DaVita Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. DaVita operates primarily U.S. dialysis and related lab services, alongside pharmacy, infusion, disease management, vascular access, direct primary care and international operations. Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total net operating revenue | $1,866.6 | $1,562.3 | +19.5% |
| Operating income | $320.7 | $235.3 | +36.3% |
| Operating margin on net operating revenue | 17.2% | 15.1% | +2.1 percentage points |
| Income from continuing operations | $164.9 | $114.6 | +43.9% |
| Net income attributable to DaVita | $140.1 | $94.5 | +48.3% |
| Diluted EPS | $1.46 | $0.96 | +$0.50 |
| Operating cash flow | $331.9 | $329.8 | +0.6% |
- Net patient service revenue was $1,710.7 million after $53.0 million of uncollectible-account deductions; other revenue was $155.9 million. Patient care costs were $1,263.2 million, and debt expense was $61.4 million.
- Dialysis and related lab services generated $1,716.5 million in net revenue and $348.0 million in segment operating income. Ancillary services and strategic initiatives generated $156.2 million in segment revenue but recorded a $17.4 million operating loss.
- Dialysis treatments totaled 5.314 million; average revenue per treatment, including lab services, was $332, versus $326 a year earlier. Average treatments per treatment day were 68,132.
- Cash and cash equivalents were $449.3 million at quarter-end; current assets were $2,374.4 million and current liabilities $1,242.1 million. The resulting current ratio was approximately 1.9.
- Total debt principal was $4,498.9 million, including $89.6 million classified as current. Long-term debt carrying value was $4,401.9 million. Cash less debt principal was approximately $4.05 billion of net debt. The company had $350 million in undrawn revolving facilities, with approximately $52.3 million committed for letters of credit.
- Investing cash outflows included $112.5 million of property and equipment additions and $132.7 million for acquisitions. Operating cash flow less property and equipment additions was approximately $219.4 million before acquisitions and other investing activity.
Changes versus comparable periods
- Year-over-year revenue growth reflected higher treatment volumes, acquisitions, one additional treatment day, an approximately $6 increase in average dialysis revenue per treatment, and growth in ancillary businesses, particularly pharmacy services.
- Operating income rose year over year on treatment growth, higher revenue per treatment, lower pharmaceutical costs and improved productivity. Higher labor and benefit costs, legal and compliance fees, and ancillary operating losses partly offset those gains.
- Compared with Q4 2011, revenue increased approximately 3.1%, but operating income declined approximately 2.7%. Management cited one fewer treatment day, lower productivity, seasonal payroll taxes, higher pharmaceutical costs and increased legal and compliance fees.
- Operating cash flow was broadly flat year over year despite higher earnings, partly because accounts receivable increased. Capital expenditures and acquisition spending were higher than in Q1 2011.
- Receivables rose to $1,266.9 million from $1,195.2 million; days sales outstanding increased to 63 from 61. Management attributed the increase primarily to slower Medicare collections following new billing requirements. The allowance for doubtful accounts increased approximately $38.9 million during the quarter.
- The company adopted updated accounting presentation for patient-service bad debts, reclassifying the provision as a deduction from patient service revenue; prior periods were retrospectively presented. This affects comparisons of revenue and expense line items.
Outlook, risks and notable items
- Management raised 2012 operating income guidance to $1,230–$1,310 million from $1,200–$1,300 million. It maintained expected 2012 operating cash flow guidance of $950–$1,050 million. The filing cautions that actual results may vary significantly.
- Management said it expects sufficient liquidity and significant operating cash generation to fund scheduled debt service and other obligations, including over the next 12 months.
- Key reimbursement exposures include Medicare’s bundled ESRD payment system, potential 2013 Medicare provider reductions, future inclusion and pricing of oral-only ESRD drugs, Medicaid rate and payment changes, and pressure on commercial reimbursement and commercial patient mix. Approximately 34% of dialysis and related lab services revenue came from commercial primary payors, 49% from Medicare, and 16% from Medicaid and other non-Medicare government programs.
- DaVita disclosed multiple federal inquiries and two private False Claims Act qui tam suits involving, among other matters, pharmaceutical practices, physician relationships, joint ventures and Medicaid infusion-drug payments. The government had declined to intervene in the two private suits; the company was cooperating with inquiries and defending the suits. Outcomes and potential damages were not estimable, and adverse outcomes could include penalties, repayments or exclusion from government programs.
- Other material risks include commercial rate pressure, regulatory and billing compliance, changing clinical and pharmaceutical practices, labor availability and costs, competition, acquisition integration, international expansion, and substantial indebtedness. Ancillary and strategic businesses incurred a $17.4 million quarterly operating loss; management identified startup costs, international expansion and weaker results in some businesses as contributing factors.
- Q1 acquisitions included 28 U.S. dialysis centers and a direct primary care business for $132.7 million in cash and deferred purchase price. The company also opened 13 U.S. centers and four centers outside the United States.
- Interest-rate swaps economically fixed the LIBOR component on $937.5 million of Term Loan A; caps limited LIBOR exposure on $1.25 billion of Term Loan B debt. The overall weighted average effective interest rate was 5.28% at quarter-end. Scheduled debt maturities are concentrated in 2015–2016, including approximately $1.862 billion in 2016.
Investor verification points
- Track Medicare and commercial reimbursement, payor mix, treatments per day, revenue per treatment and the effects of future bundled-payment changes.
- Monitor receivable days, Medicare collections, the doubtful-account allowance and any further billing-system or reimbursement adjustments.
- Assess whether the raised operating-income and operating-cash-flow guidance remains achievable as labor, pharmaceutical, compliance and ancillary-business costs evolve.
- Review developments, potential financial exposure and legal costs related to the government inquiries, qui tam suits and other claims; the filing does not provide a clear estimate of ultimate exposure.
- Verify debt repayment capacity and refinancing needs, especially the 2015–2016 maturities, and consider variable-rate exposure and put obligations for noncontrolling interests.
- Evaluate acquisition integration and the performance, funding needs and impairment risk of ancillary, direct primary care and international operations.