DaVita Inc. Q1 2009 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009. DaVita Inc. operates principally as a dialysis and related lab services business, alongside ancillary services including infusion therapy, pharmacy, and vascular access services. The company is a large accelerated filer incorporated in Delaware. As of April 30, 2009, there were approximately 103.4 million shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Operating Revenues | $1,447,640 | $1,344,724 |
| Operating Income | $220,604 | $205,781 |
| Net Income Attributable to DaVita Inc. | $96,211 | $86,934 |
| Diluted EPS | $0.92 | $0.80 |
| Operating Cash Flow | $134,249 | $107,912 |
| Total Debt (Long-term + Current) | $3,683,528 | $3,695,146 |
| Cash and Cash Equivalents | $405,683 | $479,316 |
Margins: Operating margin for Q1 2009 was approximately 15.2%. The effective tax rate was approximately 37.4%.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenues increased by 7.7% ($103 million) compared to Q1 2008, driven by a 6.0% increase in Dialysis and Related Lab Services revenue due to higher treatment volumes and a 1% Medicare composite rate increase.
- Profitability: Operating income increased by 7.2% ($15 million) year-over-year. Net income attributable to DaVita Inc. rose 10.7%.
- Cost Pressures: Patient care costs per treatment increased by approximately $6 compared to Q1 2008, attributed to higher labor rates, payroll taxes, and pharmaceutical costs, partially offset by lower pharmaceutical intensities.
- Debt Expense: Debt expense decreased by $10.8 million year-over-year due to lower LIBOR-based variable interest rates on unhedged debt.
- Accounting Changes: The company adopted SFAS No. 160 on January 1, 2009, changing the presentation of noncontrolling interests from a deduction from operating income to a separate component of equity.
Guidance, Outlook, and Risks
2009 Guidance:
- Operating Income: Projected range of $870 million to $930 million (adjusted for SFAS 160 presentation).
- Operating Cash Flow: Projected range of $550 million to $600 million.
- Capital Expenditures: Expected to spend approximately $100 million on maintenance/IT and $250 million on new center development and acquisitions.
Management Commentary: Management noted that while commercial payment rates face downward pressure, the 1% Medicare rate increase and volume growth supported results. The company continues to invest in new center development and acquisitions.
Risks and Contingencies:
- Government Investigations: The company is subject to multiple ongoing civil and criminal investigations by the U.S. Attorney's Offices (Georgia, Missouri, Texas, New York) and the Office of Inspector General regarding pharmaceutical utilization (EPO, Zemplar, etc.) and billing practices. While no proceedings have been initiated against the company in some cases, negative findings could result in substantial penalties or exclusion from Medicare/Medicaid.
- Regulatory Changes: Significant risk exists regarding the 2011 implementation of the Medicare ESRD bundled payment system, which may reduce reimbursement rates.
- Commercial Payors: Continued downward pressure on commercial payment rates and potential loss of patients to lower-paying government plans pose risks to profitability.
Investor Verification Checklist
- Verify the status and potential financial impact of ongoing federal investigations (OIG and U.S. Attorney's Offices) regarding EPO and pharmaceutical billing.
- Monitor the finalization of the 2011 Medicare ESRD bundled payment rates and their projected impact on margins.
- Assess the trend in commercial payor reimbursement rates and the mix of commercial vs. government patients.
- Review the company's ability to manage rising labor and pharmaceutical costs against fixed or slowly increasing reimbursement rates.
- Confirm the execution of the capital expenditure plan ($350 million total) and its impact on cash flow.