DaVita HealthCare Partners Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited. The company operates Kidney Care, including U.S. dialysis and related services, and HealthCare Partners (HCP), an integrated healthcare business. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenues | $3,172.5 | $2,871.7 | $6,215.3 | $5,701.3 |
| Operating income | $484.3 | $522.0 | $925.5 | $688.9 |
| Operating margin | 15.3% | 18.2% | 14.9% | 12.1% |
| Income from continuing operations | $181.4 | $283.4 | $393.2 | $329.9 |
| Net income attributable to DaVita | $147.7 | $254.4 | $331.0 | $284.5 |
| Diluted EPS from continuing operations | $0.68 | $1.18 | $1.53 | $1.26 |
- Q2 revenues rose about 10.5% year over year, led by dialysis treatment growth, HCP membership and acquisitions, and pharmacy and international operations. Six-month revenues increased about 9.0%.
- Q2 operating income fell year over year; excluding the prior-year $57 million contingent earn-out benefit, adjusted operating income was $484 million versus $465 million, up about 4%. Six-month GAAP operating income rose largely because 2013 included a $300 million legal reserve and a $57 million earn-out benefit; excluding those items, adjusted operating income was $926 million versus $932 million.
- Q2 parent-attributable income and diluted EPS declined significantly, with the $97.5 million debt refinancing charge a major unusual expense. Six-month parent-attributable income and diluted EPS increased from the prior year.
Cash, liquidity and debt
- Cash and cash equivalents were $1,421 million at June 30, up from $946 million at year-end 2013. Current assets were $4,161 million and current liabilities $2,608 million, for working capital of approximately $1,553 million.
- Six-month operating cash flow was $681.5 million, compared with $686.0 million in 2013. Investing activities used $442.9 million, including $278.6 million of property and equipment additions and $98.4 million for acquisitions.
- Debt principal outstanding was $8,817 million, compared with $8,434 million at year-end. The company reported $8,800 million of debt net of discount. Its $1,000 million revolver was undrawn, except approximately $83 million committed for letters of credit.
- In June, DaVita refinanced its credit facilities with $4.5 billion of new term loans and issued $1.75 billion of 5.125% senior notes due 2024. The company used proceeds to repay prior facilities and repurchase existing notes. The refinancing generated a $97.5 million charge. Reported overall weighted average effective interest was 4.56% at June 30.
Material changes and operating trends
- U.S. dialysis treatment volume grew: Q2 treatments were 6.20 million versus 5.87 million a year earlier, while revenue per treatment was $340 versus $339. Q2 dialysis segment operating income was $408 million versus $402 million.
- HCP Q2 revenue increased to $887 million from $761 million, but six-month operating income declined to $136 million from $190 million. Management cited lower Medicare Advantage payments, fewer commercial members and higher medical claims costs, partly offset by senior and Medicaid membership growth and other revenue items.
- Ancillary and strategic-initiative revenues increased, particularly from pharmacy services and international operations; the segment remained around break-even in the first half. DaVita reported 84 international outpatient dialysis centers across ten countries.
- HCP capitated membership was 828,500 at June 30, up from 733,300 a year earlier.
Outlook, risks and contingencies
- 2014 consolidated operating income guidance was raised at the low end to $1.755–$1.840 billion. Kidney Care guidance was raised to $1.550–$1.600 billion. HCP guidance was narrowed to $205–$240 million, with the high end reduced. Operating cash flow guidance remained $1.450–$1.550 billion; projections exclude any payment related to the physician-relationship investigations.
- Management cited reimbursement and commercial-payor pressure, wage and pharmaceutical cost increases, HCP medical-claims utilization, collection uncertainty, and execution risks in acquisitions and international expansion. CMS’s proposed 2015 ESRD payment update was a modest increase overall, while Medicare sequestration reductions continued through 2015. Medicare Advantage reimbursement changes remained a material HCP risk.
- The 2010 and 2011 U.S. Attorney physician-relationship investigations had a framework for global settlement of approximately $389 million, plus a corporate integrity agreement, independent monitor and restrictions affecting certain joint ventures. Final terms remained under negotiation. The company had accrued a $397 million reserve in 2013.
- DaVita reached an agreement in principle to resolve a separate Medicaid investigation; terms were still being negotiated. The Vainer private civil suit and an appeal in the Swoben matter were also pending. The filing warns that adverse outcomes in investigations or litigation could bring substantial penalties, business restrictions or exclusion from Medicare and Medicaid.
- HCP California and Nevada goodwill reporting units were identified as at risk of impairment. Preliminary fair values exceeded carrying values by approximately 6.0% and 10.9%, respectively; no impairment was recorded in the first half. Further reimbursement declines or adverse assumptions could result in impairment.
- Interest-rate exposure is partly hedged through swaps and caps; debt covenants include a maximum leverage ratio. The company stated it expected adequate liquidity and operating cash flow to meet obligations, but also highlighted substantial debt and related refinancing and interest-rate risks.
Key facts for investors to verify
- Final settlement terms, payment timing and operating restrictions for the physician-relationship investigations, and final terms of the Medicaid matter.
- Whether HCP can stabilize operating results as Medicare Advantage rates, medical utilization and claims costs evolve; monitor the California and Nevada goodwill valuation headroom.
- Dialysis collection trends and uncollectible-account provisions, including the stated increase in non-covered Medicare write-offs.
- Debt levels, covenant headroom, interest costs and liquidity after the refinancing, alongside progress against 2014 operating-income and cash-flow guidance.