DaVita Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; unaudited. DaVita’s primary business is dialysis and related laboratory services, supplemented by pharmacy and other ancillary services. Unless noted, amounts below are in U.S. dollars.
Financial performance
- Revenue: $1.559 billion, up 7.7% from $1.448 billion in Q1 2009. Dialysis and related lab revenue rose 7.4% to $1.478 billion; ancillary revenue increased to $81 million from $71 million.
- Operating income: $242.7 million, up 10.0% year over year; operating margin was approximately 15.6%, versus 15.2%. Net income was $125.0 million, up 15.5%; net income attributable to DaVita was $109.4 million, up 13.7%. Diluted EPS was $1.04, versus $0.92.
- Operating costs: Patient care costs were $1.083 billion (69% of revenue, versus 70% in Q1 2009). The provision for uncollectible accounts was $41.6 million, versus $36.7 million.
- Cash flow: Operating cash flow was $261.8 million, compared with $134.2 million. Capital expenditures were $42.6 million; net cash used in investing activities was $23.6 million. Cash increased $216.5 million to $755.9 million.
- Debt and liquidity: Debt principal outstanding was $3.606 billion; cash less debt principal was approximately $2.850 billion net debt. The company had $250 million of undrawn revolving facilities, of which about $52 million supported letters of credit. Current assets were $2.461 billion and current liabilities $1.047 billion.
- Operating activity: Dialysis treatments totaled 4.294 million, up about 5.2% year over year; average revenue per treatment, including lab, was $344 versus $337. Dialysis segment operating income was $252.6 million; ancillary and strategic initiatives reported a $2.0 million operating loss.
Changes versus comparable periods
- Year-over-year revenue and operating income growth reflected more treatments from existing and new centers and acquisitions, higher average revenue per treatment, and cost-control initiatives. Higher pharmaceutical, labor, benefit and other center costs partly offset those gains.
- Operating cash flow nearly doubled year over year, which management attributed mainly to stronger earnings, improved collections and payment timing. Capital spending and acquisition outlays were lower than in Q1 2009.
- Compared with Q4 2009, revenue declined 0.6%, principally because Q1 had fewer treatment days and VillageHealth special-needs plans were discontinued. Average revenue per treatment rose to $344 from $339; operating income increased about 1.7% to $242.7 million.
- Debt expense fell to $44.6 million from $48.3 million in Q1 2009, reflecting lower average debt and effective interest rates.
Outlook, risks and notable items
- 2010 outlook reaffirmed: Operating income of $950–$1,020 million and operating cash flow of $675–$725 million. Management expected approximately $125 million in routine maintenance and IT capital expenditures and $250 million for new centers, relocations and acquisitions, subject to project availability and returns.
- On April 30, 2010, DaVita elected to redeem $200 million of 6⅝% senior notes due 2013, at 101.656%, with redemption expected in June. It anticipated approximately $4 million of pretax refinancing charges in Q2.
- Reimbursement exposure is significant: management identified commercial-payor rate pressure and mix, changes to Medicare and Medicaid payments, the planned 2011 Medicare ESRD bundled-payment system, and March 2010 health-care reform as risks. About 34% of dialysis and related lab revenue came from commercial primary payors, about half from Medicare, and 16% from Medicaid and other non-Medicare government programs.
- Federal inquiries and litigation include investigations or subpoenas concerning pharmaceutical billing and practices, physician financial relationships, and joint ventures. The company said it was cooperating; adverse findings could lead to substantial penalties or exclusion from Medicare and Medicaid. Commercial-payor claims and class-action wage-and-hour matters were also disclosed. The filing does not provide a clear estimate of potential exposure for the major inquiries.
- Interest-rate exposure remains: approximately $1.5 billion of variable-rate debt was unhedged, and swaps covering $350 million were due to expire by September 2010. Management estimated a 100-basis-point increase in rates would reduce net income by about $10.3 million over the next 12 months.
- Other risks include skilled-labor costs and availability, pharmaceutical pricing and supply, revenue and refund estimates, and obligations under leases, supply agreements and noncontrolling-interest put provisions. The company reported $350.5 million of noncontrolling interests subject to put provisions.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting was identified during the quarter. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether final Medicare bundled-payment rules and other reimbursement changes allow DaVita to protect treatment economics and meet its 2010 outlook.
- Trends in commercial-payor rates and patient mix, treatment growth, revenue per treatment, and patient-care costs per treatment.
- Cash-flow sustainability and progress on the planned note redemption, debt maturities and interest-rate exposure.
- Developments in federal investigations, commercial-payor claims and other contingencies, including any quantifiable financial exposure.
- Capital spending and center-development plans, and the financial performance of ancillary businesses and supply commitments.