10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

For the Quarterly Period Ended March 31, 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 April 28, 2014, the number of shares of the Registrant’s common stock outstanding was approximately 214.2 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 $14.8 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 months ended March 31, 2014 and March 31, 2013      1   
  Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and March 31, 2013      2   
  Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013      3   
  Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and March 31, 2013      4   
  Consolidated Statements of Equity for the three months ended March 31, 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      31   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      48   
Item 4.   Controls and Procedures      50   
  PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings      51   
Item 1A.   Risk Factors      51   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      79   
Item 6.   Exhibits      80   
  Signature      81   

 

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
March 31,
 
     2014     2013  

Patient service revenues

   $ 2,114,098      $ 1,979,873   

Less: Provision for uncollectible accounts

     (83,197     (70,057
  

 

 

   

 

 

 

Net patient service revenues

     2,030,901        1,909,816   

Capitated revenues

     787,565        762,615   

Other revenues

     224,310        157,151   
  

 

 

   

 

 

 

Total net revenues

     3,042,776        2,829,582   
  

 

 

   

 

 

 

Operating expenses and charges:

    

Patient care costs and other costs

     2,179,772        1,960,891   

General and administrative

     284,061        284,410   

Depreciation and amortization

     142,579        125,909   

Provision for uncollectible accounts

     2,511        878   

Equity investment income

     (7,372     (9,367

Loss contingency reserve

     —          300,000   
  

 

 

   

 

 

 

Total operating expenses and charges

     2,601,551        2,662,721   
  

 

 

   

 

 

 

Operating income

     441,225        166,861   

Debt expense

     (106,335     (105,817

Other income, net

     1,698        598   
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     336,588        61,642   

Income tax expense

     124,851        15,144   
  

 

 

   

 

 

 

Income from continuing operations

     211,737        46,498   

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

     211,737        59,734   

Less: Net income attributable to noncontrolling interests

     (28,448     (29,570
  

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

   $ 183,289      $ 30,164   
  

 

 

   

 

 

 

Earnings per share:

    

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

   $ 0.87      $ 0.08   
  

 

 

   

 

 

 

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

   $ 0.87      $ 0.14   
  

 

 

   

 

 

 

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

   $ 0.85      $ 0.08   
  

 

 

   

 

 

 

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

   $ 0.85      $ 0.14   
  

 

 

   

 

 

 

Weighted average shares for earnings per share:

    

Basic

     211,375,232        208,968,952   
  

 

 

   

 

 

 

Diluted

     216,118,922        214,127,266   
  

 

 

   

 

 

 

Amounts attributable to DaVita HealthCare Partners Inc.:

    

Income from continuing operations

   $ 183,289      $ 16,915   

Discontinued operations

     —          13,249   
  

 

 

   

 

 

 

Net income

   $ 183,289      $ 30,164   
  

 

 

   

 

 

 

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
March 31,
 
     2014     2013  

Net income

   $ 211,737      $ 59,734   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

    

Unrealized losses on interest rate swap and cap agreements:

    

Unrealized losses on interest rate swap and cap agreements

     (2,505     (2,369

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

     3,359        2,507   

Unrealized gains on investments:

    

Unrealized gain on investments

     331        618   

Reclassification of net investment realized gains into net income

     (207     (94

Foreign currency translation adjustments

     28        (2,106
  

 

 

   

 

 

 

Other comprehensive income (loss)

     1,006        (1,444
  

 

 

   

 

 

 

Total comprehensive income

     212,743        58,290   

Less: Comprehensive income attributable to noncontrolling interests

     (28,448     (29,570
  

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 184,295      $ 28,720   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except per share data)

 

     March 31,
2014
    December 31,
2013
 

ASSETS

    

Cash and cash equivalents

   $ 1,108,069      $ 946,249   

Short-term investments

     8,080        6,801   

Accounts receivable, less allowance of $247,108 and $237,143

     1,539,728        1,485,163   

Inventories

     101,173        88,805   

Other receivables

     374,017        349,090   

Other current assets

     169,628        176,414   

Income tax receivable

     —          10,315   

Deferred income taxes

     406,538        409,441   
  

 

 

   

 

 

 

Total current assets

     3,707,233        3,472,278   

Property and equipment, net of accumulated depreciation of $1,857,718 and $1,778,259

     2,224,439        2,189,411   

Intangibles, net of accumulated amortization of $530,540 and $483,773

     2,025,822        2,024,373   

Equity investments

     40,727        40,686   

Long-term investments

     81,033        79,557   

Other long-term assets

     76,909        79,598   

Goodwill

     9,242,179        9,212,974   
  

 

 

   

 

 

 
   $ 17,398,342      $ 17,098,877   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Accounts payable

   $ 392,907      $ 435,465   

Other liabilities

     486,565        464,422   

Accrued compensation and benefits

     629,669        603,013   

Medical payables

     284,759        287,452   

Loss contingency reserve

     397,000        397,000   

Current portion of long-term debt

     292,220        274,697   

Income tax payable

     83,054        —     
  

 

 

   

 

 

 

Total current liabilities

     2,566,174        2,462,049   

Long-term debt

     8,071,622        8,141,231   

Other long-term liabilities

     407,288        380,337   

Deferred income taxes

     822,842        812,419   
  

 

 

   

 

 

 

Total liabilities

     11,867,926        11,796,036   

Commitments and contingencies

    

Noncontrolling interests subject to put provisions

     692,780        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; 214,045,116 and 213,163,248 shares issued and outstanding at March 31, 2014 and at December 31, 2013, respectively)

     214        213   

Additional paid-in capital

     1,113,714        1,070,922   

Retained earnings

     3,547,278        3,363,989   

Accumulated other comprehensive loss

     (1,639     (2,645
  

 

 

   

 

 

 

Total DaVita HealthCare Partners Inc. shareholders’ equity

     4,659,567        4,432,479   

Noncontrolling interests not subject to put provisions

     178,069        173,062   
  

 

 

   

 

 

 

Total equity

     4,837,636        4,605,541   
  

 

 

   

 

 

 
   $ 17,398,342      $ 17,098,877   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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DAVITA HEALTHCARE PARTNERS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

     Three months ended
March 31,
 
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 211,737      $ 59,734   

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

    

Loss contingency reserve

     —          300,000   

Depreciation and amortization

     142,565        125,756   

Stock-based compensation expense

     15,074        16,021   

Tax benefits from stock award exercises

     22,978        9,368   

Excess tax benefits from stock award exercises

     (18,336     (6,957

Deferred income taxes

     8,902        (111,331

Equity investment income, net

     (187     (2,486

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

     8,346        (11,396

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

    

Accounts receivable

     (54,565     (92,339

Inventories

     (12,280     2,162   

Other receivables and other current assets

     (17,740     (32,281

Other long-term assets

     1,418        (9,865

Accounts payable

     (42,558     (83,896

Accrued compensation and benefits

     23,570        (3,790

Other current liabilities

     20,615        79,277   

Income taxes

     92,905        93,401   

Other long-term liabilities

     16,663        47,829   
  

 

 

   

 

 

 

Net cash provided by operating activities

     419,107        379,207   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions of property and equipment, net

     (126,562     (116,724

Acquisitions

     (67,857     (91,498

Proceeds from asset and business sales

     56        62,357   

Purchase of investments available for sale

     (1,824     (1,212

Purchase of investments held-to-maturity

     (2,511     (4

Proceeds from sale of investments available for sale

     1,262        1,091   

Proceeds from sale of investments held to maturity

     1,508        —     

Purchase of intangible assets

     (11     (137

Distributions received on equity investments

     146        116   
  

 

 

   

 

 

 

Net cash used in investing activities

     (195,793     (146,011
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings

     16,179,463        16,797,510   

Payments on long-term debt and other financing costs

     (16,244,613     (16,861,197

Distributions to noncontrolling interests

     (33,147     (34,926

Stock award exercises and other share issuances, net

     3,450        5,833   

Excess tax benefits from stock award exercises

     18,336        6,957   

Contributions from noncontrolling interests

     13,625        14,257   

Proceeds from sales of additional noncontrolling interests

     761        4,174   
  

 

 

   

 

 

 

Net cash used in financing activities

     (62,125     (67,392

Effect of exchange rate changes on cash and cash equivalents

     631        119   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     161,820        165,923   

Cash and cash equivalents at beginning of the year

     946,249        533,748   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the year

   $ 1,108,069      $ 699,671   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Non-cash investing and financing activities:

    

Fixed assets under capital lease obligations

   $ 11,918      $ 13,594   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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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

    18,584              183,289              183,289        9,864   

Other comprehensive income

                  1,006        1,006     

Stock unit shares issued

      44          (27             (27  

Stock-settled SAR shares issued

      838        1       (1             —      

Stock-based compensation expense

          15,074                15,074     

Excess tax benefits from stock awards exercised

          18,336                18,336     

Distributions to noncontrolling interests

    (21,640                     (11,507

Contributions from noncontrolling interests

    6,975                        6,650   

Sales and assumptions of additional noncontrolling interests

    680            81                81     

Adjustment in ownership interests

          210                210     

Changes in fair value of noncontrolling interests

    (9,119         9,119                9,119     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

  $ 692,780        214,045      $ 214      $ 1,113,714      $ 3,547,278        —       $ —       $ (1,639   $ 4,659,567      $ 178,069   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 three months ended March 31, 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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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
March 31,
 
     2014     2013  

Basic:

    

Income from continuing operations attributable to DaVita HealthCare Partners Inc.

   $ 183,289      $ 16,915   

Discontinued operations attributable to DaVita HealthCare Partners Inc.

     —         13,249   
  

 

 

   

 

 

 

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

   $ 183,289      $ 30,164   
  

 

 

   

 

 

 

Weighted average shares outstanding during the period

     213,564        211,157   

Vested stock units

     5        6   

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

     (2,194     (2,194
  

 

 

   

 

 

 

Weighted average shares for basic earnings per share calculation

     211,375        208,969   
  

 

 

   

 

 

 

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

   $ 0.87      $ 0.08   

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

   $ —       $ 0.06   
  

 

 

   

 

 

 

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

   $ 0.87      $ 0.14   
  

 

 

   

 

 

 

Diluted:

    

Income from continuing operations attributable to DaVita HealthCare Partners Inc.

   $ 183,289      $ 16,915   

Discontinued operations attributable to DaVita HealthCare Partners Inc.

     —         13,249   
  

 

 

   

 

 

 

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

   $ 183,289      $ 30,164   
  

 

 

   

 

 

 

Weighted average shares outstanding during the period

     213,564        211,157   

Vested stock units

     5        6   

Assumed incremental shares from stock plans

     2,550        2,964   
  

 

 

   

 

 

 

Weighted average shares for diluted earnings per share calculation

     216,119        214,127   
  

 

 

   

 

 

 

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

   $ 0.85      $ 0.08   

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

   $ —       $ 0.06   
  

 

 

   

 

 

 

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

   $ 0.85      $ 0.14   
  

 

 

   

 

 

 

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

     2,999        2,187   
  

 

 

   

 

 

 

 

(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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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 three months ended March 31, 2014, the Company’s allowance for doubtful accounts increased by approximately $9,965. This was primarily due to an increase in the bad debt provision from 3.5% to 4.0% related to our 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:

 

     March 31, 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

   $ 6,604       $ —        $ 6,604       $ 5,601       $ —        $ 5,601   

Investments in mutual funds and common stock

     —          20,532         20,532         —          19,421         19,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,604       $ 20,532       $ 27,136       $ 5,601       $ 19,421       $ 25,022   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

   $ 6,604       $ 1,476       $ 8,080       $ 5,601       $ 1,200       $ 6,801   

Long-term investments

     —          19,056         19,056         —          18,221         18,221   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,604       $ 20,532       $ 27,136       $ 5,601       $ 19,421       $ 25,022   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 cost of the certificates of deposit and money market funds at March 31, 2014 and December 31, 2013 approximates their fair value. As of March 31, 2014 and December 31, 2013, the available-for-sale investments included $5,286 and $5,096 of gross pre-tax unrealized gains, respectively. During the three months ended March 31, 2014, the Company recorded gross pre-tax unrealized gains of $530, or $331 after tax, in other comprehensive income associated with changes in the fair value of these investments. During the three months ended March 31, 2014, the Company sold investments in mutual funds for net proceeds of $1,262 and recognized a pre-tax gain of $340, or $207 after-tax, which was previously recorded in other comprehensive income. During the three months ended March 31, 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 March 31, 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 March 31, 2014, this minimum cash balance was approximately $52,000.

5. Goodwill

Changes in goodwill by reportable segments were as follows:

 

     Three months ended March 31, 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         26,194         —           29,109   

Other adjustments

     —           —          96         96   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2014

   $ 5,472,388       $ 3,542,356       $ 227,435       $ 9,242,179   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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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DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

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

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

During the first quarter of 2014, the Company did not record any goodwill impairment charges. As of March 31, 2014, none of the goodwill associated with the Company’s various reporting units was considered at risk of impairment. Since the dates of the Company’s last annual goodwill impairment tests, there have been 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, other than California, where state regulation allows for the assumption of global risk. Health care costs payable are included in medical payables.

The following table shows the components of changes in the health care costs payable for the three months ended March 31, 2014:

 

     Three monthsended
March 31, 2014
 

Health care costs payable, beginning of the period

   $ 172,310   
  

 

 

 

Add: Components of incurred health care costs

  

Current year

     380,918   

Prior years

     3,824   
  

 

 

 

Total incurred health care costs

     384,742   
  

 

 

 

Less: Claims paid

  

Current year

     220,478   

Prior years

     140,078   
  

 

 

 

Total claims paid

     360,556   
  

 

 

 

Health care costs payable, end of the period

   $ 196,496   
  

 

 

 

Our prior year estimates of health care costs payable increased by $3,824 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

 

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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)

 

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 March 31, 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 $60,762, of which $33,151 would impact the Company’s effective tax rate if recognized. This balance represents an increase of $224 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 March 31, 2014 and December 31, 2013, the Company had approximately $11,746 and $10,742, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefits.

As of March 31, 2014, it is reasonably possible that $27,611 of unrecognized tax benefits may be recognized within the next 12 months, primarily related to the filing of tax accounting method changes.

8. Long-term debt

Long-term debt was comprised of the following:

 

     March 31,
2014
    December 31,
2013
 

Senior Secured Credit Facilities:

    

Term Loan A

   $ 762,500      $ 800,000   

Term Loan A-3

     1,265,625        1,282,500   

Term Loan B

     1,693,125        1,697,500   

Term Loan B-2

     1,629,375        1,633,500   

Senior notes

     2,800,000        2,800,000   

Acquisition obligations and other notes payable

     66,825        67,352   

Capital lease obligations

     163,106        152,751   
  

 

 

   

 

 

 

Total debt principal outstanding

     8,380,556        8,433,603   

Discount on long-term debt

     (16,714     (17,675
  

 

 

   

 

 

 
     8,363,842        8,415,928   

Less current portion

     (292,220     (274,697
  

 

 

   

 

 

 
   $ 8,071,622      $ 8,141,231   
  

 

 

   

 

 

 

Scheduled maturities of long-term debt at March 31, 2014 were as follows:

 

2014

     208,890   

2015

     845,479   

2016

     1,897,968   

2017

     911,372   

2018

     807,601   

2019

     1,565,989   

Thereafter

     2,143,257   

 

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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)

 

During the first three months of 2014, the Company made mandatory principal payments under its 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.

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 Term Loan B debt and Term Loan B-2 debt, as described below. Certain cap agreements are also designated as cash flow hedges and, as a result, changes in the fair values of these cap agreements are reported in other comprehensive income. Certain other cap agreements are 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 March 31, 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 $1,265,625. These agreements have the economic effect of modifying the LIBOR variable component of the Company’s interest rate on an equivalent amount of the Company’s Term Loan A-3 to fixed rates ranging from 0.49% to 0.52%, resulting in an overall weighted average effective interest rate of 3.01%, including the Term Loan A-3 margin of 2.50%. The swap agreements expire on September 30, 2016 and require monthly interest payments. During the three months ended March 31, 2014, the Company recognized debt expense of $1,104 from these swaps. As of March 31, 2014, the total fair value of these swap agreements was a net asset of approximately $3,717. The Company estimates that approximately $3,930 of existing unrealized pre-tax losses in other comprehensive income at March 31, 2014 will be reclassified into income over the next twelve months.

In addition, as of March 31, 2014, the Company also maintains several forward interest rate swap agreements that were entered into in March 2013 with notional amounts totaling $600,000 that will amortize after the swap agreements have become effective. These forward swap agreements will be effective September 30, 2014 and will have the economic effect of modifying the LIBOR variable component of the Company’s interest rate on an equivalent amount of the Company’s outstanding debt to fixed rates ranging from 0.72% to 0.75%. These swap agreements expire on September 30, 2016 and will require monthly interest payments beginning in October 2014. Any unrealized gains or losses resulting from changes in the fair value of these swaps is recorded in other comprehensive income. As of March 31, 2014, the total fair value of these swap agreements was a net asset of approximately $880. The Company estimates that approximately $1,555 of existing unrealized pre-tax losses in other comprehensive income at March 31, 2014 will be reclassified into income over the next twelve months.

As of March 31, 2014, the Company maintains several interest rate cap agreements that were entered into in March 2013 with notional amounts totaling $1,250,000 on the Company’s Term Loan B debt and $1,485,000 on the Company’s Term Loan B-2 debt. These agreements have the economic effect of capping the LIBOR variable

 

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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)

 

component of the Company’s interest rate at a maximum of 2.50% on an equivalent amount of the Company’s Term Loan B and Term Loan B-2 debt. During the three months ended March 31, 2014, the Company recognized debt expense of $610 from these caps. The cap agreements expire on September 30, 2016. As of March 31, 2014, the total fair value of these cap agreements was an asset of approximately $6,219. During the three months ended March 31, 2014, the Company recorded a loss of $1,347 in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements.

As of March 31, 2014, the Company also maintains a total of nine other interest rate swap agreements with amortizing notional amounts totaling $762,500. These agreements had the economic effect of modifying the LIBOR variable component of the Company’s interest rate on an equivalent amount of the Company’s Term Loan A to fixed rates ranging from 1.59% to 1.64%, resulting in an overall weighted average effective interest rate of 4.36%, including the Term Loan A margin of 2.75%. The swap agreements expire on September 30, 2014 and require monthly interest payments. During the three months ended March 31, 2014, the Company recognized debt expense of $2,903 from these swaps. As of March 31, 2014, the total fair value of these swap agreements was a liability of approximately $5,420. The Company estimates that approximately $5,420 of existing unrealized pre-tax losses in other comprehensive income at March 31, 2014 will be reclassified into income over the next twelve months.

As of March 31, 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 Term Loan B debt. However, as a result of the new interest rate cap agreements that were entered into in March 2013, as described above, these interest rate cap agreements became ineffective cash flow hedges and as a result any changes in the fair value associated with these interest rate cap agreements will be charged to income. During the three months ended March 31, 2014, the Company recognized debt expense of $897 from these caps. The cap agreements expire on September 30, 2014.

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

 

    

March 31, 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    $ 10,905       Other short-term liabilities    $ 12,069   
     

 

 

       

 

 

 

Interest rate swap agreements

   Other long-term assets    $ 10,081       Other long-term assets    $ 10,004   
     

 

 

       

 

 

 

Interest rate cap agreements

   Other long-term assets    $ 6,219       Other long-term assets    $ 7,567   
     

 

 

       

 

 

 

 

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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 summarizes the effects of the Company’s interest rate swap and cap agreements for the three months ended March 31, 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
 
     Three months ended
March 31,
       Three months ended
March 31,
 

Derivatives designated as cash flow hedges

       2014             2013            2014     2013  

Interest rate swap agreements

   $ (2,764   $ (964     Debt expense       $ (4,006   $ (3,207

Interest rate cap agreements

     (1,347     (2,913     Debt expense         (1,507     (897

Tax benefit

     1,606        1,508           2,154        1,597   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total

   $ (2,505   $ (2,369      $ (3,359   $ (2,507
  

 

 

   

 

 

      

 

 

   

 

 

 

As of March 31, 2014, interest rates on the Company’s Term Loan B and Term Loan B-2 debt are effectively fixed because of an embedded LIBOR floor which is higher than actual LIBOR as of such date and these term loans are 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 rates on the Company’s Term Loan A and the Term Loan A-3 are economically fixed as a result of interest rate swaps.

As a result of embedded LIBOR floors in some of the Company’s debt agreements and the swap and cap agreements, the Company’s overall weighted average effective interest rate on the Senior Secured Credit Facilities was 4.19%, based upon the current margins in effect of 2.75% for the Term Loan A, 2.50% for the Term Loan A-3 and 3.00% for both the Term Loan B and for the Term Loan B-2, as of March 31, 2014.

The Company’s overall weighted average effective interest rate during the first quarter of 2014 was 4.89% and as of March 31, 2014 was 4.87%.

As of March 31, 2014, the Company had undrawn revolving credit facilities totaling $350,000 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.

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

 

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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)

 

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.

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

 

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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)

 

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.

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

 

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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)

 

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.

Other

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

A wage and hour claim, which has been styled as a class action, is pending against the Company in the Superior Court of California. The Company was served with the complaint in this lawsuit in April 2008, and it has been amended since that time. The complaint, as amended, alleges that the Company failed to provide meal periods, failed to pay compensation in lieu of providing rest or meal periods, failed to pay overtime, and failed to comply with certain other California Labor Code requirements. In September 2011, the court denied the plaintiffs’ motion for class certification. Plaintiffs appealed that decision. In January 2013, the Court of Appeals affirmed the trial court’s decision on some claims, but remanded the case to the trial court for clarification of its decision on one of the claims. The Company has reached an agreement with the plaintiffs to settle the claim that was remanded to the trial court, and the court has preliminarily approved that settlement. The amount of the settlement is not material to the Company’s 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.

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

 

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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)

 

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 interests subject to put provisions can fluctuate and the implicit multiple of earnings at which these noncontrolling interests obligations may be settled will vary significantly depending upon market conditions including potential purchasers’ access to the capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses, the economic performance of these businesses and the restricted marketability of the third-party owners’ noncontrolling interests. The amount of noncontrolling interests subject to put provisions that 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. Stock-based compensation

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 three months ended March 31, 2014, the Company granted 29 stock-settled stock appreciation rights with an aggregate grant-date fair value of $452 and a weighted-average expected life of approximately 4.3 years, and also granted 2 stock units with an aggregate grant-date fair value of $167 and a weighted-average expected life of approximately 0.2 years.

 

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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)

 

For the three months ended March 31, 2014 and 2013, the Company recognized $15,074 and $16,021, respectively, in stock-based compensation expense for stock appreciation rights, stock units and discounted employee stock plan purchases, which are primarily included in general and administrative expenses. The estimated tax benefits recorded for stock-based compensation through March 31, 2014 and 2013 was $5,580 and $6,088, respectively. As of March 31, 2014, there was $79,262 of total estimated unrecognized compensation cost related to unvested stock-based compensation arrangements under the Company’s equity compensation and stock purchase plans. The Company expects to recognize this cost over a weighted average remaining period of 1.2 years.

For the three months ended March 31, 2014 and 2013, the Company received $22,978 and $9,368, respectively, in actual tax benefits upon the exercise of stock awards.

12. Comprehensive income

 

    For the three months ended
March 31, 2014
    For the three months ended
March 31, 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

  $ (2,344   $ 3,120      $ (3,421   $ (2,645   $ (15,402   $ 1,310      $ (1,205   $ (15,297
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (losses) gains

    (4,111     530        28        (3,553     (3,877     1,011        (2,106     (4,972

Related income tax benefit (expense)

    1,606        (199     —         1,407        1,508        (393     —         1,115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (2,505     331        28        (2,146     (2,369     618        (2,106     (3,857
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification from accumulated other comprehensive income into net income

    5,513        (340     —         5,173        4,104        (155     —         3,949   

Related tax

    (2,154     133        —         (2,021     (1,597     61        —         (1,536
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,359        (207     —         3,152        2,507        (94     —         2,413   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ (1,490   $ 3,244      $ (3,393   $ (1,639   $ (15,264   $ 1,834      $ (3,311   $ (16,741
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 three months of 2014, the Company acquired dialysis businesses and other businesses consisting of one dialysis center located in the U.S. and other medical businesses for a total of $67,857 in net cash and deferred

 

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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)

 

purchase price obligations totaling $10,100. 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:

 

     Three months ended
March 31, 2014
 

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

   $ 646   

Amortizable intangible and other long-term assets

     48,443   

Goodwill

     29,109   

Other adjustments

     (241
  

 

 

 

Aggregate purchase price

   $ 77,957   
  

 

 

 

Amortizable intangible assets acquired during the first three months of 2014 had weighted-average estimated useful lives of 10 years. The total amount of goodwill deductible for tax purposes associated with these acquisitions was approximately $19,196.

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 $131,500 or a certain portion of that amount if certain EBITDA performance targets and quality margins are met over the next three years, if certain percentages of operating income are met over the next five years or if certain percentages of other annual EBITDA targets are met. As of March 31, 2014, the Company has estimated the fair value of these contingent earn-out obligations to be $36,691.

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 $36,691 recognized at March 31, 2014, a total of $6,577 is included in other accrued liabilities and the remaining $30,114 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 three months ended March 31, 2014:

 

Beginning balance, January 1, 2014

  $  28,058   

Contingent earn-out obligations associated with acquisitions

    9,875   

Remeasurement of fair value for other contingent earn-outs

    (1,026

Payments of contingent earn-outs

    (216
 

 

 

 
  $ 36,691   
 

 

 

 

 

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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)

 

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. GAAP, VIEs typically include (i) those for which the entity’s equity is not sufficient to finance its activities without additional subordinated financial support; (ii) those for which the equity holders as a group lack the power to direct the activities that most significantly influence the entity’s economic performance, the obligation to absorb the entity’s expected losses, or the right to receive the entity’s expected returns; or (iii) those for which the voting rights of some investors are not proportional to their obligations to absorb the entity’s losses.

Under U.S. GAAP, the Company has determined that substantially all of the entities it is associated with that qualify as VIEs must be included in its consolidated financial statements. The Company manages these entities and provides operating and capital funding as necessary for the entities to accomplish their operational and strategic objectives. A number of these entities are subject to nominee share ownership or share transfer restriction agreements that effectively transfer the majority of the economic risks and rewards of their ownership to the Company. In other cases the Company’s management agreements with these entities include both financial terms and protective and participating rights to the entities’ operating, strategic and non-clinical governance decisions which transfer substantial powers over and economic responsibility for the entities to the Company. In 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 March 31, 2014, these consolidated financial statements include total assets of VIEs of $519,107 and total liabilities and noncontrolling interests of VIEs to third parties of $327,732.

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.

 

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DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

The following table summarizes the Company’s assets, liabilities and temporary equity measured at fair value on a recurring basis as of March 31, 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

   $ 20,532       $ 20,532       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate cap agreements

   $ 6,219       $ —        $ 6,219       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap agreements

   $ 10,081       $ —        $ 10,081       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Funds on deposit with third parties

   $ 74,954       $ 74,954       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent earn-out obligations

   $ 36,691       $ —        $ —        $ 36,691   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap agreements

   $ 10,905       $ —        $ 10,905       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Temporary equity

           

Noncontrolling interests subject to put provisions

   $ 692,780       $ —        $ —        $ 692,780   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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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)

 

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 March 31, 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 $5,333,911 as of March 31, 2014, and the fair value was approximately $5,370,500 based upon quoted market prices. The fair value of the Company’s senior notes was approximately $2,971,200 at March 31, 2014 based upon quoted market prices, as compared to the carrying amount of $2,800,000.

16. Segment reporting

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

As of March 31, 2014, the ancillary services and strategic initiatives consisted primarily of pharmacy services, disease management services, vascular access services, ESRD clinical research programs, physician services, direct primary care and the Company’s international dialysis operations.

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

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

The Company’s operating segment financial information included in this report is prepared on the internal management reporting basis that the chief operating decision 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 consists primarily of indirect labor, benefits and long-term incentive based compensation of certain departments which provide support to all of the Company’s different operating lines of business. Corporate support expenses in the first quarter of 2014, have been reduced by internal management fees paid by the Company’s ancillary lines of businesses.

 

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DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

The following 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
March 31,
 
     2014     2013  

Segment net revenues:

    

U.S. dialysis and related lab services

    

Patient service revenues:

    

External sources

   $ 2,028,743      $ 1,908,783   

Intersegment revenues

     7,832        7,511   
  

 

 

   

 

 

 

Total dialysis and related lab services revenues

     2,036,575        1,916,294   

Less: Provision for uncollectible accounts

     (81,463     (67,071
  

 

 

   

 

 

 

Net dialysis and related lab services patient service revenues

     1,955,112        1,849,223   

Other revenues(1)

     3,154        2,895   
  

 

 

   

 

 

 

Total net dialysis and related lab services revenues

     1,958,266        1,852,118   
  

 

 

   

 

 

 

HCP

    

HCP revenues:

    

Capitated revenues

     771,542        746,071   

Net patient service revenues

     56,222        53,602   

Other revenues(2)

     12,523        4,086   

Intersegment capitated and other revenues

     152        —    
  

 

 

   

 

 

 

Total revenues

     840,439        803,759   
  

 

 

   

 

 

 

Other—Ancillary services and strategic initiatives

    

Net patient service revenues—U.S.

     4,153        3,439   

Net patient service revenues—International.

     23,246        11,063   

Capitated revenues

     16,023        16,544   

Other external sources—U.S.

     206,955        148,758   

Other external sources—International.

     1,678        1,412   

Intersegment revenues

     4,819        2,779   
  

 

 

   

 

 

 

Total ancillary services and strategic initiatives revenues

     256,874        183,995   
  

 

 

   

 

 

 

Total net segment revenues

     3,055,579        2,839,872   

Elimination of intersegment revenues

     (12,803     (10,290
  

 

 

   

 

 

 

Consolidated net revenues

   $ 3,042,776      $ 2,829,582   
  

 

 

   

 

 

 

Segment operating margin (loss):

    

U.S. dialysis and related lab services

   $ 386,700      $ 84,813   

HCP

     53,953        108,084   

Other—Ancillary services and strategic initiatives

     1,678        (14,601
  

 

 

   

 

 

 

Total segment margin

     442,331        178,296   

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

    

Corporate support expenses

     (1,106     (11,435
  

 

 

   

 

 

 

Consolidated operating income

     441,225        166,861   

Debt expense

     (106,335     (105,817

Other income, net

     1,698        598   
  

 

 

   

 

 

 

Consolidated income from continuing operations before income taxes

   $ 336,588      $ 61,642   
  

 

 

   

 

 

 

 

(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.

 

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)

 

(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.

For the three months ended March 31, 2014, depreciation and amortization expense for the U.S. dialysis and related lab services, HCP and the ancillary services and strategic initiatives was $96,443, $41,737 and $4,399, respectively.

For the three months ended March 31, 2013, depreciation and amortization expense for the U.S. dialysis and related lab services, HCP and the ancillary services and strategic initiatives was $84,953, $38,017 and $2,939, respectively.

Summary of assets by segment is as follows:

 

    March 31,
2014
    December 31,
2013
 

Segment assets

   

U.S. dialysis and related lab services

  $ 10,451,802      $ 10,248,993   

HCP

    6,320,690        6,265,767   

Other—Ancillary services and strategic initiatives

    625,850        584,117   
 

 

 

   

 

 

 

Consolidated assets

  $ 17,398,342      $ 17,098,877   
 

 

 

   

 

 

 

For the three months ended March 31, 2014, the total amount of expenditures for property and equipment, excluding capital leases for the U.S. dialysis and related lab services was $113,230, $4,502 for HCP and was $8,830 for the ancillary services and strategic initiatives.

For the three months ended March 31, 2013, the total amount of expenditures for property and equipment, excluding capital leases for U.S. dialysis and related lab services, was $102,076, $6,539 for HCP and was $8,109 for the ancillary services and strategic initiatives.

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
March 31,
 
    2014     2013  

Net income attributable to DaVita HealthCare Partners Inc.

  $ 183,289      $ 30,164   
 

 

 

   

 

 

 

Increase (decrease) in paid-in capital for sales of noncontrolling interests

    81        (809

Increase in paid-in capital for adjustments in ownership interests

    210        —    
 

 

 

   

 

 

 

Net transfers to noncontrolling interests

    291        (809
 

 

 

   

 

 

 

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

  $ 183,580      $ 29,355   
 

 

 

   

 

 

 

 

25


Table of Contents

DAVITA HEALTHCARE PARTNERS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

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

 

18. New accounting standards

In April 2014, the FASB issued Accounting Standards Update (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.

 

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)

 

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 March 31, 2014

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

Patient service revenues

   $ —       $ 1,513,748      $ 598,887      $ 1,463      $ 2,114,098   

Less: Provision for uncollectible accounts

     —         (49,906     (33,291     —         (83,197
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     —         1,463,842        565,596        1,463        2,030,901   

Capitated revenues

     —         697,081        366,129        (275,645     787,565   

Other revenues

     163,043        393,304        32,291        (364,328     224,310   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     163,043        2,554,227        964,016        (638,510     3,042,776   

Operating expenses

     112,297        2,259,571        868,193        (638,510     2,601,551   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     50,746        294,656        95,823        —         441,225   

Debt expense

     (105,283     (91,437     (9,739     100,124        (106,335

Other income (expense)

     99,943        1,556        323        (100,124     1,698   

Income tax expense

     18,389        104,030        2,432        —         124,851   

Equity earnings in subsidiaries

     156,272        55,527        —         (211,799     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     183,289        156,272        83,975        (211,799     211,737   

Less: Net income attributable to noncontrolling interests

     —         —         —         (28,448     (28,448
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

   $ 183,289      $ 156,272      $ 83,975      $ (240,247   $ 183,289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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)

 

For the three months ended March 31, 2013

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

Patient service revenues

   $ —       $ 1,452,220      $ 536,658      $ (9,005   $ 1,979,873   

Less: Provision for uncollectible accounts

     —         (63,857     (6,200     —         (70,057
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues

     —         1,388,363        530,458        (9,005     1,909,816   

Capitated revenues

     —         360,024        403,675        (1,084     762,615   

Other revenues

     135,375        358,457        17,657        (354,338     157,151   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     135,375        2,106,844        951,790        (364,427     2,829,582   

Operating expenses

     120,504        2,081,223        825,421        (364,427     2,662,721   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     14,871        25,621        126,369        —         166,861   

Debt expense

     (105,331     (94,715     (10,723     104,952        (105,817

Other income (expense)

     100,221        5,967        (638     (104,952     598   

Income tax expense (benefit)

     4,597        (3,212     13,759        —         15,144   

Equity earnings in subsidiaries

     25,000        66,077        —         (91,077     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     30,164        6,162        101,249        (91,077     46,498   

Discontinued operations

     —         —         13,236        —         13,236   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     30,164        6,162        114,485        (91,077     59,734   

Less: Net income attributable to noncontrolling interests

     —         —         —         (29,570     (29,570
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DaVita HealthCare Partners Inc.

   $ 30,164      $ 6,162      $ 114,485      $ (120,647   $ 30,164   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statements of Comprehensive Income

 

For the three months ended March 31, 2014

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

Net income

   $ 183,289      $ 156,272       $ 83,975       $ (211,799   $ 211,737   

Other comprehensive income

     1,006        —          —          —         1,006   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     184,295        156,272         83,975         (211,799     212,743   

Less: comprehensive income attributable to the noncontrolling interests

     —         —          —          (28,448     (28,448
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 184,295      $ 156,272       $ 83,975       $ (240,247   $ 184,295   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

For the three months ended March 31, 2013

                                

Net income

   $ 30,164      $ 6,162       $ 114,485       $ (91,077   $ 59,734   

Other comprehensive loss

     (1,444     —          —          —         (1,444
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     28,720        6,162         114,485         (91,077     58,290   

Less: comprehensive income attributable to the noncontrolling interests

     —         —          —          (29,570     (29,570
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to DaVita HealthCare Partners Inc.

   $ 28,720      $ 6,162       $ 114,485       $ (120,647   $ 28,720   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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)

 

Condensed Consolidating Balance Sheets

 

As of March 31, 2014

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

Cash and cash equivalents

  $ 793,890      $ 142,955      $ 171,224      $ —       $ 1,108,069   

Accounts receivable, net

    —         974,294        565,434        —         1,539,728   

Other current assets

    28,046        933,748        97,642        —         1,059,436   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    821,936        2,050,997        834,300        —         3,707,233   

Property and equipment, net

    181,470        1,380,425        662,544        —         2,224,439   

Amortizable intangibles, net

    72,736        1,890,759        62,327        —         2,025,822   

Investments in subsidiaries

    8,451,785        1,407,504        —         (9,859,289     —    

Intercompany receivables

    3,820,966        —         453,436        (4,274,402     —    

Other long-term assets and investments

    60,391        69,829        68,449        —         198,669   

Goodwill

    —         7,878,857        1,363,322        —         9,242,179   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 13,409,284      $ 14,678,371      $ 3,444,378      $ (14,133,691   $ 17,398,342   

Current liabilities

    434,428        1,757,191        374,555        —         2,566,174   

Intercompany payables

    —         3,264,363        1,010,039        (4,274,402     —    

Long-term debt and other long-term liabilities

    7,873,226        1,205,032        223,494        —         9,301,752   

Noncontrolling interests subject to put provisions

    442,063        —         —         250,717        692,780   

Total DaVita HealthCare Partners Inc. shareholders’ equity

    4,659,567        8,451,785        1,407,504        (9,859,289     4,659,567   

Noncontrolling interests not subject to put provisions

    —         —         428,786        (250,717     178,069   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    4,659,567        8,451,785        1,836,290        (10,110,006     4,837,636   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 13,409,284      $ 14,678,371      $ 3,444,378      $ (14,133,691   $ 17,398,342   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2013

                             

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        904,852        108,104        —         1,040,866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    630,098        2,019,399        822,781        —         3,472,278   

Property and equipment, net

    177,633        1,378,017        633,761        —         2,189,411   

Amortizable intangibles, net

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

Investments in subsidiaries

    8,231,059        1,391,655        —         (9,622,714     —    

Intercompany receivables

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

Other long-term assets and investments

    61,391        70,728        67,722        —         199,841   

Goodwill

    —         7,850,910        1,362,064        —         9,212,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 13,160,926      $ 14,593,394      $ 3,431,478      $ (14,086,921   $ 17,098,877   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

  $ 328,875      $ 1,776,419      $ 356,755      $ —       $ 2,462,049   

Intercompany payables

    —         3,426,433        1,037,774        (4,464,207     —    

Long-term debt and other long-term liabilities

    7,948,390        1,159,483        226,114        —         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        1,391,655        (9,622,714     4,432,479   

Noncontrolling interests not subject to put provisions

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    4,432,479        8,231,059        1,810,835        (9,868,832     4,605,541   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 13,160,926      $ 14,593,394      $ 3,431,478      $ (14,086,921   $ 17,098,877   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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)

 

Condensed Consolidating Statements of Cash Flows

 

For the three months ended March 31, 2014

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

Cash flows from operating activities:

         

Net income

  $ 183,289      $ 156,272      $ 83,975      $ (211,799   $ 211,737   

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

    (28,933     (2,155     26,659        211,799        207,370   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    154,356        154,117        110,634        —         419,107   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Additions of property and equipment, net

    (11,100     (60,113     (55,349     —         (126,562

Acquisitions

    —         (67,857     —         —         (67,857

Proceeds from asset and business sales

    —         56        —         —         56   

Purchases/proceeds from investment sales and other items

    (776     135        (789     —         (1,430
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (11,876     (127,779     (56,138     —         (195,793
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Long-term debt and related financing costs, net

    (62,853     (1,579     (721     —         (65,153

Intercompany borrowing

    90,289        (57,572     (32,717     —         —    

Other items

    21,786        764        (19,522     —         3,028   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    49,222        (58,387     (52,960     —         (62,125
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

    —         —         631        —         631   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    191,702        (32,049     2,167        —         161,820   

Cash and cash equivalents at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 793,890      $ 142,955      $ 171,224      $ —       $ 1,108,069   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended March 31, 2013

                             

Cash flows from operating activities:

         

Net income

  $ 30,164      $ 6,162      $ 114,485      $ (91,077   $ 59,734   

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

    (26,097     302,603        (48,110     91,077        319,473   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

    4,067        308,765        66,375        —         379,207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Additions of property and equipment, net

    (19,582     (51,574     (45,568     —         (116,724

Acquisitions

    —         (81,505     (9,993     —         (91,498

Proceeds from asset sales

    60,650        1,707        —         —         62,357   

Purchases of investments and other items

    (125     (21     —         —         (146
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    40,943        (131,393     (55,561     —         (146,011
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Long-term debt and related financing costs, net

    (50,725     (3,907     (9,055     —         (63,687

Intercompany borrowing

    101,717        (121,198     19,481        —         —    

Other items

    12,790        4,174        (20,669     —         (3,705
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    63,782        (120,931     (10,243     —         (67,392
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

    —         —         119        —         119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

    108,792        56,441        690        —         165,923   

Cash and cash equivalents at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 303,829      $ 222,548      $ 173,294      $ —       $ 699,671   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 health care reform legislation that was enacted in the U.S. in March 2010, the impact of the Center for Medicare and Medicaid Services (CMS) 2014 Medicare Advantage benchmark structure, the impact of the American Taxpayer Relief Act, the impact of the sequestration that went into effect on April 1, 2013, the impact of disruptions in federal government operations and funding, 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 final 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 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.

 

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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 first quarter of 2014 compared with the prior sequential quarter and the same quarter of 2013 for reference in the discussion that follows.

 

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

Net revenues:

               

Patient service revenues

   $ 2,114         $ 2,152         $ 1,980      

Less: Provision for uncollectible accounts

     (83        (77        (70   
  

 

 

      

 

 

      

 

 

    

Net patient service revenues

     2,031           2,075           1,910      

Capitated revenues

     788           767           763      

Other revenues

     224           221           157      
  

 

 

      

 

 

      

 

 

    

Total consolidated net revenues

     3,043         100     3,063         100     2,830         100
  

 

 

      

 

 

      

 

 

    

Operating expenses and charges:

               

Patient care costs

     2,180         71     2,128         70     1,961         69

General and administrative

     284         9     319         10     284         10

Depreciation and amortization

     142         5     139         4     126         4

Provision for uncollectible accounts

     3         —          1         —          1         —     

Equity investment income

     (7      —          (8      —          (9      —     

Loss contingency reserve

     —           —          —           —          300         11
  

 

 

      

 

 

      

 

 

    

Total operating expenses and charges

     2,602         85     2,579         84     2,663         94
  

 

 

      

 

 

      

 

 

    

Operating income

   $ 441         15   $ 484         16   $ 167         6
  

 

 

      

 

 

      

 

 

    

 

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The following table summarizes consolidated net revenues for our Kidney Care division and our HCP division:

 

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

Net revenues:

      

Kidney Care:

      

U.S. dialysis and related lab services patient service revenues

   $ 2,037      $ 2,076      $ 1,916   

Less: Provision for uncollectible accounts

     (82     (72     (67
  

 

 

   

 

 

   

 

 

 

U.S. dialysis and related lab services net patient service revenues

   $ 1,955      $ 2,004      $ 1,849   

Other revenues

     3        3        3   
  

 

 

   

 

 

   

 

 

 

Total net U.S. dialysis and related lab services revenues

     1,958        2,007        1,852   
  

 

 

   

 

 

   

 

 

 

Other—Ancillary services and strategic initiatives revenues

     214        203        153   

Other—Capitated revenues

     16        16        16   

Other—Ancillary services and strategic initiatives net patient service revenues (less provision for uncollectable accounts)

     27        23        15   
  

 

 

   

 

 

   

 

 

 

Total net other-ancillary services and strategic initiatives revenues

     257        242        184   

Elimination of intersegment revenues

     (13     (15     (10
  

 

 

   

 

 

   

 

 

 

Total Kidney Care net revenues

     2,202        2,234        2,026   
  

 

 

   

 

 

   

 

 

 

HCP:

      

HCP capitated revenues

     772        752        746   

HCP net patient service revenues (less provision for uncollectible accounts)

     56        59        54   

Other revenues

     13        18        4   
  

 

 

   

 

 

   

 

 

 

Total net HCP revenues

     841        829        804   
  

 

 

   

 

 

   

 

 

 

Total consolidated net revenues

   $ 3,043      $ 3,063      $ 2,830   
  

 

 

   

 

 

   

 

 

 

The following table summarizes consolidated operating income and adjusted consolidated operating income:

 

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

Operating income:

     

Kidney Care:

     

U.S. dialysis and related lab services

  $ 387      $ 408      $ 85   

Other—Ancillary services and strategic initiatives income (losses)

    2        (9     (15

Corporate support expenses

    (2     (13     (11
 

 

 

   

 

 

   

 

 

 

Total kidney care operating income

    387        386        59   

HCP services

    54        98        108   
 

 

 

   

 

 

   

 

 

 

Total consolidated operating income

    441        484        167   

Reconciliation of non-GAAP measure:

     

Add:

     

Loss contingency reserve

    —          —          300   
 

 

 

   

 

 

   

 

 

 

Adjusted consolidated operating income(1)

  $ 441      $ 484      $ 467   
 

 

 

   

 

 

   

 

 

 

 

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(1) 

For the three months ended March 31, 2013, we have excluded a $300 million accrual related to an estimated loss contingency reserve. This is a non-GAAP measure and is not intended as a substitute for the GAAP equivalent measures. We have presented this adjusted amount because management believes that this presentation enhances a user’s understanding of our normal consolidated operating income by excluding an accrual of $300 million for an estimated loss contingency reserve related to the 2010 and 2011 U.S. Attorney Physician Relationship Investigations (see note 9 to the condensed consolidated financial statements). We therefore consider this adjusted consolidated operating income amount meaningful and comparable to our current and prior period results.

Consolidated net revenues

Consolidated net revenues for the first quarter of 2014 decreased by approximately $20 million, or approximately 0.7%, as compared to the fourth quarter of 2013. The decrease in consolidated net revenues was primarily due to a decrease of approximately $49 million associated with the U.S. dialysis and related lab services net revenues, principally due to three fewer treatment days in the first quarter of 2014 as compared to the fourth quarter of 2013, partially offset by additional treatments from strong non-acquired growth and an increase of $1 in the average dialysis revenue per treatment primarily due to an increase in acute services. The decrease in consolidated net revenues was partially offset by an increase of approximately $15 million associated with our ancillary services and strategic initiatives revenues primarily from additional pharmacy revenues. In addition, HCP’s net operating revenues increased by approximately $12 million, primarily due to additional senior capitated members, partially offset by a reduction in Medicare Advantage reimbursement payments.

Consolidated net revenues for the first quarter of 2014 increased by approximately $213 million, or approximately 7.5%, as compared to the first quarter of 2013. The increase in consolidated net revenues was primarily due to an increase of $106 million in the U.S. dialysis and related lab services net revenues, primarily as a result of strong volume growth from non-acquired treatment growth in existing and new centers, and an increase in HCP net revenues of $37 million, primarily due to an increase in senior capitated members in the first quarter of 2014, partially offset by a reduction in Medicare Advantage payments. In addition, the increase in consolidated net revenues was also due to an increase of approximately $73 million in our ancillary services and strategic initiatives, primarily from growth in our pharmacy services and in our international operations.

Consolidated operating income

Consolidated operating income for the first quarter of 2014 decreased by approximately $43 million, or approximately 8.9%, as compared to the fourth quarter of 2013. The decrease in the consolidated operating income was primarily due to a decrease in U.S. dialysis and related lab services net revenues due to three fewer treatment days in the first quarter of 2014 as compared to the fourth quarter of 2013, the impact of lower Medicare Advantage payments to HCP, and an increase in HCP’s medical claims expense as a result of additional senior and Medicaid members and higher utilization in the first quarter of 2014 as compared to the fourth quarter of 2013. Consolidated operating income was also negatively impacted by an overall increase in pharmaceutical unit costs, an increase in the intensities of physician-prescribed pharmaceuticals and an increase in the provision for uncollectible accounts. The decrease in consolidated operating income was partially offset by lower labor and benefit costs, lower professional fees, the write-off of certain obsolete software costs that occurred in the fourth quarter of 2013, an increase in revenues from HCP’s senior capitated members and improved operating results in our ancillary services and strategic initiatives.

Consolidated operating income for the first quarter of 2014 increased by approximately $274 million, or approximately 164.1%, as compared to the first quarter of 2013, including the accrued estimated loss contingency reserve of $300 million in the first quarter of 2013. Excluding this item, adjusted consolidated operating income would have decreased by $26 million. The decrease in adjusted operating income was primarily due to higher pharmaceutical unit costs, an increase in the intensities of physician-prescribed pharmaceuticals, an increase in the

 

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provision for uncollectible accounts, higher labor costs and related payroll taxes, an increase in benefit costs, and higher long-term incentive compensation, the impact of lower HCP Medicare Advantage revenue and an increase in HCP’s medical claims expenses. The decrease in adjusted consolidated operating income was partially offset by strong volume growth in the number of treatments from non-acquired growth and acquisitions, and from improved productivity. In addition, adjusted consolidated operating income was also positively impacted by improved operating performance of certain ancillary services and strategic initiatives, primarily our pharmacy services.

U.S. dialysis and related lab services business

Results of operations

 

     Three months ended  
     March 31,
2014
    December 31,
2013
    March 31,
2013
 
     (dollar amounts rounded to nearest million,
except per treatment data)
 

Net revenues:

      

Dialysis and related lab services patient service revenues

   $ 2,037      $ 2,076      $ 1,916   

Less: Provision for uncollectible accounts

     (82     (72     (67
  

 

 

   

 

 

   

 

 

 

Dialysis and related lab services net patient service revenues

   $ 1,955      $ 2,004      $ 1,849   

Other revenues

     3        3        3   
  

 

 

   

 

 

   

 

 

 

Total net dialysis and related lab services revenues

   $ 1,958      $ 2,007      $ 1,852   
  

 

 

   

 

 

   

 

 

 

Operating expenses and charges:

      

Patient care costs

     1,323        1,325        1,216   

General and administrative

     155        184        169   

Depreciation and amortization

     96        93        85   

Loss contingency reserve

     —          —         300   

Equity investment income

     (3     (3     (3
  

 

 

   

 

 

   

 

 

 

Total operating expenses and charges

     1,571        1,599        1,767   
  

 

 

   

 

 

   

 

 

 

Operating income

   $ 387      $ 408      $ 85   
  

 

 

   

 

 

   

 

 

 

Dialysis treatments

     5,975,627        6,106,166        5,628,799   

Average dialysis treatments per treatment day

     78,215        76,711        73,579   

Average dialysis and related lab services revenue per treatment

   $ 341      $ 340      $ 340   

Net revenues

Dialysis and related lab services’ net revenues for the first quarter of 2014 decreased by approximately $49 million, or approximately 2.4%, as compared to the fourth quarter of 2013. The decrease in dialysis and related lab services’ net revenues was due to a decrease in the number of treatments as a result of three fewer treatment days in the first quarter of 2014 as compared to the fourth quarter of 2013 and an increase in the provision for uncollectible accounts, partially offset by strong non-acquired treatment growth in existing and new centers, and an increase in the average dialysis revenue per treatment of approximately $1. The increase in the average dialysis revenue per treatment was primarily due to an increase in our acute services and a increase in some of our commercial payment rates, partially offset by a slight decline in our commercial mix.

Dialysis and related lab services’ net revenues for the first quarter of 2014 increased by approximately $106 million, or approximately 5.7%, as compared to the first quarter of 2013. The increase in net revenues in the first quarter of 2014 was principally due to strong volume growth from additional treatments. The increase in the number of treatments was primarily attributable to strong non-acquired treatment growth at existing and new centers. The average dialysis revenue per treatment was flat in the first quarter of 2014 as compared to the first quarter of 2013, but was impacted by an increase in our acute services and an increase in some of our average

 

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commercial payment rates, offset by a decrease in Medicare reimbursements due to the impact of sequestration that went into effect on April 1, 2013, and a slight decrease in our commercial mix. Dialysis and related lab services’ net revenues were also negatively impacted by an increase in the provision for uncollectible accounts.

Provision for uncollectible accounts. The provision for uncollectible accounts receivable for dialysis and related lab services was 4.0% for the first quarter of 2014, 3.5% for the fourth quarter of 2013, and 3.5% for the first quarter of 2013. We continue to experience higher amounts of non-covered Medicare write-offs. We assess our level of the provision for uncollectible accounts based upon our historical cash collection experience and trends, and have and will continue to adjust the provision as necessary as a result of changes in our cash collections.

Medicare update

CMS issued the 2014 final rule for the ESRD Prospective Payment System (PPS), which phases in over three to four years the 12% cut mandated by the American Taxpayer Relief Act of 2012 (ATRA). Although no reimbursement reduction is expected in 2014 or 2015 under the final ESRD PPS rule, it is anticipated that future reductions will occur no later than 2017. However, the recent “Protecting Access to Medicare Act” that was passed on March 31, 2014 further modified the reduction to only 1.25% in 2016 and 2017, and 1% in 2018. While this modification eases reimbursement pressure, future legislative actions could have the opposite effect.

The “Protecting Access to Medicare Act” was passed by Congress on March 31, 2014 which delayed the implementation of oral-only medications that will be included in the bundled ESRD payment rate to dialysis centers until June 1, 2024.

As previously disclosed, sequestration spending cuts took effect on April 1, 2013, which reduced our Medicare payments by 2%. Recently these spending cuts were extended through 2014 and 2015 by a two-year funding bill signed into law on December 31, 2013, which will continue to negatively impact our condensed consolidated financial results.

Operating expenses and charges

Patient care costs. Dialysis and related lab services’ patient care costs of approximately $221 per treatment for the first quarter of 2014 increased by $4 as compared to the fourth quarter of 2013. The increase in patient care costs per treatment was primarily due to an increase in labor costs and related payroll taxes, higher pharmaceutical unit costs, an increase in intensities of physician-prescribed pharmaceuticals, an increase in medical supply costs and an increase in seasonal occupancy costs, partially offset by lower benefits cost, a decrease in travel expenses and lower incentive-based compensation.

Dialysis and related lab services’ patient care costs on a per treatment basis for the first quarter of 2014 increased by approximately $5 as compared to the first quarter of 2013. The increase was primarily attributable to higher labor costs, an increase in benefit costs, higher pharmaceutical unit costs, higher occupancy costs, and an increase in our other direct operating expenses associated with our dialysis centers, an increase in intensities of physician-prescribed pharmaceuticals, partially offset by improved productivity and lower incentive-based compensation.

General and administrative expenses. Dialysis and related lab services’ general and administrative expenses of approximately $155 million in the first quarter of 2014 decreased by approximately $29 million as compared to the fourth quarter of 2013. The decrease in general and administrative expenses was primarily due to lower labor and benefit costs, a decrease in our professional fees for compliance matters and information technology initiatives, the write-off of certain obsolete software costs that occurred in the fourth quarter of 2013 and lower travel costs due to fewer management meetings in the first quarter of 2014, partially offset by higher payroll tax expense.

 

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Dialysis and related lab services’ general and administrative expenses for the first quarter of 2014 decreased by approximately $14 million as compared to the first quarter of 2013. The decrease was primarily due to lower labor costs, lower travel expenses, a decrease in professional fees for compliance matters and information technology initiatives, partially offset by higher long-term incentive compensation.

Depreciation and amortization. Depreciation and amortization for dialysis and related lab services was approximately $96 million for the first quarter of 2014, $93 million for the fourth quarter of 2013 and $85 million for the first quarter of 2013. The increases in depreciation and amortization in the first quarter of 2014, as compared to the fourth quarter of 2013 and the first quarter of 2013, were primarily due to growth in newly developed centers and from acquired centers.

Loss contingency reserve and other legal settlement expenses. We have recently 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 for both the 2010 and 2011 U.S. Attorney Physician Relationship Investigations described above. The settlement will include payment of approximately $389 million. The final settlement remains subject to negotiation of specific terms. During 2013, in connection with offers to settle these matters, we accrued a total of $397 million as an estimated loss contingency reserve, $300 million in the first quarter of 2013 and $97 million in the third quarter of 2013.

Equity investment income. Equity investment income for dialysis and related lab services was approximately $2.7 million for the first quarter of 2014, as compared to $2.6 million for the fourth quarter of 2013 and $3.3 million for the first quarter of 2013. Equity investment income in the first quarter of 2014 was flat as compared to the fourth quarter of 2013, and decreased as compared to the first quarter of 2013, primarily due to a decrease in the profitability of certain joint ventures in the first quarter of 2014.

Accounts receivable

Our dialysis and related lab services accounts receivable balances at March 31, 2014 and December 31, 2013 were $1,168 million and $1,173 million, respectively, which represented approximately 55 days for both periods, which is net of the provision for uncollectible accounts. Our DSO calculation is based on the current quarter’s average revenues per day. There were no significant changes during the first quarter of 2014 from the fourth quarter of 2013 in the amount of unreserved accounts receivable over one year old or the amounts pending approval from third-party payors.

Segment operating income

Dialysis and related lab services’ operating income for the first quarter of 2014 decreased by approximately $21 million, or approximately 5.1%, as compared to the fourth quarter of 2013. Operating income decreased primarily due to three fewer treatment days in the first quarter of 2014 as compared to the fourth quarter of 2013, higher pharmaceutical unit costs, an increase in the intensities of physician-prescribed pharmaceuticals, an increase in direct medical supply expense, higher occupancy costs and an increase in the provision for uncollectible accounts, partially offset by lower labor and benefit costs, a decrease in professional fees for compliance matters and information technology initiatives and a decrease in the write-off of certain obsolete software costs that occurred in the fourth quarter of 2013.

Dialysis and related lab services’ operating income for the first quarter of 2014 increased by approximately $302 million, or approximately 355.3%, as compared to the first quarter of 2013, including the accrued estimated legal contingency reserve of $300 million in the first quarter of 2013. Excluding this item from the first quarter of 2013, adjusted operating income would have increased by $2 million, primarily attributable to strong volume growth in revenues from additional treatments as a result of non-acquired treatment growth and growth through acquisitions and improved productivity. Adjusted dialysis and related lab services operating income was

 

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negatively impacted by higher labor costs and related payroll taxes, an increase in benefit costs, higher pharmaceutical unit costs, an increase in the intensities of physician-prescribed pharmaceuticals, higher provision for uncollectible accounts and higher long-term incentive compensation.

HCP business

Results of operations

 

     Three months ended  
     March 31,
2014
    December 31,
2013
    March 31,
2013
 
     (dollar amounts rounded to nearest millions)  

Net revenues:

            

HCP capitated revenue

   $   772            92   $   752            91   $   746            93
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Patient service revenue

     58          63          57     

Less: Provision for uncollectible accounts

     (2       (4       (3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenue

     56        7     59        7     54        7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other revenues

     13        1     18        2     4        —