2017 Q4 Form 10-Q Financial Statement

#000092706617000088 Filed on November 07, 2017

View on sec.gov

Income Statement

Concept 2017 Q4 2017 Q3 2016 Q4
Revenue $2.781B $2.765B $2.699B
YoY Change 3.02% 1.46% -23.61%
Cost Of Revenue $1.942B $1.952B -$519.4M
YoY Change -473.84% -27.65% -120.65%
Gross Profit $839.2M $813.5M $197.5M
YoY Change 324.91% -21.24% -80.61%
Gross Profit Margin 30.18% 29.42% 7.32%
Selling, General & Admin $259.8M $270.2M -$105.6M
YoY Change -346.02% -34.21% -125.91%
% of Gross Profit 30.96% 33.21% -53.47%
Research & Development
YoY Change
% of Gross Profit
Depreciation & Amortization $184.0M $203.3M $188.8M
YoY Change -2.54% 11.83% 15.62%
% of Gross Profit 21.93% 24.99% 95.59%
Operating Expenses $404.1M $412.9M -$127.5M
YoY Change -416.94% -30.3% -122.33%
Operating Profit $150.3M $395.3M $363.4M
YoY Change -58.64% -51.38% 48.38%
Interest Expense -$112.2M -$114.6M -$92.00M
YoY Change 21.96% 14.14% -3.87%
% of Operating Profit -74.63% -28.99% -25.31%
Other Income/Expense, Net $5.500M $3.396M -$600.0K
YoY Change -1016.67% 81.02% -113.04%
Pretax Income $46.83M $289.4M $259.7M
YoY Change -81.97% -59.26% 77.48%
Income Tax $101.7M $90.55M $65.80M
% Of Pretax Income 217.19% 31.29% 25.34%
Net Earnings $303.4M -$214.5M $157.7M
YoY Change 92.36% -137.54% -2728.77%
Net Earnings / Revenue 10.91% -7.76% 5.84%
Basic Earnings Per Share $1.66 -$1.14 $0.81
Diluted Earnings Per Share $1.64 -$1.12 $0.80
COMMON SHARES
Basic Shares Outstanding 183.3M shares 188.9M shares 197.4M
Diluted Shares Outstanding 191.4M shares

Balance Sheet

Concept 2017 Q4 2017 Q3 2016 Q4
SHORT-TERM ASSETS
Cash & Short-Term Investments $578.8M $1.104B $1.012B
YoY Change -42.8% -31.65% -41.92%
Cash & Equivalents $508.2M $846.1M $674.8M
Short-Term Investments $70.53M $257.5M $337.0M
Other Short-Term Assets $112.1M $205.2M $99.51M
YoY Change 12.61% 15.94% -47.71%
Inventory $181.8M $154.4M $160.4M
Prepaid Expenses $104.7M $96.82M
Receivables $1.715B $2.091B $1.504B
Other Receivables $399.3M $599.4M $288.2M
Total Short-Term Assets $8.771B $4.034B $3.995B
YoY Change 119.56% -5.35% -11.29%
LONG-TERM ASSETS
Property, Plant & Equipment $3.149B $3.386B $2.864B
YoY Change 9.95% 11.2% 2.7%
Goodwill $6.610B $9.416B $6.015B
YoY Change 9.89% 0.35% 2.02%
Intangibles $113.8M $1.451B $73.50M
YoY Change 54.86% -7.94% -95.64%
Long-Term Investments $0.00 $0.00 $0.00
YoY Change -100.0% -100.0%
Other Assets $47.29M $61.64M $33.86M
YoY Change 39.67% 43.41% -53.97%
Total Long-Term Assets $10.20B $14.98B $14.76B
YoY Change -30.87% 2.15% 5.35%
TOTAL ASSETS
Total Short-Term Assets $8.771B $4.034B $3.995B
Total Long-Term Assets $10.20B $14.98B $14.76B
Total Assets $18.97B $19.01B $18.76B
YoY Change 1.17% 0.46% 1.3%
SHORT-TERM LIABILITIES
YoY Change
Accounts Payable $509.1M $566.9M $456.6M
YoY Change 11.5% 13.74% -11.15%
Accrued Expenses $616.0M $775.0M $977.0M
YoY Change -36.95% -8.39% 9.16%
Deferred Revenue
YoY Change
Short-Term Debt $0.00 $0.00 $0.00
YoY Change
Long-Term Debt Due $178.0M $190.0M $160.0M
YoY Change 11.25% 24.18% 24.03%
Total Short-Term Liabilities $3.068B $2.875B $2.711B
YoY Change 13.15% 8.92% 13.0%
LONG-TERM LIABILITIES
Long-Term Debt $9.158B $8.909B $8.945B
YoY Change 2.38% -0.7% -0.62%
Other Long-Term Liabilities $365.3M $548.2M $317.4M
YoY Change 15.11% 30.24% -27.74%
Total Long-Term Liabilities $365.3M $548.2M $317.4M
YoY Change 15.11% 30.24% -27.74%
TOTAL LIABILITIES
Total Short-Term Liabilities $3.068B $2.875B $2.711B
Total Long-Term Liabilities $365.3M $548.2M $317.4M
Total Liabilities $13.08B $13.02B $12.93B
YoY Change 1.12% 1.42% 2.91%
SHAREHOLDERS EQUITY
Retained Earnings $3.634B $4.071B $3.710B
YoY Change -2.06% -19.86% -14.84%
Common Stock $1.043B $1.059B $1.027B
YoY Change 1.53% 2.56% -8.15%
Preferred Stock
YoY Change
Treasury Stock (at cost) $0.00 $348.8M $0.00
YoY Change -69.62% -100.0%
Treasury Stock Shares
Shareholders Equity $4.690B $4.785B $4.648B
YoY Change
Total Liabilities & Shareholders Equity $18.97B $19.01B $18.76B
YoY Change 1.17% 0.46% 1.3%

Cashflow Statement

Concept 2017 Q4 2017 Q3 2016 Q4
OPERATING ACTIVITIES
Net Income $303.4M -$214.5M $157.7M
YoY Change 92.36% -137.54% -2728.77%
Depreciation, Depletion And Amortization $184.0M $203.3M $188.8M
YoY Change -2.54% 11.83% 15.62%
Cash From Operating Activities $480.7M $503.2M $506.6M
YoY Change -5.11% -6.07% 16.01%
INVESTING ACTIVITIES
Capital Expenditures -$265.5M $240.9M -$253.9M
YoY Change 4.57% 11.21% 3.3%
Acquisitions
YoY Change
Other Investing Activities $6.200M -$13.00M $309.4M
YoY Change -98.0% -95.4% -39.85%
Cash From Investing Activities -$259.2M -$253.9M $55.50M
YoY Change -567.03% -49.12% -79.34%
FINANCING ACTIVITIES
Cash Dividend Paid
YoY Change
Common Stock Issuance & Retirement, Net
YoY Change
Debt Paid & Issued, Net
YoY Change
Cash From Financing Activities -236.5M -164.6M -544.0M
YoY Change -56.53% -59.3% 115.1%
NET CHANGE
Cash From Operating Activities 480.7M 503.2M 506.6M
Cash From Investing Activities -259.2M -253.9M 55.50M
Cash From Financing Activities -236.5M -164.6M -544.0M
Net Change In Cash -15.00M 84.70M 18.10M
YoY Change -182.87% -123.04% -96.0%
FREE CASH FLOW
Cash From Operating Activities $480.7M $503.2M $506.6M
Capital Expenditures -$265.5M $240.9M -$253.9M
Free Cash Flow $746.2M $262.3M $760.5M
YoY Change -1.88% -17.79% 11.43%

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us-gaap Description Of New Accounting Pronouncements Not Yet Adopted
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<div style="font-family:Times New Roman;font-size:10pt;"><div style="line-height:120%;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;">New accounting standards</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In May 2014, the FASB issued ASU No.&#160;2014-09, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Revenue from Contracts with Customers</font><font style="font-family:inherit;font-size:10pt;">, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In July 2015, the FASB issued ASU 2015-14, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Revenue from Contracts with Customers</font><font style="font-family:inherit;font-size:10pt;"> </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">(Topic </font><font style="font-family:inherit;font-size:10pt;">606): </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Deferral of Effective Date</font><font style="font-family:inherit;font-size:10pt;">. This guidance approves a one-year deferral of the effective date of ASU 2014-09. The ASU now permits the Company to adopt this standard effective January 1, 2018. Early application is permitted as of January 1, 2017. In March, April, and May 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-11, and ASU 2016-12, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Revenue from Contracts with Customers</font><font style="font-family:inherit;font-size:10pt;"> </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">(Topic 606)</font><font style="font-family:inherit;font-size:10pt;">, each of which amends the guidance in ASU 2014-09.&#160;When they become effective, these ASUs will replace most existing revenue recognition guidance in GAAP.&#160;The Company has assembled an internal revenue task force that meets regularly to discuss and evaluate the overall impact this guidance will have on various revenue streams in the consolidated financial statements and related disclosures.&#160;Based on the Company's current assessment, which is still ongoing, the Company does not expect this guidance to have a material effect on its net income, and is continuing to evaluate the impact it will have on its disclosures and controls. The Company plans to adopt these ASUs as of January 1, 2018 using the cumulative effect method and to apply these ASUs only to those contracts that are not completed contracts as of that date. The Company does not currently expect to record a cumulative effect adjustment on the date of initial adoption.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In January 2016, the FASB issued ASU No. 2016-01, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. </font><font style="font-family:inherit;font-size:10pt;">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 amendments in this ASU are effective for the Company beginning on January 1, 2018 and are to be applied through a cumulative effect adjustment to the statement of financial position. Early adoption is permitted under certain circumstances. The adoption of this ASU is not expected to have a material impact on the Company&#8217;s consolidated financial statements when adopted on January 1, 2018. </font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In February 2016, the FASB issued ASU No. 2016-02, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Leases (Topic 842)</font><font style="font-family:inherit;font-size:10pt;">. The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for substantially all leases with lease terms in excess of twelve months. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for the Company beginning on January 1, 2019 and are to be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company has assembled an internal lease task force that meets regularly to discuss and evaluate the overall impact of this guidance on its consolidated financial statements and related disclosures, as well as the expected timing of adoption. The Company is currently gathering information from its existing leases and believes that the new standard will have a material impact on its consolidated balance sheet but will not have a material impact on its results of operations or liquidity. The Company expects to adopt this ASU on January 1, 2019, and continues to evaluate the effect that the implementation of this ASU will have on its consolidated financial statements, related disclosures and controls. </font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In March 2016, the FASB issued ASU No. 2016-07, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. </font><font style="font-family:inherit;font-size:10pt;">The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments in this ASU were effective for the Company beginning on January 1, 2017 and was applied prospectively. The adoption of this ASU did not have a material impact on the Company&#8217;s condensed consolidated financial statements. </font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In March 2016, the FASB issued ASU No. 2016-09, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting</font><font style="font-family:inherit;font-size:10pt;">. The changes required by this ASU involve several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and an election on estimating forfeitures. The amendments in this ASU were effective for the Company beginning January&#160;1,&#160;2017. The method of adoption differs for each of the topics covered by the ASU. The primary effect of this ASU for the Company is the presentation of excess tax benefits or deficiencies as a component of income tax expense within the Company's consolidated statements of operations rather than within additional paid-in capital on its consolidated balance sheet.&#160;In addition, these excess tax benefits or deficiencies are presented as an operating activity on the consolidated statement of cash flows rather than as a financing activity. </font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The Company elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively. Additionally, the Company has elected to continue to estimate forfeitures expected to occur in determining the amount of compensation cost to be recognized each period. This new standard may cause volatility in the Company&#8217;s effective tax rates and diluted earnings per share due to the tax effects related to share-based payments being recorded within the Company&#8217;s consolidated statements of operations, including a potential increase in the Company&#8217;s provision for income taxes if a significant number of outstanding stock awards are exercised at recent levels of the Company&#8217;s stock price. </font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In August 2016, the FASB issued ASU No. 2016-15, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments</font><font style="font-family:inherit;font-size:10pt;">.&#160;The amendments in this ASU clarify how certain cash receipts and cash payments should be classified on the statement of cash flows.&#160;The new standard is effective for the Company beginning January 1, 2018 and is to be applied retrospectively to all periods presented. The Company has not yet determined the effect that adoption of this ASU will have on its consolidated financial statements.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In October 2016, the FASB issued ASU No. 2016-16, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory</font><font style="font-family:inherit;font-size:10pt;">. The amendments in this ASU allow entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The current guidance does not allow recognition until the asset has been sold to an outside party. The amendments in this ASU are effective for the Company beginning on January 1, 2018 and are to be applied on a modified retrospective basis.&#160;The Company has not yet determined the effect that adoption of this ASU will have on its consolidated financial statements.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In January 2017, the FASB issued ASU No. 2017-04, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill</font><font style="font-family:inherit;font-size:10pt;"> </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Impairment</font><font style="font-family:inherit;font-size:10pt;">.&#160;The amendments in this ASU simplify the test for goodwill impairment by eliminating the second step in goodwill impairment assessments. The Company early adopted this ASU as of January 1, 2017.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In August 2017, the FASB issued ASU No. 2017-12, </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. </font><font style="font-family:inherit;font-size:10pt;">The amendments in this ASU better align an entity&#8217;s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in the new ASU are effective for the Company on January 1, 2018 and are to be applied prospectively. The Company has not yet determined the effect that adoption of this ASU will have on its consolidated financial statements.</font></div></div>
us-gaap Loss Contingency Disclosures
LossContingencyDisclosures
<div style="font-family:Times New Roman;font-size:10pt;"><div style="line-height:120%;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;">Contingencies</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The majority of the Company&#8217;s revenues are from government programs and may be subject to adjustment as a result of: (i)&#160;examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (ii)&#160;differing interpretations of government regulations by different Medicare contractors or regulatory authorities; (iii)&#160;differing opinions regarding a patient&#8217;s medical diagnosis or the medical necessity of services provided; and (iv)&#160;retroactive applications or interpretations of governmental requirements. In addition, the Company&#8217;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.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The Company operates in a highly regulated industry and is a party to various lawsuits, claims, 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 September 30, 2017 and December 31, 2016, the Company&#8217;s total recorded accruals with respect to legal proceedings and regulatory matters, net of anticipated third party recoveries, were approximately </font><font style="font-family:inherit;font-size:10pt;">$51,000</font><font style="font-family:inherit;font-size:10pt;"> and </font><font style="font-family:inherit;font-size:10pt;">$69,000</font><font style="font-family:inherit;font-size:10pt;">, respectively. While these accruals reflect the Company&#8217;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 may be exacerbated 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.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The following is a description of certain lawsuits, claims, governmental investigations and audits and other legal proceedings to which the Company is subject.</font></div><div style="line-height:120%;padding-top:13px;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-style:italic;font-weight:bold;">Inquiries by the Federal Government and Certain Related Civil Proceedings</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">Swoben Private Civil Suit</font><font style="font-family:inherit;font-size:10pt;">:&#160;In April 2013, HealthCare Partners (HCP), now known as the Company&#8217;s DMG subsidiary, was one of several defendants served with a civil complaint filed by a former employee of SCAN Health Plan (SCAN), an HMO. On July&#160;13, 2009, pursuant to the </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">qui tam</font><font style="font-family:inherit;font-size:10pt;"> provisions of the federal False Claims Act (FCA) and the California False Claims Act, James M. Swoben, as relator, filed his initial </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">qui tam</font><font style="font-family:inherit;font-size:10pt;"> action in the United States District Court for the Central District of California purportedly on behalf of the United States of America and the State of California against SCAN, and certain other defendants whose identities were under seal. The allegations in the complaint relate to alleged overpayments received from government healthcare programs. In 2009 and 2010, the relator twice amended his complaint and added additional defendants, and in November 2011, he filed his Third Amended Complaint under seal alleging violations&#160;of the federal FCA and the California False Claims Act, and added additional defendants, including HCP and certain health insurance companies (the defendant HMOs). The allegations in the complaint against HCP relate to patient diagnosis coding to determine reimbursement in the Medicare Advantage (MA) program, referred to as HCC and RAF scores.&#160;The complaint sought monetary damages and civil penalties as well as costs and expenses. The U.S. Department of Justice (DOJ) reviewed these allegations and in January 2013 declined to intervene in the case. HCP and the other defendants filed motions to dismiss the Third Amended Complaint, and the court dismissed with prejudice the claims and judgment was entered in September 2013. Upon the plaintiff&#8217;s appeal, a panel of the Ninth Circuit overturned the trial court&#8217;s ruling and vacated the dismissal of the case. The Company, with certain defendants, petitioned the Ninth Circuit for a rehearing, but in December 2016, the Ninth Circuit rejected the petition and determined the relator should be given an opportunity to amend the complaint, and remanded the case back to district court. In March 2017, the relator filed his Fourth Amended Complaint alleging that HCP and certain health insurance companies employed one-way retrospective reviews that were designed only to identify additional diagnoses that would be submitted to CMS for risk adjustment purposes, and thereby drive higher risk scores that would increase the capitated payments made by the federal government under the MA program. In March 2017, the DOJ partially intervened as to certain defendant HMOs, but elected not to intervene with respect to HCP. In October 2017, the court dismissed a portion of the Fourth Amended Complaint finding that some claims were time-barred and that the relator had waived an alleged theory of liability. On October 18, 2017, the relator filed a Notice of Dismissal of the action as to HCP, and the government consented to the dismissal, as a result of which the suit is now dismissed, without prejudice. </font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">2015 U.S. Office of Inspector General (OIG) Medicare Advantage Civil Investigation</font><font style="font-family:inherit;font-size:10pt;">: 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). The Company has been advised by an attorney with the Civil Division of the DOJ in Washington, D.C. that the subpoena relates to an ongoing civil investigation concerning MA service providers&#8217; risk adjustment practices and data, including identification and verification of patient diagnoses and factors used in making the diagnoses. The subpoena requests 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&#8217;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&#8217;s investigation.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In addition to the subpoena described above, in June 2015, the Company received a subpoena from the OIG. This civil subpoena covers the period from January 1, 2008 through the present and seeks production of a wide range of documents relating to the Company&#8217;s and its subsidiaries&#8217; (including DMG&#8217;s and its subsidiary JSA&#8217;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&#8217;s November 1, 2012 acquisition of DMG, and the Company notified 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 and is in discussions with the DOJ about the scope and nature of a review of claims relating to those practices. The Company is cooperating with the government and is producing the requested information. 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 DMG merger, the Company 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&#8217;s potential losses related to these matters. </font></div><div style="line-height:120%;padding-top:13px;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">2016 U.S. Attorney Prescription Drug Investigation</font><font style="font-family:inherit;font-size:10pt;">: In early February 2016, the Company announced that its pharmacy services&#8217; wholly-owned subsidiary, DaVita Rx, received a CID from the U.S. Attorney&#8217;s Office for the Northern District of Texas. The government is conducting an 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&#8217;s relationship with pharmaceutical manufacturers. The CID covers the period from January&#160;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&#8217;s Office. The OIG informed the Company in February 2016 that its submission was not accepted.&#160;They indicated that the OIG is not expressing an opinion regarding the conduct disclosed or the Company&#8217;s legal positions. The Company is cooperating with the government.</font></div><div style="line-height:120%;padding-top:13px;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">Solari Post-Acquisition Matter</font><font style="font-family:inherit;font-size:10pt;">: In 2016, HCP Nevada disclosed to the OIG for the HHS that proper procedures for clinical and eligibility determinations may not have been followed by Las Vegas Solari Hospice (Solari), which was acquired in March 2013 and sold in September 2016 by HCP Nevada. In June 2016, the Company was notified by the OIG that the disclosure submission had been accepted into the OIG&#8217;s Self Disclosure Protocol. HCP Nevada had previously made a disclosure and repayment of overpayments to National Government Services (NGS), the Medicare Administrative Contractor for HCP Nevada, for claims submitted by Solari to the federal government prior to DMG&#8217;s acquisition of Solari and claims made to the government post-acquisition for which the sellers had certain responsibilities pursuant to a management services agreement. The Company is cooperating with the government in this matter. In October 2017, the Company finalized and executed a settlement agreement with the OIG including payment of an immaterial amount.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">2017 U.S. Attorney American Kidney Fund Investigation</font><font style="font-family:inherit;font-size:10pt;">: On January 4, 2017, the Company was served with an administrative subpoena for records by the United States Attorney&#8217;s Office, District of Massachusetts, relating to an investigation into possible federal health care offenses.&#160;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.&#160;The Company is cooperating with the government and is producing the requested information.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">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. In addition to the inquiries and proceedings specifically identified above, the Company is frequently subject to other inquiries by state or federal government agencies and/or private civil </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">qui tam</font><font style="font-family:inherit;font-size:10pt;"> 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&#8217;s reputation, required changes to the Company&#8217;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.</font></div><div style="line-height:120%;padding-top:13px;text-indent:18px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-style:italic;font-weight:bold;">Shareholder Claims</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">Peace Officers&#8217; Annuity and Benefit Fund of Georgia Securities Class Action Civil Suit</font><font style="font-family:inherit;font-size:10pt;">: On February 1, 2017, the Peace Officers&#8217; 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.&#160;The complaint covers the time period of August 2015 to October 2016 and alleges, generally, that the Company and its executives violated</font><font style="font-family:inherit;font-size:10pt;font-style:italic;font-weight:bold;"> </font><font style="font-family:inherit;font-size:10pt;">federal securities laws concerning the Company&#8217;s financial results and revenue derived from patients who received charitable premium assistance from an industry-funded non-profit organization.&#160;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&#8217;s business and operational status and future growth prospects."&#160;The Company disputes these allegations and intends to defend this action accordingly.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">Blackburn Shareholder Derivative Civil Suit</font><font style="font-family:inherit;font-size:10pt;">:&#160;On February 10, 2017, Charles Blackburn filed a derivative shareholder lawsuit in the U.S. District Court for the District of Delaware against the Company, as nominal defendant, the Board of Directors and certain executives.&#160;The complaint covers the time period from 2015 to present and alleges, generally, breach of fiduciary duty, unjust enrichment 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&#8217;s profits.&#160;On August 15, 2017, the District Court consolidated this action with the </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Gabilondo</font><font style="font-family:inherit;font-size:10pt;"> and </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">City of Warren Police and Fire Retirement System</font><font style="font-family:inherit;font-size:10pt;"> suits. The Company disputes these allegations and intends to defend this action accordingly.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">Gabilondo Shareholder Derivative Civil Suit</font><font style="font-family:inherit;font-size:10pt;">: On May 30, 2017, Antonio Gabilondo filed a derivative shareholder lawsuit in the U.S. District Court for the District of Delaware against the Company, as nominal defendant, the Board of Directors and certain executives.&#160;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&#8217;s profits. On August 15, 2017, the District Court consolidated this action with the </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Blackburn</font><font style="font-family:inherit;font-size:10pt;"> and </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">City of Warren Police and Fire Retirement System</font><font style="font-family:inherit;font-size:10pt;"> suits. &#160;The Company disputes these allegations and intends to defend this action accordingly.</font></div><div style="line-height:120%;padding-top:13px;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">City of Warren Police and Fire Retirement System Shareholder Derivative Civil Suit</font><font style="font-family:inherit;font-size:10pt;">: On June 9, 2017, the City of Warren Police and Fire Retirement System filed a derivative shareholder lawsuit in the U.S. District Court for the District of Delaware against the Company, as nominal defendant, the Board of Directors, and certain executives. The complaint covers the time period of 2015 to the present and alleges, generally, a breach of fiduciary duty, corporate waste, unjust enrichment, 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&#8217;s profits.&#160;On August 15, 2017, the District Court consolidated this action with the </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Blackburn</font><font style="font-family:inherit;font-size:10pt;"> and </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Gabilondo</font><font style="font-family:inherit;font-size:10pt;"> suits. The Company disputes these allegations and intends to defend this action accordingly.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;padding-left:16px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-style:italic;font-weight:bold;">Other Proceedings</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">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.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:16px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-style:italic;font-weight:bold;">Resolved Matters</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">2015 U.S. Attorney Transportation Investigation</font><font style="font-family:inherit;font-size:10pt;">: In February 2015, the Company announced that it received six administrative subpoenas from the OIG&#160;for medical records from six different dialysis centers in southern California operated by the Company. Specifically, each subpoena sought the medical records of a single patient of each respective dialysis center. In February 2016, the Company received four additional subpoenas for four additional dialysis centers in southern California. The subpoenas were similarly limited in scope to the subpoenas received in 2015. On February 8, 2017, the Company was served with a </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">qui tam</font><font style="font-family:inherit;font-size:10pt;"> complaint in the U.S. District Court for the Central District of California. The Company was advised by an attorney with the United States Attorney&#8217;s Office for the Central District of California that the </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">qui tam</font><font style="font-family:inherit;font-size:10pt;"> was related to the investigation concerning the medical necessity of patient transportation, which was the basis for the subpoenas. The relator alleged that an ambulance company submitted false claims for patient transportation. Although the Company does not provide transportation nor does it bill for the transport of its dialysis patients, the relator alleged that two of its purported clinical staff caused the submission of a small number of those claims through improper certifications of medical necessity.&#160;The DOJ has declined to intervene. In April 2017, the court granted the Company's motion to dismiss and dismissed the complaint without prejudice for failing to state a claim upon which relief can be granted. In May 2017, the relator filed a First Amended Complaint and the Company filed an additional motion to dismiss. In June 2017, the court granted the Company&#8217;s motion and dismissed the complaint without prejudice. Plaintiff was given until July 24, 2017 to file an amended complaint. Instead, the plaintiff decided not to proceed against the Company and filed a notice of dismissal on July 25, 2017. </font></div><div style="line-height:120%;padding-top:13px;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">2011 Suit against the U.S. Department of Veterans Affairs</font><font style="font-family:inherit;font-size:10pt;">: 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 </font><font style="font-family:inherit;font-size:10pt;">$538,000</font><font style="font-family:inherit;font-size:10pt;"> related to the settlement with the VA. The Company's consolidated entities recognized a net gain of </font><font style="font-family:inherit;font-size:10pt;">$527,000</font><font style="font-family:inherit;font-size:10pt;"> on this settlement. The Company's nonconsolidated and managed entities recognized a gain of </font><font style="font-family:inherit;font-size:10pt;">$9,000</font><font style="font-family:inherit;font-size:10pt;">, of which the Company's equity investment share was </font><font style="font-family:inherit;font-size:10pt;">$3,000</font><font style="font-family:inherit;font-size:10pt;">.&#160;The net effect was a net increase of </font><font style="font-family:inherit;font-size:10pt;">$530,000</font><font style="font-family:inherit;font-size:10pt;"> to the Company's operating income.</font></div><div style="line-height:120%;padding-top:13px;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">2015 U.S. Department of Justice Vascular Access Investigation and Related</font><font style="font-family:inherit;font-size:10pt;text-decoration:underline;"> </font><font style="font-family:inherit;font-size:10pt;font-style:italic;text-decoration:underline;">Qui Tam</font><font style="font-family:inherit;font-size:10pt;text-decoration:underline;"> </font><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">Litigation</font><font style="font-family:inherit;font-size:10pt;">: In November 2015, the Company announced that RMS Lifeline, Inc., a wholly-owned subsidiary of the Company that operates under the name Lifeline Vascular Access (Lifeline), received a Civil Investigative Demand (CID) from the DOJ. The CID relates to two vascular access centers in Florida that are part of Lifeline&#8217;s vascular access business. The CID covers the period from January 1, 2008 through the present. The Company acquired these </font><font style="font-family:inherit;font-size:10pt;">two</font><font style="font-family:inherit;font-size:10pt;"> centers in December 2012. Based on the language of the CID, the DOJ appeared to be looking at whether angiograms performed at the two centers were medically unnecessary and therefore whether related claims filed with federal healthcare programs possibly violated the FCA. Lifeline does not perform dialysis services but instead provides vascular access management services for dialysis patients. The Company cooperated with the government and produced the requested information. The DOJ investigation was initiated pursuant to a complaint brought under the </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">qui tam</font><font style="font-family:inherit;font-size:10pt;"> provisions of the FCA (the Complaint). The Complaint was originally filed under seal in August 2014 in the U.S. District Court, Middle District of Florida, United States ex. rel James Spafford v. DaVita HealthCare Partners, Inc., et al., Case Number 6:14-cv-1251-Orl-41DAB, naming several doctors along with the Company as defendants. In December 2015, a First Amended Complaint was filed under seal. In May 2016, the First Amended Complaint was unsealed. The First Amended Complaint alleged violations of the FCA due to the submission of claims to the government for allegedly medically unnecessary angiograms and angiography procedures at the two vascular access centers as well as employment-related claims. The Complaint covers alleged conduct dating from July 2008, prior to the Company&#8217;s acquisition of the centers, to the present. The DOJ declined to intervene. In January 2017, the Company finalized and executed a settlement agreement with the relator and the government for an immaterial amount, and in April 2017, the court dismissed the case with prejudice.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">Vainer Private Civil Suit</font><font style="font-family:inherit;font-size:10pt;">: As previously disclosed, the Company received a subpoena for documents from the OIG relating to the pharmaceutical products Zemplar, Hectorol, Venofer, Ferrlecit and erythropoietin (EPO), as well as other related matters, covering the period from January 2003 to December 2008. The Company subsequently learned that the allegations underlying this inquiry were made as part of a civil complaint filed by relators, Daniel Barbir and Dr. Alon Vainer, pursuant to the </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">qui tam</font><font style="font-family:inherit;font-size:10pt;"> provisions of the federal FCA. The relators also alleged that the Company&#8217;s drug administration practices for the Company&#8217;s dialysis operations for Vitamin D and iron agents from 2003 through 2010 fraudulently created unnecessary waste, which was billed to and paid for by the government. In June 2015, the Company finalized the terms of the settlement with plaintiffs, including a settlement amount of </font><font style="font-family:inherit;font-size:10pt;">$450,000</font><font style="font-family:inherit;font-size:10pt;"> and attorney fees and other costs of </font><font style="font-family:inherit;font-size:10pt;">$45,000</font><font style="font-family:inherit;font-size:10pt;"> which was paid in 2015.</font></div><div style="line-height:120%;padding-top:13px;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;text-decoration:underline;">2011 U.S. Attorney Medicaid Investigation</font><font style="font-family:inherit;font-size:10pt;">: In October 2011, the Company announced that it would be receiving a request for documents, which could include an administrative subpoena from the OIG. Subsequent to the Company&#8217;s announcement of this 2011 U.S. Attorney Medicaid Investigation, the Company received a request for documents in connection with the inquiry by the U.S. Attorney&#8217;s Office for the Eastern District of New York. The request related to payments for infusion drugs covered by Medicaid composite payments for dialysis. The Company cooperated with the government and produced the requested documents. In April 2014, the Company reached an agreement in principle with the government. In March 2016, the Company finalized and executed settlement agreements with the State of New York and the DOJ, including a settlement payment of an immaterial amount.</font></div><div style="line-height:120%;padding-top:13px;text-align:center;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">* * *</font></div><div style="line-height:120%;padding-top:13px;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">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, 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&#8217;s revenues, earnings and cash flows. Further, any legal proceedings or regulatory matters involving the Company, whether meritorious or not, are time consuming, and often require management&#8217;s attention and result in significant legal expense, and may result in the diversion of significant operational resources, or otherwise harm the Company&#8217;s business, financial results or reputation.</font></div></div>

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