HCP, the Company recorded a receivable to offset potential tax liabilities. The Company reduced this asset during the third quarter of 2013 which negatively impacted operating income by $7,721. The reduction in operating income was directly offset by a corresponding reduction in income tax expense. This asset may be similarly reduced in the future if the underlying tax liabilities are no longer required.

12. Acquisitions and discontinued operations

Dialysis and other acquisitions

During the first nine months of 2013, the Company acquired dialysis businesses and other businesses consisting of 21 dialysis centers located in the U.S., 26 dialysis centers located outside of the U.S. and other medical businesses for a total of $234,802 in net cash and deferred purchase price obligations totaling $11,795. 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 condensed consolidated financial statements and operating results from the designated effective dates of the acquisitions. Certain income tax amounts are pending final evaluation and quantification of any pre-acquisition tax contingencies. In addition, valuation of medical claims reserves and certain other working capital items relating to several of these acquisitions are pending final quantification.

 

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DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

The following table summarizes the assets acquired and liabilities assumed in these transactions and recognized at their acquisition dates at estimated fair values:

 

     Nine months ended
September 30, 2013
 

Tangible assets, principally leasehold improvements and equipment, net of cash

   $ 24,590   

Amortizable intangible and other long-term assets

     50,785   

Indefinite-lived intangible assets

     22,261   

Goodwill

     192,822   

Noncontrolling interest assumed

     (20,512

Liabilities assumed

     (23,349
  

 

 

 

Aggregate purchase price

   $ 246,597   
  

 

 

 

Amortizable intangible assets acquired during the first nine months of 2013 had weighted-average estimated useful lives of 12.4 years. The total amount of goodwill deductible for tax purposes associated with these acquisitions was approximately $153,892.

HCP acquisition

The initial allocations of the purchase price at the time of the acquisition of HCP on November 1, 2012 were recorded at the estimated fair values of assets acquired and liabilities assumed based upon the best information available to management at that time and will be finalized when certain information arranged to be obtained has been received. As of September 30, 2013, certain income tax amounts are pending issuance of final tax returns and the evaluation and quantification of certain pre-acquisition tax contingencies and goodwill reporting unit attributions.

The following is a summary of HCP’s purchase accounting adjustments recorded in the first nine months of 2013 applied retrospectively to the December 31, 2012 balance sheet and primarily relates to adjustments to medical claims reserves and noncontrolling interests:

 

     Adjustments to the
December 31, 2012
balance sheet
 

Accounts receivable

   $ 3,000   

Medical payables

   $ 7,000   

Other liabilities

   $ (5,251

Noncontrolling interest

   $ 11,123   

Goodwill

   $ (11,982

Deferred income taxes

   $ (3,890

Discontinued operations

Divestiture of HomeChoice Partners, Inc.

On February 1, 2013, the Company completed the sale of HomeChoice Partners Inc. (HomeChoice) to BioScrip, Inc. pursuant to a stock purchase agreement dated December 12, 2012 for $70,000 in cash, subject to various post-closing adjustments, of which the Company receives approximately 90% of the proceeds. The stock

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

purchase agreement also provides that as additional consideration the Company may earn up to a total of 90% of $20,000 if certain performance amounts exceed certain thresholds over the next two years. The Company has not yet assigned any value to this contingent receivable and will only recognize any estimated realizable value of this receivable when it becomes probable and reasonably estimable. The Company recorded a gain of approximately $13,375, net of tax, during the nine months ended September 30, 2013 related to this divestiture.

HomeChoice is a regional provider of home infusion services that provides specialized pharmacy, nursing and nutritional services to patients in their homes.

The operating results of HomeChoice have been reported as discontinued operations for all periods presented. The results from discontinued operations related to HomeChoice were as follows:

 

       Three months ended September 30,     Nine months ended September 30,  
           2013             2012             2013             2012      

Net revenues

     $ —        $ 17,059      $ 6,351      $ 50,873   
    

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

       —          (26     (223     433   

Income tax (benefit) expense

       —          (13     (84     195   
    

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from discontinued operations

     $ —          (13   $ (139   $ 238   
    

 

 

   

 

 

   

 

 

   

 

 

 

Net assets of discontinued operations related to HomeChoice as of February 1, 2013, were as follows:

 

Current assets

   $ 17,039   

Property and equipment, net

     2,963   

Long-term assets

     28   

Goodwill

     31,853   

Liabilities and noncontrolling interests

     (8,998
  

 

 

 

Net assets of discontinued operations

   $ 42,885   
  

 

 

 

Contingent earn-out obligations

As a result of HCP achieving certain financial performance targets in 2012, the Company made earn-out payments of $136,954 on April 1, 2013 to the common unit holders of HCP. During the third quarter of 2013, the Company reached agreement with the representative of the former owners and option holders of HealthCare Partners Holdings, LLC to settle certain post-closing adjustments, including the 2013 contingent earn-out obligation for $68,750, an amount equal to its carrying value at June 30, 2013. Accordingly, this settlement had no impact on the Company’s condensed consolidated statements of income during the third quarter of 2013.

The Company also has several other contingent earn-out obligations associated with other acquisitions that could result in the Company paying the former shareholders of those acquired companies up to $115,500 if certain EBITDA performance targets and quality margins are met over the next three years, additional contingent

 

23


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

earn-out obligations based on a percentage of operating income over the next five years and a contingent earn-out obligation based upon a certain percentage of annual EBITDA. As of September 30, 2013, the Company has measured the fair value of these contingent earn-out obligations to be $25,628.

Contingent earn-out obligations will be remeasured to fair value at each reporting date until the contingencies are resolved with changes in the liability due to the re-measurement recorded in earnings. See Note 9 to the condensed consolidated financial statements for further details. Of the total contingent earn-out obligations of $25,628 recognized at September 30, 2013, a total of $5,878 is included in other accrued liabilities and the remaining $19,750 is included in other long-term liabilities in the Company’s condensed consolidated balance sheet.

13. Segment reporting

The Company primarily operates two major lines of business, the largest being its U.S. dialysis and related lab services business and the other being HCP. The Company also operates various other ancillary services and strategic initiatives.

As of September 30, 2013, the ancillary services and strategic initiatives consisted primarily of pharmacy services, disease management services, vascular access services, ESRD clinical research programs, physician services, direct primary care and the Company’s international dialysis operations.

The Company’s operating segments have been defined based on the separate financial information that is regularly produced and reviewed by the Company’s chief operating decision makers in making decisions about allocating resources to and assessing the financial results of the Company’s different business units. The chief operating decision maker for the Company, its U.S. dialysis business and its ancillary services and strategic initiatives, is its Chief Executive Officer. The chief operating decision makers for the HCP business are the Chief Executive Officer and HCP’s Chief Executive Officer.

The Company’s separate operating segments include its U.S. dialysis and related lab services business, its HCP operations in each region, each of its ancillary services and strategic initiatives, and its international operations in the European and Middle Eastern, Asia Pacific, and Latin American regions. The U.S. dialysis and related lab services business and the HCP business each qualify as separately reportable segments, and all of the other ancillary services and strategic initiatives operating segments, including the international operating segments, have been combined and disclosed in the other segments category.

The Company’s operating segment financial information included in this report is prepared on the internal management reporting basis that the chief operating decision makers use to allocate resources and assess the financial results of the operating segments. For internal management reporting, segment operations include direct segment operating expenses but exclude (i) the contingent earn-out obligation adjustment, (ii) corporate support, which consists primarily of indirect labor, benefits and long-term incentive based compensation of certain departments which provide support to all of the Company’s different operating lines of business, (iii) transaction expenses for the three and nine months ended September 30, 2012 associated with the acquisition of HCP, and (iv) the reduction of a tax asset associated with the HCP acquisition escrow provisions.

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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

 

    Three months ended
September 30,
    Nine months ended
September 30,
 
    2013     2012     2013     2012  

Segment net revenues:

       

U.S. dialysis and related lab services

       

Patient service revenues:

       

External sources

  $ 2,043,694      $ 1,838,363      $ 5,932,744      $ 5,410,200   

Intersegment revenues

    8,011        4,090        23,681        12,580   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total dialysis and related lab services revenues

    2,051,705        1,842,453        5,956,425        5,422,780   

Less: Provision for uncollectible accounts

    (71,819     (59,803     (208,475     (167,227
 

 

 

   

 

 

   

 

 

   

 

 

 

Net dialysis and related lab services patient service revenues

    1,979,886        1,782,650        5,747,950        5,255,553   

Other revenues (1)

    3,016        2,600        8,997        8,358   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net dialysis and related lab services revenues

    1,982,902        1,785,250        5,756,947        5,263,911   
 

 

 

   

 

 

   

 

 

   

 

 

 

HCP

       

HCP revenues:

       

Capitated revenues

    730,400        —          2,168,828        —     

Net patient service revenues

    58,049        —          161,084        —     

Other revenues(2)

    14,300        —          37,603        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    802,749        —          2,367,515        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Other—Ancillary services and strategic initiatives

       

Net patient service revenues (U.S. and international)

    22,155        4,471        53,002        11,858   

Capitated revenues

    16,864        16,362        51,125        44,894   

Other external sources

    182,927        143,895        495,933        400,345   

Intersegment revenues

    3,719        2,582        9,895        7,026   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total ancillary services and strategic initiatives revenues

    225,665        167,310        609,955        464,123   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net segment revenues

    3,011,316        1,952,560        8,734,417        5,728,034   

Elimination of intersegment revenues

    (11,730     (6,672     (33,576     (19,607
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net revenues

  $ 2,999,586      $ 1,945,888      $ 8,700,841      $ 5,708,427   
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating margin (loss):

       

U.S. dialysis and related lab services

  $ 309,026      $ 366,840      $ 800,231      $ 1,017,137   

HCP

    97,862        —          287,328        —     

Other—Ancillary services and strategic initiatives

    (8,547     (12,443     (30,408     (51,490
 

 

 

   

 

 

   

 

 

   

 

 

 

Total segment margin

    398,341        354,397        1,057,151        965,647   

Reconciliation of segment operating margin to consolidated income from continuing operations before income taxes:

       

Contingent earn-out obligation adjustment

    —          —          56,977        —     

Corporate support costs(3)

    (21,267     (12,177     (48,173     (38,848

Transaction expenses

    —          (1,335     —          (17,771
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

    377,074        340,885        1,065,955        909,028   

Debt expense

    (108,421     (70,494     (322,334     (192,584

Other income, net

    2,113        819        1,337        2,698   
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated income from continuing operations before income taxes

  $ 270,766      $ 271,210      $ 744,958      $ 719,142   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

 

(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) 

Includes payments received for medical consulting services and management fees for providing management and administrative services to an unconsolidated joint venture that provides medical services in which the Company owns a 50% interest.

(3) 

Corporate support costs for the three and nine months ended September 30, 2013 also includes an adjustment to reduce a tax asset associated with the HCP acquisition escrow provisions.

For the three months ended September 30, 2013, depreciation and amortization expense for the U.S. dialysis and related lab services, HCP and the ancillary services and strategic initiatives was $89,449, $39,255 and $4,061, respectively.

For the nine months ended September 30, 2013, depreciation and amortization expense for the U.S. dialysis and related lab services, HCP and the ancillary services and strategic initiatives was $262,956, $115,862 and $10,445, respectively.

For the three and nine months ended September 30, 2012, depreciation and amortization expense for the U.S. dialysis and related lab services was $78,319 and $227,609, respectively, and for the ancillary services and strategic initiatives was $1,781 and $5,082, respectively.

Summary of assets by segment is as follows:

 

     September 30,
2013
     December 31,
2012
 

Segment assets

     

U.S. dialysis and related lab services

   $ 10,085,377       $ 9,351,075   

HCP

     6,264,746         6,223,384   

Other—Ancillary services and strategic initiatives

     477,196         435,155   
  

 

 

    

 

 

 

Consolidated assets

   $ 16,827,319       $ 16,009,614   
  

 

 

    

 

 

 

For the three and nine months ended September 30, 2013, the total amount of expenditures for property and equipment, excluding capital leases for the U.S. dialysis and related lab services, was $128,799 and $359,574, respectively, and was $6,281 and $20,660, respectively, for HCP and was $6,051 and $19,293, respectively, for the ancillary services and strategic initiatives.

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

 

26


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013      2012     2013     2012  

Net income attributable to DaVita HealthCare Partners Inc.

   $ 136,628       $ 144,721      $ 421,168      $ 380,178   
  

 

 

    

 

 

   

 

 

   

 

 

 

Decrease in paid-in capital for sales of noncontrolling interests

     21         (55     (866     (62

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

     —           (3,034     (474     (10,703
  

 

 

    

 

 

   

 

 

   

 

 

 

Net transfers to noncontrolling interests

     21         (3,089     (1,340     (10,765
  

 

 

    

 

 

   

 

 

   

 

 

 

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

   $ 136,649       $ 141,632      $ 419,828      $ 369,413   
  

 

 

    

 

 

   

 

 

   

 

 

 

15. Variable interest entities

The Company relies on the operating activities of certain entities that it does not directly own or control, but over which it has indirect influence and of which it is considered the primary beneficiary. These entities are subject to the consolidation guidance applicable to variable interest entities (VIEs).

Under U.S. GAAP, VIEs typically include (i) those for which the entity’s equity is not sufficient to finance its activities without additional subordinated financial support; (ii) 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, the obligation to absorb the entity’s expected losses, or the right to receive the entity’s expected returns; or (iii) those for which the voting rights of some investors are not proportional to their obligations to absorb the entity’s losses.

Under U.S. GAAP, the Company has determined that substantially all of the entities it is associated with that qualify as VIEs must be included in its consolidated financial statements. The Company manages these entities and provides operating and capital funding as necessary for the entities to accomplish their operational and strategic objectives. A number of these entities are subject to nominee share ownership or share transfer restriction agreements that effectively transfer the majority of the economic risks and rewards of their ownership to the Company. In other cases the Company’s management agreements with these entities include both financial terms and protective and participating rights to the entities’ operating, strategic and non-clinical governance decisions which transfer substantial powers over and economic responsibility for the entities to the Company. In

 

27


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

some cases such entities are subject to broad exclusivity or noncompetition restrictions that benefit the Company. Further, in some cases the Company has contractual arrangements with its related party nominee owners that effectively indemnify these parties from the economic losses from, or entitle the Company to the economic benefits of, these entities.

The analyses upon which these consolidation determinations rest are complex, involve uncertainties, and require significant judgment on various matters, some of which could be subject to different interpretations. At September 30, 2013, these consolidated financial statements include total assets of VIEs of $476,813 and total liabilities and noncontrolling interests of VIEs to third parties of $311,949.

The Company also sponsors certain deferred compensation plans whose trusts qualify as VIEs and the Company consolidates each of these plans as their primary beneficiary. The assets of these plans are recorded in short-term or long-term investments with matching offsetting liabilities recorded 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. Health care costs payable

The health care costs shown in the following table include estimates for the cost of professional medical services provided by non-employed physicians and other providers, as well as inpatient and other ancillary costs for all markets, other than California, where state regulation allows for the assumption of global risk. Health care costs payable are included in medical payables.

The following table shows the components of changes in the health care costs payable for the nine months ended September 30, 2013:

 

     Nine months
ended
September 30, 2013
 

Health care costs payable, beginning of the period

   $ 119,512   
  

 

 

 

Acquisitions and other adjustments

     26,575   
  

 

 

 

Add: Components of incurred health care costs

  

Current year

     989,331   

Prior years

     (11,146
  

 

 

 

Total incurred health care costs

     978,185   
  

 

 

 

Less: Claims paid

  

Current year

     839,622   

Prior years

     120,923   
  

 

 

 

Total claims paid

     960,545   
  

 

 

 

Health care costs payable, end of the period

   $ 163,727   
  

 

 

 

Our prior year estimates of health care costs payable decreased by $11,146 resulting from certain medical claims being settled for amounts less than originally estimated. When significant (decreases) increases in prior-year health care cost estimates occur that we believe significantly impact our current year operating results, we disclose that amount as (favorable) unfavorable development of prior-year’s health care cost estimates. Actual claim payments for prior year services have not been materially different from our year-end estimates.

 

28


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

17. Comprehensive income

On January 1, 2013, the Company adopted FASB’s ASU No. 2013-02 Comprehensive Income. This standard requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.

 

    For the three months ended
September 30, 2013
    For the nine months ended
September 30, 2013
 
    Interest
rate swap
and cap
agreements
    Investment
securities
    Foreign
currency
translation
adjustments
    Accumulated
other
comprehensive
income (loss)
    Interest
rate swap
and cap
agreements
    Investment
securities
    Foreign
currency
translation
adjustments
    Accumulated
other
comprehensive
income (loss)
 

Beginning balance

  $ (117   $ 1,935      $ (5,152   $ (3,334   $ (15,402   $ 1,310      $ (1,205   $ (15,297
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (losses) gains

    (12,656     1,059        2,741        (8,856     2,591        2,236        (1,206     3,621   

Related income tax benefit (expense)

    4,923        (411     —          4,512        (1,008     (869     —          (1,877
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (7,733     648        2,741        (4,344     1,583        1,367        (1,206     1,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification from accumulated other comprehensive income into net income

    5,669        —          —          5,669        15,439        (155     —          15,284   

Related tax

    (2,205     —          —          (2,205     (6,006     61        —          (5,945
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,464        —          —          3,464        9,433        (94     —          9,339   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ (4,386   $ 2,583      $ (2,411   $ (4,214   $ (4,386   $ 2,583      $ (2,411   $ (4,214
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

    For the three months ended
September 30, 2012
    For the nine months ended
September 30, 2012
 
    Interest
rate swap
and cap
agreements
    Investment
securities
    Foreign
currency
translation
adjustments
    Accumulated
other
comprehensive
income (loss)
    Interest
rate swap
and cap
agreements
    Investment
securities
    Foreign
currency
translation
adjustments
    Accumulated
other
comprehensive
income (loss)
 

Beginning balance

  $ (18,635   $ 711      $ (1,458   $ (19,382   $ (19,328   $ (156   $ —        $ (19,484
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (losses) gains

    (2,850     728        (135     (2,257     (9,990     2,271        (1,593     (9,312

Related income tax benefit (expense)

    1,109        (283     —          826        3,886        (884     —          3,002   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (1,741     445        (135     (1,431     (6,104     1,387        (1,593     (6,310
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification from accumulated other comprehensive income into net income

    4,141        —          —          4,141        12,414        (123     —          12,291   

Related tax

    (1,611     —          —          (1,611     (4,828     48        —          (4,780
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2,530        —          —          2,530        7,586        (75     —          7,511   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ (17,846   $ 1,156      $ (1,593   $ (18,283   $ (17,846   $ 1,156      $ (1,593   $ (18,283
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The reclassification of net swap and cap realized losses into income are recorded as debt expense in the corresponding condensed consolidated statements of income. See Note 6 to the condensed consolidated financial statements for further details.

The reclassification of net investment realized gains into income are recorded in other income in the corresponding condensed consolidated statements of income. See Note 8 to the condensed consolidated financial statements for further details.

 

30


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

18. 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’s senior notes are guaranteed by substantially all of its 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, including by merger or consolidation or the sale of all equity interests in such subsidiary owned by the Company, 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, non-owned entities and third parties are not guarantors of these obligations.

Condensed Consolidating Statements of Income

 

For the three months ended September 30, 2013

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

Patient service revenues

   $ —        $ 1,527,860      $ 602,708      $ (3,869   $ 2,126,699   

Less: Provision for uncollectible accounts

     —          (47,381     (27,096     —          (74,477
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     —          1,480,479        575,612        (3,869     2,052,222   

Capitated revenues

     —          357,058        392,040        (1,834     747,264   

Other revenues

     159,546        384,676        26,411        (370,533     200,100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     159,546        2,222,213        994,063        (376,236     2,999,586   

Operating expenses

     117,216        2,014,126        867,406        (376,236     2,622,512   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     42,330        208,087        126,657        —          377,074   

Debt expense

     (107,550     (83,432     (8,505     91,066        (108,421

Other income (expense)

     100,943        (9,615     1,851        (91,066     2,113   

Income tax expense

     16,144        81,180        3,606        —          100,930   

Equity earnings in subsidiaries

     117,049        88,791        —          (205,840     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     136,628        122,651        116,397        (205,840     169,836   

Less: Net income attributable to noncontrolling interests

     —          —          —          (33,208     (33,208
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

   $ 136,628      $ 122,651      $ 116,397      $ (239,048   $ 136,628   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

For the three months ended September 30, 2012

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

Patient service revenues

   $ —        $ 1,349,105      $ 506,837      $ (13,089   $ 1,842,853   

Less: Provision for uncollectible accounts

     —          (37,798     (22,024     —          (59,822
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     —          1,311,307        484,813        (13,089     1,783,031   

Capitated revenues

     —          16,362        —          —          16,362   

Other revenues

     130,059        156,755        6,631        (146,950     146,495   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     130,059        1,484,424        491,444        (160,039     1,945,888   

Operating expenses

     83,227        1,293,491        388,324        (160,039     1,605,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     46,832        190,933        103,120        —          340,885   

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        6,380        —          98,647   

Equity earnings in subsidiaries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     144,721        124,721        90,535        (187,414     172,563   

Discontinued operations

     —          —          (13     —          (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 HealthCare Partners Inc.

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the nine months ended September 30, 2013

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

Patient service revenues

   $ —        $ 4,456,215      $ 1,720,574      $ (21,566   $ 6,155,223   

Less: Provision for uncollectible accounts

     —          (148,456     (68,269     —          (216,725
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     —          4,307,759        1,652,305        (21,566     5,938,498   

Capitated revenues

     —          1,054,394        1,170,166        (4,607     2,219,953   

Other revenues

     461,571        1,117,710        65,251        (1,102,142     542,390   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     461,571        6,479,863        2,887,722        (1,128,315     8,700,841   

Operating expenses

     309,601        5,922,490        2,531,110        (1,128,315     7,634,886   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     151,970        557,373        356,612        —          1,065,955   

Debt expense

     (320,218     (273,747     (30,475     302,106        (322,334

Other income, net

     302,111        66        1,266        (302,106     1,337   

Income tax expense

     50,199        175,697        19,370        —          245,266   

Equity earnings in subsidiaries

     337,504        216,273        —          (553,777     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     421,168        324,268        308,033        (553,777     499,692   

Discontinued operations

     —          —          13,236        —          13,236   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     421,168        324,268        321,269        (553,777     512,928   

Less: Net income attributable to noncontrolling interests

     —          —          —          (91,760     (91,760
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

   $ 421,168      $ 324,268      $ 321,269      $ (645,537   $ 421,168   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

For the nine months ended September 30, 2012

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

Patient service revenues

   $ —        $ 4,022,250      $ 1,438,496      $ (38,646   $ 5,422,100   

Less: Provision for uncollectible accounts

     —          (84,762     (82,506     —          (167,268
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     —          3,937,488        1,355,990        (38,646     5,254,832   

Capitated revenues

     —          44,894        —          —          44,894   

Other revenues

     381,069        438,657        18,753        (429,778     408,701   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     381,069        4,421,039        1,374,743        (468,424     5,708,427   

Operating expenses

     269,394        3,880,256        1,118,173        (468,424     4,799,399   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     111,675        540,783        256,570        —          909,028   

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        1,360        —          261,943   

Equity earnings in subsidiaries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     380,178        326,196        236,638        (485,813     457,199   

Discontinued operations

     —          —          238        —          238   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 HealthCare Partners Inc.

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

DAVITA HEALTHCARE PARTNERS 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, 2013

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

Net income

   $ 136,628      $ 122,651       $ 116,397       $ (205,840   $ 169,836   

Other comprehensive loss

     (880     —           —           —          (880
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     135,748        122,651         116,397         (205,840     168,956   

Less: comprehensive income attributable to the noncontrolling interests

     —          —           —           (33,208     (33,208
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 135,748      $ 122,651       $ 116,397       $ (239,048   $ 135,748   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

For the three months ended September 30, 2012

                                

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 HealthCare Partners Inc.

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

For the nine months ended September 30, 2013

                                

Net income

   $ 421,168      $ 324,268       $ 321,269       $ (553,777   $ 512,928   

Other comprehensive income

     11,083        —           —           —          11,083   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     432,251        324,268         321,269         (553,777     524,011   

Less: comprehensive income attributable to the noncontrolling interests

     —          —           —           (91,760     (91,760
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 432,251      $ 324,268       $ 321,269       $ (645,537   $ 432,251   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

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 HealthCare Partners Inc.

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

34


Table of Contents

DAVITA HEALTHCARE PARTNERS 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, 2013

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

Cash and cash equivalents

   $ 629,360       $ 170,352       $ 170,982       $ —        $ 970,694   

Accounts receivable, net

     —           880,146         523,904         —          1,404,050   

Other current assets

     20,784         897,261         88,619         —          1,006,664   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     650,144         1,947,759         783,505         —          3,381,408   

Property and equipment, net

     160,595         1,290,886         596,754         —          2,048,235   

Amortizable intangibles, net

     82,369         1,918,383         58,816         —          2,059,568   

Investments in subsidiaries

     8,249,643         1,423,305         —           (9,672,948     —     

Intercompany receivables

     3,701,383         —           510,272         (4,211,655     —     

Other long-term assets and investments

     58,802         72,121         62,943         —