Document



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

FORM 10-Q

 
 
 
 
 
For the Quarterly Period Ended September 30, 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
☐ (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 November 3, 2017, the number of shares of the Registrant’s common stock outstanding was approximately 183.3 million shares.
 
 
 
 
 




DAVITA INC.
INDEX

 
 
 
 
Page No.
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

Item 2.
 
 

Item 3.
 
 
66

Item 4.
 
 
67

 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
Item 1.
 
 

Item 1A.
 
 

Item 2.
 
 
100

Item 6.
 
 

 
 
 

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

i




DAVITA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2017
 
2016
 
2017
 
2016
Patient service revenues
$
2,746,257

 
$
2,643,194

 
$
8,030,102

 
$
7,708,641

Less: Provision for uncollectible accounts
(123,760
)
 
(115,555
)
 
(352,228
)
 
(336,188
)
     Net patient service revenues
2,622,497

 
2,527,639

 
7,677,874

 
7,372,453

Capitated revenues
1,016,365

 
872,538

 
2,956,479

 
2,660,532

Other revenues
283,969

 
330,399

 
863,238

 
996,378

Total net revenues
3,922,831

 
3,730,576

 
11,497,591

 
11,029,363

Operating expenses and charges:
 

 
 

 
 

 
 

     Patient care costs and other costs
2,925,975

 
2,697,629

 
8,508,706

 
7,950,987

     General and administrative
400,018

 
406,890

 
1,174,113

 
1,180,214

     Depreciation and amortization
203,283

 
181,739

 
593,527

 
531,475

     Provision for uncollectible accounts
(2,685
)
 
3,773

 
(1,381
)
 
9,856

     Equity investment loss (income)
4,852

 
(4,237
)
 
(2,697
)
 
(5,119
)
     Goodwill and asset impairment charges
601,040

 

 
701,523

 
253,000

     Gain on changes in ownership interests, net
(17,129
)
 
(374,374
)
 
(23,402
)
 
(404,165
)
     Gain on settlement, net

 

 
(526,827
)
 

          Total operating expenses and charges
4,115,354

 
2,911,420

 
10,423,562

 
9,516,248

Operating (loss) income
(192,523
)
 
819,156

 
1,074,029

 
1,513,115

Debt expense
(109,623
)
 
(104,581
)
 
(322,014
)
 
(310,359
)
Other income, net
4,370

 
1,876

 
13,866

 
8,067

(Loss) income before income taxes
(297,776
)
 
716,451

 
765,881

 
1,210,823

Income tax (benefit) expense
(125,742
)
 
104,301

 
276,005

 
366,011

Net (loss) income
(172,034
)
 
612,150

 
489,876

 
844,812

     Less: Net income attributable to noncontrolling interests
(42,442
)
 
(40,818
)
 
(129,654
)
 
(122,664
)
Net (loss) income attributable to DaVita Inc.
$
(214,476
)
 
$
571,332

 
$
360,222

 
$
722,148

Earnings per share:
 

 
 

 
 

 
 

Basic net (loss) income per share attributable to
DaVita Inc.
$
(1.14
)
 
$
2.80

 
$
1.89

 
$
3.54

Diluted net (loss) income per share attributable to
DaVita Inc.
$
(1.14
)
 
$
2.76

 
$
1.86

 
$
3.48

Weighted average shares for earnings per share:
 
 
 
 
 
 
 
     Basic
188,883,922

 
203,761,433

 
190,770,165

 
204,206,979

     Diluted
188,883,922

 
206,961,450

 
193,546,245

 
207,643,794

 See notes to condensed consolidated financial statements.


1



DAVITA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net (loss) income
$
(172,034
)
 
$
612,150

 
$
489,876

 
$
844,812

Other comprehensive (loss) income, net of tax:
 

 
 

 
 

 
 

Unrealized losses on interest rate cap and swap agreements:
 

 
 

 
 

 
 

Unrealized losses on interest rate cap and swap agreements
(478
)
 
(153
)
 
(5,479
)
 
(8,238
)
Reclassifications of net rate cap and swap agreements realized
losses into net (loss) income
1,265

 
388

 
3,793

 
1,301

Unrealized gains on investments:
 

 
 

 
 

 
 

Unrealized gains on investments
863

 
1,121

 
3,478

 
1,988

Reclassification of net investment realized gains into net (loss) income
(9
)
 
(50
)
 
(221
)
 
(143
)
Unrealized gains on foreign currency translation:
 

 
 

 
 

 
 

Foreign currency translation adjustments
29,143

 
(951
)
 
91,546

 
5,386

Reclassification of foreign currency translation adjustment
realized loss into net (loss) income

 
7,513

 

 
7,513

Other comprehensive income
30,784

 
7,868

 
93,117

 
7,807

Total comprehensive (loss) income
(141,250
)
 
620,018

 
582,993

 
852,619

Less: Comprehensive income attributable to noncontrolling
interests
(42,442
)
 
(40,876
)
 
(129,652
)
 
(122,871
)
Comprehensive (loss) income attributable to DaVita Inc.
$
(183,692
)
 
$
579,142

 
$
453,341

 
$
729,748

 See notes to condensed consolidated financial statements.


2



DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
 
September 30,
2017
 
December 31,
2016
ASSETS
 

 
 

Cash and cash equivalents
$
846,110

 
$
913,187

Short-term investments
137,358

 
310,198

Accounts receivable, less allowance of $221,329 and $252,056
2,091,074

 
1,917,302

Inventories
154,422

 
164,858

Other receivables
599,374

 
453,483

Prepaid and other current assets
205,211

 
210,604

Income taxes receivable

 
10,596

Total current assets
4,033,549

 
3,980,228

Property and equipment, net of accumulated depreciation of $3,151,402 and $2,832,160
3,386,056

 
3,175,367

Intangible assets, net of accumulated amortization of $1,084,682 and $940,731
1,451,033

 
1,527,767

Equity method and other investments
545,053

 
502,389

Long-term investments
120,129

 
103,679

Other long-term assets
61,642

 
44,510

Goodwill
9,415,877

 
9,407,317

 
$
19,013,339

 
$
18,741,257

LIABILITIES AND EQUITY
 

 
 

Accounts payable
$
566,918

 
$
522,415

Other liabilities
928,123

 
856,847

Accrued compensation and benefits
775,280

 
815,761

Medical payables
400,259

 
336,381

Current portion of long-term debt
189,822

 
165,041

Income tax payable
14,391

 

Total current liabilities
2,874,793

 
2,696,445

Long-term debt
8,908,703

 
8,947,327

Other long-term liabilities
548,226

 
465,358

Deferred income taxes
685,598

 
809,128

Total liabilities
13,017,320

 
12,918,258

Commitments and contingencies


 


Noncontrolling interests subject to put provisions
1,026,890

 
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; 194,788,516 and
194,554,491 shares issued and 189,231,693 and 194,554,491 shares outstanding, respectively)
195

 
195

Additional paid-in capital
1,059,176

 
1,027,182

Retained earnings
4,070,535

 
3,710,313

Treasury stock (5,556,823 shares at September 30, 2017)
(348,801
)
 

Accumulated other comprehensive income (loss)
3,476

 
(89,643
)
Total DaVita Inc. shareholders’ equity
4,784,581

 
4,648,047

Noncontrolling interests not subject to put provisions
184,548

 
201,694

Total equity
4,969,129

 
4,849,741

 
$
19,013,339

 
$
18,741,257

See notes to condensed consolidated financial statements.

3



DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
 
Nine months ended
September 30,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net income
$
489,876

 
$
844,812

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

 
 

Depreciation and amortization
593,527

 
531,475

Goodwill and asset impairment charges
701,523

 
253,000

Stock-based compensation expense
28,478

 
29,817

Deferred income taxes
(132,781
)
 
48,778

Equity investment income, net
19,071

 
16,825

Gain on changes in ownership interests, net
(23,402
)
 
(404,165
)
Other non-cash charges
41,709

 
9,163

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

Accounts receivable
(146,024
)
 
(85,660
)
Inventories
14,272

 
(13,045
)
Other receivables and other current assets
(47,173
)
 
(1,616
)
Other long-term assets
(13,831
)
 
31,081

Accounts payable
18,595

 
(45,507
)
Accrued compensation and benefits
(60,063
)
 
79,289

Other current liabilities
39,445

 
119,549

Income taxes
22,669

 
79,592

Other long-term liabilities
18,648

 
(12,126
)
Net cash provided by operating activities
1,564,539

 
1,481,262

Cash flows from investing activities:
 

 
 

     Additions of property and equipment
(639,829
)
 
(575,243
)
     Acquisitions
(726,538
)
 
(497,331
)
     Proceeds from asset and business sales
92,529

 
18,991

     Purchase of investments available for sale
(9,882
)
 
(9,041
)
     Purchase of investments held-to-maturity
(225,166
)
 
(976,411
)
     Proceeds from sale of investments available for sale
5,822

 
8,636

     Proceeds from investments held-to-maturity
398,765

 
743,941

     Purchase of intangible assets

 
(75
)
     Purchase of equity investments
(3,014
)
 
(11,629
)
     Proceeds from sale of equity investments

 
40,920

     Distributions received on equity investments
80

 

Net cash used in investing activities
(1,107,233
)
 
(1,257,242
)
Cash flows from financing activities:
 

 
 

     Borrowings
38,160,821

 
39,102,302

     Payments on long-term debt and other financing costs
(38,269,284
)
 
(39,201,204
)
     Purchase of treasury stock
(321,411
)
 
(620,898
)
     Distributions to noncontrolling interests
(165,463
)
 
(145,072
)
     Stock award exercises and other share issuances, net
15,781

 
18,515

     Contributions from noncontrolling interests
51,156

 
35,524

     Purchase of noncontrolling interests
(1,432
)
 
(9,727
)
     Other

 
12,584

Net cash used in financing activities
(529,832
)
 
(807,976
)
Effect of exchange rate changes on cash and cash equivalents
5,449

 
(1,664
)
Net decrease in cash and cash equivalents
(67,077
)
 
(585,620
)
Cash and cash equivalents at beginning of the year
913,187

 
1,499,116

Cash and cash equivalents at end of the period
$
846,110

 
$
913,496

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) income
 
 
 
 
 
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

 
 

Changes in noncontrolling interest
from:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions
(111,092
)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(81,309
)
Contributions
33,517

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14,073

Acquisitions and divestitures
28,874

 
 

 
 

 
3,423

 
 

 
 

 
 

 
 

 
3,423

 
2,585

Partial purchases
(6,660
)
 
 

 
 

 
(13,105
)
 
 

 
 

 
 

 
 

 
(13,105
)
 
(1,747
)
Fair value remeasurements
65,855

 
 

 
 

 
(65,855
)
 
 

 
 

 
 

 
 

 
(65,855
)
 
 

Reclassifications and
expirations of 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
83,000

 
 

 
 

 
 

 
360,222

 
 

 
 

 
 

 
360,222

 
46,654

Other comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
93,119

 
93,119

 
(2
)
Stock unit shares issued
 

 
114

 

 
(94
)
 
 

 


 


 
 

 
(94
)
 
 

Stock-settled SAR shares issued
 

 
121

 

 

 
 

 


 


 
 

 

 
 

Stock-settled stock-based
compensation expense
 

 
 

 


 
28,463

 
 

 
 

 
 

 


 
28,463

 
 

Changes in noncontrolling interest
from:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions
(102,205
)
 
 

 
 

 


 
 

 
 

 
 

 
 

 

 
(63,258
)
Contributions
40,937

 
 

 
 

 


 
 

 
 

 
 

 
 

 

 
10,219

Acquisitions and divestitures
35,456

 
 

 
 

 
(708
)
 
 

 
 

 
 

 
 

 
(708
)
 
(8,550
)
Partial purchases
(1,544
)
 
 

 
 

 
195

 
 

 
 

 
 

 


 
195

 
(83
)
Fair value remeasurements
(4,138
)
 
 

 


 
4,138

 
 

 
 

 
 

 


 
4,138

 
 

Reclassifications and
expirations of puts
2,126

 
 

 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
(2,126
)
Purchase of treasury stock















(5,557
)

(348,801
)

 


(348,801
)

 

Balance at September 30, 2017
$
1,026,890

 
194,789

 
$
195

 
$
1,059,176

 
$
4,070,535

 
(5,557
)
 
$
(348,801
)
 
$
3,476

 
$
4,784,581

 
$
184,548

 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 condensed consolidated interim financial statements. All significant intercompany accounts and transactions have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve revenue recognition and accounts receivable, contingencies, impairments of goodwill and 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 nine months ended September 30, 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 (loss) 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 Partners 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.

6


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


The reconciliations of the numerators and denominators used to calculate basic and diluted earnings per share were as follows:
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
 
Basic:
 

 
 

 
 
 
 
 
Net (loss) income attributable to DaVita Inc.
$
(214,476
)
 
$
571,332

 
$
360,222

 
$
722,148

 
Weighted average shares outstanding during the period
191,078

 
205,955

 
192,964

 
206,401

 
Contingently returnable shares held in escrow from the DaVita
HealthCare Partners merger
(2,194
)
 
(2,194
)
 
(2,194
)
 
(2,194
)
 
Weighted average shares for basic earnings per share calculation
188,884

 
203,761

 
190,770

 
204,207

 
Basic net (loss) income per share attributable to DaVita Inc.
$
(1.14
)
 
$
2.80

 
$
1.89

 
$
3.54

 
Diluted:
 

 
 

 
 

 
 

 
Net (loss) income attributable to DaVita Inc.
$
(214,476
)
 
$
571,332

 
$
360,222

 
$
722,148

 
Weighted average shares outstanding during the period
191,078

 
205,955

 
192,964

 
206,401

 
Contingently returnable shares held in escrow from the DaVita
HealthCare Partners merger
(2,194
)
 

 

 

 
Assumed incremental shares from stock plans

 
1,006

 
582

 
1,243

 
Weighted average shares for diluted earnings per share calculation
188,884

 
206,961

 
193,546

 
207,644

 
Diluted net (loss) income per share attributable to DaVita Inc.
$
(1.14
)
 
$
2.76

 
$
1.86

 
$
3.48

 
Anti-dilutive potential common shares excluded from calculation
8,510

(1) 
2,375

(2) 
5,239

(2) 
2,153

(2) 
 
(1)
Shares associated with stock-settled stock appreciation rights and contingently returnable shares that are excluded from the diluted denominator calculation because they are anti-dilutive due to the Company’s net loss attributable to DaVita Inc.
(2)
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.
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 health plans under capitated arrangements, 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 services of DaVita Medical Group (DMG, formerly known as HealthCare Partners or HCP) when those amounts due have been outstanding for more than twelve months and when the amount is not subject to a payment plan.

7


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


During the nine months ended September 30, 2017, the Company’s allowance for doubtful accounts decreased by $30,727. This was primarily due to 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 estimated fair value.
The Company’s investments in these securities and certain other financial instruments consist of the following:
 
September 30, 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
$
136,158

 
$

 
$
136,158

 
$
256,827

 
$

 
$
256,827

Investments in mutual funds and common stock

 
57,089

 
57,089

 
50,000

 
47,404

 
97,404

Cash surrender value of life insurance policies

 
64,240

 
64,240

 

 
59,646

 
59,646

 
$
136,158

 
$
121,329

 
$
257,487

 
$
306,827

 
$
107,050

 
$
413,877

Short-term investments
$
136,158

 
$
1,200

 
$
137,358

 
$
306,827

 
$
3,371

 
$
310,198

Long-term investments

 
120,129

 
120,129

 

 
103,679

 
103,679

 
$
136,158

 
$
121,329

 
$
257,487

 
$
306,827

 
$
107,050

 
$
413,877

 
The cost of the certificates of deposit, commercial paper and money market funds at September 30, 2017 and December 31, 2016 approximates their fair value. As of September 30, 2017 and December 31, 2016, the available-for-sale investments included $8,021 and $3,701 of gross pre-tax unrealized gains, respectively. During the nine months ended September 30, 2017, the Company recorded gross pre-tax unrealized gains of $4,682, or $3,480 after tax, in other comprehensive income associated with changes in the fair value of these investments. During the nine months ended September 30, 2017, the Company sold investments in mutual funds and debt securities for net proceeds of $5,822 and recognized a pre-tax gain of $362, or $221 after-tax, which was previously recorded in other comprehensive income. During the nine months ended September 30, 2016, the Company sold investments in mutual funds for net proceeds of $4,645 and recognized a pre-tax gain of $233, or $143 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 September 30, 2017, this minimum cash balance was approximately $61,557. 
5.
Equity method and other 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 DaVita Kidney Care (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- and equity method investments as equity method and other investments on its balance sheet.

8



Equity method and other investments in nonconsolidated businesses were $545,053 and $502,389 at September 30, 2017 and December 31, 2016, respectively. The increase in these equity investments was primarily due to foreign exchange valuation changes, which caused an increase in the Company's investment in DaVita Care Pte. Ltd. (the APAC JV). During the nine months ended September 30, 2017 and 2016, the Company recognized equity investment income of $2,697 and $5,119, respectively, from equity method investments in nonconsolidated businesses. 
Effective as of August 1, 2016, the Company deconsolidated its Asia Pacific dialysis business held by the APAC JV, adjusted its retained investment in the APAC JV to estimated fair value at that time, and has accounted for this retained investment on the equity method since that time.
The Company’s partners in the APAC JV made an additional scheduled aggregate capital contribution of $100,000 to the APAC JV effective August 1, 2017.  Subsequent to that contribution, the Company now holds a 60% voting interest and a 73.3% current economic interest in the APAC JV. Based on the governance structure and voting rights established for the APAC JV, certain key decisions affecting the joint venture’s operations are no longer at the unilateral discretion of the Company, but rather are shared with the other noncontrolling investors.
These other noncontrolling investors now collectively hold a 40% voting interest and a 26.7% current economic interest in the APAC JV, and their economic interests are expected to increase to match their voting interests in the joint venture as they make additional subscribed capital contributions through August 1, 2019. Each of these other noncontrolling investors also holds reserved approval rights over certain key decisions affecting the joint venture’s operations. As a result, the Company has no longer consolidated the APAC JV since its formation on August 1, 2016.
6.
Goodwill
Changes in goodwill by reportable segment 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
441,486

 
132,778

 
113,611

 
687,875

Divestitures
(32,260
)
 
(29
)
 
(54
)
 
(32,343
)
Goodwill impairment charges

 
(651,659
)
 
(34,696
)
 
(686,355
)
Foreign currency and other adjustments

 

 
39,383

 
39,383

Balance at September 30, 2017
$
6,100,813

 
$
2,873,032

 
$
442,032

 
$
9,415,877

 
 
 
 
 
 
 
 
Balance at September 30, 2017:
 
 
 
 
 
 
 
Goodwill
$
6,100,813

 
$
3,966,460

 
$
511,052

 
$
10,578,325

Accumulated impairment charges

 
(1,093,428
)
 
(69,020
)
 
(1,162,448
)
 
$
6,100,813

 
$
2,873,032

 
$
442,032

 
$
9,415,877

The Company elected to early adopt ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment effective January 1, 2017. 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 2017 have been performed under this new guidance.

9


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


Each of the Company’s operating segments described in Note 18 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 reporting units during the third quarter of 2017, the Company performed impairment assessments for all of its DMG reporting units.
As a result of these assessments, the Company recognized goodwill impairment charges as shown and discussed below:

 
Three months ended
 
Nine months ended
Reporting unit
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
DMG California
 
$
560,756

 
$

 
$
560,756

 
$

DMG Florida
 
26,324

 

 
76,270

 
91,200

DMG New Mexico
 
13,960

 

 
14,633

 

DMG Nevada
 

 

 

 
161,800

Vascular access
 

 

 
34,696

 

Total
 
$
601,040

 
$

 
$
686,355

 
$
253,000

The goodwill impairment charges recognized during the three months ended September 30, 2017 resulted primarily from reimbursement pressures, continuing increases in medical costs, and other market factors.
Pursuant to further evaluation of this business during the third quarter including the preparation of these interim consolidated financial statements, the Company determined that commercial membership is expected to be lower than previously expected due to increased reimbursement pressure, Medicaid reimbursement rates are expected to trend lower within the state of California, and the gap between Medicare rate increases and medical cost increases is likely to persist. Accordingly, management has revised its expectations for certain DMG reporting units. The Company has identified opportunities to mitigate the effects of some of these challenges and is continuing to evaluate its strategic alternatives concerning the DMG business, but the timing and likelihood of such changes remain uncertain.
The goodwill impairment charge recognized at the Company’s DMG California reporting unit includes a $218,134 increase to the goodwill impairment charge, and reduction to deferred tax expense, for the deferred tax assets that the impairment itself generates. As such, the effect of this is a $601,040 charge to operating (loss) income and a $218,134 credit to tax expense, for a net $382,906 impact on net (loss) income. For the Company’s DMG reporting units, this recursive deferred tax effect is unique to DMG California and arises because this component of the DMG business was acquired by the Company in a taxable transaction for which goodwill is amortized for tax purposes.
During 2017, the Company also recognized goodwill impairment charges at its DMG Florida and DMG New Mexico reporting units during the three months ended June 30, 2017.  These charges resulted primarily from changes in expectations concerning government reimbursement, including the effect of Medicare Advantage final benchmark payment rates for 2018 announced on April 3, 2017 and the Company’s expected ability to mitigate them, as well as medical cost and utilization trends.
The goodwill impairment charge recognized at the Company's vascular access reporting unit during the nine months ended September 30, 2017 resulted primarily from continuing changes in the Company’s outlook as the Company’s partners

10


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


and operators continued to evaluate and make decisions concerning changes in operations, including termination of their management services agreements and center closures as a result of the Centers for Medicare and Medicaid Services (CMS) 2017 Physician Fee Schedule Final Rule and the Ambulatory Surgical Center Payment Final Rule released November 2, 2016, which introduced significant changes in reimbursement structure for this business unit. There is no goodwill remaining at the Company's vascular access reporting unit.
During the nine months ended September 30, 2016, the Company recognized goodwill impairment charges at its DMG Florida and DMG Nevada reporting units. These charges resulted primarily from changes in expectations concerning government reimbursement and the Company’s expected ability to mitigate them, as well as 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 as of September 30, 2017:
 
 
Goodwill balance
as of
September 30, 2017
 
Carrying
amount
coverage
(1)
 
Sensitivities
Reporting unit
 
 
 
Operating
income
(2)
 
Discount
rate
(3)
DMG California
 
$
1,888,609

 
%
 
(3.0
)%
 
(5.8
)%
DMG Florida
 
$
378,071

 
%
 
(0.9
)%
 
(3.3
)%
DMG New Mexico
 
$
56,293

 
%
 
(1.1
)%
 
(2.1
)%
DMG Washington
 
$
247,552

 
17.1
%
 
(1.7
)%
 
(3.4
)%
 
(1)
Excess of estimated fair value of the reporting unit over its 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 September 30, 2017. Since the dates of their last annual goodwill impairment tests, there have been certain developments, events, changes in operating performance and other changes in key circumstances that have affected these other businesses. However, except as further described above, these changes 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 respective carrying amounts.
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 consolidated balance sheet.

11


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


The following table shows the components of changes in healthcare costs payables:
 
For the nine
months ended
September 30, 2017
Healthcare costs payables, beginning of the period
$
214,275

Add: Components of incurred health care costs
 

Current year
1,509,433

Prior years
(12,597
)
Acquired balance(1)
3,218

Total incurred health care costs
1,500,054

Less: Claims paid
 

Current year
1,226,953

Prior years
194,285

Total claims paid
1,421,238

Healthcare costs payables, end of the period
$
293,091


 
(1)
Represents healthcare cost payables acquired in the Magan Medical Clinic, Inc. (Magan) acquisition. See Note 15 to these condensed consolidated financial statements for further discussion of the Magan acquisition.
The Company’s prior year estimates of healthcare costs payable resulted in medical claims being settled for amounts that differed from those 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 differed materially from the Company’s year-end estimates.
8.
Income taxes
As of September 30, 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 $27,196, all of which would impact the Company’s effective tax rate if recognized. This balance represents an increase of $3,130 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 September 30, 2017 and December 31, 2016, the Company had approximately $3,838 and $2,595, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefits. 

12


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: 
 
September 30,
2017
 
December 31,
2016
Senior secured credit facilities:
 
 
 
Term Loan A
$
800,000

 
$
862,500

Term Loan B
3,386,250

 
3,412,500

Senior notes
4,500,000

 
4,500,000

Acquisition obligations and other notes payable
149,734

 
117,547

Capital lease obligations
330,446

 
299,682

Total debt principal outstanding
9,166,430

 
9,192,229

Discount and deferred financing costs
(67,905
)
 
(79,861
)
 
9,098,525

 
9,112,368

Less current portion
(189,822
)
 
(165,041
)
 
$
8,908,703

 
$
8,947,327

Scheduled maturities of long-term debt at September 30, 2017 were as follows: 
2017 (remainder of the year)
59,481

2018
171,825

2019
747,908

2020
72,346

2021
3,305,940

2022
1,282,115

Thereafter
3,526,815

 
During the first nine months of 2017, the Company made mandatory principal payments under its senior secured credit facilities totaling $62,500 on Term Loan A and $26,250 on Term Loan B.
As of September 30, 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 September 30, 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 September 30, 2017, these cap agreements had an immaterial fair value. During the nine months ended September 30, 2017, the Company recognized debt expense of $6,208 from these caps. During the nine months ended September 30, 2017, the Company recorded a loss of $115 in other comprehensive income due to a decrease in unrealized fair value of these cap agreements.
As of September 30, 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 September 30, 2017, the total fair value of these cap agreements was an asset of approximately $962. During the nine months ended September 30, 2017, the Company recorded a loss of $8,852 in other comprehensive income due to a decrease in the unrealized fair value of these forward cap agreements.

13


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 September 30, 2017 and December 31, 2016
 
 
September 30, 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
 
$
962

 
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 and nine months ended September 30, 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
September 30,
 
Nine months ended
September 30,
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
Derivatives designated as cash flow hedges
2017
 
2016
 
2017
 
2016
 
 
2017
 
2016
 
2017
 
2016
Interest rate swap
agreements
$

 
$
45

 
$

 
$
(815
)
 
Debt expense
 
$

 
$
25

 
$

 
$
299

Interest rate cap
agreements
(782
)
 
(300
)
 
(8,967
)
 
(12,674
)
 
Debt expense
 
2,070

 
609

 
6,208

 
1,829

Tax benefit
304

 
102

 
3,488

 
5,251

 
Tax expense
 
(805
)
 
(246
)
 
(2,415
)
 
(827
)
Total
$
(478
)
 
$
(153
)
 
$
(5,479
)
 
$
(8,238
)
 
 
 
$
1,265

 
$
388

 
$
3,793

 
$
1,301

 
As of September 30, 2017, 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 $113,750 if LIBOR should rise above 3.50%. In addition, the uncapped portion of Term Loan A, which is subject to the variability of LIBOR, is $686,250. Interest rates on the Company’s senior notes are fixed by their terms.
The Company’s weighted average effective interest rate on the senior secured credit facilities at the end of the quarter was 4.22%, based on the current margins in effect of 2.00% for Term Loan A and 2.75% for Term Loan B, as of September 30, 2017.
The Company’s overall weighted average effective interest rate during the quarter ended September 30, 2017 was 4.77% and as of September 30, 2017 was 4.78%.
As of September 30, 2017, the Company’s interest rates are fixed on approximately 53.67% of its total debt.
As of September 30, 2017, the Company had undrawn revolving credit facilities totaling $1,000,000, of which approximately $94,568 was committed for outstanding letters of credit. The remaining amount is unencumbered. In addition, the Company has approximately $211 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

14


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


other legal proceedings. The Company records accruals for certain legal proceedings and regulatory matters to the extent that the Company determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. As of September 30, 2017 and December 31, 2016, the Company’s total recorded accruals with respect to legal proceedings and regulatory matters, net of anticipated third party recoveries, were approximately $51,000 and $69,000, respectively. 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. In March 2017, the DOJ partially intervened as to certain defendant HMOs, but elected not to intervene with respect to HCP. In October 2017, the court dismissed a portion of the Fourth Amended Complaint finding that some claims were time-barred and that the relator had waived an alleged theory of liability. On October 18, 2017, the relator filed a Notice of Dismissal of the action as to HCP, and the government consented to the dismissal, as a result of which the suit is now dismissed, without prejudice.
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. 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.

15


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


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.
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. 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 February 2016 and has been working to address and update the practices it identified in the self-disclosure, some of which overlap with information requested by the U.S. Attorney’s Office. The OIG informed the Company in February 2016 that its submission was not accepted. They indicated that the OIG is not expressing an opinion regarding the conduct disclosed or the Company’s legal positions. The Company is cooperating with the government.
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. In October 2017, the Company finalized and executed a settlement agreement with the OIG including payment of an immaterial amount.
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

16


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


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 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 connection with an alleged practice to direct patients with government-subsidized health insurance into private health insurance plans to maximize the Company’s profits. On August 15, 2017, the District Court consolidated this action with the Gabilondo and City of Warren Police and Fire Retirement System suits. The Company disputes these allegations and intends to defend this action accordingly.
Gabilondo Shareholder Derivative Civil Suit: On May 30, 2017, Antonio Gabilondo 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, abuse of control, gross mismanagement, corporate waste, and misrepresentations and/or failures to disclose certain information in violation of the federal securities laws in connection with an alleged practice to direct patients with government-subsidized health insurance into private health insurance plans to maximize the Company’s profits. On August 15, 2017, the District Court consolidated this action with the Blackburn and City of Warren Police and Fire Retirement System suits.  The Company disputes these allegations and intends to defend this action accordingly.
City of Warren Police and Fire Retirement System Shareholder Derivative Civil Suit: On June 9, 2017, the City of Warren Police and Fire Retirement System 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 of 2015 to the present and alleges, generally, a breach of fiduciary duty, corporate waste, unjust enrichment, and misrepresentations and/or failures to disclose certain information in violation of the federal securities laws in connection with an alleged practice to direct patients with government-subsidized health insurance into private health insurance plans to maximize the Company’s profits. On August 15, 2017, the District Court consolidated this action with the Blackburn and Gabilondo suits. The Company disputes these allegations and intends to defend this action accordingly.
Other Proceedings
In addition to the foregoing, from time to time the Company is subject to other lawsuits, demands, claims, governmental investigations and audits and legal proceedings that arise due to the nature of its business, including contractual disputes, such as with payors, suppliers and others, employee-related matters and professional and general liability claims. From time to time, the Company also initiates litigation or other legal proceedings as a plaintiff arising out of contracts or other matters.
Resolved Matters
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

17


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


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 was advised by an attorney with the United States Attorney’s Office for the Central District of California that the qui tam was 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 and dismissed the complaint without prejudice for failing to state a claim upon which relief can be granted. In May 2017, the relator filed a First Amended Complaint and the Company filed an additional motion to dismiss. In June 2017, the court granted the Company’s motion and dismissed the complaint without prejudice. Plaintiff was given until July 24, 2017 to file an amended complaint. Instead, the plaintiff decided not to proceed against the Company and filed a notice of dismissal on July 25, 2017.
2011 Suit against the U.S. Department of Veterans Affairs: As previously disclosed, the Company had a pending lawsuit in the U.S. Court of Federal Claims against the federal government which was originally filed in May 2011. The lawsuit related to the U.S. Department of Veterans Affairs (VA) underpayment of dialysis services the Company provided from 2005 through 2011 to veterans pursuant to VA regulations. In the first quarter of 2017, the Company received a payment of $538,000 related to the settlement with the VA. The Company's consolidated entities recognized a net gain of $527,000 on this settlement. The Company's nonconsolidated and managed entities recognized a gain of $9,000, of which the Company's equity investment share was $3,000. The net effect was a net increase of $530,000 to the Company's operating income.
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 alleged 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.
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

18


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


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 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 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 other potential commitments to provide operating capital to a number of dialysis centers that are wholly-owned by third parties or businesses in which the Company maintains a noncontrolling equity interest as well as to physician-owned vascular access clinics or medical practices that the Company operates under management and administrative services agreements of approximately $5,629.
Certain consolidated joint ventures are originally contractually scheduled to dissolve after terms ranging from 10 to 50 years. While noncontrolling interests in these limited life entities qualify as mandatorily redeemable financial instruments, they are subject to a classification and measurement scope exception from the accounting guidance generally applicable to other mandatorily redeemable financial instruments. Future distributions upon dissolution of these entities would be valued below the related noncontrolling interest carrying balances in the consolidated balance sheet.
12.
Long-term incentive compensation
Long-term incentive program (LTIP) compensation includes both stock-based awards (principally stock-settled stock appreciation rights, restricted stock units, and performance stock units) 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

19


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


awards so measured is recognized as compensation expense on a cumulative straight-line basis over the vesting terms of the awards, adjusted for expected forfeitures.
During the nine months ended September 30, 2017, the Company granted 1,672 stock-settled stock appreciation rights with an aggregate grant-date fair value of $24,246 and a weighted-average expected life of approximately 4.2 years, 526 stock units with an aggregate grant-date fair value of $34,540 and a weighted-average expected life of approximately 3.4 years, and 15 cash-settled stock appreciation rights with an aggregate grant-date fair value of $204 and a weighted-average expected life of approximately 4.3 years.
For the nine months ended September 30, 2017 and 2016, the Company recognized $59,481 and $61,042, respectively, in total LTIP expense, of which $28,478 and $29,817, 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 nine months ended September 30, 2017 and 2016 was $9,474 and $9,769, respectively.
As of September 30, 2017, the Company had $144,184 of total estimated but unrecognized compensation expense for outstanding LTIP awards, including $82,765 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 1.1 years and the stock-based component of these LTIP costs over a weighted average remaining period of 1.5 years.
For the nine months ended September 30, 2017 and 2016, the Company received $6,046 and $27,012, respectively, in actual tax benefits upon the exercise of stock awards. 
13.
Share repurchases
During the nine months ended September 30, 2017, the Company repurchased a total of 5,557 shares of its common stock for $348,801 at an average price of $62.77 per share. The Company also repurchased 5,889 shares of its common stock for $352,873 at an average price of $59.92 per share, subsequent to September 30, 2017.
On October 10, 2017, the Company's Board of Directors approved an additional share repurchase authorization in the amount of $1,252,961. This share repurchase authorization was in addition to the $247,039 remaining at that time under the Company’s Board of Directors’ prior share repurchase authorization announced in July 2016. Accordingly, as of November 7, 2017, the Company has a total of $1,228,391 available under the current Board repurchase authorizations for additional share repurchases. Although these share repurchase authorizations do not have expiration dates, the Company remains subject to share repurchase limitations under the terms of its senior secured credit facilities and the indentures governing its senior notes.

20


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


14.     Comprehensive income 
 
For the three months ended
September 30, 2017
 
For the nine months ended
September 30, 2017
 
Interest
rate cap
agreements
 
Investment
securities
 
Foreign
currency
translation
adjustments
 
Accumulated
other
comprehensive
(loss) income
 
Interest
rate cap
agreements
 
Investment
securities
 
Foreign
currency
translation
adjustments
 
Accumulated
other
comprehensive
(loss) income
Beginning balance
$
(14,502
)
 
$
4,580

 
$
(17,386
)
 
$
(27,308
)
 
$
(12,029
)
 
$
2,175

 
$
(79,789
)
 
$
(89,643
)
Unrealized (losses)
gains
(782
)
 
1,253

 
29,143

 
29,614

 
(8,967
)
 
4,682

 
91,546

 
87,261

Related income tax
benefit (expense)
304

 
(390
)
 

 
(86
)
 
3,488

 
(1,202
)
 

 
2,286

 
(478
)
 
863

 
29,143

 
29,528

 
(5,479
)
 
3,480

 
91,546

 
89,547

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

 
(15
)
 

 
2,055

 
6,208

 
(362
)
 

 
5,846

Related income tax (expense) benefit
(805
)
 
6

 

 
(799
)
 
(2,415
)
 
141

 

 
(2,274
)
 
1,265

 
(9
)
 

 
1,256

 
3,793

 
(221
)
 

 
3,572

Ending balance
$
(13,715
)
 
$
5,434

 
$
11,757

 
$
3,476

 
$
(13,715
)
 
$
5,434

 
$
11,757

 
$
3,476


 
For the three months ended
September 30, 2016
 
For the nine months ended
September 30, 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
$
(18,097
)
 
$
1,986

 
$
(43,925
)
 
$
(60,036
)
 
$
(10,925
)
 
$
1,361

 
$
(50,262
)
 
$
(59,826
)
Unrealized (losses)
gains
(255
)
 
1,454

 
(951
)
 
248

 
(13,489
)
 
2,578

 
5,386

 
(5,525
)
Related income tax
benefit (expense)
102

 
(391
)
 

 
(289
)
 
5,251

 
(797
)