DaVita Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. DaVita operates primarily dialysis and related laboratory services, with pharmacy, infusion, disease-management and other ancillary businesses.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,807.9 | $1,649.6 | $5,119.9 | $4,791.1 |
| Operating income | $318.7 | $256.7 | $800.7 | $741.3 |
| Operating margin | 17.6% | 15.6% | 15.6% | 15.5% |
| Income from continuing operations | $164.5 | $143.0 | $399.5 | $391.6 |
| Net income attributable to DaVita | $135.4 | $119.4 | $329.9 | $336.7 |
| Diluted net income per share | $1.42 | $1.15 | $3.40 | $3.22 |
- Q3 revenue increased 9.6% year over year; operating income rose 24.1%. Nine-month revenue increased 6.9%, while operating income rose 8.1% as reported. Excluding a $24 million second-quarter goodwill impairment, nine-month operating income increased approximately $84 million year over year.
- Q3 net income attributable to DaVita includes a $3.7 million after-tax loss on disposal of discontinued operations. Nine-month attributable net income declined year over year, despite higher continuing-operations income.
- Growth reflected more dialysis treatments, acquisitions and pharmacy-services growth. Q3 dialysis treatments rose 9.6% year over year, while average dialysis revenue per treatment fell approximately $5 to $334. For the first nine months, treatments rose 7.9% and revenue per treatment declined approximately $8 to $331.
- Patient-care costs per treatment declined year over year, mainly from lower pharmaceutical costs and treatment intensity. Higher labor and benefits, professional fees, information-technology spending and DSI transaction costs partly offset the benefit. The provision for uncollectible accounts was 3.0% of dialysis revenue in Q3 2011 versus 2.7% in Q3 2010.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $1,029.4 million, up from $719.1 million. Cash and equivalents were $541.2 million at September 30, down from $860.1 million at year-end 2010.
- Investing cash outflow was $1,133.0 million, including $927.1 million for acquisitions and $251.9 million of net property-and-equipment additions. Financing cash outflow was $215.3 million, including $323.3 million of share repurchases.
- Debt principal outstanding was $4,508.2 million; reported debt carrying value, net of discount and current portion, was $4,417.5 million. Current assets were $2,370.2 million and current liabilities $1,205.9 million.
- The revolving facility was increased to $350 million; approximately $42.8 million was committed for letters of credit. The company reported $350 million of undrawn facilities, with approximately $307 million not committed for letters of credit.
- The weighted-average effective interest rate was 5.30% for Q3 and 5.27% at quarter-end. Interest-rate swaps fixed the LIBOR component on $962.5 million of Term Loan A; caps covered $1.25 billion of Term Loan B. The swap liability was $24.6 million at quarter-end.
Material changes, outlook and notable items
- DaVita acquired DSI Renal on September 2 for approximately $724.2 million net cash, plus assumed liabilities, adding 113 centers and about 8,000 patients. DSI results were included from September 1. Acquisition and integration costs were approximately $9 million in Q3.
- To satisfy the FTC consent order, the company sold 28 centers on September 30 and completed the sale of two more on October 31; total expected cash consideration was approximately $83.6 million. A $3.7 million after-tax disposal loss was recorded in Q3.
- Management maintained 2011 operating-income guidance of $1.125–$1.155 billion, excluding the HCP impairment, and raised operating-cash-flow guidance to $1.020–$1.100 billion from $900–$980 million. For 2012, it reaffirmed operating-income guidance of $1.2–$1.3 billion and expected operating cash flow to be flat or slightly lower than 2011, primarily due to working-capital timing.
- Medicare’s bundled ESRD payment system began in 2011. CMS’s final 2012 rule set a 2.1% base-rate increase and includes quality measures that can reduce facility payments by up to 2% if standards are not met.
- A $24 million goodwill impairment was recorded in Q2 for HomeChoice Partners, an infusion-therapy business whose performance weakened after rapid expansion. Management was finalizing the valuation and said any additional charge was not expected to be material.
- Significant legal and regulatory matters include federal inquiries into physician relationships, joint ventures and drug billing; two privately pursued False Claims Act cases; and a newly disclosed New York Medicaid inquiry concerning infusion-drug payments. DaVita is cooperating and says outcomes and potential damages cannot be predicted. Adverse findings could entail penalties, repayments, program exclusion or criminal consequences.
- Key risks identified include commercial-payor rate and mix pressure, Medicare and Medicaid reimbursement changes, regulatory compliance and investigations, drug-pricing and utilization changes, acquisition integration, labor costs, and substantial indebtedness. Management stated it expects sufficient liquidity for obligations over the next 12 months.
Important facts for investors to verify
- How much of reported growth and future earnings reflects DSI, other acquisitions and treatment-volume growth versus organic performance and reimbursement changes.
- Whether declining revenue per treatment, commercial-payor mix or reimbursement rates continue to pressure dialysis economics under bundled-payment rules.
- Cash conversion and working-capital trends supporting the higher 2011 cash-flow guidance, alongside acquisition and capital-spending needs.
- Debt-service capacity, interest-rate exposure and the terms and availability of revolving credit, especially if rates rise or cash flow weakens.
- Final purchase accounting for DSI, the completed center divestitures, and whether HCP requires any additional impairment.
- Developments in government inquiries and private litigation, potential liabilities and any effect on operations or participation in Medicare and Medicaid.