DaVita Inc. — Q2 2011 Form 10-Q
Business context and period. DaVita operates dialysis and related laboratory services, alongside pharmacy, infusion therapy, disease management, vascular access and other ancillary businesses. This unaudited report covers the quarter and six months ended June 30, 2011; comparisons are primarily with the corresponding 2010 periods.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,711.5 million | $1,586.9 million | $3,317.5 million | $3,146.3 million |
| Operating income | $247.0 million | $242.4 million | $482.6 million | $485.0 million |
| Net income attributable to DaVita | $100.0 million | $107.9 million | $194.5 million | $217.3 million |
| Diluted EPS | $1.03 | $1.04 | $1.99 | $2.08 |
| Operating margin | 14.4% | 15.3% | 14.5% | 15.4% |
Revenue increased 7.9% in Q2 and 5.4% for the half year. Dialysis treatment volume drove growth; Q2 treatments rose 7.1% year over year, while average dialysis revenue per treatment declined about $3 in Q2 and $10 for the half year. The Q2 average was $332 per treatment. The dialysis segment generated Q2 operating income of $282.8 million; ancillary services recorded a $24.8 million operating loss.
Reported operating income includes a $24 million non-cash goodwill impairment for HomeChoice Partners (HCP). Excluding the charge, management reported Q2 operating income of about $271 million, up approximately 12% year over year, and first-half operating income of about $507 million, up approximately 4.5%.
Cash flow and liquidity. First-half operating cash flow was $534.2 million, versus $557.8 million a year earlier. Q2 operating cash flow was $204 million, versus $296 million. First-half capital expenditures were $154.9 million and acquisitions used $151.2 million. Cash and cash equivalents were $729.8 million at June 30, down from $860.1 million at year-end. Current assets of $2.51 billion exceeded current liabilities of $1.04 billion.
Debt and capital allocation. Debt principal outstanding was $4.29 billion ($4.21 billion long-term, excluding the current portion); debt expense was $59.9 million in Q2, up from $43.7 million. The Q2 weighted average effective interest rate was 5.33%. DaVita had $250 million of undrawn revolving facilities, of which about $45.8 million was committed for letters of credit. First-half share repurchases totaled 3.71 million shares for $316.1 million. Management said liquidity and operating cash flow should be sufficient for scheduled debt service and other obligations for the foreseeable future.
Material changes and management commentary
- Dialysis revenue growth reflected higher treatment volume and acquisitions, partly offset by lower average revenue per treatment year over year. The April Medicare payment-rule correction increased Medicare revenue per treatment about 3.1% versus Q1 2011.
- Patient care cost per treatment fell about $9 year over year in Q2, mainly due to lower pharmaceutical costs and utilization; labor, benefits and productivity pressures partly offset savings. General and administrative expenses rose, including costs for IT, labor, acquisitions, compliance and international initiatives.
- Ancillary-services revenue grew, particularly in pharmacy, but losses widened. HCP’s operating performance weakened following rapid expansion; management scaled back growth plans and recorded the impairment. A further charge was possible, though management did not expect it to be material.
- Accounts receivable increased to $1.13 billion from $1.05 billion at year-end. Management cited slower collections; receivables represented about 63 days of revenue at quarter-end, versus 62 days at March 31.
Guidance, risks and contingencies
Management raised 2011 operating income guidance to $1.08–$1.12 billion, excluding the HCP impairment, and operating cash flow guidance to $900–$980 million. 2012 operating income guidance increased to $1.20–$1.30 billion. Guidance assumes the DSI acquisition closes in Q3 2011. The proposed cash acquisition is approximately $689 million for a provider operating about 106 centers; FTC clearance requires divestiture of approximately 30 centers.
Key risks include dependence on higher-paying commercial patients and continued commercial rate pressure; Medicare’s new bundled payment system and potential future reimbursement reductions; labor and collection challenges; substantial debt and interest-rate exposure; regulatory compliance and billing-estimation risks; and the ability to complete and integrate acquisitions. The filing describes federal investigations and whistleblower litigation concerning, among other matters, pharmaceutical claims and physician/joint-venture relationships. Outcomes and potential damages were not estimable; adverse findings could entail penalties, repayment obligations or exclusion from government programs. Commercial-payor claims and other legal matters also remain, with no clear estimate of potential exposure.
DaVita uses swaps and interest-rate caps to hedge variable-rate debt; management said rates were economically fixed on primarily all debt at quarter-end. The filing also notes the proposed 2012 Medicare ESRD rate increase and quality-related payment adjustments, and the possibility of federal budget-related Medicare cuts.
Investor verification priorities
- Confirm the reconciliation and sustainability of raised operating income and cash-flow guidance, including the DSI acquisition assumption and required divestitures.
- Track commercial-payor mix and rates, Medicare bundled-payment realization, treatment growth and revenue per treatment.
- Monitor receivable aging, collection trends and operating cash flow relative to buybacks, capital spending and acquisition needs.
- Review debt maturities, effective interest costs, available revolving capacity and potential cash obligations under joint-venture put provisions.
- Seek updates on federal investigations, relator claims, commercial-payor disputes and any additional HCP impairment.