Improving Health, Health Care and Quality of Life

DaVita HealthCare Partners Inc. 2nd Quarter 2013 Results

DENVER--(BUSINESS WIRE)--Aug. 6, 2013-- DaVita HealthCare Partners Inc. (NYSE: DVA) today announced results for the quarter ended June 30, 2013. Adjusted income from continuing operations attributable to DaVita HealthCare Partners Inc. for the three and six months ended June 30, 2013 was$197.4 million and $394.3 million, or $1.84 and $3.68 per share, respectively, excluding a contingent earn-out obligation adjustment. In addition, adjusted income from continuing operations attributable toDaVita HealthCare Partners Inc. for the six months ended June 30, 2013 excluded a loss contingency reserve. Income from continuing operations attributable to DaVita HealthCare Partners Inc. for the three and six months ended June 30, 2013 including these items was $254.4 million and $271.3 million, or $2.37 and $2.53 per share, respectively.

Adjusted income from continuing operations attributable to DaVita HealthCare Partners Inc. for the three and six months ended June 30, 2012 was $146.7 million and $290.5 million, or $1.53 and $3.03per share, respectively, excluding transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses. Income from continuing operations attributable to DaVita HealthCare Partners Inc. for the three and six months ended June 30, 2012 including these items was$95.0 million and $235.2 million, or $0.99 and $2.45 per share, respectively.

Financial and operating highlights include:

  • Cash Flow: For the rolling twelve months ended June 30, 2013, operating cash flow was $1,253 million and free cash flow was $871 million. For the three months ended June 30, 2013, operating cash flow was $307 million and free cash flow was $218 million. For a definition of free cash flow see Note 4 to the reconciliations of non-GAAP measures.
  • Operating Income: Adjusted operating income for the three and six months ended June 30, 2013 was $465 million and $932 million, respectively, excluding a contingent earn-out obligation adjustment. In addition, adjusted operating income for the six months ended June 30, 2013 excluded a pre-tax loss contingency reserve. Operating income for the three and six months ended June 30, 2013 including these items was $522 million and $689 million, respectively.

    Adjusted operating income for the three and six months ended June 30, 2012 was $336 million and $663 million, respectively, excluding transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses. Operating income for the three and six months ended June 30, 2012including these items was $247 million and $568 million, respectively.
  • Contingent Earn-out Obligation Adjustment: As of June 30, 2013, we remeasured the estimated fair value of HCP’s 2013 contingent earn-out obligation at approximately $69 million. This represents a decrease in the obligation’s carrying value of approximately $57 million, which was recorded as operating income in our consolidated statements of income during the second quarter of 2013. This adjustment was based upon HCP’s operating results for the second quarter of 2013 and expected operating performance for the remainder of the year.

    HCP’s operating income of $81 million in the second quarter of 2013 represented a decrease of approximately$27 million as compared to the first quarter of 2013. The decrease in HCP’s operating income was primarily due to both a seasonal decrease in HCP’s revenue as average premiums for its senior capitated members declined and due to sequestration, which went into effect on April 1, 2013.
  • Adjusted Diluted Income from Continuing Operations: Adjusted diluted income from continuing operations attributable to DaVita HealthCare Partners Inc. for the three and six months ended June 30, 2013, was $221.5 million and $442.6 million, or $2.06 and $4.13 per share, respectively, net of tax. These amounts excluded amortization of intangible assets associated with acquisitions and a contingent earn-out obligation adjustment. In addition, adjusted diluted income from continuing operations for the six months ended June 30, 2013, excluded a loss contingency reserve, net of tax.

    Adjusted diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc.for the three and six months ended June 30, 2012, excluding transaction expenses associated with the acquisition of HCP, a legal settlement and related expenses and the amortization of intangible assets associated with acquisitions, which net of related tax impacts totaled $150.6 million and $298.3 million, was$1.57 and $3.11 per share, respectively.
  • Volume: Total U.S. dialysis treatments for the second quarter of 2013 were 5,867,973, or 75,230 treatments per day, representing a per day increase of 7.6% over the second quarter of 2012. Non-acquired treatment growth, as well as normalized non-acquired treatment growth in the quarter were 5.0% over the prior year’s second quarter.

    The number of member months for which HCP provided capitated care during the second quarter of 2013 was approximately 2.2 million representing an increase of 18.6% as compared to the second quarter of 2012, inclusive of growth contributed from acquisitions. These calculations include data prior to our merger with HCP on November 1, 2012.
  • Effective Tax Rate: Our effective tax rate was 31.3% and 30.4% for the three and six months ended June 30, 2013, 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 HealthCare Partners Inc. was 33.6% and 34.7% for the three and six months ended June 30, 2013, respectively. The effective tax rate attributable toDaVita HealthCare Partners Inc. for the three and six months ended June 30, 2013, excluding the contingent earn-out obligation adjustment and the loss contingency reserve, was 39.5% and 40.1%, respectively. We expect our 2013 effective tax rate attributable to DaVita HealthCare Partners Inc. to be in the range of 37.0% to 38.0%. In addition, we expect our 2013 effective tax rate attributable to DaVita HealthCare Partners Inc.excluding the contingent earn-out obligation adjustment and the loss contingency reserve to be in the range of 39.0% to 40.0%.
  • Center Activity: As of June 30, 2013, we provided dialysis services to a total of approximately 163,000 patients at 2,058 outpatient dialysis centers, of which 2,010 centers are located in the United States and 48 centers are located in ten countries outside of the United States. During the second quarter of 2013, we acquired three dialysis centers and opened a total of 18 dialysis centers in the United States. We also acquired eight dialysis centers outside of the United States.

Outlook

  • We are raising our consolidated operating income guidance for 2013 to now be in the range of $1,830 million to $1,930 million. Our previous consolidated operating income guidance for 2013 was in the range of $1,800 million to $1,900 million.
  • In addition, we are raising our operating income guidance for our dialysis services and related ancillary businesses for 2013 to now be in the range of $1,450 million to $1,500 million. Our previous operating income guidance for our dialysis services and related ancillary businesses for 2013 was in the range of $1,400 millionto $1,450 million.
  • We are also lowering our operating income guidance for HCP for 2013 which is now expected to be in the range of $380 million to $430 million. Our previous operating income guidance for HCP for 2013 was in the range of $400 million to $450 million.
  • In addition, we have increased the bottom end of our range for our consolidated operating cash flows for 2013 to now be in the range of $1,400 million to $1,500 million. Our previous consolidated operating cash flows guidance for 2013 was in the range of $1,350 million to $1,500 million.

The consolidated and dialysis services and related ancillary businesses operating income guidance and the consolidated cash flow guidance amounts exclude an estimated loss contingency reserve of$300 million which we accrued in the first quarter of 2013 in connection with the 2010 and 2011 U.S. Attorney Physician Relationship Investigations. In addition, the consolidated operating income guidance amounts exclude the contingent earn-out obligation adjustment. These projections and the underlying assumptions involve significant risks and uncertainties, including those described below and actual results may vary significantly from these current projections.

We will be holding a conference call to discuss our results for the second quarter ended June 30, 2013 on August 6, 2013 at 5:00 p.m. Eastern Time. The dial in number for the U.S. is (800) 399-4406 and for international is (937) 528-2121. A replay of the conference call will be available on DaVita’s official web page, www.davita.com, for the following 30 days.

This release contains forward-looking statements within the meaning of the federal securities laws, including statements related to our guidance and expectations for our 2013 operating income, HCP’s 2013 operating income, our 2013 operating cash flows and our 2013 effective tax rate attributable toDaVita HealthCare Partners Inc. Factors that could impact future results include the uncertainties associated with the risk factors set forth in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2012, our quarterly report on Form 10-Q for the quarter endedMarch 31, 2013 and subsequent quarterly reports to be filed on Form 10-Q, or our current reports on Form 8-K. The forward-looking statements should be considered in light of these risks and uncertainties.

These risks and uncertainties include, but are not limited to, and are qualified in their entirety by reference to the full text of those risk factors in our SEC filings relating to:

  • the concentration of profits generated by the continued downward pressure on average realized payment rates from, and a reduction in the number of patients under higher-paying commercial payor plans, which may result in the loss of revenues or patients,
  • a reduction in government payment rates under the Medicare End Stage Renal Disease program or other government-based programs,
  • the impact of health care reform legislation that was enacted in the United States in March 2010,
  • the impact of the Center for Medicare and Medicaid Services (CMS) 2014 Medicare Advantage benchmark structure,
  • the impact of the American Taxpayer Relief Act,
  • the impact of the sequester that went into effect on April 1, 2103,
  • changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing,
  • legal compliance risks, including our continued compliance with complex government regulations and current or potential investigations by various government entities and related government or private-party proceedings, including risks relating to the resolution of the 2010 and 2011 U.S. Attorney Physician Relationship Investigations,
  • our ability to maintain contracts with physician medical directors, changing affiliation models for physicians, and the emergence of new models of care introduced by the government or private sector, that may erode our patient base and reimbursement rates,
  • our ability to complete any acquisitions, mergers or dispositions that we might be considering or announce, or to integrate and successfully operate any business we may acquire or have acquired, including HCP, or to expand our operations and services to markets outside the United States,
  • risks arising from the use of accounting estimates, judgments and interpretations in our financial statements,
  • the risk that the cost of providing services under HCP’s agreements may exceed our compensation,
  • the risk that reductions in reimbursement rates, including Medicare Advantage rates, and future regulations may negatively impact HCP’s business, revenue and profitability,
  • the risk that HCP may not be able to successfully establish a presence in new geographic regions or successfully address competitive threats that could reduce its profitability,
  • the risk that a disruption in HCP’s healthcare provider networks could have an adverse effect on HCP’s business operations and profitability,
  • the risk that reductions in the quality ratings of health maintenance organization plan customers of HCP could have an adverse effect on HCP’s business, or
  • the risk that health plans that acquire health maintenance organizations may not be willing to contract with HCP or may be willing to contract only on less favorable terms.

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 HEALTHCARE PARTNERS INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands, except per share data)
         
    Three months ended

June 30,

  Six months ended
June 30,
      2013       2012       2013       2012  
Patient service revenues   $ 2,048,651     $ 1,813,763     $ 4,028,524     $ 3,579,245  
Less: Provision for uncollectible accounts     (72,191 )     (54,438 )     (142,248 )     (107,446 )
Net patient service revenues     1,976,460       1,759,325       3,886,276       3,471,799  
HCP capitated revenues     692,357         1,438,428    
Other revenues     202,856       153,681       376,551       290,740  
Total net revenues     2,871,673       1,913,006       5,701,255       3,762,539  
Operating expenses and charges:                
Patient care costs and other costs     2,014,320       1,299,322       3,975,211       2,548,717  
General and administrative     268,110       212,793       552,520       418,194  
Depreciation and amortization     130,589       77,210       256,498       152,591  
Provision for uncollectible accounts     1,260       1,038       2,138       2,144  
Equity investment income     (7,649 )     (2,618 )     (17,016 )     (5,250 )
Loss contingency reserve and other legal settlements       78,000       300,000       78,000  
Contingent earn-out obligation adjustment     (56,977 )       (56,977 )  
Total operating expenses and charges     2,349,653       1,665,745       5,012,374       3,194,396  
Operating income     522,020       247,261       688,881       568,143  
Debt expense     (108,096 )     (60,709 )     (213,913 )     (122,090 )
Other (expense) income     (1,374 )     840       (776 )     1,879  
Income from continuing operations before income taxes     412,550       187,392       474,192       447,932  
Income tax expense     129,192       67,740       144,336       163,296  
Income from continuing operations     283,358       119,652       329,856       284,636  
Discontinued operations:                
Income (loss) from operations of discontinued operations, net of tax       352       (139 )     251  
Gain on disposal of discontinued operations, net of tax         13,375    
Net income     283,358       120,004       343,092       284,887  
Less: Net income attributable to noncontrolling interests     (28,982 )     (24,667 )     (58,552 )     (49,430 )
Net income attributable to DaVita HealthCare Partners Inc.   $ 254,376     $ 95,337     $ 284,540     $ 235,457  
Earnings per share:                
Basic income from continuing operations per share attributable to DaVita HealthCare Partners Inc.   $ 2.42     $ 1.01     $ 2.59     $ 2.50  
Basic net income per share attributable to DaVita HealthCare Partners Inc.   $ 2.42     $ 1.01     $ 2.72     $ 2.51  
Diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc.   $ 2.37     $ 0.99     $ 2.53     $ 2.45  
Diluted net income per share attributable to DaVita HealthCare Partners Inc.   $ 2.37     $ 0.99     $ 2.65     $ 2.46  
Weighted average shares for earnings per share:                
Basic     104,898,667       94,171,583       104,692,690       93,970,295  
Diluted     107,424,582       96,002,190       107,245,226       95,865,605  
Amounts attributable to DaVita HealthCare Partners Inc.:                
Income from continuing operations   $ 254,376     $ 95,007     $ 271,291     $ 235,227  
Discontinued operations       330       13,249       230  
Net income   $ 254,376     $ 95,337     $ 284,540     $ 235,457  
                 
         
DAVITA HEALTHCARE PARTNERS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
         
    Three months ended

June 30,

  Six months ended
June 30,
      2013       2012       2013       2012  
Net income   $ 283,358     $ 120,004     $ 343,092     $ 284,887  
Other comprehensive income (loss), net of tax:                
Unrealized gain (loss) on interest rate swap and cap agreements:                
Unrealized gain (loss) on interest rate swap and cap agreements     11,685       (2,102 )     9,316       (4,363 )
Reclassifications of net swap and cap agreements realized loss into net income     3,462       2,536       5,969       5,056  
Unrealized gain (loss) on investments:                
Unrealized gain (loss) on investments     101       (204 )     719       942  
Reclassification of net investment realized gains into net income         (94 )     (75 )
Foreign currency translation adjustments     (1,841 )     (839 )     (3,947 )     (1,458 )
Other comprehensive income (loss)     13,407       (609 )     11,963       102  
Total comprehensive income     296,765       119,395       355,055       284,989  
Less: Comprehensive income attributable to noncontrolling interests     (28,982 )     (24,667 )     (58,552 )     (49,430 )
Comprehensive income attributable to DaVita HealthCare Partners Inc.   $ 267,783     $ 94,728     $ 296,503     $ 235,559  
                 
     
DAVITA HEALTHCARE PARTNERS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
     
    Six months ended
June 30,
      2013       2012  
Cash flows from operating activities:        
Net income   $ 343,092     $ 284,887  
Adjustments to reconcile net income to cash provided by operating activities:        
Loss contingency reserve     300,000    
Depreciation and amortization     256,382       153,782  
Stock-based compensation expense     32,266       24,344  
Tax benefits from stock award exercises     36,524       27,583  
Excess tax benefits from stock award exercises     (28,442 )     (14,841 )
Deferred income taxes     (102,039 )     (25,531 )
Equity investment income, net     (496 )     (139 )
Other non-cash charges and loss on disposal of assets     (69,050 )     12,903  
Changes in operating assets and liabilities, other than from acquisitions and divestitures:        
Accounts receivable     (17,829 )     (53,294 )
Inventories     924       1,713  
Other receivables and other current assets     (65,349 )     61,938  
Other long-term assets     (1,220 )     4,486  
Accounts payable     (94,894 )     8,178  
Accrued compensation and benefits     (14,279 )     23,209  
Other current liabilities     82,905       65,349  
Income taxes     (9,182 )     (49,069 )
Other long-term liabilities     36,713       8,481  
Net cash provided by operating activities     686,026       533,979  
Cash flows from investing activities:        
Additions of property and equipment, net     (258,396 )     (250,508 )
Acquisitions     (152,112 )     (346,774 )
Proceeds from asset and business sales     64,363       2,023  
Purchase of investments available for sale     (3,286 )     (3,070 )
Purchase of investments held-to-maturity     (1,032 )     (5,257 )
Proceeds from sale of investments available for sale     1,091       6,791  
Proceeds from maturities of investments held-to-maturity     1,376       9,582  
Purchase of intangible assets     (7 )  
Distributions received on equity investments     116       2  
Net cash used in investing activities     (347,887 )     (587,211 )
Cash flows from financing activities:        
Borrowings     33,445,567       17,217,404  
Payments on long-term debt and other contingent obligations     (33,696,216 )     (17,254,503 )
Interest rate cap premiums and other deferred financing costs     (716 )     (2 )
Distributions to noncontrolling interests     (65,206 )     (50,478 )
Stock award exercises and other share issuances, net     8,819       4,845  
Excess tax benefits from stock award exercises     28,442       14,841  
Contributions from noncontrolling interests     20,132       10,584  
Proceeds from sales of additional noncontrolling interests     5,903       142  
Purchases from noncontrolling interests     (474 )     (9,800 )
Net cash used in financing activities     (253,749 )     (66,967 )
Effect of exchange rate changes on cash and cash equivalents     (234 )     (108 )
Net increase (decrease) in cash and cash equivalents     84,156       (120,307 )
Cash and cash equivalents at beginning of period     533,748       393,752  
Cash and cash equivalents at end of period   $ 617,904     $ 273,445  
                 
         
DAVITA HEALTHCARE PARTNERS INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
         
    June 30,
2013
  December 31,
2012
ASSETS        
Cash and cash equivalents   $ 617,904     $ 533,748  
Short-term investments     6,794       7,138  
Accounts receivable, less allowance of $229,745 and $245,122     1,445,099       1,424,303  
Inventories     77,997       78,126  
Other receivables     331,741       265,671  
Other current assets     150,217       201,572  
Income tax receivable     68,047       55,454  
Deferred income taxes     434,035       315,782  
Total current assets     3,131,834       2,881,794  
Property and equipment, net of accumulated depreciation of $1,618,789 and $1,522,183     1,990,963       1,872,370  
Intangibles, net of accumulated amortization of $394,169 and $304,323     2,076,933       2,128,118  
Equity investments     35,530       35,150  
Long-term investments     65,765       59,341  
Other long-term assets     97,895       79,854  
Goodwill     9,056,589       8,947,736  
    $ 16,455,509     $ 16,004,363  
LIABILITIES AND EQUITY        
Accounts payable   $ 320,066     $ 414,143  
Other liabilities     525,272       563,365  
Accrued compensation and benefits     554,705       566,911  
Medical payables     272,521       238,964  
Loss contingency reserve     300,000        
Current portion of long-term debt     242,324       227,791  
Total current liabilities     2,214,888       2,011,174  
Long-term debt     8,234,290       8,326,534  
Other long-term liabilities     360,110       443,743  
Alliance and product supply agreement, net     11,992       14,657  
Deferred income taxes     751,446       710,638  
Total liabilities     11,572,726       11,506,746  
Commitments and contingencies        
Noncontrolling interests subject to put provisions     600,499       580,692  
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; 106,239,986 and 105,498,575 shares outstanding)     135       135  
Additional paid-in capital     1,244,693       1,208,800  
Retained earnings     4,016,375       3,731,835  
Treasury stock, at cost (28,622,297 and 29,363,708 shares)     (1,132,988 )     (1,162,336 )
Accumulated other comprehensive loss     (3,334 )     (15,297 )
Total DaVita HealthCare Partners Inc. shareholders’ equity     4,124,881       3,763,137  
Noncontrolling interests not subject to put provisions     157,403       153,788  
Total equity     4,282,284       3,916,925  
    $ 16,455,509     $ 16,004,363  
         
         
DAVITA HEALTHCARE PARTNERS INC.
SUPPLEMENTAL FINANCIAL DATA
(unaudited)
(dollars in millions, except for per share and per treatment data)
         
    Three months ended   Six months ended

June 30, 2013

    June 30,

2013

  March 31,

2013

  June 30,

2012

 
1. Consolidated Financial Results:                
Consolidated net revenues   $ 2,872     $ 2,830     $ 1,913     $ 5,701  
Operating income   $ 522.0     $ 166.9     $ 247.3     $ 688.9  
Operating income margin     18.2 %     5.9 %     12.9 %     12.1 %
Operating income excluding a contingent earn-out obligation adjustment, a loss contingency reserve, transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses(1)   $ 465.0     $ 466.9     $ 335.6     $ 931.9  
Operating income margin excluding a contingent earn-out obligation adjustment, a loss contingency reserve, transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses(1)     16.2 %     16.5 %     17.5 %     16.3 %
Income from continuing operations attributable to DaVita HealthCare Partners Inc.   $ 254.4     $ 16.9     $ 95.0     $ 271.3  
Income from continuing operations attributable to DaVita HealthCare Partners Inc. excluding a contingent earn-out obligation adjustment, a loss contingency reserve, transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses, which are all net of related tax(1)   $ 197.4     $ 196.9     $ 146.7     $ 394.3  
Diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc.   $ 2.37     $ 0.16     $ 0.99     $ 2.53  
Diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc. excluding a contingent earn-out obligation adjustment, a loss contingency reserve, transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses, which are all net of related tax(1)   $ 1.84     $ 1.84     $ 1.53     $ 3.68  
                 
2. Consolidated Business Metrics:                
Expenses                
General and administrative expenses as a percent of consolidated net revenues(2)     9.3 %     10.1 %     11.1 %     9.7 %
Consolidated effective tax rate     31.3 %     24.6 %     36.1 %     30.4 %
Consolidated effective tax rate attributable to DaVita HealthCare Partners Inc.(1)     33.6 %     47.1 %     41.5 %     34.7 %
                 
3. Summary of Segment Financial Results:                
Net revenues                
Net dialysis and related lab services revenues   $ 1,922     $ 1,852     $ 1,762     $ 3,774  
Net HCP revenues     761       804         1,565  
Net ancillary services and strategic initiatives revenues     200       184       158       384  
Total net segment revenues     2,883       2,840       1,920       5,723  
Elimination of intersegment revenues     (11 )     (10 )     (7 )     (22 )
Total net consolidated revenues   $ 2,872     $ 2,830     $ 1,913     $ 5,701  
                                 
         
DAVITA HEALTHCARE PARTNERS INC.
SUPPLEMENTAL FINANCIAL DATA—continued
(unaudited)
(dollars in millions, except for per share and per treatment data)
         
    Three months ended   Six months ended

June 30, 2013

    June 30,

2013

  March 31,

2013

  June 30,

2012

 
3. Segment Financial Results: (continued)                
Operating income                
Dialysis and related lab services operating income   $ 404     $ 87     $ 291     $ 491  
HCP operating income     81       108         190  
Other – Ancillary services and strategic initiatives, including international dialysis operations operating losses     (7 )     (15 )     (21 )     (22 )
Total segment operating income     478       180       270       659  
Reconciling items:                
Contingent earn-out obligation adjustment     57           57  
Corporate support and related long-term incentive compensation     (13 )     (13 )     (13 )     (27 )
Transaction expenses         (10 )  
Consolidated operating income   $ 522     $ 167     $ 247     $ 689  
Dialysis and Related Lab Services                
Revenue:                
Patient services revenues   $ 1,988     $ 1,916     $ 1,813     $ 3,905  
Provision for uncollectible accounts     (69 )     (67 )     (54 )     (137 )
Net patient service operating revenues     1,919       1,849       1,759       3,768  
Other revenues     3       3       3       6  
Total net operating revenues   $ 1,922     $ 1,852     $ 1,762     $ 3,774  
Operating expenses:                
Patient care cost   $ 1,265     $ 1,216     $ 1,166     $ 2,481  
General and administrative     167       167       154       334  
Depreciation and amortization     89       85       76       174  
Equity investment income     (3 )     (3 )     (3 )     (6 )
Loss contingency reserve and a legal settlement and related expenses   $ ─   $ 300       78       300  
Total operating expenses     1,518       1,765       1,471       3,283  
Segment operating income   $ 404     $ 87     $ 291     $ 491  
HCP                
Revenue:                
HCP capitated revenues   $ 693     $ 746     $ ─   $ 1,439  
Patient services revenues     52       57         109  
Provision for uncollectible accounts     (3 )     (3 )       (6 )
Net patient service operating revenues     49       54         103  
Other revenues     19       4         23  
Total net operating revenues   $ 761     $ 804     $ ─   $ 1,565  
Operating expenses:                
Patient care cost   $ 590     $ 595     $ ─   $ 1,185  
General and administrative     56       69         125  
Depreciation and amortization     39       38         76  
Equity investment income     (5 )     (6 )       (11 )
Total operating expenses     680       696         1,375  
Segment operating income   $ 81     $ 108     $ ─   $ 190  
                 
         
DAVITA HEALTHCARE PARTNERS INC.
SUPPLEMENTAL FINANCIAL DATA—continued
(unaudited)
(dollars in millions, except for per share and per treatment data)
         
    Three months ended   Six months ended

June 30, 2013

    June 30,

2013

  March 31,

2013

  June 30,

2012

 
4. Dialysis and Related Lab Services Business Metrics:                
Volume                
Treatments     5,867,973       5,628,799       5,451,901       11,496,772  
Number of treatment days     78.0       76.5       78.0       154.5  
Treatments per day     75,230       73,579       69,896       74,413  
Per day year over year increase     7.6 %     8.0 %     14.3 %     7.8 %
Non-acquired growth year over year     5.0 %     4.3 %     4.7 %     4.7 %
Operating revenues before provision for uncollectible accounts                
Dialysis and related lab services revenue per treatment   $ 338.86     $ 340.44     $ 332.67     $ 339.64  
Per treatment (decrease) increase from previous quarter     (0.5 %)     3.1 %     0.1 %  
Per treatment increase from previous year     1.9 %     2.4 %     0.1 %     2.1 %
Percent of net consolidated revenues     66.6 %     65.2 %     91.9 %     65.9 %
                 
Expenses                
Patient care costs                
Percent of total segment operating revenues     65.8 %     65.7 %     66.2 %     65.8 %
Per treatment   $ 215.66     $ 216.03     $ 213.83     $ 215.84  
Per treatment (decrease) increase from previous quarter     (0.2 %)     1.7 %     0.7 %  
Per treatment increase (decrease) from previous year     0.9 %     1.8 %     (4.1 %)     1.3 %
General and administrative expenses                
Percent of total segment operating revenues     8.7 %     9.0 %     8.8 %     8.8 %
Per treatment   $ 28.42     $ 29.70     $ 28.28     $ 29.05  
Per treatment (decrease) increase from previous quarter     (4.3 %)     4.5 %     (4.9 %)  
Per treatment increase (decrease) from previous year     0.5 %     (0.1 %)     6.9 %     0.2 %
Accounts receivable                
Net receivables   $ 1,117     $ 1,164     $ 1,250     $ ─
DSO     54       57       60    
Provision for uncollectible accounts as a percentage of net revenues     3.5 %     3.5 %     3.0 %     3.5 %
                 
5. HCP Business Metrics:                
Capitated membership                
Total     733,000       742,000      
Member months     2,209,000       2,239,400         4,448,400  
Capitated revenues by sources                
Commercial revenues   $ 176     $ 182     $ ─   $ 357  
Senior revenues     496       552         1,048  
Medicaid revenues     21       12         34  
Total capitated revenues   $ 693     $ 746     $ ─   $ 1,439  
Other                
Total care dollars under management(1)   $ 997     $ 1,042         2,040  
Ratio of operating income to total care dollars under management     8.2 %     10.4 %       9.3 %
Full time clinicians     1,073       1,069      
IPA primary care physicians     2,846       2,845      
                 
         
DAVITA HEALTHCARE PARTNERS INC.
SUPPLEMENTAL FINANCIAL DATA—continued
(unaudited)
(dollars in millions, except for per share and per treatment data)
         
    Three months ended   Six months ended

June 30, 2013

    June 30,

2013

  March 31,

2013

  June 30,

2012

 
6. Cash Flow:                
Operating cash flow   $ 306.8     $ 379.2     $ 202.1     $ 686.0
Operating cash flow, last twelve months   $ 1,252.9     $ 1,148.2     $ 1,179.8     $ ─
Free cash flow(1)   $ 218.3     $ 298.9     $ 111.4     $ 517.1
Free cash flow, last twelve months(1)   $ 871.2     $ 764.3     $ 816.5     $ ─
Capital expenditures:                
Routine maintenance/IT/other   $ 58.3     $ 45.4     $ 66.6     $ 103.7
Development and relocations   $ 83.4     $ 71.3     $ 71.4     $ 154.7
Acquisition expenditures   $ 60.6     $ 91.5     $ 214.1     $ 152.1
                 
7. Debt and Capital Structure:                
Total debt(3)   $ 8,496     $ 8,526     $ 4,505      
Net debt, net of cash and cash equivalents(3)   $ 7,878     $ 7,826     $ 4,232      
Leverage ratio (see calculation on page 12)   3.39x   3.41x   2.70x    
Overall weighted average effective interest rate during the quarter     4.86 %     4.76 %     5.27 %    
Overall weighted average effective interest rate at end of the quarter     4.85 %     4.79 %     5.28 %    
Weighted average effective interest rate on the Senior Secured Credit Facilities at end of the quarter     4.18 %     4.09 %     4.61 %    
Fixed and economically fixed interest rates as a percentage of our total debt(4)     61 %     61 %     57 %    
Fixed and economically fixed interest rates, including our interest rate cap agreements, as a percentage of our total debt(4)     93 %     93 %     85 %    
                 
8. Clinical: (quarterly averages)                
Dialysis adequacy -% of patients with Kt/V > 1.2 at the end of the quarter     98 %     98 %     98 %    
Dialysis patients with arteriovenous fistulas placed     72 %     71 %     70 %    
                             

_________________

(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 revenues are comprised of the dialysis and related lab services business, HCP’s business and other ancillary services and strategic initiatives, and in case of general and administrative expenses, includes other certain corporate support and related long-term incentive compensation and transaction expenses associated with the acquisition of HCP.

(3) The reported balance sheet amounts at June 30, 2013March 31, 2013 and June 30, 2012, are net of $19.6 million$20.6 million and $7.0 million, respectively, of debt discounts associated with our Term Loan B, Term Loan B-2 and our Term Loan A-2.

(4) The Term Loan B and Term Loan B-2 are subject to LIBOR floors of 1.50% and 1.00%, respectively. Because LIBOR, for all periods presented above, was lower than either of these embedded LIBOR floors, the interest rates on the Term Loan B and the Term Loan B-2 are set at their respective floors. At such time as the LIBOR-based component of our interest rate exceeds 1.50% on the Term Loan B and 1.00% on the Term Loan B-2, we will then be subject to LIBOR-based interest rate volatility on the LIBOR variable component of our interest rate on all of the Term Loan B, as well as for the Term Loan B-2. However, we are limited to a maximum rate of 2.50% on $1.25 billion of outstanding principal debt on the Term Loan B and $1.49 billion of outstanding principal debt on the Term Loan B-2 as a result of interest rate cap agreements. The remaining $456 millionoutstanding principal balance of the Term Loan B is subject to LIBOR-based interest rate volatility above a floor of 1.50%. The remaining $157 million outstanding principal balance of the Term Loan B-2 is subject to LIBOR-based volatility above a floor of 1.00%.

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

Note 1: Calculation of the Leverage Ratio

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

    Rolling twelve months ended

June 30, 2013

Net income attributable to DaVita HealthCare Partners Inc.   $ 585,100  
Income taxes     340,872  
Interest expense and debt refinancing charges     365,113  
Depreciation and amortization     446,362  
Loss contingency reserve     300,000  
Noncontrolling interests and equity investment income, net     117,369  
Stock-based compensation     53,306  
Other (primarily pro-forma EBITDA on acquisitions)     194,005  
“Consolidated EBITDA”   $ 2,402,127  
     
    June 30, 2013
Total debt, excluding debt discount of $19.6 million   $ 8,496,219  
Letters of credit issued     114,456  
      8,610,675  
Less: Cash and cash equivalents     (463,551 )
Consolidated net debt   $ 8,147,124  
Last twelve months “Consolidated EBITDA”   $ 2,402,127  
Leverage ratio   3.39x
     

In accordance with the Credit Agreement, the Company’s leverage ratio cannot exceed 5.00 to 1.00 as of June 30, 2013. At that date the Company’s leverage ratio did not exceed 5.00 to 1.00.

DAVITA HEALTHCARE PARTNERS INC.
RECONCILIATIONS FOR NON-GAAP MEASURES
(unaudited)
(dollars in thousands except for per share data)

1. Income from continuing operations and diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc. excluding a contingent earn-out obligation adjustment, a loss contingency reserve, transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses, which are all net of related tax.

We believe that income from continuing operations attributable to DaVita HealthCare Partners Inc.excluding a contingent earn-out obligation adjustment, a loss contingency reserve, transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses, which are all net of related tax, enhances a user’s understanding of our normal income from continuing operations attributable to DaVita HealthCare Partners Inc. and diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc. for these periods by providing a measure that is meaningful because it excludes unusual amounts that include an adjustment to HCP’s contingent earn-out obligation, a loss contingency reserve related to the 2010 and 2011 U.S. Attorney Physician Relationship Investigations, transaction expenses associated with the acquisition of HCP and legal expenses associated with a legal settlement that we reached to settle federal program claims relating to our historical Epogen practices and accordingly, is comparable to prior periods and indicative of consistent income from continuing operations attributable to DaVita HealthCare Partners Inc. and diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc. These measures are not measures of financial performance under United Statesgenerally accepted accounting principles (GAAP) and should not be considered as an alternative to income from continuing operations attributable to DaVita HealthCare Partners Inc. and diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc.

Income from continuing operations attributable to DaVita HealthCare Partners Inc. excluding a contingent earn-out obligation adjustment, a loss contingency reserve, transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses, which are all net of related tax:   Three months ended   Six months ended
    June 30,

2013

  March 31,

2013

  June 30,

2012

  June 30,

2013

  June 30,

2012

Income from continuing operations attributable to DaVita HealthCare Partners Inc.   $ 254,376     $ 16,915     $ 95,007     $ 271,291     $ 235,227  
Add (Less):                    
Contingent earn-out obligation adjustment     (56,977 )         (56,977 )  
Loss contingency reserve       300,000         300,000    
Transaction expenses associated with the acquisition of HCP         10,383         16,436  
Legal settlement and related expenses         78,000         78,000  
Less: Related income tax       (120,000 )     (36,679 )     (120,000 )     (39,131 )
    $ 197,399     $ 196,915     $ 146,711     $ 394,314     $ 290,532  
                     
Diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc. excluding a contingent earn-out obligation adjustment, a loss contingency reserve, transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses, which are all net of related tax:   Three months ended   Six months ended
    June 30,

2013

  March 31,

2013

  June 30,

2012

  June 30,

2013

  June 30,

2012

Diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc.   $ 2.37     $ 0.16   $ 0.99   $ 2.53     $ 2.45
Add (Less):                    
Contingent earn-out obligation adjustment     (0.53 )         (0.53 )  
Loss contingency reserve       1.68       1.68    
Transaction expenses associated with the acquisition of HCP         0.06       0.10
Legal settlement and related expenses         0.48       0.48
    $ 1.84     $ 1.84   $ 1.53   $ 3.68     $ 3.03

DAVITA HEALTHCARE PARTNERS INC.
RECONCILIATIONS FOR NON-GAAP MEASURES – (continued)
(unaudited)
(dollars in thousands except for per share data)

In addition, we have excluded amortization of intangible assets associated with acquisitions from our adjusted income from continuing operations attributable to DaVita HealthCare Partners Inc. and from our adjusted diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc. as we believe this presentation enhances a user’s understanding of our operating results for these periods by providing an accurate reflection of the Company’s operating performance since it excludes the amortization of intangible assets that relate to the remeasurement of acquired intangible assets associated with our acquisitions to fair value, and accordingly is indicative of consistent income from continuing operations attributable to DaVita HealthCare Partners Inc. and diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc.These measures are not measures of financial performance under GAAP and should not be considered as an alternative to income from continuing operations attributable to DaVita HealthCare Partners Inc. and diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc.

Adjusted income from continuing operations and adjusted diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc., further adjusted to exclude the amortization of intangible assets associated with acquisitions:   Three months ended   Six months ended
    June 30,

2013

  March 31,

2013

  June 30,

2012

  June 30,

2013

  June 30,

2012

Adjusted income from continuing operations attributable to DaVita HealthCare Partners Inc.   $ 197,399     $ 196,915     $ 146,711     $ 394,314     $ 290,532  
Add:                    
Amortization of intangible assets associated with acquisitions for the dialysis and ancillary operations     6,827       6,882       6,695       13,709       13,184  
Amortization of intangible assets associated with acquisitions for the HCP operations     33,088       33,362         66,450    
Related income tax     (15,767 )     (16,098 )     (2,778 )     (31,865 )     (5,406 )
    $ 221,547     $ 221,061     $ 150,628     $ 442,608     $ 298,310  
                     
Adjusted diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc.   $ 1.84     $ 1.84     $ 1.53     $ 3.68     $ 3.03  
Add:                    
Amortization of intangible assets associated with acquisitions for the dialysis and ancillary operations, net of tax     0.04       0.04       0.04       0.08       0.08  
Amortization of intangible assets associated with acquisitions for the HCP operations, net of tax     0.18       0.19         0.37    
    $ 2.06     $ 2.07     $ 1.57     $ 4.13     $ 3.11  
                     

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

2. Operating income excluding a pre-tax contingent earn-out obligation adjustment, a pre-tax loss contingency reserve, pre-tax transaction expenses related to the acquisition of HCP and a pre-tax legal settlement and related expenses.

We believe that operating income excluding a pre-tax contingent earn-out obligation adjustment, a pre-tax loss contingency reserve, pre-tax transaction expenses associated with the acquisition of HCP and a pre-tax legal settlement and related expenses enhances a user’s understanding of our normal operating income for these periods by providing a measure that is meaningful because it excludes unusual amounts that include an adjustment for HCP’s contingent earn-out obligation, a loss contingency reserve related to the 2010 and 2011 U.S. Attorney Physician Relationship Investigations, transaction expenses associated with the acquisition of HCP and legal settlement and related expenses to settle federal program claims relating to our historical Epogen practices and accordingly, is comparable to prior periods and indicative of consistent operating income. This measure is not a measure of financial performance under GAAP and should not be considered as an alternative to operating income.

Operating income excluding a pre-tax contingent earn-out obligation adjustment, a pre-tax loss contingency reserve, pre-tax transaction expenses associated with the acquisition of HCP and a pre-tax legal settlement and related expenses:   Three months ended   Six months ended
    June 30,

2013

  March 31,

2013

  June 30,

2012

  June 30,

2013

  June 30,

2012

Operating income   $ 522,020     $ 166,861   $ 247,261   $ 688,881     $ 568,143
Add (Less):                    
Contingent earn-out obligation adjustment     (56,977 )         (56,977 )  
Loss contingency reserve       300,000       300,000    
Transaction expenses associated with the acquisition of HCP         10,383       16,436
Legal settlement and related expenses         78,000       78,000
Adjusted operating income   $ 465,043     $ 466,861   $ 335,644   $ 931,904     $ 662,579
                                   

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

3. Effective Income Tax Rates

We believe that reporting the effective income tax rate attributable to DaVita HealthCare Partners Inc.as well as the adjusted effective income tax rate attributable to DaVita HealthCare Partners Inc., excluding a contingent earn-out obligation adjustment and a loss contingency reserve, enhances an investor’s understanding of DaVita HealthCare Partners Inc.’s effective income tax rate and DaVita HealthCare Partners Inc.’s adjusted effective income tax rate for the periods presented because it excludes noncontrolling owners’ income that primarily relates to non-tax paying entities, unusual amounts that include a contingent earn-out obligation adjustment and a loss contingency reserve related to the 2010 and 2011 U.S. Attorney Physician Relationship Investigations and is meaningful to an investor to fully understand the related income tax effects on DaVita HealthCare Partners Inc.’s operating results. These are not measures 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 HealthCare Partners Inc. is as follows:

    Three months ended   Six months ended

June 30, 2013

    June 30,

2013

  March 31,

2013

  June 30,

2012

 
Income from continuing operations before income taxes   $ 412,550     $ 61,642