10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

For the Quarterly Period Ended June 30, 2014

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 July 29, 2014, the number of shares of the Registrant’s common stock outstanding was approximately 214.8 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 $15.3 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 six months ended June 30, 2014 and June 30, 2013     1   
   Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and June 30, 2013     2   
   Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013     3   
   Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and June 30, 2013     4   
   Consolidated Statements of Equity for the six months ended June 30, 2014 and for the year ended December 31, 2013     5   
   Notes to Condensed Consolidated Financial Statements     6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations     41   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk     63   

Item 4.

   Controls and Procedures     65   
PART II. OTHER INFORMATION   

Item 1.

   Legal Proceedings     66   

Item 1A.

   Risk Factors     66   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds     95   

Item 6.

   Exhibits     96   
   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
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Patient service revenues

   $ 2,187,249      $ 2,048,651      $ 4,301,347      $ 4,028,524   

Less: Provision for uncollectible accounts

     (88,052     (72,191     (171,249     (142,248
  

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     2,099,197        1,976,460        4,130,098        3,886,276   

Capitated revenues

     799,369        710,074        1,586,934        1,472,689   

Other revenues

     273,923        185,139        498,233        342,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     3,172,489        2,871,673        6,215,265        5,701,255   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses and charges:

        

Patient care costs and other costs

     2,246,538        2,014,320        4,426,310        3,975,211   

General and administrative

     298,636        268,110        582,697        552,520   

Depreciation and amortization

     145,907        130,589        288,486        256,498   

Provision for uncollectible accounts

     3,208        1,260        5,719        2,138   

Equity investment income

     (6,095     (7,649     (13,467     (17,016

Loss contingency reserve

     —          —          —          300,000   

Contingent earn-out obligation adjustment

     —          (56,977     —          (56,977
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses and charges

     2,688,194        2,349,653        5,289,745        5,012,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     484,295        522,020        925,520        688,881   

Debt expense

     (106,132     (108,096     (212,467     (213,913

Debt refinancing charges

     (97,548     —          (97,548     —     

Other income (loss), net

     1,693        (1,374     3,391        (776
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     282,308        412,550        618,896        474,192   

Income tax expense

     100,887        129,192        225,738        144,336   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     181,421        283,358        393,158        329,856   

Discontinued operations:

        

Loss from operations of discontinued operations, net of tax

     —          —          —          (139

Gain on disposal of discontinued operations, net of tax

     —          —          —          13,375   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     181,421        283,358        393,158        343,092   

Less: Net income attributable to noncontrolling interests

     (33,738     (28,982     (62,186     (58,552
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

   $ 147,683      $ 254,376      $ 330,972      $ 284,540   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

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

   $ 0.70      $ 1.21      $ 1.56      $ 1.29   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.70      $ 1.21      $ 1.56      $ 1.36   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.68      $ 1.18      $ 1.53      $ 1.26   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.68      $ 1.18      $ 1.53      $ 1.33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares for earnings per share:

        

Basic

     212,258,994        209,797,334        211,817,893        209,385,380   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     216,720,944        214,849,164        216,420,713        214,490,452   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to DaVita HealthCare Partners Inc.:

        

Income from continuing operations

   $ 147,683      $ 254,376      $ 330,972      $ 271,291   

Discontinued operations

     —          —          —          13,249   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 147,683      $ 254,376      $ 330,972      $ 284,540   
  

 

 

   

 

 

   

 

 

   

 

 

 

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
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Net income

   $ 181,421      $ 283,358      $ 393,158      $ 343,092   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Unrealized losses on interest rate swap and cap agreements:

        

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

     (5,209     11,685        (7,714     9,316   

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

     4,997        3,462        8,356        5,969   

Unrealized gains on investments:

        

Unrealized gain on investments

     578        101        909        719   

Reclassification of net investment realized gains into net income

     —          —          (207     (94

Foreign currency translation adjustments

     1,939        (1,841     1,967        (3,947
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     2,305        13,407        3,311        11,963   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     183,726        296,765        396,469        355,055   

Less: Comprehensive income attributable to noncontrolling interests

     (33,738     (28,982     (62,186     (58,552
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 149,988      $ 267,783      $ 334,283      $ 296,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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DAVITA HEALTHCARE PARTNERS INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except per share data)

 

     June 30,
2014
     December 31,
2013
 
ASSETS      

Cash and cash equivalents

   $ 1,420,973       $ 946,249   

Short-term investments

     63,835         6,801   

Accounts receivable, less allowance of $244,878 and $237,143

     1,550,252         1,485,163   

Inventories

     99,650         88,805   

Other receivables

     455,620         349,090   

Other current assets

     164,591         176,414   

Income tax receivable

     6,965         10,315   

Deferred income taxes

     399,361         409,441   
  

 

 

    

 

 

 

Total current assets

     4,161,247         3,472,278   

Property and equipment, net of accumulated depreciation of $1,936,494 and $1,778,259

     2,290,844         2,189,411   

Intangibles, net of accumulated amortization of $565,839 and $483,773

     2,022,875         2,024,373   

Equity investments

     42,842         40,686   

Long-term investments

     87,614         79,557   

Other long-term assets

     66,106         79,598   

Goodwill

     9,254,043         9,212,974   
  

 

 

    

 

 

 
   $ 17,925,571       $ 17,098,877   
  

 

 

    

 

 

 
LIABILITIES AND EQUITY      

Accounts payable

   $ 405,751       $ 435,465   

Other liabilities

     465,242         464,422   

Accrued compensation and benefits

     626,617         603,013   

Medical payables

     304,551         287,452   

Loss contingency reserve

     397,000         397,000   

Senior notes (6 38% Senior Notes)

     291,907         —     

Current portion of long-term debt

     117,080         274,697   
  

 

 

    

 

 

 

Total current liabilities

     2,608,148         2,462,049   

Long-term debt

     8,390,578         8,141,231   

Other long-term liabilities

     386,033         380,337   

Deferred income taxes

     823,745         812,419   
  

 

 

    

 

 

 

Total liabilities

     12,208,504         11,796,036   

Commitments and contingencies

     

Noncontrolling interests subject to put provisions

     760,242         697,300   

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; 214,759,091 and 213,163,248 shares issued and outstanding at June 30, 2014 and at December 31, 2013, respectively)

     215         213   

Additional paid-in capital

     1,089,929         1,070,922   

Retained earnings

     3,694,961         3,363,989   

Accumulated other comprehensive income (loss)

     666         (2,645
  

 

 

    

 

 

 

Total DaVita HealthCare Partners Inc. shareholders’ equity

     4,785,771         4,432,479   

Noncontrolling interests not subject to put provisions

     171,054         173,062   
  

 

 

    

 

 

 

Total equity

     4,956,825         4,605,541   
  

 

 

    

 

 

 
   $ 17,925,571       $ 17,098,877   
  

 

 

    

 

 

 

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)

 

     Six months ended
June 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 393,158      $ 343,092   

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

    

Loss contingency reserve

     —          300,000   

Depreciation and amortization

     288,470        256,382   

Debt refinancing charges

     97,548        —     

Stock-based compensation expense

     29,699        32,266   

Tax benefits from stock award exercises

     42,110        36,524   

Excess tax benefits from stock award exercises

     (30,238     (28,442

Deferred income taxes

     13,826        (102,039

Equity investment income, net

     2,257        (496

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

     22,861        (69,050

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

    

Accounts receivable

     (65,079     (17,829

Inventories

     (10,731     924   

Other receivables and other current assets

     (95,580     (65,349

Other long-term assets

     2,158        (1,220

Accounts payable

     (46,022     (94,894

Accrued compensation and benefits

     19,912        (14,279

Other current liabilities

     31,970        82,905   

Income taxes

     2,886        (9,182

Other long-term liabilities

     (17,707     36,713   
  

 

 

   

 

 

 

Net cash provided by operating activities

     681,498        686,026   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions of property and equipment, net

     (278,593     (258,396

Acquisitions

     (98,442     (152,112

Proceeds from asset and business sales

     215        64,363   

Purchase of investments available for sale

     (6,117     (3,286

Purchase of investments held-to-maturity

     (121,333     (1,032

Proceeds from sale of investments available for sale

     1,277        1,091   

Proceeds from sale of investments held to maturity

     64,561        1,376   

Purchase of intangible assets and equity investment

     (4,760     (7

Distributions received on equity investments

     337        116   
  

 

 

   

 

 

 

Net cash used in investing activities

     (442,855     (347,887
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings

     33,136,743        33,445,567   

Payments on long-term debt and other financing costs

     (32,788,307     (33,696,216

Deferred financing costs and debt redemption costs

     (106,937     (716

Distributions to noncontrolling interests

     (65,818     (65,206

Stock award exercises and other share issuances, net

     7,274        8,819   

Excess tax benefits from stock award exercises

     30,238        28,442   

Contributions from noncontrolling interests

     28,265        20,132   

Proceeds from sales of additional noncontrolling interests

     933        5,903   

Purchases from noncontrolling interests

     (5,743     (474
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     236,648        (253,749

Effect of exchange rate changes on cash and cash equivalents

     (567     (234
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     474,724        84,156   

Cash and cash equivalents at beginning of the year

     946,249        533,748   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the year

   $ 1,420,973      $ 617,904   
  

 

 

   

 

 

 

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, 2012

  $ 580,692        269,725      $ 270      $ 1,208,665      $ 3,731,835        (58,728   $ (1,162,336   $ (15,297   $ 3,763,137      $ 153,788   

Comprehensive income:

                   

Net income

    78,215              633,446              633,446        45,540   

Other comprehensive income

                  12,652        12,652     

Stock purchase shares issued

      238          12,817                12,817     

Stock unit shares issued

      7          (3,286       164        3,247          (39  

Stock-settled SAR shares issued

      313          (29,025       1,444        28,561          (464  

Stock-based compensation expense

          59,998                59,998     

Excess tax benefits from stock awards exercised

          36,197                36,197     

Distributions to noncontrolling interests

    (80,353                     (58,973

Contributions from noncontrolling interests

    22,053                        14,943   

Sales and assumptions of additional noncontrolling interests

    23,642            (1,442             (1,442     10,770   

Purchases from noncontrolling interests

    (512         (3,119             (3,119     (147

Expiration of put option and other reclassification

    (7,141                     7,141   

Changes in fair value of noncontrolling interests

    80,704            (80,704             (80,704  

Treasury stock retirement

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  $ 697,300        213,163      $ 213      $ 1,070,922      $ 3,363,989        —       $ —       $ (2,645   $ 4,432,479      $ 173,062   

Comprehensive income:

                   

Net income

    43,590              330,972              330,972        18,596   

Other comprehensive income

                  3,311        3,311     

Stock unit shares issued

      290          (27             (27  

Stock-settled SAR shares issued

      1,306        2        (2             —      

Stock-based compensation expense

          29,699                29,699     

Excess tax benefits from stock awards exercised

          30,238                30,238     

Distributions to noncontrolling interests

    (41,733                     (24,085

Contributions from noncontrolling interests

    18,240                        10,025   

Sales and assumptions of additional noncontrolling interests

    918            15                15     

Purchase and gains from noncontrolling interests

    (446         1,247                1,247        (6,544

Adjustment in ownership interests

          210                210     

Changes in fair value of noncontrolling interests

    42,373            (42,373             (42,373  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

  $ 760,242        214,759      $ 215      $ 1,089,929      $ 3,694,961        —       $ —       $ 666      $ 4,785,771      $ 171,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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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 six months ended June 30, 2014 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, 2013. Prior year balances and amounts have been reclassified to conform to the current year presentation. The Company has evaluated subsequent events through the date these condensed consolidated financial statements were issued and has included all necessary disclosures.

2. Earnings per share

Basic net income per share is calculated by dividing net income attributable to the Company, 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 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
June 30,
    Six months ended
June 30,
 
    2014     2013     2014     2013  

Basic:

       

Income from continuing operations attributable to DaVita HealthCare Partners Inc.

  $ 147,683      $ 254,376      $ 330,972      $ 271,291   

Increase in noncontrolling interests redemption rights in excess of fair value

    —         (259     —         (259
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations for basic earnings per share calculation

  $ 147,683      $ 254,117      $ 330,972      $ 271,032   

Discontinued operations attributable to DaVita HealthCare Partners Inc.

    —         —         —         13,249   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 147,683      $ 254,117      $ 330,972      $ 284,281   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding during the period

    214,451        211,986        214,010        211,574   

Vested stock units

    2        5        2        5   

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

    (2,194     (2,194     (2,194     (2,194
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares for basic earnings per share calculation

    212,259        209,797        211,818        209,385   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 0.70      $ 1.21      $ 1.56      $ 1.29   

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

  $ —       $ —        $ —        $ 0.07   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 0.70      $ 1.21      $ 1.56      $ 1.36   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

       

Income from continuing operations attributable to DaVita HealthCare Partners Inc.

  $ 147,683      $ 254,376      $ 330,972      $ 271,291   

Increase in noncontrolling interests redemption rights in excess of fair value

    —         (259     —         (259
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations for diluted earnings per share calculation

  $ 147,683      $ 254,117      $ 330,972      $ 271,032   

Discontinued operations attributable to DaVita HealthCare Partners Inc.

    —         —         —         13,249   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 147,683      $ 254,117      $ 330,972      $ 284,281   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding during the period

    214,451        211,986        214,010        211,574   

Vested stock units

    2        5        2        5   

Assumed incremental shares from stock plans

    2,268        2,858        2,409        2,911   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares for diluted earnings per share calculation

    216,721        214,849        216,421        214,490   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 0.68      $ 1.18      $ 1.53      $ 1.26   

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

  $ —       $ —       $ —        $ 0.07   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 0.68      $ 1.18      $ 1.53      $ 1.33   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    990        4,520        1,995        3,353   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Shares associated with stock-settled stock appreciation rights 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. 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, like Medicare, the Company receives 80% of the payment directly from Medicare as established under the government’s bundled payment system, in the case of dialysis services receivables, and determines an appropriate allowance for doubtful accounts and provision for uncollectible accounts on the remaining balance due depending upon the Company’s estimate of the amounts ultimately collectible from other secondary coverage sources or from the patients. For receivables associated with services to patients covered by commercial payors 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 1% of the Company’s net accounts receivable are associated with patient pay and it is the Company’s policy to record an allowance for 100% of these outstanding dialysis accounts receivable balances when those amounts due are outstanding for more than four months.

During the six months ended June 30, 2014, the Company’s allowance for doubtful accounts increased by approximately $7,735. This was mainly due to an increase relating to the U.S. dialysis and related lab services, primarily as a result of additional non-covered Medicare write-offs. There were no unusual transactions impacting the allowance for doubtful accounts.

4. Investments in debt and equity securities and other investments

Based on the Company’s intentions and strategy concerning 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, common stock and other debt securities, are classified as available-for-sale and recorded at fair value.

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

 

     June 30, 2014      December 31, 2013  
     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

   $ 62,374       $ —         $ 62,374       $ 5,601       $ —         $ 5,601   

Investments in mutual funds and common stock

     —           25,685         25,685         —           19,421         19,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 62,374       $ 25,685       $ 88,059       $ 5,601       $ 19,421       $ 25,022   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

   $ 62,374       $ 1,461       $ 63,835       $ 5,601       $ 1,200       $ 6,801   

Long-term investments

     —           24,224         24,224         —           18,221         18,221   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 62,374       $ 25,685       $ 88,059       $ 5,601       $ 19,421       $ 25,022   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

8


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 cost of the certificates of deposit and money market funds at June 30, 2014 and December 31, 2013 approximates their fair value. As of June 30, 2014 and December 31, 2013, the available-for-sale investments included $6,161 and $5,096 of gross pre-tax unrealized gains, respectively. During the six months ended June 30, 2014, the Company recorded gross pre-tax unrealized gains of $1,405, or $909 after tax, in other comprehensive income associated with changes in the fair value of these investments. During the six months ended June 30, 2014, the Company sold investments in mutual funds for net proceeds of $1,277 and recognized a pre-tax gain of $340, or $207 after-tax, which was previously recorded in other comprehensive income. During the six months ended June 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.

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.

As of June 30, 2014, the Company held $5,000 of preferred stock in a privately held company that is accounted for under the cost method as this investment does not have a readily determinable fair value.

Certain HCP entities are required to maintain minimum cash balances in order to comply with regulatory requirements in conjunction with medical claim reserves. As of June 30, 2014, this minimum cash balance was approximately $58,000.

5. Goodwill

Changes in goodwill by reportable segments were as follows:

 

     Six months ended June 30, 2014  
     U.S. dialysis and
related lab services
     HCP     Other-ancillary
services and
strategic initiatives
     Consolidated total  

Balance at December 31, 2013

   $ 5,469,473       $ 3,516,162      $ 227,339       $ 9,212,974   

Acquisitions

     2,915         38,639        820         42,374   

Other adjustments

     —           (2,277     972         (1,305
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at June 30, 2014

   $ 5,472,388       $ 3,552,524      $ 229,131       $ 9,254,043   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Year ended December 31, 2013  
     U.S. dialysis and
related lab services
    HCP     Other-ancillary
services and
strategic initiatives
    Consolidated total  

Balance at December 31, 2012

   $ 5,309,152      $ 3,506,571      $ 137,027      $ 8,952,750   

Acquisitions

     163,037        17,833        90,397        271,267   

Divestitures

     (2,728     —          —          (2,728

Other adjustments

     12        (8,242     (85     (8,315
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ 5,469,473      $ 3,516,162      $ 227,339      $ 9,212,974   
  

 

 

   

 

 

   

 

 

   

 

 

 

Each of the Company’s operating segments described in Note 16 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.

 

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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)

 

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 within 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.

HCP’s current and expected future operating results have eroded recently, primarily as a result of reductions in its Medicare Advantage reimbursement rates. As a result, the Company has determined that two of its HCP reporting units, HCP California and HCP Nevada, are at risk of goodwill impairment. HCP California and HCP Nevada have goodwill of $2,511,477 and $517,618, respectively.

The Company obtained preliminary third-party valuations of these two businesses as of June 30, 2014, noting that the estimated fair values of HCP California and HCP Nevada exceed their total carrying values by approximately 6.0% and 10.9%, respectively. Further reductions in HCP’s reimbursement rates or other significant adverse changes in its expected future cash flows or valuation assumptions could result in a goodwill impairment charge in the future.

For example, a sustained, long-term reduction of 3% in operating income for HCP California and HCP Nevada could reduce their estimated fair values by up to 3.1% and 2.9%, respectively. Separately, an increase in their respective discount rates of 100 basis points could reduce the estimated fair values of HCP California and HCP Nevada by up to 7.7% and 6.1%, respectively.

During the first six months of 2014, the Company did not record any goodwill impairment charges. Except as described above, none of the goodwill associated with the Company’s various other reporting units was considered at risk of impairment as of June 30, 2014. Since the dates of the Company’s last annual goodwill impairment tests, there have been certain developments, events, changes in operating performance and other changes in circumstances that have affected the Company’s businesses. However, these did not 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. 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, where state regulation allows for the assumption of global risk. Health care costs payable are included in medical payables.

 

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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 table shows the components of changes in the health care costs payable for the six months ended June 30, 2014:

 

     Six months ended
June 30, 2014
 

Health care costs payable, beginning of the period

   $ 172,310   
  

 

 

 

Add: Components of incurred health care costs

  

Current year

     775,604   

Prior years

     5,602   
  

 

 

 

Total incurred health care costs

     781,206   
  

 

 

 

Less: Claims paid

  

Current year

     589,968   

Prior years

     153,223   
  

 

 

 

Total claims paid

     743,191   
  

 

 

 

Health care costs payable, end of the period

   $ 210,325   
  

 

 

 

Our prior year estimates of health care costs payable increased by $5,602 resulting from certain medical claims being settled for amounts more than originally estimated. When significant increases (decreases) in prior-year health care cost estimates occur that we believe significantly impact our current year operating results, we disclose that amount as unfavorable (favorable) 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.

7. Income taxes

As of June 30, 2014, the Company’s total liability for unrecognized tax benefits relating to tax positions that do not meet the more-likely-than-not threshold is $60,372, of which $32,945 would impact the Company’s effective tax rate if recognized. This balance represents a decrease of $166 from the December 31, 2013 balance of $60,538.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. At June 30, 2014 and December 31, 2013, the Company had approximately $11,969 and $10,742, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefits.

As of June 30, 2014, it is reasonably possible that $27,427 of unrecognized tax benefits may be recognized within the next 12 months, primarily related to the filing of tax accounting method changes which will not impact the Company’s effective tax rate.

 

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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)

 

8. Long-term debt

Long-term debt was comprised of the following:

 

     June 30,
2014
    December 31,
2013
 

Senior Secured Credit Facilities:

    

New Term Loan A

   $ 1,000,000      $ —     

New Term Loan B

     3,500,000        —     

Prior Term Loan A

     —          800,000   

Prior Term Loan A-3

     —          1,282,500   

Prior Term Loan B

     —          1,697,500   

Prior Term Loan B-2

     —          1,633,500   

Senior notes

     4,066,907        2,800,000   

Acquisition obligations and other notes payable

     66,511        67,352   

Capital lease obligations

     183,647        152,751   
  

 

 

   

 

 

 

Total debt principal outstanding

     8,817,065        8,433,603   

Discount on long-term debt

     (17,500     (17,675
  

 

 

   

 

 

 
     8,799,565        8,415,928   

Less current portion

     (408,987     (274,697
  

 

 

   

 

 

 
   $ 8,390,578      $ 8,141,231   
  

 

 

   

 

 

 

Classification of long-term debt at June 30, 2014 was as follows:

 

Senior notes

   $ 291,907   

Current portion

     117,080   
  

 

 

 

Total current portion

     408,987   

Long-term debt

     8,390,578   
  

 

 

 
   $ 8,799,565   
  

 

 

 

Scheduled maturities and pay-outs of long-term debt at June 30, 2014 were as follows:

 

2014 (remainder of the year, including the 6 38% Senior Notes)

     347,712   

2015

     112,182   

2016

     115,645   

2017

     141,972   

2018

     153,282   

2019

     727,238   

Thereafter

     7,219,034   

During the first six months of 2014, the Company made mandatory principal payments under its then existing Senior Secured Credit Facilities (before entering into a new senior secured credit agreement and repaying all outstanding amounts under the then existing Senior Secured Credit Facilities) totaling $37,500 on the Term Loan A, $16,875 on the Term Loan A-3, $4,375 on the Term Loan B and $4,125 on the Term Loan B-2.

 

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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)

 

In June 2014, the Company entered into a $5,500,000 senior secured credit agreement (the New Credit Agreement). The New Credit Agreement consists of a five year Revolving Credit Facility in the aggregate principal amount of $1,000,000 (the New Revolver), a five year Term Loan A facility in the aggregate principal amount of $1,000,000 (the New Term Loan A) and a seven year Term Loan B facility in the aggregate principal amount of $3,500,000 (the New Term Loan B and collectively with the New Revolver and the New Term Loan A, the New Loans). In addition, the Company can increase the existing revolving commitments and enter into one or more incremental term loan facilities in an amount not to exceed the sum of $1,500,000 (less the amount of other permitted indebtedness incurred or issued in reliance on such amount), plus an amount of indebtedness such that the senior secured leverage ratio is not in excess of 3.50 to 1.00 after giving effect to such borrowings. The New Revolver and the New Term Loan A initially bears interest at LIBOR plus an interest rate margin of 1.75% which is subject to adjustment depending upon the Company’s leverage ratio and can range from 1.50% to 2.00%. The New Term Loan A requires annual principal payments beginning on September 30, 2014 of $25,000 in 2014, $50,000 in 2015, $62,500 in 2016, $87,500 in 2017 and $100,000 in 2018 with the balance of $675,000 due in 2019. The New Term Loan B bears interest at LIBOR (Floor of 0.75%) plus an interest rate margin of 2.75%. The New Term Loan B requires annual principal payments of $17,500 in 2014 and $35,000 for each year from 2015 through 2020, with the balance of $3,272,500 due in 2021. These New Loans under the New Credit Agreement are guaranteed by certain of the Company’s direct and indirect wholly-owned domestic subsidiaries holding most of the Company’s domestic assets and are secured by substantially all of the Company’s and the guarantors’ assets. The New Credit Agreement contains certain customary affirmative and negative covenants such as various restrictions or limitations on the amount of investments, acquisitions, the payment of dividends and redemptions and the incurrence of other indebtedness. Many of these restrictions and limitations will not apply as long as the Company’s leverage ratio is below 3.50 to 1.00. In addition, the New Credit Agreement places limitations on the amount of tangible net assets of the non-guarantor subsidiaries and also requires compliance with a maximum leverage ratio covenant.

In addition, in June 2014, the Company issued $1,750,000 5 18% Senior Notes due 2024 (the 5 18% Senior Notes). The 5 18% Senior Notes pay interest on January 15 and July 15 of each year beginning January 15, 2015. The 5 18% Senior Notes are unsecured obligations and will rank equally in right of payment with our existing and future unsecured senior indebtedness. The 5 18% Senior Notes are guaranteed by each of the Company’s domestic subsidiaries that guarantees the Company’s New Credit Agreement. The Company may redeem up to 35% of the 5 18% Senior Notes at any time prior to July 15, 2017 at a certain specified price from the proceeds of one or more equity offerings. In addition, the Company may redeem the 5 18% Senior Notes at any time prior to July 15, 2019 at make whole redemption prices and after such date at certain specified redemption prices.

The Company received total proceeds from these borrowings of $6,250,000, $4,500,000 from the issuance of the New Term Loans and $1,750,000 from the issuance of the 5 18% Senior Notes. The Company used a portion of the proceeds to pay off the total outstanding principal balances under its then existing Senior Secured Credit Facilities plus accrued interest totaling $5,362,428 and in addition, to purchase pursuant to a cash tender offer $483,093 of the outstanding principal balances of the Company’s $775,000 6 38% Senior Notes due 2018 (6 38% Senior Notes) plus accrued interest and cash tender premium totaling $512,386. The total amount paid for the 6 38% Senior Notes from the cash tender offer was $1,051.25 per 1,000 of principal amount of the 6 38% Senior Notes, which resulted in the Company paying a cash tender premium of $24,759 for the redemption of this portion of the 6 38% Senior Notes. The Company also incurred an additional $81,569 in fees, discounts and other professional expenses associated with these transactions.

 

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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)

 

In July 2014, the Company also purchased an additional $188 principal amount of the 6 38% Senior Notes plus accrued interest totaling $194 pursuant to the cash tender offer at a price of $1,021.25 per 1,000 of principal amount of the 6 38% Senior Notes, which resulted in the Company paying an additional cash tender premium of $4.

In addition, in July 2014, the Company redeemed the remaining outstanding principal balance of the 6 38% Senior Notes of $291,719 at a redemption price of $1,047.81 per 1,000 of principal amount of the 6 38% Senior Notes plus accrued interest and a redemption premium which totaled $309,954. This resulted in an additional redemption premium of $13,947 being recorded as debt refinancing charges.

As a result of these transactions, the Company recorded debt refinancing charges of $97,548 that consist of the cash tender premiums, the redemption premium, the write-off of existing deferred financing costs, the write-off of certain new refinancing costs, other professional fees and losses associated with the termination of several of the Company’s interest rate swap agreements.

In addition, as a result of these transactions, the Company terminated $1,137,500 notional amounts of amortizing swaps and also terminated $600,000 of forward swaps during June 2014, that resulted in the Company recognizing a loss of $3,140, of which $2,972 was previously recorded in other comprehensive income due to the Company’s previously outstanding principal debt being paid-off as described above, and as a result of future forecasted transactions that are no longer probable. The loss is included as a component of the Company’s debt refinancing charges. During the six months ended June 30, 2014, the Company recognized debt expense of $6,137 from these swaps.

The Company has entered into several interest rate swap agreements as a means of hedging its exposure to and volatility from variable-based interest rate changes as part of its overall interest rate risk management strategy. These agreements are not held for trading or speculative purposes and have the economic effect of converting the LIBOR variable component of the Company’s interest rate to a fixed rate. These swap agreements are designated as cash flow hedges, and as a result, hedge-effective gains or losses resulting from changes in the fair values of these swaps are reported in other comprehensive income until such time as the hedged forecasted cash flows occur, 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 floating rate 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 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.

As of June 30, 2014, the Company maintains several interest rate swap agreements that were entered into in March 2013 with amortizing notional amounts of these swap agreements totaling $878,750. 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 New Term Loan A to fixed rates ranging from 0.49% to 0.52%, resulting in an overall weighted average effective interest rate of 2.26%, including the New Term Loan A margin of 1.75%. The overall weighted average effective interest rate also includes the effects of $121,250 of unhedged New Term Loan A debt that bears interest at LIBOR plus an interest rate margin of 1.75%. The swap agreements expire on

 

14


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

September 30, 2016 and require monthly interest payments. During the six months ended June 30, 2014, the Company recognized debt expense of $1,592 from these swaps. As of June 30, 2014, the total fair value of these swap agreements was a net asset of approximately $849. The Company estimates that approximately $2,696 of existing unrealized pre-tax losses in other comprehensive income at June 30, 2014 will be reclassified into income over the next twelve months.

As of June 30, 2014, the Company maintains several interest rate cap agreements that were entered into in March 2013 with notional amounts totaling $2,735,000 on the Company’s New Term Loan B 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 New Term Loan B. During the six months ended June 30, 2014, the Company recognized debt expense of $1,220 from these caps. The cap agreements expire on September 30, 2016. As of June 30, 2014, the total fair value of these cap agreements was an asset of approximately $2,692. During the six months ended June 30, 2014, the Company recorded a loss of $4,874 in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements.

As of June 30, 2014, the Company also maintains five other 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 New Term Loan B debt. However, as a result of the 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 six months ended June 30, 2014, the Company recognized debt expense of $1,794 from these caps. The cap agreements expire on September 30, 2014.

The following table summarizes the Company’s derivative instruments as of June 30, 2014 and December 31, 2013:

 

     June 30, 2014      December 31, 2013  

Derivatives designated as hedging
instruments

   Balance sheet
location
     Fair value      Balance sheet
location
     Fair value  

Interest rate swap agreements

     Other short-term liabilities       $ 2,696         Other short-term liabilities       $ 12,069   
     

 

 

       

 

 

 

Interest rate swap agreements

     Other long-term assets       $ 3,545         Other long-term assets       $ 10,004   
     

 

 

       

 

 

 

Interest rate cap agreements

     Other long-term assets       $ 2,692         Other long-term assets       $ 7,567   
     

 

 

       

 

 

 

 

15


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 table summarizes the effects of the Company’s interest rate swap and cap agreements for the three and six months ended June 30, 2014 and 2013:

 

    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
 

Derivatives designated
as cash flow hedges

  Three months ended
June 30,
    Six months ended
June 30,
      Three months ended
June 30,
    Six months ended
June 30,
 
      2014             2013         2014     2013           2014             2013         2014     2013  

Interest rate swap agreements

  $ (5,022   $ 13,266      $ (7,786   $ 12,302      Debt expense

(including
refinancing
charges)

  $ (6,694   $ (4,159   $ (10,700   $ (7,366
                 
                 

Interest rate cap agreements

    (3,527     5,858        (4,874     2,945      Debt expense

(including
refinancing
charges)

    (1,507     (1,507     (3,014     (2,404
                 
                 

Tax benefit (expense)

    3,340        (7,439     4,946        (5,931       3,204        2,204        5,358        3,801   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (5,209   $ 11,685      $ (7,714   $ 9,316        $ (4,997   $ (3,462   $ (8,356   $ (5,969
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2014, the interest rate on the Company’s New Term Loan B debt is effectively fixed because of an embedded LIBOR floor which is higher than actual LIBOR as of such date and the New Term Loan B is also subject to interest rate caps if LIBOR should rise above 2.50%. See above for further details. Interest rates on the Company’s senior notes are fixed by their terms. The LIBOR variable component of the Company’s interest rate on a majority of the Company’s New Term Loan A is economically fixed as a result of interest rate swaps.

As a result of embedded LIBOR floors on the New Term Loan B debt agreement and the swap and cap agreements, the Company’s overall weighted average effective interest rate on the Senior Secured Credit Facilities was 3.51%, based upon the current margins in effect of 1.75% for the New Term Loan A and 2.75% for the New Term Loan B, as of June 30, 2014.

The Company’s overall weighted average effective interest rate during the second quarter of 2014 was 4.85% and as of June 30, 2014 was 4.56%.

As of June 30, 2014, the Company had undrawn revolving credit facilities totaling $1,000,000 of which approximately $83,000 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.

9. 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.

 

16


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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 Office of Inspector General (OIG) for the U.S. Department of Health and Human Services (HHS) relating to the pharmaceutical products Zemplar, Hectorol, Venofer, Ferrlecit and erythropoietin (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 federal government 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 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 has agreed to a framework for a global resolution with 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 for both the 2010 and the 2011 U.S. Attorney Physician Relationship Investigations. The final settlement remains subject to negotiation of specific terms. The settlement will include the payment of approximately $389,000, entry into a corporate integrity agreement, the appointment of an independent compliance monitor, and the imposition of certain other business restrictions related to a subset of the Company’s joint venture arrangements. Under the terms of the framework for resolution, the Company has agreed to unwind a limited subset of joint ventures that were created through partial divestiture to nephrologists, and agreed not to enter into this type of partial divestiture joint venture with nephrologists in the future. In 2013, the Company accrued an estimated loss contingency reserve of $397,000 related to this matter. The final settlement remains subject to negotiation of specific terms and will continue to require management’s attention and significant legal expense. The Company can make no assurances as to the final outcome.

 

17


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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. As noted above, the Company has agreed to a framework for a global resolution with 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 for both the 2010 and the 2011 U.S. Attorney Physician Relationship Investigations. The final settlement remains subject to negotiation of specific terms and will continue to require management’s attention and significant legal expense. 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 OIG. 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. It is the Company’s understanding that this inquiry is civil in nature. 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 has cooperated with the government and produced the requested documents. In April 2014, we reached an agreement in principle to resolve this matter. The specific terms of a settlement remain subject to ongoing negotiation.

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.

 

18


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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.

In re DaVita HealthCare Partners Inc. Derivative Litigation: On January 7, 2014, the U.S. District Court for the District of Colorado consolidated the two previously disclosed shareholder derivative lawsuits: the Haverhill Retirement System action filed on May 17, 2013 and the Clark Shareholder action filed on August 7, 2012. The court appointed Haverhill lead plaintiff. The complaints filed against the directors of the Company and against the Company, as nominal defendant allege, among other things, that our directors breached fiduciary duties to the Company relating to the 2010 and 2011 U.S. Attorney Physician Relationship Investigations 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. At this time, the Company cannot predict the ultimate outcome of these matters or the potential range of damages, if any.

Other

The Company has received several notices of claims from commercial payors and other third parties related to historical billing practices and claims against DVA Renal Healthcare (formerly known as Gambro Healthcare), a subsidiary of the Company, related to historical Gambro Healthcare billing practices and other matters covered by its 2004 settlement agreement with the Department of Justice and certain agencies of the U.S. government. The Company has received no further indication that any of these claims are active, and some of them may be barred by applicable statutes of limitations. To the extent any of these claims might proceed, the Company intends to defend against them vigorously; however, the Company may not be successful and these claims may 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 reached an agreement with the plaintiffs to settle the claim that was remanded to the trial court, and that settlement has been finalized. The amount of the settlement is not material to the Company’s consolidated financial statements. The Company intends to continue to vigorously defend against the remaining claims. Any potential settlement of the remaining claims is not anticipated to be material to the Company’s consolidated financial statements.

 

19


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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.

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 majority-owned 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 the higher of either 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 interest may ultimately be settled, which could vary significantly from the Company’s current estimates. The estimated fair values of noncontrolling interest subject to put provisions can fluctuate and the implicit multiple of earnings at which these noncontrolling interests obligations may be settled will vary significantly depending upon market conditions including potential purchasers’ access to the capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses, the economic performance of these businesses and the restricted marketability of the third-party owners’ noncontrolling interests. The amount of noncontrolling interests subject to put provisions that employ a contractually 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 service 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 of these entities would be valued below the related noncontrolling interest carrying balances in the consolidated balance sheet.

11. Long-term incentive compensation

Long-term incentive program (LTIP) compensation includes both stock-based awards (principally stock-settled stock appreciation rights, restricted stock units and performance stock units) as well as long-term performance-based cash awards. Long-term incentive compensation expense, which was primarily general and administrative in nature, was attributed to the dialysis and related lab services business, the HCP business, corporate support costs, and the ancillary services and strategic initiatives.

 

20


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 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 six months ended June 30, 2014, the Company granted 1,248 stock-settled stock appreciation rights with an aggregate grant-date fair value of $19,997 and a weighted-average expected life of approximately 4.2 years, and also granted 316 stock units with an aggregate grant-date fair value of $22,809 and a weighted-average expected life of approximately 3.4 years.

For the six months ended June 30, 2014 and 2013, the Company recognized $52,960 and $38,773, respectively, in total LTIP expense, of which $29,699 and $32,266, respectively, was 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 June 30, 2014 and 2013 was $10,997 and $12,171, respectively. As of June 30, 2014, there was $162,351 of total estimated unrecognized compensation cost for outstanding LTIP awards, including $99,331 related to stock-based compensation arrangements under the Company’s equity compensation and stock purchase plans. The Company expects to recognize the performance-based cash component of these LTIP costs over a weighted average remaining period of 1.1 years and the stock-based component of these LTIP costs over a weighted average remaining period of 1.4 years.

For the six months ended June 30, 2014 and 2013, the Company received $42,110 and $36,524, respectively, in actual tax benefits upon the exercise of stock awards.

12. Comprehensive income

 

    For the three months ended
June 30, 2014
    For the six months ended
June 30, 2014
 
    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

  $ (1,490   $ 3,244      $ (3,393   $ (1,639   $ (2,344   $ 3,120      $ (3,421   $ (2,645
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (losses) gains

    (8,549     875        1,939        (5,736     (12,660     1,405        1,967        (9,289

Related income tax benefit (expense)

    3,340        (297     —          3,044        4,946        (496     —          4,451   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (5,209     578        1,939        (2,692     (7,714     909        1,967        (4,838
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification from accumulated other comprehensive income into net income

    8,201        —          —          8,201        13,714        (340     —          13,374   

Related tax

    (3,204     —          —          (3,204     (5,358     133        —          (5,225
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    4,997        —          —          4,997        8,356        (207     —          8,149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ (1,702   $ 3,822      $ (1,454   $ 666      $ (1,702   $ 3,822      $ (1,454   $ 666   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


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
June 30, 2013
    For the six months ended
June 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

  $ (15,264   $ 1,834      $ (3,311   $ (16,741   $ (15,402   $ 1,310      $ (1,205   $ (15,297
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses)

    19,124        166        (1,841     17,449        15,247        1,178        (3,947     12,478   

Related income tax (expense) benefit

    (7,439     (65     —          (7,504     (5,931     (459     —          (6,390
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    11,685        101        (1,841     9,945        9,316        719        (3,947     6,088   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification from accumulated other comprehensive income into net income

    5,666        —          —          5,666        9,770        (155     —          9,615   

Related tax

    (2,204     —          —          (2,204     (3,801     61        —          (3,740
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,462        —          —          3,462        5,969        (94     —          5,875   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ (117   $ 1,935      $ (5,152   $ (3,334   $ (117   $ 1,935      $ (5,152   $ (3,334
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 8 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 4 to the condensed consolidated financial statements for further details.

13. Acquisitions

During the first six months of 2014, the Company acquired dialysis businesses and other businesses consisting of one dialysis center located in the U.S., three dialysis centers located outside the U.S. and other medical businesses for a total of $98,442 in net cash and deferred purchase price obligations totaling $14,156. 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.

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

 

     Six months ended
June 30, 2014
 

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

   $ 858   

Amortizable intangible and other long-term assets

     69,366   

Goodwill

     42,374   
  

 

 

 

Aggregate purchase price

   $ 112,598   
  

 

 

 

 

22


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

Amortizable intangible assets acquired during the first six months of 2014 had weighted-average estimated useful lives of 9.9 years. The total amount of goodwill deductible for tax purposes associated with these acquisitions was approximately $27,789.

Contingent earn-out obligations

The Company has several contingent earn-out obligations associated with acquisitions that could result in the Company paying the former shareholders of those acquired companies a total of up to $136,300 or a portion of that amount if certain EBITDA performance targets and quality margins are met over the next two years, if certain percentages of operating income are met over the next three years or if certain percentages of other annual EBITDA targets are met. As of June 30, 2014, the Company has estimated the fair value of these contingent earn-out obligations to be $38,335.

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 15 to the condensed consolidated financial statements for further details. Of the total contingent earn-out obligations of $38,335 recognized at June 30, 2014, a total of $13,682 is included in other liabilities and the remaining $24,653 is included in other long-term liabilities in the Company’s condensed consolidated balance sheet.

The following is a reconciliation of changes in the contingent earn-out obligations for the six months ended June 30, 2014:

 

Beginning balance, January 1, 2014

   $  28,058   

Contingent earn-out obligations associated with acquisitions

     13,772   

Remeasurement of fair value for other contingent earn-outs

     (1,969

Payments of contingent earn-outs

     (1,526
  

 

 

 
   $ 38,335   
  

 

 

 

14. 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. generally accepted accounting principles (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

 

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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)

 

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 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 June 30, 2014, these condensed consolidated financial statements include total assets of VIEs of $515,618 and total liabilities and noncontrolling interests of VIEs to third parties of $307,133.

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 4 for disclosures on the assets of these consolidated non-qualified deferred compensation plans.

15. 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 June 30, 2014:

 

     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

   $ 25,685       $ 25,685       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate cap agreements

   $ 2,692       $ —         $ 2,692       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap agreements

   $ 3,545       $ —         $ 3,545       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Funds on deposit with third parties

   $ 72,575       $ 72,575       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent earn-out obligations

   $ 38,335       $ —         $ —         $ 38,335   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap agreements

   $ 2,696       $ —         $ 2,696       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Temporary equity

           

Noncontrolling interests subject to put provisions

   $ 760,242       $ —         $ —         $ 760,242   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


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 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 4 to these condensed consolidated financial statements for further discussion.

The interest rate swap and cap agreements are recorded at fair value based upon valuation models utilizing the income approach and commonly accepted valuation techniques that use inputs from closing prices for similar assets and liabilities in active markets as well as other relevant observable market inputs at quoted intervals such as current interest rates, forward yield curves, implied volatility and credit default swap pricing. The Company does not believe the ultimate amount that could be realized upon settlement of these interest rate swap and cap agreements would be materially different from the fair values currently reported. See Note 8 to the condensed consolidated financial statements for further discussion.

The funds on deposit with third parties represent funds held with various third parties 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 market prices.

The estimated fair value measurements of contingent earn-out obligations are primarily based on unobservable inputs including projected EBITDA, 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 these condensed consolidated financial statements for a discussion of the Company’s methodology for estimating the fair value of noncontrolling interests subject to put obligations.

Other financial instruments consist primarily of cash, accounts receivable, accounts payable, other accrued liabilities and debt. The balances of the non-debt financial instruments are presented in the consolidated financial statements at June 30, 2014 at their approximate fair values due to the short-term nature of their settlements. The carrying balance of the Company’s Senior Secured Credit Facilities totaled $4,482,500 as of June 30, 2014, and the fair value was approximately $4,526,300 based upon quoted market prices. The fair value of the Company’s senior notes was approximately $4,229,200 at June 30, 2014 based upon quoted market prices, as compared to the carrying amount of $4,066,907.

16. Segment reporting

The Company operates two major divisions, Kidney Care and HCP. The Kidney Care division is comprised of the Company’s U.S. dialysis and related lab services business and various other ancillary services and strategic initiatives, including its international dialysis operations. The HCP division is comprised of the Company’s HealthCare Partners integrated healthcare business.

As of June 30, 2014, the Company’s 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.

 

25


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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 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 maker 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 is its 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 maker uses 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 corporate support expenses, which consist 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. Corporate support expenses in the second quarter of 2014 have been reduced by internal management fees paid by the Company’s ancillary lines of businesses.

 

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)

 

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
June 30,
    Six months ended
June 30,
 
    2014     2013     2014     2013  

Segment net revenues:

       

U.S. dialysis and related lab services

       

Patient service revenues:

       

External sources

  $ 2,096,605      $ 1,980,267      $ 4,125,349      $ 3,889,050   

Intersegment revenues

    9,084        8,158        16,916        15,669   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total dialysis and related lab services revenues

    2,105,689        1,988,425        4,142,265        3,904,719   

Less: Provision for uncollectible accounts

    (84,227     (69,585     (165,690     (136,656
 

 

 

   

 

 

   

 

 

   

 

 

 

Net dialysis and related lab services patient service revenues

    2,021,462        1,918,840        3,976,575        3,768,063   

Other revenues(1)

    3,579        3,424        6,732        6,319   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net dialysis and related lab services revenues

    2,025,041        1,922,264        3,983,307        3,774,382   
 

 

 

   

 

 

   

 

 

   

 

 

 

HCP

       

HCP revenues:

       

Capitated revenues

    783,182        692,357        1,554,724        1,438,428   

Net patient service revenues

    58,076        49,433        114,297        103,035   

Other revenues(2)

    46,029        19,216        58,553        23,302   

Intersegment capitated and other revenues

    204        —         357        —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    887,491        761,006        1,727,931        1,564,765   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other—Ancillary services and strategic initiatives

       

Net patient service revenues—U.S.

    4,709        3,050        8,862        6,490   

Net patient service revenues—International

    24,035        13,294        47,281        24,357   

Capitated revenues

    16,187        17,717        32,210        34,261   

Other external sources—U.S.

    222,716        160,988        429,671        309,745   

Other external sources—International

    1,598        1,512        3,276        2,924   

Intersegment revenues

    4,474        3,397        9,293        6,176   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total ancillary services and strategic initiatives revenues

    273,719        199,958        530,593        383,953   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net segment revenues

    3,186,251        2,883,228        6,241,831        5,723,100   

Elimination of intersegment revenues

    (13,762     (11,555     (26,566     (21,845
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net revenues

  $ 3,172,489      $ 2,871,673      $ 6,215,265      $ 5,701,255   
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating margin (loss):

       

U.S. dialysis and related lab services

  $ 407,948      $ 401,415      $ 794,648      $ 486,228   

HCP

    82,048        81,382        136,002        189,466   

Other—Ancillary services and strategic initiatives

    (1,920     (6,791     (243     (21,392
 

 

 

   

 

 

   

 

 

   

 

 

 

Total segment margin

    488,076        476,006        930,407        654,302   

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

       

Contingent earn-out obligation adjustment

    —          56,977        —          56,977   

Corporate support expenses

    (3,781     (10,963     (4,887     (22,398
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

    484,295        522,020        925,520        688,881   

Debt expense

    (106,132     (108,096     (212,467     (213,913

Debt refinancing charges

    (97,548     —          (97,548     —     

Other income (loss)

    1,693        (1,374     3,391        (776
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated income from continuing operations before income taxes

  $ 282,308      $ 412,550      $ 618,896      $ 474,192   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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)

 

 

(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, as well as revenue related to the maintenance of existing physician networks.

For the three months ended June 30, 2014, depreciation and amortization expense for the U.S. dialysis and related lab services, HCP and the ancillary services and strategic initiatives was $99,163, $42,260 and $4,484, respectively.

For the six months ended June 30, 2014, depreciation and amortization expense for the U.S. dialysis and related lab services, HCP and the ancillary services and strategic initiatives was $195,606, $83,997 and $8,883, respectively.

For the three months ended June 30, 2013, depreciation and amortization expense for the U.S. dialysis and related lab services, HCP and the ancillary services and strategic initiatives was $88,588, $38,590 and $3,411, respectively.

For the six months ended June 30, 2013, depreciation and amortization expense for the U.S. dialysis and related lab services, HCP and the ancillary services and strategic initiatives was $173,540, $76,607 and $6,351, respectively.

Summary of assets by segment is as follows:

 

    June 30,
2014
    December 31,
2013
 

Segment assets

   

U.S. dialysis and related lab services

  $ 10,876,860      $ 10,248,993   

HCP

    6,369,644        6,265,767   

Other—Ancillary services and strategic initiatives

    679,067        584,117   
 

 

 

   

 

 

 

Consolidated assets

  $ 17,925,571      $ 17,098,877   
 

 

 

   

 

 

 

For the three and six months ended June 30, 2014, the total amount of expenditures for property and equipment, excluding capital leases was $136,660 and $249,869, respectively, for the U.S. dialysis and related lab services, was $5,777 and $10,279, respectively, for HCP and was $9,594 and $18,445, respectively, for the ancillary services and strategic initiatives.

For the three and six months ended June 30, 2013, the total amount of expenditures for property and equipment, excluding capital leases was $128,699 and $230,775, respectively, for the U.S. dialysis and related lab services, and was $7,840 and $14,379, respectively, for HCP and was $5,133 and $13,242, respectively, for the ancillary services and strategic initiatives.

 

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. 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
June 30,
    Six months ended
June 30,
 
     2014     2013     2014      2013  

Net income attributable to DaVita HealthCare Partners Inc.

   $ 147,683      $ 254,376      $ 330,972       $ 284,540   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

     (66     (78     15         (887

Increase (decrease) in paid-in capital for the purchase of noncontrolling interests and adjustments to ownership interest

     1,247        (474     1,457         (474
  

 

 

   

 

 

   

 

 

    

 

 

 

Net transfers to noncontrolling interests

     1,181        (552     1,472         (1,361
  

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 148,864      $ 253,824      $ 332,444       $ 283,179   
  

 

 

   

 

 

   

 

 

    

 

 

 

18. New accounting standards

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization’s results from continuing operations. The amendments in this ASU enhance convergence between U.S. GAAP and International Financial Reporting Standards (IFRS). Part of the new definition of discontinued operation is based on elements of the definition of discontinued operations in IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The adoption of this standard will not have a material impact on the Company’s condensed consolidated financial statements.

 

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)

 

19. 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 June 30, 2014

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

Patient service revenues

   $ —       $ 1,517,268      $ 668,312      $ 1,669      $ 2,187,249   

Less: Provision for uncollectible accounts

     —         (57,281     (30,771     —         (88,052
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     —         1,459,987        637,541        1,669        2,099,197   

Capitated revenues

     —         414,366        385,030        (27     799,369   

Other revenues

     181,199        424,755        35,712        (367,743     273,923   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     181,199        2,299,108        1,058,283        (366,101     3,172,489   

Operating expenses

     122,815        2,033,828        897,652        (366,101     2,688,194   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     58,384        265,280        160,631        —         484,295   

Debt expense, including debt refinancing charges

     (202,258     (94,169     (10,180     102,927        (203,680

Other income (expense)

     99,532        4,166        922        (102,927     1,693   

Income tax (benefit) expense

     (17,958     111,415        7,430        —         100,887   

Equity earnings in subsidiaries

     174,067        110,205        —         (284,272     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     147,683        174,067        143,943        (284,272     181,421   

Less: Net income attributable to noncontrolling interests

     —         —         —         (33,738     (33,738
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

   $ 147,683      $ 174,067      $ 143,943      $ (318,010   $ 147,683   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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)

 

For the three months ended June 30, 2013

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

Patient service revenues

   $ —       $ 1,476,135      $ 581,208      $ (8,692   $ 2,048,651   

Less: Provision for uncollectible accounts

     —         (37,218     (34,973     —         (72,191
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     —         1,438,917        546,235        (8,692     1,976,460   

Capitated revenues

     —         337,312        374,451        (1,689     710,074   

Other revenues

     166,650        374,577        21,183        (377,271     185,139   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     166,650        2,150,806        941,869        (387,652     2,871,673   

Operating expenses

     71,881        1,827,141        838,283        (387,652     2,349,653   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     94,769        323,665        103,586        —         522,020   

Debt expense

     (107,337     (95,600     (11,247     106,088        (108,096

Other income (expense)

     100,947        3,714        53        (106,088     (1,374

Income tax expense

     29,458        97,729        2,005        —         129,192   

Equity earnings in subsidiaries

     195,455        61,405        —         (256,860     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     254,376        195,455        90,387        (256,860     283,358   

Less: Net income attributable to noncontrolling interests

     —         —         —         (28,982     (28,982
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

   $ 254,376      $ 195,455      $ 90,387      $ (285,842   $ 254,376   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the six months ended June 30, 2014

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

Patient service revenues

   $ —       $ 3,030,545      $ 1,267,669      $ 3,133      $ 4,301,347   

Less: Provision for uncollectible accounts

     —         (107,160     (64,089     —         (171,249
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     —         2,923,385        1,203,580        3,133        4,130,098   

Capitated revenues

     —         818,913        768,428        (407     1,586,934   

Other revenues

     344,242        818,310        68,003        (732,322     498,233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     344,242        4,560,608        2,040,011        (729,596     6,215,265   

Operating expenses

     235,112        4,014,282        1,769,947        (729,596     5,289,745   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     109,130        546,326        270,064        —         925,520   

Debt expense, including debt refinancing charges

     (307,541     (188,806     (19,932     206,264        (310,015

Other income (expense)

     199,475        8,935        1,245        (206,264     3,391   

Income tax expense

     431        215,546        9,761        —         225,738   

Equity earnings in subsidiaries

     330,339        179,430        —         (509,769     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     330,972        330,339        241,616        (509,769     393,158   

Less: Net income attributable to noncontrolling interests

     —         —         —         (62,186     (62,186
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

   $ 330,972      $ 330,339      $ 241,616      $ (571,955   $ 330,972   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 six months ended June 30, 2013

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

Patient service revenues

   $ —       $ 2,928,355      $ 1,117,866      $ (17,697   $ 4,028,524   

Less: Provision for uncollectible accounts

     —         (101,075     (41,173     —         (142,248
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     —         2,827,280        1,076,693        (17,697     3,886,276   

Capitated revenues

     —         697,336        778,126        (2,773     1,472,689   

Other revenues

     302,025        733,034        38,840        (731,609     342,290   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     302,025        4,257,650        1,893,659        (752,079     5,701,255   

Operating expenses

     192,385        3,908,364        1,663,704        (752,079     5,012,374   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     109,640        349,286        229,955        —         688,881   

Debt expense

     (212,668     (190,315     (21,970     211,040        (213,913

Other income (expense)

     201,168        9,681        (585     (211,040     (776

Income tax expense

     34,055        94,517        15,764        —         144,336   

Equity earnings in subsidiaries

     220,455        127,482        —         (347,937     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     284,540        201,617        191,636        (347,937     329,856   

Discontinued operations

     —         —         13,236        —         13,236   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     284,540        201,617        204,872        (347,937     343,092   

Less: Net income attributable to noncontrolling interests

     —         —         —         (58,552     (58,552
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

   $ 284,540      $ 201,617      $ 204,872      $ (406,489   $ 284,540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statements of Comprehensive Income

 

For the three months ended June 30, 2014

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

Net income

   $ 147,683       $ 174,067       $ 143,943       $ (284,272   $ 181,421   

Other comprehensive income

     2,305         —          —          —         2,305   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     149,988         174,067         143,943         (284,272     183,726   

Less: comprehensive income attributable to the noncontrolling interests

     —          —          —          (33,738     (33,738
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 149,988       $ 174,067       $ 143,943       $ (318,010   $ 149,988   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

For the three months ended June 30, 2013

                                 

Net income

   $ 254,376       $ 195,455       $ 90,387       $ (256,860   $ 283,358   

Other comprehensive income

     13,407         —          —          —         13,407   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     267,783         195,455         90,387         (256,860     296,765   

Less: comprehensive income attributable to the noncontrolling interests

     —          —          —          (28,982     (28,982
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 267,783       $ 195,455       $ 90,387       $ (285,842   $ 267,783   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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 six months ended June 30, 2014

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

Net income

  $ 330,972      $ 330,339      $ 241,616      $ (509,769   $ 393,158   

Other comprehensive income

    3,311        —         —         —         3,311   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

    334,283        330,339        241,616        (509,769     396,469   

Less: comprehensive income attributable to the noncontrolling interests

    —         —         —         (62,186     (62,186
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

  $ 334,283      $ 330,339      $ 241,616      $ (571,955   $ 334,283   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2013

                             

Net income

  $ 284,540      $ 201,617      $ 204,872      $ (347,937   $ 343,092   

Other comprehensive income

    11,963        —         —         —         11,963   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

    296,503        201,617        204,872        (347,937     355,055   

Less: comprehensive income attributable to the noncontrolling interests

    —         —         —         (58,552     (58,552
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

  $ 296,503      $ 201,617      $ 204,872      $ (406,489   $ 296,503   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Balance Sheets

 

As of June 30, 2014

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

Cash and cash equivalents

  $ 1,081,021      $ 137,229      $ 202,723      $ —       $ 1,420,973   

Accounts receivable, net

    —         953,474        596,778        —         1,550,252   

Other current assets

    83,242        971,776        135,004        —         1,190,022   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,164,263        2,062,479        934,505        —         4,161,247   

Property and equipment, net

    187,939        1,394,182        708,723        —         2,290,844   

Amortizable intangibles, net

    92,421        1,867,978        62,476        —         2,022,875   

Investments in subsidiaries

    8,784,145        1,589,418        —         (10,373,563     —    

Intercompany receivables

    3,645,401        —         545,592        (4,190,993     —    

Other long-term assets and investments

    59,487        62,812        74,263        —         196,562   

Goodwill

    —         7,875,336        1,378,707        —         9,254,043   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 13,933,656      $ 14,852,205      $ 3,704,266      $ (14,564,556   $ 17,925,571   

Current liabilities

    496,066        1,744,652        367,430        —         2,608,148   

Intercompany payables

    —         3,115,717        1,075,276        (4,190,993     —    

Long-term debt and other long-term liabilities

    8,157,874        1,207,691        234,791        —         9,600,356   

Noncontrolling interests subject to put provisions

    493,945        —         —         266,297        760,242   

Total DaVita HealthCare Partners Inc. shareholders’ equity

    4,785,771        8,784,145        1,589,418        (10,373,563     4,785,771   

Noncontrolling interests not subject to put provisions

    —         —         437,351        (266,297     171,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    4,785,771        8,784,145        2,026,769        (10,639,860     4,956,825   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 13,933,656      $ 14,852,205      $ 3,704,266      $ (14,564,556   $ 17,925,571   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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)

 

As of December 31, 2013

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

Cash and cash equivalents

  $ 602,188      $ 175,004      $ 169,057      $ —       $ 946,249   

Accounts receivable, net

    —         939,543        545,620        —         1,485,163   

Other current assets

    27,910        908,010        104,946        —         1,040,866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    630,098        2,022,557        819,623        —         3,472,278   

Property and equipment, net

    177,633        1,377,924        633,854        —         2,189,411   

Amortizable intangibles, net

    77,531        1,882,685        64,157        —         2,024,373   

Investments in subsidiaries

    8,231,059        1,389,558        —         (9,620,617     —    

Intercompany receivables

    3,983,214        —         480,993        (4,464,207     —    

Other long-term assets and investments

    61,391        67,402        71,048        —         199,841   

Goodwill

    —         7,837,421        1,375,553        —         9,212,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 13,160,926      $ 14,577,547      $ 3,445,228      $ (14,084,824   $ 17,098,877   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

  $ 328,875      $ 1,774,634      $ 358,540      $ —       $ 2,462,049   

Intercompany payables

    —         3,421,198        1,043,009        (4,464,207     —    

Long-term debt and other long-term liabilities

    7,948,390        1,150,656        234,941        —         9,333,987   

Noncontrolling interests subject to put provisions

    451,182        —         —         246,118        697,300   

Total DaVita HealthCare Partners Inc. shareholders’ equity

    4,432,479        8,231,059        1,389,558        (9,620,617     4,432,479   

Noncontrolling interests not subject to put provisions

    —         —         419,180        (246,118     173,062   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    4,432,479        8,231,059        1,808,738        (9,866,735     4,605,541   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 13,160,926      $ 14,577,547      $ 3,445,228      $ (14,084,824   $ 17,098,877   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 Statements of Cash Flows

 

For the six months ended June 30, 2014

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

Cash flows from operating activities:

         

Net income

  $ 330,972      $ 330,339      $ 241,616      $ (509,769   $ 393,158   

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

    (191,299     7,007        (37,137     509,769        288,340   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    139,673        337,346        204,479        —         681,498   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Additions of property and equipment, net

    (25,377     (123,519     (129,697     —         (278,593

Acquisitions

    —         (97,057     (1,385     —         (98,442

Proceeds from asset and business sales

    —         215        —         —         215   

Purchases/proceeds from investment sales and other items

    (58,496     (5,263     (2,276     —         (66,035
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (83,873     (225,624     (133,358     —         (442,855
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Long-term debt and related financing costs, net

    353,406        (7,158     2,188        —         348,436   

Intercompany borrowing

    139,052        (137,529     (1,523     —         —    

Other items

    (69,425     (4,810     (37,553     —         (111,788
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    423,033        (149,497     (36,888     —         236,648   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

    —         —         (567     —         (567
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    478,833        (37,775     33,666        —         474,724   

Cash and cash equivalents at beginning of period

    602,188        175,004        169,057        —         946,249   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 1,081,021      $ 137,229      $ 202,723      $ —       $ 1,420,973   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


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 six months ended June 30, 2013

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

Cash flows from operating activities:

         

Net income

  $ 284,540      $ 201,617      $ 204,872      $ (347,937   $ 343,092   

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

    (271,776     288,254        (21,481     347,937        342,934   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    12,764        489,871        183,391        —         686,026   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Additions of property and equipment, net

    (24,213     (131,671     (102,512     —         (258,396

Acquisitions

    —         (119,818     (32,294     —         (152,112

Proceeds from asset sales

    60,650        3,713        —         —         64,363   

Purchases of investments and other items

    (2,201     359        100        —         (1,742
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    34,236        (247,417     (134,706     —         (347,887
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Long-term debt and related financing costs, net

    (238,400     (5,496     (7,472     —         (251,368

Intercompany borrowing

    250,330        (284,739     34,409        —         —    

Other items

    37,264        5,429        (45,074     —         (2,381
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    49,194        (284,806     (18,137     —         (253,749
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

    —         —         (234     —         (234
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    96,194        (42,352     30,314        —         84,156   

Cash and cash equivalents at beginning of period

    195,037        166,107        172,604        —         533,748   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 291,231      $ 123,755      $ 202,918      $ —       $ 617,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

36


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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)

 

20. Supplemental data

The following information is presented as supplemental data as required by the indentures governing our senior notes.

Condensed Consolidating Statements of Income

 

For the three months ended June 30, 2014

  Consolidated
Total
    Physician
Groups
    Unrestricted
Subsidiaries
    Company and
Restricted
Subsidiaries(1)
 

Patient service operating revenues

  $ 2,187,249      $ 29,361      $ —       $ 2,157,888   

Less: Provision for uncollectible accounts

    (88,052     (1,979     —         (86,073
 

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service operating revenues

    2,099,197        27,382        —         2,071,815   

Capitated revenues

    799,369        368,551        —         430,818   

Other revenues

    273,923        2,313        —         271,610   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating revenues

    3,172,489        398,246        —         2,774,243   

Operating expenses

    2,688,194        386,281        (16     2,301,929   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    484,295        11,965        16       472,314   

Debt expense, including refinancing charges

    (203,680     (3,423     —         (200,257

Other income

    1,693        25        —         1,668   

Income tax expense

    100,887        2,712        7       98,168   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    181,421        5,855        9       175,557   

Minority interests

    (33,738     —         —         (33,738
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

  $ 147,683      $ 5,855      $ 9     $ 141,819   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

For the six months ended June 30, 2014

  Consolidated
Total
    Physician
Groups
    Unrestricted
Subsidiaries
    Company and
Restricted
Subsidiaries(1)
 

Patient service operating revenues

  $ 4,301,347      $ 60,500      $ —       $ 4,240,847   

Less: Provision for uncollectible accounts

    (171,249     (2,589     —         (168,660
 

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service operating revenues

    4,130,098        57,911        —         4,072,187   

Capitated revenues

    1,586,934        734,680        —         852,254   

Other revenues

    498,233        2,879        —         495,354   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating revenues

    6,215,265        795,470        —         5,419,795   

Operating expenses

    5,289,745        775,799        236        4,513,710   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    925,520        19,671        (236     906,085   

Debt expense, including refinancing charges

    (310,015     (6,618     —         (303,397

Other income

    3,391        33        —         3,358   

Income tax expense

    225,738        4,157        (94     221,675   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    393,158        8,929        (142     384,371   

Minority interests

    (62,186     —         —         (62,186
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

  $ 330,972      $ 8,929      $ (142   $ 322,185   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  After the elimination of the unrestricted subsidiaries and the physician groups

 

37


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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)

 

Condensed Consolidating Statements of Comprehensive Income

 

For the three months ended June 30, 2014

   Consolidated
Total
    Physician
Groups
     Unrestricted
Subsidiaries
     Company and
Restricted
Subsidiaries(1)
 

Net income

   $ 181,421      $ 5,855       $ 9      $ 175,557   

Other comprehensive income

     2,305        —          —          2,305   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total comprehensive income

     183,726        5,855         9        177,862   

Less: comprehensive income attributable to the noncontrolling interests

     (33,738     —          —          (33,738
  

 

 

   

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 149,988      $ 5,855       $ 9      $ 144,124   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

For the six months ended June 30, 2014

   Consolidated
Total
    Physician
Groups
     Unrestricted
Subsidiaries
    Company and
Restricted
Subsidiaries(1)
 

Net income

   $ 393,158      $ 8,929       $ (142   $ 384,371   

Other comprehensive income

     3,311        —          —         3,311   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

     396,469        8,929         (142     387,682   

Less: comprehensive income attributable to the noncontrolling interests

     (62,186     —          —         (62,186
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 334,283      $ 8,929       $ (142   $ 325,496   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)  After the elimination of the unrestricted subsidiaries and the physician groups

Condensed Consolidating Balance Sheets

 

As of June 30, 2014

   Consolidated
Total
     Physician
Groups
     Unrestricted
Subsidiaries
     Company and
Restricted
Subsidiaries(1)
 

Cash and cash equivalents

   $ 1,420,973       $ 117,313       $ —        $ 1,303,660   

Accounts receivable, net

     1,550,252         239,428         —          1,310,824   

Other current assets

     1,190,022         27,776         —          1,162,246   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     4,161,247         384,517         —          3,776,730   

Property and equipment, net

     2,290,844         5,006         —          2,285,838   

Amortizable intangibles, net

     2,022,875         6,794         —          2,016,081   

Other long-term assets

     196,562         69,311         3,089         124,162   

Goodwill

     9,254,043         9,181         —          9,244,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 17,925,571       $ 474,809       $ 3,089       $ 17,447,673   
  

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

   $ 2,608,148       $ 175,238       $ —        $ 2,432,910   

Payables to parent

     —          202,448         3,089         (205,537

Long-term debt and other long-term liabilities

     9,600,356         83,106         —          9,517,250   

Noncontrolling interests subject to put provisions

     760,242         —          —          760,242   

Total DaVita HealthCare Partners Inc. shareholders’ equity

     4,785,771         14,017         —          4,771,754   

Noncontrolling interests not subject to put provisions

     171,054         —          —          171,054   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shareholders’ equity

     4,956,825         14,017         —          4,942,808   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and shareholder’s equity

   $ 17,925,571       $ 474,809       $ 3,089       $ 17,447,673   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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)

 

As of December 31, 2013

   Consolidated
Total
     Physician
Groups
     Unrestricted
Subsidiaries
     Company and
Restricted
Subsidiaries(1)
 

Cash and cash equivalents

   $ 946,249       $ 127,309       $ —        $ 818,940   

Accounts receivable, net

     1,485,163         235,463         —          1,249,700   

Other current assets

     1,040,866         35,640         —          1,005,226   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     3,472,278         398,412         —          3,073,866   

Property and equipment, net

     2,189,411         5,541         —          2,183,870   

Amortizable intangibles, net

     2,024,373         7,283         —          2,017,090   

Other long-term assets

     199,841         64,013         3,325         132,503   

Goodwill

     9,212,974         8,981         —          9,203,993   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 17,098,877       $ 484,230       $ 3,325       $ 16,611,322   
  

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

   $ 2,462,049       $ 193,079       $ —        $ 2,268,970   

Payables to parent

     —          194,958         3,325         (198,283

Long-term debt and other long-term liabilities

     9,333,987         94,727         —          9,239,260   

Noncontrolling interests subject to put provisions

     697,300         —          —          697,300   

Total DaVita HealthCare Partners Inc. shareholders’ equity

     4,432,479         1,466         —          4,431,013   

Noncontrolling interests not subject to put provisions

     173,062         —          —          173,062   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shareholders’ equity

     4,605,541         1,466         —          4,604,075   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and shareholder’s equity

   $ 17,098,877       $ 484,230       $ 3,325       $ 16,611,322   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  After the elimination of the unrestricted subsidiaries and the physician groups

 

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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)

 

Condensed Consolidating Statements of Cash Flows

 

For the six months ended June 30, 2014

   Consolidated
Total
    Physician
Groups
    Unrestricted
Subsidiaries
    Company and
Restricted
Subsidiaries(1)
 

Cash flows from operating activities:

        

Net income

   $ 393,158      $ 8,929      $ (142   $ 384,371   

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

     288,340        (27,961     142        316,159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     681,498        (19,032     —         700,530   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Additions of property and equipment

     (278,593     (20     —         (278,573

Acquisitions and divestitures, net

     (98,442     —         —         (98,442

Proceeds from discontinued operations

     215        —         —         215   

Investments and other items

     (66,035     (2,276     —         (63,759
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (442,855     (2,296     —         (440,559
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Long-term debt

     348,436        —         —         348,436   

Intercompany

     —         11,332        —         (11,332

Other items

     (111,788     —         —         (111,788
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     236,648        11,332        —         225,316   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (567     —         —         (567

Net increase (decrease) in cash

     474,724        (9,996     —         484,720   

Cash at beginning of year

     946,249        127,309        —         818,940   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of year

   $ 1,420,973      $ 117,313      $ —       $ 1,303,660   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  After the elimination of the unrestricted subsidiaries and the physician groups

 

40


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

Forward-looking statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking statements within the meaning of the federal securities laws. All statements that do not concern historical facts are forward-looking statements and include, among other things, statements about our expectations, beliefs, intentions and/or strategies for the future. These forward-looking statements include statements regarding our future operations, financial condition and prospects, expectations for treatment growth rates, revenue per treatment, expense growth, levels of the provision for uncollectible accounts receivable, operating income, cash flow, operating cash flow, estimated tax rates, capital expenditures, the development of new dialysis centers and dialysis center acquisitions, government and commercial payment rates, revenue estimating risk and the impact of our level of indebtedness on our financial performance, and including earnings per share. These statements involve substantial known and unknown risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements, including but not limited to, risks resulting from the concentration of profits generated by higher-paying commercial payor plans for which there is continued downward pressure on average realized payment rates, and a reduction in the number of patients under such plans, which may result in the loss of revenues or patients, a reduction in government payment rates under the Medicare ESRD program or other government-based programs, the impact of the Center for Medicare and Medicaid Services (CMS) 2014 Medicare Advantage benchmark structure, risks arising from potential federal and/or state legislation that could have an adverse effect on our operations and profitability, changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing, legal compliance risks, including our continued compliance with complex government regulations and current or potential investigations by various government entities and related government or private-party proceedings, including risks relating to the resolution of the 2010 and 2011 U.S. Attorney Physician Relationship Investigations, such as restrictions on our business and operations required by a corporate integrity agreement and other settlement terms, and the financial impact thereof, continued increased competition from large and medium-sized dialysis providers that compete directly with us, our ability to maintain contracts with physician medical directors, changing affiliation models for physicians, and the emergence of new models of care introduced by the government or private sector that may erode our patient base and reimbursement rates such as accountable care organizations (ACOs), independent practice associations (IPAs) and integrated delivery systems, or to businesses outside of dialysis and HCP’s business, our ability to complete acquisitions, mergers or dispositions that we might be considering or announce, or to integrate and successfully operate any business we may acquire or have acquired, including HCP, or to expand our operations and services to markets outside the U.S., variability of our cash flows, the risk that we might invest material amounts of capital and incur significant costs in connection with the growth and development of our international operations, yet we might not be able to operate them profitably anytime soon, if at all, risks arising from the use of accounting estimates, judgments and interpretations in our financial statements, loss of key HCP employees, potential disruption from the HCP transaction making it more difficult to maintain business and operational relationships with customers, partners, associated physicians and physician groups, hospitals and others, the risk that laws regulating the corporate practice of medicine could restrict the manner in which HCP conducts its business, the risk that the cost of providing services under HCP’s agreements may exceed our compensation, the risk that reductions in reimbursement rates, including Medicare Advantage rates, and future regulations may negatively impact HCP’s business, revenue and profitability, the risk that HCP may not be able to successfully establish a presence in new geographic regions or successfully address competitive threats that could reduce its profitability, the risk that a disruption in HCP’s healthcare provider networks could have an adverse effect on HCP’s business operations and profitability, the risk that reductions in the quality ratings of health maintenance organization plan customers of HCP could have an adverse effect on HCP’s business, or the risk that health plans that acquire health maintenance organizations may not be willing to contract with HCP or may be willing to contract only on less favorable terms, and the other risk factors set forth in Part II, Item 1A. of this Quarterly Report on Form 10-Q. We base our forward-looking statements on information currently available to us, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in underlying factors, new information, future events or otherwise.

 

41


Table of Contents

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

Consolidated results of operations

We operate two major divisions, Kidney Care and HealthCare Partners (HCP). Our Kidney Care division is comprised of our U.S. dialysis and related lab services business, our ancillary services and strategic initiatives including our international operations, and our corporate support expenses. Our HCP division is comprised of our HCP business.

Our largest major line of business is our U.S. dialysis and related lab services, which is a leading provider of kidney dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as ESRD. Our other major line of business is HCP, which is a patient- and physician-focused integrated health care delivery and management company.

Following is a summary of our consolidated operating results for the second quarter of 2014 compared with the prior sequential quarter and the same quarter of 2013, as well as the six months ended June 30, 2014 compared to the same period in 2013, for reference in the discussion that follows.

 

     Three months ended     Six months ended  
     June 30,
2014
    March 31,
2014
    June 30,
2013
    June 30,
2014
    June 30,
2013
 
     (dollar amounts rounded to nearest million)  

Net revenues:

                    

Patient service revenues

   $ 2,187        $ 2,114        $ 2,049        $ 4,301        $ 4,028     

Less: Provision for uncollectible accounts

     (88       (83       (72       (171       (142  
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net patient service revenues

     2,099          2,031          1,977          4,130          3,886     

Capitated revenues

     799          788          710          1,587          1,473     

Other revenues

     274          224          185          498          342     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total consolidated net revenues

     3,172        100     3,043        100     2,872        100     6,215        100     5,701        100
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Operating expenses and charges:

                    

Patient care costs

     2,247        71     2,180        71     2,015        70     4,426        71     3,975        70

General and administrative

     298        9     284        9     268        9     582        9     553        10

Depreciation and amortization

     146        5     142        5     131        5