Improving Health, Health Care and Quality of Life

DaVita Inc. Reports 3rd Quarter 2005 Results
PRNewswire-FirstCall
EL SEGUNDO, Calif.

DaVita Inc. , today announced results for the quarter ended September 30, 2005. Net income for the three months and nine months ended September 30, 2005 was $55.2 million and $164.5 million, or $0.53 and $1.58 per share, respectively.

(Logo: http://www.newscom.com/cgi-bin/prnh/20020729/DAVITALOGO )

Net income for the quarter ended September 30, 2005 included pre-tax Medicare lab recoveries related to prior years' services of $1.1 million and a net swap valuation loss of $1.7 million.

  Financial and operating highlights include:

  --  Cash Flow:  Operating cash flow for the quarter ended September 30,
      2005 was $85 million and free cash flow was $75 million. For the
      rolling 12-month period ended September 30, 2005 operating cash flow
      was $334 million and free cash flow was $287 million, excluding the
      tax benefit from stock option exercises and the after-tax benefit of
      Medicare lab recoveries related to prior years' services.  Including
      those items, the rolling 12-month period operating cash flow was
      $390 million and free cash flow was $343 million.
  --  Operating Income:  Operating income for the three months and nine
      months ended September 30, 2005, was $111.2 million and
      $324.9 million, respectively, excluding Medicare lab prior years'
      recoveries of $1.1 million and $3.8 million, respectively.
  --  Operating Income Margins:  Operating income margins declined from
      17.6% for the third quarter of 2004 to 16.5% for 2005. The decrease
      was primarily attributable to increases in labor and benefit costs,
      and higher G&A costs, driven primarily by legal and compliance
      professional fees, as well as integration costs associated with the
      Gambro Healthcare acquisition.
  --  Volume:  Total treatments for the third quarter were 2,037,584 or
      25,792 treatments per day, an increase of 12.9% per day as compared to
      the third quarter of last year.  Non-acquired treatment growth was
      5.2% for the third quarter.
  --  Effective Tax Rate:  The effective income tax rate for third quarter
      2005 was 37.5%. We expect the annual effective tax rate to be 38.0%
      for 2005, and within a range of 39% - 40% for 2006, exclusive of
      valuation allowance adjustments.
  --  Center Activity:  As of September 30, 2005, we operated or provided
      administrative services at 724 outpatient centers serving
      approximately 58,100 patients.  During the third quarter we acquired
      11 centers, opened 8 de novo centers and divested one wholly owned
      center.

  Summary of Recent Transactions:

On October 5, 2005, we completed our acquisition of Gambro Healthcare, one of the largest dialysis service providers in the U.S. for an aggregate purchase price of $3.055 billion. In connection with the acquisition we:

  --  entered into a new credit agreement for $3.05 billion and used
      borrowings of $2.85 billion under the facilities along with available
      cash of $252 million to purchase Gambro Healthcare and pay related
      fees of $47 million;
  --  entered into an Alliance and Product Supply Agreement with Gambro AB
      and Gambro Renal Products, Inc. for the next ten years, during which
      we are committed to purchase a significant majority of our
      hemodialysis products, supplies and equipment; and
  --  on October 6, 2005 we completed the sale of 70 freestanding renal
      dialysis centers to Renal Advantage.  The sale of an additional three
      centers to Renal Advantage will be made upon receipt of Illinois state
      regulatory approval and is expected to close within the next 60 days.
      Also one other center was sold to a separate physician group and two
      management services agreements were terminated. We are receiving
      approximately $328 million for all of the divested centers, and
      resulting tax payments are estimated at approximately $95 million.

As of September 30, 2005, proforma for the Gambro Healthcare acquisition and divestitures, we would have operated or provided administrative services to over 1,200 outpatient centers in 41 states serving approximately 94,000 patients.

Outlook

Our 2006 operating income is currently projected to be in the $600-$670 million range, before the impact of FASB No. 123R related to stock option expensing. Major variables include integration of the Gambro Healthcare operations, government reimbursement rates, intensities of physician prescribed pharmaceuticals, payor contracting, and growth assumptions.

Kent Thiry, CEO, stated, "This is a difficult time to provide guidance because there is an unusual amount of change going on, internally and externally. The integration is off to a strong start and we remain confident the combination of these two teams was the correct long-term decision for shareholders. In addition we remain confident that the combination will lead to even better patient care."

DaVita will be holding a conference call to discuss its third quarter results for 2005 on October 31, 2005, at 11:30 AM Eastern Time. The dial in number is 800-399-4406. A replay of the conference call will be available on DaVita's official web page, http://www.davita.com/, for the following 30 days.

This release contains forward-looking statements. Factors which could impact future results include the uncertainties associated with governmental regulations, general economic and other market conditions, acquisitions and the risk factors set forth in the Company's SEC filings, including its Form 10-Q for the quarter ended June 30, 2005. The forward-looking statements should be considered in light of these risks and uncertainties. These risks and uncertainties include those relating to:

   --  the concentration of profits generated from preferred provider
       organizations (PPO) and private indemnity patients,
   --  possible reductions in private and government reimbursement rates,
   --  changes in pharmaceutical practice patterns or reimbursement
       policies,
   --  our ability to maintain contracts with physician medical directors,
   --  legal compliance risks, including our continued compliance with
       complex government regulations and the ongoing review by the U.S.
       Attorney's Office for the Eastern District of Pennsylvania and the
       OIG, the subpoena from the U.S. Attorney's Office for the Eastern
       District of New York, the subpoena from the U.S. Attorney's Office,
       Eastern District of Missouri and our ability to cause Gambro
       Healthcare to comply with its corporate integrity agreement, and
   --  our ability to complete and integrate acquisitions, including Gambro
       Healthcare.

We undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in underlying factors, new information, future events or otherwise.

This release contains non-GAAP financial measures. For reconciliations of these non-GAAP financial measures to their most comparable measure calculated and presented in accordance with GAAP, see the attached reconciliation schedules.

                               DAVITA INC.

                    CONSOLIDATED STATEMENTS OF INCOME
                               (unaudited)
              (dollars in thousands, except per share data)

                               Three months ended        Nine months ended
                                 September 30,             September 30,
                              2005         2004         2005         2004
  Net operating revenues    $676,820     $595,531   $1,935,825   $1,682,592
  Operating expenses
   and charges:
      Patient care costs     457,994      396,909    1,303,297    1,135,477
      General and
       administrative         60,820       50,600      174,939      138,931
      Depreciation and
       amortization           26,372       22,257       77,080       63,454
      Provision for
       uncollectible
       accounts               12,034       10,520       34,457       29,964
      Minority interests
       and equity income,
       net                     7,262        3,593       17,403        9,814
          Total operating
           expenses and
           charges           564,482      483,879    1,607,176    1,377,640

  Operating income           112,338      111,652      328,649      304,952

  Debt expense               (24,297)     (13,741)     (66,728)     (36,635)
  Swap valuation (loss)
   gain                       (1,718)                    4,543
  Refinancing charges                                   (6,872)
  Other income                 2,074        1,010        5,777        3,120
  Income before income
   taxes                      88,397       98,921      265,369      271,437
  Income tax expense          33,180       38,535      100,875      105,785

        Net income           $55,217      $60,386     $164,494     $165,652


  Earnings per share:
        Basic                  $0.55        $0.61        $1.64        $1.67
        Diluted                $0.53        $0.59        $1.58        $1.61
        Weighted average
         shares:
           Basic         101,307,461   99,168,930  100,399,902   98,972,666
           Diluted       104,371,789  102,889,781  103,803,975  103,193,267



                               DAVITA INC.

                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (unaudited)
                          (dollars in thousands)

                                                      Nine months ended
                                                        September 30,
                                                     2005           2004
  Cash flows from operating activities:
  Net income                                      $164,494       $165,652
  Adjustments to reconcile net income to cash
   provided by operating activities:
     Depreciation and amortization                  77,080         63,454
     Stock options, principally tax benefits        37,021         30,465
     Minority interests in income of
      consolidated subsidiaries                     18,225         11,345
     Distributions to minority interests           (12,261)        (6,966)
     Deferred income taxes                          (8,950)        11,831
     Refinancing charges                             6,872
     Swap valuation gains                           (4,543)
     Non-cash debt expense                           2,397          1,497
     (Gain) loss on divestitures                    (2,213)            59
     Equity investment income                         (822)        (1,531)
  Changes in operating assets and liabilities,
   other than from acquisitions and divestitures:
     Accounts receivable                           (39,953)       (33,998)
     Medicare lab recoveries                        (1,131)        10,707
     Inventories                                    (2,670)         5,065
     Other current assets                           (2,899)          (755)
     Other long-term assets                         (2,134)         2,109
     Accounts payable                                2,753          7,773
     Accrued compensation and benefits              27,366         22,409
     Other current liabilities                      27,279         43,360
     Income taxes                                   19,670            136
     Other long-term liabilities                    (3,371)            (8)
          Net cash provided by
           operating activities                    302,210        332,604
  Cash flows from investing activities:
     Additions of property and equipment, net      (97,529)       (89,872)
     Acquisitions and divestitures, net           (130,113)      (245,284)
     Investments in and advances to affiliates,
      net                                           14,294          4,862
     Intangible assets                                (779)          (635)
          Net cash used in investing activities   (214,127)      (330,929)
  Cash flows from financing activities:
     Borrowings                                  1,742,433      3,123,171
     Payments on long-term debt                 (1,753,351)    (2,903,648)
     Deferred financing costs                      (30,561)        (3,934)
     Purchase of treasury stock                    (86,559)
     Stock option exercises                         38,613         34,580
          Net cash (used in) provided by
           financing activities                     (2,866)       163,610
  Net increase in cash and cash equivalents         85,217        165,285
  Cash and cash equivalents at
   beginning of period                             251,979         61,657
  Cash and cash equivalents at end of period      $337,196       $226,942



                               DAVITA INC.

                       CONSOLIDATED BALANCE SHEETS
                               (unaudited)
              (dollars in thousands, except per share data)

                                                September 30,   December 31,
                                                     2005           2004
                      ASSETS
  Cash and cash equivalents                       $337,196       $251,979
  Accounts receivable, less allowance
   of $68,379 and $58,166                          502,887        462,095
  Medicare lab recoveries                            1,131
  Inventories                                       36,032         31,843
  Other current assets                              47,163         44,210
  Deferred income taxes                            104,772         78,593
        Total current assets                     1,029,181        868,720
  Property and equipment, net                      452,033        412,064
  Amortizable intangibles, net                      83,683         60,719
  Investments in third-party dialysis businesses     2,526          3,332
  Other long-term assets                            44,889         10,898
  Goodwill                                       1,256,223      1,156,226
                                                $2,868,535     $2,511,959
         LIABILITIES AND SHAREHOLDERS' EQUITY
  Accounts payable                                 $99,080        $96,231
  Other liabilities                                184,666        157,214
  Accrued compensation and benefits                162,219        133,919
  Current portion of long-term debt                  4,349         53,364
  Income taxes payable                              20,677          1,007
        Total current liabilities                  470,991        441,735
  Long-term debt                                 1,360,665      1,322,468
  Other long-term liabilities                       25,096         22,570
  Deferred income taxes                            163,491        148,859
  Minority interests                                75,759         53,193
  Commitments and contingencies
  Shareholders' equity:
      Preferred stock ($0.001 par value,
       5,000,000 shares authorized; none issued)
      Common stock ($0.001 par value,
       195,000,000 shares authorized;
       134,862,283 shares issued)                      135            135
      Additional paid-in capital                   565,071        542,714
      Retained earnings                            775,781        611,287
      Treasury stock, at cost
       (33,239,209 and 36,295,339 shares)         (579,455)      (632,732)
      Accumulated comprehensive income valuations   11,001          1,730
        Total shareholders' equity                 772,533        523,134
                                                $2,868,535     $2,511,959



                               DAVITA INC.

                       SUPPLEMENTAL FINANCIAL DATA
                               (unaudited)
    (dollars in millions, except for per share and per treatment data)

                                                                 Nine months
                                      Three months ended            ended
                                September   June 30,  September   September
                                30, 2005      2005     30, 2004    30, 2005
  Financial Results:
    Net income, excluding
     Medicare lab prior
     years' recoveries, swap
     valuations and
     refinancing charges          $55.6      $52.6       $55.3       $163.6
       Basic EPS                  $0.55      $0.52       $0.56        $1.63
       Diluted EPS                $0.53      $0.51       $0.54        $1.58

    Operating income, excluding
     Medicare lab prior years'
     recoveries                  $111.2     $107.7      $103.4       $324.9
       Operating income margin     16.5%      16.7%       17.6%        16.8%

    Other comprehensive income
       Unrealized gain (loss)
        on securities, net of
        tax benefit (expense)
        of $(7.1), $5.7, $1.6,
        and $(8.2)                $11.1      $(9.0)      $(2.5)       $13.0

  Business Metrics:
     Volume
       Treatments             2,037,584  1,964,098   1,804,534    5,870,469
       Number of treatment days    79.0       78.0        79.0        234.0
       Treatments per day        25,792     25,181      22,842       25,087
       Per day year over
        year increase              12.9%      15.2%       11.0%        13.9%
       Non-acquired growth          5.2%       5.5%        4.8%         5.5%

     Revenue
       Total operating revenue     $677       $649        $596       $1,936
       Medicare lab prior years'
        recoveries                   $1         $3          $8           $4
       Total operating revenue,
        excluding Medicare lab
        prior years' recoveries    $676       $646        $587       $1,932
       Dialysis revenue per
        treatment               $315.69    $312.52     $313.60      $313.11
       Per treatment increase
        from previous quarter       1.0%       0.5%        0.7%           -
       Per treatment increase
        from prior year             0.7%       0.3%        2.4%         0.3%

     Expenses
     A. Patient care costs
       Percent of revenue          67.8%      67.3%       67.6%        67.5%
       Per treatment            $224.77    $221.66     $219.95      $222.01
       Per treatment increase
        from previous quarter       1.4%       1.0%          -            -
       Per treatment increase
        from previous year          2.2%       0.7%        2.7%         1.0%

     B. General & administrative
         expenses
       Percent of revenue           9.0%       9.3%        8.6%         9.1%
       Per treatment             $29.85     $30.48      $28.04       $29.80
       Per treatment increase
        (decrease) from
        previous quarter           (2.1%)      5.0%        4.5%           -
       Per treatment increase
        from previous year          6.5%      13.6%       14.1%        10.8%

     C. Bad debt expense as a
         percent of current-period
         revenue                    1.8%       1.8%        1.8%         1.8%

     D. Consolidated effective
         tax rate                  37.5%      38.0%       39.0%        38.0%



                               DAVITA INC.

                  SUPPLEMENTAL FINANCIAL DATA-continued
                               (unaudited)
    (dollars in millions, except for per share and per treatment data)

                                                                 Nine months
                                      Three months ended            ended
                                September   June 30,  September   September
                                30, 2005      2005     30, 2004    30, 2005
  Cash Flow
     Operating cash flow          $84.6     $106.2      $115.9       $302.2
     Operating cash flow,
      excluding Medicare
      lab prior years'
      recoveries and tax
      benefit from stock
      option exercises            $75.3      $92.8      $110.4       $263.6
     Free cash flow, excluding
      Medicare lab prior years'
      recoveries and tax
      benefit from stock option
      exercises                   $65.6      $78.2       $99.5       $231.7
     Capital expenditures:
        Development               $24.9      $22.2       $22.8        $65.2
        Routine maintenance/
         IT/other                 $11.4      $18.6       $11.0        $37.7
     Acquisition expenditures,
      net                         $46.1      $81.5     $213.50       $130.1

  Accounts Receivable
     Net receivables               $503       $490        $435
     DSO                             70         70          68

  Debt/Capital Structure
     Total debt                  $1,365     $1,366      $1,388
     Net debt, net of cash       $1,028     $1,053      $1,161
     Leverage ratio -
      (see Note 1)                 1.78x      1.86x       2.14x


  Clinical (quarterly averages)
     Dialysis adequacy -
      % of patients with
      Kt/V > 1.2                     94%        94%         94%
     Patients with arteriovenous
      fistula                        46%        45%         41%



                               DAVITA INC.

                  SUPPLEMENTAL FINANCIAL DATA-continued
                               (unaudited)
                          (dollars in thousands)

  Note 1: Calculation of the Leverage Ratio

The leverage ratio under the Company's senior secured credit agreement as in effect for the quarter ended September 30, 2005 (the Prior Credit Agreement), is defined as all funded debt plus the face amount of all letters of credit issued, minus cash and cash equivalents, divided by "EBITDA". The leverage ratio determines the interest rate margin payable by the Company under the Prior Credit Agreement by establishing the margin over the base interest rate (LIBOR) that is applicable. The following Leverage Ratio was calculated using "Consolidated EBITDA" as defined in the indentures governing our recently issued senior notes. Such calculation is on a basis that is materially consistent with the definition of "EBITDA" contained in the Prior Credit Agreement, except that EBITDA under our Prior Credit Agreement is based on the last twelve-months and is not based on annualized EBITDA, and pro forma incremental "EBITDA" relating to acquisitions is included in the calculation of "EBITDA" under the Prior Credit Agreement and is not included in the following calculations.

                                            Three months ended
                                September 30,     June 30,    September 30,
                                    2005            2005          2004
  Net income                      $55,217         $52,943       $60,386
  Debt expense                     24,297          24,897        13,741
  Income taxes                     33,180          32,420        38,535
  Depreciation and amortization    26,372          25,860        22,257
    Minority interests and
     equity income, net             7,262           6,125         3,593
    Swap valuation loss             1,718           2,131
    "Consolidated EBITDA" as
     defined in the indentures   $148,046        $144,376      $138,512

  Annualized "Consolidated
   EBITDA" as defined in the
   indentures                    $592,184        $577,504      $554,048

                                September 30,     June 30,    September 30,
                                    2005            2005          2004
  Total debt                   $1,365,014      $1,365,867    $1,387,964
  Letters of credit issued         23,959          22,959        22,984
                                1,388,973       1,388,826     1,410,948
  Less: cash and cash
   equivalents                   (337,196)       (312,761)     (226,942)
  Consolidated net debt        $1,051,777      $1,076,065    $1,184,006
  Annualized "Consolidated
   EBITDA" as defined in the
   indentures                    $592,184        $577,504      $554,048
  Leverage Ratio                     1.78x           1.86x         2.14x

As a result of the Gambro Healthcare acquisition and our related borrowings under our new senior secured credit agreement, we anticipate that our post-acquisition leverage ratio will initially be in the range of 4.5x to 5.0x, which is in compliance with the leverage ratio covenants contained within the new credit agreement. The leverage ratio calculation in our new credit agreement is materially consistent with our Prior Credit Agreement, existing at September 30, 2005.

                               DAVITA INC.

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

  1. Net income excluding Medicare lab recoveries related to prior years'
     services, swap valuations and refinance charges:

                                                                 Nine months
                                      Three months ended            ended
                                September   June 30,  September   September
                                30, 2005      2005     30, 2004    30, 2005
  Net income                    $55,217     $52,943    $60,386     $164,494
  Less: Medicare lab recoveries
   for prior years' services     (1,131)     (2,641)    (8,293)      (3,771)
  Related income tax expense        440       1,027      3,234        1,467
      Net income excluding
       Medicare lab recoveries   54,526      51,329     55,327      162,190
  Swap valuation loss (gain)      1,718       2,131                  (4,543)
  Refinancing charges                                                 6,872
  Related income tax expense       (668)       (829)                   (906)
                                $55,576     $52,631    $55,327     $163,613


  2. Operating income, excluding Medicare lab recoveries related to prior
     years' services:

                                                                 Nine months
                                      Three months ended            ended
                               September   June 30,   September    September
                               30, 2005      2005      30, 2004    30, 2005
  Operating income             $112,338    $110,315    $111,652    $328,649
  Less: Medicare lab prior
   years' recoveries             (1,131)     (2,641)     (8,293)     (3,771)
                               $111,207    $107,674    $103,359    $324,878


  3. Operating cash flow, excluding Medicare lab recoveries related to prior
     years' services, and tax benefit from stock option exercises:

                                              Three months ended
                                  September 30,  June 30,    September 30,
                                     2005         2005           2004
  Cash provided by operating
   activities                      $84,609      $106,195       $115,852
  Less: Medicare lab prior years'
   recoveries                                     (2,641)
      Related income tax expense                   1,027
  Operating cash flow, excluding
   Medicare lab prior years'
   recoveries                       84,609       104,581        115,852
  Less: Tax benefit from stock
   option exercises                 (9,313)      (11,774)        (5,417)
                                   $75,296       $92,807       $110,435


                                                            Rolling 12-
                                     Nine months           month period
                                        ended                 ended
                                     September 30,         September 30,
                                         2005                  2005
  Cash provided by operating
   activities                         $302,210              $389,551
  Less: Medicare lab prior years'
   Medicare lab prior years'
   recoveries                           (2,641)              (10,934)
          Related income tax expense     1,027                 4,261
  Operating cash flow, excluding
   Medicare lab prior years'
   recoveries                          300,596               382,878
  Less: Tax benefit from stock
   option exercises                    (37,021)              (49,326)
                                      $263,575              $333,552



                               DAVITA INC.

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

  4. Free cash flow and free cash flow, excluding Medicare lab recoveries
     related to prior years' services, and tax benefit from stock option
     exercises:

  Free cash flow represents net cash provided by operating activities less
  non-development capital expenditures.  We believe free cash flow is a
  useful adjunct to cash flow from operating activities and other
  measurements under generally accepted accounting principles in the
  United States since it is a meaningful measure of our ability to fund
  acquisition and development activities and meet our debt service
  requirements. Free cash flow is not a measure of financial performance
  under generally accepted accounting principles in the United States and
  should not be considered as an alternative to cash flows from operating,
  investing or financing activities as an indicator of cash flows or as a
  measure of liquidity.

                                              Three months ended
                                  September 30,    June 30,    September 30,
                                     2005           2005           2004
  Cash provided by operating
   activities                      $84,609       $106,195       $115,852
  Less: Expenditures for routine
   maintenance and information
   technology                       (9,656)       (14,614)       (10,956)
  Free cash flow                    74,953         91,581        104,896
  Less: Medicare lab prior years'
   recoveries                                      (2,641)
  Related income tax expense                        1,027
  Free cash flow, excluding
   Medicare lab prior years'
   recoveries                       74,953         89,967        104,896
  Less: Tax benefit from stock
   option exercises                 (9,313)       (11,774)        (5,417)
                                   $65,640        $78,193        $99,479


                                                            Rolling 12-
                                      Nine months          month period
                                        ended                 ended
                                     September 30,         September 30,
                                         2005                  2005
  Cash provided by operating
   activities                         $302,210              $389,551
  Less: Expenditures for routine
   maintenance and information
   technology                          (31,904)              (46,787)
  Free cash flow                       270,306               342,764
  Less: Medicare lab prior
   years' recoveries                    (2,641)              (10,934)
  Related income tax expense             1,027                 4,261
  Free cash flow, excluding
   Medicare lab prior years'
   recoveries                          268,692               336,091
  Less: Tax benefit from stock
   option exercises                    (37,021)              (49,326)
                                      $231,671              $286,765
Photo: http://www.newscom.com/cgi-bin/prnh/20020729/DAVITALOGO

SOURCE: DaVita Inc.

CONTACT: LeAnne Zumwalt, Investor Relations of DaVita Inc.,
+1-650-696-8910


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