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DaVita 2nd Quarter 2012 Results

DENVER--(BUSINESS WIRE)--Aug. 1, 2012-- DaVita Inc. (NYSE: DVA) today announced results for the quarter ended June 30, 2012. Net income attributable to DaVita Inc. for the three and six months ended June 30, 2012 was $142.9 million and $283.0 million, or $1.49 and $2.96 per share, respectively, excluding an after-tax legal proceeding contingency accrual and related expenses of $47.6 million, or $0.50 per share, as further discussed below. This compares to net income attributable to DaVita Inc. for the three and six months ended June 30, 2011 of $114.4 million and $208.9 million, or $1.17 and $2.13 per share, respectively, excluding an after-tax non-cash goodwill impairment charge of approximately $14.4 million, or $0.14 per share, related to our infusion therapy business.

Net income attributable to DaVita Inc. for the three and six months ended June 30, 2012 including the after-tax legal proceeding contingency accrual was $95.3 million and $235.5 million, or $0.99 and $2.46 per share, respectively. Net income attributable to DaVita Inc. for the three and six months ended June 30, 2011 including the after-tax goodwill impairment charge was $100.0 million and $194.5 million, or $1.03 and $1.99 per share, respectively.

Financial and operating highlights include:

  • Cash Flow: For the rolling twelve months ended June 30, 2012 operating cash flow was $1,180 million and free cash flow was $817 million. For the three months ended June 30, 2012 operating cash flow was $202 million and free cash flow was $111 million. For a definition of free cash flow see Note 4 to the reconciliations of non-GAAP measures.
  • Operating Income: Operating income for the three and six months ended June 30, 2012 was $326 million and $647 million, respectively, excluding the pre-tax legal proceeding contingency accrual and related expenses of $78 million. This compares to operating income of $271 million and $506 million, respectively, excluding the pre-tax non-cash goodwill impairment charge of $24 million for the same periods of 2011.

    Operating income for the three and six months ended June 30, 2012 including the legal proceeding contingency accrual and related expenses was $248 million and $569 million, respectively. Operating income for the three and six months ended June 30, 2011 including the non-cash goodwill impairment charge was $247 million and $482 million, respectively.
  • Volume: Total U.S. treatments for the second quarter of 2012 were 5,451,901, or 69,896 treatments per day, representing a per day increase of 14.3% over the second quarter of 2011. Non-acquired treatment growth, as well as our normalized non-acquired treatment growth in the quarter, were both 4.7% over the prior year’s second quarter.
  • Effective Tax Rate: Our effective tax rate was 36.2% and 36.5% for the three and six months ended June 30, 2012, respectively. This effective tax rate is impacted by the amount of third party owners’ income attributable to non-tax paying entities. The effective tax rate attributable to DaVita Inc. was 41.5% and 40.9% for the three and six months ended June 30, 2012, respectively. We still expect our 2012 effective tax rate attributable to DaVita Inc. to be in the range of 40.0% to 41.0%.
  • Acquisition: As previously announced on May 21, 2012, we entered into a definitive merger agreement to acquire HealthCare Partners (HCP), the country’s largest operator of medical groups and physician networks. The total purchase price to be paid by DaVita Inc. will consist of $3.66 billion in cash and approximately 9.38 million shares of DaVita common stock, subject to post-close adjustments. In addition to the total merger consideration payable at close, DaVita will pay to the owners of HCP a total of up to $275 million of additional cash consideration in the form of two separate earn-out payments if certain financial performance targets are achieved by HCP in 2012 and 2013. We still expect the transaction to close early in the fourth quarter of this year.
  • Legal Proceeding Contingency Accrual: As previously announced on July 3, 2012, we reached an agreement in principle to settle all allegations relating to claims arising out of the previously disclosed litigation filed in 2002 in the U.S. District Court in the Eastern District of Texas (Settlement). In connection with the Settlement we accrued a pre-tax charge of approximately $78 million in the second quarter of 2012 that consists of $55 million for the settlement plus attorney fees and other related expenses. We expect that the Settlement will resolve federal program claims regarding Epogen that were or could have been raised in the complaint relating to historical Epogen practices dating back to 1997. The Settlement is subject to certain conditions, such as court approval. Until the conditions and documentation are completed, there can be no assurance that this matter will in fact be resolved pursuant to the terms of the Settlement.
  • Center Activity: As of June 30, 2012, we operated or provided administrative services at 1,884 outpatient dialysis centers located in the United States serving approximately 149,000 patients and 19 outpatient dialysis centers serving approximately 1,000 patients that are located in four countries outside of the United States. During the second quarter of 2012, we acquired 33 centers and opened a total of 14 centers located in the United States. In addition, we also acquired and opened a total of four centers outside of the United States.

Outlook

We are raising our operating income guidance for 2012 to now be in the range of $1,275 million to $1,325 million. Our previous operating income guidance for 2012 was in the range of $1,230 million to $1,310 million. These projections exclude any operating results associated with the proposed acquisition of HealthCare Partners as well as the legal proceeding contingency accrual and related expenses of $78 million. We also still expect our operating cash flows for 2012 to be in the range of $950 million to $1,050 million. These projections and the underlying assumptions involve significant risks and uncertainties, including those described below, and actual results may vary significantly from these current projections.

We will be holding a conference call to discuss our results for the second quarter ended June 30, 2012 on August 1, 2012 at 5:00 p.m. Eastern Time. The dial in number is (800) 399-4406. A replay of the conference call will be available on DaVita’s official web page, www.davita.com, for the following 30 days.

This release contains forward-looking statements, within the meaning of the federal securities laws, including statements related to our guidance and expectations for our 2012 operating income, our 2012 operating cash flows and our 2012 effective tax rate attributable to DaVita Inc., the anticipated timing and closing of the HCP transaction and expected timing and impact of the Settlement. Factors that could impact future results include the uncertainties associated with governmental regulations, general economic and other market conditions, competition, accounting estimates, the variability of our cash flows and the risk factors set forth in our SEC filings, including our quarterly report on Form 10-Q for the quarter ended March 31, 2012 and subsequent quarterly reports to be filed on Form 10-Q. The forward-looking statements should be considered in light of these risks and uncertainties.

These risks and uncertainties include those relating to:

  • the concentration of profits generated from commercial payor plans,
  • continued downward pressure on average realized payment rates from commercial payors, which may result in the loss of revenues or patients,
  • a reduction in the number of patients under higher-paying commercial plans,
  • a reduction in government payment rates under the Medicare End Stage Renal Disease program or other government-based programs,
  • the impact of health care legislation that was enacted in the United States in March 2010,
  • changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing,
  • our ability to maintain contracts with physician medical directors,
  • legal compliance risks, including our continued compliance with complex government regulations,
  • current or potential investigations by various government entities and related government or private-party proceedings,
  • continued increased competition from large and medium-sized dialysis providers that compete directly with us,
  • the emergence of new models of care introduced by the government or private sector, such as accountable care organizations, independent practice association and integrated delivery systems, and changing affiliation models for physicians, such as employment by hospitals, that may erode our patient base and reimbursement rates,
  • our ability to complete any acquisitions, mergers or dispositions that we might be considering or announce, or integrate and successfully operate any business we may acquire, including the HCP transaction, and
  • expansion of our operations and services to markets outside the United States, or to businesses outside of dialysis.

We base our forward-looking statements on information currently available to us at the time of this release, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in underlying factors, new information, future events or otherwise.

This release contains non-GAAP financial measures. For reconciliations of these non-GAAP financial measures to their most comparable measure calculated and presented in accordance with GAAP, see the attached reconciliation schedules. For the reasons stated in the reconciliation schedules, we believe our presentation of non-GAAP financial measures provides useful supplemental information for investors.

DAVITA INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars in thousands, except per share data)

       

Three months ended June 30,

 

Six months ended June 30,

 
2012     2011 2012     2011  
Dialysis patient service operating revenues $ 1,809,259 $ 1,582,949 $ 3,571,837 $ 3,080,383
Less: Provision for uncollectible accounts related to patient service operating revenues  

(54,416

)

 

(47,410

)

 

(107,424

)

 

(88,481

)

Net patient service operating revenues 1,754,843 1,535,539 3,464,413 2,991,902
Other revenues   174,897     125,694     331,962     231,644  
Total net operating revenues   1,929,740     1,661,233     3,796,375     3,223,546  
Operating expenses and charges:
Patient care costs 1,312,247 1,163,136 2,575,406 2,277,222
General and administrative 214,621 163,793 422,010 315,395
Depreciation and amortization 77,807 64,245 153,782 126,083
Provision for uncollectible accounts 1,801 1,852 3,825 2,824
Equity investment income

(2,618

)

(2,417

)

(5,250

)

(3,936

)

Legal proceeding contingency accrual and related expenses 78,000 78,000
Goodwill impairment charge

    24,000       24,000  
Total operating expenses and charges   1,681,858     1,414,609     3,227,773     2,741,588  
Operating income 247,882 246,624 568,602 481,958
Debt expense

(60,709

)

(59,897

)

(122,090

)

(118,492

)

Other income   840     556     1,879     1,397  
Income from continuing operations before income taxes 188,013 187,283 448,391 364,863
Income tax expense   68,009     66,871     163,504     129,830  
Income from continuing operations 120,004 120,412 284,887 235,033
Discontinued operations:
Income from operations of discontinued operations, net of tax     253       384  
Net income 120,004 120,665 284,887 235,417
Less: Net income attributable to noncontrolling
interests
 

(24,667

)

 

(20,650

)

 

(49,430

)

 

(40,900

)

Net income attributable to DaVita Inc. $ 95,337   $ 100,015   $ 235,457   $ 194,517  
Earnings per share:
Basic income from continuing operations per share attributable to DaVita Inc. $ 1.01   $ 1.05   $ 2.51   $ 2.03  
Basic net income per share attributable to DaVita Inc. $ 1.01   $ 1.05   $ 2.51   $ 2.03  
Diluted income from continuing operations per share attributable to DaVita Inc. $ 0.99   $ 1.02   $ 2.46   $ 1.98  
Diluted net income per share attributable to DaVita Inc. $ 0.99   $ 1.03   $ 2.46   $ 1.99  
Weighted average shares for earnings per share:
Basic   94,171,583     95,488,449     93,970,295     95,872,466  
Diluted   96,002,190     97,657,578     95,865,605     98,014,315  
Amounts attributable to DaVita Inc.:
Income from continuing operations $ 95,337 $ 99,762 $ 235,457 $ 194,133
Discontinued operations     253       384  
Net income $ 95,337   $ 100,015   $ 235,457   $ 194,517  
 

DAVITA INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands, except per share data)

       
Three months ended June 30, Six months ended June 30,
2012     2011 2012     2011
Net income $ 120,004   $ 120,665   $ 284,887   $ 235,417  
Other comprehensive (loss) income, net of tax:
Unrealized losses on interest rate swap and cap agreements:
 
Unrealized losses on interest rate swap and cap agreements (2,102 ) (12,837 ) (4,363 ) (16,971 )
Less: Reclassifications of net swap and cap agreements realized losses into net income 2,536 2,680 5,056 4,423
 
Unrealized (loss) gains on investments:
Unrealized (loss) gains on investments (204 ) 47 942 315
Less: Reclassification of net investment realized gains into net income

(75 ) (57 )
 
Foreign currency translation adjustments   (839 )     (1,458 )  
Other comprehensive (loss) income   (609 )   (10,110 )   102     (12,290 )
 
Total comprehensive income 119,395 110,555 284,989 223,127
Less: Comprehensive income attributable to the noncontrolling interests   (24,667 )   (20,650 )   (49,430 )   (40,900 )
Comprehensive income attributable to DaVita Inc. $ 94,728   $ 89,905   $ 235,559   $ 182,227  
 

DAVITA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

   
Six months ended
June 30,
2012     2011
Cash flows from operating activities:  
Net income $ 284,887 $ 235,417
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 153,782 126,507
Stock-based compensation expense 24,344 23,058
Tax benefits from stock award exercises 27,583 33,765
Excess tax benefits from stock award exercises (14,841 ) (19,009 )
Deferred income taxes (25,531 ) 24,225
Equity investment income, net (139 ) 472
Other non-cash charges and loss on disposal of assets 12,903 10,842
Goodwill impairment charge 24,000
Changes in operating assets and liabilities, other than from acquisitions and divestitures:
Accounts receivable (53,294 ) (83,075 )
Inventories 1,713 9,369
Other receivables and other current assets 61,938 23,791
Other long-term assets 4,486 2,164
Accounts payable 8,178 41,436
Accrued compensation and benefits 23,209 68,008
Other current liabilities 65,349 (25,716 )
Income taxes (49,069 ) 34,799
Other long-term liabilities   8,481     4,140  
Net cash provided by operating activities   533,979     534,193  
Cash flows from investing activities:
Additions of property and equipment, net (250,508 ) (154,929 )
Acquisitions (346,774 ) (151,196 )
Proceeds from asset sales 2,023 2,954
Purchase of investments available for sale (3,070 ) (1,868 )
Purchase of investments held-to-maturity (5,257 ) (19,684 )
Proceeds from sale of investments available for sale 6,791 1,149
Proceeds from maturities of investments held-to-maturity 9,582 19,683
Purchase of equity investments and other assets (5,005 )
Distributions received on equity investments   2     340  
Net cash used in investing activities   (587,211 )   (308,556 )
Cash flows from financing activities:
Borrowings 17,217,404 19,169,580
Payments on long-term debt (17,254,503 ) (19,201,362 )
Interest rate cap premiums and other deferred financing costs (2 ) (13,457 )
Purchase of treasury stock (290,593 )
Distributions to noncontrolling interests (50,478 ) (46,423 )
Stock award exercises and other share issuances, net 4,845 7,410
Excess tax benefits from stock award exercises 14,841 19,009
Contributions from noncontrolling interests 10,584 6,490
Proceeds from sales of additional noncontrolling interests 142 2,067
Purchases from noncontrolling interests   (9,800 )   (8,650 )
Net cash used in financing activities (66,967 ) (355,929 )
Effect of exchange rate changes on cash and cash equivalents   (108 )  
Net decrease in cash and cash equivalents (120,307 ) (130,292 )
Cash and cash equivalents at beginning of period   393,752     860,117  
Cash and cash equivalents at end of period $ 273,445   $ 729,825  
 

DAVITA INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except per share data)

       

June 30,
2012

December 31,
2011

ASSETS
Cash and cash equivalents $ 273,445 $ 393,752
Short-term investments 8,629 17,399
Accounts receivable, less allowance of $253,199 and $250,343 1,249,995 1,195,163
Inventories 77,684 75,731
Other receivables 211,487 269,832
Other current assets 45,649 49,349
Income tax receivable 11,586
Deferred income taxes   300,276     280,382  
Total current assets 2,178,751 2,281,608
Property and equipment, net 1,586,460 1,432,651
Amortizable intangibles, net 162,322 159,491
Equity investments 27,578 27,325
Long-term investments 12,143 9,890
Other long-term assets 29,623 34,231
Goodwill   5,258,056     4,946,976  
$ 9,254,933   $ 8,892,172  
LIABILITIES AND EQUITY
Accounts payable $ 299,005 $ 289,653
Other liabilities 395,024 325,734
Accrued compensation and benefits 436,273 412,972
Current portion of long-term debt 105,562 87,345
Income tax payable     37,412  
Total current liabilities 1,235,864 1,153,116
Long-term debt 4,392,908 4,417,624
Other long-term liabilities 146,948 132,006
Alliance and product supply agreement, net 17,322 19,987
Deferred income taxes   431,196     423,098  
Total liabilities 6,224,238 6,145,831
Commitments and contingencies
Noncontrolling interests subject to put provisions 522,748 478,216
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; 134,862,283 shares issued; 94,486,725 and 93,641,363 shares outstanding) 135 135
Additional paid-in capital 564,795 596,300
Retained earnings 3,431,275 3,195,818
Treasury stock, at cost (40,375,558 and 41,220,920 shares) (1,598,231 ) (1,631,694 )
Accumulated other comprehensive loss   (19,382 )   (19,484 )
Total DaVita Inc. shareholders’ equity 2,378,592 2,141,075
Noncontrolling interests not subject to put provisions   129,355     127,050  
Total equity   2,507,947     2,268,125  
$ 9,254,933   $ 8,892,172  
 

DAVITA INC.

SUPPLEMENTAL FINANCIAL DATA

(unaudited)

(dollars in millions, except for per share and per treatment data)

       
Three months ended

Six months
ended
June 30, 2012

June 30,
2012

   

March 31,
2012

   

June 30,

2011

1. Consolidated Financial Results:
Consolidated operating revenues $ 1,984 $ 1,920 $ 1,709 $ 3,904
Consolidated net operating revenues $ 1,930 $ 1,867 $ 1,661 $ 3,797
Operating income $ 247.9 $ 320.7 $ 246.6 $ 568.6
Operating income excluding the legal proceeding contingency accrual and related expenses and the non-cash goodwill impairment charge $ 325.9 $ 320.7 $ 270.6 $ 646.6
Operating income margin 12.5 % 16.7 % 14.4 % 14.6 %
Operating income margin excluding the legal proceeding contingency accrual and related expenses and the non-cash goodwill impairment charge 16.4 % 16.7 % 15.8 % 16.6 %
Net income attributable to DaVita Inc. $ 95.3 $ 140.1 $ 100.0 $ 235.5
Net income attributable to DaVita Inc. excluding the legal proceeding contingency accrual and related expenses and the non-cash goodwill impairment charge $ 142.9 $ 140.1 $ 114.4 $ 283.0
Diluted net income per share attributable to DaVita Inc. $ 0.99 $ 1.46 $ 1.03 $ 2.46
Diluted net income per share attributable to DaVita Inc. excluding the legal proceeding contingency accrual and related expenses and the non-cash goodwill impairment charge $ 1.49 $ 1.46 $ 1.17 $ 2.96
 
2. Consolidated Business Metrics:
Expenses
Patient care costs as a percent of consolidated operating revenues(1) 66.1 % 65.8 % 68.1 % 66.0 %
General and administrative expenses as a percent of consolidated operating revenues(1) 10.8 % 10.8 % 9.6 % 10.8 %
 
Total provision for uncollectible accounts as a percent of consolidated operating revenues 2.8 % 2.9 % 2.9 % 2.9 %
 
Consolidated effective tax rate 36.2 % 36.7 % 35.7 % 36.5 %
Consolidated effective tax rate attributable to DaVita Inc.(2) 41.5 % 40.5 % 40.0 % 40.9 %
 
3. Segment Financial Results: (dollar amounts rounded to nearest million)
Operating revenues
Dialysis and related lab services patient service operating revenues $ 1,813 $ 1,767 $ 1,585 $ 3,580
Less: Provision for uncollectible accounts related to patient service operating revenues   (54 )   (53 )   (48 )   (107 )
Dialysis and related lab services net patient service operating revenues $ 1,759 $ 1,714 $ 1,537 $ 3,473
Other revenues   3     3     3     6  
Total net dialysis and related lab services operating revenues 1,762 1,717 1,540 3,479
Other – Ancillary services and strategic initiatives 170 153 121 323
Other – Ancillary services and strategic initiatives net patient service operating revenues (related to international dialysis operations and a vascular access clinic)   5     3     2     8  
Total net segment operating revenues 1,937 1,873 1,663 3,810
Elimination of intersegment revenues   (7 )   (6 )   (2 )   (13 )
Total net consolidated operating revenues $ 1,930   $ 1,867   $ 1,661   $ 3,797  
 

DAVITA INC.

SUPPLEMENTAL FINANCIAL DATA—continued

(unaudited)

(dollars in millions, except for per share and per treatment data)

       

Three months ended

Six months
ended
June 30, 2012

 

June 30,
2012

   

March 31,
2012

   

June 30,
2011

3. Segment Financial Results: (dollar amounts rounded to nearest million)(continued)
Operating Income
Dialysis and related lab services operating income $ 286 $ 354 $ 288 $ 641
Other – Ancillary services and strategic initiatives, including international dialysis operations operating losses   (19 )   (17 )   (30 )   (37 )
Total segment operating income $ 267 $ 337 $ 258 $ 604
Reconciling items:
Other corporate level general and administrative expenses including stock-based compensation (22 ) (19 ) (13 ) (40 )
Equity investment income   3     3     2     5  
Consolidated operating income $ 248   $ 321   $ 247   $ 569  
 
4. Segment Business Metrics:
Dialysis and related lab services
Volume
Treatments 5,451,901 5,314,275 4,769,661 10,766,176
Number of treatment days 78.0 78.0 78.0 156.0
Treatments per day 69,896 68,132 61,150 69,014
Per day year over year increase 14.3 % 14.2 % 7.1 % 14.2 %
Non-acquired growth year over year 4.7 % 5.5 % 4.6 % 5.1 %
 
Operating revenues before provision for uncollectible accounts
Dialysis and related lab services revenue per treatment $ 332.67 $ 332.43 $ 332.30 $ 332.55
Per treatment increase from previous quarter 0.1 % 1.2 % 1.8 %
Per treatment increase (decrease) from previous year 0.1 % 1.8 % (0.7 %) 1.0 %
Percent of consolidated revenues 91.6 % 92.2 % 92.9 % 91.9 %
 
Expenses
Patient care costs
Percent of total segment operating revenues 64.1 % 63.7 % 66.9 % 63.9 %
Per treatment $ 213.68 $ 212.12 $ 222.79 $ 212.91
Per treatment increase (decrease) from previous quarter 0.7 % 1.7 % (0.2 %)
Per treatment decrease from previous year (4.1 %) (5.0 %) (4.0 %) (4.5 %)
 
General and administrative expenses
Percent of total segment operating revenues 8.6 % 9.1 % 8.0 % 8.9 %
Per treatment $ 28.80 $ 30.38 $ 26.79 $ 29.58
Per treatment (decrease) increase from previous quarter (5.2 %) 3.2 % 0.3 %
Per treatment increase from previous year 7.5 % 13.7 % 9.8 % 10.5 %
 

DAVITA INC.

SUPPLEMENTAL FINANCIAL DATA—continued

(unaudited)

(dollars in millions, except for per share and per treatment data)

       
Three months ended

Six months
ended
June 30, 2012

June 30,
2012

   

March 31,
2012

   

June 30,
2011

5. Cash Flow:
Operating cash flow $ 202.1 $ 331.9 $ 204.4 $ 534.0
Operating cash flow, last twelve months $ 1,179.8 $ 1,182.1 $ 816.1
Free cash flow(2) $ 111.4 $ 249.9 $ 132.1 $ 361.3
Free cash flow, last twelve months(2) $ 816.5 $ 837.2 $ 528.0
Capital expenditures:
Routine maintenance/IT/other $ 66.6 $ 55.6 $ 48.0 $ 122.2
Development and relocations $ 71.4 $ 56.8 $ 39.4 $ 128.3
Acquisition expenditures $ 214.1 $ 132.7 $ 69.7 $ 346.8
 
6. Accounts Receivable:
Net receivables $ 1,250 $ 1,267 $ 1,132
DSO 60 63 63
7. Debt and Capital Structure:
Total debt(3) $ 4,505 $ 4,499 $ 4,294
Net debt, net of cash(3) $ 4,232 $ 4,050 $ 3,564
Leverage ratio (see calculation on page 11) 2.70x 2.55x 2.69x
Overall weighted average effective interest rate during the quarter 5.27 % 5.27 % 5.33 %
Overall weighted average effective interest rate at end of the quarter 5.28 % 5.28 % 5.34 %
Weighted average effective interest rate on the Senior Secured Credit Facilities at end of the quarter 4.61 % 4.63 % 4.68 %
Fixed and economically fixed interest rates as a percentage of our total debt(4) 57.0 % 56.9 % 59.3 %
Share repurchases $ - $ - $ 302.4
 
8. Clinical: (quarterly averages)
Dialysis adequacy -% of patients with Kt/V > 1.2 at the end of the quarter 98 % 97 % 97 %
Patients with arteriovenous fistulas placed 70 % 69 % 69 %
 

_________________

(1)     Consolidated percentages of revenues are comprised of the dialysis and related lab services business, other ancillary services and strategic initiatives, stock-based compensation expenses, and in case of general and administrative expenses, includes other certain corporate level general and administrative expenses.
(2) These are non-GAAP financial measures. For a reconciliation of these non-GAAP financial measures to their most comparable measure calculated and presented in accordance with GAAP, see attached reconciliation schedules.
(3) The reported balance sheet amounts at June 30, 2012, March 31, 2012 and June 30, 2011, are net of $7.0 million, $7.4 million and $7.6 million, respectively, of debt discounts associated with our Term Loan B and our Term Loan A-2.
(4) The Term Loan A-2 and Term Loan B are subject to LIBOR floors of 1.00% and 1.50%, respectively. Because LIBOR, for all periods presented above, was lower than either of these floors, the interest rates on the Term Loan A-2 and the Term Loan B are set at their respective floors. At such time as the LIBOR-based component of our interest rate exceeds 1.00% on the Term Loan A-2 and 1.50% on the Term Loan B, we will then be subject to LIBOR-based interest rate volatility on the LIBOR variable component of our interest rate on all of the Term Loan A-2, as well as for the Term Loan B, but limited to a maximum rate of 4.00% on $1.25 billion of outstanding principal debt on the Term Loan B. The remaining $474 million outstanding principal balance of the Term Loan B is subject to LIBOR-based interest rate volatility above a floor of 1.50%.
 

DAVITA INC.
SUPPLEMENTAL FINANCIAL DATA—continued
(unaudited)
(dollars in thousands)

Note 1: Calculation of the Leverage Ratio

Under the Company’s Senior Secured Credit Facilities (Credit Agreement), the leverage ratio is defined as all funded debt plus the face amount of all letters of credit issued, minus cash and cash equivalents, divided by “Consolidated EBITDA”. The leverage ratio determines the interest rate margin payable by the Company for its Term Loan A and revolving line of credit under the Credit Agreement by establishing the margin over the base interest rate (LIBOR) that is applicable. The following leverage ratio was calculated using “Consolidated EBITDA” as defined in the Credit Agreement. The calculation below is based on the last twelve months of “Consolidated EBITDA”, pro forma for routine acquisitions that occurred during the period. The Company’s management believes the presentation of “Consolidated EBITDA” is useful to investors to enhance their understanding of the Company’s leverage ratio under its Credit Agreement.

   

Rolling twelve
months ended
June 30, 2012

Net income attributable to DaVita Inc. $ 518,941
Income taxes 349,143
Interest expense 227,380
Depreciation and amortization 294,590
Noncontrolling interests and equity investment income, net 103,667
Stock-based compensation 50,004
Other items   41,681  
“Consolidated EBITDA” $ 1,585,406  
 
 
June 30, 2012
Total debt, excluding debt discount of $7.0 million $ 4,505,483
Letters of credit issued   48,940  
4,554,423
Less: Cash and cash equivalents   (273,445 )
Consolidated net debt $ 4,280,978  
Last twelve months “Consolidated EBITDA” $ 1,585,406  
Leverage ratio 2.70x
 

In accordance with the Credit Agreement, the Company’s leverage ratio cannot exceed 4.25 to 1.0 as of June 30, 2012. At that date the Company’s leverage ratio did not exceed 4.25 to 1.0.

DAVITA INC.
RECONCILIATIONS FOR NON-GAAP MEASURES
(unaudited)
(dollars in thousands)

1. Net income attributable to DaVita Inc. excluding an after-tax legal proceeding contingency accrual and related expenses and an after-tax non-cash goodwill impairment charge and diluted earnings per share attributable to DaVita Inc. excluding an after-tax legal proceeding contingency accrual and related expenses and an after-tax non-cash goodwill impairment charge.

We believe that net income attributable to DaVita Inc. excluding an after-tax legal proceeding contingency accrual and related expenses and an after-tax non-cash goodwill impairment charge enhances a user’s understanding of our normal net income attributable to DaVita Inc. and diluted earnings per share attributable to DaVita Inc. for these periods by providing a measure that is meaningful because it excludes an unusual charge for a legal proceeding contingency accrual that resulted from an agreement we reached in principle to settle federal program claims relating to our historical Epogen practices and also excludes a non-cash goodwill impairment charge that resulted from a decrease in the implied fair value of goodwill below its carrying amount associated with our infusion therapy business during the second quarter of 2011 and accordingly, is more comparable to prior periods and indicative of consistent net income attributable to DaVita Inc. and diluted earnings per share to DaVita Inc. These measures are not measures of financial performance under United States generally accepted accounting principles (GAAP) and should not be considered as an alternative to net income attributable to DaVita Inc., and diluted earnings per share attributable to DaVita Inc.

Net income attributable to DaVita Inc. excluding an after-tax legal proceeding contingency accrual and related expenses and an after-tax non-cash goodwill impairment charge:

    Three months ended       Six months ended

June 30,
2012

     

March 31,

2012

   

June 30,

2011

 

June 30,

2012

     

June 30,

2011

 
Net income attributable to DaVita Inc. $ 95,337 $ 140,120

$

100,015 $ 235,457 $ 194,517
Add:
Legal proceeding contingency accrual and related expenses 78,000 78,000
Non-cash goodwill impairment charge 24,000 24,000
Less: Related income tax   (30,420 )   (9,600 )   (30,420 )   (9,600 )
$ 142,917   $ 140,120 $ 114,415   $ 283,037   $ 208,917  
 
Diluted earnings per share attributable to DaVita Inc. excluding an after-tax legal proceeding contingency accrual and related expenses and an after-tax non-cash goodwill impairment charge: Three months ended   Six months ended

June 30,
2012

 

March 31,

2012

June 30,

2011

 

June 30,

2012

 

June 30,

2011

 
Diluted earnings per share attributable to DaVita Inc. $ 0.99 $ 1.46 $ 1.03 $ 2.46 $ 1.99
Add:
Legal proceeding contingency accrual and related expenses 0.50 0.50
Non-cash goodwill impairment charge     0.14       0.14  
$ 1.49   $ 1.46 $ 1.17   $ 2.96   $ 2.13  
 

DAVITA INC.
RECONCILIATIONS FOR NON-GAAP MEASURES
(unaudited)
(dollars in thousands)

2. Operating income excluding a pre-tax legal proceeding contingency accrual and related expenses and a pre-tax non-cash goodwill impairment charge.

We believe that operating income excluding a pre-tax legal proceeding contingency accrual and related expenses and a pre-tax non-cash goodwill impairment charge enhances a user’s understanding of our normal operating income for these periods by providing a measure that is meaningful because it excludes an unusual charge for a legal proceeding contingency accrual that resulted from an agreement we reached in principle to settle federal program claims relating to our historical Epogen practices and also excludes a non-cash goodwill impairment charge that resulted from a decrease in the implied fair value of goodwill below its carrying amount associated with our infusion therapy business during the second quarter of 2011 and accordingly, is more comparable to prior periods and indicative of consistent operating income. This measure is not a measure of financial performance under GAAP and should not be considered as an alternative to operating income.

Operating income excluding a pre-tax legal proceeding contingency accrual and related expenses and a pre-tax non-cash goodwill impairment charge:     Three months ended     Six months ended

June 30,

2012

   

March 31,
2012

   

June 30,

2011

June 30,

2012

   

June 30,

2011

Operating income $ 247,882 $ 320,720 $ 246,624 $ 568,602 $ 481,958
Add:
Legal proceeding contingency accrual and related expenses 78,000 78,000
Non-cash goodwill impairment charge   24,000   24,000
$ 325,882 $ 320,720 $ 270,624 $ 646,602 $ 505,958

DAVITA INC.
RECONCILIATIONS FOR NON-GAAP MEASURES
(unaudited)
(dollars in thousands)

3. Effective Income Tax Rates

We believe that reporting the effective income tax rate attributable to DaVita Inc. enhances an investor’s understanding of DaVita’s effective income tax rate for the periods presented because it excludes noncontrolling owners’ income that primarily relates to non-tax paying entities and accordingly is more comparable to prior periods presentations regarding DaVita’s effective income tax rate and is meaningful to an investor to fully understand the related income tax effects on DaVita Inc.’s operating results. This is not a measure under GAAP and should not be considered as an alternative to the effective income tax rate calculated in accordance with GAAP.

Effective income tax rate as compared to the effective income tax rate attributable to DaVita Inc. is as follows:

    Three months ended    

Six months
ended
June 30, 2012

June 30,

2012

   

March 31,

2012

   

June 30,

2011

Income from continuing operations before income taxes $ 188,013   $ 260,378   $ 187,283   $ 448,391  
Income tax expense $ 68,009   $ 95,495   $ 66,871   $ 163,504  
Effective income tax rate   36.2 %   36.7 %   35.7 %   36.5 %
 
 
Three months ended

Six months
ended
June 30, 2012

June 30,

2012

March 31,

2012

June 30,

2011

Income from continuing operations before income taxes $ 188,013 $ 260,378 $ 187,283 $ 448,391
Less: Noncontrolling owners’ income primarily attributable to non-tax paying entities   (25,051 )   (24,883 )   (21,020 )   (49,934 )
Income before income taxes attributable to DaVita Inc. $ 162,962   $ 235,495   $ 166,263   $ 398,457  
 
Income tax expense 68,009 95,495 $ 66,871 $ 163,504
Less: Income tax attributable to noncontrolling interests   (384 )   (120 )   (370 )   (504 )
Income tax attributable to DaVita Inc. $ 67,625   $ 95,375   $ 66,501   $ 163,000  
 
Effective income tax rate attributable to DaVita Inc.   41.5 %   40.5 %   40.0 %   40.9 %
 

DAVITA INC.
RECONCILIATIONS FOR NON-GAAP MEASURES
(unaudited)
(dollars in thousands)

4. Free cash flow

Free cash flow represents net cash provided by operating activities less income distributions to noncontrolling interests and capital expenditures for routine maintenance and information technology. We believe free cash flow is a useful adjunct to cash flow from operating activities and other measurements under GAAP, since free cash flow is a meaningful measure of our ability to fund acquisition and development activities and meet our debt service requirements. In addition, free cash flow excluding income distributions to noncontrolling interests provides an investor with an understanding of free cash flows that are attributable to DaVita Inc. Free cash flow is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operating, investing or financing activities, as an indicator of cash flows or as a measure of liquidity.

    Three months ended      

Six months
ended
June 30, 2012

June 30,

2012

   

March 31,

2012

   

June 30,

2011

 
Cash provided by operating activities $ 202,105 $ 331,874 $ 204,410 $ 533,979
Less: Income distributions to noncontrolling interests   (24,073 )   (26,405 )   (24,236 )   (50,478 )
Cash provided by operating activities attributable to DaVita Inc. 178,032 305,469 180,174 483,501
Less: Expenditures for routine maintenance and information technology   (66,603 )   (55,609 )   (48,027 )   (122,212 )
Free cash flow $ 111,429   $ 249,860   $ 132,147   $ 361,289  
 
 
Rolling 12-Month Period

June 30,

2012

March 31,

2012

June 30,

2011

Cash provided by operating activities $ 1,179,832 $ 1,182,137 $ 816,110
Less: Income distributions to noncontrolling interests   (104,708 )   (104,871 ) (92,713

)

 

Cash provided by operating activities attributable to DaVita Inc. 1,075,124 1,077,266 723,397
Less: Expenditures for routine maintenance and information technology   (258,623 )   (240,047 ) (195,443

)

 

Free cash flow $ 816,501   $ 837,219   $ 527,954  

Source: DaVita Inc.

DaVita Inc.
Jim Gustafson
Investor Relations
(310) 536-2585

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