DaVita HealthCare Partners Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013; the filing also reports fourth-quarter results. The company combines U.S. dialysis and related laboratory services, HealthCare Partners (HCP), and ancillary businesses. HCP was acquired November 1, 2012, so the 2012 comparison includes only two months of HCP operations and is not directly comparable.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net revenue | $11.764 billion | $8.186 billion |
| Operating income | $1.550 billion | $1.297 billion |
| Operating margin | 13.2% | 15.8% |
| Net income attributable to DaVita | $633 million | $536 million |
| Diluted continuing-operations EPS | $2.89 | $2.74 |
| Cash from operations | $1.773 billion | $1.101 billion |
| Cash and cash equivalents at year-end | $946 million | $534 million |
| Long-term debt at carrying value | $8.141 billion | $8.327 billion |
Revenue rose 43.7%, primarily reflecting a full year of HCP; operating income increased 19.5%. Management’s non-GAAP adjusted operating income was $1.898 billion, up 34.2%, excluding specified legal and acquisition-related items. The reported operating margin declined in part because of a $397 million legal reserve. Debt expense was $430 million. Working capital was $1.010 billion, and the company reported an undrawn $350 million revolving facility, with about $70 million committed for letters of credit.
Capital expenditures were $618 million and acquisitions used $310 million in cash. The company reported no common-stock repurchases in 2013 and no current plan to pay dividends.
Segments and fourth-quarter results
- U.S. dialysis: Net revenue was $7.764 billion, up 9.4%; treatments increased 7.2%, and average revenue per treatment rose to $340 from $332. Segment operating income was $1.212 billion, including the $397 million legal reserve. Revenue was 66% government-based and 34% commercial; management stated that commercial payors generate nearly all dialysis profits.
- HCP: Revenue was $3.196 billion and operating income was $385 million. Approximately 91% of HCP revenue was capitated. Membership at year-end was about 764,500, including 265,000 senior members.
- Ancillary and strategic initiatives: Revenue was $852 million and operating loss was $39 million; international dialysis revenue remained below 1% of consolidated revenue.
- Fourth quarter: Revenue was $3.063 billion, operating income $484 million, net income attributable to DaVita $212 million, and diluted continuing-operations EPS $0.99. The comparable fourth-quarter 2012 figures were $2.478 billion, $388 million, $156 million, and $0.76, respectively.
Material changes, outlook, risks, and unusual items
- Growth also reflected dialysis center expansion and acquisitions: the U.S. network ended 2013 at 2,074 centers, up 120 year over year. HCP’s full-year contribution substantially changes the consolidated year-over-year comparison.
- The company accrued a $397 million reserve for the 2010 and 2011 federal physician-relationship investigations. DaVita agreed to a framework for a global resolution expected to involve approximately $389 million, a corporate integrity agreement, an independent monitor, and restrictions on certain joint ventures. Final terms remained under negotiation at filing.
- Management described 2014 as challenging: it expected clinical costs, including labor and supplies, to rise faster than dialysis Medicare reimbursement. CMS rules then provided for no net dialysis reimbursement reduction in 2014 or 2015, with ATRA-mandated drug-utilization cuts of 12% phased in over three or four years and potential reductions in 2016 and/or 2017.
- HCP estimated that 2014 Medicare Advantage risk recalibration would reduce average revenue managed for senior capitated members by approximately 6%–9%; management expected to offset part of the impact through pass-throughs and other initiatives.
- Key risks include commercial rate pressure and declining commercial patient mix; Medicare and Medicaid payment changes; HCP’s medical-cost and claims-reserve estimates; regulatory and physician-referral compliance; pending investigations and litigation; and substantial debt and interest expense. The company also planned continued investment in international expansion.
- Other unusual items included a $57 million reduction in HCP’s contingent earn-out obligation, recorded as an operating-income benefit, and the sale of HomeChoice for $70 million cash, with a $13 million after-tax gain.
Important facts for investors to verify
- Final settlement terms, payment timing, and operating restrictions relating to the physician-relationship investigations.
- Whether dialysis commercial reimbursement rates and commercial patient mix stabilize or continue to weaken.
- Actual timing and financial effect of future ESRD bundled-payment reductions and oral-only drug inclusion.
- HCP’s realized 2014 Medicare Advantage revenue impact versus the estimated 6%–9% reduction, and its ability to manage medical costs.
- Debt repayment capacity, liquidity needs, and cash generation after interest, capital spending, and acquisitions.