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DaVita 3rd Quarter 2008 Results
Date:11/2/2008

EL SEGUNDO, Calif., Nov. 3 /PRNewswire-FirstCall/ -- DaVita Inc. (NYSE: DVA) today announced results for the quarter ended September 30, 2008. Net income for the three and nine months ended September 30, 2008 was $93.9 million and $275.8 million, or $0.89 per share and $2.59 per share, respectively.

(Logo: http://www.newscom.com/cgi-bin/prnh/20020729/DAVITALOGO)

Net income for the three months ended September 30, 2007 was $89.3 million, or $0.83 per share excluding after-tax gains from insurance settlements and after-tax gains on the sale of investment securities, and was $94.5 million, or $0.88 per share including these items.

Net income for the nine months ended September 30, 2007 was $254.6 million, or $2.38 per share excluding after-tax gains from insurance settlements, after-tax gains on the sale of investment securities and the valuation gain on the Company's alliance and product supply agreement with Gambro Renal Products, and was $296.1 million, or $2.76 per share including these items.

Financial and operating highlights include:

-- Cash Flow: For the rolling 12 months ended September 30, 2008 operating cash flow was $595 million and free cash flow was $491 million. For the three months ended September 30, 2008 operating cash flow was $146 million and free cash flow was $119 million.

-- Operating Income: Operating income for the three and nine months ended September 30, 2008 was $208 million and $610 million, respectively. Operating income for the three months ended September 30, 2007 was $206 million, excluding pre-tax gains from insurance settlements of $6.8 million. Operating income for the nine months ended September 30, 2007 was $605 million, excluding pre-tax gains from insurance settlements and the pre-tax valuation gain on the Company's product supply agreement with Gambro Renal Products of $55 million.

-- Volume: Total treatments for the third quarter of 2008 were 4,091,099, or 51,786 treatments per day, representing a per day increase of 5.1% over the third quarter of 2007. Non-acquired treatment growth in the quarter was 3.8% over the prior year's third quarter.

-- Effective Tax Rate: The effective tax rate was 39.8% and 38.9% for the three and nine months ended September 30, 2008, respectively. We are still projecting our 2008 annual effective tax rate to be in the range of 38.5%- 39.5%, and are still projecting our 2009 effective tax rate to return to around 40.0%.

-- Share Repurchases: During the first nine months of 2008, we repurchased a total of 3,461,353 shares of our common stock for $169.7 million, or an average price of $49.02 per share, pursuant to previously announced Board authorizations. We did not repurchase any shares of our common stock during the third quarter of 2008. However, during October 2008, we repurchased 1,027,502 shares of our common stock for $50 million, or an average price of $48.66 per share.

-- Center Activity: As of September 30, 2008, we operated or provided administrative services at 1,425 outpatient dialysis centers serving approximately 111,000 patients, of which 1,402 centers are consolidated in our financial statements. During the third quarter of 2008, we acquired 6 centers, opened 22 new centers, merged 2 centers, closed 1 center, and divested 1 center.

Outlook

We expect our operating income results for 2008 to be near the middle of the range of our previously provided guidance of $800-$840 million. We still expect to generate approximately $480 million to $530 million of operating cash flow in 2008. Our operating income guidance for 2009 remains unchanged at a range of $820-$880 million. These projections and the underlying assumptions involve significant risks and uncertainties, including those described below and actual results may vary significantly from these current projections.

DaVita will be holding a conference call to discuss its results for the third quarter ended September 30, 2008 on November 3, 2008 at 12:00 p.m. Eastern Time. The dial in number is (800) 399-4406. A replay of the conference call will be available on DaVita's official web page, http://www.davita.com, for the following 30 days.

This release contains forward-looking statements, including statements related to our 2008 and 2009 operating results and our 2009 expected effective tax rate. Factors which could impact future results include the uncertainties associated with governmental regulations, general economic and other market conditions, competition, accounting estimates and the risk factors set forth in the Company's SEC filings, including its Form 10-Q for the quarter ended June 30, 2008. The forward-looking statements should be considered in light of these risks and uncertainties.

These risks and uncertainties include those relating to:

-- the concentration of profits generated from commercial payor plans,

-- continued downward pressure on average realized payment rates from commercial payors, which may result in the loss of revenue or patients,

-- a reduction in the number of patients under higher-paying commercial plans,

-- changes in government payment rates or the structure of payments under the Medicare ESRD Program may result in lower reimbursement for services we provide to Medicare patients and could have a material impact on our overall profitability,

-- changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing,

-- our ability to maintain contracts with physician medical directors,

-- legal compliance risks, including our continued compliance with complex government regulations and compliance with the corporate integrity agreement applicable to the dialysis centers acquired from Gambro Healthcare and assumed in connection with such acquisition, and

-- the resolution of ongoing investigations by various federal and state governmental agencies.

We undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in underlying factors, new information, future events or otherwise.

This release contains non-GAAP financial measures. For reconciliations of these non-GAAP financial measures to their most comparable measure calculated and presented in accordance with GAAP, see the attached reconciliation schedules.

DAVITA INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars in thousands, except per share data)

Three months ended Nine months ended

September 30, September 30,

2008 2007 2008 2007

Net operating revenues $1,447,135 $1,318,381 $4,199,163 $3,909,282

Operating expenses and

charges:

Patient care costs 1,005,648 890,243 2,909,143 2,662,841

General and

administrative 128,617 120,596 374,581 356,249

Depreciation and

amortization 54,970 49,230 160,673 142,078

Provision for

uncollectible accounts 37,305 34,107 109,433 101,686

Minority interests and

equity income, net 12,711 11,793 35,168 34,757

Valuation gain on

alliance and product

supply agreement - - - (55,275)

Total operating

expenses and

charges 1,239,251 1,105,969 3,588,998 3,242,336

Operating income 207,884 212,412 610,165 666,946

Debt expense (54,505) (62,715) (168,891) (194,496)

Other income 2,481 6,278 10,331 17,131

Income before income

taxes 155,860 155,975 451,605 489,581

Income tax expense 61,950 61,520 175,810 193,520

Net income $93,910 $94,455 $275,795 $296,061

Earnings per share:

Basic earnings per

share $0.90 $0.89 $2.61 $2.80

Diluted earnings per

share $0.89 $0.88 $2.59 $2.76

Weighted average shares

for earnings per share:

Basic 104,556,770 106,171,473 105,569,971 105,558,536

Diluted 105,577,823 107,561,139 106,421,184 107,129,135

DAVITA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

Nine months ended

September 30,

2008 2007

Cash flows from operating activities:

Net income $275,795 $296,061

Adjustments to reconcile net income to cash

provided by operating activities:

Depreciation and amortization 160,673 142,078

Valuation gain on alliance and product supply

agreement - (55,275)

Stock-based compensation expense 29,975 25,260

Tax benefits from stock award exercises 10,174 27,000

Excess tax benefits from stock award exercises (5,054) (23,632)

Deferred income taxes 56,157 25,645

Minority interests in income of consolidated

subsidiaries 35,822 35,703

Distributions to minority interests (43,391) (35,216)

Equity investment income (654) (946)

Loss (gain) on disposal of assets 9,688 (4,944)

Non-cash debt and non-cash rent charges 9,971 11,810

Changes in operating assets and liabilities, other

than from acquisitions and divestitures:

Accounts receivable (130,022) (32,425)

Inventories (1,248) 15,144

Other receivables and other current assets (28,684) (42,818)

Other long-term assets (12,761) (11,921)

Accounts payable (12,800) (6,458)

Accrued compensation and benefits (11,752) (17,347)

Other current liabilities 29,838 (26,151)

Income taxes (3,129) (13,072)

Other long-term liabilities 3,163 1,214

Net cash provided by operating activities 371,761 309,710

Cash flows from investing activities:

Additions of property and equipment, net (223,851) (176,078)

Acquisitions and purchases of other

ownership interests (101,166) (81,782)

Proceeds from asset sales 451 4,643

Purchase of investments available for sale (1,695) (21,363)

Purchase of investments held-to-maturity (19,005) (20,839)

Proceeds from sale of investments available

for sale 5,323 32,138

Proceeds from maturities of investments

held-to-maturity 18,728 4,780

Contributions from minority owners 22,749 16,204

Purchase of intangible assets (65) (556)

Net cash used in investing activities (298,531) (242,853)

Cash flows from financing activities:

Borrowings 12,937,047 10,405,556

Payments on long-term debt (12,938,297) (10,451,891)

Deferred financing costs (130) (4,462)

Purchase of treasury stock (169,673) (6,350)

Excess tax benefits from stock award exercises 5,054 23,632

Stock award exercises and other share issuances,

net 33,670 47,756

Net cash (used in) provided by financing

activities (132,329) 14,241

Net (decrease) increase in cash and cash

equivalents (59,099) 81,098

Cash and cash equivalents at beginning of period 447,046 310,202

Cash and cash equivalents at end of period $387,947 $391,300

DAVITA INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except per share data)

September 30, December 31,

ASSETS 2008 2007

Cash and cash equivalents $387,947 $447,046

Short-term investments 51,614 40,278

Accounts receivable, less allowance of

$204,594 and $195,953 1,056,691 927,949

Inventories 82,494 80,173

Other receivables 230,073 198,744

Other current assets 36,010 34,482

Deferred income taxes 219,160 247,578

Total current assets 2,063,989 1,976,250

Property and equipment, net 1,011,702 939,326

Amortizable intangibles, net 165,270 183,042

Investments in third-party dialysis

businesses 19,239 19,446

Long-term investments 6,930 22,562

Other long-term assets 48,162 35,401

Goodwill 3,856,601 3,767,933

$7,171,893 $6,943,960

LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable $212,661 $225,461

Other liabilities 515,989 486,151

Accrued compensation and benefits 330,838 334,961

Current portion of long-term debt 64,262 23,431

Income taxes payable - 16,492

Total current liabilities 1,123,750 1,086,496

Long-term debt 3,643,275 3,683,887

Other long-term liabilities 83,494 83,448

Alliance and product supply agreement, net 37,310 41,307

Deferred income taxes 214,477 166,055

Minority interests (fair value subject to

potential put obligations . $296,000 and

$330,000) 162,908 150,517

Commitments and contingencies

Shareholders' 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;

134,862,283 shares issued; 104,787,536

and 107,130,127 shares outstanding) 135 135

Additional paid-in capital 755,579 707,080

Retained earnings 1,791,085 1,515,290

Treasury stock, at cost

(30,074,747 and 27,732,156 shares) (635,274) (487,744)

Accumulated other comprehensive loss (4,846) (2,511)

Total shareholders' equity 1,906,679 1,732,250

7,171,893 6,943,960

DAVITA INC.

SUPPLEMENTAL FINANCIAL DATA

(unaudited)

(dollars in millions, except for per share and per treatment data)

Nine months

Three months ended ended

September 30, June 30, September 30, September 30,

2008 2008 2007 2008

Financial Results

excluding gains

from insurance

settlements and

gains on sale of

investment securities

for the three months

ended September 30,

2007:

Net income(1) $93.9 $95.0 $89.3 $275.8

Diluted earnings per

share(1) $0.89 $0.90 $0.83 $2.59

Operating income(1) $207.9 $205.6 $205.6 $610.2

Operating income

margin(1) 14.4% 14.6% 15.6% 14.5%

Business Metrics:

Volume

Treatments 4,091,099 4,018,763 3,842,763 12,044,639

Number of

treatment days 79.0 78.0 78.0 234.4

Treatments per

day 51,786 51,523 49,266 51,385

Per day year over

year increase 5.1% 6.0% 6.1% 5.8%

Non-acquired growth

year over year 3.8% 4.5% 5.2% 4.4%

Revenue

Total operating

revenue $1,447 $1,407 $1,318 $4,199

Dialysis and

related lab

services revenue

per treatment $336.42 $335.98 $333.57 $333.83

Per treatment

increase (decrease)

from previous

quarter 0.1% 2.1% (1.3%) -

Per treatment

increase (decrease)

from previous

year 0.9% (0.6%) 0.6% (0.8%)

Expenses

A. Patient care costs

Percent of revenue 69.5% 69.2% 67.5% 69.3%

Per treatment

(including gains

from insurance

settlements of

$1.76 for the

third quarter of

2007)(2) $245.81 $242.19 $231.67 $241.53

Per treatment

increase (decrease)

from previous

quarter 1.5% 2.4% (1.4%) -

Per treatment

increase (decrease)

from previous year 6.1% 3.1% (0.8%) 2.8%

B. General & administrative

expenses

Percent of revenue 8.9% 8.9% 9.1% 8.9%

Per treatment $31.44 $31.15 $31.38 $31.10

Per treatment

increase (decrease)

from previous

quarter 0.9% 1.5% (2.8%) -

Per treatment

increase (decrease)

from previous year 0.2% (3.5%) 1.5% (1.0%)

C. Bad debt expense as

a percent of

current-period

revenue 2.6% 2.7% 2.6% 2.6%

D. Consolidated

effective tax rate 39.8% 38.0% 39.4% 38.9%

(1) These are non-GAAP financial measures. For a reconciliation of these

non-GAAP financial measures to their most comparable measure

calculated and presented in accordance with GAAP, see attached

reconciliation schedules.

(2) On a non-GAAP basis patient care costs per treatment excluding gains

from insurance settlements of $1.76 for the third quarter of 2007

would have been $233.43.

DAVITA INC.

SUPPLEMENTAL FINANCIAL DATA -- continued

(unaudited)

(dollars in millions, except for per share and per treatment data)

Nine months

Three months ended ended

September 30, June 30, September 30, September 30,

2008 2008 2007 2008

Cash Flow

Operating cash

flow $146.2 $134.5 $95.8 $371.8

Operating cash

flow, last twelve

months $595.1 $544.6 $499.8

Free cash flow(1) $119.0 $114.4 $73.5 $306.6

Free cash flow, last

twelve months(1) $491.2 $445.7 $395.6

Capital expenditures:

Development and

relocations $51.6 $60.2 $48.5 $158.0

Routine

maintenance/IT

other $27.2 $20.2 $22.6 $65.9

Acquisition

expenditures $31.5 $60.9 $75.5 $101.2

Accounts Receivable

Net receivables $1,057 $1,047 $976

DSO 70 70 70

Debt/Capital Structure

Total debt(2) $3,704 $3,705 $3,701

Net debt, net of

cash(2) $3,316 $3,378 $3,309

Leverage ratio

(see Note 1) 2.98x 3.07x 3.10x

Overall effective

weighted average

interest rate

during the quarter 5.66% 5.75% 6.48%

Overall effective

weighted average

interest rate end

of the quarter 6.09% 5.68% 6.43%

Effective weighted

average interest

rate on the Senior

Secured Credit

Facilities end of

the quarter 5.39% 4.59% 6.00%

Economically fixed

interest rates as

a percentage of

our total debt 70% 69% 77%

Share repurchases $- $137.2 $- $169.7

Clinical (quarterly averages)

Dialysis adequacy

-% of patients

with Kt/V > 1.2 94% 95% 94%

Patients with

Hb>=10 <=13 87% 86% 80%

Patients with

arteriovenous

fistulas placed 61% 60% 57%

(1) These are non-GAAP financial measures. For a reconciliation of these

non-GAAP financial measures to their most comparable measure

calculated and presented in accordance with GAAP, see attached

reconciliation schedules.

(2) Excludes an unamortized balance of a debt premium associated with our

senior notes that is not actually outstanding debt principal.

DAVITA INC.

SUPPLEMENTAL FINANCIAL DATA -- continued

(unaudited)

(dollars in thousands)

Note 1: Calculation of the Leverage Ratio

Under the Company's current Senior Secured Credit Facilities (Credit Agreement), the leverage ratio is defined as all funded debt plus the face amount of all letters of credit issued, minus cash and cash equivalents, divided by "Consolidated EBITDA". The leverage ratio determines the interest rate margin payable by the Company for its term loan A and revolving line of credit under the Credit Agreement by establishing the margin over the base interest rate (LIBOR) that is applicable. The following leverage ratio was calculated using "Consolidated EBITDA" as defined in the Credit Agreement. The calculation below is based on the last twelve months of "Consolidated EBITDA", pro forma for the routine acquisitions that occurred during the period. The Company's management believes that the presentation of "Consolidated EBITDA" is useful to investors to enhance their understanding of the Company's leverage ratio under its Credit Agreement.

Rolling 12-months

ended September 30,

2008

Net income $361,512

Income taxes $228,034

Debt expense $231,542

Depreciation and amortization $212,065

Minority interests and equity income, net $45,896

Other $10,683

Stock-based compensation expense $38,865

"Consolidated EBITDA" $1,128,597

September 30, 2008

Total debt, excluding debt premium of

$3.9 million $3,703,599

Letters of credit issued 47,001

3,750,600

Less: cash and cash equivalents (387,947)

Consolidated net debt $3,362,653

Last twelve months "Consolidated EBITDA" $1,128,597

Leverage ratio 2.98x

In accordance with the Company's Credit Agreement, the Company's leverage ratio cannot exceed 4.75 to 1.0 as of September 30, 2008. At that date, the Company's leverage ratio did not exceed 4.75 to 1.0.

RECONCILIATIONS FOR NON-GAAP MEASURES

(unaudited)

(dollars in thousands)

1. Net income excluding gains from insurance settlements, gains on the sale of investment securities and the valuation gain on the alliance and product supply agreement (the Product Supply Agreement):

We believe that net income excluding gains from insurance settlements, gains on the sale of investment securities and the valuation gain on the Product Supply Agreement enhances a user's understanding of our normal net income for these periods by providing a measure that is more meaningful because it excludes insurance settlement gains related to insurance proceeds from Hurricane Katrina and from a fire that destroyed one of our centers, as well as non-recurring gains on the sale of investment securities and a non- recurring non-cash item that resulted from the termination of our purchase obligation for dialysis machines from Gambro Renal Products Inc. under the Product Supply Agreement, and accordingly is more comparable to current and prior periods and indicative of consistent net income. This measure is not a measure of financial performance under United States generally accepted accounting principles and should not be considered as an alternative to net income.

Three months ended Nine months ended

September 30, June 30, September 30, September 30, September 30,

2008 2008 2007 2008 2007

Net income $93,910 $94,951 $94,455 $275,795 $296,061

Less:

Gains on

insurance

settlements - - (6,779) - (6,779)

Gains on

the sale

of investment

securities - - (1,634) - (5,868)

Valuation

gain - - - - (55,275)

Add:

Related

income tax - - 3,273 - 26,422

$93,910 $94,951 $89,315 $275,795 $254,561

2. Operating income excluding pre-tax gains from insurance settlements and the pre-tax valuation gain on the Product Supply Agreement:

We believe that operating income excluding gains from insurance settlements and the valuation gain on the Product Supply Agreement enhances a user's understanding of our normal operating income for these periods by providing a measure that is more meaningful because it excludes insurance settlements gains related to insurance proceeds from Hurricane Katrina and from a fire that destroyed one of our centers and a non-recurring non-cash item that resulted from the termination of our purchase obligation for dialysis machines from Gambro Renal Products Inc. under the Product Supply Agreement and accordingly is more comparable to current and prior periods and indicative of consistent operating income items. This measure is not a measure of financial performance under United States generally accepted accounting principles and should not be considered as an alternative to operating income.

Three months ended Nine months ended

September 30, June 30, September 30, September 30, September 30,

2008 2008 2007 2008 2007

Operating

income $207,884 $205,554 $212,412 $610,165 $666,946

Less:

Gains on

insurance

settlements - - (6,779) - (6,779)

Valuation

gain - - - - (55,275)

$207,884 $205,554 $205,633 $610,165 $604,892

RECONCILIATIONS FOR NON-GAAP MEASURES

(unaudited)

(dollars in thousands)

3. Free cash flow

Free cash flow represents net cash provided by operating activities less capital expenditures for routine maintenance and information technology. We believe free cash flow is a useful adjunct to cash flow from operating activities and other measurements under United States generally accepted accounting principles, since free cash flow is a meaningful measure of our ability to fund acquisition and development activities and meet our debt service requirements. Free cash flow is not a measure of financial performance under United States generally accepted accounting principles and should not be considered as an alternative to cash flows from operating, investing or financing activities, as an indicator of cash flows or as a measure of liquidity.

Three months ended Nine months ended

September 30, June 30, September 30, September 30,

2008 2008 2007 2008

Cash provided

by operating

activities $146,227 $134,510 $95,778 $371,761

Less: Expenditures

for routine

maintenance and

information

technology (27,217) (20,153) (22,229) (65,197)

Free cash flow $119,010 $114,357 $73,549 $306,564

Rolling 12-Month Period

September 30, June 30, September 30,

2008 2008 2007

Cash provided by operating

activities $595,087 $544,638 $499,818

Less: Expenditures for routine

maintenance and information

technology (103,885) (98,897) (104,189)

Free cash flow $491,202 $445,741 $395,629


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SOURCE DaVita Inc.
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