DaVita Inc. — Q3 2010 Form 10-Q
Business context and period. DaVita operates primarily dialysis and related laboratory services, with ancillary businesses including pharmacy, infusion therapy, disease management, vascular access and physician services. This unaudited filing covers the quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods unless noted. Dollar figures below are in millions except per-share data.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $1,651.6 | $1,573.9 | $4,798.0 | $4,540.6 |
| Operating income | $256.6 | $245.0 | $741.6 | $701.6 |
| Net income attributable to DaVita | $119.4 | $110.9 | $336.7 | $313.0 |
| Diluted EPS | $1.15 | $1.06 | $3.22 | $3.00 |
- Growth and margins: Q3 revenue rose 4.9%, operating income 4.7%, and DaVita-attributable net income 7.6%. Nine-month revenue and operating income each increased about 5.7%; diluted EPS increased about 7.3%. Operating margin was approximately 15.5% in both Q3 periods and for the nine-month periods.
- Drivers: Dialysis and lab revenue increased 4.2% in Q3 and 5.1% year to date, mainly from more treatments, including acquired and non-acquired growth. Q3 treatments rose 5.5% year over year; average revenue per treatment fell about $4 to $339. Ancillary revenue grew, led by pharmacy services. Patient-care costs per treatment were about $5 lower year over year in Q3, while labor, pharmaceutical and professional-fee costs pressured results.
- Cash flow: Nine-month operating cash flow was $719.1, up from $514.1; management cited improved cash earnings, collections and working-capital timing. Investing used $285.3, including $169.4 of capital expenditures and $137.6 for acquisitions. Cash ended at $534.6, versus $539.5 at year-end 2009. Q3 operating cash flow was $161, versus $167 a year earlier.
- Liquidity and debt: Current assets were $2,262.0 and current liabilities $1,111.8 at quarter-end. Debt principal was $3,360.8, down from $3,629.5 at December 31, 2009; balance-sheet current and long-term debt totaled approximately $3,362.4 including premium. The company had $250 of undrawn revolving capacity, with about $52 committed for letters of credit.
- Capital returns: DaVita repurchased 3.0 million shares for $198.5 in the first nine months. After quarter-end it repurchased a further 4.24 million shares for $301.5, completing the prior authorization; the board then authorized an additional $800 of repurchases.
Material changes, outlook and commentary
- Management narrowed 2010 operating-income guidance to $995–$1,015 and raised operating-cash-flow guidance to $800–$875 from $725–$825, citing lower tax payments from accelerated deductions. It provided no specific 2011 operating-income range because of uncertainty around the Medicare bundled payment system and payor mix.
- Medicare’s new bundled dialysis payment system was scheduled to begin in January 2011. DaVita elected full implementation in 2011 rather than a four-year phase-in. The company warned that reimbursement reductions, utilization risk, documentation and billing-system readiness could affect revenue and cash flow.
- On October 20, 2010, after quarter-end, DaVita refinanced its debt with a new $3.0 billion secured credit agreement and issued $1.55 billion of senior notes due 2018 and 2020. It used proceeds to repay prior credit facilities and tender for existing notes; approximately $827 of excess cash was intended for general purposes, including repurchases, acquisitions and growth. Management expected $65–$75 of one-time refinancing charges in Q4 2010. The filing’s September 30 debt balances do not reflect this refinancing.
- Interest-rate swaps expired September 30. At quarter-end, approximately 46% of total debt was fixed-rate; the company disclosed exposure to variable-rate debt. The new credit agreement includes financial covenants and restrictions, with certain restrictions relaxed below a specified leverage ratio.
- Federal inquiries and subpoenas concern, among other matters, pharmaceutical billing and physician and joint-venture relationships. DaVita said it was cooperating and that, to its knowledge, no proceedings had been initiated in connection with the described inquiries. Adverse findings could entail substantial penalties, criminal penalties or exclusion from Medicare and Medicaid. Other disclosed matters include commercial-payor billing claims and employment litigation.
- Other notable items include a change to the methodology for valuing noncontrolling interests subject to put provisions, which increased their recorded fair value to $368.4 at September 30; a planned Denver headquarters estimated to cost about $90; and a new NxStage agreement that may provide warrants tied to home-patient growth targets.
Key investor verification points
- Track the 2011 Medicare bundled-payment transition, reimbursement and utilization assumptions, and whether billing and documentation systems support timely, accurate claims.
- Monitor commercial-payor rates and patient mix, government reimbursement, pharmaceutical utilization and pricing, and treatment growth versus revenue per treatment.
- Review the completed refinancing’s final debt, interest expense, covenant headroom and Q4 refinancing charges; assess variable-rate exposure and use of excess cash.
- Follow federal and state investigations, commercial-payor claims and other contingencies, including potential effects on penalties, program participation and cash flows.
- Assess accounts-receivable collection trends and revenue-estimation risk; management said dialysis revenue estimates can materially affect operating income.