UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the Quarter Ended
June 30, 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 July 30, 2004, there were approximately 100.5 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 and six months ended June 30, 2004 and June 30, 2003 | 1 | |||
| Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 | 2 | |||
| Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and June 30, 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 4. |
Submission of Matters to a Vote of Security Holders | 20 | ||
| Item 6. |
Exhibits and Reports on Form 8-K | 21 | ||
| 22 | ||||
Note: Items 2, 3 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 June 30, |
Six months ended June 30, | |||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||
| Net operating revenues |
$ | 551,630 | $ | 489,883 | $ | 1,087,061 | $ | 949,690 | ||||
| Operating expenses and charges: |
||||||||||||
| Patient care costs |
375,139 | 335,986 | 738,568 | 652,696 | ||||||||
| General and administrative |
45,727 | 42,583 | 88,331 | 79,370 | ||||||||
| Depreciation and amortization |
20,927 | 17,921 | 41,197 | 35,366 | ||||||||
| Provision for uncollectible accounts |
9,867 | 8,780 | 19,444 | 17,017 | ||||||||
| Minority interests and equity income, net |
3,503 | 1,813 | 6,221 | 3,107 | ||||||||
| Total operating expenses and charges |
455,163 | 407,083 | 893,761 | 787,556 | ||||||||
| Operating income |
96,467 | 82,800 | 193,300 | 162,134 | ||||||||
| Debt expense |
11,258 | 19,495 | 22,894 | 38,951 | ||||||||
| Other income |
667 | 890 | 2,110 | 1,675 | ||||||||
| Income before income taxes |
85,876 | 64,195 | 172,516 | 124,858 | ||||||||
| Income tax expense |
33,475 | 25,675 | 67,250 | 49,925 | ||||||||
| Net income |
$ | 52,401 | $ | 38,520 | $ | 105,266 | $ | 74,933 | ||||
| Earnings per share: |
||||||||||||
| Basic |
$ | 0.53 | $ | 0.42 | $ | 1.06 | $ | 0.82 | ||||
| Diluted |
$ | 0.50 | $ | 0.37 | $ | 1.02 | $ | 0.72 | ||||
| Weighted average shares for earnings per share: |
||||||||||||
| Basic |
99,686,182 | 91,958,932 | 98,873,220 | 91,646,761 | ||||||||
| Diluted |
104,010,356 | 118,783,081 | 103,416,270 | 118,446,739 | ||||||||
| STATEMENTS OF COMPREHENSIVE INCOME |
||||||||||||
| Net income |
$ | 52,401 | $ | 38,520 | $ | 105,266 | $ | 74,933 | ||||
| Unrealized gain on securities, net of tax of $3,630 and $1,989 |
5,680 | 3,111 | ||||||||||
| Comprehensive income |
$ | 58,081 | $ | 38,520 | $ | 108,377 | $ | 74,933 | ||||
See notes to condensed consolidated financial statements.
1
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
| June 30, 2004 |
December 31, 2003 |
|||||||
| ASSETS |
||||||||
| Cash and cash equivalents |
$ | 200,701 | $ | 61,657 | ||||
| Accounts receivable, less allowance of $57,264 and $52,554 |
402,046 | 387,933 | ||||||
| Medicare lab recoveries |
19,000 | |||||||
| Inventories |
28,337 | 32,853 | ||||||
| Other current assets |
40,836 | 43,875 | ||||||
| Deferred income taxes |
76,513 | 59,740 | ||||||
| Total current assets |
748,433 | 605,058 | ||||||
| Property and equipment, net |
363,164 | 342,447 | ||||||
| Amortizable intangibles, net |
49,095 | 49,971 | ||||||
| Investments in third-party dialysis businesses |
3,791 | 3,095 | ||||||
| Other long-term assets |
12,352 | 10,771 | ||||||
| Goodwill |
959,539 | 934,188 | ||||||
| $ | 2,136,374 | $ | 1,945,530 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Accounts payable |
$ | 71,805 | $ | 71,868 | ||||
| Other liabilities |
129,235 | 112,654 | ||||||
| Accrued compensation and benefits |
112,854 | 100,909 | ||||||
| Current portion of long-term debt |
49,868 | 50,557 | ||||||
| Income taxes payable |
20,617 | 26,832 | ||||||
| Total current liabilities |
384,379 | 362,820 | ||||||
| Long-term debt |
1,094,247 | 1,117,002 | ||||||
| Other long-term liabilities |
18,308 | 19,310 | ||||||
| Deferred income taxes |
127,841 | 106,240 | ||||||
| Minority interests |
40,391 | 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; 134,862,283 and 134,806,204 shares issued) |
135 | 135 | ||||||
| Additional paid-in capital |
541,121 | 539,575 | ||||||
| Retained earnings |
494,299 | 389,083 | ||||||
| Treasury stock, at cost (34,714,719 and 38,052,028 shares) |
(566,534 | ) | (620,998 | ) | ||||
| Accumulated comprehensive income valuations |
2,187 | (924 | ) | |||||
| Total shareholders’ equity |
471,208 | 306,871 | ||||||
| $ | 2,136,374 | $ | 1,945,530 | |||||
See notes to condensed consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
| Six months ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 105,266 | $ | 74,933 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
| Depreciation and amortization |
41,197 | 35,366 | ||||||
| Stock option expense and tax benefits |
25,048 | 5,699 | ||||||
| Deferred income taxes |
4,828 | 4,754 | ||||||
| (Gain) loss on divestitures |
(481 | ) | 343 | |||||
| Non-cash debt expense |
951 | 1,958 | ||||||
| Equity investment income |
(1,145 | ) | (967 | ) | ||||
| Minority interests in income of consolidated subsidiaries |
7,366 | 4,074 | ||||||
| Distributions to minority interests |
(3,634 | ) | (3,685 | ) | ||||
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: |
||||||||
| Accounts receivable |
(14,113 | ) | (740 | ) | ||||
| Medicare lab recoveries |
19,000 | |||||||
| Inventories |
4,942 | 5,327 | ||||||
| Other current assets |
3,043 | 2,495 | ||||||
| Other long-term assets |
2,004 | (2,774 | ) | |||||
| Accounts payable |
(63 | ) | 5,852 | |||||
| Accrued compensation and benefits |
13,653 | (716 | ) | |||||
| Other current liabilities |
18,095 | 13,554 | ||||||
| Income taxes |
(6,215 | ) | 10,577 | |||||
| Other long-term liabilities |
(2,990 | ) | 3,377 | |||||
| Net cash provided by operating activities |
216,752 | 159,427 | ||||||
| Cash flows from investing activities: |
||||||||
| Additions of property and equipment, net |
(55,139 | ) | (42,077 | ) | ||||
| Acquisitions and divestitures, net |
(31,752 | ) | (47,035 | ) | ||||
| Investments in and advances to affiliates, net |
3,988 | 2,663 | ||||||
| Intangible assets |
(580 | ) | 754 | |||||
| Net cash used in investing activities |
(83,483 | ) | (85,695 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Borrowings |
1,549,894 | 1,350,195 | ||||||
| Payments on long-term debt |
(1,573,338 | ) | (1,212,574 | ) | ||||
| Stock option exercises |
29,219 | 7,778 | ||||||
| Net cash provided by financing activities |
5,775 | 145,399 | ||||||
| Net increase in cash and cash equivalents |
139,044 | 219,131 | ||||||
| Cash and cash equivalents at beginning of period |
61,657 | 96,475 | ||||||
| Cash and cash equivalents at end of period |
$ | 200,701 | $ | 315,606 | ||||
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 six months ended June 30, 2004 are not necessarily indicative of the operating results for the full year. The consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2003. All share and per share data has been restated to reflect the effects of a stock split during the second quarter of 2004 (see Note 4).
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 (shares in 000’s):
| Pro forma - As if all stock options were expensed |
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Net income: |
||||||||||||||||
| As reported |
$ | 52,401< | ||||||||||||||