DaVita Inc. — FY 2010 Form 10-K
Period: Fiscal year ended December 31, 2010; the filing also reports fourth-quarter results. DaVita provides dialysis and related laboratory services, operating or managing 1,612 outpatient centers and serving approximately 125,000 patients. About 94% of consolidated revenue came from dialysis and related lab services.
Financial and operating performance
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net operating revenue | $6.447 billion | $6.109 billion |
| Operating income | $997 million | $940 million |
| Operating margin | 15.5% | 15.4% |
| Net income attributable to DaVita | $406 million | $423 million |
| Diluted EPS | $3.94 | $4.06 |
| Cash from operations | $840 million | $667 million |
| Cash and cash equivalents at year-end | $860 million | $539 million |
| Working capital | $1.699 billion | $1.256 billion |
| Long-term debt, carrying value | $4.234 billion | $3.532 billion |
Revenue increased 5.5% and operating income increased 6.1%. Net income attributable to DaVita declined despite higher operating income, principally reflecting $74 million of debt refinancing and redemption charges and increased income attributable to noncontrolling interests. The filing reports fourth-quarter 2010 revenue of $1.649 billion, operating income of $255 million, net income attributable to DaVita of $69 million, and diluted EPS of $0.70; fourth-quarter 2009 diluted EPS was $1.06.
- Dialysis treatments rose 5.8% to 17.99 million; patient volume increased approximately 6%, and the center network grew by 82 net locations.
- Average dialysis and related lab revenue per treatment fell to $337 from $340, primarily due to lower prescribed pharmaceutical intensity and a lower commercial-payor mix. Patient care cost per treatment declined to $232 from $235.
- Government programs generated 66% of dialysis and related lab revenue; commercial payors generated 34% of revenue but nearly all dialysis profits. Approximately 89% of patients were covered by government-based programs.
- Ancillary-services revenue grew 18% to $374 million; the segment’s operating loss narrowed to $6 million from $12 million.
- Capital expenditures were $274 million and acquisitions used $189 million. DaVita repurchased 8.9 million shares for $619 million.
Liquidity, debt and capital allocation
Year-end principal debt outstanding was approximately $4.317 billion. In October, DaVita refinanced its facilities with $2.75 billion of term loans and issued $1.55 billion of senior notes due 2018 and 2020, using proceeds to repay or redeem prior debt. The new secured credit agreement includes financial covenants and collateral guarantees. The company reported $250 million of undrawn revolver capacity, of which approximately $46 million supported letters of credit. Management said liquidity and operating cash flow should fund foreseeable obligations; it also expected 2011 interest expense to be significantly higher than in 2010. January 2011 swaps and caps hedge portions of variable-rate debt.
Outlook, changes and key risks
- Medicare payment change: Beginning January 2011, Medicare moved to a bundled rate covering services, pharmaceuticals and most laboratory testing previously paid separately. DaVita elected a full transition in 2011. The initial rate includes reductions, and payment depends in part on documenting patient case-mix factors. Management cited uncertainty over reimbursement, pharmaceutical utilization and cost offsets.
- 2011 outlook: DaVita provided no specific operating-income guidance range. Excluding the proposed DSI Renal acquisition, its projections indicated operating income would be flat or modestly lower than 2010. The filing projected a 35%–36% effective tax rate.
- Commercial payors and payer mix: Commercial rates face negotiation pressure; job losses or changes in insurance coverage could shift patients to lower-paying government programs. Some new commercial contracts use bundled rates and eliminate out-of-network payments.
- Government programs: The VA adopted a bundled payment method and estimated a 39% reduction in payments to non-VA centers; VA patients represented about 2% of dialysis and related lab revenue. Medicare and state Medicaid rate or coverage changes pose further risk.
- Legal and regulatory matters: The company was cooperating with multiple federal inquiries and subpoenas involving pharmaceuticals, EPO billing, physician relationships and joint ventures. DaVita said it could not predict outcomes or potential damages and that, to its knowledge, no government proceedings had been initiated in connection with those inquiries. It also disclosed commercial-payor claims and other litigation.
- Other exposure: EPO is supplied by Amgen, the sole supplier, and accounted for about 18% of dialysis and related lab revenue. Physician referral relationships, complex billing and revenue estimates, staffing, supplier availability, and substantial debt are additional risks. Management estimated dialysis revenue-estimation risk generally within 1% of segment revenue, potentially equivalent to as much as 6% of consolidated operating income.
- Subsequent transaction: In February 2011, DaVita agreed to acquire DSI Renal for approximately $689 million, subject to regulatory approval and expected divestitures; closing was anticipated in the second or third quarter of 2011.
Important facts for investors to verify
- Actual 2011 reimbursement, case-mix documentation and cost performance under the Medicare bundled-payment system.
- Commercial-payor rate and patient-mix trends, given the concentration of profits in commercial coverage.
- Developments and financial exposure from the federal investigations, EPO matters, physician arrangements and payor claims.
- Debt service, higher refinancing-related interest costs, covenant headroom and the effect of buybacks on liquidity.
- Whether the DSI acquisition closes as expected, required divestitures and the purchase’s eventual contribution to earnings and cash flow.