Document



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

FORM 10-Q

 
 
 
 
 
For the Quarterly Period Ended March 31, 2017
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
 
 
 
 
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 April 28, 2017, the number of shares of the Registrant’s common stock outstanding was approximately 194.6 million shares.
 
 
 
 
 




DAVITA INC.
INDEX

 
 
 
  
Page No.
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 1.
 
  
 
 
 
  

 
 
  

 
 
  

 
 
  

 
 
  

 
 
  

Item 2.
 
  

Item 3.
 
  
56

Item 4.
 
  
57

 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
Item 1.
 
  

Item 1A.
 
  

Item 2.
 
  
87

Item 6.
 
  

 
 
  

 
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
March 31,
 
2017
 
2016
Patient service revenues
$
2,601,378

 
$
2,481,933

Less: Provision for uncollectible accounts
(112,983
)
 
(109,205
)
     Net patient service revenues
2,488,395

 
2,372,728

Capitated revenues
918,036

 
887,047

Other revenues
290,852

 
321,361

Total net revenues
3,697,283

 
3,581,136

Operating expenses and charges:
 

 
 

     Patient care costs and other costs
2,722,820

 
2,582,333

     General and administrative
391,780

 
386,429

     Depreciation and amortization
190,206

 
169,355

     Provision for uncollectible accounts
1,910

 
2,517

     Equity investment income
(3,935
)
 
(1,387
)
     Goodwill and asset impairment charges
39,366

 
77,000

     Gain on changes in ownership interests
(6,273
)
 

     Gain on settlement, net
(526,827
)
 

          Total operating expenses and charges
2,809,047

 
3,216,247

Operating income
888,236

 
364,889

Debt expense
(104,429
)
 
(102,884
)
Other income, net
4,243

 
2,976

Income before income taxes
788,050

 
264,981

Income tax expense
287,765

 
126,822

Net income
500,285

 
138,159

     Less: Net income attributable to noncontrolling interests
(52,588
)
 
(40,725
)
Net income attributable to DaVita Inc.
$
447,697

 
$
97,434

Earnings per share:
 

 
 

     Basic net income per share attributable to DaVita Inc.
$
2.33

 
$
0.48

     Diluted net income per share attributable to DaVita Inc.
$
2.29

 
$
0.47

Weighted average shares for earnings per share:
 
 
 
     Basic
192,376,735

 
204,366,869

     Diluted
195,281,014

 
207,928,096

 
See notes to condensed consolidated financial statements.


1



DAVITA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
 
 
Three months ended
March 31,
 
2017
 
2016
Net income
$
500,285

 
$
138,159

Other comprehensive income (loss), net of tax:
 

 
 

Unrealized losses on interest rate cap and swap agreements:
 

 
 

Unrealized losses on interest rate cap and swap agreements
(3,188
)
 
(5,469
)
Reclassifications of net rate cap and swap agreements realized losses into net
income
1,265

 
465

Unrealized gains on investments:
 

 
 

Unrealized gains on investments
1,557

 
229

Reclassification of net investment realized gains into net income
(140
)
 
(93
)
Unrealized gains on foreign currency translation:
 

 
 

Foreign currency translation adjustments
13,261

 
11,181

Other comprehensive income
12,755

 
6,313

Total comprehensive income
513,040

 
144,472

Less: Comprehensive income attributable to noncontrolling interests
(52,586
)
 
(40,725
)
Comprehensive income attributable to DaVita Inc.
$
460,454

 
$
103,747

 
See notes to condensed consolidated financial statements.


2



DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
 
March 31,
2017
 
December 31,
2016
ASSETS
 

 
 

Cash and cash equivalents
$
1,472,232

 
$
913,187

Short-term investments
313,265

 
310,198

Accounts receivable, less allowance of $242,462 and $252,056
1,900,561

 
1,917,302

Inventories
174,159

 
164,858

Other receivables
539,656

 
453,483

Prepaid and other current assets
204,027

 
210,604

Income taxes receivable

 
10,596

Total current assets
4,603,900

 
3,980,228

Property and equipment, net of accumulated depreciation of $2,954,237 and $2,832,160
3,171,199

 
3,175,367

Intangible assets, net of accumulated amortization of $987,468 and $940,731
1,487,029

 
1,527,767

Equity investments
521,848

 
502,389

Long-term investments
108,368

 
103,679

Other long-term assets
43,450

 
44,510

Goodwill
9,452,470

 
9,407,317

 
$
19,388,264

 
$
18,741,257

LIABILITIES AND EQUITY
 

 
 

Accounts payable
$
464,790

 
$
522,415

Other liabilities
783,806

 
856,847

Accrued compensation and benefits
756,002

 
815,761

Medical payables
389,681

 
336,381

Current portion of long-term debt
170,217

 
165,041

Income tax payable
249,081

 

Total current liabilities
2,813,577

 
2,696,445

Long-term debt
8,918,878

 
8,947,327

Other long-term liabilities
504,380

 
465,358

Deferred income taxes
830,990

 
809,128

Total liabilities
13,067,825

 
12,918,258

Commitments and contingencies:
 

 
 

Noncontrolling interests subject to put provisions
979,848

 
973,258

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; 194,596,120 and
194,554,491 shares issued and outstanding, respectively)
195

 
195

Additional paid-in capital
1,058,610

 
1,027,182

Retained earnings
4,158,010

 
3,710,313

Accumulated other comprehensive loss
(76,886
)
 
(89,643
)
Total DaVita Inc. shareholders’ equity
5,139,929

 
4,648,047

Noncontrolling interests not subject to put provisions
200,662

 
201,694

Total equity
5,340,591

 
4,849,741

 
$
19,388,264

 
$
18,741,257

See notes to condensed consolidated financial statements.

3



DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
 
Three months ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net income
$
500,285

 
$
138,159

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

 
 

Depreciation and amortization
190,206

 
169,355

Goodwill and asset impairment charges
39,366

 
77,000

Stock-based compensation expense
9,601

 
13,097

Deferred income taxes
20,091

 
47,519

Equity investment income, net
1,423

 
5,238

Other non-cash charges
9,467

 
11,507

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

 
 

Accounts receivable
16,168

 
(78,097
)
Inventories
(8,909
)
 
(4,924
)
Other receivables and other current assets
(84,511
)
 
(75,326
)
Other long-term assets
(2,310
)
 
(965
)
Accounts payable
(26,214
)
 
7,782

Accrued compensation and benefits
(62,825
)
 
(32,909
)
Other current liabilities
(9,633
)
 
55,673

Income taxes
258,490

 
76,685

Other long-term liabilities
14,479

 
19,208

Net cash provided by operating activities
865,174

 
429,002

Cash flows from investing activities:
 

 
 

     Additions of property and equipment
(214,535
)
 
(173,187
)
     Acquisitions
(77,236
)
 
(405,154
)
     Proceeds from asset and business sales
46,612

 
4,657

     Purchase of investments available for sale
(2,358
)
 
(4,435
)
     Purchase of investments held-to-maturity
(121,670
)
 
(228,198
)
     Proceeds from sale of investments available for sale
4,025

 
5,155

     Proceeds from investments held-to-maturity
116,285

 
252,701

     Purchase of equity investments
(1,135
)
 
(5,850
)
Net cash used in investing activities
(250,012
)
 
(554,311
)
Cash flows from financing activities:
 

 
 

     Borrowings
12,803,015

 
13,098,553

     Payments on long-term debt and other financing costs
(12,839,156
)
 
(13,118,741
)
     Purchase of treasury stock

 
(274,926
)
     Distributions to noncontrolling interests
(43,316
)
 
(50,409
)
     Stock award exercises and other share issuances, net
3,330

 
3,167

     Contributions from noncontrolling interests
17,989

 
10,190

     Proceeds from sales of additional noncontrolling interests

 
3,557

     Purchase of noncontrolling interests
(799
)
 
(4,300
)
     Deferred financing costs

 
(188
)
Net cash used in financing activities
(58,937
)
 
(333,097
)
Effect of exchange rate changes on cash and cash equivalents
2,820

 
717

Net increase (decrease) in cash and cash equivalents
559,045

 
(457,689
)
Cash and cash equivalents at beginning of the year
913,187

 
1,499,116

Cash and cash equivalents at end of the period
$
1,472,232

 
$
1,041,427

See notes to condensed consolidated financial statements.

4



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
 
 
 
 
 
Common stock
 
 
Retained
earnings
 
Treasury stock
 
 
 
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
Total
 
Balance at December 31, 2015
$
864,066

 
217,120

 
$
217

 
$
1,118,326

 
$
4,356,835

 
(7,366
)
 
$
(544,772
)
 
$
(59,826
)
 
$
4,870,780

 
$
213,392

Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
99,834

 
 

 
 

 


 
879,874

 
 

 
 

 
 

 
879,874

 
53,374

Other comprehensive loss
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(29,817
)
 
(29,817
)
 
190

Stock purchase shares issued
 

 
438

 
1

 
23,902

 
 

 

 


 
 

 
23,903

 
 

Stock unit shares issued
 

 
4

 

 
(19,815
)
 
 

 
276

 
19,815

 
 

 

 
 

Stock-settled SAR shares issued
 

 
218

 

 
(36,685
)
 
 

 
513

 
36,685

 
 

 

 
 

Stock-settled stock-based
compensation expense
 

 
 

 
 

 
37,970

 
 

 
 

 
 

 
 

 
37,970

 
 

Excess tax benefits from
stock awards exercised
 

 
 

 
 

 
13,251

 
 

 
 

 
 

 
 

 
13,251

 
 

Distributions to
noncontrolling interests
(111,092
)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(81,309
)
Contributions from
noncontrolling interests
33,517

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14,073

Sales and assumptions
of noncontrolling interests
28,874

 
 

 
 

 
3,423

 
 

 
 

 
 

 
 

 
3,423

 
2,585

Purchase of noncontrolling
interests
(6,660
)
 
 

 
 

 
(13,105
)
 
 

 
 

 
 

 
 

 
(13,105
)
 
(1,747
)
Changes in fair value of
noncontrolling interests
65,855

 
 

 
 

 
(65,855
)
 
 

 
 

 
 

 
 

 
(65,855
)
 
 

Reclassifications and expirations of
noncontrolling interests subject to
puts
(1,136
)
 


 


 


 


 


 


 


 


 
1,136

Purchase of treasury stock


 


 


 


 


 
(16,649
)
 
(1,072,377
)
 


 
(1,072,377
)
 


Retirement of treasury stock


 
(23,226
)
 
(23
)
 
(34,230
)
 
(1,526,396
)
 
23,226

 
1,560,649

 
 

 

 
 

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
34,585

 
 

 
 

 
 

 
447,697

 
 

 
 

 
 

 
447,697

 
18,003

Other comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
12,757

 
12,757

 
(2
)
Stock unit shares issued
 

 
4

 

 

 
 

 

 

 
 

 

 
 

Stock-settled SAR shares issued
 

 
38

 

 

 
 

 

 

 
 

 

 
 

Stock-settled stock-based
compensation expense
 

 
 

 


 
9,567

 
 

 
 

 
 

 


 
9,567

 
 

Distributions to noncontrolling
interests
(25,957
)
 
 

 
 

 

 
 

 
 

 
 

 
 

 

 
(17,359
)
Contributions from
noncontrolling interests
13,193

 
 

 
 

 

 
 

 
 

 
 

 
 

 

 
4,796

Sales and assumptions
of noncontrolling interests
7,347

 
 

 
 

 

 
 

 
 

 
 

 
 

 

 
(6,388
)
Purchase of noncontrolling
interests
(294
)
 
 

 
 

 
(423
)
 
 

 
 

 
 

 


 
(423
)
 
(82
)
Changes in fair value of
noncontrolling interests
(22,284
)
 
 

 


 
22,284

 
 

 
 

 
 

 


 
22,284

 
 

Balance at March 31, 2017
$
979,848

 
194,596

 
$
195

 
$
1,058,610

 
$
4,158,010

 

 
$

 
$
(76,886
)
 
$
5,139,929

 
$
200,662


 See notes to condensed consolidated financial statements

5


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 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 other long-lived assets, fair value estimates, accounting for income taxes, variable compensation accruals, consolidation of variable interest entities, purchase accounting valuation estimates, long-term incentive program compensation and medical liability claims. The results of operations for the three months ended March 31, 2017 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, 2016. 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.
Earnings per share
Basic net income per share is calculated by dividing net income attributable to the Company, adjusted for any change in noncontrolling interests redemption rights in excess of fair value, by the weighted average number of common shares and vested stock units outstanding, net of shares held in escrow from the DaVita HealthCare Partner merger that under certain circumstances may be returned to the Company.
Diluted net income per share includes the dilutive effect of outstanding stock-settled stock appreciation rights and unvested stock units (under the treasury stock method) as well as contingently returnable shares held in escrow.
The reconciliations of the numerators and denominators used to calculate basic and diluted earnings per share are as follows:
 
 
Three months ended
March 31,
 
2017
 
2016
Basic:
 

 
 

Net income attributable to DaVita Inc.
$
447,697

 
$
97,434

Weighted average shares outstanding during the period
194,571

 
206,561

Contingently returnable shares held in escrow from the DaVita HealthCare Partners merger
(2,194
)
 
(2,194
)
Weighted average shares for basic earnings per share calculation
192,377

 
204,367

Basic net income per share attributable to DaVita Inc.
$
2.33

 
$
0.48

Diluted:
 

 
 

Net income attributable to DaVita Inc.
$
447,697

 
$
97,434

Weighted average shares outstanding during the period
194,571

 
206,561

Assumed incremental shares from stock plans
710

 
1,367

Weighted average shares for diluted earnings per share calculation
195,281

 
207,928

Diluted net income per share attributable to DaVita Inc.
$
2.29

 
$
0.47

Anti-dilutive potential common shares excluded from calculation(1)
3,427

 
2,273

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

6


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


3.
Accounts receivable
Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the ultimate collectability of accounts receivable, the Company analyzes its historical cash collection experience and trends for each of its government payors and commercial payors to estimate the adequacy of the allowance for doubtful accounts and the amount of the provision for uncollectible accounts. Management regularly updates its analysis based upon the most recent information available to determine its current provision for uncollectible accounts and the adequacy of its allowance for doubtful accounts.
For receivables associated with dialysis patient services covered by Medicare, the Company receives 80% of the payment directly from Medicare as established under the government’s bundled payment system and determines an appropriate allowance for doubtful accounts and provision for uncollectible accounts on the remaining balance due depending upon the Company’s estimate of the amounts ultimately collectible from other secondary coverage sources or from the patients. For receivables associated with services to patients covered by commercial payors that are either based upon contractual terms or for non-contracted health plan coverage, the Company provides an allowance for doubtful accounts by recording a provision for uncollectible accounts based upon its historical collection experience, potential inefficiencies in its billing processes and for which collectability is determined to be unlikely.
For receivables associated with the Company’s capitated health plans, the balances remain on the balance sheet for as long as the respective plan years are open, which varies by health plan, but is generally two years in length, with collections occurring on a periodic basis throughout the duration of the corresponding plan year.
Approximately 1% of the Company’s net accounts receivable are associated with patient pay. The Company’s policy is to reserve 100% of the outstanding accounts receivable balances for dialysis services when those amounts due have been outstanding for more than three months and to reserve 100% of the outstanding accounts receivable balances for DaVita Medical Group's (DMG, formerly known as HealthCare Partners or HCP) services when those amounts due have been outstanding for more than twelve months and when the amount is not subject to a payment plan.
During the three months ended March 31, 2017, the Company’s allowance for doubtful accounts decreased by $9,594. This was primarily due to a decrease in outstanding balances and an increase in write-offs of aged balances related to the U.S. dialysis and related lab business. There were no unusual transactions impacting the allowance for doubtful accounts.
 
4.
Investments in debt and equity securities
The Company classifies certain debt securities as held-to-maturity and records them at amortized cost based on the Company’s intentions and strategy concerning those investments. Equity securities that have readily determinable fair values, and certain other financial instruments that have readily determinable fair values or redemption values, are classified as available-for-sale and recorded at fair value.
The Company’s investments in these securities and certain other financial instruments consist of the following:
 
March 31, 2017
 
December 31, 2016
 
Held to
maturity
 
Available
for sale
 
Total
 
Held to
maturity
 
Available
for sale
 
Total
Certificates of deposit, commercial paper and
money market funds due within one year
$
312,065

 
$

 
$
312,065

 
$
256,827

 
$

 
$
256,827

Investments in mutual funds and common stock

 
48,124

 
48,124

 
50,000

 
47,404

 
97,404

Cash surrender value of life insurance policies

 
61,444

 
61,444

 

 
59,646

 
59,646

 
$
312,065

 
$
109,568

 
$
421,633

 
$
306,827

 
$
107,050

 
$
413,877

Short-term investments
$
312,065

 
$
1,200

 
$
313,265

 
$
306,827

 
$
3,371

 
$
310,198

Long-term investments

 
108,368

 
108,368

 

 
103,679

 
103,679

 
$
312,065

 
$
109,568

 
$
421,633

 
$
306,827

 
$
107,050

 
$
413,877

 

7


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


The cost of the certificates of deposit, commercial paper and money market funds at March 31, 2017 and December 31, 2016 approximates their fair value. As of March 31, 2017 and December 31, 2016, the available-for-sale investments included $5,585 and $3,701 of gross pre-tax unrealized gains, respectively. During the three months ended March 31, 2017, the Company recorded gross pre-tax unrealized gains of $2,113, or $1,559 after tax, in other comprehensive income associated with changes in the fair value of these investments. During the three months ended March 31, 2017, the Company sold investments in mutual funds and debt securities for net proceeds of $4,025 and recognized a pre-tax gain of $229, or $140 after-tax, which was previously recorded in other comprehensive income. During the three months ended March 31, 2016, the Company sold investments in mutual funds for net proceeds of $1,062 and recognized a pre-tax gain of $152, or $93 after-tax, which was previously recorded in other comprehensive income.
The investments in mutual funds classified as available-for-sale are held within a trust to fund existing obligations associated with several of the Company’s non-qualified deferred compensation plans.
Investments in life insurance policies are carried at their cash surrender value, are held within trusts to fund existing obligations associated with certain of the Company’s non-qualified deferred compensation plans, and are principally classified as long-term to correspond with the long-term classification of the related plan liabilities.
Certain DMG legal entities are required to maintain minimum cash balances in order to comply with regulatory requirements in conjunction with medical claim reserves. As of March 31, 2017, this minimum cash balance was approximately $61,567.
 
 
5.
Equity investments
Equity investments that do not have readily determinable fair values are carried on the cost or equity method, as applicable. The Company maintains equity method investments in nonconsolidated investees in both its Kidney Care and DMG lines of business, as well as minor cost method investments in private securities of certain other healthcare businesses. The Company classifies its non-marketable cost- or equity-method investments as equity investments on its balance sheet.
Equity investments in nonconsolidated businesses were $521,848 and $502,389 at March 31, 2017 and December 31, 2016, respectively. The increase in equity investments was primarily due to an increase in the number of nonconsolidated entities. During the first quarters of 2017 and 2016, the Company recognized equity investment income of $3,935 and $1,387, respectively, relating to equity investments in nonconsolidated businesses under the equity method of accounting. 

8


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


6.
Goodwill
Changes in goodwill by reportable segments were as follows:
 
U.S. dialysis and
related lab services
 
DMG
 
Other-ancillary
services and
strategic initiatives
 
Consolidated total
Balance at January 1, 2016
$
5,629,183

 
$
3,398,264

 
$
267,032

 
$
9,294,479

Acquisitions
75,295

 
248,901

 
123,632

 
447,828

Divestitures
(12,891
)
 
(2,223
)
 
(29,645
)
 
(44,759
)
Goodwill impairment charges

 
(253,000
)
 
(28,415
)
 
(281,415
)
Foreign currency and other adjustments

 

 
(8,816
)
 
(8,816
)
Balance at December 31, 2016
$
5,691,587

 
$
3,391,942

 
$
323,788

 
$
9,407,317

Acquisitions
46,569

 
14,989

 
17,171

 
78,729

Divestitures
(14,110
)
 
(29
)
 

 
(14,139
)
Goodwill impairment charges

 

 
(24,198
)
 
(24,198
)
Foreign currency and other adjustments

 

 
4,761

 
4,761

Balance at March 31, 2017
$
5,724,046

 
$
3,406,902

 
$
321,522

 
$
9,452,470

 
 
 
 
 
 
 
 
Balance at March 31, 2017:
 
 
 
 
 
 
 
Goodwill
5,724,046

 
3,848,671

 
380,044

 
9,952,761

Accumulated impairment charges

 
(441,769
)
 
(58,522
)
 
(500,291
)
 
$
5,724,046

 
3,406,902

 
321,522

 
9,452,470

 The Company elected to early adopt ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment effective for the quarter ended March 31, 2017. The amendments in this ASU simplify the test for goodwill impairment by eliminating the second step in the assessment. All goodwill impairment tests performed during the quarter ended March 31, 2017 were performed under this new guidance.
Each of the Company’s operating segments described in Note 17 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 DMG operations in each region, to the vascular access service centers in its vascular access reporting unit, to the physician practices in its physician services and direct primary care reporting units, and to the dialysis centers within each international reporting unit. For the Company’s other operating segments, discrete business components below the operating segment level constitute individual reporting units.
Based on continuing developments at the Company’s DMG and vascular access reporting units during the first quarter of 2017, the Company performed impairment assessments for certain at-risk reporting units.

9


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


The Company has recognized goodwill impairment charges as shown and discussed below:
 
 
Three months ended
Reporting unit
 
March 31, 2017
 
March 31, 2016
DMG Nevada
 
$

 
$
77,000

Vascular access
 
24,198

 

Total
 
$
24,198

 
$
77,000

During the quarter ended December 31, 2016, the Company determined that circumstances indicated it had become more likely than not that the goodwill of its vascular access reporting unit had become impaired. These circumstances included changes in future governmental reimbursement and the Company’s expected ability to mitigate them. Specifically, on November 2, 2016, the Centers for Medicare and Medicaid Services (CMS) released the 2017 Physician Fee Schedule Final Rule and the Ambulatory Surgical Center Payment Final Rule which reflected significant changes in reimbursement structure for this business unit. Accordingly, the Company performed the required valuations to estimate the fair value of the net assets and implied goodwill of this reporting unit and recognized a goodwill impairment charge of $28,415 in the fourth quarter of 2016.
During the quarter ended March 31, 2017, the Company recognized an incremental goodwill impairment charge of $24,198 at its vascular access reporting unit. This additional charge resulted primarily from changes in the Company’s outlook since the fourth quarter of 2016. The Company’s partners and operators have been evaluating potential changes in operations, including termination of their management services agreements and center closures, as a result of recent changes in Medicare reimbursement. These ongoing evaluations could lead to additional impairment charges in future quarters.
During the quarter ended March 31, 2016, the Company recognized goodwill impairment charges of $77,000 at its DMG Nevada reporting unit. This charge resulted primarily from changes in expectations concerning government reimbursement and the Company’s expected ability to mitigate them, medical cost trends, and other market conditions.
Further reductions in reimbursement rates, increases in medical cost or utilization trends, or other significant adverse changes in expected future cash flows or valuation assumptions could result in goodwill impairment charges in the future for the following reporting units, which remain at risk of goodwill impairment:
 
Goodwill balance
as of
March 31, 2017
 
Carrying
amount
coverage
(1)
 
Sensitivities
 
 
 
Operating
income
(2)
 
Discount
rate
(3)
Reporting unit
 
 
 
DMG Nevada
$
261,204

 
14.0
%
 
(2.7
)%
 
(3.9
)%
DMG Florida
$
447,073

 
10.5
%
 
(1.6
)%
 
(2.8
)%
DMG New Mexico
$
70,926

 
4.9
%
 
(1.5
)%
 
(2.3
)%
DMG Washington
$
245,576

 
2.0
%
 
(1.7
)%
 
(3.0
)%
Vascular Access
$
10,498

 
0.0
%
 
(1.7
)%
 
(4.9
)%
 
(1)
Excess of estimated fair value of the reporting unit over carrying amount as of the latest assessment date.
(2)
Potential impact on estimated fair value of a sustained, long-term reduction of 3% in operating income as of the latest assessment date.
(3)
Potential impact on estimated fair value of an increase in discount rates of 100 basis points as of the latest assessment date.
Except as described above, none of the Company’s various other reporting units were considered at risk of goodwill impairment as of March 31, 2017. Since the dates of the Company’s last annual goodwill impairment tests, there have been certain developments, events, changes in operating performance and other changes in key circumstances that have affected the Company’s businesses. However, except as further described above, these did not cause management to believe it is more likely than not that the fair value of any of its reporting units would be less than their carrying amounts. 

10


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


7.
Medical payables
The following table includes estimates for the cost of professional medical services provided by non-employed physicians and other providers, as well as inpatient and other ancillary costs, other than California's non-global risk contracts. The Company does not include inpatient and other ancillary costs for non-global risk contracts held in California, as state regulation does not allow medical group entities to assume risk for inpatient services. Healthcare costs payable are included in medical payables in the condensed consolidated balance sheet.
The following table shows the components of changes in health care costs payable for the three months ended March 31, 2017
 
Three months ended
 
March 31, 2017
Healthcare costs payable, beginning of the period
$
214,275

Add: Components of incurred health care costs
 

Current year
467,683

Prior years
421

Total incurred health care costs
468,104

Less: Claims paid
 

Current year
247,723

Prior years
172,693

Total claims paid
420,416

Healthcare costs payable, end of the period
$
261,963

 
The Company’s prior year estimates of healthcare costs payable resulted in medical claims being settled for different amounts than originally estimated. When significant increases (decreases) in prior-year health care cost estimates occur that the Company believes significantly impact its current year operating results, the Company discloses that amount as unfavorable (favorable) development of prior-year’s health care cost estimates. Actual claim payments for prior year services have not been materially different from the Company’s year-end estimates. 
8.
Income taxes
As of March 31, 2017, the Company’s total liability for unrecognized tax benefits relating to tax positions that do not meet the more-likely-than-not threshold was $26,399, all of which would impact the Company’s effective tax rate if recognized. This balance represents an increase of $2,333 from the December 31, 2016 balance of $24,066.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. At March 31, 2017 and December 31, 2016, the Company had approximately $2,776 and $2,595, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefits. 

11


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


9.
Long-term debt
Long-term debt was comprised of the following: 
 
March 31, 2017
 
December 31, 2016
Senior secured credit facilities:
 
 
 
Term Loan A
$
843,750

 
$
862,500

Term Loan B
3,403,750

 
3,412,500

Senior notes
4,500,000

 
4,500,000

Acquisition obligations and other notes payable
120,952

 
117,547

Capital lease obligations
296,505

 
299,682

Total debt principal outstanding
9,164,957

 
9,192,229

Discount and deferred financing costs
(75,862
)
 
(79,861
)
 
9,089,095

 
9,112,368

Less current portion
(170,217
)
 
(165,041
)
 
$
8,918,878

 
$
8,947,327


Scheduled maturities of long-term debt at March 31, 2017 were as follows: 
2017 (remainder of the year)
129,532

2018
167,855

2019
745,584

2020
70,157

2021
3,301,236

2022
1,277,759

Thereafter
3,472,834

 
During the first three months of 2017, the Company made mandatory principal payments under its senior secured credit facilities totaling $18,750 on Term Loan A and $8,750 on Term Loan B.
As of March 31, 2017, the Company maintains several active and forward 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 term of the cap agreements. The cap agreements do not contain credit-risk contingent features.
As of March 31, 2017, the Company maintains several interest rate cap agreements that were entered into in November 2014 with notional amounts totaling $3,500,000. These cap agreements became effective September 30, 2016 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 the Company’s debt. The cap agreements expire on June 30, 2018. As of March 31, 2017, the total fair value of these cap agreements was an asset of approximately $14. During the three months ended March 31, 2017, the Company recognized debt expense of $2,070 from these caps. During the three months ended March 31, 2017, the Company recorded a loss of $102 in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements.
As of March 31, 2017, the Company also maintains several forward interest rate cap agreements that were entered into in October 2015 with notional amounts totaling $3,500,000. These forward cap agreements will become effective June 29, 2018 and will 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 March 31, 2017, the total fair value of these cap agreements was an asset of approximately $4,698. During the three months ended March 31, 2017, the Company recorded a loss of $5,115 in other comprehensive income due to a decrease in the unrealized fair value of these forward cap agreements.

12


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 derivative instruments as of March 31, 2017 and December 31, 2016
 
March 31, 2017
 
December 31, 2016
Derivatives designated as hedging instruments
Balance sheet location
 
Fair value
 
Balance sheet location
 
Fair value
Interest rate cap agreements
Other long-term assets
 
$
4,712

 
Other long-term assets
 
$
9,929

 
The following table summarizes the effects of the Company’s interest rate cap and swap agreements for the three months ended March 31, 2017 and 2016:
 
 
Amount of losses
recognized in OCI on interest
rate cap and swap agreements
 
Location of losses reclassified from accumulated OCI into income
 
Amount of losses
reclassified from
accumulated OCI into income
 
Three months ended
March 31,
 
 
Three months ended
March 31,
Derivatives designated as cash flow hedges
2017
 
2016
 
 
2017
 
2016
Interest rate swap agreements
$

 
$
(692
)
 
Debt expense
 
$

 
$
151

Interest rate cap agreements
(5,217
)
 
(8,259
)
 
Debt expense
 
2,070

 
610

Tax benefit (expense)
2,029

 
3,482

 
 
 
(805
)
 
(296
)
Total
$
(3,188
)
 
$
(5,469
)
 
 
 
$
1,265

 
$
465

 
As of March 31, 2017, the interest rate on 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 $96,250. In addition, the uncapped portion of Term Loan A, which is subject to the variability of LIBOR, is $747,500. 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 end of the quarter was 3.95%, based on the current margins in effect of 2.00% for Term Loan A and 2.75% for Term Loan B, as of March 31, 2017.
The Company’s overall weighted average effective interest rate during the quarter ended March 31, 2017 was 4.55% and as of March 31, 2017 was 4.64%.
As of March 31, 2017, the Company’s interest rates are fixed on approximately 53.1% of its total debt.
As of March 31, 2017, the Company had undrawn revolving credit facilities totaling $1,000,000, of which approximately $94,623 was committed for outstanding letters of credit. The remaining amount is unencumbered. In addition, the Company has approximately $1,286 of committed letters of credit outstanding related to 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, 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 December 31, 2016 and March 31, 2017, the Company’s total recorded accruals with respect to legal proceedings and

13


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


regulatory matters, net of anticipated third party recoveries, were approximately $69,300 for both periods. 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 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 may be exacerbated 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
Swoben Private Civil Suit: In April 2013, HealthCare Partners (HCP), now known as the Company’s DMG subsidiary, was one of several defendants served with a civil complaint filed by a former employee of SCAN Health Plan (SCAN), an HMO. On July 13, 2009, pursuant to the qui tam provisions of the federal False Claims Act (FCA) and the California False Claims Act, James M. Swoben, as relator, filed his initial qui tam action in the United States District Court for the Central District of California purportedly on behalf of the United States of America and the State of California against SCAN, and certain other defendants whose identities were under seal. The allegations in the complaint relate to alleged overpayments received from government healthcare programs. In 2009 and 2010, the relator twice amended his complaint and added additional defendants, and in November 2011, he filed his Third Amended Complaint under seal alleging violations of the federal FCA and the California False Claims Act, and added additional defendants, including HCP and certain health insurance companies (the defendant HMOs). The allegations in the complaint against HCP relate to patient diagnosis coding to determine reimbursement in the Medicare Advantage (MA) program, referred to as HCC and RAF scores. The complaint sought monetary damages and civil penalties as well as costs and expenses. The U.S. Department of Justice (DOJ) reviewed these allegations and in January 2013 declined to intervene in the case. HCP and the other defendants filed motions to dismiss the Third Amended Complaint, and the court dismissed with prejudice the claims and judgment was entered in September 2013. Upon the plaintiff’s appeal, a panel of the Ninth Circuit overturned the trial court’s ruling and vacated the dismissal of the case. The Company, with certain defendants, petitioned the Ninth Circuit for a rehearing, but in December 2016, the Ninth Circuit rejected the petition and determined the relator should be given an opportunity to amend the complaint, and remanded the case back to district court. In March 2017, the relator filed his Fourth Amended Complaint alleging that HCP and certain health insurance companies employed one-way retrospective reviews that were designed only to identify additional diagnoses that would be submitted to CMS for risk adjustment purposes, and thereby drive higher risk scores that would increase the capitated payments made by the federal government under the MA program. The Company disputes the allegations and intends to defend accordingly.
2015 U.S. Attorney Transportation Investigation: In February 2015, the Company announced that it received six administrative subpoenas from the OIG for medical records from six different dialysis centers in southern California operated by the Company. Specifically, each subpoena sought the medical records of a single patient of each respective dialysis center. In February 2016, the Company received four additional subpoenas for four additional dialysis centers in southern California. The subpoenas were similarly limited in scope to the subpoenas received in 2015. On February 8, 2017, the Company was served with a qui tam complaint in the U.S. District Court for the Central District of California. The Company has been advised by an attorney with the United States Attorney’s Office for the Central District of California that the qui tam is related to the investigation concerning the medical necessity of patient transportation, which was the basis for the subpoenas. The relator alleged that an ambulance company submitted false claims for patient transportation. Although the Company does not provide transportation nor does it bill for the transport of its dialysis patients, the relator alleged that two of its purported clinical staff caused the submission of a small number of those claims through improper certifications of medical necessity. The DOJ has declined to intervene. In April 2017, the court granted the Company's motion to dismiss the complaint without prejudice for failing to state a claim upon which relief can be granted.
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 Office of Inspector General (OIG) for the U.S.

14


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


Department of Health and Human Services (HHS). The Company has been advised by an attorney with the Civil Division of the DOJ in Washington, D.C. that the subpoena relates to an ongoing civil investigation concerning MA service providers’ risk adjustment practices and data, including identification and verification of patient diagnoses and factors used in making the diagnoses. The subpoena requests 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 requests information regarding JSA’s communications about patient diagnoses as they relate to certain MA plans generally, and more specifically as related to two Florida physicians with whom JSA previously contracted. The Company is producing the requested information and is cooperating with the government’s investigation.
In addition to the subpoena described above, in June 2015, the Company received a subpoena from the OIG. This civil subpoena covers the period from January 1, 2008 through the present and seeks production of a wide range of documents relating to the Company’s and its subsidiaries’ (including DMG’s and its subsidiary JSA’s) provision of services to MA plans and related patient diagnosis coding and risk adjustment submissions and payments. The Company believes that the request is part of a broader industry investigation into MA patient diagnosis coding and risk adjustment practices and potential overpayments by the government. The information requested includes information relating 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 DMG, and the Company notified CMS in April 2015 of the coding practice and potential overpayments. In that regard, the Company has identified certain additional coding practices which may have been problematic and is in discussions with the DOJ about the scope and nature of a review of claims relating to those practices. The Company is cooperating with the government and is producing the requested information. In addition, the Company is continuing to review other DMG coding practices to determine whether there were any improper coding issues. In connection with the DMG merger, the Company has certain indemnification rights against the sellers and an escrow was established as security for the indemnification. The Company has submitted an indemnification claim against the sellers secured by the escrow for any and all liabilities incurred relating to these matters and intends to pursue recovery from the escrow. However, the Company can make no assurances that the indemnification and escrow will cover the full amount of the Company’s potential losses related to these matters.
2015 U.S. Department of Justice Vascular Access Investigation and Related Qui Tam Litigation: In November 2015, the Company announced that RMS Lifeline, Inc., a wholly-owned subsidiary of the Company that operates under the name Lifeline Vascular Access (Lifeline), received a Civil Investigative Demand (CID) from the DOJ. The CID relates to two vascular access centers in Florida that are part of Lifeline’s vascular access business. The CID covers the period from January 1, 2008 through the present. The Company acquired these two centers in December 2012. Based on the language of the CID, the DOJ appeared to be looking at whether angiograms performed at the two centers were medically unnecessary and therefore whether related claims filed with federal healthcare programs possibly violated the FCA. Lifeline does not perform dialysis services but instead provides vascular access management services for dialysis patients. The Company cooperated with the government and produced the requested information. The DOJ investigation was initiated pursuant to a complaint brought under the qui tam provisions of the FCA (the Complaint). The Complaint was originally filed under seal in August 2014 in the U.S. District Court, Middle District of Florida, United States ex. rel James Spafford v. DaVita HealthCare Partners, Inc., et al., Case Number 6:14-cv-1251-Orl-41DAB, naming several doctors along with the Company as defendants. In December 2015, a First Amended Complaint was filed under seal. In May 2016, the First Amended Complaint was unsealed. The First Amended Complaint alleges violations of the FCA due to the submission of claims to the government for allegedly medically unnecessary angiograms and angiography procedures at the two vascular access centers as well as employment-related claims. The Complaint covers alleged conduct dating from July 2008, prior to the Company’s acquisition of the centers, to the present. The DOJ declined to intervene. In January 2017, the Company finalized and executed a settlement agreement with the relator and the government for an immaterial amount, and in April 2017, the court dismissed the case with prejudice.

15


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


2016 U.S. Attorney Prescription Drug Investigation: In early February 2016, the Company announced that its pharmacy services’ wholly-owned subsidiary, DaVita Rx, received a CID from the U.S. Attorney’s Office for the Northern District of Texas. It appears the government is conducting an 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 relationship 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 early 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 Company does not know if the U.S. Attorney’s Office, which is part of the DOJ, knew when it served the CID on the Company that it was already in the process of developing a self-disclosure to the OIG. 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. The Company is cooperating with the government and is producing the requested information.
Solari Post-Acquisition Matter: In 2016, HCP Nevada disclosed to the OIG for the HHS that proper procedures for clinical and eligibility determinations may not have been followed by Las Vegas Solari Hospice (Solari), which was acquired in March 2013 and sold in September 2016 by HCP Nevada. In June 2016, the Company was notified by the OIG that the disclosure submission had been accepted into the OIG’s Self Disclosure Protocol. HCP Nevada had previously made a disclosure and repayment of overpayments to National Government Services (NGS), the Medicare Administrative Contractor for HCP Nevada, for claims submitted by Solari to the federal government prior to DMG’s acquisition of Solari and claims made to the government post-acquisition for which the sellers had certain responsibilities pursuant to a management services agreement. The Company is cooperating with the government in this matter.
2017 U.S. Attorney American Kidney Fund Investigation: On January 4, 2017, the Company was served with an administrative subpoena for records by the United States 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 cooperating with the government and is producing the requested information.
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. In addition to the inquiries and proceedings specifically identified above, the Company is frequently 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 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

16


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.” The Company disputes these allegations and intends to defend this action accordingly.
Blackburn Shareholder Derivative Civil Suit: On February 10, 2017, Charles Blackburn filed a derivative shareholder lawsuit in the U.S. District Court for the District of Delaware against the Company, as nominal defendant, the Board of Directors and certain executives. The complaint covers the time period from 2015 to present and alleges, generally, breach of fiduciary duty, unjust enrichment and misrepresentations and/or failures to disclose certain information in violation of the federal securities laws in the Company’s 2016 proxy statement 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. The Company disputes these allegations and intends to defend this action accordingly. On April 4, 2017, the court stayed this proceeding until the resolution of the Peace Officers’ Annuity and Benefit Fund of Georgia Securities Class Action Civil Suit, whether by dismissal with prejudice or entry of final judgment.
Resolved Matters
Vainer Private Civil Suit: As previously disclosed, the Company received a subpoena for documents from the OIG relating to the pharmaceutical products Zemplar, Hectorol, Venofer, Ferrlecit and erythropoietin (EPO), as well as other related matters, covering the period from January 2003 to December 2008. The Company subsequently learned that the allegations underlying this inquiry were made as part of a civil complaint filed by relators, Daniel Barbir and Dr. Alon Vainer, pursuant to the qui tam provisions of the federal FCA. The relators also alleged that the Company’s drug administration practices for the Company’s dialysis operations for Vitamin D and iron agents from 2003 through 2010 fraudulently created unnecessary waste, which was billed to and paid for by the government. In June 2015, the Company finalized the terms of the settlement with plaintiffs, including a settlement amount of $450,000 and attorney fees and other costs of $45,000 which was paid in 2015.
2011 U.S. Attorney Medicaid Investigation: In October 2011, the Company announced that it would be receiving a request for documents, which could include an administrative subpoena from the OIG. Subsequent to the Company’s announcement of this 2011 U.S. Attorney Medicaid Investigation, the Company received a request for documents in connection with the inquiry by the U.S. Attorney’s Office for the Eastern District of New York. The request related to payments for infusion drugs covered by Medicaid composite payments for dialysis. The Company cooperated with the government and produced the requested documents. In April 2014, the Company reached an agreement in principle with the government. In March 2016, the Company finalized and executed settlement agreements with the State of New York and the DOJ, including a settlement payment of an immaterial amount.
Other Proceedings
In addition to the foregoing, from time to time the Company is subject to other lawsuits, 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 initiates litigation or other legal proceedings as a plaintiff arising out of contracts or other matters. In that regard, 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, we received a payment of $538,000 related to the settlement with the VA. Our consolidated entities recognized a net gain of $527,000 on this settlement. Our nonconsolidated and managed entities recognized a gain of $9,000, of which our 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, 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 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

17


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


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 noncontrolling interests held by third parties in several of its majority-owned and other nonconsolidated entities. These obligations are in the form of put provisions and are exercisable at the third-party owners’ discretion within specified periods as outlined in each specific put provision. If these put provisions were exercised, the Company would be required to purchase the third-party owners’ equity interests at either the appraised fair market value or a predetermined multiple of earnings or cash flow 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 the noncontrolling interests subject to put provisions is a critical accounting estimate that involves significant judgments and assumptions and may not be indicative of the actual values at which the noncontrolling interests may ultimately be settled, which could vary significantly from the Company’s current estimates. The estimated fair values of noncontrolling interests subject to put provisions can fluctuate and the implicit multiple of earnings at which these noncontrolling interest obligations may be settled could 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 several 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 $3,441.
Certain consolidated joint ventures are originally contractually scheduled to dissolve after terms ranging from 10 to 50 years. Accordingly, the noncontrolling interests in these partnerships are considered mandatorily redeemable instruments, for which the classification and measurement requirements have been indefinitely deferred. Future distributions upon dissolution of these entities would be valued below the related noncontrolling interest carrying balances in the consolidated balance sheet.
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) as well as long-term performance-based cash awards. Long-term incentive compensation expense, which was primarily general and administrative in nature, was attributed to the Company’s U.S. dialysis and related lab services business, DMG business, corporate administrative support, and the other 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 three months ended March 31, 2017, the Company granted 244 stock-settled stock appreciation rights with an aggregate grant-date fair value of $3,453 and a weighted average expected life of approximately 4.1 years, and also granted 54 stock-settled restricted stock units with an aggregate grant-date fair value of $3,679 and a weighted-average expected life of approximately 2.5 years.
For the three months ended March 31, 2017 and 2016, the Company recognized $17,166 and $24,745, respectively, in total LTIP expense, of which $9,601 and $13,097, respectively, represented stock-based compensation expense for stock appreciation rights, restricted stock units, and discounted employee stock plan purchases, which are primarily included in general and administrative expense. The estimated tax benefits recorded for stock-based compensation for the three months ended March 31, 2017 and 2016 was $3,300 and $4,539, respectively. As of March 31, 2017, the Company had $91,479 of total

18


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


estimated but unrecognized compensation expense for outstanding LTIP awards, including $60,244 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 1.0 year and the stock-based component of these LTIP costs over a weighted average remaining period of 1.3 years.
For the three months ended March 31, 2017 and 2016, the Company received $1,091 and $8,668, respectively, in actual tax benefits upon the exercise of stock awards. 
13.     Comprehensive income 
 
For the three months ended March 31, 2017
 
For the three months ended March 31, 2016
 
Interest
rate cap
and swap
agreements
 
Investment
securities
 
Foreign
currency
translation
adjustments
 
Accumulated
other
comprehensive
(loss) income
 
Interest
rate cap
and swap
agreements
 
Investment
securities
 
Foreign
currency
translation
adjustments
 
Accumulated
other
comprehensive
(loss) income
Beginning balance
$
(12,029
)
 
$
2,175

 
$
(79,789
)
 
$
(89,643
)
 
$
(10,925
)
 
$
1,361

 
$
(50,262
)
 
$
(59,826
)
Unrealized (losses)
gains
(5,217
)
 
2,113

 
13,261

 
10,157

 
(8,951
)
 
342

 
11,181

 
2,572

Related income tax
benefit (expense)
2,029

 
(554
)
 

 
1,475

 
3,482

 
(113
)
 

 
3,369

 
(3,188
)
 
1,559

 
13,261

 
11,632

 
(5,469
)
 
229

 
11,181

 
5,941

Reclassification
from accumulated
other
comprehensive
income into net
income
2,070

 
(229
)
 

 
1,841

 
761

 
(152
)
 

 
609

Related income tax (expense) benefit
(805
)
 
89

 

 
(716
)
 
(296
)
 
59

 

 
(237
)
 
1,265

 
(140
)
 

 
1,125

 
465

 
(93
)
 

 
372

Ending balance
$
(13,952
)
 
$
3,594

 
$
(66,528
)
 
$
(76,886
)
 
$
(15,929
)
 
$
1,497

 
$
(39,081
)
 
$
(53,513
)
  
The reclassification of net cap and swap realized losses into income are recorded as debt expense in the corresponding consolidated statements of income. See Note 9 to these condensed consolidated financial statements for further details.
The reclassification of net investment realized gains into income are recorded in other income in the corresponding consolidated statements of income. See Note 4 to these condensed consolidated financial statements for further details. 
14.
Acquisitions and divestitures
Other routine acquisitions
During the three months ended March 31, 2017, the Company acquired dialysis and other businesses consisting of 12 dialysis centers located in the U.S., three dialysis centers located outside the U.S., and two other medical businesses for a total of $77,236 in net cash, $2,205 in deferred purchase price obligations, and $1,495 in earn-outs and liabilities assumed. The assets and liabilities for all of these acquisitions were recorded at their estimated fair values at the dates of the acquisitions and are included in the Company’s condensed consolidated financial statements, as are their operating results, from the designated effective dates of the acquisitions. Certain income tax amounts are pending final evaluation and quantification of any pre-acquisition tax contingencies. In addition, valuation of medical claims liabilities and certain other working capital items relating to these acquisitions are pending final quantification.

19


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


The following table summarizes the assets acquired and liabilities assumed in these transactions and recognized at their acquisition dates at estimated fair values: 
Current assets
$
1,123

Property and equipment
5,604

Amortizable intangible and other long-term assets
6,173

Goodwill
78,729

Noncontrolling interests assumed
(8,052
)
Deferred income taxes
(2,194
)
Liabilities assumed
(447
)
Aggregate purchase price
$
80,936

 Amortizable intangible assets acquired during the first three months of 2017 had weighted-average estimated useful lives of five years. The majority of the intangible assets acquired during the first three months of 2017 relate to non-compete agreements having a weighted-average useful life and amortization period of five years. The total amount of goodwill deductible for tax purposes associated with these acquisitions was approximately $69,691.
Contingent earn-out obligations
The Company has several contingent earn-out obligations associated with acquisitions that could result in the Company paying the former owners of acquired companies a total of up to $13,754 if certain EBITDA, operating income performance targets or quality margins are met primarily over the next one to seven years.
Contingent earn-out obligations are remeasured to fair value at each reporting date until the contingencies are resolved with changes in the liability due to the re-measurement recorded in earnings. See Note 16 to these condensed consolidated financial statements for further details. As of March 31, 2017, the Company has estimated the fair value of these contingent earn-out obligations to be $8,565, of which a total of $4,653 is included in other liabilities and the remaining $3,912 is included in other long-term liabilities in the Company’s condensed consolidated balance sheet.
The following is a reconciliation of changes in the contingent earn-out obligations for the three months ended March 31, 2017:
 
Beginning balance, January 1, 2017
$
9,977

Contingent earn-out obligations associated with acquisitions
1,053

Remeasurement of fair value for contingent earn-out obligations
102

Payments on contingent earn-out obligations
(2,567
)
 
$
8,565

 
15.
Variable interest entities
The Company relies on the operating activities of certain legal entities that it does not directly own or control, but over which it has indirect influence and of which it is considered the primary beneficiary. These entities are subject to the consolidation guidance applicable to variable interest entities (VIEs).
Under U.S. generally accepted accounting principles (GAAP), VIEs typically include entities for which (i) the entity’s equity is not sufficient to finance its activities without additional subordinated financial support; (ii) the equity holders as a group lack the power to direct the activities that most significantly influence the entity’s economic performance, the obligation to absorb the entity’s expected losses, or the right to receive the entity’s expected returns; or (iii) the voting rights of some investors are not proportional to their obligations to absorb the entity’s losses.
The Company has determined that substantially all of the legal entities it is associated with that qualify as VIEs must be included in its consolidated financial statements. The Company manages these entities and provides operating and capital funding as necessary for these entities to accomplish their operational and strategic objectives. A number of these entities are

20


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


subject to nominee ownership transfer restriction agreements that effectively transfer the majority of the economic risks and rewards of their ownership to the Company. In other cases, the Company’s management agreements with these entities include both financial terms and protective and participating rights to the entities’ operating, strategic and non-clinical governance decisions which transfer substantial powers over and economic responsibility for the entities to the Company. In some cases, such entities are subject to broad exclusivity or noncompetition restrictions that benefit the Company. Further, in some cases, the Company has contractual arrangements with the nominee owners that effectively indemnify these parties from the economic losses from, or entitle the Company to the economic benefits of, these entities.
The analyses upon which these consolidation determinations rest are complex, involve uncertainties, and require significant judgment on various matters, some of which could be subject to different interpretations. At March 31, 2017, these condensed consolidated financial statements include total assets of VIEs of $751,805 and total liabilities and noncontrolling interests of VIEs to third parties of $411,822.
The Company also sponsors certain deferred compensation plans whose trusts qualify as VIEs and the Company consolidates each of these plans as their primary beneficiary. The assets of these plans are recorded in short-term or long-term investments with matching offsetting liabilities recorded in accrued compensation and benefits and other long-term liabilities. See Note 4 to these condensed consolidated financial statements for disclosures on the assets of these consolidated non-qualified deferred compensation plans. 
16.
Fair value of financial instruments
The Company measures the fair value of certain assets, liabilities and noncontrolling interests subject to put provisions (temporary equity) based upon certain valuation techniques that include observable or unobservable inputs and assumptions that market participants would use in pricing these assets, liabilities, temporary equity and commitments. The Company also has classified certain assets, liabilities and temporary equity that are measured at fair value into the appropriate fair value hierarchy levels as defined by the Financial Accounting Standards Board (FASB).
The following table summarizes the Company’s assets, liabilities and temporary equity measured at fair value on a recurring basis as of March 31, 2017
 
Total
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 

 
 

 
 

 
 

Available-for-sale securities
$
48,124

 
$
48,124

 
$

 
$

Cash surrender value of life insurance policies
$
61,444

 
$

 
$
61,444

 
$

Interest rate cap agreements
$
4,712

 
$

 
$
4,712

 
$

Funds on deposit with third parties
$
79,459

 
$
79,459

 
$

 
$

Liabilities
 
 
 

 
 

 
 

Contingent earn-out obligations
$
8,565

 
$

 
$

 
$
8,565

Temporary equity
 

 
 

 
 

 
 

Noncontrolling interests subject to put provisions
$
979,848

 
$

 
$

 
$
979,848

 
Available-for-sale securities represent investments in various open-ended registered investment companies, or mutual funds, and are recorded at estimated fair value based upon quoted prices reported by each mutual fund. See Note 4 to these condensed consolidated financial statements for further discussion.
Investments in life insurance policies are carried at their cash surrender value which approximates their fair value. See Note 4 to these condensed consolidated financial statements for further discussion.
The interest rate cap agreements are recorded at fair value estimated from valuation models utilizing the income approach and commonly accepted valuation techniques that use inputs from closing prices for similar assets and liabilities in active markets as well as other relevant observable market inputs at quoted intervals such as current interest rates, forward yield curves, implied volatility and credit default swap pricing. The Company does not believe the ultimate amount that could be

21


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


realized upon settlement of these interest rate cap agreements would be materially different from the fair value estimates currently reported. See Note 9 to these condensed consolidated financial statements for further discussion.
The funds on deposit with third parties represent funds held with various third parties as required by regulation or contract and invested by those parties in various investments, which are measured at estimated fair value based primarily on quoted market prices.
The estimated fair value measurements of contingent earn-out obligations are primarily based on unobservable inputs including projected EBITDA, estimated probability of achieving gross margins or quality margins of certain medical procedures and the estimated probability of earn-out payments being made using an option pricing technique and a simulation model for expected EBITDA and operating income. In addition, a probability adjusted model was used to estimate the fair value amounts of the quality margins. The estimated fair value of these contingent earn-out obligations are remeasured as of each reporting date and could fluctuate based upon any significant changes in key assumptions, such as changes in the Company credit risk adjusted rate that is used to discount obligations to present value.
See Note 11 to these condensed consolidated financial statements for a discussion of the Company’s methodology for estimating the fair value of noncontrolling interests subject to put obligations.
Other financial instruments consist primarily of cash, accounts receivable, accounts payable, other accrued liabilities and debt. The balances of the non-debt financial instruments are presented in the condensed consolidated financial statements at March 31, 2017 at their approximate fair values due to the short-term nature of their settlements.
The carrying balance of the Company’s senior secured credit facilities totaled $4,171,638 as of March 31, 2017, and the fair value was approximately $4,300,460 based upon quoted market prices, a level 2 input.
The carrying balance of the Company’s senior notes was $4,500,000 as of March 31, 2017 and their fair value was approximately $4,568,650, based upon quoted market prices, a level 2 input.  
17.
Segment reporting
The Company operates two major divisions, DaVita Kidney Care (Kidney Care) and DaVita Medical Group (DMG). The Kidney Care division is comprised of the Company’s U.S. dialysis and related lab services business, various ancillary services and strategic initiatives, including its international operations, and the Company’s corporate administrative support. The Company’s U.S. dialysis and related lab services business is its largest line of business, and is a leading provider of kidney dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as ESRD. The Company’s DMG division is a patient- and physician-focused integrated healthcare delivery and management company with over two decades of providing coordinated outcomes-based medical care in a cost-effective manner.
The Company’s ancillary services and strategic initiatives consist primarily of pharmacy services, disease management services, vascular access services, clinical research programs, physician services, direct primary care and the Company’s international dialysis operations.
The Company’s operating segments have been defined based on the separate financial information that is regularly produced and reviewed by the Company’s chief operating decision maker in making decisions about allocating resources to and assessing the financial performance of the Company’s various operating lines of business. The chief operating decision maker for the Company is its Chief Executive Officer.
The Company’s separate operating segments include its U.S. dialysis and related lab services business, its DMG operations in each region, each of its ancillary services and strategic initiatives, and its consolidated international kidney care and other healthcare operations in the European and Middle Eastern, Latin America, and Asia Pacific markets, and under the Saudi Ministry of Health charter. The U.S. dialysis and related lab services business and the DMG business each qualify as separately reportable segments, and all of the other ancillary services and strategic initiatives operating segments, including the international operating segments, have been combined and disclosed in the other segments category.
The Company’s operating segment financial information included in this report is prepared on the internal management reporting basis that the chief operating decision maker uses to allocate resources and assess the financial performance of the operating segments. For internal management reporting, segment operations include direct segment operating expenses but

22


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


exclude corporate administrative support costs, which consist primarily of indirect labor, benefits and long-term incentive based compensation of certain departments which provide support to all of the Company’s various operating lines of business. These corporate administrative support costs are reduced by internal management fees received from the Company’s ancillary lines of businesses.
The following is a summary of segment net revenues, segment operating margin (loss), and a reconciliation of segment operating margin to consolidated income before income taxes:
 
Three months ended
March 31,
 
2017
 
2016
Segment net revenues:
 
 
 
U.S. dialysis and related lab services
 
 
 
Patient service revenues:
 
 
 
External sources
$
2,348,901

 
$
2,313,663

Intersegment revenues
23,760

 
14,308

Total dialysis and related lab services revenues
2,372,661

 
2,327,971

Less: Provision for uncollectible accounts
(106,770
)
 
(104,751
)
Net dialysis and related lab services patient service revenues
2,265,891

 
2,223,220

Other revenues(1)
5,303

 
3,973

Total net dialysis and related lab services revenues
2,271,194

 
2,227,193

DMG
 
 
 
DMG revenues:
 
 
 
Capitated revenues
889,686

 
866,019

Net patient service revenues
178,971

 
112,433

Other revenues(2)
18,269

 
10,335

Intersegment capitated and other revenues
59

 
71

Total net DMG revenues
1,086,985

 
988,858

Other—Ancillary services and strategic initiatives
 
 
 
Net patient service revenues
67,293

 
51,383

Capitated revenues
28,350

 
21,028

Other external sources
267,280

 
307,053

Intersegment revenues
15,302

 
11,827

Total ancillary services and strategic initiatives revenues
378,225

 
391,291

Total net segment revenues
3,736,404

 
3,607,342

Elimination of intersegment revenues
(39,121
)
 
(26,206
)
Consolidated net revenues
$
3,697,283

 
$
3,581,136

Segment operating margin (loss):
 
 
 
U.S. dialysis and related lab services(3)
$
944,740

 
$
440,055

DMG
12,308

 
(57,145
)
Other—Ancillary services and strategic initiatives
(58,220
)
 
(11,100
)
Total segment operating margin
898,828

 
371,810

Reconciliation of segment operating margin to consolidated income before
income taxes:
 
 
 
Corporate administrative support
(10,592
)
 
(6,921
)
Consolidated operating income
888,236

 
364,889

Debt expense
(104,429
)
 
(102,884
)
Other income, net
4,243

 
2,976

Consolidated income before income taxes
$
788,050

 
$
264,981

 
 
(1)
Includes management fees for providing management and administrative services to dialysis centers that are wholly-owned by third parties and legal entities in which the Company owns a noncontrolling equity investment.
(2)
Includes medical consulting service fees and management fees for providing management and administrative services to unconsolidated joint ventures, as well as revenue related to the maintenance of existing physician

23


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


networks.
(3)
U.S. dialysis and related lab services operating income includes the net gain on the settlement with the VA.
Depreciation and amortization expense by reportable segment is as follows: 
 
Three months ended
March 31,
 
2017
 
2016
U.S. dialysis and related lab services
$
125,029

 
$
116,537

DMG
57,323

 
46,263

Ancillary services and strategic initiatives
7,854

 
6,555

 
$
190,206

 
$
169,355

 
Summary of assets by reportable segment is as follows: 
Subsequent to issuance of the Company’s fiscal year 2016 consolidated financial statements and their inclusion in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2017 (the “2016 10-K”), the Company determined that it had misstated its disclosure of segment assets at December 31, 2016 in Note 25 to those consolidated financial statements. This misstatement resulted in an overstatement of “U.S. dialysis and related lab services” segment assets of $338,963 and a corresponding understatement of “Other - ancillary services and strategic initiatives” segment assets of the same amount.  The Company performed an assessment of the materiality of this misstatement and concluded that this misstatement as originally disclosed was not materially misleading in its 2016 consolidated financial statements taken as a whole.  The Company therefore has not amended its financial statements filed on its 2016 10-K to correct this misstatement, but has provided the corrected disclosure here.
 
March 31, 2017
 
December 31, 2016
Segment assets
 

 
 

U.S. dialysis and related lab services (including equity
   investments of $85,769 and $66,924, respectively)
$
11,744,695

 
$
11,099,137

DMG (including equity investments of $12,579 and $10,350,
   respectively)
6,209,369

 
6,213,091

Other—Ancillary services and strategic initiatives (including
   equity investments of $423,500 and $425,115, respectively)
1,434,200

 
1,429,029

Consolidated assets
$
19,388,264

 
$
18,741,257

Expenditures for property and equipment by reportable segment is as follows: 
 
Three months ended
March 31,
 
2017
 
2016
U.S. dialysis and related lab services
$
173,528

 
$
133,450

DMG
27,788

 
20,145

Ancillary services and strategic initiatives
13,219

 
19,592

 
$
214,535

 
$
173,187

 

24



18.
Changes in DaVita Inc.’s ownership interest in consolidated subsidiaries
The effects of changes in DaVita Inc.’s ownership interest on the Company’s equity are as follows: 
 
Three months ended
March 31,
 
2017
 
2016
Net income attributable to DaVita Inc.
$
447,697

 
$
97,434

Increase in paid-in capital for sales of noncontrolling interests

 
885

Decrease in paid-in capital for the purchase of noncontrolling
   interests and adjustments to ownership interest
(423
)
 
(3,337
)
Net transfers to noncontrolling interests
(423
)
 
(2,452
)
Net income attributable to DaVita Inc., net of transfers to
   noncontrolling interests
$
447,274

 
$
94,982

19.
New accounting standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date. This guidance approves a one-year deferral of the effective date of ASU 2014-09. The ASU now permits the Company to adopt this standard effective January 1, 2018. Early application is permitted as of January 1, 2017. In March, April, and May 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-11, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606), each of which amends the guidance in ASU 2014-09. When they become effective, these ASUs will replace most existing revenue recognition guidance in GAAP. The Company has assembled an internal revenue task force that meets regularly to discuss and evaluate the overall impact this guidance will have on various revenue streams in the condensed consolidated financial statements and related disclosures. The Company is continuing to evaluate the impact this guidance will have on its consolidated financial statements. The Company expects to adopt these ASU’s effective January 1, 2018 retrospectively with the cumulative effect of initially applying it recognized at the date of initial application (the cumulative effect method).
In January 2016, the FASB issued ASU No. 2016-01, Financial Statements - 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 amendments in this ASU are effective for the Company beginning on January 1, 2018 and are to be applied through a cumulative effect adjustment to the statement of financial position. Early adoption is permitted under certain circumstances. The adoption of this ASU is not expected to have a material impact on the Company’s condensed consolidated financial statements when adopted on January 1, 2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for substantially all leases with lease terms in excess of twelve months. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for the Company beginning on January 1, 2019 and are to be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company has assembled an internal lease task force that meets regularly to discuss and evaluate the overall impact of this guidance on its condensed consolidated financial statements and related disclosures, as well as the expected timing of adoption. The Company believes that the new standard will have a material impact on its condensed consolidated balance sheet but will not have a material impact on its results of operations or liquidity. The Company expects to adopt this ASU on January 1, 2019, and continues to evaluate the effect that the implementation of this ASU will have on its condensed consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree

25


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


of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments in this ASU were effective for the Company beginning on January 1, 2017 and was applied prospectively. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The changes required by this ASU involve several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and an election on estimating forfeitures. The amendments in this ASU were effective for the Company beginning January 1, 2017. The method of adoption differs for each of the topics covered by the ASU. The primary effect of this ASU for the Company is the presentation of excess tax benefits or deficiencies as a component of income tax expense within the Company's condensed consolidated statement of income rather than within additional paid-in capital on its condensed consolidated balance sheet. In addition, these excess tax benefits or deficiencies are presented as an operating activity on the condensed consolidated statement of cash flows rather than as a financing activity.
The Company elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively. Additionally, the Company has elected to continue to estimate forfeitures expected to occur in determining the amount of compensation cost to be recognized each period.
The new standard may cause volatility in the Company’s effective tax rates and diluted earnings per share due to the tax effects related to share-based payments being recorded within the Company’s condensed consolidated statement of income, including a potential increase in the Company’s provision for income taxes if a significant number of outstanding stock awards are exercised at recent levels of the Company’s stock price.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify how certain cash receipts and cash payments should be classified on the statement of cash flows. The new standard is effective for the Company beginning January 1, 2018 and should be applied retrospectively to all periods presented. The Company has not yet determined the effect that adoption of this ASU will have on its condensed consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in this ASU allow entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The current guidance does not allow recognition until the asset has been sold to an outside party. The amendments in this ASU are effective for the Company beginning on January 1, 2018 and are to be applied on a modified retrospective basis. The Company has not yet determined the effect that adoption of this ASU will have on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the test for goodwill impairment by eliminating the second step in testing for goodwill impairment. The amendments in this new ASU are effective for the Company January 1, 2020 and are to be applied on a prospective basis. Early adoption is permitted after January 1, 2017. The Company early adopted this ASU as of January 1, 2017.

26


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


20.
Condensed consolidating financial statements
The following information is presented in accordance with Rule 3-10 of Regulation S-X. The operating and investing activities of the separate legal entities included in the Company’s condensed consolidated financial statements are fully interdependent and integrated. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other administrative services. The Company’s senior notes are guaranteed by substantially all of its domestic subsidiaries. The subsidiary guarantors have guaranteed the senior notes on a joint and several basis. However, a subsidiary guarantor will be released from its obligations under its guarantee of the senior notes and the indentures governing the senior notes if, in general, there is a sale or other disposition of all or substantially all of the assets of such subsidiary guarantor, including by merger or consolidation, or a sale or other disposition of all of the equity interests in such subsidiary guarantor held by the Company and its restricted subsidiaries, as defined in the indentures; such subsidiary guarantor is designated by the Company as an unrestricted subsidiary, as defined in the indentures, or otherwise ceases to be a restricted subsidiary of the Company, in each case in accordance with the indentures; or such subsidiary guarantor no longer guarantees any other indebtedness, as defined in the indentures, of the Company or any of its restricted subsidiaries, except for guarantees that are contemporaneously released. The senior notes are not guaranteed by certain of the Company’s domestic subsidiaries, any of the Company’s foreign subsidiaries, or any entities that do not constitute subsidiaries within the meaning of the indentures, such as corporations in which the Company holds capital stock with less than a majority of the voting power, joint ventures and partnerships in which the Company holds less than a majority of the equity or voting interests, non-owned entities and third parties.
Condensed Consolidating Statements of Income
 
 
 
 
Guarantor
subsidiaries
 
Non-
Guarantor
subsidiaries
 
Consolidating
adjustments
 
Consolidated
total
For The Three Months Ended March 31, 2017
DaVita Inc.
 
 
 
 
Patient services revenues
$