dva-10q_20160930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the Quarterly Period Ended September 30, 2016

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

THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-14106

 

DAVITA INC.

 

2000 16th Street

Denver, CO 80202

Telephone number (303) 405-2100

 

Delaware

 

51-0354549

(State of incorporation)

 

(I.R.S. Employer

Identification No.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      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      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

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  

As of October 31, 2016, the number of shares of the Registrant’s common stock outstanding was approximately 197.4 million shares.

 

 

 

 


 

DAVITA INC.

INDEX

 

 

 

 

  

Page No.

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements:

  

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2016 and September 30, 2015

  

2

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and September 30, 2015

  

3

 

 

Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

  

4

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and September 30, 2015

  

5

 

 

Consolidated Statements of Equity for the nine months ended September 30, 2016 and for the year ended December 31, 2015

  

6

 

 

Notes to Condensed Consolidated Financial Statements

  

7

Item 2.

 

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

  

37

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

58

Item 4.

 

Controls and Procedures

  

59

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

  

60

Item 1A.

 

Risk Factors

  

62

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

89

Item 6.

 

Exhibits

  

90

 

 

Signature

  

91

 

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

 

 

 

i


 

DAVITA INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars in thousands, except per share data)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Patient service revenues

 

$

2,629,661

 

 

$

2,414,034

 

 

$

7,678,053

 

 

$

7,049,428

 

Less: Provision for uncollectible accounts

 

 

(115,555

)

 

 

(109,452

)

 

 

(336,188

)

 

 

(314,581

)

Net patient service revenues

 

 

2,514,106

 

 

 

2,304,582

 

 

 

7,341,865

 

 

 

6,734,847

 

Capitated revenues

 

 

869,290

 

 

 

926,847

 

 

 

2,654,163

 

 

 

2,643,552

 

Other revenues

 

 

347,180

 

 

 

294,236

 

 

 

1,033,335

 

 

 

869,849

 

Total net revenues

 

 

3,730,576

 

 

 

3,525,665

 

 

 

11,029,363

 

 

 

10,248,248

 

Operating expenses and charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patient care costs and other costs

 

 

2,697,629

 

 

 

2,501,015

 

 

 

7,950,987

 

 

 

7,309,703

 

General and administrative

 

 

406,890

 

 

 

353,492

 

 

 

1,180,214

 

 

 

1,043,253

 

Depreciation and amortization

 

 

181,739

 

 

 

162,062

 

 

 

531,475

 

 

 

474,694

 

Provision for uncollectible accounts

 

 

3,773

 

 

 

2,511

 

 

 

9,856

 

 

 

6,497

 

Equity investment income

 

 

(4,237

)

 

 

(2,783

)

 

 

(5,119

)

 

 

(10,724

)

Goodwill impairment charges

 

 

 

 

 

 

 

 

253,000

 

 

 

4,065

 

Gain on changes in ownership interests, net

 

 

(374,374

)

 

 

 

 

 

(404,165

)

 

 

 

Settlement charge

 

 

 

 

 

 

 

 

 

 

 

495,000

 

Total operating expenses and charges

 

 

2,911,420

 

 

 

3,016,297

 

 

 

9,516,248

 

 

 

9,322,488

 

Operating income

 

 

819,156

 

 

 

509,368

 

 

 

1,513,115

 

 

 

925,760

 

Debt expense

 

 

(104,581

)

 

 

(103,481

)

 

 

(310,359

)

 

 

(305,121

)

Debt redemption charges

 

 

 

 

 

 

 

 

 

 

 

(48,072

)

Other income, net

 

 

1,876

 

 

 

2,484

 

 

 

8,067

 

 

 

4,262

 

Income before income taxes

 

 

716,451

 

 

 

408,371

 

 

 

1,210,823

 

 

 

576,829

 

Income tax expense

 

 

104,301

 

 

 

147,064

 

 

 

366,011

 

 

 

183,893

 

Net income

 

 

612,150

 

 

 

261,307

 

 

 

844,812

 

 

 

392,936

 

Less: Net income attributable to noncontrolling interests

 

 

(40,818

)

 

 

(45,435

)

 

 

(122,664

)

 

 

(117,204

)

Net income attributable to DaVita Inc.

 

$

571,332

 

 

$

215,872

 

 

$

722,148

 

 

$

275,732

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share attributable to DaVita Inc.

 

$

2.80

 

 

$

1.02

 

 

$

3.54

 

 

$

1.30

 

Diluted net income per share attributable to DaVita Inc.

 

$

2.76

 

 

$

1.00

 

 

$

3.48

 

 

$

1.27

 

Weighted average shares for earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

203,761,433

 

 

 

212,374,897

 

 

 

204,206,979

 

 

 

212,914,126

 

Diluted

 

 

206,961,450

 

 

 

216,691,461

 

 

 

207,643,794

 

 

 

217,421,213

 

 

See notes to condensed consolidated financial statements.

 

 

2


 

DAVITA INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

612,150

 

 

$

261,307

 

 

$

844,812

 

 

$

392,936

 

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

 

 

(153

)

 

 

(1,851

)

 

 

(8,238

)

 

 

(10,064

)

Reclassifications of net swap and cap agreements realized

   losses into net income

 

 

388

 

 

 

771

 

 

 

1,301

 

 

 

2,372

 

Unrealized gains (losses) on investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on investments

 

 

1,121

 

 

 

(1,651

)

 

 

1,988

 

 

 

(1,368

)

Reclassification of net investment realized gains into

   net income

 

 

(50

)

 

 

(203

)

 

 

(143

)

 

 

(376

)

Unrealized gains (losses) on foreign currency translation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(951

)

 

 

(7,023

)

 

 

5,386

 

 

 

(19,883

)

Reclassification of foreign currency translation adjustment

   realized loss into net income

 

 

7,513

 

 

 

 

 

 

7,513

 

 

 

 

Other comprehensive income (loss)

 

 

7,868

 

 

 

(9,957

)

 

 

7,807

 

 

 

(29,319

)

Total comprehensive income

 

 

620,018

 

 

 

251,350

 

 

 

852,619

 

 

 

363,617

 

Less: Comprehensive income attributable to noncontrolling

   interests

 

 

(40,876

)

 

 

(45,435

)

 

 

(122,871

)

 

 

(117,204

)

Comprehensive income attributable to DaVita Inc.

 

$

579,142

 

 

$

205,915

 

 

$

729,748

 

 

$

246,413

 

 

See notes to condensed consolidated financial statements.

 

 

3


 

DAVITA INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

913,496

 

 

$

1,499,116

 

Short-term investments

 

 

659,478

 

 

 

408,084

 

Accounts receivable, less allowance of $251,593 and $264,144

 

 

1,850,425

 

 

 

1,724,228

 

Inventories

 

 

200,563

 

 

 

185,575

 

Other receivables

 

 

451,953

 

 

 

435,885

 

Other current assets

 

 

177,248

 

 

 

190,322

 

Income taxes receivable

 

 

8,196

 

 

 

60,070

 

Total current assets

 

 

4,261,359

 

 

 

4,503,280

 

Property and equipment, net of accumulated depreciation of $2,728,217 and $2,397,007

 

 

3,044,988

 

 

 

2,788,740

 

Intangible assets, net of accumulated amortization of $895,034 and $770,691

 

 

1,576,157

 

 

 

1,687,326

 

Equity investments

 

 

516,383

 

 

 

78,368

 

Long-term investments

 

 

100,786

 

 

 

89,122

 

Other long-term assets

 

 

42,984

 

 

 

73,560

 

Goodwill

 

 

9,382,996

 

 

 

9,294,479

 

 

 

$

18,925,653

 

 

$

18,514,875

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

498,422

 

 

$

513,950

 

Other liabilities

 

 

828,535

 

 

 

682,123

 

Accrued compensation and benefits

 

 

845,879

 

 

 

741,926

 

Medical payables

 

 

313,869

 

 

 

332,102

 

Current portion of long-term debt

 

 

152,764

 

 

 

129,037

 

Total current liabilities

 

 

2,639,469

 

 

 

2,399,138

 

Long-term debt

 

 

8,972,002

 

 

 

9,001,308

 

Other long-term liabilities

 

 

420,938

 

 

 

439,229

 

Deferred income taxes

 

 

802,109

 

 

 

726,962

 

Total liabilities

 

 

12,834,518

 

 

 

12,566,637

 

Commitments and contingencies:

 

 

 

 

 

 

 

 

Noncontrolling interests subject to put provisions

 

 

971,744

 

 

 

864,066

 

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;

   217,338,629 and 217,120,346 shares issued and 200,778,434 and 209,754,247

   shares outstanding, respectively)

 

 

217

 

 

 

217

 

Additional paid-in capital

 

 

1,032,739

 

 

 

1,118,326

 

Retained earnings

 

 

5,078,983

 

 

 

4,356,835

 

Treasury stock (16,560,195 and 7,366,099 shares, respectively)

 

 

(1,147,967

)

 

 

(544,772

)

Accumulated other comprehensive loss

 

 

(52,226

)

 

 

(59,826

)

Total DaVita Inc. shareholders’ equity

 

 

4,911,746

 

 

 

4,870,780

 

Noncontrolling interests not subject to put provisions

 

 

207,645

 

 

 

213,392

 

Total equity

 

 

5,119,391

 

 

 

5,084,172

 

 

 

$

18,925,653

 

 

$

18,514,875

 

 

See notes to condensed consolidated financial statements.

 

 

4


 

DAVITA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands) 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

844,812

 

 

$

392,936

 

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

 

 

 

 

 

 

 

 

Settlement charge

 

 

 

 

 

495,000

 

Settlement payments

 

 

 

 

 

(493,775

)

Depreciation and amortization

 

 

531,475

 

 

 

474,694

 

Debt redemption charges

 

 

 

 

 

48,072

 

Goodwill impairment charges

 

 

253,000

 

 

 

4,065

 

Stock-based compensation expense

 

 

29,817

 

 

 

42,794

 

Tax benefits from stock award exercises

 

 

27,012

 

 

 

31,069

 

Excess tax benefits from stock award exercises

 

 

(12,584

)

 

 

(19,555

)

Deferred income taxes

 

 

48,778

 

 

 

(1,994

)

Equity investment income, net

 

 

16,825

 

 

 

10,563

 

Gain on changes in ownership interests, net

 

 

(404,165

)

 

 

 

Other non-cash charges

 

 

9,163

 

 

 

22,518

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(85,660

)

 

 

(178,148

)

Inventories

 

 

(13,045

)

 

 

(35,856

)

Other receivables and other current assets

 

 

(1,616

)

 

 

54,924

 

Other long-term assets

 

 

31,081

 

 

 

1,940

 

Accounts payable

 

 

(45,507

)

 

 

11,473

 

Accrued compensation and benefits

 

 

79,289

 

 

 

123,081

 

Other current liabilities

 

 

119,549

 

 

 

96,671

 

Income taxes

 

 

65,164

 

 

 

35,282

 

Other long-term liabilities

 

 

(12,126

)

 

 

4,773

 

Net cash provided by operating activities

 

 

1,481,262

 

 

 

1,120,527

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions of property and equipment

 

 

(575,243

)

 

 

(462,213

)

Acquisitions

 

 

(497,331

)

 

 

(90,709

)

Proceeds from asset and business sales

 

 

18,991

 

 

 

6,865

 

Purchase of investments available for sale

 

 

(9,041

)

 

 

(6,667

)

Purchase of investments held-to-maturity

 

 

(976,411

)

 

 

(1,555,604

)

Proceeds from sale of investments available for sale

 

 

8,636

 

 

 

1,961

 

Proceeds from investments held-to-maturity

 

 

743,941

 

 

 

969,549

 

Purchase of intangible assets

 

 

(75

)

 

 

 

Purchase of equity investments

 

 

(11,629

)

 

 

(13,623

)

Proceeds from sale of equity investments

 

 

40,920

 

 

 

 

Distributions received on equity investments

 

 

 

 

 

57

 

Net cash used in investing activities

 

 

(1,257,242

)

 

 

(1,150,384

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings

 

 

39,102,302

 

 

 

41,371,392

 

Payments on long-term debt and other financing costs

 

 

(39,201,016

)

 

 

(40,732,075

)

Deferred financing and debt redemption costs

 

 

(188

)

 

 

(59,354

)

Purchase of treasury stock

 

 

(620,898

)

 

 

(384,110

)

Distributions to noncontrolling interests

 

 

(145,072

)

 

 

(125,938

)

Stock award exercises and other share issuances, net

 

 

18,515

 

 

 

19,802

 

Excess tax benefits from stock award exercises

 

 

12,584

 

 

 

19,555

 

Contributions from noncontrolling interests

 

 

35,524

 

 

 

28,212

 

Purchase of noncontrolling interests

 

 

(9,727

)

 

 

(23,605

)

Net cash (used in) provided by financing activities

 

 

(807,976

)

 

 

113,879

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,664

)

 

 

(1,844

)

Net (decrease) increase in cash and cash equivalents

 

 

(585,620

)

 

 

82,178

 

Cash and cash equivalents at beginning of the year

 

 

1,499,116

 

 

 

965,241

 

Cash and cash equivalents at end of the period

 

$

913,496

 

 

$

1,047,419

 

 

See notes to condensed consolidated financial statements.

 

5


 

DAVITA INC.

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

(dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

controlling

 

 

 

controlling

 

 

DaVita Inc. Shareholders’ Equity

 

 

interests

 

 

 

interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

not

 

 

 

subject to

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

 

subject to

 

 

 

put

 

 

Common

 

 

paid-in

 

 

Retained

 

 

 

 

 

 

 

 

 

 

comprehensive

 

 

 

 

 

 

put

 

 

 

provisions

 

 

stock

 

 

capital

 

 

earnings

 

 

Treasury stock

 

 

loss

 

 

Total

 

 

provisions

 

Balance at December 31, 2014

 

$

829,965

 

 

 

215,641

 

 

$

216

 

 

$

1,108,211

 

 

$

4,087,103

 

 

 

 

 

$

 

 

$

(25,017

)

 

$

5,170,513

 

 

$

189,798

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

96,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

269,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

269,732

 

 

 

61,168

 

Other comprehensive

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34,809

)

 

 

(34,809

)

 

 

 

 

Stock purchase shares issued

 

 

 

 

 

 

 

 

 

 

 

 

(6,079

)

 

 

 

 

 

 

414

 

 

 

30,608

 

 

 

 

 

 

 

24,529

 

 

 

 

 

Stock unit shares issued

 

 

 

 

 

 

348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-settled SAR shares

   issued

 

 

 

 

 

 

1,131

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-settled stock-based

   compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,899

 

 

 

 

 

Excess tax benefits from stock

   awards exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,157

 

 

 

 

 

Distributions to noncontrolling

   interests

 

 

(103,355

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(71,280

)

Contributions from

   noncontrolling interests

 

 

25,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,849

 

Sales and assumptions of

   additional noncontrolling

   interests

 

 

10,654

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,875

 

Purchase of noncontrolling

   interests

 

 

(8,538

)

 

 

 

 

 

 

 

 

 

 

(55,826

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(55,826

)

 

 

(2,018

)

Changes in fair value of

   noncontrolling interests

 

 

13,035

 

 

 

 

 

 

 

 

 

 

 

(13,035