DaVita HealthCare Partners Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited results; comparison is with Q1 2012 unless otherwise noted. DaVita’s consolidated results include HealthCare Partners (HCP), acquired November 1, 2012, so year-over-year growth is not like-for-like.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net revenue | $2.830 billion | $1.850 billion |
| Operating income | $166.9 million | $320.9 million |
| Net income attributable to DaVita | $30.2 million | $140.1 million |
| Diluted EPS | $0.28 | $1.46 |
| Cash from operating activities | $379.2 million | $331.9 million |
- Revenue increased 53.0%, largely reflecting HCP’s $804 million of Q1 revenue; HCP was not included in Q1 2012. U.S. dialysis and related lab services revenue increased 7.9% to approximately $1.852 billion.
- Operating income included a $300 million loss-contingency reserve for the 2010 and 2011 U.S. Attorney physician-relationship investigations. Management’s non-GAAP adjusted operating income, excluding that reserve and specified prior-period legal or transaction expenses, was $467 million versus $327 million in Q1 2012.
- Reported operating margin was approximately 5.9%, versus 17.4% in Q1 2012, reflecting the reserve and the changed business mix. Debt expense rose to $105.8 million from $61.4 million, primarily due to financing associated with HCP and 2012 debt issuance.
- Operating cash flow increased by $47.3 million. Capital expenditures were $116.7 million; acquisitions used $91.5 million. Cash and equivalents were $699.7 million at quarter-end.
- Debt principal outstanding was $8.526 billion at March 31, 2013. The company reported $350 million of undrawn revolving facilities, with about $114 million committed for letters of credit. Current assets were $3.191 billion and current liabilities $2.325 billion.
Material developments and outlook
- HCP contributed $110 million of operating income in the quarter. Its capitated membership was 742,000 at March 31, up from 724,000 at December 31, 2012.
- Management raised 2013 consolidated operating-income guidance to $1.8–$1.9 billion and dialysis and related ancillary-business guidance to $1.4–$1.45 billion. HCP guidance remained $400–$450 million; operating cash flow guidance remained $1.35–$1.5 billion. Consolidated and dialysis guidance exclude the $300 million reserve.
- Management reported that the 2% Medicare sequestration reduction took effect April 1, 2013, estimating an approximately $20 million quarterly reduction to dialysis Medicare reimbursements.
- CMS’s final 2014 Medicare Advantage rate structure was estimated to reduce average revenue managed for HCP senior capitated members by approximately 6%–9%. Management expected some offsets from contractual pass-throughs and possible health-plan benefit-design changes, but could not quantify the full offset.
- DaVita sold HomeChoice Partners on February 1 for $70 million cash, subject to adjustments; it recorded a $13.4 million after-tax gain. A potential additional payment tied to future performance was assigned no value at the sale date.
- Management stated that discussions with government authorities over the physician-relationship investigations were ongoing and that the $300 million reserve, based on an offer to settle related matters, could change. The filing warns of possible financial penalties, operational restrictions, exclusion from government programs, and potential criminal proceedings.
- Other stated risks include reimbursement and commercial-payor pressure, HCP medical-cost and health-plan concentration exposure, regulatory compliance, labor costs, integration of HCP, and substantial indebtedness. Management said it expected sufficient liquidity and operating cash flow for obligations, including over the next 12 months.
Most important facts for investors to verify
- Whether and on what terms the physician-relationship investigations are resolved, and whether the $300 million reserve is adequate or changes.
- Underlying dialysis performance and the extent to which reported revenue growth reflects HCP’s inclusion rather than organic growth; also monitor treatment volume, revenue per treatment, labor costs, and collections.
- HCP’s membership, medical-cost trends, contract concentration, and the realized effect of 2014 Medicare Advantage rates and any offsets.
- Impact of the April 2013 Medicare sequestration reduction and subsequent reimbursement changes on dialysis results and guidance.
- Debt-service requirements, interest-rate exposure, liquidity, and delivery against 2013 operating-income and cash-flow guidance, noting that operating-income guidance excludes the reserve.