Business context and reporting period
DaVita Inc.’s Form 10-K covers the fiscal year ended December 31, 2009, with unaudited quarterly comparisons for Q4 2009 and Q4 2008. DaVita provided dialysis and related laboratory services, operating or managing 1,530 outpatient centers and serving approximately 118,000 patients. Its dialysis and lab business generated about 95% of consolidated revenue.
Financial and operating performance
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Net operating revenue | $6.109 billion | $5.660 billion | +7.9% |
| Operating income | $940.3 million | $869.1 million | +8.2% |
| Operating margin | 15.4% | 15.4% | Broadly unchanged |
| Net income attributable to DaVita | $422.7 million | $374.2 million | +13.0% |
| Diluted EPS | $4.06 | $3.53 | +15.0% |
| Cash from operations | $666.7 million | $613.7 million | +$53.0 million |
Q4 2009 revenue was $1.568 billion, operating income $238.7 million, net income attributable to DaVita $109.7 million and diluted EPS $1.06. In Q4 2008, the corresponding figures were $1.461 billion, $223.1 million, $98.4 million and $0.94.
Dialysis and lab revenue rose 6.9% to $5.792 billion; treatments increased approximately 4.7% and revenue per treatment rose from $334 to $340. Patient-care cost per treatment increased from $230 to $234. Ancillary-services revenue increased to $317 million from $245 million, while the segment’s operating loss narrowed to $17.7 million from $29.9 million.
At year-end, cash and cash equivalents were $539.5 million; working capital was $1.256 billion. Total principal debt outstanding was $3.630 billion, versus $3.691 billion a year earlier; long-term debt on the balance sheet was $3.532 billion. The company reported $250 million of revolving-credit capacity, with about $52 million committed to letters of credit. Its senior secured facilities were secured by substantially all company and guarantor-subsidiary assets. Capital expenditures were $274.6 million and acquisition spending was $87.6 million.
Material changes and management commentary
- Revenue and earnings improved year over year, supported by treatment growth, higher average revenue per treatment, productivity and cost-control initiatives, and lower ancillary-business losses. Higher labor, benefit, pharmaceutical and center operating costs partly offset these gains.
- Government programs accounted for 65% of dialysis and lab revenue; commercial payors accounted for 35% and generated nearly all dialysis profits. Government-based patients grew faster than commercial patients, weighing on revenue mix.
- Management’s 2010 outlook was operating income of $950 million–$1.020 billion and operating cash flow of $675 million–$725 million. It expected a 2010 effective tax rate of 36.5%–37.5%, maintenance capital expenditures of about $125 million, and about $250 million for center development, relocations and acquisitions, subject to project availability and returns.
- MIPPA’s new Medicare bundled payment system was scheduled to begin in 2011. DaVita said the 2009 proposed CMS rule could reduce reimbursement by materially more than the stated 2% baseline reduction; the final rate and impact were not yet known. Providers could phase in the system over three years.
- DaVita reported multiple federal inquiries and subpoenas concerning pharmaceuticals, EPO billing, physician relationships and joint ventures. It was cooperating; it said no federal proceedings had been initiated to its knowledge at the filing date. Potential outcomes could include financial penalties or exclusion from government programs. Other disclosed matters included commercial-payor billing claims and employee wage-and-hour litigation; some claims had tentative settlements pending final court approval.
- The five-year Corporate Integrity Agreement covering former Gambro Healthcare operations expired November 30, 2009. DaVita reported that the OIG confirmed compliance for the final reporting period in February 2010.
- The filing identifies commercial-rate pressure, a shift from commercial to government coverage, Medicare and Medicaid reimbursement changes, EPO utilization and sole-supplier pricing, regulatory compliance, staffing, collections, and substantial debt as material risks. A 100-basis-point increase in variable rates was estimated to reduce net income by about $9.9 million over the next 12 months.
Important facts for investors to verify
- Track the final 2011 Medicare bundled-payment rules and their effects on reimbursement, treatment costs and margins.
- Assess commercial-payor rates, patient mix and out-of-network access, which are especially important because commercial patients generate nearly all dialysis profits.
- Monitor outcomes and possible liabilities from government inquiries, qui tam matters, payor claims and pending litigation; the filing does not provide a clear estimate of potential losses for these matters.
- Review debt maturities, refinancing and interest-rate exposure, particularly the $1.7 billion Term Loan B maturity in 2012 and the expiration of interest-rate swaps in 2010.
- Compare 2010 guidance with actual results and assess whether cash generation supports planned investment, debt service and share repurchases. DaVita repurchased $153.5 million of shares in 2009 and authorized an additional $500 million.
- Confirm reported financial statements and controls: KPMG issued an unqualified opinion on the financial statements and internal control over financial reporting.