Business Context and Reporting Period
Company: DaVita Inc. (formerly Total Renal Care Holdings, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: DaVita operates dialysis centers and laboratories, primarily in the continental United States. The company has substantially divested non-continental U.S. operations, retaining only two centers pending sale in Puerto Rico. As of November 1, 2001, there were 84,599,565 shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2000 |
|---|---|---|---|
| Net Operating Revenues | $434,239 | $1,221,096 | $1,113,556 |
| Operating Income | $96,867 | $242,766 | $123,066 |
| Net Income | $44,278 | $104,757 | $(1,848) |
| Diluted EPS | $0.47 | $1.16 | $(0.02) |
| Cash Flow from Operations (9mo) | $246,904 | ||
| Cash and Equivalents (Sep 30, 2001) | $45,255 | ||
| Total Debt (Sep 30, 2001) | $820,409 (Gross); $813,977 (Long-term) | ||
| Debt Net of Cash | ~$775 million |
Margins: Operating margin for the three months ended September 30, 2001, was approximately 22.3% ($96.9M / $434.2M). Continental U.S. center operating expenses were 67% of operating revenues.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenues increased 19.8% year-over-year for the quarter ($434.2M vs. $362.5M) and 9.7% for the nine-month period. Growth was driven by a 6% increase in treatment volume and an 8% increase in average revenue per treatment (from $260 to $280).
- Profitability: The company returned to profitability, reporting net income of $44.3M for the quarter compared to $9.7M in the prior year quarter. The nine-month period showed a turnaround from a net loss of $1.8M in 2000 to net income of $104.8M in 2001.
- Debt Reduction: Long-term debt decreased significantly due to refinancing activities. Net debt (debt less cash) was $775 million, down $169 million from the beginning of the year. Debt expense for the quarter was $18.3M, down $8M from the prior year due to lower interest rates and reduced balances.
- Recoveries: Q3 2001 revenues included $22 million in cash settlements and collections in excess of prior estimates for 2000 services. The provision for uncollectible accounts included $5.2 million in cash recoveries from aged receivables reserved in 1999.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Q4 2001: Management expects normal operating earnings before depreciation, amortization, debt expense, and taxes to meet or exceed the Q3 level of approximately $96 million.
- 2002 Projection: Projected normal operating earnings (before D&A, debt, and taxes) are in the range of $350 million to $380 million.
- Capital Expenditures: Plans to substantially increase capital expenditures in 2002 for IT projects and new centers (targeting 12-18 new centers). Acquisition targets are set at a minimum of $25 million to $50 million.
Risks and Contingencies
- Legal Proceedings (Florida Lab): A Florida-based laboratory subsidiary faces a Medicare carrier review. Payments have been suspended since May 1998. The carrier has alleged improper support for 70-99% of tests over various periods. The company estimates potential cash exposure at no more than $10 million but notes the possibility of substantial fines if resolved adversely.
- DOJ Review: The Civil Division of the U.S. Attorney's Office (Eastern District of Pennsylvania) is reviewing historical practices, including billing and physician relationships. No allegations of wrongdoing have been made at this time, but penalties could be substantial if wrongdoing is found.
- Reimbursement Risk: Approximately 53% of revenue comes from Medicare. Rates have not kept pace with inflation. Future legislative changes could reduce reimbursement for ancillary services like EPO (Erythropoietin), which accounts for roughly 38% of net operating revenue.
- Accounting Changes: Adoption of SFAS 142 (Goodwill) and SFAS 144 (Impairment) effective January 1, 2002, will discontinue goodwill amortization but introduce impairment testing.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of the $22 million in "prior period" revenue recoveries included in Q3 2001, as management states future timing and amounts are unpredictable.
- Florida Lab Exposure: Monitor the status of the Medicare carrier review and DOJ investigation regarding the Florida laboratory subsidiary, as payment suspensions and potential fines could materially impact cash flow.
- Debt Structure: Review the terms of the new $225 million 9 1/8% Senior Subordinated Notes and the refinanced senior credit facilities to assess future interest obligations.
- Medicare Rate Stability: Assess the risk of future Medicare composite rate freezes or reductions, particularly regarding the inclusion of EPO and lab services in the composite rate.
- IT Implementation: Evaluate the progress and potential disruption risks associated with the rollout of new information technology systems planned for 2002.