DaVita 2nd Quarter 2012 Results

DaVita Inc. (NYSE: DVA) today announced results for the quarter ended June 30, 2012. Net income attributable to DaVita Inc. for the three and six months ended June 30, 2012 was $142.9 million and $283.0 million, or $1.49 and $2.96 per share, respectively, excluding an after-tax legal proceeding contingency accrual and related expenses of $47.6 million, or $0.50 per share, as further discussed below. This compares to net income attributable to DaVita Inc. for the three and six months ended June 30, 2011 of $114.4 million and $208.9 million, or $1.17 and $2.13 per share, respectively, excluding an after-tax non-cash goodwill impairment charge of approximately $14.4 million, or $0.14 per share, related to our infusion therapy business.

Net income attributable to DaVita Inc. for the three and six months ended June 30, 2012 including the after-tax legal proceeding contingency accrual was $95.3 million and $235.5 million, or $0.99 and $2.46 per share, respectively. Net income attributable to DaVita Inc. for the three and six months ended June 30, 2011 including the after-tax goodwill impairment charge was $100.0 million and $194.5 million, or $1.03 and $1.99 per share, respectively.

Financial and operating highlights include:

• Cash Flow: For the rolling twelve months ended June 30, 2012 operating cash flow was $1,180 million and free cash flow was $817 million. For the three months ended June 30, 2012 operating cash flow was $202 million and free cash flow was $111 million. For a definition of free cash flow see Note 4 to the reconciliations of non-GAAP measures.
• Operating Income: Operating income for the three and six months ended June 30, 2012 was $326 million and $647 million, respectively, excluding the pre-tax legal proceeding contingency accrual and related expenses of $78 million. This compares to operating income of $271 million and $506 million, respectively, excluding the pre-tax non-cash goodwill impairment charge of $24 million for the same periods of 2011.
  
  Operating income for the three and six months ended June 30, 2012 including the legal proceeding contingency accrual and related expenses was $248 million and $569 million, respectively. Operating income for the three and six months ended June 30, 2011 including the non-cash goodwill impairment charge was $247 million and $482 million, respectively.

• Volume: Total U.S. treatments for the second quarter of 2012 were 5,451,901, or 69,896 treatments per day, representing a per day increase of 14.3% over the second quarter of 2011. Non-acquired treatment growth, as well as our normalized non-acquired treatment growth in the quarter, were both 4.7% over the prior year’s second quarter.
• Effective Tax Rate: Our effective tax rate was 36.2% and 36.5% for the three and six months ended June 30, 2012, 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 41.5% and 40.9% for the three and six months ended June 30, 2012, respectively. We still expect our 2012 effective tax rate attributable to DaVita Inc. to be in the range of 40.0% to 41.0%.
• Acquisition: As previously announced on May 21, 2012, we entered into a definitive merger agreement to acquire HealthCare Partners (HCP), the country’s largest operator of medical groups and physician networks. The total purchase price to be paid by DaVita Inc. will consist of $3.66 billion in cash and approximately 9.38 million shares of DaVita common stock, subject to post-close adjustments. In addition to the total merger consideration payable at close, DaVita will pay to the owners of HCP a total of up to $275 million of additional cash consideration in the form of two separate earn-out payments if certain financial performance targets are achieved by HCP in 2012 and 2013. We still expect the transaction to close early in the fourth quarter of this year.
• Legal Proceeding Contingency Accrual: As previously announced on July 3, 2012, we reached an agreement in principle to settle all allegations relating to claims arising out of the previously disclosed litigation filed in 2002 in the U.S. District Court in the Eastern District of Texas (Settlement). In connection with the Settlement we accrued a pre-tax charge of approximately $78 million in the second quarter of 2012 that consists of $55 million for the settlement plus attorney fees and other related expenses. We expect that the Settlement will resolve federal program claims regarding Epogen that were or could have been raised in the complaint relating to historical Epogen practices dating back to 1997. The Settlement is subject to certain conditions, such as court approval. Until the conditions and documentation are completed, there can be no assurance that this matter will in fact be resolved pursuant to the terms of the Settlement.
• Center Activity: As of June 30, 2012, we operated or provided administrative services at 1,884 outpatient dialysis centers located in the United States serving approximately 149,000 patients and 19 outpatient dialysis centers serving approximately 1,000 patients that are located in four countries outside of the United States. During the second quarter of 2012, we acquired 33 centers and opened a total of 14 centers located in the United States. In addition, we also acquired and opened a total of four centers outside of the United States.

Outlook

We are raising our operating income guidance for 2012 to now be in the range of $1,275 million to $1,325 million. Our previous operating income guidance for 2012 was in the range of $1,230 million to $1,310 million. These projections exclude any operating results associated with the proposed acquisition of HealthCare Partners as well as the legal proceeding contingency accrual and related expenses of $78 million. We also still expect our operating cash flows for 2012 to be in the range of $950 million to $1,050 million. 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, 2012 on August 1, 2012 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 guidance and expectations for our 2012 operating income, our 2012 operating cash flows and our 2012 effective tax rate attributable to DaVita Inc., the anticipated timing and closing of the HCP transaction and expected timing and impact of the Settlement. Factors that 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 quarterly report on Form 10-Q for the quarter ended March 31, 2012 and subsequent quarterly reports to be 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 revenues or patients,
• a reduction in the number of patients under higher-paying commercial plans,
• a reduction in government payment rates under the Medicare End Stage Renal Disease program or other government-based programs,
• the impact of health care 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,
• current or potential investigations by various government entities and related government or private-party proceedings,
• continued increased competition from large and medium-sized dialysis providers that compete directly with us,
• the emergence of new models of care introduced by the government or private sector, such as accountable care organizations, independent practice association and integrated delivery systems, and changing affiliation models for physicians, such as employment by hospitals, 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 integrate and successfully operate any business we may acquire, including the HCP transaction, and
• expansion of our operations and services to markets outside the United States, or to businesses outside of dialysis.

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.
SUPPLEMENTAL FINANCIAL DATA—continued
(unaudited)
(dollars in thousands)

Note 1: Calculation of the Leverage Ratio

Under the Company’s 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.

In accordance with the Credit Agreement, the Company’s leverage ratio cannot exceed 4.25 to 1.0 as of June 30, 2012. At that date the Company’s leverage ratio did not exceed 4.25 to 1.0.

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

1. Net income attributable to DaVita Inc. excluding an after-tax legal proceeding contingency accrual and related expenses and an after-tax non-cash goodwill impairment charge and diluted earnings per share attributable to DaVita Inc. excluding an after-tax legal proceeding contingency accrual and related expenses and an after-tax non-cash goodwill impairment charge.

We believe that net income attributable to DaVita Inc. excluding an after-tax legal proceeding contingency accrual and related expenses and an after-tax non-cash goodwill impairment charge 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 meaningful because it excludes an unusual charge for a legal proceeding contingency accrual that resulted from an agreement we reached in principle to settle federal program claims relating to our historical Epogen practices and also excludes a non-cash goodwill impairment charge that resulted from a decrease in the implied fair value of goodwill below its carrying amount associated with our infusion therapy business during the second quarter of 2011 and accordingly, is more comparable to prior periods and indicative of consistent net income attributable to DaVita Inc. and diluted earnings per share 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.

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

2. Operating income excluding a pre-tax legal proceeding contingency accrual and related expenses and a pre-tax non-cash goodwill impairment charge.

We believe that operating income excluding a pre-tax legal proceeding contingency accrual and related expenses and a pre-tax non-cash goodwill impairment charge enhances a user’s understanding of our normal operating income for these periods by providing a measure that is meaningful because it excludes an unusual charge for a legal proceeding contingency accrual that resulted from an agreement we reached in principle to settle federal program claims relating to our historical Epogen practices and also excludes a non-cash goodwill impairment charge that resulted from a decrease in the implied fair value of goodwill below its carrying amount associated with our infusion therapy business during the second quarter of 2011 and accordingly, is more 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.

DAVITA 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 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 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:

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

4. 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.