21.

Acquisitions and discontinued operations

Routine acquisitions

During 2013, the Company acquired dialysis-related and other ancillary businesses consisting of 26 dialysis centers in the U.S., 38 dialysis centers outside of the U.S. and other medical businesses for a total of $310,394 in net cash and deferred purchase price of $24,683. During 2012, the Company acquired dialysis-related and other ancillary businesses consisting of 93 dialysis centers in the U.S., 13 dialysis centers outside of the U.S. and other medical businesses for a total of $648,318 in net cash and deferred purchase price of $6,101. During 2011, the Company acquired other dialysis businesses consisting of 57 centers in the U.S., eight dialysis centers outside of the U.S., and one vascular access center for a total of $354,430 in cash and deferred purchase price obligations of $12,469.

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 financial statements and operating results from the effective dates of the acquisitions. For several of the 2013 acquisitions, certain income tax amounts are pending final evaluation and quantification of any pre-acquisition tax contingencies. In addition, valuation of medical claims reserves and certain other working capital items are pending final quantification.

Acquisition of DSI Renal Inc.

In 2011, the Company acquired all of the outstanding common stock of CDSI I Holding Company, Inc., the parent company of dialysis provider DSI Renal Inc. (DSI), pursuant to an agreement and plan of merger for approximately $723,012 in net cash, plus the assumption of certain liabilities totaling approximately $6,541. DSI had 113 outpatient dialysis centers that provide services to approximately 8,000 patients in 23 states. The Company also incurred approximately $21,700 in transaction and integration costs during 2011 associated with this acquisition that are included in general and administrative expenses in the consolidated statements of income.

The operating results of DSI are included in the Company’s consolidated financial statements effective from September 1, 2011.

The following table summarizes the assets acquired and liabilities assumed in the above described transactions and recognized at their acquisition dates at estimated fair values, as well as the estimated fair value of the noncontrolling interests assumed in these transactions:


	Year ended December 31,
	2013			2012			2011
Current assets	$	7,215		$	18,708		$	171,619
Property and equipment		23,760			41,741			90,107
Amortizable intangible and other long-term assets		80,646			90,296			28,557
Goodwill		271,267			554,685			889,506
Long-term deferred income taxes		(5,666	)		(1,838	)		79,420
Noncontrolling interests assumed		(22,880	)		(21,962	)		(93,921	)
Liabilities assumed		(19,265	)		(27,211	)		(68,836	)

Aggregate purchase cost	$	335,077		$	654,419		$	1,096,452

Amortizable intangible assets acquired during 2013, 2012 and 2011 had weighted-average estimated useful lives of fourteen, fifteen and nine years, respectively. The total amount of goodwill deductible for tax purposes associated with these acquisitions for 2013, 2012, and 2011 was approximately $221,454, $491,457 and $560,000, respectively.

2012 acquisition of HCP

On November 1, 2012, the Company completed the acquisition of HCP pursuant to an Agreement and Plan of Merger dated May 20, 2012, whereby HCP became a wholly-owned subsidiary of the Company. HCP is one of the country’s largest operators of medical groups and physician networks generating approximately $3,200,000 in annual revenues and approximately $385,000 in operating income for the year ended December 31, 2013. The operating results of HCP are included in the Company’s consolidated financial results from November 1, 2012.

The total consideration paid at closing for all of the outstanding common units of HCP was approximately $4,701,231, which consisted of $3,645,759 in cash, net of cash acquired, and 18,760,624 shares of the Company’s common stock valued at approximately $1,055,472. During 2013, the Company paid an additional $5,251 in cash for post-closing working capital adjustments. In addition, the acquisition agreement provides that as further consideration, the Company could have paid the common unit holders of HCP a total of up to an additional $275,000 in cash if certain performance targets were achieved by HCP in 2012 and 2013. See contingent earn-out obligation as discussed below for further details.

The following table summarizes the initial assets acquired and liabilities assumed in this transaction and recognized at the acquisition date at their estimated fair values at that date:


Current assets, net of cash acquired	$	321,235
Property and equipment		102,382
Intangible assets		1,882,818
Other long-term assets		100,143
Goodwill		3,496,713
Current liabilities assumed		(559,180	)
Other long-term liabilities		(169,015	)
Long-term deferred income taxes		(184,015	)
Noncontrolling interests		(29,850	)

	$	4,961,231

The initial allocations of purchase price were recorded at the estimated fair values of assets acquired and liabilities assumed based upon the best information available to management. The fair values of property and equipment, intangible assets, and contingent earn-out obligations were estimated by the Company with the assistance of an independent third party. During 2013, the Company completed the final valuations of medical claims reserves, certain noncontrolling interests and certain income tax amounts, including pre-acquisition tax contingencies that were previously unresolved. See below for further details regarding these final adjustments.

The amortizable intangible assets acquired in this transaction included $1,453,410 for customer relationships, $170,494 for trade names, $74,650 for non-compete agreements and $184,686 for provider network and practice management tools. See Note 7 to the consolidated financial statements. These amortizable intangible assets and liabilities are scheduled to be amortized on a straight-line method over a weighted-average amortization period of 17.2 years. The weighted-average amortization period for customer relationships is 20 years, trade names is 10.6 years, non-compete agreements is 5.7 years, and provider network and practice management tools is 7 years.

Of the goodwill recognized in this transaction, approximately $2,426,986 is expected to be deductible for tax purposes over the next 15 years, assuming all related earn-out and other escrow release conditions are satisfied.

The following is a summary of HCP’s purchase accounting adjustments recorded in 2013 applied retrospectively to the December 31, 2012 balance sheet and primarily relate to adjustments to medical claims reserves, noncontrolling interests and income taxes:


	Adjustments to the December 31, 2012 balance sheet
Accounts receivable	$	3,000
Medical payables	$	7,000
Other liabilities	$	(5,251	)
Noncontrolling interest	$	11,123
Goodwill	$	(12,219	)
Deferred income taxes	$	(544	)
Income tax payable	$	(3,109	)

Contingent earn-out obligations

As a result of HCP achieving certain financial performance targets in 2012, the Company made earn-out payments of $136,954 on April 1, 2013 to the common unit holders of HCP. During 2013, the Company also reached an agreement with the representative of the former owners and option holders of HealthCare Partners Holdings, LLC to settle certain post-closing adjustments, including the 2013 contingent earn-out obligation for $68,750, which resulted in the Company recording a contingent earn-out gain of $56,977 in operating income.

The Company also has several other contingent earn-out obligations associated with other acquisitions that could result in the Company paying the former shareholders of those acquired companies a total of up to $118,600 or a certain portion of that amount if certain EBITDA performance targets and quality margins are met over the next three years, if certain percentages of operating income are met over the next five years or if certain percentages of other annual EBITDA targets are met. As of December 31, 2013, the Company has estimated the fair value of these contingent earn-out obligations to be $28,058.

Contingent earn-out obligations will be remeasured to fair value at each reporting date until the contingencies are resolved with changes in the liability due to the re-measurement recorded in earnings. See Note 24 to the consolidated financial statements for further details. Of the total contingent earn-out obligations of $28,058 recognized at December 31, 2013, a total of $6,736 is included in other accrued liabilities and the remaining $21,322 is included in other long-term liabilities in the Company’s consolidated balance sheet.

The following is a reconciliation of changes in the contingent earn-out obligations for the year ended December 31, 2013:


Beginning balance, January 1, 2013	$	292,042
Contingent earn-out obligations associated with acquisitions		12,152
Remeasurement of fair value for HCP		(56,977	)
Remeasurement of fair value for other contingent earn-outs		(15,742	)
Payments of the contingent earn-outs to HCP		(205,704	)
Other payments of contingent earn-outs		(380	)
Other tax-related adjustments		2,667

	$	28,058

Discontinued operations

Divestiture of HomeChoice Partners, Inc.

On February 1, 2013, the Company completed the sale of HomeChoice Partners Inc. (HomeChoice) to BioScrip, Inc. pursuant to a stock purchase agreement (the Agreement) dated December 12, 2012 for $70,000 in cash, subject to various post-closing adjustments, of which the Company receives approximately 90% of the proceeds. The stock purchase agreement also provides that as additional consideration the Company can earn up to a total of 90% of $20,000 if certain performance amounts exceed certain thresholds over the next two years. The Company has not yet assigned any value to this contingent receivable and will only recognize the estimated realizable value of this receivable when it becomes probable and reasonably estimable. The Company recorded a gain of approximately $13,375, net of tax, during 2013, related to this divestiture.

HomeChoice is a regional provider of home infusion services that provides specialized pharmacy nursing and nutritional services to patients in their homes.

The operating results of HomeChoice have been reported as discontinued operations for all periods presented.

The results from discontinued operations related to HomeChoice were as follows:


	Year ended December 31,
	2013			2012			2011
Net revenues	$	6,351		$	67,990		$	60,174

Loss before income taxes		(223	)		(304	)		(23,931	)
Income tax benefit		(84	)		(82	)		(9,548	)

Loss from discontinued operations	$	(139	)	$	(222	)	$	(14,383	)

Net assets of discontinued operations related to HomeChoice as of February 1, 2013, were as follows:


Current assets	$	17,039
Property and equipment, net		2,963
Long-term assets		28
Goodwill		31,853
Liabilities and noncontrolling interests		(8,998	)

Net assets from discontinued operations	$	42,885

Divestitures in connection with the DSI acquisition

Pursuant to a consent order issued by the Federal Trade Commission on September 2, 2011, the Company agreed to divest a total of 30 outpatient dialysis centers and several home-based dialysis programs in order to complete the acquisition of DSI. In conjunction with the consent order, on September 30, 2011, the Company completed the sale of 28 outpatient dialysis centers to Dialysis Newco, Inc. (Dialysis Newco), a portfolio company of Frazier Healthcare VI, L.P. and New Enterprise Associates 13, Limited Partnership pursuant to an asset purchase agreement dated August 26, 2011. Effective October 31, 2011, the Company also completed the sale of two additional outpatient dialysis centers to Dialysis Newco that were previously pending state regulatory approval. The Company received a total net cash consideration of approximately $84,000 for all of the outpatient dialysis centers that were divested. As part of this transaction, Dialysis Newco assumed specific liabilities related to the centers it acquired. All other liabilities were retained by the Company. The Company recorded a loss of approximately $4,756, net of tax, during the year ended December 31, 2011 related to the divestiture of its historical DaVita centers.

The operating results of the historical DaVita divested centers are reflected as discontinued operations in 2011. In addition, the operating results of the DSI divested centers are reflected as discontinued operations in the consolidated financial statements beginning September 1, 2011.

The results from discontinued operations related to the DSI acquisition were as follows:


	Year ended December 31,
	2013		2012		2011
Net revenues	$	—	$	—	$	16,648

Income before income taxes		—		—		1,896
Income tax expense		—		—		675

Income from discontinued operations	$	—	$	—	$	1,221

Net assets of discontinued operations related to the DSI acquisition as of September 30, 2011, were as follows:


Current assets	$	71,384
Property and equipment, net		5,183
Goodwill		7,999
Liabilities and noncontrolling interests		(836	)

Net assets from discontinued operations	$	83,730

Pro forma financial information (unaudited)

The following summary, prepared on a pro forma basis, combines the results of operations as if all acquisitions and divestitures in 2013 and 2012 had been consummated as of the beginning of 2012, after including the impact of certain adjustments such as amortization of intangibles, interest expense on acquisition financing and income tax effects.


	Year ended December 31,
	2013		2012
	(unaudited)
Pro forma net revenues	$	11,890,346	$	10,875,475
Pro forma net income attributable to DaVita HealthCare Partners Inc.		1,009,166		787,403
Pro forma income from continuing operations attributable to DaVita HealthCare Partners Inc.		1,009,305		787,625
Pro forma basic net income per share attributable to DaVita HealthCare Partners Inc.		4.81		4.10
Pro forma diluted net income per share attributable to DaVita HealthCare Partners Inc.		4.70		4.02