DaVita Inc. — Q3 2009 Form 10-Q
Business context and reporting period. DaVita operates dialysis and related laboratory services, alongside pharmacy, infusion, vascular access, physician, disease-management and other strategic businesses. This unaudited report covers the quarter and nine months ended September 30, 2009; comparisons are with the corresponding 2008 periods unless otherwise noted.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $1,573.9 million | $1,447.1 million | $4,540.6 million | $4,199.2 million |
| Operating income | $245.0 million | $221.8 million | $701.6 million | $646.0 million |
| Net income attributable to DaVita | $110.9 million | $93.9 million | $313.0 million | $275.8 million |
| Diluted EPS | $1.06 | $0.89 | $3.00 | $2.59 |
| Operating cash flow | Not stated in the income statement | Not stated in the income statement | $514.1 million | $415.2 million |
- Q3 revenue increased 8.8%, operating income 10.5%, DaVita-attributable net income 18.1% and diluted EPS 19.1% year over year. Nine-month revenue rose 8.1%, operating income 8.6%, attributable net income 13.5% and diluted EPS 15.8%.
- Approximate operating margin was 15.6% in Q3 2009 versus 15.3% in Q3 2008; nine-month margins were approximately 15.5% and 15.4%. Q3 patient care costs were 69.7% of revenue versus 69.5% a year earlier; the filing reports both as about 70%.
- Dialysis and related lab services generated $1,491.3 million of Q3 revenue and $260.1 million of segment margin. Treatments increased 6.1% year over year, and average revenue per treatment rose about 2.0% to $343. Ancillary-services revenue grew, but that segment recorded a $4.4 million Q3 operating loss.
- For the first nine months, investing cash outflow was $248.7 million, including $205.7 million of capital expenditures and $64.0 million of acquisitions. Financing cash outflow was $94.6 million. Cash and equivalents ended the period at $581.7 million, up from $410.9 million at year-end 2008.
- At September 30, total debt carrying value was $3,656.5 million, including $100.7 million current. Debt principal outstanding was $3,653.6 million. Debt expense was $45.5 million in Q3, down from $54.5 million a year earlier.
- Current assets were $2,308.5 million and current liabilities $1,113.5 million. Undrawn revolving facilities totaled $250 million, with about $48 million committed for letters of credit. Management said liquidity and operating cash flow, together with borrowing access, should be sufficient for scheduled debt service and other obligations for the foreseeable future.
Material changes, outlook and management commentary
- Management raised 2009 operating-income guidance from $900–$930 million to $930–$950 million. It said operating cash flow could modestly exceed its prior $550–$600 million outlook. The 2010 operating-income outlook was $950 million–$1.02 billion.
- Revenue growth reflected more treatments from organic growth, new centers and acquisitions, higher average revenue per treatment, and growth in pharmacy and other ancillary businesses. Q3 also had an additional treatment day versus the prior quarter.
- Operating-income growth benefited from revenue gains, cost controls and improved productivity. These were partly offset by higher labor, benefit, pharmaceutical and workers’ compensation costs, as well as center-level settlement and impairment charges. Management cited increased physician-prescribed pharmaceutical intensity in Q3; intensity declined over the first nine months.
- The company repurchased 1.85 million shares for $94.4 million during the first nine months and repurchased a further 1.05 million shares for $59.1 million in early October. The board authorized an additional $500 million repurchase program in October; no purchases under that authorization had been made through November 5.
- Eight interest-rate swaps had $482.6 million of amortizing notional value and a $14.9 million liability fair value. They expire in 2010. About 25% of variable-rate debt and 61% of total debt were economically fixed. Management estimated a 100-basis-point increase in variable rates would reduce annual net income by about $9.8 million.
- The filing describes a proposed Medicare ESRD bundled-payment system for 2011. Management said the combined adjustments in the proposed rule could produce a rate reduction materially greater than 2% versus historical fee-for-service payments; the final impact was not yet known.
Risks, contingencies and unusual items
- Federal civil inquiries and related qui tam matters concern pharmaceutical products and billing, including EPO, as well as broader business practices. The company said it was cooperating and, to its knowledge, no federal proceedings had been initiated against it at the reporting date. Adverse findings could bring substantial penalties, exclusion from Medicare or Medicaid, and, in one inquiry, possible criminal penalties.
- Other disclosed matters include commercial-payor claims and arbitration, California wage-and-hour class-action claims (with tentative settlements in three matters awaiting court approval), and a Nevada Medicaid audit risk. The filing says outcomes and potential damages cannot be predicted for several matters.
- DaVita depends substantially on commercial-payor business for profits and faces pressure on commercial rates and potential shifts of patients to lower-paying government coverage. Other key risks include Medicare and Medicaid reimbursement changes, pharmaceutical utilization and pricing, regulatory compliance, billing and collections, staffing, supplier availability, acquisitions, and substantial indebtedness.
- Management warned that accelerating identification and repayment of payor overpayments could materially adversely affect operating cash flow. The company also had approximately $293 million of noncontrolling interests subject to put provisions, whose eventual settlement value may differ from current estimates.
- New accounting presentation rules for noncontrolling interests changed how these interests and related income are presented, but management said adoption had no material impact on the financial statements. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether final Medicare bundled-payment rules, commercial-rate negotiations or changes in patient payor mix affect reimbursement and treatment profitability.
- Developments and potential exposure in the federal inquiries, qui tam cases, commercial-payor disputes and other legal or audit matters.
- Progress against 2009 and 2010 operating-income guidance and the cash-flow outlook, including the effect of capital spending, acquisitions and any accelerated payor refunds.
- Debt maturities, variable-rate exposure and refinancing or covenant flexibility; scheduled debt principal includes approximately $1.71 billion due in 2012.
- Whether treatment growth, revenue per treatment, bad-debt experience and cost trends—especially labor, benefits and pharmaceuticals—remain consistent with reported performance.