UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the Quarter Ended
March 31, 2004
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-4034
DAVITA INC.
601 Hawaii Street
El Segundo, California 90245
Telephone number (310) 536-2400
| Delaware | 51-0354549 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
The Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days.
The Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
As of April 30, 2004, there were approximately 66.2 million shares of the Registrant’s common stock (par value $0.001) outstanding.
INDEX
| Page No. | ||||
| PART I. FINANCIAL INFORMATION | ||||
| Item 1. |
Condensed Consolidated Financial Statements: | |||
| Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2004 and March 31, 2003 | 1 | |||
| Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 | 2 | |||
| Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and March 31, 2003 | 3 | |||
| Notes to Condensed Consolidated Financial Statements | 4 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 13 | ||
| Item 4. |
Controls and Procedures | 13 | ||
| 15 | ||||
| PART II. OTHER INFORMATION | ||||
| Item 1. |
Legal Proceedings | 20 | ||
| Item 6. |
Exhibits and Reports on Form 8-K | 20 | ||
| 21 | ||||
Note: Items 2, 3, 4 and 5 of Part II are omitted because they are not applicable.
i
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands, except per share data)
| Three months ended March 31, | |||||||
| 2004 |
2003 | ||||||
| Net operating revenues |
$ | 535,431 | $ | 459,807 | |||
| Operating expenses and charges: |
|||||||
| Patient care costs |
363,429 | 316,710 | |||||
| General and administrative |
42,604 | 36,787 | |||||
| Depreciation and amortization |
20,270 | 17,445 | |||||
| Provision for uncollectible accounts |
9,577 | 8,237 | |||||
| Minority interests and equity income, net |
2,718 | 1,294 | |||||
| Total operating expenses and charges |
438,598 | 380,473 | |||||
| Operating income |
96,833 | 79,334 | |||||
| Debt expense |
11,636 | 19,456 | |||||
| Other income |
1,443 | 785 | |||||
| Income before income taxes |
86,640 | 60,663 | |||||
| Income tax expense |
33,775 | 24,250 | |||||
| Net income |
$ | 52,865 | $ | 36,413 | |||
| Earnings per share: |
|||||||
| Basic |
$ | 0.81 | $ | 0.60 | |||
| Diluted |
$ | 0.77 | $ | 0.52 | |||
| Weighted average shares for earnings per share: |
|||||||
| Basic |
65,399,651 | 60,905,056 | |||||
| Diluted |
68,588,969 | 78,772,410 | |||||
| STATEMENTS OF COMPREHENSIVE INCOME |
|||||||
| Net income |
$ | 52,865 | $ | 36,413 | |||
| Unrealized loss on securities, net of tax of $1,641 |
(2,569 | ) | |||||
| Comprehensive income |
$ | 50,296 | $ | 36,413 | |||
See notes to condensed consolidated financial statements.
1
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
| March 31, 2004 |
December 31, 2003 |
|||||||
| ASSETS | ||||||||
| Cash and cash equivalents |
$ | 153,156 | $ | 61,657 | ||||
| Accounts receivable, less allowance of $54,391 and $52,554 |
400,444 | 387,933 | ||||||
| Medicare lab recoveries |
19,000 | |||||||
| Inventories |
26,187 | 32,853 | ||||||
| Other current assets |
43,178 | 43,875 | ||||||
| Deferred income taxes |
66,530 | 59,740 | ||||||
| Total current assets |
689,495 | 605,058 | ||||||
| Property and equipment, net |
349,868 | 342,447 | ||||||
| Amortizable intangibles, net |
50,570 | 49,971 | ||||||
| Investments in third-party dialysis businesses |
3,348 | 3,095 | ||||||
| Other long-term assets |
9,179 | 10,771 | ||||||
| Goodwill |
947,894 | 934,188 | ||||||
| $ | 2,050,354 | $ | 1,945,530 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Accounts payable |
$ | 80,711 | $ | 71,868 | ||||
| Other liabilities |
118,643 | 112,654 | ||||||
| Accrued compensation and benefits |
101,652 | 100,909 | ||||||
| Current portion of long-term debt |
50,025 | 50,557 | ||||||
| Income taxes payable |
30,506 | 26,832 | ||||||
| Total current liabilities |
381,537 | 362,820 | ||||||
| Long-term debt |
1,105,277 | 1,117,002 | ||||||
| Other long-term liabilities |
24,500 | 19,310 | ||||||
| Deferred income taxes |
112,014 | 106,240 | ||||||
| Minority interests |
36,200 | 33,287 | ||||||
| Commitments and contingencies |
||||||||
| Shareholders’ equity: |
||||||||
| Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued) |
||||||||
| Common stock ($0.001 par value, 195,000,000 shares authorized; 89,908,189 and 89,870,803 shares issued) |
90 | 90 | ||||||
| Additional paid-in capital |
538,877 | 539,575 | ||||||
| Retained earnings |
441,993 | 389,128 | ||||||
| Treasury stock, at cost (23,964,510 and 25,368,019 shares) |
(586,641 | ) | (620,998 | ) | ||||
| Accumulated comprehensive income valuations |
(3,493 | ) | (924 | ) | ||||
| Total shareholders’ equity |
390,826 | 306,871 | ||||||
| $ | 2,050,354 | $ | 1,945,530 | |||||
See notes to condensed consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 52,865 | $ | 36,413 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
| Depreciation and amortization |
20,270 | 17,445 | ||||||
| Stock option expense and tax benefits |
14,389 | 1,378 | ||||||
| Deferred income taxes |
(1,016 | ) | 4,841 | |||||
| (Gain) loss on divestitures |
(628 | ) | 119 | |||||
| Non-cash debt expense |
484 | 840 | ||||||
| Equity investment income |
(442 | ) | (519 | ) | ||||
| Minority interests in income of consolidated subsidiaries |
3,160 | 1,813 | ||||||
| Distributions to minority interests |
(2,082 | ) | (2,465 | ) | ||||
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: |
||||||||
| Accounts receivable |
(12,511 | ) | (676 | ) | ||||
| Medicare lab recoveries |
19,000 | |||||||
| Inventories |
6,818 | 9,543 | ||||||
| Other current assets |
697 | 4,721 | ||||||
| Other long-term assets |
1,592 | (2,457 | ) | |||||
| Accounts payable |
8,843 | (6,674 | ) | |||||
| Accrued compensation and benefits |
2,393 | (13,075 | ) | |||||
| Other current liabilities |
1,779 | 11,952 | ||||||
| Income taxes |
5,315 | 16,641 | ||||||
| Other long-term liabilities |
5,190 | 809 | ||||||
| Net cash provided by operating activities |
126,116 | 80,649 | ||||||
| Cash flows from investing activities: |
||||||||
| Additions of property and equipment, net |
(24,681 | ) | (21,708 | ) | ||||
| Acquisitions and divestitures, net |
(17,088 | ) | (718 | ) | ||||
| Investments in and advances to affiliates, net |
2,191 | 1,931 | ||||||
| Intangible assets |
(360 | ) | (300 | ) | ||||
| Net cash used in investing activities |
(39,938 | ) | (20,795 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Borrowings |
774,534 | 623,822 | ||||||
| Payments on long-term debt |
(786,791 | ) | (478,659 | ) | ||||
| Net proceeds from issuance of common stock |
17,578 | 3,502 | ||||||
| Net cash provided by financing activities |
5,321 | 148,665 | ||||||
| Net increase in cash and cash equivalents |
91,499 | 208,519 | ||||||
| Cash and cash equivalents at beginning of period |
61,657 | 96,475 | ||||||
| Cash and cash equivalents at end of period |
$ | 153,156 | $ | 304,994 | ||||
See notes to condensed consolidated financial statements.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
Unless otherwise indicated in this Form 10-Q “the Company”, “we”, “us”, “our” and similar terms refer to DaVita Inc. and its subsidiaries.
| 1. | Condensed consolidated interim financial statements |
The condensed consolidated interim financial statements included in this report are prepared by the Company without audit. In the opinion of management, all adjustments consisting only of normal recurring items necessary for a fair presentation of the results of operations are reflected in these consolidated interim financial statements. All significant intercompany accounts and transactions have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve revenue recognition and provisions for uncollectible accounts, impairments and valuation adjustments, accounting for income taxes and variable compensation accruals. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the operating results for the full year. The consolidated interim financial statements should be read in conjunction with Management’s Discussion and Analysis and the consolidated financial statements and notes thereto included in the Company’s 2003 Form 10-K.
Stock-based compensation
If the Company had adopted the fair value-based compensation expense provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123 upon the issuance of that standard, net earnings and net earnings per share would have been adjusted to the pro forma amounts indicated below:
| Pro forma - As if all stock options were expensed (shares in 000’s) |
Three months ended March 31, |
|||||||
| 2004 |
2003 |
|||||||
| Net income: |
||||||||
| As reported |
$ | 52,865 | $ | 36,413 | ||||
| Add: Stock-based employee compensation expense included in reported net earnings, net of tax |
97 | 161 | ||||||
| Deduct: Total stock-based employee compensation expense under the fair value-based method, net of tax |
(1,850 | ) | (1,911 | ) | ||||
| Pro forma net earnings |
$ | 51,112 | $ | 34,663 | ||||
| Pro forma basic earnings per share: |
||||||||
| Pro forma net earnings for basic earnings per share calculation |
$ | 51,112 | $ | 34,663 | ||||
| Weighted average shares outstanding |
65,383 | 60,847 | ||||||
| Vested restricted stock units |
17 | 58 | ||||||
| Weighted average shares for basic earnings per share calculation |
65,400 | 60,905 | ||||||
| Basic net income per share—Pro forma |
$ | 0.78 | $ | 0.57 | ||||
| Basic net income per share—As reported |
$ | 0.81 | $ | 0.60 | ||||
4
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars in thousands, except per share data)
| Pro forma - As if all stock options were expensed | Three months ended March 31, | |||||
| 2004 | ||||||