Document



 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 

FORM 10-Q

 
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018
Commission File Number: 1-14106
 
 
 
 
 

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12537159&doc=13
DAVITA INC.
Delaware
 
51-0354549
(State of incorporation)
 
(I.R.S. Employer Identification No.)
2000 16th Street
Denver, CO 80202
Telephone number (303) 405-2100
 
 
 
 
 
 
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  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
☐ 
Smaller reporting company
 
 
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ☐    No  ☒
As of November 2, 2018, the number of shares of the Registrant’s common stock outstanding was approximately 166.0 million shares.
 
 
 
 
 




DAVITA INC.
INDEX

 
 
 
 
Page No.
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 6.
 
 
 
 
 
 
Note: Items 3, 4 and 5 of Part II are omitted because they are not applicable.
 
 
 

i




DAVITA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2018
 
2017
 
2018
 
2017
Dialysis and related lab patient service revenues
$
2,670,701

 
$
2,561,543

 
$
7,980,178

 
$
7,478,938

Provision for uncollectible accounts
(11,977
)
 
(119,321
)
 
(35,838
)
 
(335,979
)
Net dialysis and related lab patient service revenues
2,658,724

 
2,442,222

 
7,944,340

 
7,142,959

Other revenues
188,606

 
322,849

 
639,387

 
952,762

Total revenues
2,847,330

 
2,765,071

 
8,583,727

 
8,095,721

Operating expenses and charges:
 

 
 

 
 

 
 

Patient care costs and other costs
2,063,770

 
1,951,609

 
6,168,444

 
5,698,318

General and administrative
336,299

 
272,911

 
866,922

 
798,602

Depreciation and amortization
146,000

 
142,634

 
435,878

 
415,544

Equity investment loss (income)
3,824

 
5,308

 
(6,126
)
 
5,456

Provision for uncollectible accounts
800

 
(2,685
)
 
(7,300
)
 
(1,381
)
Investment and other asset impairments
6,093

 

 
17,338

 
15,168

Goodwill impairment charges

 

 
3,106

 
34,696

Loss (gain) on changes in ownership interests, net
1,506

 

 
(32,451
)
 
(6,273
)
Gain on settlement, net

 

 

 
(526,827
)
Total operating expenses and charges
2,558,292

 
2,369,777

 
7,445,811

 
6,433,303

Operating income
289,038

 
395,294

 
1,137,916

 
1,662,418

Debt expense
(125,927
)
 
(109,306
)
 
(359,135
)
 
(321,637
)
Other income, net
4,007

 
3,396

 
10,583

 
12,180

Income from continuing operations before income taxes
167,118

 
289,384

 
789,364

 
1,352,961

Income tax expense
52,047

 
90,546

 
206,652

 
474,126

Net income from continuing operations
115,071

 
198,838

 
582,712

 
878,835

Net loss from discontinued operations, net of tax
(211,739
)
 
(370,872
)
 
(147,829
)
 
(388,959
)
Net (loss) income
(96,668
)
 
(172,034
)
 
434,883

 
489,876

Less: Net income attributable to noncontrolling interests
(40,128
)
 
(42,442
)
 
(125,717
)
 
(129,654
)
Net (loss) income attributable to DaVita Inc.
$
(136,796
)
 
$
(214,476
)
 
$
309,166

 
$
360,222

Earnings per share attributable to DaVita Inc.:
 

 
 

 
 
 
 
Basic net income from continuing operations per share
$
0.44

 
$
0.81

 
$
2.69

 
$
3.91

Basic net (loss) income per share
$
(0.82
)
 
$
(1.14
)
 
$
1.79

 
$
1.89

Diluted net income from continuing operations per share
$
0.44

 
$
0.80

 
$
2.66

 
$
3.85

Diluted net (loss) income per share
$
(0.82
)
 
$
(1.12
)
 
$
1.77

 
$
1.86

Weighted average shares for earnings per share:
 
 
 
 
 
 
 
Basic
166,770,664

 
188,883,922

 
172,403,944

 
190,770,165

Diluted
167,262,358

 
191,408,117

 
174,348,421

 
193,546,245

Amounts attributable to DaVita Inc.:
 
 
 
 
 
 
 
Net income from continuing operations
$
73,371

 
$
152,870

 
$
463,989

 
$
745,067

Net loss from discontinued operations
(210,167
)
 
(367,346
)
 
(154,823
)
 
(384,845
)
Net (loss) income attributable to DaVita Inc.
$
(136,796
)
 
$
(214,476
)
 
$
309,166

 
$
360,222

 
See notes to condensed consolidated financial statements.

1



DAVITA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net (loss) income
$
(96,668
)
 
$
(172,034
)
 
$
434,883

 
$
489,876

Other comprehensive (loss) income, net of tax:
 

 
 

 
 
 
 
Unrealized gains (losses) on interest rate cap agreements:
 

 
 

 
 
 
 
Unrealized gains (losses) on interest rate cap agreements
37

 
(478
)
 
819

 
(5,479
)
Reclassifications of net realized gains on interest rate cap agreements into net (loss) income
1,606

 
1,265

 
4,680

 
3,793

Unrealized gains on investments:
 

 
 

 
 
 
 
Unrealized gains on investments

 
863

 

 
3,478

Reclassification of net investment realized gains into net (loss) income

 
(9
)
 

 
(221
)
Unrealized (losses) gains on foreign currency translation:
 

 
 

 
 
 
 
Foreign currency translation adjustments
(8,827
)
 
29,143

 
(39,475
)
 
91,546

Other comprehensive (loss) income
(7,184
)
 
30,784

 
(33,976
)
 
93,117

Total comprehensive (loss) income
(103,852
)
 
(141,250
)
 
400,907

 
582,993

Less: Comprehensive income attributable to noncontrolling interests
(40,128
)
 
(42,442
)
 
(125,717
)
 
(129,652
)
Comprehensive (loss) income attributable to DaVita Inc.
$
(143,980
)
 
$
(183,692
)
 
$
275,190

 
$
453,341

 See notes to condensed consolidated financial statements.


2



DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
 
September 30,
2018
 
December 31,
2017
ASSETS
 

 
 

Cash and cash equivalents
$
448,215

 
$
508,234

Restricted cash and equivalents
91,940

 
10,686

Short-term investments
4,730

 
32,830

Accounts receivable, net
1,847,086

 
1,714,750

Inventories
91,102

 
181,799

Other receivables
383,783

 
372,919

Income tax receivable
26,002

 
49,440

Prepaid and other current assets
88,857

 
112,058

Current assets held for sale, net
5,947,786

 
5,761,642

Total current assets
8,929,501

 
8,744,358

Property and equipment, net of accumulated depreciation of $3,454,107 and $3,103,662
3,275,636

 
3,149,213

Intangible assets, net of accumulated amortization of $225,862 and $356,774
97,609

 
113,827

Equity method and other investments
240,820

 
245,534

Long-term investments
35,047

 
37,695

Other long-term assets
76,517

 
47,287

Goodwill
6,702,659

 
6,610,279

 
$
19,357,789

 
$
18,948,193

LIABILITIES AND EQUITY
 

 
 

Accounts payable
$
458,927

 
$
509,116

Other liabilities
560,692

 
552,662

Accrued compensation and benefits
631,799

 
616,116

Current portion of long-term debt
1,784,065

 
178,213

Current liabilities held for sale
1,419,621

 
1,185,070

Total current liabilities
4,855,104

 
3,041,177

Long-term debt
8,440,673

 
9,158,018

Other long-term liabilities
452,445

 
365,325

Deferred income taxes
515,893

 
486,247

Total liabilities
14,264,115

 
13,050,767

Commitments and contingencies:
 
 
 
Noncontrolling interests subject to put provisions
1,064,412

 
1,011,360

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; 182,828,547 and
182,462,278 shares issued and 165,984,480 and 182,462,278 shares outstanding,
respectively)
183

 
182

Additional paid-in capital
1,055,839

 
1,042,899

Retained earnings
3,951,247

 
3,633,713

Treasury stock (16,844,067 and zero shares, respectively)
(1,153,511
)
 

Accumulated other comprehensive (loss) income
(29,109
)
 
13,235

Total DaVita Inc. shareholders' equity
3,824,649

 
4,690,029

Noncontrolling interests not subject to put provisions
204,613

 
196,037

Total equity
4,029,262

 
4,886,066

 
$
19,357,789

 
$
18,948,193

See notes to condensed consolidated financial statements.

3



DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
 
Nine months ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income
$
434,883

 
$
489,876

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

Depreciation and amortization
435,878

 
593,527

Impairment charges
20,444

 
701,523

Stock-based compensation expense
59,605

 
28,478

Deferred income taxes
200,056

 
(132,781
)
Equity investment loss, net
8,611

 
19,071

Gain on sales of business interests, net
(57,547
)
 
(23,402
)
Other non-cash charges, net
164,856

 
41,703

Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
 
 
 
Accounts receivable
(74,622
)
 
(146,024
)
Inventories
88,355

 
14,272

Other receivables and other current assets
(757
)
 
(43,556
)
Other long-term assets
2,142

 
(13,831
)
Accounts payable
(12,800
)
 
18,595

Accrued compensation and benefits
40,225

 
(60,063
)
Other current liabilities
45,624

 
39,445

Income taxes
21,749

 
22,669

Other long-term liabilities
5,546

 
18,648

Net cash provided by operating activities
1,382,248

 
1,568,150

Cash flows from investing activities:
 
 
 

Additions of property and equipment
(705,659
)
 
(639,829
)
Acquisitions
(113,526
)
 
(726,538
)
Proceeds from asset and business sales
135,268

 
92,529

Purchase of investments available for sale
(5,791
)
 
(9,882
)
Purchase of investments held-to-maturity
(3,728
)
 
(223,482
)
Proceeds from sale of investments available for sale
8,783

 
5,822

Proceeds from investments held-to-maturity
32,628

 
398,765

Purchase of equity investments
(12,874
)
 
(3,014
)
Distributions received on equity investments
3,580

 
80

Net cash used in investing activities
(661,319
)
 
(1,105,549
)

4



DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(unaudited)
(dollars in thousands)
 
Nine months ended
September 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Borrowings
41,674,279

 
38,160,821

Payments on long-term debt and other financing costs
(40,828,443
)
 
(38,269,284
)
Purchase of treasury stock
(1,161,511
)
 
(321,411
)
Stock award exercises and other share issuances, net
8,803

 
15,781

Distributions to noncontrolling interests
(139,673
)
 
(165,463
)
Contributions from noncontrolling interests
43,179

 
51,156

Proceeds from sales of additional noncontrolling interests
15

 

Purchases of noncontrolling interests
(19,988
)
 
(1,432
)
Net cash used in financing activities
(423,339
)
 
(529,832
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(5,790
)
 
5,449

Net increase (decrease) in cash, cash equivalents and restricted cash
291,800

 
(61,782
)
Less: Net increase in cash, cash equivalents and restricted cash from discontinued
operation
s
270,565

 
82,694

Net increase (decrease) in cash, cash equivalents and restricted cash from continuing
operations
21,235

 
(144,476
)
Cash, cash equivalents and restricted cash of continuing operations at beginning of the year
518,920

 
683,463

Cash, cash equivalents and restricted cash of continuing operations at end of the period
$
540,155

 
$
538,987


See notes to condensed consolidated financial statements.

5



DAVITA INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(dollars and shares in thousands)

 
Non-
controlling
interests
subject to
put provisions
 
DaVita Inc. Shareholders’ Equity
 
Non-
controlling
interests not
subject to
put provisions
 
 
 
 
Additional
paid-in
capital
 
 
 
 
 
 
 
Accumulated
other
comprehensive
(loss) income
 
 
 
 
 
Common stock
 
 
Retained
earnings
 
Treasury stock
 
 
 
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
Total
 
Balance at December 31, 2016
$
973,258

 
194,554

 
$
195

 
$
1,027,182

 
$
3,710,313

 

 
$

 
$
(89,643
)
 
$
4,648,047

 
$
201,694

Comprehensive income:
 

 


 


 


 


 


 


 


 


 


Net income
103,641

 


 


 


 
663,618

 


 


 


 
663,618

 
63,296

Other comprehensive income
 

 


 


 


 


 


 


 
102,878

 
102,878

 
(2
)
Stock purchase shares issued


 
360

 


 
22,131

 


 


 


 


 
22,131

 


Stock unit shares issued
 

 
117

 


 
(101
)
 


 


 


 


 
(101
)
 
 

Stock-settled SAR shares
issued


 
398

 


 

 


 


 


 


 

 


Stock-settled stock-based
compensation expense


 


 


 
34,981

 


 


 


 


 
34,981

 


Changes in noncontrolling interest
from:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions
(128,853
)
 


 


 


 


 


 


 


 


 
(82,614
)
Contributions
52,911

 


 


 


 


 


 


 


 


 
21,641

Acquisitions and divestitures
43,799

 


 


 
(823
)
 


 


 


 


 
(823
)
 
(5,770
)
Partial purchases
(397
)
 


 


 
(2,752
)
 


 


 


 


 
(2,752
)
 
(2,208
)
Fair value remeasurements
(32,999
)
 


 


 
32,999

 


 


 


 


 
32,999

 
 

Purchase of treasury stock


 


 


 


 


 
(12,967
)
 
(810,949
)
 


 
(810,949
)
 


Retirement of treasury stock


 
(12,967
)
 
(13
)
 
(70,718
)
 
(740,218
)
 
12,967

 
810,949

 


 

 


Balance at December 31, 2017
$
1,011,360

 
182,462

 
$
182

 
$
1,042,899

 
$
3,633,713

 

 
$

 
$
13,235

 
$
4,690,029

 
$
196,037

Cumulative effect of change in
accounting principle


 


 


 


 
8,368

 


 


 
(8,368
)
 

 


Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
77,803

 


 


 


 
309,166

 


 


 


 
309,166

 
47,914

Other comprehensive loss


 


 


 


 


 


 


 
(33,976
)
 
(33,976
)
 


Stock unit shares issued


 
154

 


 
(448
)
 


 


 


 


 
(448
)
 


Stock-settled SAR shares issued


 
212

 
1

 
(4,887
)
 


 


 


 


 
(4,886
)
 


Stock-settled stock-based
compensation expense


 


 


 
59,539

 


 


 


 


 
59,539

 


Changes in noncontrolling interest
from:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions
(85,372
)
 


 


 


 


 


 


 


 


 
(54,301
)
Contributions
26,367

 


 


 


 


 


 


 


 


 
16,812

Acquisitions and divestitures
11,262

 


 


 
79

 


 


 


 


 
79

 
(212
)
Partial purchases
(869
)
 


 


 
(17,482
)
 


 


 


 


 
(17,482
)
 
(1,637
)
Fair value remeasurements
23,861

 


 


 
(23,861
)
 


 


 


 


 
(23,861
)
 


Purchase of treasury stock


 


 


 


 


 
(16,844
)
 
(1,153,511
)
 


 
(1,153,511
)
 


Balance at September 30, 2018
$
1,064,412

 
182,828

 
$
183

 
$
1,055,839

 
$
3,951,247

 
(16,844
)
 
$
(1,153,511
)
 
$
(29,109
)
 
$
3,824,649

 
$
204,613

 See notes to condensed consolidated financial statements

6


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars and shares in thousands, except per share data)


Unless otherwise indicated in this Quarterly Report on Form 10-Q "the Company", "we", "us", "our" and similar terms refer to DaVita Inc. and its consolidated subsidiaries.
  
1.
Condensed consolidated interim financial statements
The condensed consolidated interim financial statements included in this report are prepared by the Company without audit. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations are reflected in these condensed consolidated interim financial statements. All significant intercompany accounts and transactions have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve revenue recognition and accounts receivable, contingencies, impairments of goodwill and investments, accounting for income taxes, long-term variable compensation accruals, consolidation of variable interest entities and certain fair value estimates. The results of operations for the nine months ended September 30, 2018 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, 2017. 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 adjustments and disclosures. 
2.
Revenue recognition
On January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606 Revenue from Contracts with Customers (Topic 606) using the cumulative effect method for those contracts that were not substantially completed as of January 1, 2018. Results for reporting periods beginning on and after January 1, 2018 are presented under Topic 606, while prior period amounts continue to be presented in accordance with the Company's historical accounting under Revenue Recognition (Topic 605).
The adoption of this new standard primarily changed the Company’s presentation of revenues, provision for uncollectible accounts and allowance for doubtful accounts. Topic 606 requires revenue to be recognized based on the Company’s estimate of the transaction price the Company expects to collect as a result of satisfying its performance obligations. Accordingly, for performance obligations satisfied after the adoption of Topic 606, the Company no longer separately presents a provision for uncollectible accounts on the consolidated income statement and no longer presents the related allowance for doubtful accounts on the consolidated balance sheet. However, as a result of the Company’s election to apply Topic 606 only to contracts not substantially completed as of January 1, 2018, the Company continues to maintain an allowance for doubtful accounts related to performance obligations satisfied prior to the adoption of Topic 606. Net collections or write-offs of accounts receivable generated prior to January 1, 2018, beyond amounts previously reserved thereon, are presented in the provision for uncollectible accounts on the consolidated income statement in accordance with Topic 605.
The Company’s allowance for doubtful accounts related to performance obligations satisfied prior to the adoption of Topic 606 was $71,108 and $218,399 as of September 30, 2018 and December 31, 2017, respectively.
There are significant risks associated with estimating revenue, which generally take several years to resolve. These estimates are subject to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payor issues, as well as patient issues including determining applicable primary and secondary coverage, changes in patient coverage and coordination of benefits. As these estimates are refined over time, both positive and negative adjustments to revenue are recognized in the current period. As a result of changes in these estimates, additional revenue was recognized during the three and nine months ended September 30, 2018 associated with performance obligations satisfied in years prior to the adoption of Topic 606 of $1,246 and $77,473, respectively, which includes a benefit of $36,000 for the nine months ended September 30, 2018 from electing to apply Topic 606 only to contracts not substantially completed as of January 1, 2018.

7


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


The following table summarizes the Company's segment revenues by primary payor source:
 
For the three months ended
 
September 30, 2018
 
September 30, 2017(1)
 
U.S. dialysis and related lab services
 
Other - Ancillary services and strategic initiatives
 
Consolidated
 
U.S. dialysis and related lab services
 
Other - Ancillary services and strategic initiatives
 
Consolidated
Patient service revenues:
 
 
 
 
 
 
 
 
 
 
 
Medicare and Medicare Advantage
$
1,513,191

 
$
 
$
1,513,191

 
$
1,338,155

 
$
 
$
1,338,155

Medicaid and Managed Medicaid
159,165

 
 
 
159,165

 
155,113

 
 
 
155,113

Other government
113,043

 
80,915

 
193,958

 
89,243

 
72,681

 
161,924

Commercial
786,470

 
31,364

 
817,834

 
783,171

 
17,334

 
800,505

Other revenues:
 
 
 
 
 
 
 
 
 
 
 
Medicare and Medicare Advantage
 
 
130,746

 
130,746

 
 
 
232,251

 
232,251

Medicaid and Managed Medicaid
 
 
12,042

 
12,042

 
 
 
17,142

 
17,142

Commercial
 
 
20,205

 
20,205

 
 
 
27,222

 
27,222

Other(2)
4,932

 
29,042

 
33,974

 
4,792

 
47,438

 
52,230

Eliminations of intersegment revenues
(25,424
)
 
(8,361
)
 
(33,785
)
 
(13,475
)
 
(5,996
)
 
(19,471
)
Total
$
2,551,377

 
$
295,953

 
$
2,847,330

 
$
2,356,999

 
$
408,072

 
$
2,765,071

 
(1)
As noted above, prior period amounts have not been adjusted under the cumulative effect method. In this table, the Company's dialysis and related lab services revenues for the three months ended September 30, 2017 has been presented net of the provision for uncollectible accounts of $119,321 to conform to the current period presentation.
(2)
Other consists of management fees and revenue from the Company's ancillary services and strategic initiatives.
 
For the nine months ended
 
September 30, 2018
 
September 30, 2017(1)
 
U.S. dialysis and related lab services
 
Other - Ancillary services and strategic initiatives
 
Consolidated
 
U.S. dialysis and related lab services
 
Other - Ancillary services and strategic initiatives
 
Consolidated
Patient service revenues:
 
 
 
 
 
 
 
 
 
 
 
Medicare and Medicare Advantage
$
4,524,449

 
$
 
$
4,524,449

 
$
3,924,255

 
$
 
$
3,924,255

Medicaid and Managed Medicaid
466,948

 
 
 
466,948

 
450,984

 
 
 
450,984

Other government
330,500

 
250,048

 
580,548

 
271,947

 
183,050

 
454,997

Commercial
2,366,182

 
70,156

 
2,436,338

 
2,304,745

 
46,537

 
2,351,282

Other revenues:
 
 
 
 
 
 
 
 
 
 
 
Medicare and Medicare Advantage
 
 
427,532

 
427,532

 
 
 
682,964

 
682,964

Medicaid and Managed Medicaid
 
 
43,991

 
43,991

 
 
 
54,757

 
54,757

Commercial
 
 
77,633

 
77,633

 
 
 
79,241

 
79,241

Other(2)
14,965

 
103,014

 
117,979

 
14,951

 
139,337

 
154,288

Eliminations of intersegment revenues
(63,943
)
 
(27,748
)
 
(91,691
)
 
(38,559
)
 
(18,488
)
 
(57,047
)
Total
$
7,639,101

 
$
944,626

 
$
8,583,727

 
$
6,928,323

 
$
1,167,398

 
$
8,095,721


(1)
As noted above, prior period amounts have not been adjusted under the cumulative effect method. In this table, the Company's dialysis and related lab services revenues for the nine months ended September 30, 2017 has been presented net of the provision for uncollectible accounts of $335,979 to conform to the current period presentation.

8


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


(2)
Other consists of management fees and revenue from the Company's ancillary services and strategic initiatives.
Dialysis and related lab patient service revenues
Dialysis and related lab services patient service revenues are recognized in the period services are provided. Revenues consist primarily of payments from Medicare, Medicaid and commercial health plans for dialysis and related lab services provided to patients. A usual and customary fee schedule is maintained for the Company’s dialysis treatments and related lab services; however, actual collectible revenue is normally recognized at a discount from the fee schedule.
Revenues associated with Medicare and Medicaid programs are estimated based on: (a) the payment rates that are established by statute or regulation for the portion of payment rates paid by the government payor (e.g., 80% for Medicare patients) and (b) for the portion not paid by the primary government payor, estimates of the amounts ultimately collectible from other government programs paying secondary coverage (e.g., Medicaid secondary coverage), the patient’s commercial health plan secondary coverage, or the patient. The Company’s reimbursements from Medicare are subject to certain variations under Medicare’s single bundled payment rate system, whereby reimbursements can be adjusted for certain patient characteristics and other factors. The Company’s revenue recognition is estimated based on its judgment regarding its ability to collect, which depends upon its ability to effectively capture, document and bill for Medicare’s base payment rate as well as these other variable factors.
Under Medicare’s bundled payment rate system, services covered by Medicare are subject to estimating risk, whereby reimbursements from Medicare can vary significantly depending upon certain patient characteristics and other variable factors. Even with the bundled payment rate system, Medicare payments for bad debt claims as established by cost reports require evidence of collection efforts. As a result, billing and collection of Medicare bad debt claims can be delayed significantly and final payment is subject to audit.
Medicaid payments, when Medicaid coverage is secondary, can also be difficult to estimate. For many states, Medicaid payment terms and methods differ from Medicare, and may prevent accurate estimation of individual payment amounts prior to billing.
Revenues associated with commercial health plans are estimated based on contractual terms for the patients under healthcare plans with which the Company has formal agreements, non-contracted health plan coverage terms if known, estimated secondary collections, historical collection experience, historical trends of refunds and payor payment adjustments (retractions), inefficiencies in the Company’s billing and collection processes that can result in denied claims for payments, and regulatory compliance matters.
Commercial revenue recognition also involves significant estimating risks. With many larger, commercial insurers the Company has several different contracts and payment arrangements, and these contracts often include only a subset of the Company’s centers. In certain circumstances, it may not be possible to determine which contract, if any, should be applied prior to billing. In addition, for services provided by non-contracted centers, final collection may require specific negotiation of a payment amount, typically at a significant discount from the Company’s usual and customary rates.
Other revenues
Other revenues consist of the revenues associated with the ancillary services and strategic initiatives, management and administrative support services that are provided to outpatient dialysis centers that the Company does not own or in which the Company owns a noncontrolling interest, and administrative and management support services to certain other non-dialysis joint ventures in which the Company owns a noncontrolling interest. Revenues associated with pharmacy services are estimated as prescriptions are filled and shipped to patients. Revenues associated with dialysis management services, disease management services, clinical research programs, physician services, end stage renal disease (ESRD) seamless care organizations, and comprehensive care are estimated in the period services are provided. Revenues associated with direct primary care are estimated over the membership period.

9


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


3.
Earnings per share
Basic earnings per share is calculated by dividing net income attributable to the Company, adjusted for any change in noncontrolling interest redemption rights in excess of fair value, by the weighted average number of common shares, net of the weighted average shares held in escrow that under certain circumstances may have been returned to the Company.
Diluted earnings per share includes the dilutive effect of outstanding stock-settled stock appreciation rights (SSARs) and unvested stock units (under the treasury stock method) as well as the weighted average shares held in escrow that were outstanding during the period.
The reconciliations of the numerators and denominators used to calculate basic and diluted earnings per share were as follows:
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2018
 
2017
 
2018
 
2017
Numerators:
 

 
 

 
 
 
 
Net income from continuing operations attributable to DaVita Inc.
$
73,371

 
$
152,870

 
$
463,989

 
$
745,067

Change in noncontrolling interest redemption rights in excess of fair value
98

 

 

 

Net income from continuing operations for earnings per share calculation
73,469

 
152,870

 
463,989

 
745,067

Net loss from discontinued operations attributable to DaVita Inc.
(210,167
)
 
(367,346
)
 
(154,823
)
 
(384,845
)
Net (loss) income attributable to DaVita Inc. for earnings per share calculation
$
(136,698
)
 
$
(214,476
)
 
$
309,166

 
$
360,222

 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Weighted average shares outstanding during the period
166,819

 
191,078

 
173,875

 
192,964

Weighted average contingently returnable shares held in escrow for the
DaVita HealthCare Partners merger
(48
)
 
(2,194
)
 
(1,471
)
 
(2,194
)
Weighted average shares for basic earnings per share calculation
166,771

 
188,884

 
172,404

 
190,770

 
 
 
 
 
 
 
 
Basic net income (loss) attributable to DaVita Inc. from:
 
 
 
 
 
 
 
Continuing operations per share
$
0.44

 
$
0.81

 
$
2.69

 
$
3.91

Discontinued operations per share
(1.26
)
 
(1.95
)
 
(0.90
)
 
(2.02
)
Basic net (loss) income per share attributable to DaVita Inc.
$
(0.82
)
 
$
(1.14
)
 
$
1.79

 
$
1.89

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Weighted average shares outstanding during the period
166,819

 
191,078

 
173,875

 
192,964

Assumed incremental shares from stock plans
443

 
330

 
473

 
582

Weighted average shares for diluted earnings per share calculation
167,262

 
191,408

 
174,348

 
193,546

 
 
 
 
 
 
 
 
Diluted net income (loss) attributable to DaVita Inc. from:
 
 
 
 
 
 
 
Continuing operations per share
$
0.44

 
$
0.80

 
$
2.66

 
$
3.85

Discontinued operations per share
(1.26
)
 
(1.92
)
 
(0.89
)
 
(1.99
)
Diluted net (loss) income per share attributable to DaVita Inc.
$
(0.82
)
 
$
(1.12
)
 
$
1.77

 
$
1.86

Anti-dilutive stock-settled awards excluded from calculation(1)
5,281

 
5,201

 
4,987

 
5,239

 
(1)
Shares associated with stock-settled stock appreciation rights excluded from the diluted denominator calculation because they are anti-dilutive under the treasury stock method.

10


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


4.
Restricted cash and equivalents
The Company had restricted cash and cash equivalents of $91,940 and $10,686 at September 30, 2018 and December 31, 2017, respectively. Approximately $78,951 of the balance at September 30, 2018 represents restricted cash equivalents held in trust to satisfy insurer and state regulatory requirements related to the Company's self-insurance for professional and general liability and workers' compensation risks administered by wholly-owned captive insurance entities. Prior to the first quarter of 2018, these requirements were satisfied by a letter of credit rather than restricted cash held in trust. The remaining restricted cash and equivalents held at September 30, 2018 and December 31, 2017 primarily represent cash pledged to third parties in connection with two of the Company's ancillary and strategic initiatives businesses.
5.
Short-term and long-term investments

Effective January 1, 2018, the Company adopted ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU revise accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities at fair value. The Company also adopted ASU 2018-03 which provides related technical corrections and improvements. The principal effect of these ASUs on the Company's consolidated financial statements is that, prior to adoption of ASU 2016-01, changes in the fair values of investments in equity securities with readily determinable fair values or redemption values were recognized in other comprehensive income until realized, while under ASU 2016-01 all changes in the fair values of these equity securities are recognized in current earnings. The adoption of these ASUs did not have a material impact on these condensed consolidated financial statements.

Effective January 1, 2018, the Company recognized a cumulative effect of change in accounting principle upon adoption of ASUs 2016-01 and 2018-03, in conjunction with ASU 2018-02, the effect of which was to decrease accumulated other comprehensive income, and to increase retained earnings, by $5,662 in after-tax unrealized gains accumulated in other comprehensive income through December 31, 2017 from equity securities classified as available-for-sale investments prior to adoption of ASU 2016-01.
From January 1, 2018, equity securities that have readily determinable fair values or redemption values are recorded at estimated fair value with changes in their value recognized in current earnings. The Company classifies its debt securities as held-to-maturity and records them at amortized cost based on its intentions and strategy concerning those investments.
The Company classifies these debt and equity investments as "Short-term investments" or "Long-term investments" on its consolidated balance sheet, as applicable, based on the characteristics of the financial instrument or the Company's intentions or expectations for the investment.
The Company’s investments in these short-term and long-term debt and equity investments consist of the following:
 
September 30, 2018
 
December 31, 2017
 
Debt
securities
 
Equity
securities
 
Total
 
Debt
securities
 
Equity
securities
 
Total
Certificates of deposit and other time deposits
$
2,230

 
$

 
$
2,230

 
$
31,630

 
$

 
$
31,630

Investments in mutual funds and common stock

 
37,547

 
37,547

 

 
38,895

 
38,895

 
$
2,230

 
$
37,547

 
$
39,777

 
$
31,630

 
$
38,895

 
$
70,525

Short-term investments
$
2,230

 
$
2,500

 
$
4,730

 
$
31,630

 
$
1,200

 
$
32,830

Long-term investments

 
35,047

 
35,047

 

 
37,695

 
37,695

 
$
2,230

 
$
37,547

 
$
39,777

 
$
31,630

 
$
38,895

 
$
70,525

Debt securities: The Company's short-term debt investments are principally bank certificates of deposit with contractual maturities longer than three months but shorter than one year. These debt securities are accounted for as held to maturity and recorded at amortized cost, which approximates their fair values at September 30, 2018 and December 31, 2017.
Equity securities: The Company's equity investments in mutual funds and common stock are held within a trust to fund existing obligations associated with several of the Company’s non-qualified deferred compensation plans. During the nine months ended September 30, 2018, the Company recognized pre-tax net gains of $1,597 in the income statement associated

11


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


with changes in the fair value of these equity securities, comprised of pre-tax realized gains of $4,101 and a net decrease in unrealized gains of $2,504. During the nine months ended September 30, 2017, the Company recognized pre-tax realized gains on the sale or redemption of equity securities of $362, or $221 after-tax, which was previously recorded in other comprehensive income.
6.
Equity method and other investments
Equity investments in nonconsolidated businesses over which the Company maintains significant influence, but which do not have readily determinable fair values, are carried on the equity method.
As described in Note 5 to these condensed consolidated financial statements, effective January 1, 2018, the Company adopted ASU 2016-01 and related ASU 2018-03 concerning recognition and measurement of financial assets and financial liabilities. In adopting this new guidance, the Company has made an accounting policy election to adopt an adjusted cost method measurement alternative for investments in equity securities without readily determinable fair values.
Specifically, under this measurement alternative, unless elected otherwise for a particular investment, the Company initially records equity investments that qualify for the measurement alternative at cost but remeasures them to fair value through earnings when there is an observable transaction involving the same or a similar investment with the same issuer or upon an impairment.
The Company maintains equity method and minor adjusted cost method investments in the private securities of certain other healthcare and healthcare-related businesses. The Company classifies these investments as "Equity method and other investments" on its consolidated balance sheet.
The total carrying amount of equity investments carried under the adjusted cost method measurement alternative at September 30, 2018 was $12,386. Through September 30, 2018, there have been no meaningful impairments or other downward or upward valuation adjustments recognized on these investments.
Total equity method and other investments in nonconsolidated businesses were $240,820 and $245,534 at September 30, 2018 and December 31, 2017, respectively. During the nine months ended September 30, 2018 and 2017, the Company recognized equity investment income of $6,126 and loss of $5,456, respectively, from equity method investments in nonconsolidated businesses. 
The Company's largest equity method investment is its ownership interest in DaVita Care Pte. Ltd. (the APAC JV), which was carried at $146,829 and $160,481 at September 30, 2018 and December 31, 2017, respectively. The Company recognized a non-cash other-than-temporary impairment on this investment of $280,066 in the fourth quarter of 2017.
As of September 30, 2018 and December 31, 2017, the Company holds a 60% voting interest and a 73.3% current economic interest in the APAC JV. Based on the governance structure and voting rights established for the APAC JV at its formation on August 1, 2016, certain key decisions affecting the joint venture’s operations are not subject to the unilateral discretion of the Company, but rather are shared with the other noncontrolling investors. These other noncontrolling investors currently collectively hold a 40% voting interest and a 26.7% economic interest in the APAC JV. During the third quarter of 2018, the investors in the APAC JV jointly agreed to a six-month deferral of the subscribed incremental capital contribution originally scheduled for August 1, 2018 based upon an assessment of the capital needs of the joint venture. The Company continues to expect the economic interests of the noncontrolling investors in the APAC JV to adjust to match their voting interests by August 1, 2019.

12


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


7.
Goodwill
Changes in goodwill by reportable segment were as follows:
 
U.S. dialysis and
related lab services
 
Other-ancillary
services and
strategic initiatives
 
Consolidated total
Balance at January 1, 2017
$
5,691,587

 
$
323,788

 
$
6,015,375

Acquisitions
485,434

 
131,598

 
617,032

Divestitures
(32,260
)
 
(126
)
 
(32,386
)
Impairment charges

 
(36,196
)
 
(36,196
)
Foreign currency and other adjustments

 
46,454

 
46,454

Balance at December 31, 2017
$
6,144,761

 
$
465,518

 
$
6,610,279

Acquisitions
24,431

 
111,223

 
135,654

Divestitures
(331
)
 
(15,166
)
 
(15,497
)
Impairment charges

 
(3,106
)
 
(3,106
)
Foreign currency and other adjustments

 
(24,671
)
 
(24,671
)
Balance at September 30, 2018
$
6,168,861

 
$
533,798

 
$
6,702,659

 
 
 
 
 
 
Balance at September 30, 2018:
 
 
 
 
 
Goodwill
$
6,168,861

 
$
561,399

 
$
6,730,260

Accumulated impairment charges

 
(27,601
)
 
(27,601
)
 
$
6,168,861

 
$
533,798

 
$
6,702,659

The Company elected to early adopt ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, effective January 1, 2017.
Each of the Company’s operating segments described in Note 19 to these condensed consolidated financial statements represents an individual reporting unit for goodwill impairment testing purposes, except that each sovereign jurisdiction within the Company’s international operating segments is considered a separate reporting unit.
Within the U.S. dialysis and related lab services operating segment, the Company considers each of its dialysis centers to constitute an individual business for which discrete financial information is available. However, since these dialysis centers have similar operating and economic characteristics, and 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 vascular access service centers in its vascular access reporting unit, to the physician practices in its physician services reporting unit, to the dialysis centers within each international reporting unit, and to the non-dialysis healthcare businesses within each international region. For the Company’s other operating segments, discrete business components below the operating segment level constitute individual reporting units.
During the three and nine months ended September 30, 2018, the Company performed scheduled annual and other reporting unit goodwill impairment assessments. As a result of these assessments, the Company did not recognize any goodwill impairment charges during the three months ended September 30, 2018 and recognized a goodwill impairment charge of $3,106 at the Company's German integrated healthcare business during the nine months ended September 30, 2018.
During the nine months ended September 30, 2017, the Company recognized goodwill impairment charges of $34,696, at the Company’s vascular access reporting unit. These charges resulted primarily from continuing changes in the Company's outlook for this business as the Company's partners and operators continued to evaluate potential changes in operations, including termination of their management services agreements and center closures, as a result of recent changes in Medicare reimbursement. There is no goodwill remaining at the Company's vascular access reporting unit.

13


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


Except as described in the Company’s annual report on Form 10-K for the year ended December 31, 2017 and quarterly reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018, none of the Company's various other reporting units were considered at risk of significant goodwill impairment as of September 30, 2018. Since the dates of the Company's last annual goodwill impairment assessments there have been certain developments, events, changes in operating performance and other changes in key circumstances that have affected the Company's businesses. However, these changes did not cause management to believe it is more likely than not that the fair values of any of the Company's reporting units would be less than their respective carrying amounts as of September 30, 2018.
8.
Income taxes
The Company's effective income tax rate from continuing operations was 31.1% for the third quarter of 2018 as compared to 26.2% for the second quarter of 2018 and 31.3% for the third quarter of 2017. The Company's effective income tax rate increased in the third quarter of 2018 as compared to the second quarter of 2018 due to non-deductible advocacy costs and additional non-deductible expenses related to the Tax Cuts and Jobs Act of 2017 (2017 Tax Act), partially offset by return to provision adjustments.
As of September 30, 2018, the Company’s total liability for unrecognized tax benefits relating to tax positions that do not meet the more-likely-than-not threshold was $40,376, of which $37,533 would impact the Company's effective tax rate if recognized. The total balance increased $7,600 from the December 31, 2017 balance of $32,776.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. At September 30, 2018 and December 31, 2017, the Company had approximately $8,296 and $4,195, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefits. 
The Company performed a provisional analysis of the 2017 Tax Act and recorded a reasonable estimate of its effect at December 31, 2017. The Company is in the process of completing its analysis with regards to the 2017 Tax Act and will record any adjustments to its estimate on or before December 22, 2018. As of September 30, 2018, the Company has not made any material adjustments to its December 31, 2017 estimates.
9.
Long-term debt
Long-term debt was comprised of the following: 
 
September 30,
2018
 
December 31,
2017
Senior secured credit facilities:
 
 
 
Term Loan A
$
700,000

 
$
775,000

Term Loan A-2
995,000

 

Term Loan B
3,351,250

 
3,377,500

Revolver
275,000

 
300,000

Senior notes
4,500,000

 
4,500,000

Acquisition obligations and other notes payable
167,779

 
150,512

Capital lease obligations
289,333

 
297,170

Total debt principal outstanding
10,278,362

 
9,400,182

Discount and deferred financing costs
(53,624
)
 
(63,951
)
 
10,224,738

 
9,336,231

Less current portion
(1,784,065
)
 
(178,213
)
 
$
8,440,673

 
$
9,158,018


14


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


Scheduled maturities of long-term debt at September 30, 2018 were as follows: 
2018 (remainder of the year)
49,701

2019
2,028,808

2020
74,985

2021
3,311,502

2022
1,289,539

2023
36,437

Thereafter
3,487,390

On March 29, 2018, the Company entered into an Increase Joinder No. 1 (Increase Joinder Agreement) under its existing senior secured credit facilities. Pursuant to this Increase Joinder Agreement, the Company entered into an additional $995,000 Term Loan A-2. The new Term Loan A-2 bears interest at LIBOR plus an interest rate margin of 1.00%.
During the first nine months of 2018, the Company made mandatory principal payments under its senior secured credit facilities totaling $75,000 on Term Loan A and $26,250 on Term Loan B.
As of September 30, 2018, the Company maintains several effective interest rate cap agreements that have the economic effect of capping the Company's maximum exposure to LIBOR variable interest rate changes on specific portions of the Company's floating rate debt, as described below. The cap agreements are designated as cash flow hedges and, as a result, changes in the fair values of these cap agreements are reported in other comprehensive income. The amortization of the original cap premium is recognized as a component of debt expense on a straight-line basis over the terms of the cap agreements. These cap agreements do not contain credit-risk contingent features.
As of September 30, 2018, the Company maintains several effective interest rate cap agreements that were entered into in October 2015 with notional amounts totaling $3,500,000. These cap agreements became effective June 29, 2018 and have the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 3.50% on an equivalent amount of its debt. These cap agreements expire on June 30, 2020. As of September 30, 2018, the total fair value of these cap agreements was an asset of approximately $2,135. During the nine months ended September 30, 2018, the Company recognized debt expense of $2,163 from these cap agreements and recorded a gain of $1,103 in other comprehensive income due to an increase in the unrealized fair value of these cap agreements.
Previously, the Company maintained other interest rate cap agreements that were entered into in November 2014 with notional amounts totaling $3,500,000. These cap agreements had the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 3.50% on an equivalent amount of the Company’s debt. However, these interest rate cap agreements expired on June 30, 2018. During the nine months ended September 30, 2018, the Company recognized debt expense of $4,140 from these cap agreements and recorded an immaterial loss in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements.
The following table summarizes the Company’s derivative instruments outstanding as of September 30, 2018 and December 31, 2017
 
 
September 30, 2018
 
December 31, 2017
Derivatives designated as hedging instruments
 
Balance sheet location
 
Fair value
 
Balance sheet location
 
Fair value
Interest rate cap agreements
 
Other long-term assets
 
$
2,135

 
Other long-term assets
 
$
1,032


15


DAVITA 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 cap agreements for the three and nine months ended September 30, 2018 and 2017:
 
Amount of unrecognized gains (losses) in OCI on interest rate cap agreements
 
Location of losses reclassified from accumulated OCI into income
 
Amount of losses reclassified from accumulated OCI into income
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
Derivatives designated as cash flow hedges
2018
 
2017
 
2018
 
2017
 
 
2018
 
2017
 
2018
 
2017
Interest rate cap
agreements
$
50

 
$
(782
)
 
$
1,103

 
$
(8,967
)
 
Debt expense
 
$
2,163

 
$
2,070

 
$
6,303

 
$
6,208

Tax (benefit) expense
(13
)
 
304

 
(284
)
 
3,488

 
Tax expense
 
(557
)
 
(805
)
 
(1,623
)
 
(2,415
)
Total
$
37

 
$
(478
)
 
$
819

 
$
(5,479
)
 
 
 
$
1,606

 
$
1,265

 
$
4,680

 
$
3,793

As of September 30, 2018, the Company’s Term Loan B debt bears interest at LIBOR plus an interest rate margin of 2.75%. Term Loan B is subject to interest rate caps if LIBOR should rise above 3.50%. Term Loan A bears interest at LIBOR plus an interest rate margin of 2.00%. The capped portion of Term Loan A is $148,750 if LIBOR should rise above 3.50%. In addition, the uncapped portion of Term Loan A, which is subject to the variability of LIBOR, is $551,250. Term Loan A-2 is subject to the variability of LIBOR plus an interest rate margin of 1.00%. Interest rates on the Company’s senior notes are fixed by their terms.
The Company’s weighted average effective interest rate on the senior secured credit facilities at the end of the third quarter was 4.80%, based on the current margins in effect of 2.00% for Term Loan A, 1.00% for Term Loan A-2, and 2.75% for Term Loan B, as of September 30, 2018.
The Company’s overall weighted average effective interest rate during the quarter ended September 30, 2018 was 4.93% and as of September 30, 2018 was 5.03%. The Company's weighted average effective interest rate for the nine months ended September 30, 2018 was 4.92%.
As of September 30, 2018, the Company’s interest rates are fixed on approximately 47.43% of its total debt.
As of September 30, 2018, the Company had $275,000 drawn on its $1,000,000 revolving line of credit under its senior secured credit facilities, of which approximately $14,355 was committed for outstanding letters of credit. The remaining amount is unencumbered. The Company also has approximately $22,621 of additional outstanding letters of credit related to its Kidney Care business and $211 of committed outstanding letters of credit related to DaVita Medical Group (DMG), which is backed by a certificate of deposit.
10.
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.
The Company operates in a highly regulated industry and is a party to various lawsuits, claims, qui tam suits, governmental investigations and audits (including investigations resulting from its obligation to self-report suspected violations of law) and other legal proceedings. The Company records accruals for certain legal proceedings and regulatory matters to the extent that the Company determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. As of September 30, 2018, and December 31, 2017, the Company’s total recorded accruals, including DMG, with respect to legal proceedings and regulatory matters, net of anticipated third party recoveries, were immaterial. While these accruals reflect the Company’s best estimate of the probable loss for those matters as of the dates of those accruals, the recorded

16


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


amounts may differ materially from the actual amount of the losses for those matters, and any anticipated third party recoveries for any such losses may not ultimately be recoverable. Additionally, in some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal proceedings and regulatory matters, which also may be impacted by various factors, including that they may involve indeterminate claims for monetary damages or may involve fines, penalties or non-monetary remedies; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; are in the early stages of the proceedings; or result in a change of business practices. Further, there may be various levels of judicial review available to the Company in connection with any such proceeding.
The following is a description of certain lawsuits, claims, governmental investigations and audits and other legal proceedings to which the Company is subject.
Inquiries by the Federal Government and Certain Related Civil Proceedings
2015 U.S. Office of Inspector General (OIG) Medicare Advantage Civil Investigation: In March 2015, JSA HealthCare Corporation (JSA), a subsidiary of DMG, received a subpoena from the OIG for the U.S. Department of Health and Human Services (HHS) requesting documents and information for the period from January 1, 2008 through December 31, 2013, for certain MA plans for which JSA provided services. It also requested information regarding JSA’s communications about patient diagnoses as they related to certain MA plans generally, and more specifically as related to two Florida physicians with whom JSA previously contracted.
In addition to the subpoena described above, in June 2015, the Company received a civil subpoena from the OIG covering the period from January 1, 2008 through the present and seeking production of a wide range of documents relating to the Company’s and its subsidiaries’ (including DMG and its subsidiary JSA) provision of services to MA plans and related patient diagnosis coding and risk adjustment submissions and payments. The Company believes that the request was part of a broader industry investigation into MA patient diagnosis coding and risk adjustment practices and potential overpayments by the government. The information requested included information related to patient diagnosis coding practices for a number of conditions, including potentially improper historical DMG coding for a particular condition. With respect to that condition, the guidance related to that coding issue was discontinued following the Company’s November 1, 2012, acquisition of HealthCare Partners (now known as the Company's DMG business), and the Company notified Centers for Medicare and Medicaid Services (CMS) in April 2015 of the coding practice and potential overpayments. In that regard, the Company identified certain additional coding practices which may have been problematic, some of which were the subject of the previously disclosed and dismissed Swoben Private Civil Suit.
The Company entered into a settlement agreement with the Department of Justice (DOJ) and OIG to resolve these matters on September 28, 2018. As previously disclosed, an escrow established in connection with the Company's acquisition of HealthCare Partners in 2012 held back a portion of the purchase price to the prior owners of HealthCare Partners as security for the indemnification rights of the Company. The settlement amount of $270,000 was paid with these escrowed funds.
2016 U.S. Attorney Texas Investigation: In early February 2016, the Company announced that its pharmacy services wholly-owned subsidiary, DaVita Rx, LLC, (DaVita Rx) received a Civil Investigative Demand (CID) from the U.S. Attorney’s Office for the Northern District of Texas. The government is conducting a federal False Claims Act (FCA) investigation concerning allegations that DaVita Rx presented or caused to be presented false claims for payment to the government for prescription medications, as well as into the Company’s relationships with pharmaceutical manufacturers. The CID covers the period from January 1, 2006 through the present. In the spring of 2015, the Company initiated an internal compliance review of DaVita Rx during which it identified potential billing and operational issues, including potential write-offs and discounts of patient co-payment obligations, and credits to payors for returns of prescription drugs related to DaVita Rx. The Company notified the government in September 2015 that it was conducting this review of DaVita Rx and began providing regular updates of its review. Upon completion of its review, the Company filed a self-disclosure with the OIG in February 2016 and has been working to address and update the practices it identified in the self-disclosure, some of which overlap with information requested by the U.S. Attorney’s Office. The OIG informed the Company in February 2016 that its submission was not accepted. They indicated that the OIG is not expressing an opinion regarding the conduct disclosed or the Company’s legal positions. In connection with the Company’s ongoing efforts working with the government the Company learned that a qui tam complaint had been filed covering some of the issues in the CID and the Company’s self-disclosure. In December 2017, the Company finalized and executed a settlement agreement with the government and relators in the qui tam matter and that included total monetary consideration of $63,700, as previously announced, of which $41,500 was an incremental cash

17


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


payment and $22,200 was for amounts previously refunded, and all of which was previously accrued. The government’s investigation into certain of the Company's relationships with pharmaceutical manufacturers is ongoing, and in July 2018 the government served an HHS-OIG subpoena seeking additional documents and information relating to those relationships. The Company is continuing to cooperate with the government in this investigation.
2017 U.S. Attorney Massachusetts Investigation: In January 2017, the Company was served with an administrative subpoena for records by the U.S. Attorney’s Office, District of Massachusetts, relating to an investigation into possible federal health care offenses. The subpoena covers the period from January 1, 2007 through the present, and seeks documents relevant to charitable patient assistance organizations, particularly the American Kidney Fund, including documents related to efforts to provide patients with information concerning the availability of charitable assistance. The Company is continuing to cooperate with the government in this investigation.
2017 U.S. Attorney Colorado Investigation: In November 2017, the U.S. Attorney’s Office, District of Colorado informed the Company of an investigation it was conducting into possible federal health care offenses involving DaVita Kidney Care, as well as several of the Company’s wholly-owned subsidiaries, including DMG, DaVita Rx, DaVita Laboratory Services, Inc. (DaVita Labs), and RMS Lifeline Inc. (Lifeline). In August 2018, the Company received a CID from the DOJ. The CID was issued pursuant to the FCA and covers the period from January 2005 through the present. In connection with the resolution of the 2015 U.S. OIG Medicare Advantage Civil Investigation referred to above, the Company resolved possible claims relating to DMG in this investigation. The Company is continuing to cooperate with the government in this investigation.
2017 U.S. Attorney Florida Investigation: In November 2017, the U.S. Attorney’s Office, Southern District of Florida informed the Company of an investigation it was conducting into possible federal healthcare offenses involving the Company's wholly-owned subsidiary, Lifeline. The Company is continuing to cooperate with the government in this investigation.
2018 U.S. Attorney Florida Investigation: In March 2018, DaVita Labs received two CIDs from the U.S. Attorney’s Office, Middle District of Florida that were identical in nature but directed to the two different labs. According to the face of the CIDs, the U.S. Attorney’s Office is conducting an investigation as to whether the Company’s subsidiary submitted claims for blood, urine, and fecal testing, where there were insufficient test validation or stability studies to ensure accurate results, in violation of the FCA. In October 2018, DaVita Labs received a subpoena from the OIG in connection with this matter requesting certain patient records linked to clinical laboratory tests. The Company is continuing to cooperate with the government in this investigation.
* * *
Although the Company cannot predict whether or when proceedings might be initiated or when these matters may be resolved (other than as described above), 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 and to develop over the course of time. In addition to the inquiries and proceedings specifically identified above, the Company frequently is subject to other inquiries by state or federal government agencies and/or private civil qui tam complaints filed by relators. Negative findings or terms and conditions that the Company might agree to accept as part of a negotiated resolution of pending or future government inquiries or relator proceedings could result in, among other things, substantial financial penalties or awards against the Company, substantial payments made by the Company, harm to the Company’s reputation, required changes to the Company’s business practices, exclusion from future participation in the Medicare, Medicaid and other federal health care programs and, if criminal proceedings were initiated against the Company, possible criminal penalties, any of which could have a material adverse effect on the Company.
Shareholder and Derivative Claims
Peace Officers’ Annuity and Benefit Fund of Georgia Securities Class Action Civil Suit: On February 1, 2017, the Peace Officers’ Annuity and Benefit Fund of Georgia filed a putative federal securities class action complaint in the U.S. District Court for the District of Colorado against the Company and certain executives. The complaint covers the time period of August 2015 to October 2016 and alleges, generally, that the Company and its executives violated federal securities laws concerning the Company’s financial results and revenue derived from patients who received charitable premium assistance from an industry-funded non-profit organization. The complaint further alleges that the process by which patients obtained commercial insurance and received charitable premium assistance was improper and "created a false impression of DaVita’s business and

18


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


operational status and future growth prospects." In November 2017, the court appointed the lead plaintiff and an amended complaint was filed on January 12, 2018. On March 27, 2018, the Company and various individual defendants filed a motion to dismiss. Briefing on the motion is complete. The plaintiffs filed an opposition to the motion to dismiss on June 6, 2018. The Company filed a reply in support of the motion on July 19, 2018. The Company disputes these allegations and intends to defend this action accordingly.
In re DaVita Inc. Stockholder Derivative Litigation: On August 15, 2017, the U.S. District Court for the District of Delaware consolidated three previously disclosed shareholder derivative lawsuits: the Blackburn Shareholder action filed on February 10, 2017, the Gabilondo Shareholder action filed on May 30, 2017, and the City of Warren Police and Fire Retirement System Shareholder action filed on June 9, 2017. The complaint covers the time period from 2015 to present and alleges, generally, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, corporate waste, and misrepresentations and/or failures to disclose certain information in violation of the federal securities laws in connection with an alleged practice to direct patients with government-subsidized health insurance into private health insurance plans to maximize the Company’s profits. An amended complaint was filed in September 2017, and on December 18, 2017, the Company filed a motion to dismiss and a motion to stay proceedings in the alternative. The plaintiffs filed an opposition to the motion to dismiss on March 9, 2018. On June 25, 2018, the U.S. District Court for the District of Delaware granted the Company’s motion to stay proceedings and stayed the case until January 7, 2019, the date of the next status conference. The Company disputes these allegations and intends to defend this action accordingly.
Other Proceedings
White, Kathleen, et al. v. DaVita Healthcare Partners, Inc., Civil Action No. 15-cv-2106, U.S. District Court for the District of Colorado: Three actions (Menchaca v. DaVita Healthcare Partners, Inc., Saldana v. DaVita Healthcare Partners, Inc. and Hardin v. DaVita Healthcare Partners, Inc.) were consolidated in December 2016 into one action in U.S. District Court for the District of Colorado. In all three actions, the plaintiffs brought claims for wrongful death based on allegations related to Granuflo®, a product used as a component of the dialysis process. The Menchaca and Saldana actions arose out of the treatment of patients in California, while the Hardin action arose out of the treatment of a patient in Illinois. On June 27, 2018, the jury returned a verdict in favor of the plaintiffs, collectively awarding $8,500 in compensatory damages and $375,000 in punitive damages. Judgment on this verdict was not entered. On November 1, 2018, the parties filed a joint motion notifying the court that they have arrived at a settlement of the three actions. The resolution of all three of the consolidated actions, collectively, is for $25,500, and requires the filing of a stipulation of dismissal with prejudice in each case. The court has now ordered the parties to file these stipulations of dismissal by November 30, 2018. The Company believes it is probable that it will be able to recover the settlement amount from insurers, indemnitors, and the like; however, the Company can make no assurances that it will recover the full amount.
In addition to the foregoing, from time to time the Company is subject to other lawsuits, demands, claims, governmental investigations and audits and legal proceedings that arise due to the nature of its business, including contractual disputes, such as with payors, suppliers and others, employee-related matters and professional and general liability claims. From time to time, the Company also initiates litigation or other legal proceedings as a plaintiff arising out of contracts or other matters.
Resolved Matters
2011 Suit against the U.S. Department of Veterans Affairs: As previously disclosed, the Company had a pending lawsuit in the U.S. Court of Federal Claims against the federal government which was originally filed in May 2011. The lawsuit related to the U.S. Department of Veterans Affairs (VA) underpayment of dialysis services the Company provided from 2005 through 2011 to veterans pursuant to VA regulations. In the first quarter of 2017, the Company received a payment of $538,000 related to the settlement with the VA. The Company's consolidated entities recognized a net gain of $527,000 on this settlement. The Company's nonconsolidated and managed entities recognized a gain of $9,000, of which the Company's equity investment share was $3,000. The net effect was a net increase of $530,000 to the Company's operating income.
* * *
Other than as described above, the Company cannot predict the ultimate outcomes of the various legal proceedings and regulatory matters to which the Company is or may be subject from time to time, including those described in this Note 10 to these condensed consolidated financial statements, or the timing of their resolution or the ultimate losses or impact of developments in those matters, which could have a material adverse effect on the Company’s revenues, earnings and cash

19


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


flows. Further, any legal proceedings or regulatory matters involving the Company, whether meritorious or not, are time consuming, and often require management’s attention and result in significant legal expense, and may result in the diversion of significant operational resources, or otherwise harm the Company’s business, financial results or reputation.
11.
Noncontrolling interests subject to put provisions and other commitments
The Company has potential obligations to purchase the equity interests held by third parties in several of its majority-owned joint ventures and other nonconsolidated entities. These obligations are in the form of put provisions that 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’ equity interests at either the appraised fair market value or a predetermined multiple of earnings or cash flows attributable to the equity 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 noncontrolling interests subject to put provisions are a critical accounting estimate that involves significant judgments and assumptions and may not be indicative of the actual values at which the noncontrolling interests may ultimately be settled, which could vary significantly from the Company’s current estimates. The estimated fair values of 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’ equity interests. The amount of noncontrolling interests subject to put provisions that employ a contractually predetermined multiple of earnings rather than fair value are immaterial.
The Company has certain other potential commitments to provide operating capital to a number of dialysis centers that are wholly-owned by third parties or businesses in which the Company maintains a noncontrolling equity interest as well as to physician-owned vascular access clinics or medical practices that the Company operates under management and administrative services agreements of approximately $5,264.
Certain consolidated joint ventures are originally contractually scheduled to dissolve after terms ranging from 10 to 50 years. While noncontrolling interests in these limited life entities qualify as mandatorily redeemable financial instruments, they are subject to a classification and measurement scope exception from the accounting guidance generally applicable to other mandatorily redeemable financial instruments. Future distributions upon dissolution of these entities would be valued below the related noncontrolling interest carrying balances in the consolidated balance sheet.
12.
Long-term incentive compensation
Long-term incentive program (LTIP) compensation includes both stock-based awards (principally stock-settled stock appreciation rights, restricted stock units, and performance stock units) and long-term performance-based cash awards. Long-term incentive compensation expense, which was primarily general and administrative in nature, was attributed to the Company’s U.S. dialysis and related lab services business, corporate administrative support, and ancillary services and strategic initiatives.
The Company’s stock-based compensation awards are measured at their estimated fair values on the date of grant if settled in shares or at their estimated fair values at the end of each reporting period if settled in cash. The value of stock-based awards so measured is recognized as compensation expense on a cumulative straight-line basis over the vesting terms of the awards, adjusted for expected forfeitures.
During the nine months ended September 30, 2018, the Company granted 1,897 stock-settled stock appreciation rights with an aggregate grant-date fair value of $30,817 and a weighted-average expected life of approximately 4.2 years and 1,097 restricted and performance stock units with an aggregate grant-date fair value of $72,718 and a weighted-average expected life of approximately 3.3 years.
For the nine months ended September 30, 2018 and 2017, the Company recognized $74,077 and $46,972, respectively, in total LTIP expense, of which $60,461 and $25,281, respectively, represented stock-based compensation expense for stock appreciation rights, restricted stock units, performance stock units and discounted employee stock plan purchases, which are

20


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


primarily included in general and administrative expense. The estimated tax benefits recorded for stock-based compensation for the nine months ended September 30, 2018 and 2017 was $10,887 and $8,497, respectively.
During the three months ended September 30, 2018, the Company adopted a retirement policy (Rule of 65 policy). The Rule of 65 policy generally provides that Section 16 executive officers that are a minimum age of 55 with five years of continuous service with the Company receive certain benefits with respect to their outstanding equity awards upon a qualifying retirement if the sum of their age plus years of service is greater than or equal to 65. These benefits generally include accelerated vesting of restricted stock unit awards, continued vesting of stock-settled stock appreciation rights and performance stock unit awards and an exercise window from the original vest date through the original expiration date regardless of continued employment, with pro rata vesting for a Rule of 65 retirement within one year of the award grant date. The adoption of the Rule of 65 policy resulted in a $14,680 modification charge and a net acceleration of expense of $8,790 during the three and nine months ended September 30, 2018 that is included in the expense amounts reported above.
As of September 30, 2018, the Company had $122,887 of total estimated but unrecognized compensation expense for outstanding LTIP awards, including $103,923 related to stock-based compensation arrangements under the Company’s equity compensation and employee stock purchase plans. The Company expects to recognize the performance-based cash component of these LTIP costs over a weighted average remaining period of 0.9 year and the stock-based component of these LTIP costs over a weighted average remaining period of 1.5 years.
For the nine months ended September 30, 2018 and 2017, the Company recognized $7,919 and $6,046, respectively, in actual tax benefits upon the settlement of stock awards. 
13.
Share repurchases
During the nine months ended September 30, 2018, the Company repurchased a total of 16,844 shares of its common stock for $1,153,511 at an average price of $68.48 per share. The Company has not repurchased any shares of its common stock subsequent to September 30, 2018.
On July 11, 2018, the Company's Board of Directors approved an additional share repurchase authorization in the amount of $1,389,999. This share repurchase authorization was in addition to the $110,001 remaining at that time under the Company’s Board of Directors’ prior share repurchase authorization approved in October 2017. Accordingly, as of November 5, 2018, the Company has a total of $1,355,605 remaining available under the current Board repurchase authorizations for additional share repurchases. Although these share repurchase authorizations do not have expiration dates, the Company remains subject to share repurchase limitations under the terms of its senior secured credit facilities and the indentures governing its senior notes.

21


DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


14.
Accumulated other comprehensive (loss) income 
 
For the three months ended September 30, 2018
 
For the nine months ended September 30, 2018
 
Interest
rate cap
agreements
 
Investment
securities
 
Foreign
currency
translation
adjustments
 
Accumulated
other
comprehensive
(loss) income
 
Interest
rate cap
agreements
 
Investment
securities
 
Foreign
currency
translation
adjustments
 
Accumulated
other
comprehensive
(loss) income
Beginning balance
$
(11,258
)
 
 
 
$
(10,667
)
 
$
(21,925
)
 
$
(12,408
)
 
$
5,662

 
$
19,981

 
$
13,235

Cumulative effect
of change in
accounting
principle
(1)