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Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File Number: 1-14106
DAVITA INC.
| Delaware | 51-0354549 | |||||||
| (State of incorporation) | (I.R.S. Employer Identification No.) |
| 2000 16th Street | ||||||||
| Denver, | CO | 80202 |
Telephone number (720) 631-2100
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading symbol(s): | Name of each exchange on which registered: | ||||||||||||
| Common Stock, $0.001 par value | DVA | NYSE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
As of October 22, 2021, the number of shares of the Registrant’s common stock outstanding was approximately 101.9 million shares.
DAVITA INC.
INDEX
Note: Items 3, 4 and 5 of Part II are omitted because they are not applicable.
i
DAVITA INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share data)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Dialysis patient service revenues | $ | 2,837,940 | $ | 2,781,650 | $ | 8,370,484 | $ | 8,253,128 | |||||||||||||||
| Other revenues | 100,379 | 142,416 | 304,346 | 392,154 | |||||||||||||||||||
| Total revenues | 2,938,319 | 2,924,066 | 8,674,830 | 8,645,282 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Patient care costs | 2,008,589 | 1,971,719 | 5,912,196 | 5,931,732 | |||||||||||||||||||
| General and administrative | 293,095 | 363,280 | 872,612 | 943,065 | |||||||||||||||||||
| Depreciation and amortization | 170,462 | 156,894 | 505,852 | 468,949 | |||||||||||||||||||
| Equity investment income, net | (8,704) | (5,496) | (23,785) | (27,681) | |||||||||||||||||||
| Loss on changes in ownership interest, net | — | — | — | 16,252 | |||||||||||||||||||
| Total operating expenses | 2,463,442 | 2,486,397 | 7,266,875 | 7,332,317 | |||||||||||||||||||
| Operating income | 474,877 | 437,669 | 1,407,955 | 1,312,965 | |||||||||||||||||||
| Debt expense | (72,829) | (73,658) | (213,167) | (243,642) | |||||||||||||||||||
| Debt prepayment, refinancing and redemption charges | — | (86,074) | — | (89,022) | |||||||||||||||||||
| Other (loss) income, net | (7,590) | 5,395 | 8,766 | 10,590 | |||||||||||||||||||
| Income from continuing operations before income taxes | 394,458 | 283,332 | 1,203,554 | 990,891 | |||||||||||||||||||
| Income tax expense | 74,704 | 65,792 | 241,224 | 240,564 | |||||||||||||||||||
| Net income from continuing operations | 319,754 | 217,540 | 962,330 | 750,327 | |||||||||||||||||||
| Net income from discontinued operations, net of tax | — | — | — | 9,980 | |||||||||||||||||||
| Net income | 319,754 | 217,540 | 962,330 | 760,307 | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | (60,000) | (58,866) | (171,353) | (160,438) | |||||||||||||||||||
| Net income attributable to DaVita Inc. | $ | 259,754 | $ | 158,674 | $ | 790,977 | $ | 599,869 | |||||||||||||||
| Earnings per share attributable to DaVita Inc.: | |||||||||||||||||||||||
| Basic net income from continuing operations | $ | 2.48 | $ | 1.31 | $ | 7.41 | $ | 4.81 | |||||||||||||||
| Basic net income | $ | 2.48 | $ | 1.31 | $ | 7.41 | $ | 4.89 | |||||||||||||||
| Diluted net income from continuing operations | $ | 2.36 | $ | 1.28 | $ | 7.08 | $ | 4.72 | |||||||||||||||
| Diluted net income | $ | 2.36 | $ | 1.28 | $ | 7.08 | $ | 4.80 | |||||||||||||||
| Weighted average shares for earnings per share: | |||||||||||||||||||||||
| Basic shares | 104,793 | 120,905 | 106,685 | 122,582 | |||||||||||||||||||
| Diluted shares | 109,838 | 123,954 | 111,666 | 124,927 | |||||||||||||||||||
| Amounts attributable to DaVita Inc.: | |||||||||||||||||||||||
| Net income from continuing operations | $ | 259,754 | $ | 158,674 | $ | 790,977 | $ | 589,889 | |||||||||||||||
| Net income from discontinued operations | — | — | — | 9,980 | |||||||||||||||||||
| Net income attributable to DaVita Inc. | $ | 259,754 | $ | 158,674 | $ | 790,977 | $ | 599,869 |
See notes to condensed consolidated financial statements.
DAVITA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net income | $ | 319,754 | $ | 217,540 | $ | 962,330 | $ | 760,307 | ||||||||||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||||||||
| Unrealized (losses) gains on interest rate cap agreements: | ||||||||||||||||||||||||||
| Unrealized (losses) gains | (357) | (1,628) | 2,466 | (16,470) | ||||||||||||||||||||||
| Reclassifications of net realized losses into net income | 1,034 | 1,034 | 3,100 | 4,280 | ||||||||||||||||||||||
| Unrealized (losses) gains on foreign currency translation: | (54,528) | 13,171 | (59,162) | (62,842) | ||||||||||||||||||||||
| Other comprehensive (loss) income | (53,851) | 12,577 | (53,596) | (75,032) | ||||||||||||||||||||||
| Total comprehensive income | 265,903 | 230,117 | 908,734 | 685,275 | ||||||||||||||||||||||
| Less: Comprehensive income attributable to noncontrolling interests | (60,000) | (58,866) | (171,353) | (160,438) | ||||||||||||||||||||||
| Comprehensive income attributable to DaVita Inc. | $ | 205,903 | $ | 171,251 | $ | 737,381 | $ | 524,837 |
See notes to condensed consolidated financial statements.
DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars and shares in thousands, except per share data)
| September 30, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 1,045,742 | $ | 324,958 | |||||||
| Restricted cash and equivalents | 92,867 | 176,832 | |||||||||
| Short-term investments | 26,690 | 20,101 | |||||||||
| Accounts receivable | 2,027,599 | 1,824,282 | |||||||||
| Inventories | 114,096 | 111,625 | |||||||||
| Other receivables | 410,796 | 544,376 | |||||||||
| Prepaid and other current assets | 69,060 | 76,387 | |||||||||
| Income tax receivable | 52,688 | 70,163 | |||||||||
| Total current assets | 3,839,538 | 3,148,724 | |||||||||
| Property and equipment, net of accumulated depreciation of $4,838,262 and $4,480,429, respectively | 3,463,212 | 3,521,824 | |||||||||
| Operating lease right-of-use assets | 2,860,172 | 2,863,089 | |||||||||
| Intangible assets, net of accumulated amortization of $66,455 and $70,141, respectively | 152,121 | 166,585 | |||||||||
| Equity method and other investments | 243,163 | 257,491 | |||||||||
| Long-term investments | 33,598 | 32,193 | |||||||||
| Other long-term assets | 101,469 | 79,501 | |||||||||
| Goodwill | 6,940,667 | 6,919,109 | |||||||||
| $ | 17,633,940 | $ | 16,988,516 | ||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Accounts payable | $ | 387,712 | $ | 434,253 | |||||||
| Other liabilities | 723,080 | 810,529 | |||||||||
| Accrued compensation and benefits | 683,045 | 685,555 | |||||||||
| Current portion of operating lease liabilities | 388,089 | 369,497 | |||||||||
| Current portion of long-term debt | 166,818 | 168,541 | |||||||||
| Income tax payable | 14,309 | 7,768 | |||||||||
| Total current liabilities | 2,363,053 | 2,476,143 | |||||||||
| Long-term operating lease liabilities | 2,716,707 | 2,738,670 | |||||||||
| Long-term debt | 8,770,883 | 7,917,263 | |||||||||
| Other long-term liabilities | 163,051 | 150,060 | |||||||||
| Deferred income taxes | 868,078 | 809,600 | |||||||||
| Total liabilities | 14,881,772 | 14,091,736 | |||||||||
| Commitments and contingencies | |||||||||||
| Noncontrolling interests subject to put provisions | 1,423,917 | 1,330,028 | |||||||||
| Equity: | |||||||||||
| Preferred stock ($0.001 par value, 5,000 shares authorized; none issued) | — | — | |||||||||
| Common stock ($0.001 par value, 450,000 shares authorized; 110,886 and 103,136 shares issued and outstanding at September 30, 2021, respectively, and 109,933 shares issued and outstanding at December 31, 2020) | 111 | 110 | |||||||||
| Additional paid-in capital | 525,009 | 597,073 | |||||||||
| Retained earnings | 1,643,514 | 852,537 | |||||||||
| Treasury stock (7,750 and zero shares, respectively) | (899,447) | — | |||||||||
| Accumulated other comprehensive loss | (119,750) | (66,154) | |||||||||
| Total DaVita Inc. shareholders' equity | 1,149,437 | 1,383,566 | |||||||||
| Noncontrolling interests not subject to put provisions | 178,814 | 183,186 | |||||||||
| Total equity | 1,328,251 | 1,566,752 | |||||||||
| $ | 17,633,940 | $ | 16,988,516 |
See notes to condensed consolidated financial statements.
DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(dollars in thousands)
| Nine months ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 962,330 | $ | 760,307 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 505,852 | 468,949 | |||||||||
| Debt prepayment, refinancing and redemption charges | — | 86,957 | |||||||||
| Stock-based compensation expense | 75,898 | 67,217 | |||||||||
| Deferred income taxes | 56,724 | 191,783 | |||||||||
| Equity investment (income) loss, net | (1,687) | 3,026 | |||||||||
| Loss on sales of business interests, net | — | 16,252 | |||||||||
| Other non-cash charges, net | 13,418 | (7,980) | |||||||||
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | |||||||||||
| Accounts receivable | (205,792) | (12,405) | |||||||||
| Inventories | (2,490) | (8,445) | |||||||||
| Other receivables and prepaid and other current assets | 144,967 | (62,025) | |||||||||
| Other long-term assets | (19,663) | (1,853) | |||||||||
| Accounts payable | (47,412) | 445 | |||||||||
| Accrued compensation and benefits | (7,176) | (12,124) | |||||||||
| Other current liabilities | (87,842) | 123,833 | |||||||||
| Income taxes | 22,609 | (100,160) | |||||||||
| Other long-term liabilities | (8,748) | (19,547) | |||||||||
| Net cash provided by operating activities | 1,400,988 | 1,494,230 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions of property and equipment | (451,909) | (449,896) | |||||||||
| Acquisitions | (45,143) | (112,597) | |||||||||
| Proceeds from asset and business sales | 46,578 | 83,339 | |||||||||
| Purchase of debt investments held-to-maturity | (13,274) | (147,829) | |||||||||
| Purchase of other debt and equity investments | (2,609) | (3,388) | |||||||||
| Proceeds from debt investments held-to-maturity | 13,274 | 148,341 | |||||||||
| Proceeds from sale of other debt and equity investments | 11,976 | 3,434 | |||||||||
| Purchase of intangible assets | (745) | — | |||||||||
| Purchase of equity method investments | (7,925) | (9,613) | |||||||||
| Distributions from equity method investments | 1,592 | 902 | |||||||||
| Net cash used in investing activities | (448,185) | (487,307) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings | 1,613,036 | 3,826,484 | |||||||||
| Payments on long-term debt | (812,659) | (3,927,411) | |||||||||
| Deferred financing costs | (9,091) | (105,705) | |||||||||
| Purchase of treasury stock | (882,411) | (1,025,878) | |||||||||
| Distributions to noncontrolling interests | (177,146) | (179,098) | |||||||||
| Net payments related to stock purchases and awards | (59,849) | 3,838 | |||||||||
| Contributions from noncontrolling interests | 28,295 | 32,854 | |||||||||
| Proceeds from sales of additional noncontrolling interest | 2,880 | — | |||||||||
| Purchases of noncontrolling interests | (11,658) | (6,782) | |||||||||
| Net cash used in financing activities | (308,603) | (1,381,698) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (7,381) | (16,606) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 636,819 | (391,381) | |||||||||
| Less: Net increase in cash, cash equivalents and restricted cash from discontinued operations | — | — | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash from continuing operations | 636,819 | (391,381) | |||||||||
| Cash, cash equivalents and restricted cash of continuing operations at beginning of the year | 501,790 | 1,208,718 | |||||||||
| Cash, cash equivalents and restricted cash of continuing operations at end of the period | $ | 1,138,609 | $ | 817,337 |
See notes to condensed consolidated financial statements.
DAVITA INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(dollars and shares in thousands)
| Three months ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non- controlling interests subject to put provisions | DaVita Inc. Shareholders’ Equity | Non- controlling interests not subject to put provisions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Retained earnings | Treasury stock | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | 1,426,211 | 110,644 | $ | 111 | $ | 523,038 | $ | 1,383,760 | (5,019) | $ | (563,230) | $ | (65,899) | $ | 1,277,780 | $ | 185,046 | |||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 41,182 | 259,754 | 259,754 | 18,818 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | (53,851) | (53,851) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock award plans | 242 | (23,584) | (23,584) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-settled stock-based compensation expense | 24,055 | 24,055 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest from: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | (49,766) | (28,018) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | 9,041 | 3,329 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions and divestitures | 5,903 | (351) | (351) | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Partial purchases | (6,803) | (6,803) | (362) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value remeasurements | (8,654) | 8,654 | 8,654 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (2,731) | (336,217) | (336,217) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | 1,423,917 | 110,886 | $ | 111 | $ | 525,009 | $ | 1,643,514 | (7,750) | $ | (899,447) | $ | (119,750) | $ | 1,149,437 | $ | 178,814 | |||||||||||||||||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non- controlling interests subject to put provisions | DaVita Inc. Shareholders’ Equity | Non- controlling interests not subject to put provisions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Retained earnings | Treasury stock | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 1,330,028 | 109,933 | $ | 110 | $ | 597,073 | $ | 852,537 | — | $ | — | $ | (66,154) | $ | 1,383,566 | $ | 183,186 | |||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 121,774 | 790,977 | 790,977 | 49,579 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | (53,596) | (53,596) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock award plans | 953 | 1 | (74,761) | (74,760) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-settled stock-based compensation expense | 74,568 | 74,568 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest from: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | (114,008) | (63,138) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | 19,830 | 8,465 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions and divestitures | 5,903 | (351) | (351) | 1,250 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Partial purchases | (552) | (10,578) | (10,578) | (528) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value remeasurements | 60,942 | (60,942) | (60,942) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (7,750) | (899,447) | (899,447) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | 1,423,917 | 110,886 | $ | 111 | $ | 525,009 | $ | 1,643,514 | (7,750) | $ | (899,447) | $ | (119,750) | $ | 1,149,437 | $ | 178,814 |
See notes to condensed consolidated financial statements.
DAVITA INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(dollars and shares in thousands)
| Three months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non- controlling interests subject to put provisions | DaVita Inc. Shareholders’ Equity | Non- controlling interests not subject to put provisions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Retained earnings | Treasury stock | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | 1,241,937 | 126,037 | $ | 126 | $ | 719,102 | $ | 1,872,933 | (4,052) | $ | (303,139) | $ | (135,107) | $ | 2,153,915 | $ | 179,902 | |||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 40,854 | 158,674 | 158,674 | 18,012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 12,577 | 12,577 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock award plan | 28 | (934) | (934) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-settled stock-based compensation expense | 24,913 | 24,913 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest from: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | (38,154) | (22,391) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | 10,348 | 1,924 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions and divestitures | 1,136 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value remeasurements | 48,949 | (48,949) | (48,949) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (8,232) | (725,439) | (725,439) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | 1,303,934 | 126,065 | $ | 126 | $ | 694,132 | $ | 2,031,607 | (12,284) | $ | (1,028,578) | $ | (122,530) | $ | 1,574,757 | $ | 178,583 |
| Nine months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non- controlling interests subject to put provisions | DaVita Inc. Shareholders’ Equity | Non- controlling interests not subject to put provisions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Retained earnings | Treasury stock | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 1,180,376 | 125,843 | $ | 126 | $ | 749,043 | $ | 1,431,738 | — | $ | — | $ | (47,498) | $ | 2,133,409 | $ | 185,833 | |||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 107,737 | 599,869 | 599,869 | 52,701 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (75,032) | (75,032) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock award plan | 222 | (9,145) | (9,145) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-settled stock-based compensation expense | 66,591 | 66,591 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest from: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | (115,289) | (63,809) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | 24,443 | 8,411 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions and divestitures | (3,214) | (247) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Partial purchases | (6,673) | 4,197 | 4,197 | (4,306) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value remeasurements | 116,554 | (116,554) | (116,554) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (12,284) | (1,028,578) | (1,028,578) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | 1,303,934 | 126,065 | $ | 126 | $ | 694,132 | $ | 2,031,607 | (12,284) | $ | (1,028,578) | $ | (122,530) | $ | 1,574,757 | $ | 178,583 |
See notes to condensed consolidated financial statements.
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 unaudited condensed consolidated interim financial statements included in this report are prepared by the Company. 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 revenues, expenses, assets, liabilities, contingencies and noncontrolling interests subject to put provisions. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve revenue recognition and accounts receivable, impairments of goodwill, accounting for income taxes, certain fair value estimates and loss contingencies. The results of operations reflected in these interim financial statements may not necessarily be indicative of annual operating results. These 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, 2020 (2020 10-K). Prior period classifications have been conformed to the current period presentation. The Company has evaluated subsequent events through the date these condensed consolidated interim financial statements were issued and has included all necessary adjustments and disclosures.
2. Revenue recognition
The following table summarizes the Company's segment revenues by primary payor source:
| Three months ended September 30, 2021 | Three months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||
| U.S. dialysis | Other - Ancillary services | Consolidated | U.S. dialysis | Other - Ancillary services | Consolidated | ||||||||||||||||||||||||||||||
| Dialysis patient service revenues: | |||||||||||||||||||||||||||||||||||
| Medicare and Medicare Advantage**(1)** | $ | 1,543,819 | $ | $ | 1,543,819 | $ | 1,541,707 | $ | $ | 1,541,707 | |||||||||||||||||||||||||
| Medicaid and Managed Medicaid | 203,169 | 203,169 | 193,254 | 193,254 | |||||||||||||||||||||||||||||||
| Other government**(1)** | 82,624 | 113,260 | 195,884 | 83,602 | 98,044 | 181,646 | |||||||||||||||||||||||||||||
| Commercial | 862,218 | 54,857 | 917,075 | 858,247 | 43,845 | 902,092 | |||||||||||||||||||||||||||||
| Other revenues: | |||||||||||||||||||||||||||||||||||
| Medicare and Medicare Advantage | 77,277 | 77,277 | 111,248 | 111,248 | |||||||||||||||||||||||||||||||
| Medicaid and Managed Medicaid | 377 | 377 | 412 | 412 | |||||||||||||||||||||||||||||||
| Commercial | 7,164 | 7,164 | 7,799 | 7,799 | |||||||||||||||||||||||||||||||
| Other**(2)** | 6,216 | 9,442 | 15,658 | 17,409 | 9,895 | 27,304 | |||||||||||||||||||||||||||||
| Eliminations of intersegment revenues | (22,104) | — | (22,104) | (37,317) | (4,079) | (41,396) | |||||||||||||||||||||||||||||
| Total | $ | 2,675,942 | $ | 262,377 | $ | 2,938,319 | $ | 2,656,902 | $ | 267,164 | $ | 2,924,066 |
(1)During the first quarter of 2021, the Company realigned the classification of revenue previously disclosed in the “Other government” category to the “Medicare and Medicare Advantage” category for certain government-reimbursed plans which have structure and payment characteristics similar to traditional Medicare Advantage plans. The classification of revenue for these plans for the three months ended September 30, 2020 has also been recast to conform to the current period presentation.
(2)Other consists of management service fees earned in the respective Company line of business as well as other revenue from the Company's ancillary services.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||
| U.S. dialysis | Other - Ancillary services | Consolidated | U.S. dialysis | Other - Ancillary services | Consolidated | ||||||||||||||||||||||||||||||
| Dialysis patient service revenues: | |||||||||||||||||||||||||||||||||||
| Medicare and Medicare Advantage(1) | $ | 4,586,278 | $ | $ | 4,586,278 | $ | 4,619,852 | $ | $ | 4,619,852 | |||||||||||||||||||||||||
| Medicaid and Managed Medicaid | 585,053 | 585,053 | 547,045 | 547,045 | |||||||||||||||||||||||||||||||
| Other government(1) | 245,125 | 338,553 | 583,678 | 253,654 | 283,431 | 537,085 | |||||||||||||||||||||||||||||
| Commercial | 2,528,499 | 157,172 | 2,685,671 | 2,534,388 | 118,869 | 2,653,257 | |||||||||||||||||||||||||||||
| Other revenues: | |||||||||||||||||||||||||||||||||||
| Medicare and Medicare Advantage | 243,085 | 243,085 | 309,555 | 309,555 | |||||||||||||||||||||||||||||||
| Medicaid and Managed Medicaid | 981 | 981 | 1,061 | 1,061 | |||||||||||||||||||||||||||||||
| Commercial | 14,387 | 14,387 | 27,370 | 27,370 | |||||||||||||||||||||||||||||||
| Other(2) | 19,308 | 31,107 | 50,415 | 30,846 | 36,600 | 67,446 | |||||||||||||||||||||||||||||
| Eliminations of intersegment revenues | (70,424) | (4,294) | (74,718) | (104,987) | (12,402) | (117,389) | |||||||||||||||||||||||||||||
| Total | $ | 7,893,839 | $ | 780,991 | $ | 8,674,830 | $ | 7,880,798 | $ | 764,484 | $ | 8,645,282 |
(1)During the first quarter of 2021, the Company realigned the classification of revenue previously disclosed in the “Other government” category to the “Medicare and Medicare Advantage” category for certain government-reimbursed plans which have structure and payment characteristics similar to traditional Medicare Advantage plans. The classification of revenue for these plans for the nine months ended September 30, 2020 has also been recast to conform to the current period presentation.
(2)Other consists of management service fees earned in the respective Company line of business as well as other revenue from the Company's ancillary services.
There are significant uncertainties associated with estimating revenue, which generally take several years to resolve. These estimates are subject to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payor issues, as well as patient issues, including determination of applicable primary and secondary coverage, changes in patient insurance coverage and coordination of benefits. As these estimates are refined over time, both positive and negative adjustments to revenue are recognized in the current period.
Dialysis patient service revenues. Revenues are recognized based on the Company’s estimate of the transaction price the Company expects to collect as a result of satisfying its performance obligations. Dialysis patient service revenues are recognized in the period services are provided based on these estimates. Revenues consist primarily of payments from government and commercial health plans for dialysis services provided to patients. A usual and customary fee schedule is maintained for the Company’s dialysis treatments and related lab services; however, actual collectible revenue is normally recognized at a discount from the fee schedule.
Other revenues. Other revenues consist of fees for management and administrative support services provided to outpatient dialysis businesses that the Company does not own or in which the Company owns a noncontrolling interest as well as revenues associated with the Company's non-dialysis ancillary services. Revenues associated with dialysis management services, integrated care services, clinical research programs, physician services, and end stage renal disease (ESRD) seamless care organizations are estimated and recognized in the period services are provided.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
3. Earnings per share
Basic earnings per share is calculated by dividing net income attributable to the Company by the weighted average number of common shares outstanding. Weighted average common shares outstanding include restricted stock unit awards that are no longer subject to forfeiture because the recipients have satisfied either the explicit vesting terms or retirement eligibility requirements.
Diluted earnings per share includes the dilutive effect of outstanding stock-settled stock appreciation rights and unvested stock units as computed under the treasury stock method.
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, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income attributable to DaVita Inc.: | |||||||||||||||||||||||
| Continuing operations | $ | 259,754 | $ | 158,674 | $ | 790,977 | $ | 589,889 | |||||||||||||||
| Discontinued operations | — | — | — | 9,980 | |||||||||||||||||||
| Net income attributable to DaVita Inc. | $ | 259,754 | $ | 158,674 | $ | 790,977 | $ | 599,869 | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic shares | 104,793 | 120,905 | 106,685 | 122,582 | |||||||||||||||||||
| Assumed incremental from stock plans | 5,045 | 3,049 | 4,981 | 2,345 | |||||||||||||||||||
| Diluted shares | 109,838 | 123,954 | 111,666 | 124,927 | |||||||||||||||||||
| Basic net income attributable to DaVita Inc.: | |||||||||||||||||||||||
| Continuing operations per share | $ | 2.48 | $ | 1.31 | $ | 7.41 | $ | 4.81 | |||||||||||||||
| Discontinued operations per share | — | — | — | 0.08 | |||||||||||||||||||
| Basic net income per share attributable to DaVita Inc. | $ | 2.48 | $ | 1.31 | $ | 7.41 | $ | 4.89 | |||||||||||||||
| Diluted net income attributable to DaVita Inc.: | |||||||||||||||||||||||
| Continuing operations per share | $ | 2.36 | $ | 1.28 | $ | 7.08 | $ | 4.72 | |||||||||||||||
| Discontinued operations per share | — | — | — | 0.08 | |||||||||||||||||||
| Diluted net income per share attributable to DaVita Inc. | $ | 2.36 | $ | 1.28 | $ | 7.08 | $ | 4.80 | |||||||||||||||
| Anti-dilutive stock-settled awards excluded from calculation(1) | 141 | 2,765 | 103 | 3,063 |
(1)Shares associated with stock awards excluded from the diluted denominator calculation because they were anti-dilutive under the treasury stock method.
4. Restricted cash and equivalents
The Company had restricted cash and cash equivalents of $92,867 and $176,832 at September 30, 2021 and December 31, 2020, respectively. The decrease in restricted cash and equivalents was primarily driven by the release of escrow funds in the third quarter of 2021 related to a resolved legal settlement, see Note 9 for further details. Substantially all of the restricted cash and equivalents balance at September 30, 2021 is held in trust to satisfy insurer and state regulatory requirements related to the wholly-owned captive insurance companies that bear professional and general liability and workers' compensation risks for the Company and the remaining restricted cash and cash equivalents held at September 30, 2021 represents cash pledged to third parties in connection with one of the Company's ancillary businesses.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
5. Short-term and long-term investments
The Company’s short-term and long-term debt and equity investments, consisting of debt instruments classified as held-to-maturity and equity investments with readily determinable fair values or redemption values, were as follows:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Debt securities | Equity securities | Total | Debt securities | Equity securities | Total | ||||||||||||||||||||||||||||||
| Certificates of deposit and other time deposits | $ | 8,225 | $ | — | $ | 8,225 | $ | 8,217 | $ | — | $ | 8,217 | |||||||||||||||||||||||
| Investments in mutual funds and common stocks | — | 52,063 | 52,063 | — | 44,077 | 44,077 | |||||||||||||||||||||||||||||
| $ | 8,225 | $ | 52,063 | $ | 60,288 | $ | 8,217 | $ | 44,077 | $ | 52,294 | ||||||||||||||||||||||||
| Short-term investments | $ | 8,225 | $ | 18,465 | $ | 26,690 | $ | 8,217 | $ | 11,884 | $ | 20,101 | |||||||||||||||||||||||
| Long-term investments | — | 33,598 | 33,598 | — | 32,193 | 32,193 | |||||||||||||||||||||||||||||
| $ | 8,225 | $ | 52,063 | $ | 60,288 | $ | 8,217 | $ | 44,077 | $ | 52,294 |
Debt securities: The Company's short-term debt investments are principally bank certificates of deposit with contractual maturities longer than three months but shorter than one year. These debt securities are accounted for as held to maturity and recorded at amortized cost, which approximated their fair values at September 30, 2021 and December 31, 2020.
Equity securities: During the nine months ended September 30, 2021 certain of the Company’s equity investments previously accounted for under the adjusted cost method now have readily determinable fair values from public markets. As a result, these investments were reclassified from equity method and other investments to short-term investments during that period. The Company recognized $10,314 and $1,986 in net unrealized losses on these investments during the three and nine months ended September 30, 2021, respectively, which were valued at $15,264 as of September 30, 2021. The Company's remaining short-term and long-term equity investments are held within a trust to fund existing obligations associated with the Company’s non-qualified deferred compensation plans.
6. Goodwill
Changes in goodwill by reportable segments were as follows:
| U.S. dialysis | Other - Ancillary services | Consolidated | |||||||||||||||
| Balance at December 31, 2019 | $ | 6,287,100 | $ | 500,535 | $ | 6,787,635 | |||||||||||
| Acquisitions | 24,377 | 105,680 | 130,057 | ||||||||||||||
| Divestitures | (1,549) | (6,744) | (8,293) | ||||||||||||||
| Foreign currency and other adjustments | — | 9,710 | 9,710 | ||||||||||||||
| Balance at December 31, 2020 | $ | 6,309,928 | $ | 609,181 | $ | 6,919,109 | |||||||||||
| Acquisitions | 12,423 | 41,196 | 53,619 | ||||||||||||||
| Divestitures | (623) | — | (623) | ||||||||||||||
| Foreign currency and other adjustments | — | (31,438) | (31,438) | ||||||||||||||
| Balance at September 30, 2021 | $ | 6,321,728 | $ | 618,939 | $ | 6,940,667 | |||||||||||
| Balance at September 30, 2021: | |||||||||||||||||
| Goodwill | $ | 6,321,728 | $ | 747,933 | $ | 7,069,661 | |||||||||||
| Accumulated impairment charges | — | (128,994) | (128,994) | ||||||||||||||
| $ | 6,321,728 | $ | 618,939 | $ | 6,940,667 |
The Company did not recognize any goodwill impairment charges during the nine months ended September 30, 2021 and 2020.
As dialysis treatments are an essential, life-sustaining service for patients who depend on them, the Company's operations have continued throughout the novel coronavirus (COVID-19) pandemic. However, the ultimate impact of the dynamic and evolving COVID-19 pandemic on the Company will depend on future developments that are highly uncertain and
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
difficult to predict, including among other things the ultimate severity and duration of the pandemic, further spread or resurgence of the virus (including as a result of the emergence of new strains of the virus such as the Delta variant), its impact on the chronic kidney disease (CKD) patient population and the Company's patient population, the availability, acceptance, impact and efficacy of COVID-19 vaccines, treatments and therapies, the pandemic’s continuing impact on the U.S. and global economies, unemployment, labor market conditions, inflation and evolving monetary policies, the responses of the Company's competitors to the pandemic and related changes in the marketplace, and the timing, scope and effectiveness of federal, state and local governmental responses. While the Company does not currently expect a material adverse impact to its business as a result of this public health crisis, there can be no assurance that the COVID-19 pandemic will not have a material adverse impact on one or more of the Company's businesses.
Developments, events, changes in operating performance and other changes in circumstances since the dates of the Company’s last annual goodwill impairment assessments have not caused management to believe it is more likely than not that the fair values of any of the Company's reporting units would be less than their respective carrying amounts as of September 30, 2021. Except for the Company's Germany kidney care reporting unit as described further in Note 10 to the Company's consolidated financial statements included in the 2020 10-K, none of the Company's various other reporting units were considered at risk of significant goodwill impairment as of September 30, 2021.
7. Income taxes
The Company's effective tax rate was 18.9% and 23.2% for the three months ended September 30, 2021 and 2020, respectively, and 20.0% and 24.3% for the nine months ended September 30, 2021 and 2020, respectively. The decrease in the Company's effective tax rate for the three and nine months ended September 30, 2021 compared to the prior year is primarily due to an increase in tax benefits from stock-based compensation deductions in 2021 as well as a reduction in nondeductible advocacy expenses in 2021.
8. Long-term debt
Long-term debt was comprised of the following:
| As of September 30, 2021 | |||||||||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | Maturity date | Interest rate | Estimated fair value**(1)** | |||||||||||||||||||||||||
| Senior Secured Credit Facilities: | |||||||||||||||||||||||||||||
| Term Loan A | $ | 1,618,750 | $ | 1,684,375 | 8/12/2024 | LIBOR+1.50% | $ | 1,618,750 | |||||||||||||||||||||
| Term Loan B-1 | 2,695,120 | 2,715,694 | 8/12/2026 | LIBOR+1.75% | $ | 2,688,383 | |||||||||||||||||||||||
| Revolving line of credit | — | 75,000 | 8/12/2024 | LIBOR+1.50% | |||||||||||||||||||||||||
| Senior Notes: | |||||||||||||||||||||||||||||
| 4.625% Senior Notes | 2,750,000 | 1,750,000 | 6/1/2030 | 4.625 | % | $ | 2,825,625 | ||||||||||||||||||||||
| 3.75% Senior Notes | 1,500,000 | 1,500,000 | 2/15/2031 | 3.750 | % | $ | 1,460,625 | ||||||||||||||||||||||
| Acquisition obligations and other notes payable(2) | 133,260 | 164,160 | 2021-2036 | 4.78 | % | $ | 133,260 | ||||||||||||||||||||||
| Financing lease obligations(3) | 300,340 | 274,292 | 2022-2038 | 4.62 | % | ||||||||||||||||||||||||
| Total debt principal outstanding | 8,997,470 | 8,163,521 | |||||||||||||||||||||||||||
| Discount, premium and deferred financing costs(4) | (59,769) | (77,717) | |||||||||||||||||||||||||||
| 8,937,701 | 8,085,804 | ||||||||||||||||||||||||||||
| Less current portion | (166,818) | (168,541) | |||||||||||||||||||||||||||
| $ | 8,770,883 | $ | 7,917,263 |
(1)For the Company's senior secured credit facilities and senior notes, fair value estimates are based upon bid and ask quotes, typically a level 2 input. For acquisition obligations and other notes payable, the carrying values presented approximate their estimated fair values, based on estimates of their present values using level 2 interest rate inputs.
(2)The interest rate presented for acquisition obligations and other notes payable is their weighted average interest rate based on the current fixed and LIBOR interest rate components in effect as of September 30, 2021.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
(3)Financing lease obligations are measured at their approximate present values at inception. The interest rate presented is the weighted average discount rate embedded in financing leases outstanding. The term of one ground lease runs to 2070, in addition to the other lease maturity dates presented in the table above.
(4)As of September 30, 2021, the carrying amount of the Company's senior secured credit facilities is reduced by a discount of $4,719 and deferred financing costs of $29,340, and the carrying amount of the Company's senior notes is reduced by deferred financing costs of $42,091 and increased by a debt premium of $16,381. As of December 31, 2020, the carrying amount of the Company's senior secured credit facilities is reduced by a discount of $5,461 and deferred financing costs of $35,825, and the carrying amount of the Company's senior notes is reduced by deferred financing costs of $36,431.
During the first nine months of 2021, the Company made regularly scheduled mandatory principal payments under its senior secured credit facilities totaling $65,625 on Term Loan A and $20,574 on Term Loan B-1.
On February 26, 2021, the Company completed an unregistered add-on offering of $1,000,000 aggregate principal amount to the existing 4.625% senior notes due June 1, 2030 (the Additional 2030 Notes) pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Additional 2030 Notes were issued at an offering price of 101.750% of face amount, plus an interest payment advance to the Company for interest that would have accrued from December 1, 2020 (the last interest payment date) through the closing date, and began bearing full six months' semi-annual coupon interest payments as of June 1, 2021. The terms of the Additional 2030 Notes, other than their issue date, offering price and first interest payment date, are identical to the terms of the $1,750,000 principal amount of the Company’s 4.625% senior notes due June 1, 2030 previously issued by the Company on June 9, 2020. The Additional 2030 Notes are unsecured senior obligations and rank equally in right of payment with the Company's existing and future unsecured senior indebtedness. During the nine months ended September 30, 2021, the Company incurred $9,091 in fees and other professional expenses associated with this transaction, which were capitalized and will amortize over the term of the Additional 2030 Notes.
As of September 30, 2021, the Company's 2019 interest rate cap agreements have the economic effect of capping the Company's maximum exposure to LIBOR variable interest rate changes on equivalent amounts of the Company's floating rate debt, including all of Term Loan B-1 and a portion of Term Loan A. The remaining $813,870 outstanding principal balance of Term Loan A is subject to LIBOR-based interest rate volatility. These cap agreements are designated as cash flow hedges and, as a result, changes in the fair values of the cap agreements are reported in other comprehensive income. The original premiums paid for the caps are amortized to debt expense on a straight-line basis over the term of each cap agreement starting from its effective date. These cap agreements do not contain credit risk-contingent features.
The following table summarizes the Company’s interest rate cap agreements outstanding as of September 30, 2021 and December 31, 2020, which are classified in "Other long-term assets" on its consolidated balance sheet:
| Nine months ended September 30, 2021 | Fair value | ||||||||||||||||||||||||||||||||||||||||||||||
| Notional amount | LIBOR maximum rate | Effective date | Expiration date | Debt expense | Recorded OCI gain | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| 2019 cap agreements | $ | 3,500,000 | 2.00% | 6/30/2020 | 6/30/2024 | $ | 4,132 | $ | 3,284 | $ | 5,955 | $ | 2,671 |
See Note 11 for further details on amounts reclassified from accumulated other comprehensive loss and recorded as debt expense related to the Company’s interest rate cap agreements for the three and nine months ended September 30, 2021 and 2020.
The Company’s weighted average effective interest rate on its senior secured credit facilities at the end of the third quarter of 2021 was 2.16%, based on the current margins in effect for its senior secured credit facilities as of September 30, 2021, as described above.
The Company’s overall weighted average effective interest rate for the three and nine months ended September 30, 2021 was 3.34% and 3.26%, respectively, and as of September 30, 2021 was 3.34%.
As of September 30, 2021, the Company’s interest rates were fixed on approximately 51% of its total debt.
As of September 30, 2021, the Company had an undrawn $1,000,000 revolving line of credit under its senior secured credit facilities. Credit available under this facility is reduced by the amount of any letters of credit outstanding under this facility, of which there were none as of September 30, 2021. The Company also had approximately $69,185 in letters of credit outstanding under a separate bilateral secured letter of credit facility as of September 30, 2021.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
9. Commitments and 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, demands, claims, qui tam suits, governmental investigations (which frequently arise from qui tam suits) and audits (including, without limitation, investigations or other actions resulting from its obligation to self-report suspected violations of law) and other legal proceedings, including, without limitation, those described below. 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, 2021 and December 31, 2020, the Company’s total recorded accruals with respect to legal proceedings and regulatory matters, net of anticipated third party recoveries, were immaterial. While these accruals reflect the Company’s best estimate of the probable loss for those matters as of the dates of those accruals, the recorded amounts may differ materially from the actual amount of the losses for those matters, and any anticipated third party recoveries for any such losses may not ultimately be recoverable. Additionally, in some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal proceedings and regulatory matters, which also may be impacted by various factors, including, without limitation, 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 may 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.
Certain Governmental Inquiries and Related Proceedings
2016 U.S. Attorney Texas Investigation: In February 2016, DaVita Rx, LLC (DaVita Rx), a wholly-owned subsidiary of the Company, received a Civil Investigative Demand (CID) from the U.S. Attorney’s Office, Northern District of Texas. The government is conducting a federal False Claims Act (FCA) investigation concerning allegations that DaVita Rx presented or caused to be presented false claims for payment to the government for prescription medications, as well as an investigation into the Company’s relationships with pharmaceutical manufacturers. The government’s investigation covers the period from January 1, 2006 through December 31, 2018. In December 2017, the Company finalized and executed a settlement agreement that resolved certain of the issues in the government’s investigation and that included total monetary consideration of $63,700, as previously disclosed, of which $41,500 was an incremental cash payment and $22,200 was for amounts previously refunded, and all of which was previously accrued. The government’s investigation is ongoing with respect to issues related to DaVita Rx’s historic relationships with certain pharmaceutical manufacturers, and in July 2018 the Office of Inspector General (OIG) served the Company with a subpoena seeking additional documents and information relating to those relationships. On September 15, 2021, the U.S. Attorney’s Office notified the U.S. District Court, Northern District of Texas, of its decision and the decision of 31 states not to elect to intervene at this time in the matter of U.S. ex rel. Doe v. DaVita Inc., et al. The court then unsealed the complaint, which alleges violations of the FCA, by order dated September 17, 2021. The complaint has not been served on the Company to date. The Company disputes the allegations in the complaint. The Company is continuing to cooperate with the government in this investigation.
2017 U.S. Attorney Colorado Investigation: In November 2017, the U.S. Attorney’s Office, District of Colorado informed the Company of an investigation it was conducting into possible federal healthcare offenses involving DaVita Kidney Care, as well as several of the Company’s wholly-owned subsidiaries. In addition to DaVita Kidney Care, the matter currently includes an investigation into DaVita Rx, DaVita Laboratory Services, Inc. (DaVita Labs), and RMS Lifeline Inc. (Lifeline). In each of August 2018, May 2019, and July 2021, the Company received a CID pursuant to the FCA from the U.S. Attorney's Office relating to this investigation. In May 2020, the Company sold its interest in Lifeline, but the Company retained certain liabilities of the Lifeline business, including those related to this investigation. The Company is continuing to cooperate with the government in this investigation.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
2018 U.S. Attorney Florida Investigation: In March 2018, DaVita Labs received two CIDs from the U.S. Attorney’s Office, Middle District of Florida that were identical in nature but directed to the two different labs. According to the face of the CIDs, the U.S. Attorney’s Office is conducting an investigation as to whether the Company’s subsidiary submitted claims for blood, urine, and fecal testing, where there were insufficient test validation or stability studies to ensure accurate results, in violation of the FCA. In October 2018, DaVita Labs received a subpoena from the OIG in connection with this matter requesting certain patient records linked to clinical laboratory tests. On September 30, 2019, the U.S. Attorney’s Office notified the U.S. District Court, Middle District of Florida, of its decision not to elect to intervene at this time in the matter of U.S. ex rel. Lorne Holland, et al. v. DaVita Healthcare Partners, Inc., et al. The court then unsealed the complaint, which alleges violations of the FCA, by order dated the same day. In January 2020, the private party relators served the Company and DaVita Labs with an amended complaint. The Company and DaVita Labs answered the complaint on July 23, 2020. On August 10, 2021, the court entered summary judgment in favor of the Company and DaVita Labs on all of the relators’ FCA claims leaving only the claims for retaliation. The court dismissed the case on October 13, 2021. On October 15, 2021, the parties signed an agreement to resolve the remaining retaliation claims for an immaterial amount.
2020 U.S. Attorney New Jersey Investigation: In March 2020, the U.S. Attorney’s Office, District of New Jersey served the Company with a subpoena and a CID relating to an investigation being conducted by that office and the U.S. Attorney’s Office, Eastern District of Pennsylvania. The subpoena and CID request information on several topics, including certain of the Company’s joint venture arrangements with physicians and physician groups, medical director agreements, and compliance with its five-year Corporate Integrity Agreement, the term of which expired October 22, 2019. The Company is cooperating with the government in this investigation.
2020 California Department of Insurance Investigation: In April 2020, the California Department of Insurance (CDI) sent the Company an Investigative Subpoena relating to an investigation being conducted by that office. CDI issued a superseding subpoena in September 2020 and an additional subpoena in September 2021. Those subpoenas request information on a number of topics, including but not limited to the Company’s communications with patients about insurance plans and financial assistance from the American Kidney Fund (AKF), analyses of the potential impact of patients’ decisions to change insurance providers, and documents relating to donations or contributions to the AKF. The Company is cooperating with CDI in this investigation.
2020 Department of Justice Investigation: In October 2020, the Company received a CID from the Department of Justice pursuant to a False Claims Act investigation concerning allegations that DaVita Medical Group (DMG) may have submitted undocumented or unsupported diagnosis codes in connection with Medicare Advantage beneficiaries. The CID covers the period from January 1, 2015 through June 19, 2019, the date the Company completed the divestiture of DMG to Collaborative Care Holdings, LLC. The Company is cooperating with the government in this investigation.
Although the Company cannot predict whether or when proceedings might be initiated or when these matters may be resolved (other than as may be described above), it is not unusual for inquiries such as these to continue for a considerable period of time through the various phases of document and witness requests and on-going discussions with regulators and to develop over the course of time. In addition to the inquiries and proceedings specifically identified above, the Company frequently is subject to other inquiries by state or federal government agencies, many of which relate to qui tam complaints filed by relators. Negative findings or terms and conditions that the Company might agree to accept as part of a negotiated resolution of pending or future government inquiries or relator proceedings could result in, among other things, substantial financial penalties or awards against the Company, substantial payments made by the Company, harm to the Company’s reputation, required changes to the Company’s business practices, an impact on the Company's various relationships and/or contracts related to the Company's business, exclusion from future participation in the Medicare, Medicaid and other federal health care programs and, if criminal proceedings were initiated against the Company, members of its board of directors or management, possible criminal penalties, any of which could have a material adverse effect on the Company.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
Other Proceedings
2021 Antitrust Indictment and Putative Class Action Suit: On July 14, 2021, an indictment was returned by a grand jury in the U.S. District Court, District of Colorado against the Company and its former chief executive officer in the matter of U.S. v. DaVita Inc., et al. The two count indictment alleges that purported agreements entered into by its former chief executive officer not to solicit senior-level employees violate Section 1 of the Sherman Act. On September 14, 2021, DaVita and its former chief executive officer filed a motion to dismiss the indictment. On July 16, 2021, a former DaVita employee filed a putative class action complaint in the matter of Pena v. Surgical Care Affiliates, LLC, et al. in the U.S. District Court, Northern District of Illinois based on the allegations in the matter of U.S. v. DaVita Inc., et al. On August 6, 2021, the plaintiff in the Pena case filed a notice of voluntary dismissal and the court dismissed the complaint on August 9, 2021. On August 9, 2021, DaVita was named as defendant in a consolidated class action complaint in the matter of In re Outpatient Medical Center Employee Antitrust Litigation in the U.S. District Court, Northern District of Illinois. This class action complaint seeks to bring an action on behalf of certain groups of individuals employed by the Company between February 1, 2012 and January 5, 2021. On October 18, 2021, the Company filed a motion to dismiss the class action complaint.The Company disputes the allegations in the indictment and the class action complaint, as well as the asserted violations of the Sherman Act, and intends to defend these actions accordingly.
Additionally, 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, without limitation, 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.
Other than as may be 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 9, 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, may impact the Company's various relationships and/or contracts related to the Company's business or otherwise harm the Company’s business, results of operations, financial condition, cash flows or reputation.
Resolved Matters
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."
While the Company continues to dispute the allegations, it reached an agreement to resolve this matter without admitting to any liability. Settlement of this matter was covered primarily with insurance proceeds. The Company contributed an amount that did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. On April 13, 2021, the court granted final approval of the settlement. On August 9, 2021, the court entered final judgment and dismissed all claims in the action with prejudice.
In re DaVita Inc. Stockholder Derivative Litigation: On August 15, 2017, the U.S. District Court for the District of Delaware consolidated three previously disclosed shareholder derivative lawsuits: the Blackburn Shareholder action filed on February 10, 2017, the Gabilondo Shareholder action filed on May 30, 2017, and the City of Warren Police and Fire Retirement System Shareholder action filed on June 9, 2017. The complaint covers the time period from 2015 to present and alleges, generally, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, corporate waste, and misrepresentations and/or failures to disclose certain information in violation of the federal securities laws in connection with an alleged practice to direct patients with government-subsidized health insurance into private health insurance plans to maximize the Company’s profits.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
While the defendants continue to dispute the allegations, an agreement was reached to resolve this matter without admitting to any liability and the court approved the settlement and entered final judgment and dismissed the case with prejudice on January 29, 2021. As part of the settlement, the Company agreed to certain corporate governance policies, but did not make any financial contribution towards the settlement.
Other Commitments
The Company also has certain potential commitments to provide working capital funding, if necessary, to certain nonconsolidated outpatient dialysis businesses that the Company manages and in which the Company owns a noncontrolling equity interest or which are wholly-owned by third parties of approximately $11,100.
10. Shareholders' equity
Stock-based compensation
During the nine months ended September 30, 2021, the Company granted 722 restricted and performance stock units with an aggregate grant-date fair value of $79,214 and a weighted-average expected life of approximately 3.5 years and 132 stock-settled stock appreciation rights with an aggregate grant-date fair value of $4,250 and a weighted-average expected life of approximately 4.5 years.
As of September 30, 2021, the Company had $179,110 in total estimated but unrecognized stock-based compensation expense under the Company's equity compensation and employee stock purchase plans. The Company expects to recognize this expense over a weighted average remaining period of 1.3 years.
Share repurchases
The following table summarizes the Company's common stock repurchases during the three and nine months ended September 30, 2021 and 2020:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Open market repurchases: | |||||||||||||||||||||||
| Shares | 2,731 | 250 | 7,750 | 4,302 | |||||||||||||||||||
| Amount paid | $ | 336,217 | $ | 21,259 | $ | 899,447 | $ | 324,398 | |||||||||||||||
| Average paid per share | $ | 123.14 | $ | 85.04 | $ | 116.06 | $ | 75.40 | |||||||||||||||
| Tender offer: | |||||||||||||||||||||||
| Shares | — | 7,982 | — | 7,982 | |||||||||||||||||||
| Amount paid(1) | $ | — | $ | 704,180 | $ | — | $ | 704,180 | |||||||||||||||
| Average paid per share | $ | — | $ | 88.22 | $ | — | $ | 88.22 | |||||||||||||||
| Total: | |||||||||||||||||||||||
| Shares | 2,731 | 8,232 | 7,750 | 12,284 | |||||||||||||||||||
| Amount paid | $ | 336,217 | $ | 725,439 | $ | 899,447 | $ | 1,028,578 | |||||||||||||||
| Average paid per share | $ | 123.14 | $ | 88.13 | $ | 116.06 | $ | 83.73 |
(1)Represents the aggregate amount paid for shares repurchased pursuant to the Company's 2020 tender offer for its shares during the three and nine months ended September 30, 2020, including its clearing price of $88.00 per share plus related fees and expenses of $1,792.
The Company repurchased 1,229 shares of its common stock for $139,538 at an average cost of $113.54 per share subsequent to September 30, 2021 through October 27, 2021.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
Effective on December 10, 2020, the Company's Board of Directors (Board) terminated all remaining prior share repurchase authorizations available to the Company and approved a new share repurchase authorization of $2,000,000. As of October 27, 2021, the Company had a total of $890,970 available under the current authorization for additional share repurchases. Although this share repurchase authorization does not have an expiration date, the Company remains subject to share repurchase limitations including under the terms of its current senior secured credit facilities.
11. Accumulated other comprehensive loss
| Three months ended September 30, 2021 | Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| Interest rate cap agreements | Foreign currency translation adjustments | Accumulated other comprehensive loss | Interest rate cap agreements | Foreign currency translation adjustments | Accumulated other comprehensive loss | ||||||||||||||||||||||||||||||
| Beginning balance | $ | (7,577) | $ | (58,322) | $ | (65,899) | $ | (12,466) | $ | (53,688) | $ | (66,154) | |||||||||||||||||||||||
| Unrealized (losses) gains | (477) | (54,528) | (55,005) | 3,284 | (59,162) | (55,878) | |||||||||||||||||||||||||||||
| Related income tax | 120 | — | 120 | (818) | — | (818) | |||||||||||||||||||||||||||||
| (357) | (54,528) | (54,885) | 2,466 | (59,162) | (56,696) | ||||||||||||||||||||||||||||||
| Reclassification into net income | 1,378 | — | 1,378 | 4,132 | — | 4,132 | |||||||||||||||||||||||||||||
| Related income tax | (344) | — | (344) | (1,032) | — | (1,032) | |||||||||||||||||||||||||||||
| 1,034 | — | 1,034 | 3,100 | — | 3,100 | ||||||||||||||||||||||||||||||
| Ending balance | $ | (6,900) | $ | (112,850) | $ | (119,750) | $ | (6,900) | $ | (112,850) | $ | (119,750) |
| Three months ended September 30, 2020 | Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||
| Interest rate cap agreements | Foreign currency translation adjustments | Accumulated other comprehensive loss | Interest rate cap agreements | Foreign currency translation adjustments | Accumulated other comprehensive loss | ||||||||||||||||||||||||||||||
| Beginning balance | $ | (13,029) | $ | (122,078) | $ | (135,107) | $ | (1,433) | $ | (46,065) | $ | (47,498) | |||||||||||||||||||||||
| Unrealized (losses) gains | (2,169) | 13,171 | 11,002 | (21,946) | (62,842) | (84,788) | |||||||||||||||||||||||||||||
| Related income tax | 541 | — | 541 | 5,476 | — | 5,476 | |||||||||||||||||||||||||||||
| (1,628) | 13,171 | 11,543 | (16,470) | (62,842) | (79,312) | ||||||||||||||||||||||||||||||
| Reclassification into net income | 1,378 | — | 1,378 | 5,704 | — | 5,704 | |||||||||||||||||||||||||||||
| Related income tax | (344) | — | (344) | (1,424) | — | (1,424) | |||||||||||||||||||||||||||||
| 1,034 | — | 1,034 | 4,280 | — | 4,280 | ||||||||||||||||||||||||||||||
| Ending balance | $ | (13,623) | $ | (108,907) | $ | (122,530) | $ | (13,623) | $ | (108,907) | $ | (122,530) |
The interest rate cap agreement net realized losses reclassified into net income are recorded as debt expense in the corresponding consolidated statements of income. See Note 8 for further details.
12. Acquisitions and divestitures
Routine acquisitions
During the nine months ended September 30, 2021, the Company acquired dialysis businesses consisting of two dialysis centers located in the U.S. and ten dialysis centers located outside the U.S. for total net cash of $45,143, contingent earn-out obligations of $3,181 and deferred purchase price and liabilities assumed of $8,626. The assets and liabilities for these acquisitions were recorded at their estimated fair values at the dates of the acquisitions and are included in the Company’s condensed consolidated financial statements, as are their operating results, from the designated effective dates of the acquisitions.
The initial purchase price allocations for these transactions have been recorded at estimated fair values based on information available to management and will be finalized when certain information arranged to be obtained has been received. In particular, certain income tax amounts are pending final evaluation and quantification of any pre-acquisition tax contingencies. In addition, valuation of intangibles, leases and certain other working capital items relating to several of these acquisitions are pending final quantification.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
The following table summarizes the assets acquired and liabilities assumed in these transactions and recognized at their acquisition dates at estimated fair values, as well as the estimated fair value of the noncontrolling interests assumed in these transactions:
| Current assets | $ | 5,655 | |||
| Property and equipment | 4,154 | ||||
| Noncompetition agreements and other long-term assets | 4,451 | ||||
| Indefinite-lived licenses | 2,448 | ||||
| Goodwill | 53,619 | ||||
| Liabilities assumed | (9,456) | ||||
| Noncontrolling interests | (3,921) | ||||
| $ | 56,950 |
Goodwill deductible for tax purposes associated with acquisitions completed during the nine months ended September 30, 2021 was $49,501.
Contingent earn-out obligations
The Company has several contingent earn-out obligations associated with acquisitions that could result in the Company paying the former owners of acquired businesses a total of up to approximately $35,941 if certain performance targets or quality margins are met over the next one year to five years.
Contingent earn-out obligations are remeasured to fair value at each reporting date until the contingencies are resolved with changes in the liability due to the remeasurement recognized in earnings. As of September 30, 2021, the Company estimated the fair value of these contingent earn-out obligations to be $22,757, of which $7,420 is included in other current liabilities and the remaining $15,337 is included in other long-term liabilities in the Company’s consolidated balance sheet.
The following is a reconciliation of changes in contingent earn-out obligations for the three and nine months ended September 30, 2021:
| Three months ended September 30, 2021 | Nine months ended September 30, 2021 | ||||||||||
| Beginning balance | $ | 28,342 | $ | 30,248 | |||||||
| Acquisitions | 487 | 3,181 | |||||||||
| Foreign currency translation | (1,954) | (979) | |||||||||
| Fair value remeasurements | (1,166) | (1,320) | |||||||||
| Payments | (2,952) | (8,373) | |||||||||
| Ending balance | $ | 22,757 | $ | 22,757 |
Discontinued operations
On June 19, 2019, the Company completed the sale of its prior DaVita Medical Group (DMG) business to Collaborative Care Holdings, LLC (Optum), a subsidiary of UnitedHealth Group Inc. At close of the DMG sale, the Company's ultimate net sale proceeds remained subject to resolution of certain post-closing purchase price adjustments described in the equity purchase agreement, which adjustments were finalized in the fourth quarter of 2020. During the first nine months of 2020, the Company recognized $9,980 in additional tax benefits under the Coronavirus Aid, Relief, and Economic Security Act related to its period of DMG ownership, which were recognized as an adjustment to the Company's loss on sale of the DMG business.
13. Variable interest entities (VIEs)
At September 30, 2021, these condensed consolidated financial statements include total assets of VIEs of $307,877 and total liabilities and noncontrolling interests of VIEs to third parties of $205,410. There have been no material changes in the nature of the Company's arrangements with VIEs or its judgments concerning them from those described in Note 23 to the Company's consolidated financial statements included in the 2020 10-K.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
14. Fair values of financial instruments
The Company measures the fair value of certain assets, liabilities and noncontrolling interests subject to put provisions (redeemable equity interests classified as temporary equity) based upon certain valuation techniques that include observable or unobservable inputs and assumptions that market participants would use in pricing these assets, liabilities, temporary equity and commitments. The Company has also classified assets, liabilities and temporary equities that are measured at fair value on a recurring basis into the appropriate fair value hierarchy levels as defined by the Financial Accounting Standards Board (FASB).
The following table summarizes the Company’s assets, liabilities and temporary equities measured at fair value on a recurring basis as of September 30, 2021:
| Total | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments in equity securities | $ | 52,063 | $ | 52,063 | $ | — | $ | — | |||||||||||||||
| Interest rate cap agreements | $ | 5,955 | $ | — | $ | 5,955 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Contingent earn-out obligations | $ | 22,757 | $ | — | $ | — | $ | 22,757 | |||||||||||||||
| Temporary equity | |||||||||||||||||||||||
| Noncontrolling interests subject to put provisions | $ | 1,423,917 | $ | — | $ | — | $ | 1,423,917 |
For reconciliations of changes in contingent earn-out obligations and noncontrolling interests subject to put provisions during the three and nine months ended September 30, 2021, see Note 12 and the consolidated statement of equity, respectively.
Investments in equity securities represent investments in various open-ended registered investment companies (mutual funds) and common stocks, some of which are held within a trust to fund existing obligations associated with several of the Company's non-qualified deferred compensation plans. These investments are recorded at fair value estimated based on reported market prices or redemption prices, as applicable. See Note 5 for further discussion.
Interest rate cap agreements are recorded at fair value estimated from valuation models utilizing the income approach and commonly accepted valuation techniques that use inputs from closing prices for similar assets and liabilities in active markets as well as other relevant observable market inputs at quoted intervals such as current interest rates, forward yield curves, implied volatility and credit default swap pricing. The Company does not believe the ultimate amount that could be realized upon settlement of these interest rate cap agreements would be materially different from the fair value estimates currently reported. See Note 8 for further discussion.
The estimated fair value measurements of contingent earn-out obligations are primarily based on unobservable inputs, including projected earnings before interest, taxes, depreciation, and amortization (EBITDA), revenue and certain operating metrics. The estimated fair values of these contingent earn-out obligations are remeasured as of each reporting date and could fluctuate based upon any significant changes in key assumptions, such as changes in the Company's credit risk adjusted rate that is used to discount obligations to present value. See Note 12 for further discussion.
The estimated fair value of noncontrolling interests subject to put provisions is based principally on the higher of either estimated liquidation value of net assets or a multiple of earnings for each subject dialysis partnership, based on historical earnings, revenue mix, and other performance indicators that can affect future results. The multiples used for these valuations are derived from observed ownership transactions for dialysis businesses between unrelated parties in the U.S. in recent years, and the specific valuation multiple applied to each dialysis partnership is principally determined by its recent and expected revenue mix and contribution margin. As of September 30, 2021, an increase or decrease in the weighted average multiple used in these valuations of one times EBITDA would change the estimated fair value of these noncontrolling interests by approximately $180,000. See Note 17 and Note 24 to the Company's consolidated financial statements included in the 2020 10-K for further discussion of the Company’s methodology for estimating the fair value of noncontrolling interests subject to put obligations.
The Company's fair value estimates for its senior secured credit facilities and senior notes are based upon bid and ask quotes for these instruments, typically a level 2 input. See Note 8 for further discussion of the Company's debt.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
Other financial instruments consist primarily of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, other accrued liabilities, lease liabilities and debt. The balances of financial instruments other than debt and lease liabilities are presented in these condensed consolidated financial statements at September 30, 2021 at their approximate fair values due to the short-term nature of their settlements.
15. Segment reporting
The Company’s operations are comprised of its U.S. dialysis and related lab services business (its U.S. dialysis business), its various ancillary services including its international operations (collectively, its ancillary services), and its corporate administrative support.
The Company’s separate operating segments include its U.S. dialysis and related lab services business, each of its ancillary services, its kidney care operations in each foreign sovereign jurisdiction, its other health operations in each foreign sovereign jurisdiction, and its equity method investment in the Asia Pacific joint venture (APAC JV). The U.S. dialysis and related lab services business qualifies as a separately reportable segment, and all other ancillary services operating segments, including the international operating segments, have been combined and disclosed in the other segments category. See Note 25 to the Company's consolidated financial statements included in the 2020 10-K for further description of how the Company determines and measures results for its operating segments.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
The following is a summary of segment net revenues, segment operating income (loss), and a reconciliation of segment operating income (loss) to consolidated income before income taxes:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Segment revenues: | |||||||||||||||||||||||
| U.S. dialysis | |||||||||||||||||||||||
| Dialysis patient service revenues: | |||||||||||||||||||||||
| External sources | $ | 2,669,823 | $ | 2,639,761 | $ | 7,874,759 | $ | 7,850,828 | |||||||||||||||
| Intersegment revenues | 22,007 | 37,049 | 70,196 | 104,111 | |||||||||||||||||||
| U.S. dialysis patient service revenues | 2,691,830 | 2,676,810 | 7,944,955 | 7,954,939 | |||||||||||||||||||
| Other revenues: | |||||||||||||||||||||||
| External sources | 6,119 | 17,141 | 19,080 | 29,970 | |||||||||||||||||||
| Intersegment revenues | 97 | 268 | 228 | 876 | |||||||||||||||||||
| Total U.S. dialysis revenues | 2,698,046 | 2,694,219 | 7,964,263 | 7,985,785 | |||||||||||||||||||
| Other—Ancillary services | |||||||||||||||||||||||
| Dialysis patient service revenues | 168,117 | 141,889 | 495,725 | 402,300 | |||||||||||||||||||
| Other external sources | 94,260 | 125,275 | 285,266 | 362,184 | |||||||||||||||||||
| Intersegment revenues | — | 4,079 | 4,294 | 12,402 | |||||||||||||||||||
| Total ancillary services revenues | 262,377 | 271,243 | 785,285 | 776,886 | |||||||||||||||||||
| Total net segment revenues | 2,960,423 | 2,965,462 | 8,749,548 | 8,762,671 | |||||||||||||||||||
| Elimination of intersegment revenues | (22,104) | (41,396) | (74,718) | (117,389) | |||||||||||||||||||
| Consolidated revenues | $ | 2,938,319 | $ | 2,924,066 | $ | 8,674,830 | $ | 8,645,282 | |||||||||||||||
| Segment operating income (loss): | |||||||||||||||||||||||
| U.S. dialysis | $ | 509,939 | $ | 470,596 | $ | 1,523,625 | $ | 1,484,833 | |||||||||||||||
| Other—Ancillary services | (6,909) | (7,086) | (36,577) | (49,354) | |||||||||||||||||||
| Total segment operating income | 503,030 | 463,510 | 1,487,048 | 1,435,479 | |||||||||||||||||||
| Reconciliation of segment operating income to consolidated income from continuing operations before income taxes: | |||||||||||||||||||||||
| Corporate administrative support | (28,153) | (25,841) | (79,093) | (122,514) | |||||||||||||||||||
| Consolidated operating income | 474,877 | 437,669 | 1,407,955 | 1,312,965 | |||||||||||||||||||
| Debt expense | (72,829) | (73,658) | (213,167) | (243,642) | |||||||||||||||||||
| Debt prepayment, refinancing and redemption charges | — | (86,074) | — | (89,022) | |||||||||||||||||||
| Other (loss) income, net | (7,590) | 5,395 | 8,766 | 10,590 | |||||||||||||||||||
| Consolidated income from continuing operations before income taxes | $ | 394,458 | $ | 283,332 | $ | 1,203,554 | $ | 990,891 |
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
Depreciation and amortization expense by reportable segment was as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| U.S. dialysis | $ | 161,252 | $ | 148,221 | $ | 477,054 | $ | 442,833 | |||||||||||||||
| Other—Ancillary services | 9,210 | 8,673 | 28,798 | 26,116 | |||||||||||||||||||
| $ | 170,462 | $ | 156,894 | $ | 505,852 | $ | 468,949 | ||||||||||||||||
Expenditures for property and equipment by reportable segment were as follows:
| Nine months ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| U.S. dialysis | $ | 415,994 | $ | 430,646 | |||||||
| Other—Ancillary services | 35,915 | 19,250 | |||||||||
| $ | 451,909 | $ | 449,896 |
A summary of assets by reportable segment was as follows:
| September 30, 2021 | December 31, 2020 | ||||||||||
| U.S. dialysis | $ | 15,939,286 | $ | 15,344,647 | |||||||
| Other—Ancillary services | 1,694,654 | 1,643,869 | |||||||||
| Consolidated assets | $ | 17,633,940 | $ | 16,988,516 |
16. New accounting standards
New standards recently adopted
In December 2019, the FASB issued Accounting Standards Update (ASU) No. 2019-12*, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes*. ASU No. 2019-12 attempts to simplify aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The amendments in this ASU became effective for the Company beginning on January 1, 2021. The adoption of ASU No. 2019-12 did not have a material impact on the Company's consolidated financial statements.
New standards not yet adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU No. 2020-04 provides optional expedients and exceptions for applying U.S. generally accepted accounting principles to contract modifications and hedging relationships, subject to certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in this ASU were effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently assessing the effect this guidance may have on its consolidated financial statements.
Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.