DAVITA INC. - FORM 10-Q - May 3, 2018

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EX-32.2 - EXHIBIT 32.2 - DAVITA INC.dva-33118ex322.htm
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EX-31.2 - EXHIBIT 31.2 - DAVITA INC.dva-33118ex312.htm
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EX-10.1 - EXHIBIT 10.1 - DAVITA INC.dva-33118ex101.htm



 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 

FORM 10-Q

 
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2018
Commission File Number: 1-14106
 
 
 
 
 

logo.jpg
DAVITA INC.
Delaware
 
51-0354549
(State of incorporation)
 
(I.R.S. Employer Identification No.)
2000 16th Street
Denver, CO 80202
Telephone number (303) 405-2100
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
 
 
 
 
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
☐
 
 
 
 
Emerging growth company
☐
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ☐    No  ☒
As of April 30, 2018, the number of shares of the Registrant’s common stock outstanding was approximately 174.5 million shares.
 
 
 
 
 



DAVITA INC.
INDEX

 
 
 
 
Page No.
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 6.
 
 
 
 
 
 
Note: Items 3, 4 and 5 of Part II are omitted because they are not applicable.
 
 
 

i



DAVITA INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands, except per share data)
 
Three months ended
March 31,
 
2018
 
2017
Dialysis and related lab patient service revenues
$
2,591,074

 
$
2,422,786

Provision for uncollectible accounts
25,545

 
(107,058
)
Net dialysis and related lab patient service revenues
2,616,619

 
2,315,728

Other revenues
232,825

 
315,523

Total revenues
2,849,444

 
2,631,251

Operating expenses and charges:
 

 
 

Patient care costs and other costs
2,035,585

 
1,852,045

General and administrative
266,529

 
262,895

Depreciation and amortization
142,799

 
132,884

Equity investment income
(155
)
 
(677
)
Provision for uncollectible accounts
(6,000
)
 
1,910

Investment and other asset impairments
—

 
15,168

Goodwill impairment charges
—

 
24,198

Gain on changes in ownership interests
—

 
(6,273
)
Gain on settlement, net
—

 
(526,827
)
Total operating expenses and charges
2,438,758

 
1,755,323

Operating income
410,686

 
875,928

Debt expense
(113,516
)
 
(104,397
)
Other income, net
4,582

 
3,986

Income from continuing operations before income taxes
301,752

 
775,517

Income tax expense
70,737

 
281,665

Net income from continuing operations
231,015

 
493,852

Net (loss) income from discontinued operations, net of tax
(5,786
)
 
6,433

Net income
225,229

 
500,285

Less: Net income attributable to noncontrolling interests
(46,543
)
 
(52,588
)
Net income attributable to DaVita Inc.
$
178,686

 
$
447,697

Earnings per share:
 

 
 

Basic net income from continuing operations per share attributable to DaVita Inc.
$
1.07

 
$
2.29

Basic net income per share attributable to DaVita Inc.
$
1.00

 
$
2.33

Diluted net income from continuing operations per share attributable to DaVita Inc.
$
1.05

 
$
2.26

Diluted net income per share attributable to DaVita Inc.
$
0.98

 
$
2.29

Weighted average shares for earnings per share:
 
 
 
Basic
178,957,865

 
192,376,735

Diluted
181,834,547

 
195,281,014

Amounts attributable to DaVita Inc.:
 
 
 
Net income from continuing operations
$
191,015

 
$
440,905

Net (loss) income from discontinued operations
(12,329
)
 
6,792

Net income attributable to DaVita Inc.
$
178,686

 
$
447,697

 
See notes to condensed consolidated financial statements.

1


DAVITA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
 
 
Three months ended
March 31,
 
2018
 
2017
Net income
$
225,229

 
$
500,285

Other comprehensive income, net of tax:
 

 
 

Unrealized gains (losses) on interest rate cap agreements:
 

 
 

Unrealized gains (losses) on interest rate cap agreements
1,050

 
(3,188
)
Reclassifications of net realized losses on interest rate cap agreements into net income
1,537

 
1,265

Unrealized gains on investments:
 

 
 

Unrealized gains on investments
—

 
1,557

Reclassification of net investment realized gains into net income
—

 
(140
)
Unrealized gains on foreign currency translation:
 

 
 

Foreign currency translation adjustments
19,881

 
13,261

Other comprehensive income
22,468

 
12,755

Total comprehensive income
247,697

 
513,040

Less: Comprehensive income attributable to noncontrolling interests
(46,543
)
 
(52,586
)
Comprehensive income attributable to DaVita Inc.
$
201,154

 
$
460,454

 See notes to condensed consolidated financial statements.


2


DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
 
March 31,
2018
 
December 31,
2017
ASSETS
 

 
 

Cash and cash equivalents
$
358,874

 
$
508,234

Restricted cash and equivalents
88,744

 
10,686

Short-term investments
4,602

 
32,830

Accounts receivable, net
1,830,590

 
1,714,750

Inventories
125,555

 
181,799

Other receivables
415,914

 
372,919

Income tax receivable
18,660

 
49,440

Prepaid and other current assets
106,351

 
112,058

Current assets held for sale
5,724,265

 
5,761,642

Total current assets
8,673,555

 
8,744,358

Property and equipment, net of accumulated depreciation of $3,230,717 and $3,103,662
3,185,223

 
3,149,213

Intangible assets, net of accumulated amortization of $360,828 and $356,774
113,366

 
113,827

Equity method and other investments
245,564

 
245,534

Long-term investments
34,344

 
37,695

Other long-term assets
51,728

 
47,287

Goodwill
6,638,592

 
6,610,279

 
$
18,942,372

 
$
18,948,193

LIABILITIES AND EQUITY
 

 
 

Accounts payable
$
437,733

 
$
509,116

Other liabilities
544,846

 
552,662

Accrued compensation and benefits
526,183

 
616,116

Current portion of long-term debt
184,136

 
178,213

Current liabilities held for sale
1,254,625

 
1,185,070

Total current liabilities
2,947,523

 
3,041,177

Long-term debt
9,279,885

 
9,158,018

Other long-term liabilities
391,156

 
365,325

Deferred income taxes
507,226

 
486,247

Total liabilities
13,125,790

 
13,050,767

Commitments and contingencies:
 
 
 
Noncontrolling interests subject to put provisions
1,034,501

 
1,011,360

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; 182,660,712 and
182,462,278 shares issued and 178,463,408 and 182,462,278 shares outstanding,
respectively)
183

 
182

Additional paid-in capital
1,030,772

 
1,042,899

Retained earnings
3,820,767

 
3,633,713

Treasury stock (4,197,304 and zero shares, respectively)
(298,377
)
 
—

Accumulated other comprehensive income
27,335

 
13,235

Total DaVita Inc. shareholders' equity
4,580,680

 
4,690,029

Noncontrolling interests not subject to put provisions
201,401

 
196,037

Total equity
4,782,081

 
4,886,066

 
$
18,942,372

 
$
18,948,193

See notes to condensed consolidated financial statements.

3


DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
 
Three months ended
March 31,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income
$
225,229

 
$
500,285

Adjustments to reconcile net income to net cash provided by operating
activities:
 
 
 

Depreciation and amortization
142,799

 
190,206

Impairment charges
—

 
39,366

Stock-based compensation expense
9,685

 
9,601

Deferred income taxes
43,617

 
20,091

Equity investment income, net
3,564

 
1,423

Other non-cash charges, net
9,959

 
9,464

Changes in operating assets and liabilities, net of effect of acquisitions and
divestitures:
 
 
 
Accounts receivable
(63,701
)
 
16,168

Inventories
57,621

 
(8,909
)
Other receivables and other current assets
(34,120
)
 
(84,511
)
Other long-term assets
2,054

 
(2,310
)
Accounts payable
(62,830
)
 
(26,214
)
Accrued compensation and benefits
(62,550
)
 
(62,825
)
Other current liabilities
49,379

 
(9,633
)
Income taxes
30,772

 
258,490

Other long-term liabilities
11,061

 
14,479

Net cash provided by operating activities
362,539

 
865,171

Cash flows from investing activities:
 
 
 

Additions of property and equipment
(232,443
)
 
(214,535
)
Acquisitions
(16,582
)
 
(77,236
)
Proceeds from asset and business sales
18,535

 
46,612

Purchase of investments available for sale
(2,646
)
 
(2,358
)
Purchase of investments held-to-maturity
(3,586
)
 
(121,645
)
Proceeds from sale of investments available for sale
5,151

 
4,025

Proceeds from investments held-to-maturity
31,454

 
116,285

Purchase of equity investments
(2,476
)
 
(1,135
)
Distributions received on equity investments
2,465

 
—

Net cash used in investing activities
(200,128
)
 
(249,987
)

4


DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(unaudited)
(dollars in thousands)
 
Three months ended
March 31,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Borrowings
13,306,898

 
12,803,015

Payments on long-term debt and other financing costs
(13,202,225
)
 
(12,839,156
)
Purchase of treasury stock
(290,377
)
 
—

Stock award exercises and other share issuances, net
(1,185
)
 
3,330

Distributions to noncontrolling interests
(45,467
)
 
(43,316
)
Contributions from noncontrolling interests
12,009

 
17,989

Purchases of noncontrolling interests
(2,200
)
 
(799
)
Net cash used in financing activities
(222,547
)
 
(58,937
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
6,668

 
2,820

Net (decrease) increase in cash, cash equivalents and restricted cash
(53,468
)
 
559,067

Less: Net increase in cash, cash equivalents and restricted cash from discontinued
operations
17,834

 
24,493

Net (decrease) increase in cash, cash equivalents and restricted cash from
continuing operations
(71,302
)
 
534,574

Cash, cash equivalents and restricted cash of continuing operations at beginning of
the year
518,920

 
683,463

Cash, cash equivalents and restricted cash of continuing operations at end of the
period
$
447,618

 
$
1,218,037


See notes to condensed consolidated financial statements.

5


DAVITA INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(dollars and shares in thousands)

 
Non-
controlling
interests
subject to
put provisions
 
DaVita Inc. Shareholders’ Equity
 
Non-
controlling
interests not
subject to
put provisions
 
 
 
 
Additional
paid-in
capital
 
 
 
 
 
 
 
Accumulated
other
comprehensive
(loss) income
 
 
 
 
 
Common stock
 
 
Retained
earnings
 
Treasury stock
 
 
 
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
Total
 
December 31, 2016
$
973,258

 
194,554

 
$
195

 
$
1,027,182

 
$
3,710,313

 
—

 
$
—

 
$
(89,643
)
 
$
4,648,047

 
$
201,694

Comprehensive income:
 

 


 


 


 


 


 


 


 


 


Net income
103,641

 


 


 


 
663,618

 


 


 


 
663,618

 
63,296

Other comprehensive income
 

 


 


 


 


 


 


 
102,878

 
102,878

 
(2
)
Stock purchase shares issued


 
360

 


 
22,131

 


 


 


 


 
22,131

 


Stock unit shares issued
 

 
117

 


 
(101
)
 


 


 


 


 
(101
)
 
 

Stock-settled SAR shares
issued


 
398

 


 
—

 


 


 


 


 
—

 


Stock-settled stock-based
compensation expense


 


 


 
34,981

 


 


 


 


 
34,981

 


Changes in noncontrolling interest
from:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions
(128,853
)
 


 


 


 


 


 


 


 


 
(82,614
)
Contributions
52,911

 


 


 


 


 


 


 


 


 
21,641

Acquisitions and divestitures
43,799

 


 


 
(823
)
 


 


 


 


 
(823
)
 
(5,770
)
Partial purchases
(397
)
 


 


 
(2,752
)
 


 


 


 


 
(2,752
)
 
(2,208
)
Fair value remeasurements
(32,999
)
 


 


 
32,999

 


 


 


 


 
32,999

 
 

Purchase of treasury stock


 


 


 


 


 
(12,967
)
 
(810,949
)
 


 
(810,949
)
 


Retirement of treasury stock


 
(12,967
)
 
(13
)
 
(70,718
)
 
(740,218
)
 
12,967

 
810,949

 


 
—

 


Balance at December 31, 2017
$
1,011,360

 
182,462

 
$
182

 
$
1,042,899

 
$
3,633,713

 
—

 
$
—

 
$
13,235

 
$
4,690,029

 
$
196,037

Cumulative effect of change in
accounting principle


 


 


 


 
8,368

 


 


 
(8,368
)
 
—

 


Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
24,107

 


 


 


 
178,686

 


 


 


 
178,686

 
22,436

Other comprehensive income


 


 


 


 


 


 


 
22,468

 
22,468

 


Stock unit shares issued


 
4

 


 


 


 


 


 


 


 


Stock-settled SAR shares issued


 
195

 
1

 
(4,887
)
 


 


 


 


 
(4,886
)
 


Stock-settled stock-based
compensation expense


 


 


 
9,682

 


 


 


 


 
9,682

 


Changes in noncontrolling interest
from:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions
(26,166
)
 


 


 


 


 


 


 


 


 
(19,301
)
Contributions
9,508

 


 


 


 


 


 


 


 


 
2,501

Acquisitions and divestitures
688

 


 


 
76

 


 


 


 


 
76

 
(66
)
Partial purchases


 


 


 
(1,994
)
 


 


 


 


 
(1,994
)
 
(206
)
Fair value remeasurements
15,004

 


 


 
(15,004
)
 


 


 


 


 
(15,004
)
 


Purchase of treasury stock


 


 


 


 


 
(4,197
)
 
(298,377
)
 


 
(298,377
)
 


Balance at March 31, 2018
$
1,034,501

 
182,661

 
$
183

 
$
1,030,772

 
$
3,820,767

 
(4,197
)
 
$
(298,377
)
 
$
27,335

 
$
4,580,680

 
$
201,401

 See notes to condensed consolidated financial statements

6

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars and shares in thousands, except per share data)


Unless otherwise indicated in this Quarterly Report on Form 10-Q "the Company", "we", "us", "our" and similar terms refer to DaVita Inc. and its consolidated 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 necessary for a fair presentation of the results of operations are reflected in these condensed 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 accounts receivable, contingencies, impairments of goodwill and investments, accounting for income taxes, long-term variable compensation accruals, consolidation of variable interest entities and certain fair value estimates. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the operating results for the full year. The condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Prior year balances and amounts have been reclassified to conform to the current year presentation. The Company has evaluated subsequent events through the date these condensed consolidated financial statements were issued and has included all necessary adjustments and disclosures. 
2.
Revenue recognition
On January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606 Revenue from Contracts with Customers (Topic 606) using the cumulative effect method for those contracts that were not substantially completed as of January 1, 2018. Results for reporting periods beginning on and after January 1, 2018 are presented under Topic 606, while prior period amounts continue to be presented in accordance with the Company's historical accounting under Revenue Recognition (Topic 605).
The adoption of this new standard primarily changed the Company’s presentation of revenues, provision for uncollectible accounts and allowance for doubtful accounts. Topic 606 requires revenue to be recognized based on the Company’s estimate of the transaction price the Company expects to collect as a result of satisfying its performance obligations. Accordingly, for performance obligations satisfied after the adoption of Topic 606, the Company no longer separately presents a provision for uncollectible accounts on the consolidated income statement and no longer presents the related allowance for doubtful accounts on the consolidated balance sheet.
However, as a result of the Company’s election to apply Topic 606 only to contracts not substantially completed as of January 1, 2018, the Company continues to maintain an allowance for doubtful accounts related to performance obligations satisfied prior to the adoption of Topic 606. Changes to this allowance for doubtful accounts, other than write-offs of uncollectible accounts, are recorded through the provision for uncollectible accounts on the consolidated income statement in accordance with Topic 605.
The Company’s allowance for doubtful accounts related to performance obligations satisfied prior to the adoption of Topic 606 was $162,516 and $218,399 as of March 31, 2018 and December 31, 2017, respectively.
There are significant risks associated with estimating revenue, which generally take several years to resolve. These estimates are subject to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payor issues, as well as patient issues including determining applicable primary and secondary coverage, changes in patient coverage and coordination of benefits. As these estimates are refined over time, both positive and negative adjustments to revenue are recognized in the current period. As a result of changes in these estimates, additional revenue was recognized during the three months ended March 31, 2018 associated with performance obligations satisfied in years prior to the adoption of Topic 606 of $67,410, which includes a benefit of $24,000 from electing to apply Topic 606 only to contracts not substantially completed as of January 1, 2018.


7

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


The following table summarizes the Company's segment revenues by primary payor source:
 
For the three months ended
 
March 31, 2018
 
March 31, 2017(1)
 
U.S. dialysis and related lab services
 
Other - Ancillary services and strategic initiatives
 
Consolidated
 
U.S. dialysis and related lab services
 
Other - Ancillary services and strategic initiatives
 
Consolidated
Patient service revenues:
 
 
 
 
 
 
 
 
 
 
 
Medicare and Medicare Advantage
$
1,485,192

 
$
—

 
$
1,485,192

 
$
1,272,595

 
$
—

 
$
1,272,595

Medicaid and Managed Medicaid
157,496

 
—

 
157,496

 
144,585

 
—

 
144,585

Other government
107,119

 
82,537

 
189,656

 
91,993

 
47,761

 
139,754

Commercial
782,979

 
19,718

 
802,697

 
756,710

 
13,883

 
770,593

Other revenues:
 
 
 
 
 
 
 
 
 
 
 
Medicare and Medicare Advantage
—

 
142,758

 
142,758

 
—

 
225,203

 
225,203

Medicaid and Managed Medicaid
—

 
15,791

 
15,791

 
—

 
18,595

 
18,595

Commercial
—

 
40,420

 
40,420

 
—

 
25,207

 
25,207

Other(2)
5,114

 
38,941

 
44,055

 
5,311

 
47,576

 
52,887

Eliminations of intersegment revenues
(18,422
)
 
(10,199
)
 
(28,621
)
 
(11,799
)
 
(6,369
)
 
(18,168
)
Total
$
2,519,478

 
$
329,966

 
$
2,849,444

 
$
2,259,395

 
$
371,856

 
$
2,631,251

 
(1)
As noted above, prior period amounts have not been adjusted under the cumulative effect method. The Company's dialysis and related lab services revenues for the three months ended March 31, 2017 has been presented net of the provision for uncollectible accounts of $107,058 in this table to conform to the current period presentation.
(2)
Other consists of management fees and revenue from the Company's ancillary services and strategic initiatives.
Dialysis and related lab patient service revenues
Dialysis and related lab services patient service revenues are recognized in the period services are provided. Revenues consist primarily of payments from Medicare, Medicaid and commercial health plans for dialysis and related lab services provided to patients. A usual and customary fee schedule is maintained for the Company’s dialysis treatments and related lab patient services; however, actual collectible revenue is normally recognized at a discount from the fee schedule.
Revenues associated with Medicare and Medicaid programs are estimated based on: (a) the payment rates that are established by statute or regulation for the portion of payment rates paid by the government payor (e.g., 80% for Medicare patients) and (b) for the portion not paid by the primary government payor, estimates of the amounts ultimately collectible from other government programs paying secondary coverage (e.g., Medicaid secondary coverage), the patient’s commercial health plan secondary coverage, or the patient. The Company’s reimbursements from Medicare are subject to certain variations under Medicare’s single bundled payment rate system, whereby reimbursements can be adjusted for certain patient characteristics and other factors. The Company’s revenue recognition is estimated based on its judgment regarding its ability to collect, which depends upon its ability to effectively capture, document and bill for Medicare’s base payment rate as well as these other variable factors.
Under Medicare’s bundled payment rate system, services covered by Medicare are subject to estimating risk, whereby reimbursements from Medicare can vary significantly depending upon certain patient characteristics and other variable factors. Even with the bundled payment rate system, Medicare payments for bad debt claims as established by cost reports require evidence of collection efforts. As a result, billing and collection of Medicare bad debt claims can be delayed significantly and final payment is subject to audit.
Medicaid payments, when Medicaid coverage is secondary, can also be difficult to estimate. For many states, Medicaid payment terms and methods differ from Medicare, and may prevent accurate estimation of individual payment amounts prior to billing.

8

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


Revenues associated with commercial health plans are estimated based on contractual terms for the patients under healthcare plans with which the Company has formal agreements, non-contracted health plan coverage terms if known, estimated secondary collections, historical collection experience, historical trends of refunds and payor payment adjustments (retractions), inefficiencies in the Company’s billing and collection processes that can result in denied claims for payments, and regulatory compliance matters.
Commercial revenue recognition also involves significant estimating risks. With many larger, commercial insurers the Company has several different contracts and payment arrangements, and these contracts often include only a subset of the Company’s centers. It is often not possible to determine which contract, if any, should be applied prior to billing. In addition, for services provided by non-contracted centers, final collection may require specific negotiation of a payment amount, typically at a significant discount from the Company’s usual and customary rates.
Other revenues
Other revenues consist of the revenues associated with the ancillary services and strategic initiatives, management and administrative support services that are provided to outpatient dialysis centers that the Company does not own or in which the Company owns a noncontrolling interest, and administrative and management support services to certain other non-dialysis joint ventures in which the Company owns a noncontrolling interest. Revenues associated with pharmacy services are estimated as prescriptions are filled and shipped to patients. Revenues associated with dialysis management services, disease management services, medical consulting services, clinical research programs, physician services, end stage renal disease (ESRD) seamless care organizations, and comprehensive care are estimated in the period services are provided. Revenues associated with direct primary care are estimated over the membership period.
3.
Earnings per share
Basic earnings per share is calculated by dividing net income attributable to the Company, adjusted for any change in noncontrolling interests redemption rights in excess of fair value, by the weighted average number of common shares, net of shares held in escrow that under certain circumstances may be returned to the Company.
Diluted earnings per share includes the dilutive effect of outstanding stock-settled stock appreciation rights (SSARs) and unvested stock units (under the treasury stock method) as well as shares held in escrow that the Company expects will remain outstanding.

9

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


The reconciliations of the numerators and denominators used to calculate basic and diluted earnings per share were as follows:
 
Three months ended March 31,
 
2018
 
2017
Numerators:
 

 
 

Net income from continuing operations attributable to DaVita Inc.
$
191,015

 
$
440,905

Net (loss) income from discontinued operations attributable to DaVita Inc.
(12,329
)
 
6,792

Net income attributable to DaVita Inc. for basic earnings per share calculation
$
178,686

 
$
447,697

Basic:
 
 
 
Weighted average shares outstanding during the period
181,152

 
194,571

Contingently returnable shares held in escrow for the DaVita HealthCare Partners merger
(2,194
)
 
(2,194
)
Weighted average shares for basic earnings per share calculation
178,958

 
192,377

 
 
 
 
Basic net income from continuing operations per share attributable to DaVita Inc.
$
1.07

 
$
2.29

Basic net (loss) income from discontinued operations per share attributable to DaVita Inc.
(0.07
)
 
0.04

Basic net income per share attributable to DaVita Inc.
$
1.00

 
$
2.33

Diluted:
 
 
 
Weighted average shares outstanding during the period
181,152

 
194,571

Assumed incremental shares from stock plans
683

 
710

Weighted average shares for diluted earnings per share calculation
181,835

 
195,281

 
 
 
 
Diluted net income from continuing operations per share attributable to DaVita Inc.
$
1.05

 
$
2.26

Diluted net (loss) income from discontinued operations per share attributable to DaVita Inc.
(0.07
)
 
0.03

Diluted net income per share attributable to DaVita Inc.
$
0.98

 
$
2.29

Anti-dilutive stock-settled awards excluded from calculation(1)
3,453

 
3,427

 
(1)
Shares associated with stock-settled stock appreciation rights excluded from the diluted denominator calculation because they are antidilutive under the treasury stock method.
4.
Restricted cash and equivalents
The Company had restricted cash and cash equivalents of $88,744 and $10,686 at March 31, 2018 and December 31, 2017, respectively. Approximately $78,320 of the balance at March 31, 2018 represents restricted cash equivalents held in trust to satisfy insurer and state regulatory requirements related to the Company's self-insurance for professional and general liability and workers' compensation risks administered by wholly-owned captive insurance entities. Prior to the first quarter of 2018, these requirements were satisfied by a letter of credit rather than restricted cash held in trust. The remaining restricted cash and equivalents held at March 31, 2018 and December 31, 2017 primarily represent cash pledged to third parties in connection with two of the Company's ancillary and strategic initiatives businesses.
5.
Short-term and long-term investments

Effective January 1, 2018, the Company adopted ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU revise accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities at fair value. The Company also adopted ASU 2018-03 which provides related technical corrections and improvements. The principal effect of ASUs 2016-01 and 2018-03 on the Company's consolidated financial statements is that, prior to adoption of ASU 2016-01, changes in the fair values of investments in equity securities with readily determinable fair values or redemption values were recognized in other comprehensive income until realized, while under ASU 2016-01 all changes in the fair values of these equity securities are recognized in current earnings. The adoption of these ASUs did not have a material impact on these condensed consolidated financial statements.

10

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)



Effective January 1, 2018, the Company recognized a cumulative effect of change in accounting principle upon adoption of ASUs 2016-01 and 2018-03, in conjunction with ASU 2018-02, the effect of which was to decrease accumulated other comprehensive income, and to increase retained earnings, by $5,662 in after-tax unrealized gains accumulated in other comprehensive income through December 31, 2017 from equity securities classified as available-for-sale investments prior to adoption of ASU 2016-01.
From January 1, 2018, equity securities that have readily determinable fair values or redemption values are recorded at estimated fair value with changes in their value recognized in current earnings. The Company classifies its debt securities as held-to-maturity and records them at amortized cost based on its intentions and strategy concerning those investments.
The Company classifies these debt and equity investments as "Short-term investments" or "Long-term investments" on its consolidated balance sheet, as applicable, based on the characteristics of the financial instrument or the Company's intentions or expectations for the investment.
The Company’s investments in these short-term and long-term debt and equity investments consist of the following:
 
March 31, 2018
 
December 31, 2017
 
Debt
securities
 
Equity
securities
 
Total
 
Debt
securities
 
Equity
securities
 
Total
Certificates of deposit and other time deposits
$
3,402

 
$
—

 
$
3,402

 
$
31,630

 
$
—

 
$
31,630

Investments in mutual funds and common stock
—

 
35,544

 
35,544

 
—

 
38,895

 
38,895

 
$
3,402

 
$
35,544

 
$
38,946

 
$
31,630

 
$
38,895

 
$
70,525

Short-term investments
$
3,402

 
$
1,200

 
$
4,602

 
$
31,630

 
$
1,200

 
$
32,830

Long-term investments
—

 
34,344

 
34,344

 
—

 
37,695

 
37,695

 
$
3,402

 
$
35,544

 
$
38,946

 
$
31,630

 
$
38,895

 
$
70,525

Debt securities: The Company's short-term debt investments are principally comprised of bank certificates of deposit with contractual maturities longer than three months but shorter than one year. These debt securities are accounted for as held to maturity and recorded at amortized cost, which approximates their fair values at March 31, 2018 and December 31, 2017.
Equity securities: The Company's equity investments in mutual funds and common stock are held within a trust to fund existing obligations associated with several of the Company’s non-qualified deferred compensation plans. During the three months ended March 31, 2018, the Company recognized pre-tax net gains of $86 in the income statement associated with changes in the fair value of these equity securities, comprised of pre-tax realized gains of $3,746 and a net decrease in unrealized gains of $3,660. During the three months ended March 31, 2017, the Company recognized pre-tax realized gains on the sale or redemption of equity securities of $229, or $140 after-tax, which was previously recorded in other comprehensive income.
6.
Equity method and other investments
Equity investments in nonconsolidated investees over which the Company maintains significant influence, but which do not have readily determinable fair values, are carried on the equity method.
As described in Note 5 to these condensed consolidated financial statements, effective January 1, 2018, the Company adopted ASU 2016-01 and related ASU 2018-03 concerning recognition and measurement of financial assets and financial liabilities. In adopting this new guidance, the Company has made an accounting policy election to adopt an adjusted cost method measurement alternative for investments in equity securities without readily determinable fair values.
Specifically, under this measurement alternative, unless elected otherwise for a particular investment, the Company initially records equity investments that qualify for the measurement alternative at cost but remeasures them to fair value through earnings when there is an observable transaction involving the same or a similar investment with the same issuer or upon an impairment.

11

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


The Company maintains equity method and minor adjusted cost method investments in the private securities of certain other healthcare and healthcare-related businesses. The Company classifies these investments as "Equity method and other investments" on its consolidated balance sheet.
Total equity method and other investments in nonconsolidated businesses were $245,564 and $245,534 at March 31, 2018 and December 31, 2017, respectively. During the three months ended March 31, 2018 and 2017, the Company recognized equity investment income of $155 and $677, respectively, from equity method investments in nonconsolidated businesses. 
The Company's largest equity method investment is its ownership interest in DaVita Care Pte. Ltd. (the APAC JV), which was carried at $160,535 and $160,481 at March 31, 2018 and December 31, 2017, respectively. The Company recognized a non-cash other-than-temporary impairment on this investment of $280,066 in the fourth quarter of 2017.
As of March 31, 2018 and December 31, 2017, the Company holds a 60% voting interest and a 73.3% current economic interest in the APAC JV. Based on the governance structure and voting rights established for the APAC JV at its formation on August 1, 2016, certain key decisions affecting the joint venture’s operations are not subject to the unilateral discretion of the Company, but rather are shared with the other noncontrolling investors. These other noncontrolling investors currently collectively hold a 40% voting interest and a 26.7% economic interest in the APAC JV, and their economic interests are expected to increase to match their voting interests in the joint venture as they make additional subscribed capital contributions through August 1, 2019.
The total carrying amount of equity investments carried under the adjusted cost method measurement alternative at March 31, 2018 was $5,386. Through March 31, 2018, there have been no meaningful impairments or other downward or upward valuation adjustments recognized on these investments.
7.
Goodwill
Changes in goodwill by reportable segment were as follows:
 
U.S. dialysis and
related lab services
 
Other-ancillary
services and
strategic initiatives
 
Consolidated total
Balance at January 1, 2017
$
5,691,587

 
$
323,788

 
$
6,015,375

Acquisitions
485,434

 
131,598

 
617,032

Divestitures
(32,260
)
 
(126
)
 
(32,386
)
Goodwill impairment charges
—

 
(36,196
)
 
(36,196
)
Foreign currency and other adjustments
—

 
46,454

 
46,454

Balance at December 31, 2017
$
6,144,761

 
$
465,518

 
$
6,610,279

Acquisitions
2,137

 
13,905

 
16,042

Foreign currency and other adjustments
—

 
12,271

 
12,271

Balance at March 31, 2018
$
6,146,898

 
$
491,694

 
$
6,638,592

 
 
 
 
 
 
Balance at March 31, 2018:
 
 
 
 
 
Goodwill
$
6,146,898

 
$
562,214

 
$
6,709,112

Accumulated impairment charges
—

 
(70,520
)
 
(70,520
)
 
$
6,146,898

 
$
491,694

 
$
6,638,592

The Company elected to early adopt ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, effective January 1, 2017. The amendments in this ASU simplify the test for goodwill impairment by eliminating the second step in the assessment. All goodwill impairment tests performed during 2017 and 2018 have been performed under this new guidance.
Each of the Company’s operating segments described in Note 19 to these condensed consolidated financial statements represents an individual reporting unit for goodwill impairment testing purposes, except that each sovereign jurisdiction within the Company’s international operating segments is considered a separate reporting unit.

12

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


Within the U.S. dialysis and related lab services operating segment, the Company considers each of its dialysis centers to constitute an individual business for which discrete financial information is available. However, since these dialysis centers have similar operating and economic characteristics, and the allocation of resources and significant investment decisions concerning these businesses are highly centralized and the benefits broadly distributed, the Company has aggregated these centers and deemed them to constitute a single reporting unit.
The Company has applied a similar aggregation to the vascular access service centers in its vascular access reporting unit, to the physician practices in its physician services and direct primary care reporting units, and to the dialysis centers within each international reporting unit. For the Company’s other operating segments, discrete business components below the operating segment level constitute individual reporting units.
During the three months ended March 31, 2018, the Company did not recognize any goodwill impairment charges.
During the three months ended March 31, 2017, the Company recognized a goodwill impairment charge of $24,198 at the Company’s vascular access reporting unit. This charge resulted primarily from changes in the Company's outlook as the Company's partners and operators continued to evaluate potential changes in operations, including termination of their management services agreements and center closures, as a result of recent changes in Medicare reimbursement. There is no goodwill remaining at the Company's vascular access reporting unit.
For the reporting units considered at risk as of December 31, 2017 listed in the table below, there have been no major changes in the business, prospects, or expected future results of these reporting units from their latest assessment date through March 31, 2018. Based on the most recent assessments, the Company determined that reductions in reimbursement rates, changes in actual or expected growth rates, or other significant adverse changes in expected future cash flows or valuation assumptions could result in goodwill impairment charges in the future for the following reporting units, which remain at risk of goodwill impairment as of March 31, 2018:
 
 
Goodwill balance
as of
March 31, 2018
 
Carrying
amount
coverage(1)
 
Sensitivities
Reporting unit
 
 
 
Operating
income(2)
 
Discount
rate(3)
Kidney Care Germany
 
$
337,619

 
13.7
%
 
(1.6
)%
 
(11.1
)%
Kidney Care Portugal
 
$
48,066

 
16.9
%
 
(1.9
)%
 
(6.0
)%
Kidney Care Poland
 
$
47,669

 
11.8
%
 
(1.9
)%
 
(6.0
)%
 
(1)
Excess of estimated fair value of the reporting unit over its carrying amount as of the latest assessment date.
(2)
Potential impact on estimated fair value of a sustained, long-term reduction of 3% in operating income as of the latest assessment date.
(3)
Potential impact on estimated fair value of an increase in discount rates of 100 basis points as of the latest assessment date.
Except as described above, none of the Company's various other reporting units were considered at risk of significant goodwill impairment as of March 31, 2018. Since the dates of the Company's last annual goodwill impairment tests, there have been certain developments, events, changes in operating performance and other changes in key circumstances that have affected the Company's businesses. However, these changes did not cause management to believe it is more likely than not that the fair value of any of the Company's reporting units would be less than their respective carrying amounts as of March 31, 2018.
8.
Income taxes
As of March 31, 2018, the Company’s total liability for unrecognized tax benefits relating to tax positions that do not meet the more-likely-than-not threshold was $33,880, all of which would impact the Company’s effective tax rate if recognized. This balance represents an increase of $1,104 from the December 31, 2017 balance of $32,776.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. At March 31, 2018 and December 31, 2017, the Company had approximately $3,971 and $4,195, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefits. 

13

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


The Company performed a provisional analysis of the Tax Cuts and Jobs Act of 2017 (2017 Tax Act) and recorded a reasonable estimate of its effect for the year ended December 31, 2017. The Company is in the process of completing its analysis with respect to the 2017 Tax Act and will record any adjustments to its estimate on or before December 22, 2018, with any adjustments to be recorded to income tax expense in the period when the adjustments are determined. As of March 31, 2018, the Company has not made any material adjustments to the December 31, 2017 estimates. The 2018 effective tax rate reduction is primarily due to the impact of the 2017 Tax Act which reduced the federal tax rate from 35% to 21%.
9.
Long-term debt
Long-term debt was comprised of the following: 
 
March 31,
2018
 
December 31,
2017
Senior secured credit facilities:
 
 
 
Term Loan A
$
750,000

 
$
775,000

Term Loan A-2
452,000

 
—

Term Loan B
3,368,750

 
3,377,500

Revolver
—

 
300,000

Senior notes
4,500,000

 
4,500,000

Acquisition obligations and other notes payable
151,167

 
150,512

Capital lease obligations
304,062

 
297,170

Total debt principal outstanding
9,525,979

 
9,400,182

Discount and deferred financing costs
(61,958
)
 
(63,951
)
 
9,464,021

 
9,336,231

Less current portion
(184,136
)
 
(178,213
)
 
$
9,279,885

 
$
9,158,018

Scheduled maturities of long-term debt at March 31, 2018 were as follows: 
2018 (remainder of the year)
136,885

2019
1,206,668

2020
72,608

2021
3,307,539

2022
1,283,255

2023
32,340

Thereafter
3,486,684

On March 29, 2018, the Company entered into an Increase Joinder No. 1 (Increase Joinder Agreement) under its existing senior secured credit facilities. Pursuant to this Increase Joinder Agreement, the Company entered into an additional $995,000 Term Loan A-2. The new Term Loan A-2 bears interest at LIBOR plus an interest rate margin of 1.00%. As of March 31, 2018, the Company has initially drawn $452,000 of the Term Loan A-2, and the Company can draw up to an incremental $543,000 on Term Loan A-2 through its maturity date in June 2019.
During the first three months of 2018, the Company made mandatory principal payments under its senior secured credit facilities totaling $25,000 on Term Loan A and $8,750 on Term Loan B.
As of March 31, 2018, the Company maintains several active and forward interest rate cap agreements that have the economic effect of capping the Company's maximum exposure to LIBOR variable interest rate changes on specific portions of the Company's floating rate debt, as described below. The cap agreements are designated as cash flow hedges and, as a result, changes in the fair values of these cap agreements are reported in other comprehensive income. The amortization of the original cap premium is recognized as a component of debt expense on a straight-line basis over the terms of the cap agreements. The cap agreements do not contain credit-risk contingent features.

14

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


As of March 31, 2018, the Company maintains several currently effective interest rate cap agreements that were entered into in November 2014 with notional amounts totaling $3,500,000. These cap agreements became effective September 30, 2016 and have the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 3.50% on an equivalent amount of the Company’s debt. These cap agreements expire on June 30, 2018. As of March 31, 2018, these cap agreements had an immaterial fair value. During the three months ended March 31, 2018, the Company recognized debt expense of $2,070 from these caps. During the three months ended March 31, 2018, the Company recorded an immaterial loss in other comprehensive income due to a decrease in unrealized fair value of these cap agreements.
As of March 31, 2018, the Company also maintains several forward interest rate cap agreements that were entered into in October 2015 with notional amounts totaling $3,500,000. These forward cap agreements will become effective June 29, 2018 and will have the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 3.50% on an equivalent amount of its debt. These cap agreements expire on June 30, 2020. As of March 31, 2018, the total fair value of these cap agreements was an asset of approximately $2,446. During the three months ended March 31, 2018, the Company recorded a gain of $1,414 in other comprehensive income due to an increase in the unrealized fair value of these forward cap agreements.
The following table summarizes the Company’s derivative instruments as of March 31, 2018 and December 31, 2017: 
 
 
March 31, 2018
 
December 31, 2017
Derivatives designated as hedging instruments
 
Balance sheet location
 
Fair value
 
Balance sheet location
 
Fair value
Interest rate cap agreements
 
Other long-term assets
 
$
2,446

 
Other long-term assets
 
$
1,032

 The following table summarizes the effects of the Company’s interest rate cap agreements for the three months ended March 31, 2018 and 2017:
 
Amount of unrecognized gains (losses) in OCI on interest rate cap agreements
 
Location of losses reclassified from accumulated OCI into income
 
Amount of losses reclassified from accumulated OCI into income
 
Three months ended
March 31,
 
 
Three months ended
March 31,
Derivatives designated as cash flow hedges
2018
 
2017
 
 
2018
 
2017
Interest rate cap agreements
$
1,414

 
$
(5,217
)
 
Debt expense
 
$
2,070

 
$
2,070

Tax (benefit) expense
(364
)
 
2,029

 
Tax expense
 
(533
)
 
(805
)
Total
$
1,050

 
$
(3,188
)
 
 
 
$
1,537

 
$
1,265

As of March 31, 2018, the Company’s Term Loan B debt bears interest at LIBOR plus an interest rate margin of 2.75%. Term Loan B is subject to interest rate caps if LIBOR should rise above 3.50%. Term Loan A bears interest at LIBOR plus an interest rate margin of 2.00%. The capped portion of Term Loan A is $131,250 if LIBOR should rise above 3.50%. In addition, the uncapped portion of Term Loan A, which is subject to the variability of LIBOR, is $618,750. Term Loan A-2 is subject to the variability of LIBOR plus an interest rate margin of 1.00%. Interest rates on the Company’s senior notes are fixed by their terms.
The Company’s weighted average effective interest rate on the senior secured credit facilities at the end of the quarter was 4.67%, based on the current margins in effect of 2.00% for Term Loan A, 1.00% for Term Loan A-2, and 2.75% for Term Loan B, as of March 31, 2018.
The Company’s overall weighted average effective interest rate during the quarter ended March 31, 2018 was 4.87% and as of March 31, 2018 was 4.98%.
As of March 31, 2018, the Company’s interest rates are fixed on approximately 51.34% of its total debt.
As of March 31, 2018, the Company had undrawn revolving credit facilities totaling $1,000,000, of which approximately $14,355 was committed for outstanding letters of credit. The remaining amount is unencumbered. The Company

15

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


also has approximately $22,351 of additional outstanding letters of credit related to its Kidney Care business and $211 of committed outstanding letters of credit related to DaVita Medical Group (DMG), which is backed by a certificate of deposit.
10.
Contingencies
The majority of the Company’s revenues are from government programs and may be subject to adjustment as a result of: (i) examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (ii) differing interpretations of government regulations by different Medicare contractors or regulatory authorities; (iii) differing opinions regarding a patient’s medical diagnosis or the medical necessity of services provided; and (iv) retroactive applications or interpretations of governmental requirements. In addition, the Company’s revenues from commercial payors may be subject to adjustment as a result of potential claims for refunds, as a result of government actions or as a result of other claims by commercial payors.
The Company operates in a highly regulated industry and is a party to various lawsuits, claims, qui tam suits, governmental investigations and audits (including investigations resulting from its obligation to self-report suspected violations of law) and other legal proceedings. The Company records accruals for certain legal proceedings and regulatory matters to the extent that the Company determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. As of March 31, 2018 and December 31, 2017, the Company’s total recorded accruals, including DMG, with respect to legal proceedings and regulatory matters, net of anticipated third party recoveries, were immaterial. While these accruals reflect the Company’s best estimate of the probable loss for those matters as of the dates of those accruals, the recorded amounts may differ materially from the actual amount of the losses for those matters, and any anticipated third party recoveries for any such losses may not ultimately be recoverable. Additionally, in some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal proceedings and regulatory matters, which also may be impacted by various factors, including that they may involve indeterminate claims for monetary damages or may involve fines, penalties or non-monetary remedies; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; are in the early stages of the proceedings; or result in a change of business practices. Further, there may be various levels of judicial review available to the Company in connection with any such proceeding.
The following is a description of certain lawsuits, claims, governmental investigations and audits and other legal proceedings to which the Company is subject.
Inquiries by the Federal Government and Certain Related Civil Proceedings
2015 U.S. Office of Inspector General (OIG) Medicare Advantage Civil Investigation: In March 2015, JSA HealthCare Corporation (JSA), a subsidiary of DMG, received a subpoena from the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services (HHS) requesting documents and information for the period from January 1, 2008 through December 31, 2013, for certain MA plans for which JSA provided services. It also requests information regarding JSA’s communications about patient diagnoses as they relate to certain MA plans generally, and more specifically as related to two Florida physicians with whom JSA previously contracted. The Company is producing the requested information and is cooperating with the government’s investigation.
In addition to the subpoena described above, in June 2015, the Company received a civil subpoena from the OIG covering the period from January 1, 2008 through the present and seeking production of a wide range of documents relating to the Company’s and its subsidiaries’ (including DMG’s and its subsidiary JSA’s) provision of services to MA plans and related patient diagnosis coding and risk adjustment submissions and payments. The Company believes that the request is part of a broader industry investigation into MA patient diagnosis coding and risk adjustment practices and potential overpayments by the government. The information requested includes information relating to patient diagnosis coding practices for a number of conditions, including potentially improper historical DMG coding for a particular condition. With respect to that condition, the guidance related to that coding issue was discontinued following the Company’s November 1, 2012 acquisition of HealthCare Partners (now known as the Company's DMG business), and the Company notified Centers for Medicare and Medicaid Services (CMS) in April 2015 of the coding practice and potential overpayments. In that regard, the Company has identified certain additional coding practices which may have been problematic, some of which were the subject of the previously disclosed and dismissed Swoben Private Civil Suit, and is in discussions with the DOJ relating to those practices. The Company is cooperating with the government. In addition, the Company is continuing to review other DMG coding practices to determine whether there were any improper coding issues. In connection with the Company's acquisition of DMG in 2012, the Company

16

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


has certain indemnification rights against the sellers and an escrow was established as security for the indemnification. The Company has submitted an indemnification claim against the sellers secured by the escrow for any and all liabilities incurred relating to these matters and intends to pursue recovery from the escrow. However, the Company can make no assurances that the indemnification and escrow will cover the full amount of the Company’s potential losses related to these matters.
2016 U.S. Attorney Texas Investigation: In early February 2016, the Company announced that its pharmacy services’ wholly-owned subsidiary, DaVita Rx, LLC, (DaVita Rx) received a Civil Investigative Demand (CID) from the U.S. Attorney’s Office for the Northern District of Texas. The government is conducting a federal False Claims Act (FCA) investigation concerning allegations that DaVita Rx presented or caused to be presented false claims for payment to the government for prescription medications, as well as into the Company’s relationship with pharmaceutical manufacturers. The CID covers the period from January 1, 2006 through the present. In the spring of 2015, the Company initiated an internal compliance review of DaVita Rx during which it identified potential billing and operational issues, including potential write-offs and discounts of patient co-payment obligations, and credits to payors for returns of prescription drugs related to DaVita Rx. The Company notified the government in September 2015 that it was conducting this review of DaVita Rx and began providing regular updates of its review. Upon completion of its review, the Company filed a self-disclosure with the OIG in February 2016 and has been working to address and update the practices it identified in the self-disclosure, some of which overlap with information requested by the U.S. Attorney’s Office. The OIG informed the Company in February 2016 that its submission was not accepted. They indicated that the OIG is not expressing an opinion regarding the conduct disclosed or the Company’s legal positions. In connection with the Company’s ongoing efforts working with the government the Company learned that a qui tam complaint had been filed covering some of the issues in the CID and the Company’s self-disclosure. In December 2017, the Company finalized and executed a settlement agreement with the government and relators in the qui tam matter and that included total monetary consideration of $63,700, as previously announced, of which $41,500 was an incremental cash payment and $22,200 was for amounts previously refunded, and all of which was previously accrued. The government’s investigation into the Company's relationship with pharmaceutical manufacturers is ongoing and the Company is continuing to cooperate with the government in this investigation.
2017 U.S. Attorney Massachusetts Investigation: In January 2017, the Company was served with an administrative subpoena for records by the United States Attorney’s Office, District of Massachusetts, relating to an investigation into possible federal health care offenses. The subpoena covers the period from January 1, 2007 through the present, and seeks documents relevant to charitable patient assistance organizations, particularly the American Kidney Fund, including documents related to efforts to provide patients with information concerning the availability of charitable assistance. The Company is cooperating with the government.
2017 U.S. Attorney Colorado Investigation: In November 2017, United States Attorney’s Office, District of Colorado informed the Company of an investigation it was conducting into possible federal health care offenses involving DaVita Kidney Care, as well as several of the Company's wholly-owned subsidiaries, including DMG, DaVita Rx, DaVita Laboratory Services, Inc. (DaVita Labs), and RMS Lifeline Inc. (Lifeline). There is overlap between the Colorado investigation and the other reported investigations concerning DMG and DaVita Rx. The Company is cooperating with the government.
2017 U.S. Attorney Florida Investigation: In November 2017, United States Attorney’s Office, Southern District of Florida informed the Company of an investigation it was conducting into possible federal healthcare offenses involving the Company's wholly-owned subsidiary, Lifeline. The Company is cooperating with the government.
2018 U.S. Attorney Florida Investigation: In March 2018, DaVita Labs, received two CIDs from the United States Attorney’s Office, Middle District of Florida that were identical in nature but directed to the two different labs. According to the face of the CIDs, the U.S. Attorney’s Office is conducting an investigation as to whether the Company's subsidiary submitted claims for blood, urine, and fecal testing, where there were insufficient test validation or stability studies to ensure accurate results, in violation of the False Claims Act. The Company is cooperating with the government.
* * *
Although the Company cannot predict whether or when proceedings might be initiated or when these matters may be resolved (other than as described above), it is not unusual for inquiries such as these to continue for a considerable period of time through the various phases of document and witness requests and on-going discussions with regulators and to develop over the course of time. In addition to the inquiries and proceedings specifically identified above, the Company frequently is subject

17

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


to other inquiries by state or federal government agencies and/or private civil qui tam complaints filed by relators. Negative findings or terms and conditions that the Company might agree to accept as part of a negotiated resolution of pending or future government inquiries or relator proceedings could result in, among other things, substantial financial penalties or awards against the Company, substantial payments made by the Company, harm to the Company’s reputation, required changes to the Company’s business practices, exclusion from future participation in the Medicare, Medicaid and other federal health care programs and, if criminal proceedings were initiated against the Company, possible criminal penalties, any of which could have a material adverse effect on the Company.
Shareholder and Derivative Claims
Peace Officers’ Annuity and Benefit Fund of Georgia Securities Class Action Civil Suit: On February 1, 2017, the Peace Officers’ Annuity and Benefit Fund of Georgia filed a putative federal securities class action complaint in the U.S. District Court for the District of Colorado against the Company and certain executives. The complaint covers the time period of August 2015 to October 2016 and alleges, generally, that the Company and its executives violated federal securities laws concerning the Company’s financial results and revenue derived from patients who received charitable premium assistance from an industry-funded non-profit organization. The complaint further alleges that the process by which patients obtained commercial insurance and received charitable premium assistance was improper and "created a false impression of DaVita’s business and operational status and future growth prospects." In November 2017, the court appointed the lead plaintiff and an amended complaint was filed on January 12, 2018. On March 27, 2018, the Company and various individual defendants filed a motion to dismiss. The Company disputes these allegations and intends to defend this action accordingly.
In re DaVita Inc. Stockholder Derivative Litigation: On August 15, 2017, the U.S. District Court for the District of Delaware consolidated three previously disclosed shareholder derivative lawsuits: the Blackburn Shareholder action filed on February 10, 2017, the Gabilondo Shareholder action filed on May 30, 2017, and the City of Warren Police and Fire Retirement System Shareholder action filed on June 9, 2017. The complaint covers the time period from 2015 to present and alleges, generally, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, corporate waste, and misrepresentations and/or failures to disclose certain information in violation of the federal securities laws in connection with an alleged practice to direct patients with government-subsidized health insurance into private health insurance plans to maximize the Company’s profits. An amended complaint was filed in September 2017, and on December 18, 2017 the Company filed a motion to dismiss and a motion to stay proceedings in the alternative. The plaintiffs filed an opposition to the motion to dismiss on March 9, 2018. The Company disputes these allegations and intends to defend this action accordingly.
Other Proceedings
In addition to the foregoing, from time to time the Company is subject to other lawsuits, demands, claims, governmental investigations and audits and legal proceedings that arise due to the nature of its business, including contractual disputes, such as with payors, suppliers and others, employee-related matters and professional and general liability claims. From time to time, the Company also initiates litigation or other legal proceedings as a plaintiff arising out of contracts or other matters.
Resolved Matters
2011 Suit against the U.S. Department of Veterans Affairs: As previously disclosed, the Company had a pending lawsuit in the U.S. Court of Federal Claims against the federal government which was originally filed in May 2011. The lawsuit related to the U.S. Department of Veterans Affairs (VA) underpayment of dialysis services the Company provided from 2005 through 2011 to veterans pursuant to VA regulations. In the first quarter of 2017, the Company received a payment of $538,000 related to the settlement with the VA. The Company's consolidated entities recognized a net gain of $527,000 on this settlement. The Company's nonconsolidated and managed entities recognized a gain of $9,000, of which the Company's equity investment share was $3,000. The net effect was a net increase of $530,000 to the Company's operating income.
* * *
Other than as described above, the Company cannot predict the ultimate outcomes of the various legal proceedings and regulatory matters to which the Company is or may be subject from time to time, including those described in this Note 10 to these condensed consolidated financial statements, or the timing of their resolution or the ultimate losses or impact of developments in those matters, which could have a material adverse effect on the Company’s revenues, earnings and cash flows. Further, any legal proceedings or regulatory matters involving the Company, whether meritorious or not, are time

18

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


consuming, and often require management’s attention and result in significant legal expense, and may result in the diversion of significant operational resources, or otherwise harm the Company’s business, financial results or reputation.
11.
Noncontrolling interests subject to put provisions and other commitments
The Company has potential obligations to purchase the equity interests held by third parties in several of its majority-owned joint ventures and other nonconsolidated entities. These obligations are in the form of put provisions that are exercisable at the third-party owners’ discretion within specified periods as outlined in each specific put provision. If these put provisions were exercised, the Company would be required to purchase the third-party owners’ equity interests at either the appraised fair market value or a predetermined multiple of earnings or cash flows attributable to the equity interests put to the Company, which is intended to approximate fair value. The methodology the Company uses to estimate the fair values of noncontrolling interests subject to put provisions assumes the higher of either a liquidation value of net assets or an average multiple of earnings, based on historical earnings, patient mix and other performance indicators that can affect future results, as well as other factors. The estimated fair values of noncontrolling interests subject to put provisions are a critical accounting estimate that involves significant judgments and assumptions and may not be indicative of the actual values at which the noncontrolling interests may ultimately be settled, which could vary significantly from the Company’s current estimates. The estimated fair values of noncontrolling interests subject to put provisions can fluctuate and the implicit multiple of earnings at which these noncontrolling interests obligations may be settled will vary significantly depending upon market conditions including potential purchasers’ access to the capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses, the economic performance of these businesses and the restricted marketability of the third-party owners’ equity interests. The amount of noncontrolling interests subject to put provisions that employ a contractually predetermined multiple of earnings rather than fair value are immaterial.
The Company has certain other potential commitments to provide operating capital to a number of dialysis centers that are wholly-owned by third parties or businesses in which the Company maintains a noncontrolling equity interest as well as to physician-owned vascular access clinics or medical practices that the Company operates under management and administrative services agreements of approximately $5,542.
Certain consolidated joint ventures are originally contractually scheduled to dissolve after terms ranging from 10 to 50 years. While noncontrolling interests in these limited life entities qualify as mandatorily redeemable financial instruments, they are subject to a classification and measurement scope exception from the accounting guidance generally applicable to other mandatorily redeemable financial instruments. Future distributions upon dissolution of these entities would be valued below the related noncontrolling interest carrying balances in the consolidated balance sheet.
12.
Long-term incentive compensation
Long-term incentive program (LTIP) compensation includes both stock-based awards (principally stock-settled stock appreciation rights, restricted stock units, and performance stock units) as well as long-term performance-based cash awards. Long-term incentive compensation expense, which was primarily general and administrative in nature, was attributed to the Company’s U.S. dialysis and related lab services business, corporate administrative support, and ancillary services and strategic initiatives.
The Company’s stock-based compensation awards are measured at their estimated fair values on the date of grant if settled in shares or at their estimated fair values at the end of each reporting period if settled in cash. The value of stock-based awards so measured is recognized as compensation expense on a cumulative straight-line basis over the vesting terms of the awards, adjusted for expected forfeitures.
During the three months ended March 31, 2018, the Company granted 11 stock-settled stock appreciation rights with an aggregate grant-date fair value of $200 and a weighted-average expected life of approximately 3.7 years and 60 stock units with an aggregate grant-date fair value of $3,995 and a weighted-average expected life of approximately 1.0 years.
For the three months ended March 31, 2018 and 2017, the Company recognized $15,215 and $15,254, respectively, in total LTIP expense, of which $9,155 and $8,425, respectively, represented stock-based compensation expense for stock appreciation rights, restricted stock units, and discounted employee stock plan purchases, which are primarily included in general and administrative expense. The estimated tax benefits recorded for stock-based compensation for the three months ended March 31, 2018 and 2017 was $2,088 and $2,922, respectively.

19

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


As of March 31, 2018, the Company had $91,823 of total estimated but unrecognized compensation expense for outstanding LTIP awards, including $62,013 related to stock-based compensation arrangements under the Company’s equity compensation and employee stock purchase plans. The Company expects to recognize the performance-based cash component of these LTIP costs over a weighted average remaining period of 1.1 years and the stock-based component of these LTIP costs over a weighted average remaining period of 1.3 years.
For the three months ended March 31, 2018 and 2017, the Company recognized $4,895 and $1,091, respectively, in actual tax benefits upon the exercise of stock awards. 
13.
Share repurchases
During the three months ended March 31, 2018, the Company repurchased a total of 4,197 shares of its common stock for $298,377 at an average price of $71.09 per share. The Company also repurchased 4,350 shares of its common stock for $275,992 at an average price of $63.44 per share, subsequent to March 31, 2018 through May 2, 2018.
On October 10, 2017, the Company's Board of Directors approved an additional share repurchase authorization in the amount of $1,252,961. This share repurchase authorization was in addition to the $247,039 remaining at that time under the Company’s Board of Directors’ prior share repurchase authorization announced in July 2016. Accordingly, as of May 2, 2018, the Company has a total of $544,747 available under the current Board repurchase authorizations for additional share repurchases. Although these share repurchase authorizations do not have expiration dates, the Company remains subject to share repurchase limitations under the terms of its senior secured credit facilities and the indentures governing its senior notes.
14.     Other comprehensive income 
 
For the three months ended March 31, 2018
 
For the three months ended March 31, 2017
 
Interest
rate cap
agreements
 
Investment
securities
 
Foreign
currency
translation
adjustments
 
Accumulated
other
comprehensive
income (loss)
 
Interest
rate cap
agreements
 
Investment
securities
 
Foreign
currency
translation
adjustments
 
Accumulated
other
comprehensive
(loss) income
Beginning balance
$
(12,408
)
 
$
5,662

 
$
19,981

 
$
13,235

 
$
(12,029
)
 
$
2,175

 
$
(79,789
)
 
$
(89,643
)
Cumulative effect
of change in
accounting
principle(1)
(2,706
)
 
(5,662
)
 
—

 
(8,368
)
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains
(losses)
1,414

 
—

 
19,881

 
21,295

 
(5,217
)
 
2,113

 
13,261

 
10,157

Related income tax (expense) benefit
(364
)
 
—

 
—

 
(364
)
 
2,029

 
(554
)
 
—

 
1,475

 
1,050

 
—

 
19,881

 
20,931

 
(3,188
)
 
1,559

 
13,261

 
11,632

Reclassification
from accumulated
other
comprehensive
income into net
income
2,070

 
—

 
—

 
2,070

 
2,070

 
(229
)
 
—

 
1,841

Related income tax (expense) benefit
(533
)
 
—

 
—

 
(533
)
 
(805
)
 
89

 
—

 
(716
)
 
1,537

 
—

 
—

 
1,537

 
1,265

 
(140
)
 
—

 
1,125

Ending balance
$
(12,527
)
 
$
—

 
$
39,862

 
$
27,335

 
$
(13,952
)
 
$
3,594

 
$
(66,528
)
 
$
(76,886
)
 
(1)
Reflects the cumulative effect of a change in accounting principle for ASUs 2016-01 and 2018-03 on classification and measurement of financial instruments and ASU 2018-02 on remeasurement and reclassification of deferred tax effects in accumulated other comprehensive income associated with the 2017 Tax Act.

20

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


Net realized losses on interest rate cap agreements that are reclassified into income are recorded as debt expense in the corresponding consolidated statements of operations. See Note 9 to these condensed consolidated financial statements for further details.
Net realized gains on investment securities reclassified into income for the three months ended March 31, 2017 were recognized in other income in the corresponding consolidated statements of operations. See Note 5 to these condensed consolidated financial statements for further details. 
15.
Acquisitions and divestitures
Routine acquisitions
During the three months ended March 31, 2018, the Company acquired dialysis businesses consisting of one dialysis center located in the U.S. and four dialysis centers located outside the U.S. for a total of $15,677 in net cash, $655 in deferred purchase price obligations, and $2,408 in liabilities assumed. The assets and liabilities for these acquisitions were recorded at their estimated fair values at the dates of the acquisitions and are included in the Company’s condensed consolidated financial statements, as are their operating results, from the designated effective dates of the acquisitions.
The initial purchase price allocations for these transactions have been recorded at estimated fair values based on the best information available to management and will be finalized when certain information arranged to be obtained has been received.  In particular, certain income tax amounts are pending final evaluation and quantification of pre-acquisition tax contingencies and filing of final tax returns.  In addition, valuation of certain working capital items, fixed assets and intangibles are pending final audits and related valuation reports.
The following table summarizes the assets acquired and liabilities assumed in these transactions at their estimated acquisition date fair values: 
Current assets
$
1,572

Property and equipment
1,643

Amortizable intangible and other long-term assets
2,563

Goodwill
16,042

Current liabilities
(2,392
)
Noncontrolling interests
(688
)

$
18,740

 Amortizable intangible assets acquired during the first three months of 2018 primarily represent non-compete agreements which had weighted-average estimated useful lives of approximately five years. The total estimated amount of goodwill deductible for tax purposes associated with these acquisitions was approximately $15,383.
Contingent earn-out obligations
The Company has several contingent earn-out obligations associated with acquisitions that could result in the Company paying the former owners of acquired companies a total of up to $11,555 if certain EBITDA, operating income performance targets or quality margins are met primarily over the next one to six years.
Contingent earn-out obligations are remeasured at fair value at each reporting date until the contingencies are resolved with changes in the liability due to the remeasurement recorded in earnings. See Note 18 to these condensed consolidated financial statements for further details. As of March 31, 2018, the Company has estimated the fair value of these contingent earn-out obligations to be $6,562, of which a total of $222 is included in other liabilities and the remaining $6,340 is included in other long-term liabilities in the Company’s consolidated balance sheet.

21

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


The following is a reconciliation of changes in liabilities for contingent earn-out obligations:
 
 
For the three
months ended
March 31, 2018
Beginning balance
$
6,388

Remeasurement of fair value for contingent earn-out obligations
174

Ending balance
$
6,562

 
16.     Held for sale and discontinued operations
DaVita Medical Group
In December 2017, the Company entered into an equity purchase agreement to sell its DMG division to Collaborative Care Holdings, LLC (Optum), a subsidiary of UnitedHealth Group Inc., for $4,900,000 in cash, subject to net working capital and other customary adjustments. The transaction is expected to close in 2018 and is subject to regulatory approvals and other customary closing conditions. As a result of this pending transaction, the DMG business has been classified as held for sale and its results of operations are reported as discontinued operations for all periods presented.
The following table presents the financial results of discontinued operations related to DMG:
 
Three months ended
March 31,

 
2018
 
2017
Revenues
$
1,227,932

 
$
1,086,985

Expenses
1,226,407

 
1,074,452

Income from discontinued operations before taxes
1,525

 
12,533

Income tax expense
7,311

 
6,100

Net (loss) income from discontinued operations, net of tax
$
(5,786
)
 
$
6,433

The following table presents the financial position of discontinued operations related to DMG:
 
March 31, 2018
 
December 31, 2017
Assets
 

 
 

Cash and cash equivalents
192,399

 
179,668

Other current assets
768,388

 
826,608

Property and equipment, net
410,127

 
379,945

Intangible assets, net
1,316,462

 
1,316,550

Other long-term assets
155,385

 
178,894

Goodwill
2,881,504

 
2,879,977

Total current assets held for sale
$
5,724,265

 
$
5,761,642

Liabilities
 

 
 

Other liabilities
529,354

 
505,734

Medical payables
505,872

 
457,040

Current portion of long-term debt
2,735

 
2,845

Long-term debt
34,541

 
35,003

Other long-term liabilities
182,123

 
184,448

Total current liabilities held for sale
$
1,254,625

 
$
1,185,070


22

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


The following table presents cash flows of discontinued operations related to DMG:
 
March 31, 2018
 
March 31, 2017
Net cash provided by operating activities from discontinued operations
156,248

 
95,585

Net cash used in investing activities from discontinued operations
(33,068
)
 
(41,686
)
DMG acquisitions
During the first quarter of 2018, the Company's DMG business acquired one medical business for a total of $905 in cash and deferred purchase price of $99. Certain income tax amounts are pending final evaluation and quantification of any pre-acquisition tax contingencies. In addition, valuation of medical claims liabilities and certain other working capital items relating to acquisitions are pending final quantification. The assets and liabilities for all acquisitions were recorded at their estimated fair values at the dates of the acquisitions and are included in the Company’s current held for sale assets and liabilities.
17.
Variable interest entities
The Company relies on the operating activities of certain legal entities that it does not directly own or control, but over which it has indirect influence and of which it is considered the primary beneficiary. These entities are subject to the consolidation guidance applicable to variable interest entities (VIEs).
Under U.S. generally accepted accounting principles (GAAP), VIEs typically include entities for which (i) the entity’s equity is not sufficient to finance its activities without additional subordinated financial support; (ii) the equity holders as a group lack the power to direct the activities that most significantly influence the entity’s economic performance, the obligation to absorb the entity’s expected losses, or the right to receive the entity’s expected returns; or (iii) the voting rights of some investors are not proportional to their obligations to absorb the entity’s losses.
The Company has determined that substantially all of the legal entities it is associated with that qualify as VIEs must be included in its consolidated financial statements. A number of these VIEs are within the Company's DMG business, which is classified as held for sale and as a discontinued operation in these condensed consolidated financial statements. The Company manages these entities and provides operating and capital funding as necessary for these entities to accomplish their operational and strategic objectives. A number of these entities are subject to nominee share ownership or share transfer restriction agreements that effectively transfer the majority of the economic risks and rewards of their ownership to the Company. In other cases the Company’s management agreements with these entities include both financial terms and protective and participating rights to the entities’ operating, strategic and non-clinical governance decisions which transfer substantial powers over and economic responsibility for the entities to the Company. In some cases such entities are subject to broad exclusivity or noncompetition restrictions that benefit the Company. Further, in some cases the Company has contractual arrangements with its related party nominee owners that effectively indemnify these parties from the economic losses from, or entitle the Company to the economic benefits of, these entities.
The analyses upon which these consolidation determinations rest are complex, involve uncertainties, and require significant judgment on various matters, some of which could be subject to different interpretations. At March 31, 2018, these condensed consolidated financial statements include total assets of VIEs of $852,912 and total liabilities and noncontrolling interests of VIEs to third parties of $507,962, including assets of $580,039 and liabilities and noncontrolling interests of $345,926 related to the Company's DMG business classified as held for sale.
The Company also sponsors certain deferred compensation plans whose trusts qualify as VIEs and the Company consolidates these plans as their primary beneficiary. The assets of these plans are recorded in short-term or long-term investments with matching offsetting liabilities recorded in accrued compensation and benefits and other long-term liabilities. See Note 5 to these condensed consolidated financial statements for disclosures on the assets of these consolidated non-qualified deferred compensation plans. 
18.
Fair values of financial instruments
The Company measures the fair value of certain assets, liabilities and noncontrolling interests subject to put provisions (temporary equity) based upon certain valuation techniques that include observable or unobservable inputs and assumptions that market participants would use in pricing these assets, liabilities, temporary equity and commitments. The Company has also

23

DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


classified certain assets, liabilities and temporary equity that are measured at fair value into the appropriate fair value hierarchy levels as defined by the FASB.
The following table summarizes the Company’s assets, liabilities and temporary equity that are measured at fair value on a recurring basis as of March 31, 2018: 
 
Total
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 

 
 

 
 

 
 

Investments in mutual funds and common stock
$
35,544

 
$
35,544

 
$
—

 
$
—

Interest rate cap agreements
$
2,446

 
$
—

 
$
2,446

 
$
—

Liabilities
 
 
 

 
 

 
 

Contingent earn-out obligations
$
6,562

 
$
—

 
$
—

 
$
6,562

Temporary equity
 

 
 

 
 

 
 

Noncontrolling interests subject to put provisions
$
1,034,501

 
$
—

 
$
—

 
$
1,034,501

 
Investments in mutual funds and common stock represent equity securities that are recorded at estimated fair value based upon quoted redemption prices reported by each mutual fund. See Note 5 to these condensed consolidated financial statements for further discussion.
Interest rate cap agreements are recorded at fair value estimated from valuation models utilizing the income approach and commonly accepted valuation techniques that use inputs from closing prices for similar assets and liabilities in active markets as well as other relevant observable market inputs at quoted intervals such as current interest rates, forward yield curves, implied volatility and credit default swap pricing. The Company does not believe the ultimate amount that could be realized upon settlement of these interest rate cap agreements would be materially different from the fair value estimates currently reported. See Note 9 to these condensed consolidated financial statements for further discussion.
The estimated fair value of contingent earn-out obligations are primarily based on unobservable inputs including projected EBITDA. The estimated fair value of these contingent earn-out obligations is remeasured as of each reporting date and could fluctuate based upon any significant changes in key assumptions, such as changes in the Company credit risk-adjusted rate that is used to discount the obligations to present value. See Note 15 to these condensed consolidated financial statements for further discussion.
See Note 11 to these condensed consolidated financial statements for a discussion of the Company’s methodology for estimating the fair value of noncontrolling interests subject to put obligations.
The carrying balance of the Company’s senior secured credit facilities totaled $4,546,990 as of March 31, 2018, and the fair value was approximately $4,616,019 based upon quoted market prices, a level 2 input.
The carrying balance of the Company’s senior notes was $4,461,802 as of March 31, 2018 and their fair value was approximately $4,433,500, based upon quoted market prices, a level 2 input.
Other financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, other accrued liabilities and debt. The balances of the Company's financial instruments other than the senior secured credit facilities and the senior notes are presented in the condensed consolidated financial statements at March 31, 2018 at their approximate fair values due to the short-term nature of their settlements.
19.
Segment reporting
The Company has consisted of two major divisions, DaVita Kidney Care (Kidney Care) and DMG. The Kidney Care division is comprised of the Company’s U.S. dialysis and related lab services business, various ancillary services and strategic initiatives, including its international operations, and the Company’s corporate administrative support. The Company’s U.S. dialysis and related lab services business is its largest line of business and is a leading provider of kidney dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as ESRD. The Company’s ancillary services and strategic

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DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)


initiatives consist primarily of pharmacy services, disease management services, vascular access services, clinical research programs, physician services, direct primary care, ESRD seamless care organizations and comprehensive care, as well as the Company’s international operations.
The Company’s DMG division is a patient- and physician-focused integrated healthcare delivery and management company with over two decades of providing coordinated outcomes-based medical care in a cost-effective manner. In Decemb