DaVita Inc. 10-Q Summary: Quarter Ended September 30, 2000
Business Context and Reporting Period
This Form 10-Q covers the three and nine months ended September 30, 2000, for DaVita Inc. (formerly Total Renal Care Holdings, Inc.), a provider of dialysis services. The reporting period reflects the company's transition following the divestiture of approximately 90% of its non-continental U.S. operations in the second quarter of 2000. The company recently restructured its credit facilities in July 2000 to regain compliance with financial covenants.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2000 | Nine Months Ended Sep 30, 2000 | Nine Months Ended Sep 30, 1999 |
|---|---|---|---|
| Net Operating Revenues | $362.5 million | $1,113.6 million | $1,072.2 million |
| Operating Income | $49.9 million | $123.1 million | $90.9 million |
| Net Income (Loss) | $9.7 million | $(1.8) million | $3.4 million |
| Diluted EPS | $0.12 | $(0.02) | $0.04 |
| Operating Cash Flow | $84.0 million (Q3) | $194.8 million (9mo) | $113.7 million (9mo) |
| Total Debt | $1.083 billion | $1.083 billion | $1.458 billion (Dec 31, 1999) |
| Cash and Equivalents | $38.6 million | $38.6 million | $108.0 million (Dec 31, 1999) |
Margins: Operating margin for the nine months ended September 30, 2000, was approximately 11.1% ($123.1M / $1,113.6M). Facility operating expenses represented 69% of revenues for continental U.S. operations in the first nine months of 2000, up from 67% in the prior year.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenues for the nine months ended September 30, 2000, increased 3.9% compared to the same period in 1999. Continental U.S. revenues grew approximately 6%, driven by a 2% increase in revenue per treatment and a 5% increase in treatment volume.
- Profitability: Operating income increased significantly to $123.1 million for the nine-month period (up from $90.9 million in 1999). However, net income turned negative ($(1.8) million) due to a $10.8 million pre-tax charge for a securities class action settlement and a $3.5 million extraordinary loss related to debt restructuring.
- Debt Reduction: Long-term debt decreased by approximately $370 million since year-end 1999, aided by $134 million in proceeds from the sale of international operations, $125 million of which was applied directly to debt.
- Bad Debt Provision: The provision for uncollectible accounts dropped to 3% of revenues for the first nine months of 2000, compared to 6% in 1999, reflecting improved billing and collection operations.
Guidance, Outlook, and Risks
Outlook: Management expects organic growth in dialysis treatments to remain in the 3% to 6% range. They anticipate sustaining or improving revenue per treatment for the next two quarters. The provision for uncollectible accounts is expected to stabilize in the 2% to 3% range long-term.
Material Risks and Contingencies:
- Florida Laboratory Dispute: A third-party carrier has suspended Medicare payments to DaVita's Florida lab since May 1998. Approximately $38.3 million in revenue has been recognized but withheld. The company ceased accruing revenue from this lab in Q3 2000 due to uncertainty. Potential cash exposure is estimated at $13 million based on overpayment findings.
- Debt Covenants: The company was previously out of compliance with covenants, causing all debt to be classified as current. A July 2000 restructuring restored compliance, but the company remains subject to strict financial ratios and amortization schedules.
- Reimbursement Rates: Approximately 50% of revenue comes from Medicare. Future declines or lack of increases in reimbursement rates, particularly for ancillary drugs like EPO, could materially reduce income.
- Goodwill: Goodwill represents 48% of total assets. Changes in the estimated useful life of goodwill could significantly impact future earnings.
Investor Verification Checklist
- Florida Lab Resolution: Verify the status of the appeal process with the federal administrative law judge regarding the $38.3 million in withheld Medicare billings.
- Debt Service Capacity: Confirm the company's ability to meet scheduled principal and interest payments (approx. $88 million in 2001 and $127 million in 2002) given the high leverage ratio.
- Medical Director Contracts: Monitor the renewal rates of medical director contracts, as these relationships are critical for patient referrals and revenue stability.
- EPO Pricing: Track any further price increases from Amgen for erythropoietin (EPO), a significant cost component, and the impact on facility operating margins.
- Goodwill Amortization: Review future filings for any changes in the estimated useful life of goodwill, which could lead to increased amortization charges.