DaVita Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. DaVita primarily operates U.S. dialysis and related laboratory services, alongside pharmacy, infusion, disease-management, physician, and other ancillary businesses. Financial amounts below are in U.S. dollars; millions unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net operating revenue | $1,963m | $1,758m | $5,759m | $4,981m |
| Operating income | $341m | $319m | $909m | $801m |
| Net income attributable to DaVita | $145m | $135m | $380m | $330m |
| Diluted EPS | $1.50 | $1.42 | $3.96 | $3.40 |
| Operating margin | 17.4% | 18.1% | 15.8% | 16.1% |
- Q3 net operating revenue rose about 11.7% year over year, driven by dialysis treatment volume and ancillary-business growth. U.S. dialysis treatments increased to 5.55 million from 5.01 million; average revenue per treatment declined to $332 from $334.
- Nine-month revenue increased about 15.6%. Dialysis treatments grew about 13.5%, and average revenue per treatment rose to $332 from $331.
- Q3 operating income increased about 6.9% year over year. Nine-month operating income increased about 13.6%; excluding the 2012 legal accrual and 2011 goodwill impairment, management reported adjusted operating income of $987m versus $825m.
- Patient care costs were 66% of operating revenue in Q3 and the nine-month period, versus 66% and 68%, respectively, in the comparable 2011 periods. Management cited lower pharmaceutical costs and productivity improvements, partly offset by higher labor, benefits, and other center costs.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow was $901m for the first nine months, down from $1,029m. Management attributed the decrease mainly to working-capital timing and higher tax payments, partly offset by improved cash earnings. Q3 operating cash flow was $367m versus $495m.
- Nine-month capital expenditures were $379m and acquisition spending was $419m. Cash and cash equivalents were $382m at September 30, 2012, compared with $394m at year-end 2011.
- Total debt principal was $5.745bn, up from $4.513bn at year-end; carrying debt was $5.739bn. Q3 debt expense was $70.5m, up from $60.8m a year earlier.
- Current assets were $2.326bn and current liabilities $1.337bn. The balance sheet also included $1.269bn of restricted cash, principally proceeds from senior notes held in escrow pending the HCP acquisition. The company reported $350m of revolving facilities, with about $88m committed for letters of credit.
- DaVita issued $1.25bn of 5.75% senior notes due 2022 in August. It also amended credit facilities to allow up to $3.0bn of additional borrowing, subject to conditions related to financing and closing the HCP transaction. Interest-rate swaps and caps hedge some variable-rate exposure; the company reported a 5.38% overall weighted-average effective interest rate at quarter-end.
Material developments, outlook, and risks
- HealthCare Partners (HCP) acquisition: DaVita expected to close the announced acquisition in early November 2012. Consideration was $3.66bn cash and approximately 9.38m DaVita shares, subject to adjustments, plus up to $275m in contingent earn-outs. HCP generated approximately $2.4bn revenue and $488m operating income in 2011. Management expected HCP results to be consolidated beginning in November 2012.
- Guidance: 2012 operating income guidance for dialysis and related ancillary businesses was raised to $1.315bn–$1.330bn, excluding the $78m legal accrual and HCP transaction expenses. For 2013, consolidated operating income guidance was $1.75bn–$1.90bn, including HCP; the stated ranges were $1.35bn–$1.45bn for dialysis and related ancillary businesses and $400m–$450m for HCP. 2013 operating cash flow guidance was $1.35bn–$1.50bn. Management cautioned that actual results could differ materially.
- Unusual charges and legal matters: DaVita recorded a $78m charge in Q2 2012 for the Woodard False Claims Act matter, comprising a $55m settlement amount plus fees and related expenses; settlement remained subject to conditions and court approval. A separate 2011 goodwill impairment charge was $24m. The company said the 2005 St. Louis federal investigation had closed in October 2012 without charges, payment demands, or policy changes. Other government inquiries and private litigation remained ongoing, including physician-relationship and Medicaid inquiries and the Vainer suit; outcomes and potential financial exposure were not determinable from the filing.
- Principal risks: DaVita highlighted dependence on higher-paying commercial payors, possible Medicare and other government reimbursement reductions, healthcare reform and sequestration, regulatory investigations and compliance exposure, legal and billing-estimation risks, competition and staffing costs, and the substantial debt and integration risks associated with HCP. Ancillary and strategic businesses were loss-making in aggregate: their Q3 operating loss was $11m and nine-month loss $48m.
- Management stated it believed liquidity and operating cash flows would be sufficient to meet obligations for the foreseeable future. The filing’s projections depend on the HCP transaction closing and integration, reimbursement and payor trends, costs, and other risks.
Important facts for investors to verify
- Whether HCP closed on the expected terms and schedule, the final financing and share issuance, and any earn-out obligations.
- Whether the Woodard settlement received required approvals and whether other government inquiries or litigation produced material outcomes or costs.
- Changes in commercial-payor mix and rates, Medicare/Medicaid reimbursement, dialysis treatments, and revenue per treatment.
- Cash conversion and working-capital trends, alongside acquisition-related spending, debt balances, interest expense, and available borrowing capacity.
- Performance and losses of ancillary businesses, and whether 2012 and 2013 guidance was achieved; the filing notes that interim results are not necessarily indicative of full-year performance.