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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, 2023
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 November 3, 2023, the number of shares of the registrant’s common stock outstanding was approximately 91.3 million shares.
DAVITA INC.
INDEX
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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Dialysis patient service revenues | $ | 2,951,950 | $ | 2,846,494 | $ | 8,602,669 | $ | 8,372,874 | |||||||||||||||
| Other revenues | 169,382 | 102,200 | 391,731 | 320,132 | |||||||||||||||||||
| Total revenues | 3,121,332 | 2,948,694 | 8,994,400 | 8,693,006 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Patient care costs | 2,067,315 | 2,085,555 | 6,181,348 | 6,120,872 | |||||||||||||||||||
| General and administrative | 376,883 | 365,447 | 1,072,513 | 975,486 | |||||||||||||||||||
| Depreciation and amortization | 188,423 | 194,414 | 550,166 | 538,534 | |||||||||||||||||||
| Equity investment income, net | (7,228) | (8,509) | (22,502) | (24,696) | |||||||||||||||||||
| Total operating expenses | 2,625,393 | 2,636,907 | 7,781,525 | 7,610,196 | |||||||||||||||||||
| Operating income | 495,939 | 311,787 | 1,212,875 | 1,082,810 | |||||||||||||||||||
| Debt expense | (98,080) | (99,680) | (302,361) | (256,057) | |||||||||||||||||||
| Debt extinguishment and modification costs | — | — | (7,962) | — | |||||||||||||||||||
| Other loss, net | (19,650) | (4,898) | (14,525) | (7,968) | |||||||||||||||||||
| Income before income taxes | 378,209 | 207,209 | 888,027 | 818,785 | |||||||||||||||||||
| Income tax expense | 68,848 | 42,515 | 161,621 | 163,757 | |||||||||||||||||||
| Net income | 309,361 | 164,694 | 726,406 | 655,028 | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | (62,729) | (59,328) | (185,536) | (162,731) | |||||||||||||||||||
| Net income attributable to DaVita Inc. | $ | 246,632 | $ | 105,366 | $ | 540,870 | $ | 492,297 | |||||||||||||||
| Earnings per share attributable to DaVita Inc.: | |||||||||||||||||||||||
| Basic net income | $ | 2.70 | $ | 1.16 | $ | 5.95 | $ | 5.24 | |||||||||||||||
| Diluted net income | $ | 2.62 | $ | 1.13 | $ | 5.80 | $ | 5.07 | |||||||||||||||
| Weighted average shares for earnings per share: | |||||||||||||||||||||||
| Basic shares | 91,322 | 91,160 | 90,937 | 93,959 | |||||||||||||||||||
| Diluted shares | 94,041 | 93,263 | 93,317 | 97,153 | |||||||||||||||||||
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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income | $ | 309,361 | $ | 164,694 | $ | 726,406 | $ | 655,028 | |||||||||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||||||||||||||
| Unrealized gains on interest rate cap agreements: | |||||||||||||||||||||||
| Unrealized gains | 6,996 | 41,312 | 28,305 | 95,660 | |||||||||||||||||||
| Reclassifications of net realized (gains) losses into net income | (21,198) | 1,033 | (55,895) | 3,100 | |||||||||||||||||||
| Unrealized (losses) gains on foreign currency translation: | (47,644) | (66,100) | 27,878 | (95,064) | |||||||||||||||||||
| Other comprehensive (loss) income | (61,846) | (23,755) | 288 | 3,696 | |||||||||||||||||||
| Total comprehensive income | 247,515 | 140,939 | 726,694 | 658,724 | |||||||||||||||||||
| Less: Comprehensive income attributable to noncontrolling interests | (62,729) | (59,328) | (185,536) | (162,731) | |||||||||||||||||||
| Comprehensive income attributable to DaVita Inc. | $ | 184,786 | $ | 81,611 | $ | 541,158 | $ | 495,993 |
See notes to condensed consolidated financial statements.
DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars and shares in thousands, except per share data)
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 449,458 | $ | 244,086 | |||||||
| Restricted cash and equivalents | 95,667 | 94,903 | |||||||||
| Short-term investments | 11,713 | 77,693 | |||||||||
| Accounts receivable | 2,024,827 | 2,132,070 | |||||||||
| Inventories | 109,620 | 109,122 | |||||||||
| Other receivables | 352,965 | 413,976 | |||||||||
| Prepaid and other current assets | 91,109 | 78,839 | |||||||||
| Income tax receivable | — | 4,603 | |||||||||
| Total current assets | 3,135,359 | 3,155,292 | |||||||||
| Property and equipment, net of accumulated depreciation of $5,650,912 and $5,265,372, respectively | 3,097,483 | 3,256,397 | |||||||||
| Operating lease right-of-use assets | 2,509,416 | 2,666,242 | |||||||||
| Intangible assets, net of accumulated amortization of $37,738 and $49,772, respectively | 185,403 | 182,687 | |||||||||
| Equity method and other investments | 565,394 | 231,108 | |||||||||
| Long-term investments | 45,320 | 44,329 | |||||||||
| Other long-term assets | 302,142 | 315,587 | |||||||||
| Goodwill | 7,088,223 | 7,076,610 | |||||||||
| $ | 16,928,740 | $ | 16,928,252 | ||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Accounts payable | $ | 435,417 | $ | 479,780 | |||||||
| Other liabilities | 808,000 | 802,469 | |||||||||
| Accrued compensation and benefits | 770,184 | 692,654 | |||||||||
| Current portion of operating lease liabilities | 393,440 | 395,401 | |||||||||
| Current portion of long-term debt | 108,558 | 231,404 | |||||||||
| Income tax payable | 22,331 | 18,039 | |||||||||
| Total current liabilities | 2,537,930 | 2,619,747 | |||||||||
| Long-term operating lease liabilities | 2,342,170 | 2,503,068 | |||||||||
| Long-term debt | 8,285,146 | 8,692,617 | |||||||||
| Other long-term liabilities | 184,944 | 105,233 | |||||||||
| Deferred income taxes | 753,871 | 782,787 | |||||||||
| Total liabilities | 14,104,061 | 14,703,452 | |||||||||
| Commitments and contingencies | |||||||||||
| Noncontrolling interests subject to put provisions | 1,445,403 | 1,348,908 | |||||||||
| Equity: | |||||||||||
| Preferred stock ($0.001 par value, 5,000 shares authorized; none issued) | — | — | |||||||||
| Common stock ($0.001 par value, 450,000 shares authorized; 91,348 and 90,411 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively) | 91 | 90 | |||||||||
| Additional paid-in capital | 552,651 | 606,935 | |||||||||
| Retained earnings | 715,357 | 174,487 | |||||||||
| Accumulated other comprehensive loss | (68,898) | (69,186) | |||||||||
| Total DaVita Inc. shareholders' equity | 1,199,201 | 712,326 | |||||||||
| Noncontrolling interests not subject to put provisions | 180,075 | 163,566 | |||||||||
| Total equity | 1,379,276 | 875,892 | |||||||||
| $ | 16,928,740 | $ | 16,928,252 |
See notes to condensed consolidated financial statements.
DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(dollars in thousands)
| Nine months ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 726,406 | $ | 655,028 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 550,166 | 538,534 | |||||||||
| Loss on extinguishment of debt | 7,132 | — | |||||||||
| Stock-based compensation expense | 82,313 | 77,904 | |||||||||
| Deferred income taxes | (17,767) | (35,637) | |||||||||
| Equity investment loss (income), net | 40,121 | (417) | |||||||||
| Other non-cash charges, net | 1,633 | 16,035 | |||||||||
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | |||||||||||
| Accounts receivable | 118,148 | (135,632) | |||||||||
| Other current assets | 32,132 | 43,739 | |||||||||
| Other long-term assets | 1,101 | (49,326) | |||||||||
| Accounts payable | (33,837) | 38,870 | |||||||||
| Accrued compensation and benefits | 65,279 | 35,491 | |||||||||
| Other current liabilities | 10,822 | 87,248 | |||||||||
| Income taxes | (1,878) | (37,770) | |||||||||
| Other long-term liabilities | (7,945) | (13,219) | |||||||||
| Net cash provided by operating activities | 1,573,826 | 1,220,848 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions of property and equipment | (409,011) | (409,391) | |||||||||
| Acquisitions | (7,990) | (43,811) | |||||||||
| Proceeds from asset and business sales | 24,907 | 116,088 | |||||||||
| Purchase of debt investments held-to-maturity | (30,419) | (94,602) | |||||||||
| Purchase of other debt and equity investments | (6,693) | (3,322) | |||||||||
| Proceeds from debt investments held-to-maturity | 94,414 | 40,660 | |||||||||
| Proceeds from sale of other debt and equity investments | 3,930 | 3,763 | |||||||||
| Other | — | (782) | |||||||||
| Purchase of equity method investments | (276,006) | (28,176) | |||||||||
| Distributions from equity method investments | 3,364 | 2,490 | |||||||||
| Net cash used in investing activities | (603,504) | (417,083) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings | 2,468,335 | 1,705,913 | |||||||||
| Payments on long-term debt | (2,992,248) | (1,557,358) | |||||||||
| Deferred and debt related financing costs | (53,466) | — | |||||||||
| Purchase of treasury stock | — | (802,228) | |||||||||
| Distributions to noncontrolling interests | (203,381) | (188,592) | |||||||||
| Net payments related to stock purchases and awards | (41,155) | (42,248) | |||||||||
| Contributions from noncontrolling interests | 11,579 | 11,382 | |||||||||
| Proceeds from sales of additional noncontrolling interests | 50,962 | 3,673 | |||||||||
| Purchases of noncontrolling interests | (7,875) | (20,770) | |||||||||
| Net cash used in financing activities | (767,249) | (890,228) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 3,063 | (6,283) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 206,136 | (92,746) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of the year | 338,989 | 554,960 | |||||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | 545,125 | $ | 462,214 |
See notes to condensed consolidated financial statements.
DAVITA INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(dollars and shares in thousands)
| Three months ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, 2023 | $ | 1,423,549 | 91,271 | $ | 91 | $ | 555,680 | $ | 468,725 | — | $ | — | $ | (7,052) | $ | 1,017,444 | $ | 188,626 | |||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 44,572 | 246,632 | 246,632 | 18,157 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | (61,846) | (61,846) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock award plan | 77 | (4,750) | (4,750) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-settled stock-based compensation expense | 27,071 | 27,071 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest from: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | (52,382) | (26,821) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | 4,493 | 140 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Partial purchases | (179) | (179) | (27) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value remeasurements | 25,171 | (25,171) | (25,171) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | 1,445,403 | 91,348 | $ | 91 | $ | 552,651 | $ | 715,357 | — | $ | — | $ | (68,898) | $ | 1,199,201 | $ | 180,075 |
| Nine months ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, 2022 | $ | 1,348,908 | 90,411 | $ | 90 | $ | 606,935 | $ | 174,487 | — | $ | — | $ | (69,186) | $ | 712,326 | $ | 163,566 | |||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 131,523 | 540,870 | 540,870 | 54,013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 288 | 288 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock award plan | 937 | 1 | (53,353) | (53,352) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-settled stock-based compensation expense | 80,579 | 80,579 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest from: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | (133,656) | (69,725) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | 10,102 | 1,477 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions and divestitures | 13,077 | 13,077 | 30,776 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Partial purchases | (700) | (5,361) | (5,361) | (32) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value remeasurements | 89,226 | (89,226) | (89,226) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | 1,445,403 | 91,348 | $ | 91 | $ | 552,651 | $ | 715,357 | — | $ | — | $ | (68,898) | $ | 1,199,201 | $ | 180,075 |
See notes to condensed consolidated financial statements.
DAVITA INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(dollars and shares in thousands)
| Three months ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, 2022 | $ | 1,385,821 | 98,179 | $ | 98 | $ | 578,272 | $ | 741,268 | (5,973) | $ | (603,058) | $ | (111,796) | $ | 604,784 | $ | 170,390 | |||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 39,205 | 105,366 | 105,366 | 20,123 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (23,755) | (23,755) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock purchase shares issued | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock award plan | 20 | (986) | (986) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-settled stock-based compensation expense | 27,619 | 27,619 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest from: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | (48,275) | (22,002) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | 1,996 | 270 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions and divestitures | 867 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Partial purchases | (215) | (3,339) | (3,339) | (193) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value remeasurements | (7,779) | 7,779 | 7,779 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (2,122) | (184,796) | (184,796) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | 1,370,753 | 98,199 | $ | 98 | $ | 609,345 | $ | 846,634 | (8,095) | $ | (787,854) | $ | (135,551) | $ | 532,672 | $ | 169,455 |
| Nine months ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, 2021 | $ | 1,434,832 | 97,289 | $ | 97 | $ | 540,321 | $ | 354,337 | — | $ | — | $ | (139,247) | $ | 755,508 | $ | 180,640 | |||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 113,157 | 492,297 | 492,297 | 49,574 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 3,696 | 3,696 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock award plan | 910 | 1 | (55,359) | (55,358) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-settled stock-based compensation expense | 77,835 | 77,835 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest from: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | (125,534) | (63,058) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | 9,300 | 2,082 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions and divestitures | 2,392 | 939 | 939 | 867 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Partial purchases | (11,633) | (6,609) | (6,609) | (193) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value remeasurements | (52,218) | 52,218 | 52,218 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 457 | (457) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (8,095) | (787,854) | (787,854) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | 1,370,753 | 98,199 | $ | 98 | $ | 609,345 | $ | 846,634 | (8,095) | $ | (787,854) | $ | (135,551) | $ | 532,672 | $ | 169,455 |
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, certain fair value estimates, accounting for income taxes 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, 2022 (2022 10-K). Prior period classifications conform 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 tables summarize the Company's segment revenues by primary payor source:
| Three months ended September 30, 2023 | Three months ended September 30, 2022 | ||||||||||||||||||||||||||||||||||
| U.S. dialysis | Other — Ancillary services | Consolidated | U.S. dialysis | Other — Ancillary services | Consolidated | ||||||||||||||||||||||||||||||
| Dialysis patient service revenues: | |||||||||||||||||||||||||||||||||||
| Medicare and Medicare Advantage | $ | 1,515,860 | $ | 1,515,860 | $ | 1,535,680 | $ | 1,535,680 | |||||||||||||||||||||||||||
| Medicaid and Managed Medicaid | 207,327 | 207,327 | 193,853 | 193,853 | |||||||||||||||||||||||||||||||
| Other government | 90,549 | $ | 128,980 | 219,529 | 86,852 | $ | 116,084 | 202,936 | |||||||||||||||||||||||||||
| Commercial | 965,331 | 68,192 | 1,033,523 | 880,812 | 56,170 | 936,982 | |||||||||||||||||||||||||||||
| Other revenues: | |||||||||||||||||||||||||||||||||||
| Medicare and Medicare Advantage | 137,149 | 137,149 | 78,345 | 78,345 | |||||||||||||||||||||||||||||||
| Medicaid and Managed Medicaid | 331 | 331 | 412 | 412 | |||||||||||||||||||||||||||||||
| Commercial | 16,063 | 16,063 | 6,484 | 6,484 | |||||||||||||||||||||||||||||||
| Other**(1)** | 6,239 | 11,832 | 18,071 | 6,056 | 10,903 | 16,959 | |||||||||||||||||||||||||||||
| Eliminations of intersegment revenues | (24,289) | (2,232) | (26,521) | (22,957) | — | (22,957) | |||||||||||||||||||||||||||||
| Total | $ | 2,761,017 | $ | 360,315 | $ | 3,121,332 | $ | 2,680,296 | $ | 268,398 | $ | 2,948,694 |
(1) Other primarily consists of management service fees earned in the respective Company line of business as well as other non-patient service revenue from the Company's U.S. integrated kidney care (IKC) and other ancillary services and international operations.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
| Nine months ended September 30, 2023 | Nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||||
| U.S. dialysis | Other — Ancillary services | Consolidated | U.S. dialysis | Other — Ancillary services | Consolidated | ||||||||||||||||||||||||||||||
| Dialysis patient service revenues: | |||||||||||||||||||||||||||||||||||
| Medicare and Medicare Advantage | $ | 4,538,264 | $ | 4,538,264 | $ | 4,529,300 | $ | 4,529,300 | |||||||||||||||||||||||||||
| Medicaid and Managed Medicaid | 629,118 | 629,118 | 570,380 | 570,380 | |||||||||||||||||||||||||||||||
| Other government | 265,119 | $ | 376,530 | 641,649 | 253,731 | $ | 349,633 | 603,364 | |||||||||||||||||||||||||||
| Commercial | 2,676,758 | 183,578 | 2,860,336 | 2,570,054 | 164,302 | 2,734,356 | |||||||||||||||||||||||||||||
| Other revenues: | |||||||||||||||||||||||||||||||||||
| Medicare and Medicare Advantage | 317,624 | 317,624 | 255,204 | 255,204 | |||||||||||||||||||||||||||||||
| Medicaid and Managed Medicaid | 1,296 | 1,296 | 1,181 | 1,181 | |||||||||||||||||||||||||||||||
| Commercial | 20,888 | 20,888 | 16,029 | 16,029 | |||||||||||||||||||||||||||||||
| Other(1) | 18,822 | 38,108 | 56,930 | 18,124 | 29,584 | 47,708 | |||||||||||||||||||||||||||||
| Eliminations of intersegment revenues | (66,698) | (5,007) | (71,705) | (64,516) | — | (64,516) | |||||||||||||||||||||||||||||
| Total | $ | 8,061,383 | $ | 933,017 | $ | 8,994,400 | $ | 7,877,073 | $ | 815,933 | $ | 8,693,006 |
(1) Other primarily consists of management service fees earned in the respective Company line of business as well as other non-patient service revenue from the Company's U.S. integrated kidney care (IKC) and other ancillary services and international operations.
There are significant uncertainties associated with estimating revenue, many of which 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.
Other revenues. Other revenues consist of revenues earned by the Company's non-dialysis ancillary services as well as fees for management and administrative services to outpatient dialysis businesses that the Company does not consolidate. Other revenues are estimated in the period services are provided. The Company's integrated kidney care (IKC) revenues include revenues earned under risk-based arrangements, including value-based care (VBC) arrangements. Under its VBC arrangements, the Company assumes full or shared financial risk for the total medical cost of care for patients below or above a benchmark. The benchmarks against which the Company incurs profit or loss on these contracts are typically based on the underlying premiums paid to the insuring entity (the Company's counterparty), with adjustments where applicable, or on trended or adjusted medical cost targets.
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.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
The reconciliations of the numerators and denominators used to calculate basic and diluted earnings per share were as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income attributable to DaVita Inc. | $ | 246,632 | $ | 105,366 | $ | 540,870 | $ | 492,297 | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic shares | 91,322 | 91,160 | 90,937 | 93,959 | |||||||||||||||||||
| Assumed incremental from stock plans | 2,719 | 2,103 | 2,380 | 3,194 | |||||||||||||||||||
| Diluted shares | 94,041 | 93,263 | 93,317 | 97,153 | |||||||||||||||||||
| Basic net income per share attributable to DaVita Inc. | $ | 2.70 | $ | 1.16 | $ | 5.95 | $ | 5.24 | |||||||||||||||
| Diluted net income per share attributable to DaVita Inc. | $ | 2.62 | $ | 1.13 | $ | 5.80 | $ | 5.07 | |||||||||||||||
| Anti-dilutive stock-settled awards excluded from calculation(1) | 271 | 1,260 | 615 | 878 |
(1)Shares associated with stock awards excluded from the diluted denominator calculation because they were anti-dilutive under the treasury stock method.
4. 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, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Debt securities | Equity securities | Total | Debt securities | Equity securities | Total | ||||||||||||||||||||||||||||||
| Certificates of deposit and other time deposits | $ | 20,430 | $ | — | $ | 20,430 | $ | 82,879 | $ | — | $ | 82,879 | |||||||||||||||||||||||
| Investments in mutual funds and common stocks | — | 36,603 | 36,603 | — | 39,143 | 39,143 | |||||||||||||||||||||||||||||
| $ | 20,430 | $ | 36,603 | $ | 57,033 | $ | 82,879 | $ | 39,143 | $ | 122,022 | ||||||||||||||||||||||||
| Short-term investments | $ | 5,419 | $ | 6,294 | $ | 11,713 | $ | 67,872 | $ | 9,821 | $ | 77,693 | |||||||||||||||||||||||
| Long-term investments | 15,011 | 30,309 | 45,320 | 15,007 | 29,322 | 44,329 | |||||||||||||||||||||||||||||
| $ | 20,430 | $ | 36,603 | $ | 57,033 | $ | 82,879 | $ | 39,143 | $ | 122,022 |
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. The Company's long-term debt investments are bank time deposits with contractual maturities longer 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, 2023 and December 31, 2022.
Equity securities. The Company holds certain equity investments that have readily determinable fair values from public markets. 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.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
5. Goodwill
Changes in the carrying value of goodwill by reportable segment were as follows:
| U.S. dialysis | Other — Ancillary services | Consolidated | |||||||||||||||
| Balance at December 31, 2021 | $ | 6,400,162 | $ | 646,079 | $ | 7,046,241 | |||||||||||
| Acquisitions | 16,750 | 32,297 | 49,047 | ||||||||||||||
| Divestitures | (87) | (3,263) | (3,350) | ||||||||||||||
| Foreign currency and other adjustments | — | (15,328) | (15,328) | ||||||||||||||
| Balance at December 31, 2022 | $ | 6,416,825 | $ | 659,785 | $ | 7,076,610 | |||||||||||
| Acquisitions | — | 4,688 | 4,688 | ||||||||||||||
| Foreign currency and other adjustments | — | 6,925 | 6,925 | ||||||||||||||
| Balance at September 30, 2023 | $ | 6,416,825 | $ | 671,398 | $ | 7,088,223 | |||||||||||
| Balance at September 30, 2023: | |||||||||||||||||
| Goodwill | $ | 6,416,825 | $ | 789,338 | $ | 7,206,163 | |||||||||||
| Accumulated impairment charges | — | (117,940) | (117,940) | ||||||||||||||
| $ | 6,416,825 | $ | 671,398 | $ | 7,088,223 |
The Company did not recognize any goodwill impairment charges during the nine months ended September 30, 2023 and 2022.
The Company's business continues to be impacted by the effects of the coronavirus (COVID-19). While the Company does not currently expect a material adverse impact to its business as a result of COVID-19, there can be no assurance that the magnitude of the cumulative impacts from COVID-19 will not have a material adverse impact on one or more of the Company's businesses. These cumulative impacts from COVID-19 may include, among other things, the cumulative impact on mortality rates for the kidney patient population and the cumulative impact on certain conditions and developments in the U.S. and global economies, labor market conditions, inflation and monetary policies.
Developments, events, changes in operating performance and other changes in key 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, 2023. 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 2022 10-K, none of the Company's various other reporting units were considered at risk of significant goodwill impairment as of September 30, 2023.
6. Equity method and other investments
The Company maintains equity method and other minor investments in the private securities of certain other healthcare and healthcare-related businesses as follows:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Mozarc Medical Holdings LLC | $ | 342,315 | |||||||||
| APAC joint venture | 98,215 | $ | 99,141 | ||||||||
| Other equity method partnerships | 112,305 | 116,403 | |||||||||
| Adjusted cost method and other investments | 12,559 | 15,564 | |||||||||
| $ | 565,394 | $ | 231,108 |
During the nine months ended September 30, 2023 and 2022 the Company recognized equity investment income of $22,502 and $24,696, respectively, from its equity method investments in nonconsolidated dialysis partnerships. The Company also recognized equity investment losses from other equity method investments of $38,653 and $1,974 in other (loss) income during the nine months ended September 30, 2023 and 2022, respectively.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
On May 25, 2022, the Company entered into an agreement with Medtronic, Inc. and one of its subsidiaries (collectively, Medtronic) to form a new, independent kidney care-focused medical device company (Mozarc Medical Holding LLC, or Mozarc) via a deconsolidating partial interest sale from Medtronic to the Company, which closed effective April 1, 2023. The Company holds a 50% voting equity interest in Mozarc and Medtronic holds the other 50% voting equity interest. The Company does not maintain a controlling financial interest in Mozarc and therefore accounts for this investment on the equity method, with equity method income or loss recognized in Other income (loss), net, on a one-month lag.
At the closing, the Company made an estimated purchase price payment, including certain transaction cost adjustments, to Medtronic of $44,651, subject to certain customary post-closing adjustments, and contributed certain other non-cash assets to Mozarc with an estimated value of $14,000. In addition, the Company agreed to pay Medtronic additional consideration of up to $300,000 if certain regulatory, commercial and financial milestones are achieved between 2024 and 2028. At close, the Company and Medtronic also each contributed an additional $224,415 in cash to Mozarc to fund its development initiatives.
The Company’s investment in Mozarc was recorded at an initial estimated cost of $375,326, which represents the sum of the cash amounts paid and contributed for the Company’s investment in Mozarc, the estimated fair value of the non-cash assets contributed, the estimated fair value of the Company’s contingent consideration payable to Medtronic for its interest in Mozarc of $86,200, and direct costs incurred to complete this transaction. The foregoing cost estimates are based upon the best information available to management but remain subject to change based on finalization of post-closing purchase price adjustments yet to be completed between the parties and finalization of related third-party valuation reports. As of September 30, 2023, the book value of the Company's contingent consideration payable to Medtronic approximates its estimated fair value.
The recorded cost of the Company's equity method investment in Mozarc, and its prospective equity method income (or loss) from that investment, remain subject to finalization of fair value estimates for the following based on third-party valuation reports: the Company's non-cash assets contributed to Mozarc, the Company's contingent consideration payable to Medtronic, and valuation of Mozarc's underlying net assets, including its intangible assets, fixed assets, leases and certain working capital items, some of which are pending final quantification for certain post-closing purchase price adjustments.
See Note 9 to the Company's consolidated financial statements included in the 2022 10-K for further description of the Company's other equity method investments.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
7. Long-term debt
Long-term debt comprised the following:
| As of September 30, 2023 | |||||||||||||||||||||||||||||
| September 30, 2023 | December 31, 2022 | Maturity date | Interest rate | Estimated fair value**(1)** | |||||||||||||||||||||||||
| Senior Secured Credit Facilities: | |||||||||||||||||||||||||||||
| Term Loan A-1(2) | $ | 1,242,188 | (3) | SOFR+CSA+2.00% | $ | 1,220,449 | |||||||||||||||||||||||
| Term Loan B-1 | 2,610,643 | $ | 2,660,831 | 8/12/2026 | SOFR+CSA+1.75% | $ | 2,578,010 | ||||||||||||||||||||||
| New Revolving line of credit(2) | — | (3) | SOFR+CSA+2.00% | $ | — | ||||||||||||||||||||||||
| Prior Term Loan A | — | 1,498,438 | 8/12/2024 | (4) | $ | — | |||||||||||||||||||||||
| Prior Revolving line of credit | — | 165,000 | 8/12/2024 | (4) | $ | — | |||||||||||||||||||||||
| Senior Notes: | |||||||||||||||||||||||||||||
| 4.625% Senior Notes | 2,750,000 | 2,750,000 | 6/1/2030 | 4.625 | % | $ | 2,258,438 | ||||||||||||||||||||||
| 3.75% Senior Notes | 1,500,000 | 1,500,000 | 2/15/2031 | 3.75 | % | $ | 1,143,750 | ||||||||||||||||||||||
| Acquisition obligations and other notes payable(5) | 97,657 | 120,562 | 2023-2036 | 6.89 | % | $ | 97,657 | ||||||||||||||||||||||
| Financing lease obligations(6) | 250,695 | 273,688 | 2024-2039 | 4.48 | % | ||||||||||||||||||||||||
| Total debt principal outstanding | 8,451,183 | 8,968,519 | |||||||||||||||||||||||||||
| Discount, premium and deferred financing costs(7) | (57,479) | (44,498) | |||||||||||||||||||||||||||
| 8,393,704 | 8,924,021 | ||||||||||||||||||||||||||||
| Less current portion | (108,558) | (231,404) | |||||||||||||||||||||||||||
| $ | 8,285,146 | $ | 8,692,617 |
(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 Company's interest rate in its Term Loan A-1 and new revolving line of credit is subject to adjustment depending upon the Company's leverage ratio under the credit agreement governing its senior secured credit facilities. Based on the Company's leverage ratio as of September 30, 2023, the Company's interest rate effective in the fourth quarter of 2023 will be SOFR plus CSA plus 1.75% for its Term Loan A-1 and new revolving line of credit.
(3)Outstanding Term Loan A-1 and new revolving line of credit balances are due on April 28, 2028, unless any of Term Loan B-1 remains outstanding 91 days prior to the Term Loan B-1 maturity date, in which case the outstanding Term Loan A-1 and the new revolving line of credit balances become due at that 91 day date (May 13, 2026).
(4)At March 31, 2023, the interest rate on the Company's then-existing credit facilities was LIBOR plus an interest rate margin in effect of 1.75% for the prior Term Loan A and prior revolving line of credit.
(5)The interest rate presented for acquisition obligations and other notes payable is their weighted average interest rate based on the current fixed and variable interest rate components in effect as of September 30, 2023.
(6)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.
(7)As of September 30, 2023, the carrying amount of the Company's senior secured credit facilities have been reduced by a discount of $2,724 and deferred financing costs of $34,688, and the carrying amount of the Company's senior notes have been reduced by deferred financing costs of $32,668 and increased by a debt premium of $12,601. As of December 31, 2022, the carrying amount of the Company's senior secured credit facilities were reduced by a discount of $3,497 and deferred financing costs of $18,816, and the carrying amount of the Company's senior notes were reduced by deferred financing costs of $36,203 and increased by a debt premium of $14,018.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
Scheduled maturities of long-term debt at September 30, 2023 were as follows:
| 2023 (remainder of the year) | $ | 29,877 | |||
| 2024 | $ | 110,271 | |||
| 2025 | $ | 129,871 | |||
| 2026 | $ | 2,660,604 | |||
| 2027 | $ | 113,551 | |||
| 2028 | $ | 1,014,649 | |||
| Thereafter | $ | 4,392,360 |
On April 3, 2023, the Company entered into the Second Amendment (the Second Amendment) to its senior secured credit agreement (the Credit Agreement). The Second Amendment modifies the Credit Agreement to, among other things, transition the interest pricing on Term Loan B-1 from LIBOR + 1.75% to a forward-looking term rate (Term SOFR) based on the Secured Overnight Financing Rate (SOFR) + 1.75% plus an additional credit spread adjustment (CSA), provided that this adjusted rate shall never be less than 0.00%, as well as to update the successor interest rate provisions in the Credit Agreement with respect to Term Loan B-1. As of September 30, 2023, the CSA for all tranches outstanding on the Company's Term Loan B-1 was 0.11%. The Company adopted Accounting Standards Update (ASU) No. 2020-04 and ASU No. 2022-06 regarding reference rate reform during the second quarter and applied one of their practical expedients to treat the amendment of Term Loan B-1 as a non-substantial modification.
On April 28, 2023, the Company entered into the Third Amendment (the Third Amendment, and together with the Second Amendment, the Amendments) to the Credit Agreement. The Third Amendment modifies the Credit Agreement to, among other things, refinance its Term Loan A and revolving line of credit with a secured Term Loan A-1 facility in the aggregate principal amount of $1,250,000 and a secured revolving line of credit in the aggregate principal amount of up to $1,500,000 (the foregoing referred to as the new Term Loan A-1 and new revolving line of credit, respectively).
The new Term Loan A-1 and new revolving line of credit initially bear interest at Term SOFR, plus a CSA of 0.10% and an interest rate margin of 2.00%, which is subject to adjustment depending upon the Company's leverage ratio under the Credit Agreement, as amended, and which can range from 1.25% to 2.25%, provided that this adjusted rate shall never be less than 0.00%. The new Term Loan A-1 requires amortizing quarterly principal payments beginning on September 30, 2023 of $7,813 per quarter for the first four payments, $15,625 per quarter for the fifth through sixteenth payments, $23,438 per quarter for the seventeenth through nineteenth payments, with the balance due on April 28, 2028. The new revolving line of credit has a five-year term. However, under the Third Amendment, Term Loan A-1 and the new revolving line of credit become due if any of Term Loan B-1 remains outstanding 91 days prior to the Term Loan B-1 maturity date, in which case the Term Loan A-1 balance and any outstanding balance on the new revolving line of credit become due at that 91 day date (May 13, 2026).
Borrowings under the Company's senior secured credit facilities are guaranteed and secured by substantially all of DaVita Inc.'s and certain of the Company’s domestic subsidiaries' assets and rank senior to all unsecured indebtedness. Borrowings under the new Term Loan A-1, Term Loan B-1 and new revolving line of credit rank equal in priority for that security and related subsidiary guarantees under the facility's terms. The Credit Agreement, as amended, contains certain customary affirmative and negative covenants such as various restrictions or limitations on permitted amounts of investments (including acquisitions), share repurchases, payment of dividends, and redemptions and incurrence of other indebtedness. Many of these restrictions and limitations will not apply as long as the Company’s leverage ratio calculated in accordance with the Amendments is below 4.00:1.00. In addition, the Amendments require compliance with a maximum leverage ratio covenant, tested quarterly, of 5.00:1.00 through June 30, 2026 and 4.50:1.00 thereafter.
In the second quarter of 2023, the Company used a portion of the proceeds from the new Term Loan A-1 and initial borrowing of $400,000 on the new revolving line of credit to pay off the remaining principal balance outstanding and accrued interest and fees on its prior Term Loan A and prior revolving line of credit in the amount of $1,602,199. The remaining borrowings added cash to the balance sheet for general corporate purposes.
In addition to the prepayments described above, during the first nine months of 2023, the Company made regularly scheduled and other principal payments under its senior secured credit facilities totaling $54,011 on its prior Term Loan A, $7,813 on Term Loan A-1 and $50,188 on Term Loan B-1.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
As a result of the transactions described above, the Company recognized debt extinguishment and modification costs of $7,962 in the second quarter of 2023 composed partially of deferred financing costs written off for the portion of debt considered extinguished and reborrowed as a result of the repayment of all principal balances outstanding on the Company's prior Term Loan A and prior revolving line of credit and partially of fees incurred for this transaction. For the portion of the debt that was considered extinguished and reborrowed, the Company recognized constructive financing cash outflows and financing cash inflows on the statement of cash flows of $434,393 and $150,000 for the Term Loan A and prior revolving line of credit, respectively, even though no funds were actually paid or received. Another $715,019 of the debt considered extinguished in this refinancing represented a non-cash financing activity.
After September 30, 2023, the Company's 2019 interest rate cap agreements described below have the economic effect of capping the Company's maximum exposure to SOFR 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 new Term Loan A-1. The remaining $352,831 outstanding principal balance of new Term Loan A-1 is subject to SOFR-based interest rate volatility. These cap agreements are designated as cash flow hedges and, as a result, changes in their fair values 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.
In the second and third quarters of 2023 the Company entered into several forward interest rate cap agreements, described below, that have the economic effect of capping the Company's exposure to SOFR variable interest rate changes on specific portions of the Company's floating rate debt (2023 cap agreements). These 2023 cap agreements are designated as cash flow hedges and, as a result, changes in their fair values will be reported in other comprehensive income. These 2023 cap agreements, do not contain credit-risk contingent features, and become effective and expire as described in the table below. Certain of these 2023 cap agreements have notional amounts that amortize downward over time.
On October 18, 2023, the Company entered into several forward interest rate cap agreements with an aggregate notional amount of $500,000 that become effective on June 28, 2024 and expire on December 31, 2026, and a forward interest rate cap agreement with an aggregate notional amount of $250,000 that becomes effective on December 31, 2024 and expires on December 31, 2025 (together, the October 2023 cap agreements). These October 2023 cap agreements have the economic effect of capping the Company's exposure to SOFR variable interest rate changes on specific portions of the Company's floating rate debt and do not contain credit-risk contingent features. Additionally, the October 2023 cap agreements are designated as cash flow hedges and, as a result, changes in their fair values will be reported in other comprehensive income.
Finally, during and as of the end of the second quarter, the Company transitioned the variable rate base on its senior secured credit facilities and related hedging interest rate caps from LIBOR to SOFR. This transition involved a SOFR-to-LIBOR rate mismatch between this debt and the 2019 interest rate caps for a portion of the second quarter, but the Company’s interest rate hedges remained highly effective throughout the transition and thereafter.
This transition was accomplished through the Amendments to the Credit Agreement for the Company's senior secured credit facility debt and, for the Company's 2019 interest rate caps outstanding, through the the International Swaps and Derivatives Association (ISDA)'s Interbank Offered Rate (IBOR) Fallbacks Supplement and IBOR Fallbacks Protocol which were established in anticipation of the cessation of LIBOR. That ISDA protocol incorporated fallbacks for derivatives linked to LIBOR which facilitated their transition to a replacement reference rate. The Company has adhered to this ISDA protocol and as of June 30, 2023 has transitioned all of its LIBOR-based derivative exposure to SOFR.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
The following table summarizes the Company’s interest rate cap agreements outstanding as of September 30, 2023 and December 31, 2022, which are classified in other long-term assets on its consolidated balance sheet:
| Nine months ended September 30, 2023 | Fair value | ||||||||||||||||||||||||||||||||||||||||||||||
| Notional amount | SOFR rate maximum | Effective date | Expiration date | Debt expense (offset) | Recorded OCI gain | September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| 2019 cap agreements | $ | 3,500,000 | 2.00% | 6/30/2020 | 6/30/2024 | $ | (74,475) | $ | 28,901 | $ | 90,048 | $ | 139,755 | ||||||||||||||||||||||||||||||||||
| 2023 cap agreements | $ | 200,000 | 3.75% | 6/28/2024 | 12/31/2025 | $ | 1,047 | $ | 2,238 | ||||||||||||||||||||||||||||||||||||||
| 2023 cap agreements | $ | 1,000,000 | 4.00%(1) | 6/28/2024 | 12/31/2025 | $ | 3,142 | $ | 12,379 | ||||||||||||||||||||||||||||||||||||||
| 2023 cap agreements | $ | 1,000,000 | 4.75%(2) | 6/28/2024 | 12/31/2025 | $ | 751 | $ | 9,056 | ||||||||||||||||||||||||||||||||||||||
| 2023 cap agreements | $ | 800,000 | 3.75% | 6/30/2024 | 12/31/2025 | $ | 3,871 | $ | 8,836 |
(1)Effective January 1, 2025, the maximum rate of 4.00% decreases to 3.75% for these interest rate caps.
(2)Effective January 1, 2025, the maximum rate of 4.75% decreases to 4.00% for these interest rate caps.
See Note 10 for further details on amounts reclassified from accumulated other comprehensive loss and recorded as debt expense (offset) related to the Company’s interest rate cap agreements for the three and nine months ended September 30, 2023 and 2022.
As a result of the variable rate cap from the Company's 2019 interest rate cap agreements, the Company’s weighted average effective interest rate on its senior secured credit facilities at the end of the third quarter of 2023 was 4.70%, based on the current margins in effect for its senior secured credit facilities as of September 30, 2023, as detailed in the table above.
The Company’s weighted average effective interest rate on all debt, including the effect of interest rate caps and amortization of debt discount, for the three and nine months ended September 30, 2023 was 4.61% and as of September 30, 2023 was 4.56%.
As of September 30, 2023, the Company’s interest rates were fixed and economically fixed on approximately 54% and 95% of its total debt, respectively.
As of September 30, 2023, the Company had an undrawn revolving line of credit under its senior secured credit facilities of $1,500,000. Credit available under this revolving line of credit is reduced by the amount of any letters of credit outstanding under the facility, of which there were none as of September 30, 2023. The Company also had letters of credit of approximately $151,387 outstanding under a separate bilateral secured letter of credit facility as of September 30, 2023.
8. 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, 2023 and December 31, 2022, 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
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
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
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.
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. In November 2022, the Company learned that, on April 1, 2022, the U.S. Attorney’s Office for the District of New Jersey notified the U.S. District Court for the District of New Jersey of its decision not to elect to intervene in the matter of U.S. ex rel. Doe v. DaVita Inc. and filed a Stipulation of Dismissal. On April 13, 2022, the U.S. District Court for the District of New Jersey dismissed the case without prejudice. On October 12, 2022, the U.S. Attorney’s Office for the Eastern District of Pennsylvania notified the U.S. District Court, Eastern District of Pennsylvania, of its decision not to elect to intervene at this time in the matter of U.S. ex rel. Bayne v. DaVita Inc., et al. The court then unsealed an amended complaint, which alleges violations of federal and state False Claims Acts, by order dated October 14, 2022. In May 2023, the private party relator served the Company with a second amended complaint. On July 14, 2023, the Company filed a motion to dismiss the second amended complaint. On August 4, 2023, the private party relator filed a third amended complaint. On October 18, 2023, the Company filed a motion to dismiss the third amended complaint.
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 continuing to cooperate with CDI in this investigation.
2023 District of Columbia Office of Attorney General Investigation: In January 2023, the Office of the Attorney General for the District of Columbia issued a CID to the Company in connection with an antitrust investigation into the AKF. The CID covers the period from January 1, 2016 to the present. The CID requests information on a number of topics, including but not limited to the Company’s communications with AKF, documents relating to donations to the AKF, and communications with patients, providers, and insurers regarding the AKF. 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 ongoing discussions with regulators and to
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
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.
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. alleging that purported agreements entered into by DaVita's former chief executive officer not to solicit senior-level employees violated Section 1 of the Sherman Act. On April 15, 2022, a jury returned a verdict in the Company’s favor, acquitting both the Company and its former chief executive officer on all counts. On April 20, 2022, the court entered judgments of acquittal and closed the case. On August 9, 2021, DaVita Inc. and its former chief executive officer were added as defendants in a consolidated putative 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 asserts that the defendants violated Section 1 of the Sherman Act and 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 September 26, 2022, the court denied the Company's motion to dismiss. The Company disputes the allegations in the class action complaint, as well as the asserted violations of the Sherman Act, and intends to defend this action 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 8, 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
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 conducted 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. After its investigation, the government and the named states declined to intervene in the matter, and on April 5, 2023, the U.S. District Court, Northern District of Texas, entered an order unsealing the complaint in the matter of U.S. ex rel. Grenon v. DaVita Rx, LLC et al. The complaint was not served on the Company. On May 31, 2023, the private party relator filed a notice of voluntary dismissal of all claims. On June 1, 2023, the U.S. District Court for the Northern District of Texas dismissed the matter without prejudice.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
Other Commitments
The Company also has certain potential commitments to provide working capital funding, if necessary, to certain nonconsolidated 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 $9,279.
9. Shareholders' equity
Stock-based compensation
During the nine months ended September 30, 2023, the Company granted 1,343 stock-settled restricted and performance stock units with an aggregate grant-date fair value of $103,599 and a weighted average expected life of approximately 3.4 years.
As of September 30, 2023, the Company had $149,839 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 1.4 years.
Share repurchases
The Company has not repurchased any shares subsequent to December 31, 2022.
10. Accumulated other comprehensive loss
| Three months ended September 30, 2023 | Nine months ended September 30, 2023 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 85,297 | $ | (92,349) | $ | (7,052) | $ | 98,685 | $ | (167,871) | $ | (69,186) | |||||||||||||||||||||||
| Unrealized gains (losses) | 9,319 | (47,644) | (38,325) | 37,712 | 27,878 | 65,590 | |||||||||||||||||||||||||||||
| Related income tax | (2,323) | — | (2,323) | (9,407) | — | (9,407) | |||||||||||||||||||||||||||||
| 6,996 | (47,644) | (40,648) | 28,305 | 27,878 | 56,183 | ||||||||||||||||||||||||||||||
| Reclassification into net income | (28,244) | — | (28,244) | (74,475) | — | (74,475) | |||||||||||||||||||||||||||||
| Related income tax | 7,046 | — | 7,046 | 18,580 | — | 18,580 | |||||||||||||||||||||||||||||
| (21,198) | — | (21,198) | (55,895) | — | (55,895) | ||||||||||||||||||||||||||||||
| Ending balance | $ | 71,095 | $ | (139,993) | $ | (68,898) | $ | 71,095 | $ | (139,993) | $ | (68,898) |
| Three months ended September 30, 2022 | Nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 55,237 | $ | (167,033) | $ | (111,796) | $ | (1,178) | $ | (138,069) | $ | (139,247) | |||||||||||||||||||||||
| Unrealized gains (losses) | 55,045 | (66,100) | (11,055) | 127,460 | (95,064) | 32,396 | |||||||||||||||||||||||||||||
| Related income tax | (13,733) | — | (13,733) | (31,800) | — | (31,800) | |||||||||||||||||||||||||||||
| 41,312 | (66,100) | (24,788) | 95,660 | (95,064) | 596 | ||||||||||||||||||||||||||||||
| Reclassification into net income | 1,377 | — | 1,377 | 4,132 | — | 4,132 | |||||||||||||||||||||||||||||
| Related income tax | (344) | — | (344) | (1,032) | — | (1,032) | |||||||||||||||||||||||||||||
| 1,033 | — | 1,033 | 3,100 | — | 3,100 | ||||||||||||||||||||||||||||||
| Ending balance | $ | 97,582 | $ | (233,133) | $ | (135,551) | $ | 97,582 | $ | (233,133) | $ | (135,551) |
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 7 for further details.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
11. Variable interest entities (VIEs)
At September 30, 2023, these condensed consolidated financial statements include total assets of VIEs of $284,761 and total liabilities and noncontrolling interests of VIEs to third parties of $160,526. 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 2022 10-K.
12. 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, 2023:
| 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 | $ | 36,603 | $ | 36,603 | $ | — | $ | — | |||||||||||||||
| Interest rate cap agreements | $ | 122,557 | $ | — | $ | 122,557 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Contingent earn-out obligations for acquisitions | $ | 19,377 | $ | — | $ | — | $ | 19,377 | |||||||||||||||
| Temporary equity | |||||||||||||||||||||||
| Noncontrolling interests subject to put provisions | $ | 1,445,403 | $ | — | $ | — | $ | 1,445,403 |
For a reconciliation of changes in noncontrolling interests subject to put provisions during the three and nine months ended September 30, 2023, see the consolidated statement of equity.
Investments in equity securities represent investments in various open-ended registered investment companies (mutual funds) and common stocks and are recorded at fair value estimated based on reported market prices or redemption prices, as applicable. See Note 4 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 7 for further discussion.
As of September 30, 2023, the Company had contingent earn-out obligations associated with business acquisitions that could result in the Company paying the former owners a total of up to approximately $54,387 if certain performance targets or quality margins are met over the next one year to five years. The estimated fair value measurements of these contingent earn-out obligations are primarily based on unobservable inputs, including key financial metrics such as projected earnings before interest, taxes, depreciation, and amortization (EBITDA), revenue and other key performance indicators. 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.
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,
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
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, 2023, 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 $185,000. See Notes 17 and 24 to the Company's consolidated financial statements included in the 2022 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 quoted bid and ask prices for these instruments, typically a level 2 input. See Note 7 for further discussion of the Company's debt.
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, 2023 at their approximate fair values due to the short-term nature of their settlements.
13. Segment reporting
The Company’s operating divisions comprises its U.S. dialysis and related lab services business (its U.S. dialysis business), its U.S. IKC business, its U.S. other ancillary services and its international operations (collectively, its ancillary services), as well as its corporate administrative support.
The Company’s separate operating segments include its U.S. dialysis and related lab services business, its U.S. IKC business, its U.S. other ancillary services, its kidney care operations in each foreign sovereign jurisdiction, and its equity method investments in each of the Asia Pacific joint venture (APAC JV) and Mozarc. The U.S. dialysis and related lab services business qualifies as a separately reportable segment, and all other 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 2022 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 revenues, segment operating margin (loss), and a reconciliation of segment operating margin to consolidated income before income taxes:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Segment revenues: | |||||||||||||||||||||||
| U.S. dialysis | |||||||||||||||||||||||
| Dialysis patient service revenues: | |||||||||||||||||||||||
| External sources | $ | 2,754,778 | $ | 2,674,240 | $ | 8,042,561 | $ | 7,858,939 | |||||||||||||||
| Intersegment revenues | 24,289 | 22,957 | 66,698 | 64,526 | |||||||||||||||||||
| U.S. dialysis patient service revenues | 2,779,067 | 2,697,197 | 8,109,259 | 7,923,465 | |||||||||||||||||||
| Other revenues: | |||||||||||||||||||||||
| External sources | 6,239 | 6,056 | 18,822 | 18,134 | |||||||||||||||||||
| Intersegment revenues | — | — | — | (10) | |||||||||||||||||||
| Total U.S. dialysis revenues | 2,785,306 | 2,703,253 | 8,128,081 | 7,941,589 | |||||||||||||||||||
| Other—Ancillary services | |||||||||||||||||||||||
| Dialysis patient service revenues | 197,172 | 172,254 | 560,108 | 513,935 | |||||||||||||||||||
| Other external sources | 163,143 | 96,144 | 372,909 | 301,998 | |||||||||||||||||||
| Intersegment revenues | 2,232 | — | 5,007 | — | |||||||||||||||||||
| Total ancillary services revenues | 362,547 | 268,398 | 938,024 | 815,933 | |||||||||||||||||||
| Total net segment revenues | 3,147,853 | 2,971,651 | 9,066,105 | 8,757,522 | |||||||||||||||||||
| Elimination of intersegment revenues | (26,521) | (22,957) | (71,705) | (64,516) | |||||||||||||||||||
| Consolidated revenues | $ | 3,121,332 | $ | 2,948,694 | $ | 8,994,400 | $ | 8,693,006 | |||||||||||||||
| Segment operating margin (loss): | |||||||||||||||||||||||
| U.S. dialysis | $ | 509,135 | $ | 351,474 | $ | 1,330,992 | $ | 1,230,715 | |||||||||||||||
| Other—Ancillary services | 28,098 | (15,271) | (18,372) | (56,689) | |||||||||||||||||||
| Total segment operating margin | 537,233 | 336,203 | 1,312,620 | 1,174,026 | |||||||||||||||||||
| Reconciliation of segment operating income to consolidated income before income taxes: | |||||||||||||||||||||||
| Corporate administrative support | (41,294) | (24,417) | (99,745) | (91,217) | |||||||||||||||||||
| Consolidated operating income | 495,939 | 311,787 | 1,212,875 | 1,082,810 | |||||||||||||||||||
| Debt expense | (98,080) | (99,680) | (302,361) | (256,057) | |||||||||||||||||||
| Debt extinguishment and modification costs | — | — | (7,962) | — | |||||||||||||||||||
| Other loss, net | (19,650) | (4,898) | (14,525) | (7,968) | |||||||||||||||||||
| Consolidated income before income taxes | $ | 378,209 | $ | 207,209 | $ | 888,027 | $ | 818,785 |
Depreciation and amortization expense by reportable segment was as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| U.S. dialysis | $ | 175,908 | $ | 184,688 | $ | 514,710 | $ | 507,320 | |||||||||||||||
| Other—Ancillary services | 12,515 | 9,726 | 35,456 | 31,214 | |||||||||||||||||||
| $ | 188,423 | $ | 194,414 | $ | 550,166 | $ | 538,534 |
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
Expenditures for property and equipment by reportable segment were as follows:
| Nine months ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| U.S. dialysis | $ | 363,895 | $ | 363,046 | |||||||||||||||||||
| Other—Ancillary services | 45,116 | 46,345 | |||||||||||||||||||||
| $ | 409,011 | $ | 409,391 |
A summary of assets by reportable segment were as follows:
| September 30, 2023 | December 31, 2022 | ||||||||||
| U.S. dialysis | $ | 14,574,707 | $ | 15,084,454 | |||||||
| Other—Ancillary services | 2,354,033 | 1,843,798 | |||||||||
| Consolidated assets | $ | 16,928,740 | $ | 16,928,252 |
14. New accounting standards
New standards recently adopted
In March 2020, the FASB issued Accounting Standards Update (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. GAAP 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 could elect to apply the amendments prospectively through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extended the election date to December 31, 2024. Effective January 1, 2022 certain LIBOR tenors that do not affect the Company, including the one-week and two-month U.S. dollar LIBOR rate, ceased or became non-representative. The remaining U.S. dollar LIBOR tenors ceased or became non-representative effective July 1, 2023. This change will have no impact on the Company's ability to borrow. The application of this ASU did not have a material impact on its consolidated financial statements. See Note 7 for further discussion of the Company's debt.
Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.