DaVita Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated interim results; dollar amounts below are in millions unless noted.
Business context
DaVita’s primary business is U.S. dialysis and related laboratory services, alongside pharmacy, infusion, disease management, vascular access, physician services, direct primary care and international operations. It acquired 61 U.S. dialysis centers and three centers outside the U.S. during the first half.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net operating revenue | $1,929.7 | $1,661.2 | $3,796.4 | $3,223.5 |
| Operating income | $247.9 | $246.6 | $568.6 | $482.0 |
| Income from continuing operations | $120.0 | $120.4 | $284.9 | $235.0 |
| Net income attributable to DaVita | $95.3 | $100.0 | $235.5 | $194.5 |
| Diluted EPS | $0.99 | $1.03 | $2.46 | $1.99 |
| Operating cash flow | Not separately stated for Q2 in cash flow statement | Not separately stated for Q2 in cash flow statement | $534.0 | $534.2 |
- First-half net operating revenue rose about 17.8%; revenue growth was driven mainly by treatment volume, acquisitions and ancillary-services growth. Dialysis treatments increased about 15% year over year, and average dialysis revenue per treatment rose about $4 to $333.
- First-half operating income increased 18.0% as reported. Excluding the 2012 legal accrual and the 2011 goodwill impairment, company-defined adjusted operating income was $647 million versus $506 million. Q2 adjusted operating income was $326 million versus $271 million.
- Q2 operating income included a $78 million legal proceeding accrual; Q2 2011 included a $24 million goodwill impairment. DaVita-attributable Q2 net income declined despite higher revenue, while first-half attributable net income grew approximately 21%.
- Six-month capital expenditures were $250.5 million and acquisition spending was $346.8 million. Cash and equivalents were $273.4 million at June 30, down from $393.8 million at year-end; current assets were $2.18 billion and current liabilities $1.24 billion.
- Debt principal outstanding was $4.51 billion ($4.50 billion carrying value, including current portion). The company had $350 million of undrawn revolving facilities, with about $49 million committed for letters of credit. Total liabilities were $6.22 billion.
Material changes, outlook and risks
- Guidance raised: 2012 operating income guidance increased to $1.275–$1.325 billion, excluding HCP operating results and the $78 million legal accrual. Operating cash flow guidance remained $950 million–$1.05 billion. Management cautioned that actual results may vary materially.
- HealthCare Partners transaction: DaVita agreed to acquire HCP for $3.66 billion cash and approximately 9.38 million DaVita shares, subject to adjustments, plus up to $275 million in earn-outs. At filing, closing was expected early in Q4 2012; completion was not assured.
- Settlement and investigations: DaVita accrued $78 million for an agreement in principle to resolve the Woodard False Claims Act matter, including $55 million settlement consideration and related fees. Settlement remained subject to documentation and court approval. Other federal inquiries and the Vainer civil suit remained unresolved; adverse outcomes could involve penalties, repayment, exclusion from government programs or criminal proceedings.
- Operating and reimbursement risks: Management highlighted pressure on commercial reimbursement and commercial patient mix, Medicare and Medicaid payment changes, sequestration, health reform, pharmaceutical utilization and pricing, regulatory compliance, billing and collection estimates, competition, staffing, and execution/integration risks for acquisitions and international expansion. Commercial payors generated nearly all dialysis profits; approximately 34% of first-half dialysis revenue came from commercial primary payors.
- Ancillary services and strategic initiatives reported a $36.5 million first-half operating loss, versus $38.6 million in the prior-year period; management cited losses tied to disease management, direct primary care and international expansion.
Important facts for investors to verify
- Whether the Woodard settlement received required approvals and fully resolved the claims covered by the agreement.
- HCP closing timing, final consideration, financing impact, and whether earn-out targets are met.
- Progress against raised operating-income and cash-flow guidance, including the stated exclusions.
- Trends in commercial reimbursement, payor mix, treatment growth, revenue per treatment and bad-debt collections.
- Debt and liquidity following the proposed HCP purchase, including put-provision obligations and interest-rate exposure.
- Developments in pending government investigations, Medicare/Medicaid rules and the other identified regulatory and reimbursement risks.