DaVita Inc. — Q2 2009 Form 10-Q
Business context and period: DaVita operates dialysis and related laboratory services, with ancillary businesses including pharmacy, infusion therapy, vascular access, disease management and clinical research. This unaudited quarterly report covers the three and six months ended June 30, 2009; comparisons are with the corresponding 2008 periods unless noted.
Key financial results
Amounts are in millions of dollars except per-share data and treatment statistics.
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Revenue | $1,519.0 | $1,407.3 | $2,966.7 | $2,752.0 |
| Operating income | $236.0 | $218.4 | $456.6 | $424.2 |
| Net income attributable to DaVita | $105.8 | $95.0 | $202.0 | $181.9 |
| Diluted EPS | $1.02 | $0.90 | $1.94 | $1.70 |
| Operating cash flow | Not separately stated in the income statement | Not separately stated in the income statement | $346.6 | $255.0 |
- Q2 revenue grew 7.9%, operating income 8.0% and DaVita-attributable net income 11.4%. First-half revenue grew 7.8%, operating income 7.6% and attributable net income 11.1%.
- Operating margin was approximately 15.5% in Q2 2009, broadly flat year over year; attributable net margin was approximately 7.0%, versus 6.7% in Q2 2008.
- Q2 dialysis treatments totaled 4.23 million, up 5.2% from Q2 2008. Average dialysis revenue per treatment, including lab, was $340 versus $336. First-half treatments increased 4.5% and average revenue per treatment was $339 versus $333.
- At June 30, cash and cash equivalents were $544.1 million and short-term investments were $19.1 million. Current assets were $2.23 billion and current liabilities $1.11 billion. Undrawn revolving facilities totaled $250 million, of which approximately $48 million supported letters of credit.
- Debt principal outstanding was $3.67 billion; reported long-term debt carrying value, including premium and excluding current portion, was $3.58 billion. Total debt expense was $47.1 million in Q2, down from $55.3 million. The overall effective interest rate was 4.87% at quarter-end.
- First-half capital expenditures were $138.2 million and acquisitions used $43.3 million. Cash increased $133.2 million in the first half, to $544.1 million.
Material changes and management commentary
- Q2 revenue increased $111.7 million year over year, mainly from dialysis treatment growth, higher revenue per treatment and expansion in pharmacy and other ancillary businesses. The dialysis segment generated $1.44 billion of Q2 revenue and $250.7 million of segment margin; ancillary services generated $77.9 million and recorded a $3.8 million segment loss.
- Management attributed operating income growth to dialysis revenue outpacing expense growth, improved labor productivity and lower payroll taxes, alongside reduced losses in ancillary businesses. Cost pressures included higher labor and benefits, pharmaceutical costs and medical insurance. The provision for uncollectible accounts was 2.8% of dialysis and related lab revenue in Q2, up from 2.6% in Q1 and Q2 2008; management cited slower payments from some commercial payors.
- Management narrowed 2009 operating income guidance to $900–$930 million; operating cash flow guidance remained $550–$600 million. It expected approximately $100 million of routine maintenance and IT capital spending and $250 million for development, relocations and acquisitions, subject to project availability and returns.
- DaVita opened 23 dialysis centers and acquired two in Q2. For the first half it opened 41 centers and acquired nine. It repurchased no shares in Q2; first-half repurchases were 744,400 shares for $32.0 million, leaving $121.5 million authorized.
- Eight interest-rate swaps covered $576 million of notional debt and expire in 2010. Approximately 36% of variable-rate debt and 64% of total debt were economically fixed. A 100-basis-point increase in rates was estimated to reduce annual net income by approximately $5.8 million.
Risks, contingencies and unusual items
- Federal inquiries include subpoenas and civil or civil/criminal investigations involving pharmaceutical products, EPO claims, billing and joint ventures. A sealed qui tam complaint in Georgia was disclosed; a Texas complaint was unsealed in July 2009. The company said it was cooperating and, to its knowledge, no federal proceedings had been initiated against it. Adverse findings could cause substantial penalties, exclusion from Medicare or Medicaid and, in some matters, criminal penalties. A separate New York investigation concluded without action in April 2009.
- Other disclosed contingencies include commercial-payor claims and arbitration, California wage-and-hour class-action complaints, and possible Nevada Medicaid audits. The filing states outcomes and potential damages cannot be predicted for several matters.
- Revenue and cash flow are exposed to commercial reimbursement pressure and shifts from higher-paying commercial coverage to government programs. The filing also highlights prospective Medicare ESRD bundled-payment changes beginning in 2011, Medicaid rate and eligibility risk, pharmaceutical utilization and pricing, and skilled-clinical-staff availability.
- DaVita noted substantial debt, variable-rate exposure, refinancing and debt-service risks, and the possibility of accelerated refunds or recoupments as it improves overpayment identification and processing. Substantially all facilities are leased; the filing also lists put obligations for noncontrolling interests and product-supply commitments through 2015.
- The Medicare and commercial revenue estimates involve significant judgment; management said estimating risk for dialysis and related lab revenue is generally expected to be within 1% of segment revenue, which could represent as much as 6% of consolidated operating income.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether 2009 operating income and operating cash flow meet the revised guidance, and how much results depend on treatment growth, revenue per treatment and expense control.
- Trends in commercial-payor rates, patient mix, collections, uncollectible-account provisions and any refunds or recoupments.
- Developments and possible financial or operational consequences of the federal investigations, qui tam claims, commercial disputes and other litigation.
- Progress and final payment details for the 2011 Medicare bundled-payment system, including its effects on pharmaceutical and lab revenue.
- Debt maturities, access to revolving credit, interest-rate exposure and refinancing needs; scheduled debt maturities are concentrated in 2012–2013.
- Actual returns and losses from ancillary businesses, acquisitions and new-center development, and the valuation and timing of noncontrolling-interest put obligations.