Improving Health, Health Care and Quality of Life

DaVita 3rd Quarter 2010 Results

DENVER, Nov 04, 2010 (BUSINESS WIRE) --

DaVita Inc. (NYSE: DVA) today announced results for the quarter ended September 30, 2010. Net income attributable to DaVita Inc. for the three months ended September 30, 2010 was $119.4 million, or $1.15 per share. This compares to net income attributable to DaVita Inc. for the three months ended September 30, 2009 of $110.9 million, or $1.06 per share.

 

Net income attributable to DaVita Inc. for the nine months ended September 30, 2010, excluding after-tax debt redemption charges of $2.5 million, was $339.2 million, or $3.25 per share as compared with $313.0 million, or $3.00 per share, respectively, for the same period of 2009. Net income attributable to DaVita Inc. for the nine months ended September 30, 2010, including this item, was $336.7 million, or $3.22 per share.

Financial and operating highlights include:

 

  • Cash Flow: For the rolling twelve months ended September 30, 2010 operating cash flow was $872 million and free cash flow was $658 million. For the three months ended September 30, 2010 operating cash flow was $161 million and free cash flow was $91 million.
  • Operating Income: Operating income for the three and nine months ended September 30, 2010 was $257 million and $742 million, respectively, as compared to $245 million and $702 million, respectively, for the same period of 2009.
  • Volume: Total treatments for the third quarter of 2010 were 4,578,622, or 57,957 treatments per day, representing a per day increase of 5.5% over the third quarter of 2009. Non-acquired treatment growth in the quarter was 3.7% over the prior year's third quarter.
  • Effective Tax Rate: Our effective tax rate was 34.4% and 36.0% for the three and nine months ended September 30, 2010, respectively. This effective tax rate is impacted by the amount of third party owners' income attributable to non-tax paying entities. The effective tax rate attributable to DaVita Inc. was 38.5% and 39.5% for the three and nine months ended September 30, 2010, respectively, which was within the range of our previously stated guidance. Our effective tax rate for 2010 is now projected to be approximately 36.0% and our 2010 effective tax rate attributable to DaVita Inc. is projected to be approximately 39.5%.
  • Share Repurchases: During the third quarter of 2010, we repurchased a total of 1,448,000 shares of our common stock for $98.5 million, or an average price of $68.02 per share. During the first nine months of 2010, we repurchased a total of 3,035,160 shares of our common stock for $198.5 million, or an average price of $65.41 per share. In addition, we also repurchased a total of 4,244,300 shares of our common stock from October 1, 2010 through October 22, 2010 for $301.5 million, or an average price of $71.03 per share, which completed all of our previous board authorization for share repurchases. On November 3, 2010, our Board of Directors authorized an additional $800 million of share repurchases of our common stock.
  • Debt Refinancing: On October 20, 2010 we completed our $4.55 billion debt refinancing transactions. See note 2 of the supplemental financial data for further details.
  • Center Activity: As of September 30, 2010, we operated or provided administrative services at 1,598 outpatient dialysis centers serving approximately 124,000 patients, of which 1,566 centers are consolidated in our financial statements. During the third quarter of 2010, we acquired 10 centers, opened 12 new centers, and closed seven centers.

 

Outlook

We are narrowing our operating income guidance for 2010 to be in the range of $995 million to $1,015 million. We are also revising our operating cash flow guidance for 2010. Our operating cash flow is now projected to be in the range of $800 million to $875 million. Our previous operating cash flow guidance for 2010 was in the range of $725 million to $825 million. The increase in our operating cash flow guidance was primarily due to reduced tax payments resulting from accelerated tax deductions. Because of the uncertainties of operating under the new Medicare bundled payment system and the ongoing uncertainties associated with our payor mix, we will not be providing a specific guidance range for 2011 operating income at this time. These projections and the underlying assumptions involve significant risks and uncertainties, including those described below, and actual results may vary significantly from these current projections.

DaVita will be holding a conference call to discuss its results for the third quarter ended September 30, 2010 on November 4, 2010 at 5:00 p.m. Eastern Time. The dial in number is (800) 399-4406. A replay of the conference call will be available on DaVita's official web page, www.davita.com, for the following 30 days.

This release contains forward-looking statements, within the meaning of the federal securities laws, including statements related to our 2010 operating income, operating cash flow, our expected effective tax rate and the expected effective tax rate attributable to DaVita Inc. Factors which could impact future results include the uncertainties associated with governmental regulations, general economic and other market conditions, competition, accounting estimates, the variability of our cash flows and the risk factors set forth in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2009, our quarterly report on Form 10-Q for the second quarter ended June 30, 2010 and subsequent quarterly reports filed on Form 10-Q.The forward-looking statements should be considered in light of these risks and uncertainties.

These risks and uncertainties include those relating to:

 

  • the concentration of profits generated from commercial payor plans,
  • continued downward pressure on average realized payment rates from commercial payors, which may result in the loss of revenue or patients,
  • a reduction in the number of patients under higher-paying commercial plans,
  • a reduction in government payment rates or changes to the structure of payments under the Medicare End Stage Renal Disease program or other government-based programs, including, for example, the implementation of a bundled payment rate system beginning January 2011, which will lower reimbursement for services we provide to Medicare patients, and the impact of health care reform legislation that was enacted in the United States in March 2010,
  • changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing,
  • our ability to maintain contracts with physician medical directors,
  • legal compliance risks, including our continued compliance with complex government regulations,
  • the resolution of ongoing investigations by various federal and state governmental agencies,
  • continued increased competition from large and medium-sized dialysis providers that compete directly with us, and
  • our ability to complete any acquisitions, mergers or dispositions that we might be considering or announce, or integrate and successfully operate any business we may acquire.

 

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

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

 

DAVITA INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars in thousands, except per share data)

             
      Three months ended

September 30,

    Nine months ended

September 30,

      2010     2009     2010     2009
Net operating revenues     $ 1,651,649       $ 1,573,915       $ 4,797,974       $ 4,540,596  
Operating expenses and charges:                        
Patient care costs       1,146,382         1,095,857         3,339,723         3,153,622  
General and administrative       148,041         134,931         421,422         394,370  
Depreciation and amortization       58,486         56,813         174,307         172,121  
Provision for uncollectible accounts       43,938         42,021         127,868         119,990  
Equity investment income       (1,789 )       (708 )       (6,968 )       (1,066 )
Total operating expenses and charges       1,395,058         1,328,914         4,056,352         3,839,037  
Operating income       256,591         245,001         741,622         701,559  
Debt expense       (39,490 )       (45,535 )       (127,728 )       (140,924 )
Debt redemption charges       -         -         (4,127 )       -  
Other income       759         999         2,329         3,026  
Income before income taxes       217,860         200,465         612,096         563,661  
Income tax expense       74,979         74,195         220,322         209,485  
Net income       142,881         126,270         391,774         354,176  
Less: Net income attributable to noncontrolling interests       (23,494 )       (15,340 )       (55,111 )       (41,216 )
Net income attributable to DaVita Inc.     $ 119,387       $ 110,930       $ 336,663       $ 312,960  
Earnings per share:                        
Basic earnings per share attributable to DaVita Inc.     $ 1.16       $ 1.07       $ 3.27       $ 3.01  
Diluted earnings per share attributable to DaVita Inc.     $ 1.15       $ 1.06       $ 3.22       $ 3.00  
Weighted average shares for earnings per share:                        
Basic       102,608,844         104,127,334         102,989,010         103,904,768  
Diluted       104,022,458         104,607,318         104,408,939         104,315,019  
                                         

DAVITA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

       
      Nine months ended

September 30,

      2010     2009
Cash flows from operating activities:            
Net income     $ 391,774       $ 354,176  
Adjustments to reconcile net income to cash provided by operating activities:            
Depreciation and amortization       174,307         172,121  
Stock-based compensation expense       33,492         33,850  
Tax benefits from stock award exercises       15,755         12,434  
Excess tax benefits from stock award exercises       (2,079 )       (8,115 )
Deferred income taxes       61,499         45,417  
Equity investment income, net       (3,048 )       (1,066 )
Loss on disposal of assets and other non-cash charges       5,650         15,323  
Debt redemption charges       4,127         -  
Changes in operating assets and liabilities, other than from acquisitions and divestitures:            
Accounts receivable       21,680         (68,235 )
Inventories       3,041         15,858  
Other receivables and other current assets       16,596         (2,164 )
Other long-term assets       187         5,641  
Accounts payable       95,350         (58,995 )
Accrued compensation and benefits       72,501         20,733  
Other current liabilities       (118,305 )       (68,383 )
Income taxes       (55,703 )       55,226  
Other long-term liabilities       2,308         (9,702 )
Net cash provided by operating activities       719,132         514,119  
Cash flows from investing activities:            
Additions of property and equipment       (169,376 )       (205,653 )
Acquisitions       (137,643 )       (64,001 )
Proceeds from asset sales       18,471         6,256  
Purchase of investments available for sale       (955 )       (1,737 )
Purchase of investments held-to-maturity       (23,540 )       (16,942 )
Proceeds from sale of investments available for sale       900         16,537  
Proceeds from maturities of investments held-to-maturity       26,916         16,123  
Purchase of equity investments and other assets       (436 )       (260 )
Distributions received on equity investments       350         929  
Net cash used in investing activities       (285,313 )       (248,748 )
Cash flows from financing activities:            
Borrowings       14,736,519         13,924,642  
Payments on long-term debt       (15,006,754 )       (13,961,667 )
Debt call premium       (3,314 )       -  
Purchase of treasury stock       (148,669 )       (61,223 )
Excess tax benefits from stock award exercises       2,079         8,115  
Stock award exercises and other share issuances, net       39,416         30,309  
Distributions to noncontrolling interests       (61,112 )       (46,888 )
Contributions from noncontrolling interests       5,365         11,117  
Proceeds from sales of additional noncontrolling interests       3,205         7,733  
Purchases from noncontrolling interests       (5,402 )       (6,668 )
Deferred financing costs       (46 )       (42 )
Net cash used in financing activities       (438,713 )       (94,572 )
Net (decrease) increase in cash and cash equivalents       (4,894 )       170,799  
Cash and cash equivalents at beginning of period       539,459         410,881  
Cash and cash equivalents at end of period     $ 534,565       $ 581,680  
                     

DAVITA INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except per share data)

             
ASSETS     September 30,

2010

    December 31,

2009

Cash and cash equivalents     $ 534,565       $ 539,459  
Short-term investments       22,945         26,475  
Accounts receivable, less allowance of $244,176 and $229,317       1,082,676         1,105,903  
Inventories       68,950         70,041  
Other receivables       249,445         263,456  
Other current assets       38,798         40,234  
Income tax receivables       44,284         -  
Deferred income taxes       220,342         256,953  
Total current assets       2,262,005         2,302,521  
Property and equipment, net       1,121,604         1,104,925  
Amortizable intangibles, net       124,217         136,732  
Equity investments       25,679         22,631  
Long-term investments       8,049         7,616  
Other long-term assets       32,428         32,615  
Goodwill       4,053,123         3,951,196  
      $ 7,627,105       $ 7,558,236  
LIABILITIES AND EQUITY            
Accounts payable     $ 321,179       $ 176,657  
Other liabilities       337,221         461,092  
Accrued compensation and benefits       357,132         286,121  
Current portion of long-term debt       96,252         100,007  
Income taxes payable       -         23,064  
Total current liabilities       1,111,784         1,046,941  
Long-term debt       3,266,190         3,532,217  
Other long-term liabilities       89,919         87,692  
Alliance and product supply agreement, net       26,650         30,647  
Deferred income taxes       387,717         334,855  
Total liabilities       4,882,260         5,032,352  
Commitments and contingencies            
Noncontrolling interests subject to put provisions       368,369         331,725  
Equity:            
Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued)            
Common stock ($0.001 par value, 450,000,000 shares authorized; 134,862,283 shares            
issued; 101,330,359 and 103,062,698 shares outstanding)       135         135  
Additional paid-in capital       631,062         621,685  
Retained earnings       2,648,797         2,312,134  
Treasury stock, at cost (33,531,924 and 31,799,585 shares)       (958,680 )       (793,340 )
Accumulated other comprehensive income (loss)       119         (5,548 )
Total DaVita Inc. shareholders' equity       2,321,433         2,135,066  
Noncontrolling interests not subject to put provisions       55,043         59,093  
Total equity       2,376,476         2,194,159  
      $ 7,627,105       $ 7,558,236  
                     

DAVITA INC.

SUPPLEMENTAL FINANCIAL DATA

(unaudited)

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

             
      Three months ended    

Nine months ended
September 30,
2010

      September 30,

2010

    June 30,

2010

    September 30,

2009

   
1. Consolidated Financial Results:                        
Revenues     $ 1,652       $ 1,587       $ 1,574       $ 4,798  
Operating income     $ 256.6       $ 242.4       $ 245.0       $ 741.6  
Operating income margin       15.5 %       15.3 %       15.6 %       15.5 %
Net income attributable to DaVita Inc.     $ 119.4       $ 107.9       $ 110.9       $ 336.7  
Net income attributable to DaVita Inc., excluding debt redemption charges(1)     $ 119.4       $ 110.4       $ 110.9       $ 339.2  
Diluted earnings per share attributable to DaVita Inc.     $ 1.15       $ 1.04       $ 1.06       $ 3.22  
Diluted earnings per share attributable to DaVita Inc., excluding debt redemption charges(1)     $ 1.15       $ 1.06       $ 1.06       $ 3.25  
                         
2. Consolidated Business Metrics:                        
Expenses                        
Patient care costs as a percent of consolidated revenue(2)       69.4 %       70.0 %       69.6 %       69.6 %
General and administrative expenses as a percent of consolidated revenue (2)       9.0 %       8.6 %       8.6 %       8.8 %
                         
Bad debt expense as a percent of consolidated revenue       2.7 %       2.7 %       2.7 %       2.7 %
                         
Consolidated effective tax rate attributable to DaVita Inc.(1)       38.5 %       39.75 %       40.0 %       39.5 %
                         
3. Segment Financial Results: (dollar amounts rounded to nearest million)                        
Dialysis and related lab services                        
Revenues     $ 1,553       $ 1,496       $ 1,491       $ 4,528  
Direct operating expenses       1,288         1,243         1,233         3,757  
Dialysis segment operating income     $ 266       $ 254       $ 259       $ 771  
                         
Other - Ancillary services and strategic initiatives                        
Revenues     $ 98       $ 91       $ 83       $ 270  
Direct operating expenses       98         93         85         273  
Ancillary segment operating loss     $ -       $ (2 )     $ (3 )     $ (3 )
                         
Total segment operating income     $ 266       $ 252       $ 256       $ 768  
Reconciling items:                        
Stock-based compensation       (11 )       (12 )       (11 )       (33 )
Equity investment income       2         3         1         7  
Consolidated operating income     $ 257       $ 242       $ 245       $ 742  
                                         
                                         

DAVITA INC.

SUPPLEMENTAL FINANCIAL DATA--continued

(unaudited)

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

             
      Three months ended    

Nine months ended
September 30, 
2010

      September 30,

2010

    June 30,

2010

    September 30,

2009

   
4. Segment Business Metrics:                        
Dialysis and related lab services                        
Volume                        
Treatments       4,578,622         4,462,565         4,339,195         13,335,307  
Number of treatment days       79.0         78.0         79.0         234.0  
Treatments per day       57,957         57,212         54,927         56,988  
Per day year over year increase       5.5 %       5.5 %       6.1 %       5.2 %
Non-acquired growth year over year       3.7 %       4.1 %       5.2 %       4.2 %
                         
Revenue                        
Dialysis and related lab services revenue per treatment     $ 338.70       $ 334.64       $ 343.14       $ 338.95  
Per treatment increase (decrease) from previous quarter       1.2 %       (2.6 %)       0.8 %      
Per treatment (decrease) increase from previous year       (1.3 %)       (1.7 %)       2.0 %       (0.3 %)
Percent of consolidated revenue       94.0 %       94.3 %       94.7 %       94.4 %
                         
Expenses                        
Patient care costs                        
Percent of segment revenue       68.7 %       69.2 %       69.1 %       68.9 %
Per treatment     $ 232.93       $ 232.16       $ 237.39       $ 234.01  
Per treatment increase (decrease) from previous quarter       0.3 %       (2.1 %)       1.3 %      
Per treatment (decrease) increase from previous year       (1.9 %)       (0.9 %)       2.1 %       (0.3 %)
                         
General and administrative expenses                        
Percent of segment revenue       7.8 %       7.3 %       7.1 %       7.6 %
Per treatment     $ 26.58       $ 24.36       $ 24.57       $ 25.67  
Per treatment increase (decrease) from previous quarter       9.1 %       (6.5 %)       (2.3 %)      
Per treatment increase (decrease) from previous year       8.2 %       (3.1 %)       (1.2 %)       2.8 %
                         
5. Cash Flow:                        
Operating cash flow     $ 161.4       $ 295.9       $ 167.5       $ 719.1  
Operating cash flow, last twelve months     $ 871.7       $ 877.8       $ 712.7        
Free cash flow(1)     $ 90.9       $ 249.5       $ 125.5       $ 561.0  
Free cash flow, last twelve months(1)     $ 657.7       $ 692.3       $ 533.3        
Capital expenditures:                        
Routine maintenance/IT other     $ 46.7       $ 27.8       $ 25.0       $ 97.0  
Development and relocations     $ 23.3       $ 29.0       $ 42.4       $ 75.1  
Acquisition expenditures     $ 45.9       $ 90.6       $ 20.7       $ 137.6  
                         
6. Accounts Receivable:                        
Net receivables     $ 1,083       $ 1,071       $ 1,143        
DSO       63         64         70        
                                     

DAVITA INC.

SUPPLEMENTAL FINANCIAL DATA--continued

(unaudited)

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

             
      Three months ended    

Nine months ended
September 30,
2010

     

September 30,
2010

   

June 30, 2010

   

September 30,
2009

   
7. Debt and Capital Structure:                        
Total debt(3)     $ 3,361       $ 3,382       $ 3,654        
Net debt, net of cash(3)     $ 2,826       $ 2,808       $ 3,072        

Leverage ratio (see Note 1)

    2.31x     2.31x     2.57x      
Overall weighted average effective interest rate during the quarter       4.45 %       4.68 %       4.79 %      
Overall weighted average effective interest rate at end of the quarter       4.18 %       4.62 %       4.76 %      
Weighted average effective interest rate on the Senior Secured Credit Facilities at end of the quarter       1.80 %       2.66 %       2.81 %      
Fixed interest rates at September 30, 2010 and economically fixed interest rates as a percentage of our total debt at June 30, 2010 and September 30, 2009       46 %       56 %       61 %      
Share repurchases     $ 98.5       $ 100.0       $ 62.4       $ 198.5
                         
8. Clinical: (quarterly averages)                        
Dialysis adequacy -% of patients with Kt/V > 1.2       96 %       96 %       95 %      
90 day patients average Hb>=10 <=12       69 %       67 %       64 %      
Patients with arteriovenous fistulas placed       67 %       66 %       64 %      
                                     
                                     

_________________

                                   

(1) These are non-GAAP financial measures. For a reconciliation of these non-GAAP financial measures to their most comparable measure calculated and presented in accordance with GAAP, see attached reconciliation schedules.

(2) Consolidated percentages of revenue are comprised of the dialysis and related lab services business, other ancillary services and strategic initiatives, as well as stock-based compensation expenses.

(3) This is a non-GAAP financial measure. It excludes $1.6 million, for the quarter ended September 30, 2010, the unamortized balance of a debt premium associated with our senior notes that is not actually outstanding debt principal.

 

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

Note 1: Calculation of the Leverage Ratio

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

     

Rolling twelve
months ended
September 30, 2010

 
Net income attributable to DaVita Inc.     $ 446,387  
Income taxes       289,302  
Debt expense       172,559  
Depreciation and amortization       231,172  
Noncontrolling interests and equity investment income, net       62,626  
Other       (843 )
Stock-based compensation expense       44,066  
"Consolidated EBITDA"     $ 1,245,269  
         
      September 30, 2010  
Total debt, excluding debt premium of $1.6 million     $ 3,360,834  
Letters of credit issued       51,889  
        3,412,723  
Less: cash and cash equivalents       (534,565 )
Consolidated net debt     $ 2,878,158  
Last twelve months "Consolidated EBITDA"     $ 1,245,269  
Leverage ratio    

2.31x

 
         

In accordance with the Company's Credit Agreement, the Company's leverage ratio cannot exceed 3.75 to 1.0 as of September 30, 2010. At that date the Company's leverage ratio did not exceed 3.75 to 1.0.

   

DAVITA INC.
SUPPLEMENTAL FINANCIAL DATA--continued
(unaudited)

Note 2: Debt Refinancing

On October 20, 2010, we entered into a new $3,000 million Senior Secured Credit Agreement consisting of a five year $250 million revolving line of credit, a five year $1,000 million Term Loan A and a six year $1,750 million Term Loan B.

On October 20, 2010, the Company also issued $775 million aggregate principal amount of 6 â...oe% senior notes due 2018 and $775 million aggregate principal amount of 6 5/8% senior notes due 2020 (the "New Senior Notes").

We received total proceeds of $4,300 million from these transactions and used a portion of the proceeds to pay-off the outstanding principal balances of our existing Senior Secured Credit Facility plus accrued interest totaling $1,795 million and to purchase pursuant to a cash tender offer a portion of the outstanding principal balances of our existing 6 5/8% senior notes due 2013 and 7 ¼% senior subordinated notes due 2015 (the "Existing Notes") plus accrued interest totaling $1,297 million. We also paid fees, discounts and other expenses as well as cash tender premiums totaling approximately $109 million.

On November 19, 2010, we will redeem the remaining outstanding principal balances of the Existing Notes that were not tendered pursuant to the cash tender offer along with accrued interest for $265 million. In addition, we will pay call premiums totaling $7 million.

As a result of these transactions we received approximately $827 million in excess cash which we intend to use for general purposes and other opportunities, including share repurchases, potential acquisitions and other growth investments.

In connection with these transactions we expect to expense one time refinancing charges ranging from $65 million to $75 million which includes the write off of existing deferred financing costs, the cash tender and call premiums, and other expenses.

The following table illustrates the sources and uses of funds for these transactions.

Sources of Funds       Uses of Funds
(in millions)       (in millions)
New Senior Secured Credit Facilities:                    
Revolving credit facility     $ -       Refinancing of existing Senior Secured Credit Facilities(1)     $ 1,795
Term loans       2,750       Repurchase of Existing Notes per tender offer(1)       1,297
New Senior Notes       1,550       Redemption of remaining Existing Notes(1)       265
              Tender, call and consent payments       46
              Fees, discounts and other expenses       70
              Cash to balance sheet       827
Total sources     $ 4,300       Total uses     $ 4,300

 

                       

(1) includes accrued interest.

 

Long-term debt as of September 30, 2010, assuming we had completed the above transactions would have been comprised of the following:

       
      September 30,
2010
      (in millions)
Senior Secured Credit Facilities:      
Term Loan A (LIBOR plus 2.75%)     $ 1,000  
Term Loan B (LIBOR floor of 1.50% plus 3.00%)       1,750  
Senior notes at 6 â...oe%       775  
Senior notes at 6 5/8%       775  
Other       17  
Total debt principal outstanding       4,317  
Discount on Term Loan B       (9 )
        4,308  
           

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

1.Net income attributable to DaVita Inc. excluding debt redemption charges and diluted earnings per share attributable to DaVita Inc. excluding debt redemption charges.

We believe that net income attributable to DaVita Inc. excluding debt redemption charges and diluted earnings per share attributable to DaVita Inc. excluding debt redemption charges enhances a user's understanding of our normal net income attributable to DaVita Inc. and diluted earnings per share attributable to DaVita Inc. for these periods by providing a measure that is more meaningful because it excludes a charge that resulted from the redemption of $200 million aggregate principal amount of our outstanding 6 5/8% senior notes due 2013 and accordingly, is more comparable to prior periods and indicative of consistent net income attributable to DaVita Inc. and diluted earnings per share attributable to DaVita Inc. These measures are not measures of financial performance under United States generally accepted accounting principles (GAAP) and should not be considered as an alternative to net income attributable to DaVita Inc. and diluted earnings per share attributable to DaVita Inc.

Net income attributable to DaVita Inc. excluding debt redemption charges:     Three months ended    

Nine months ended
September 30,
2010

      September 30,

2010

    June 30,

2010

    September 30,

2009

   
Net income attributable to DaVita Inc.     $ 119,387     $ 107,853       $ 110,930     $ 336,663  
Add: Debt redemption charges       -       4,127         -       4,127  
Less: Related income tax       -       (1,605 )       -       (1,605 )
      $ 119,387     $ 110,375       $ 110,930     $ 339,185  
                                     

Diluted earnings per share attributable to DaVita Inc. excluding debt redemption charges:

   

Three months ended

   

Nine months ended
September 30,
2010

      September 30,

2010

    June 30,

2010

    September 30,

2009

   
Diluted earnings per share attributable to DaVita Inc.     $ 1.15     $ 1.04     $ 1.06     $ 3.22
Add: Net after-tax debt redemption charges       -       0.02       -       0.02
Other - rounding       -       -       -       0.01
      $ 1.15     $ 1.06     $ 1.06     $ 3.25
                                 

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

2.Effective Income Tax Rates

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

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

     

Three months ended

   

Nine months ended
September 30,
2010

      September 30,

2010

    June 30,

2010

    September 30,

2009

   
Income before income taxes     $ 217,860       $ 195,322       $ 200,465       $ 612,096  
Income tax expense     $ 74,979       $ 71,429       $ 74,195       $ 220,322  
Effective income tax rate       34.4 %       36.6 %       37.0 %       36.0 %
                                         
     

Three months ended

   

Nine months ended
September 30,
2010

      September 30,

2010

    June 30,

2010

    September 30,

2009

   
Income before income taxes     $ 217,860       $ 195,322       $ 200,465       $ 612,096  
Less: Noncontrolling owners' income primarily attributable to non-tax paying entities       (23,703 )       (16,319 )       (15,585 )       (55,803 )
Income before income taxes attributable to DaVita Inc.     $ 194,157       $ 179,003       $ 184,880       $ 556,293  
                         
Income tax expense     $ 74,979       $ 71,429       $ 74,195       $ 220,322  
Less income tax attributable to noncontrolling interests       (209 )       (279 )       (245 )       (692 )
Income tax attributable to DaVita Inc.     $ 74,770       $ 71,150       $ 73,950       $ 219,630  
                         
Effective income tax rate attributable to DaVita Inc.       38.5 %       39.75 %       40.0 %       39.5 %
                                         

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

3.Free cash flow

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

      Three months ended    

Nine months ended
September 30,
2010

      September 30,

2010

    June 30,

2010

    September 30,

2009

   
Cash provided by operating activities     $ 161,366       $ 295,919       $ 167,487       $ 719,132  
Less: Income distributions to noncontrolling interests       (23,811 )       (18,643 )       (16,993 )       (61,112 )
Cash provided by operating activities attributable to DaVita Inc.       137,555         277,276         150,494         658,020  
Less: Expenditures for routine maintenance and information technology       (46,690 )       (27,760 )       (25,040 )       (97,013 )
Free cash flow     $ 90,865       $ 249,516       $ 125,454       $ 561,007  
                                         
      Rolling 12-Month Period
      September 30,

2010

    June 30,

2010

    September 30,

2009

Cash provided by operating activities     $ 871,723       $ 877,844       $ 712,668  
Less: Income distributions to noncontrolling interests       (81,972 )       (75,154 )       (61,267 )
Cash provided by operating activities attributable to DaVita Inc.       789,751         802,690         651,401  
Less: Expenditures for routine maintenance and information technology       (132,079