DaVita HealthCare Partners Inc. 1st Quarter 2013 Results

DaVita HealthCare Partners Inc. (NYSE: DVA) today announced results for the quarter ended March 31, 2013. Adjusted income from continuing operations attributable to DaVita HealthCare Partners Inc. for the three months ended March 31, 2013 was $196.9 million, or $1.84 per share, excluding a loss contingency reserve as further discussed below. Income from continuing operations including this item was $16.9 million, or $0.16 per share.

Adjusted income from continuing operations attributable to DaVita HealthCare Partners Inc. for the quarter ended March 31, 2012 was $143.8 million, or $1.50 per share, excluding after-tax transaction expenses associated with the acquisition of HCP of $3.6 million, or $0.04 per share. Income from continuing operations attributable to DaVita HealthCare Partners Inc. for the quarter ended March 31, 2012 including this item was $140.2 million, or $1.46 per share.

Financial and operating highlights include:

• Cash Flow: For the rolling twelve months ended March 31, 2013, operating cash flow was $1,148 million and free cash flow was $764 million. For the three months ended March 31, 2013, operating cash flow was $379 million and free cash flow was $299 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 months ended March 31, 2013 was $467 million, excluding a pre-tax loss contingency reserve of $300 million, as further discussed below. Operating income for the three months ended March 31, 2013 including this item was $167 million.
  
  Adjusted operating income for the three months ended March 31, 2012 was $327 million, excluding transactions expenses associated with the acquisition of HCP of $6 million. Operating income for the three months ended March 31, 2012 including this item was $321 million.

• Adjusted Diluted Income from Continuing Operations: Adjusted diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc. for the three months ended March 31, 2013, excluding a loss contingency reserve and amortization of intangible assets associated with acquisitions, which net of tax impacts totaled $221.1 million, was $2.07 per share.
  
  Adjusted diluted income from continuing operations per share attributable to DaVita HealthCare Partners Inc. for the three months ended March 31, 2012, excluding transaction expenses associated with the acquisition of HCP and the amortization of intangible assets associated with acquisitions, which net of related tax impacts totaled $147.7 million, was $1.54 per share.

• Volume: Total U.S. dialysis treatments for the first quarter of 2013 were 5,628,799, or 73,579 treatments per day, representing a per day increase of 8.0% over the first quarter of 2012. Non-acquired treatment growth in the quarter was 4.3% over the prior year’s first quarter. Our normalized non-acquired treatment growth in the quarter was 4.4% over the prior year’s first quarter.
  
  The number of member months for which HCP provided capitated care during the first quarter of 2013 was approximately 2.2 million, representing an increase of 5.8% as compared to the fourth quarter of 2012 and an increase of 20.3% as compared to the first 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 24.6% for the three months ended March 31, 2013. 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 47.1% for the three months ended March 31, 2013. Excluding the impact of the loss contingency reserve our effective tax rate attributable to DaVita HealthCare Partners Inc. would have been 40.7%. We expect our 2013 effective tax rate attributable to DaVita HealthCare Partners Inc. to be in the range of 40.0% to 41.0%.
• Loss Contingency Reserve: We are engaged in good faith discussions with the attorneys from the United States Attorney’s Office for the District of Colorado, the Civil Division of the United States Department of Justice and the Office of the Inspector General in an effort to find a mutually acceptable resolution to the 2010 and the 2011 U.S. Attorney Physician Relationship Investigations. Discussions have advanced to a point where we believe it is appropriate to accrue an estimated loss contingency reserve of $300 million in the first quarter of 2013 in connection with an offer to settle the related civil, administrative and criminal matters. However, the discussions are ongoing, and until concluded, there can be no certainty about the timing or likelihood of a definitive resolution or the scope of any potential restrictions that may be agreed upon in connection with a settlement. As these discussions proceed and additional information becomes available to us, the amount of the estimated loss contingency reserve may need to be increased or decreased to reflect this new information.
• Debt Transactions: In March 2013, we entered into several new interest rate swap agreements. As of March 31, 2013, the amortizing notional amounts of these swap agreements totaled $1.33 billion. These agreements have the economic effect of modifying the LIBOR variable component of the Company’s interest rate on an equivalent amount of our Term Loan A-3 to fixed rates ranging from 0.49% to 0.52%, resulting in an overall weighted average effective interest rate of 3.01%, including the Term Loan A-3 margin of 2.50%. The swap agreements expire by September 30, 2016 and require monthly interest payments.
  
  In addition, in March 2013, we entered into several interest rate forward swap agreements with amortizing notional amounts totaling $600 million. These forward swap agreements will be effective September 30, 2014 and will have the economic effect of modifying the LIBOR variable component of our interest rate on an equivalent amount of our outstanding debt to fixed rates ranging from 0.72% to 0.75%. These swap agreements expire on September 30, 2016 and will require quarterly interest payments beginning in October 2014.
  
  Any unrealized gains or losses resulting from changes in the fair value of these swaps will be recorded in other comprehensive income.
  
  During March 2013, we entered into several interest rate cap agreements with notional amounts totaling $1.25 billion on our Term Loan B debt and $1.49 billion on our Term Loan B-2 debt. These agreements have the economic effect of capping the LIBOR variable component of our interest rate at a maximum of 2.50% on an equivalent amount of our Term Loan B and Term Loan B-2 debt. The cap agreements expire on September 30, 2016.

• Center Activity: As of March 31, 2013, we provided dialysis services to a total of 158,600 patients at 2,032 outpatient dialysis centers, of which 41 are located in nine countries outside of the United States. During the first quarter of 2013, we acquired eight dialysis centers and opened a total of 27 dialysis centers located in the United States. We also provided management and administrative services to four dialysis centers and opened one dialysis center outside of the United States.

Outlook

• We are updating our consolidated operating income guidance for 2013 to now be in the range of $1,800 million to $1,900 million. Our previous consolidated operating income guidance was expected to be in the range of $1,750 million to $1,900 million.
• In addition, we are also updating our operating income guidance for our dialysis services and related ancillary businesses for 2013 to now be in the range of $1,400 million to $1,450 million. Our previous dialysis services and related ancillary businesses guidance was expected to be in the range of $1,350 million to $1,450 million.
• Operating income guidance for HCP for 2013 is still expected to be in the range of $400 million to $450 million.
• Consolidated operating cash flows for 2013 are still expected to be in the range of $1,350 million to $1,500 million.

The consolidated and dialysis services and related ancillary businesses operating income guidance amounts exclude the estimated loss contingency reserve of $300 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 first quarter ended March 31, 2013 on May 7, 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, our 2013 operating cash flows and our 2013 effective tax rate attributable to DaVita 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, and our subsequent quarterly and annual reports and 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,
• 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 interpretation 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.

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(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 stock-based compensation and transaction expenses associated with the acquisition of HCP.

(3) Operating results of HCP for the three months ended December 31, 2012, include only the period November 1, 2012 through December 31, 2012.

(4) The reported balance sheet amounts at March 31, 2013, December 31, 2012 and March 31, 2012, are net of $20.6 million, $21.5 million and $7.4 million, respectively, of debt discounts associated with our Term Loan B, Term Loan B-2 and our Term Loan A-2.

(5) 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, but 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 $461 million outstanding principal balance of the Term Loan B is subject to LIBOR-based interest rate volatility above a floor of 1.50%. The remaining $161 million outstanding principal balance of the Term Loan B-2 is subject to LIBOR-based volatility above a floor of 1.00%.

In accordance with the Credit Agreement, the Company’s leverage ratio cannot exceed 5.00 to 1.00 as of March 31, 2013. At that date the Company’s leverage ratio did not exceed 5.00 to 1.00.