DaVita HealthCare Partners Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The company provides kidney dialysis and related services, alongside its integrated care management business, HealthCare Partners (HCP). Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net revenue | $3,581 | $3,288 |
| Operating income (loss) | $365 | $(64) |
| Net income (loss) attributable to DaVita | $97 | $(111) |
| Diluted earnings (loss) per share | $0.47 | $(0.52) |
| Cash from operating activities | $429 | $410 |
| Capital expenditures | $173 | $121 |
- Revenue grew 8.9% year over year. Net revenue comprised $2,369 million in net patient service revenue, $887 million in capitated revenue, and $326 million in other revenue.
- Operating margin was approximately 10.2%. Q1 2016 results included a $77 million goodwill impairment charge and a $16 million estimated HCP Nevada hospice liability accrual. Management’s non-GAAP adjusted operating income was $458 million, up 6.3% from $431 million in Q1 2015; this measure excludes specified unusual items.
- Operating cash flow increased 4.6%. Investing activities used $554 million, including $405 million for acquisitions; financing activities used $333 million, including $275 million for treasury stock purchases. Cash declined to $1,041 million from $1,499 million at year-end 2015.
- At March 31, cash plus short-term investments totaled approximately $1,438 million. Current assets were $4,200 million and current liabilities $2,444 million. Long-term debt was $8,980 million, with $138 million current; total debt principal outstanding was $9,210 million.
- The company had $1,000 million in undrawn revolving credit facilities, with approximately $91 million committed for letters of credit. The reported overall effective interest rate was 4.40%.
Material changes and operating trends
- Revenue increased by $293 million year over year, supported by dialysis treatment growth, acquisitions, one additional treatment day, higher average dialysis revenue per treatment, and growth in HCP and ancillary businesses.
- U.S. dialysis and related lab services revenue was $2,227 million; operating income was $440 million. Treatments increased to 6.64 million from 6.26 million, while revenue per treatment rose to $351 from $346. Patient care cost per treatment increased about $2 year over year, primarily from labor, benefits, and pharmaceutical costs.
- HCP revenue increased to $989 million from $928 million, but HCP reported a $57 million operating loss, including the impairment and hospice accrual. Higher medical claims and corporate support costs weighed on results. Senior capitated membership grew year over year, while commercial and Medicaid membership declined.
- TEC was acquired on March 1 for approximately $398 million net of cash acquired, plus assumed liabilities; the reported purchase price allocation was approximately $405 million. The company also had a pending agreement to acquire Renal Ventures for approximately $415 million, subject to regulatory clearance and anticipated divestitures.
- DaVita repurchased 3.69 million shares for $249 million at an average $67.61 per share. Approximately $259 million remained under the repurchase authorization as of April 29, 2016.
Outlook, commentary, and risks
- Management reaffirmed 2016 operating income guidance of $1.800–$1.950 billion, including $1.625–$1.725 billion for Kidney Care and $175–$225 million for HCP, and operating cash flow guidance of $1.550–$1.750 billion. Guidance excludes the Q1 goodwill impairment and HCP Nevada hospice accrual; actual results may differ materially.
- Management attributed Q1 year-over-year adjusted operating income growth to dialysis volume and revenue per treatment, partly offset by labor, pharmaceutical, and medical claims costs. It cited lower pharmacy volume as a sequential headwind.
- CMS’s 2017 Medicare Advantage rate announcement was estimated by the company to reduce HCP rates by approximately 1%, with an estimated operating income impact of about $25 million in 2017. The 2016 rate structure was estimated to reduce HCP’s average Medicare Advantage revenue by approximately 2% versus 2015.
- HCP Nevada goodwill was impaired by $77 million. Nevada’s estimated fair value was about 9.9% below its carrying amount; Florida, Colorado Springs, Kidney Care Germany, and Kidney Care Malaysia were also identified as at risk. Further reimbursement reductions, rising medical costs, or adverse valuation assumptions could lead to additional impairment.
- Legal and regulatory matters include federal investigations concerning Medicare Advantage diagnosis coding, dialysis patient transportation, vascular access services, and DaVita Rx prescription billing. The company said outcomes and potential damages could not be predicted; negative findings could result in significant penalties, repayment obligations, or exclusion from government healthcare programs. It may need additional reserves. The OIG did not accept the company’s DaVita Rx self-disclosure, without expressing an opinion on the underlying conduct or the company’s legal position.
- The filing also reports a $16 million estimated accrual for potential liabilities involving Solari hospice and a previously recorded $22.5 million pharmacy-related accrual. Management cited risks from commercial and government reimbursement pressure, HCP medical-cost trends, labor availability and costs, acquisition integration, and substantial indebtedness. The company stated it expects sufficient liquidity and operating cash flow to meet obligations for the foreseeable future.
Most important facts for investors to verify
- Whether the reaffirmed 2016 operating income and cash flow guidance remains achievable, and how its exclusions compare with eventual reported results.
- HCP claims-cost performance, commercial and Medicaid membership trends, Medicare Advantage rate impacts, and the status of at-risk goodwill valuations.
- Developments, potential reserves, and financial exposure from the federal investigations and hospice matter; the filing does not provide a clear estimate of total potential losses.
- Cash generation after acquisitions, capital expenditures, and share repurchases, alongside debt service needs and the company’s large lease and put-option commitments.
- Closing, regulatory conditions, and integration outcomes for pending or recently completed acquisitions and the proposed Asia-Pacific investment.