DaVita Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report. Amounts below are in U.S. dollars unless otherwise stated.
Business context
DaVita is a leading U.S. kidney dialysis provider. At year-end it operated or administered 1,809 U.S. outpatient dialysis centers, served approximately 142,000 patients, and provided inpatient dialysis services at about 900 hospitals. U.S. dialysis and related laboratory services generated approximately 93% of consolidated revenue; ancillary services and strategic initiatives generated the balance. International dialysis operations were at start-up scale and produced immaterial 2011 revenue.
Financial and operating performance
| Metric | 2011 | 2010 | Change/comment |
|---|---|---|---|
| Consolidated revenue | $6.982 billion | $6.438 billion | Up 8.5% |
| Operating income | $1.131 billion | $997 million | Up 13.4%; up 15.8% excluding the 2011 impairment charge |
| Operating margin | 16.2% | 15.5% | Approximate, calculated from reported revenue and operating income |
| Net income attributable to DaVita | $478 million | $406 million | Up approximately 18% |
| Diluted continuing-operations EPS | $4.99 | $3.93 | Up approximately 27% |
| Operating cash flow | $1.180 billion | $840 million | Up $340 million |
| Cash and cash equivalents at year-end | $394 million | $860 million | Down $466 million |
| Long-term debt at year-end | $4.418 billion | $4.234 billion | Up $184 million; total principal debt was $4.513 billion |
| Working capital | $1.128 billion | $1.699 billion | Down $570 million |
Dialysis and related laboratory revenue was $6.485 billion, up 7.0%. Treatments increased 9.1% to 19.60 million, while average revenue per treatment fell to $330 from $337. Management attributed the decline mainly to Medicare bundling, a lower commercial payer mix, and reduced pharmaceutical intensity, partly offset by higher rates from some commercial payors. Patient-care cost per treatment declined to $217 from $232, largely due to lower pharmaceutical utilization and cost controls.
Commercial payors accounted for 34% of dialysis and related laboratory revenue and approximately 11% of patients; government programs accounted for 66% of segment revenue and approximately 89% of patients. Management said nearly all dialysis profits come from commercial payors. Ancillary and strategic-initiative revenue increased 33.9% to $514 million, but the segment recorded a $54 million operating loss, compared with a $6 million loss in 2010.
Fourth-quarter 2011 revenue was $1.862 billion, operating income was $330 million, net income attributable to DaVita was $148 million, and diluted EPS was $1.56. For fourth-quarter 2010, the corresponding reported figures were $1.647 billion, $255 million, $69 million, and $0.70.
Material changes and notable items
- DaVita acquired DSI in September 2011 for approximately $723 million in net cash, plus assumed liabilities. DSI contributed 113 centers before required divestitures; total 2011 acquisition cash outflow was $1.077 billion.
- To satisfy an FTC consent order related to the DSI transaction, DaVita divested 30 centers. It expected approximately $82 million in net proceeds from those center sales.
- A $24 million non-cash goodwill impairment was recorded for HomeChoice Partners, the infusion therapy business, following weaker performance and reduced growth expectations.
- Capital expenditures were approximately $436 million, including new-center development and maintenance/IT investment. DaVita repurchased 3.8 million shares for $323 million.
- The company entered into a seven-year Amgen supply agreement requiring purchases covering at least 90% of its erythropoiesis-stimulating-agent requirements. EPO costs rose approximately 5% in 2011; initial-year rebate opportunities were lower than under the expiring agreement.
- Medicare’s bundled ESRD payment system began in 2011. The 2012 base-rate update was 2.1%, with a quality-program payment reduction of up to 2%; DaVita reported an overall 2012 quality-program reduction of 0.2% to its rates.
Outlook, risks and contingencies
Management forecast 2012 operating income of $1.2–$1.3 billion and operating cash flow of $950 million–$1.05 billion. It cautioned that results could differ materially and described 2012 as challenging, citing Medicare billing and documentation requirements, system upgrades, pharmaceutical policy and pricing uncertainty, commercial payer mix, and continued international investment.
- Reimbursement and payer mix: Commercial rate negotiations and loss of higher-paying commercial coverage could materially affect earnings and cash flow. Medicare and state-program reimbursement changes, including future pricing of oral-only drugs entering the Medicare bundle in 2014, are also risks.
- Regulatory and legal matters: Federal inquiries include investigations of physician relationships and joint ventures, pharmaceutical practices, and Medicaid payments for infusion drugs. Two private False Claims Act suits were being pursued by relators after the government declined to intervene. Outcomes and potential damages were not estimable from the filing.
- Debt and liquidity: Debt was substantial; the senior credit facilities were secured by substantially all of DaVita’s and guarantors’ assets and include financial covenants. Variable-rate exposure is partly hedged, but rate increases could raise interest expense. Undrawn revolver capacity was $350 million, of which approximately $52 million supported letters of credit.
- Operations and estimates: Revenue and refund-liability estimates are sensitive to complex payer coordination, billing, collections, and Medicare patient-characteristic documentation. The company estimated dialysis-segment revenue estimation risk at within 1% of segment revenue.
- Other exposures: Ancillary businesses may continue to incur losses; labor shortages and rising costs, supplier concentration, acquisition integration, physician referrals, and international start-up risks could affect performance. Operating lease commitments totaled approximately $1.708 billion.
Important facts for investors to verify
- Whether treatment growth and the DSI acquisition translate into sustained earnings and cash-flow growth after integration costs and required divestitures.
- Trends in commercial payer rates and patient mix, given their importance to dialysis profitability.
- Actual Medicare reimbursement and quality-program effects, including the ability to document case-mix adjustments and the 2014 oral-drug bundle pricing.
- Progress on the 2012 guidance, cash conversion, capital spending, and debt reduction; cash declined materially during 2011 despite higher operating cash flow.
- Developments and potential financial consequences in the government investigations and private litigation, and performance of the impaired infusion therapy business.