DaVita HealthCare Partners Inc. — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015; filed February 26, 2016. The filing also reports unaudited fourth-quarter results. The company operates U.S. dialysis and related services, HealthCare Partners (HCP), and ancillary and international businesses.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | $13.782 billion | $12.795 billion |
| Operating income | $1.171 billion | $1.815 billion |
| Net income attributable to DaVita | $269.7 million | $723.1 million |
| Diluted earnings per share | $1.25 | $3.33 |
| Cash from operations | $1.557 billion | $1.459 billion |
| Capital expenditures | $708 million | $641 million |
Revenue increased 7.7%. GAAP operating margin was approximately 8.5%, versus 14.2% in 2014, reflecting significant unusual charges. Excluding specified items, management reported adjusted operating income of $1.898 billion, up 3.6% from $1.832 billion; this is a non-GAAP measure.
Fourth-quarter revenue was $3.534 billion, compared with $3.328 billion a year earlier. Operating income was $244.9 million, versus $452.1 million; net loss attributable to DaVita was $6.0 million, versus net income of $208.0 million. Diluted loss per share was $0.03, versus earnings of $0.96.
At year-end, cash and cash equivalents were $1.499 billion and short-term investments were $408 million. Working capital was $2.104 billion. Debt principal outstanding was $9.226 billion (carrying debt, including current portion, was $9.130 billion). The company reported an undrawn $1.0 billion revolving facility, with about $92 million committed to letters of credit. The company stated it expected liquidity and cash generation to cover obligations for the foreseeable future.
Business and year-over-year changes
- U.S. dialysis generated about 62% of consolidated revenue. Treatment volume rose approximately 4.1%; average revenue per treatment increased $6 to $348. Segment revenue rose 5.2% to $8.642 billion.
- Dialysis revenue remained reliant on government payors: 66% of dialysis revenue was government-based and 34% commercial. Management said commercial payors generate nearly all dialysis profits; shifts from commercial coverage to lower-paying government coverage are therefore important.
- HCP revenue increased 9.6% to $3.837 billion, while segment operating income fell to $33.9 million from $215.0 million. Excluding impairment charges, HCP adjusted operating income increased about 11.6%.
- Ancillary and strategic initiatives revenue rose 21.3% to $1.382 billion, but segment operating losses widened to $103.9 million from $24.5 million, in part due to pharmacy costs and international expansion.
Outlook, risks, and unusual items
- Management expected 2016 operating-cost increases, including labor and supplies, to outpace net Medicare rate increases. The 2016 ESRD payment rule was expected by CMS to increase overall facility payments modestly, while the annual 2% Medicare sequestration reduction was extended through fiscal 2025.
- HCP expected an approximately 2% reduction in its 2016 Medicare Advantage rates, with an estimated approximately $50 million impact on operating income; actual results could differ. HCP recorded an estimated $206 million impairment charge, including goodwill and an indefinite-lived intangible asset, after recent underperformance and reimbursement-market changes. The final valuation was pending at filing.
- FY2015 included a $495 million Vainer litigation settlement charge, approximately $210 million of goodwill and intangible impairment charges, and a $22 million estimated DaVita Rx accrual. The company paid approximately $494 million in settlement payments during 2015.
- DaVita Rx received a government demand for information concerning a False Claims Act investigation; the company disclosed an ongoing internal review, a $22 million accrual, and that its self-disclosure to the OIG was not accepted. Other government inquiries included HCP Medicare Advantage diagnosis coding and risk adjustment, vascular access procedures, and patient transportation. Outcomes and potential losses were not estimable from the filing.
- The company operates under a five-year Corporate Integrity Agreement following a 2014 settlement. It disclosed that the OIG had identified prior implementation deficiencies, which DaVita said it remediated and for which it paid stipulated penalties.
- Other key risks include commercial rate pressure and loss of commercially insured patients; HCP medical-cost and contract risk; billing-system and collection issues; regulatory compliance; and substantial debt. The company issued $1.5 billion of 5.0% notes due 2025 and used proceeds in part to redeem $775 million of higher-coupon notes.
Important facts for investors to verify
- Reconcile the $495 million settlement charge and cash payments, and monitor any remaining claims or contingencies.
- Review the final HCP impairment valuation and subsequent Medicare Advantage reimbursement and operating performance.
- Track commercial dialysis patient mix, contracted rates, bad-debt provisions, and receivable aging; dialysis receivables over six months old increased to about 18% from 13%.
- Assess DaVita Rx and other government investigations, potential additional reserves, and compliance with the Corporate Integrity Agreement.
- Evaluate debt maturities, interest-rate exposure, capital spending, planned acquisitions, and the sustainability of operating cash flow and share repurchases.