DaVita HealthCare Partners Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The interim financial statements are unaudited. The company operates Kidney Care, including U.S. dialysis and related services, and HealthCare Partners (HCP), an integrated healthcare delivery and management business.
Financial performance
| Metric | Q1 2015 | Comparable period |
|---|---|---|
| Total net revenue | $3.288 billion | $3.043 billion in Q1 2014; up 8.1% |
| Operating income (loss) | $(64) million | $441 million in Q1 2014 |
| Adjusted operating income | $431 million | $441 million in Q1 2014; excludes the $495 million Vainer contingency accrual |
| Net income (loss) attributable to DaVita | $(111) million; diluted EPS $(0.52) | $183 million; diluted EPS $0.85 in Q1 2014 |
| Operating cash flow | $410 million | $419 million in Q1 2014 |
| Cash and short-term investments | $1.434 billion | At March 31, 2015 |
| Debt principal outstanding | $8.514 billion | At March 31, 2015 |
- Revenue growth year over year reflected higher dialysis treatment volume and average revenue per treatment, HCP membership and revenue, and growth in ancillary services and international operations.
- U.S. dialysis revenue increased about 5.8% year over year; average revenue per treatment rose about $5 to $346. The dialysis provision for uncollectible accounts increased to 4.5% of revenue from 4.0% a year earlier.
- HCP revenue increased about 10.3% year over year to $928 million, while operating income rose to $60 million from $54 million. Ancillary services and strategic initiatives recorded a $14 million operating loss, versus $2 million of operating income a year earlier.
- Reported operating margin was approximately negative 2.0%; adjusted operating margin was approximately 13.1%, using adjusted operating income of $431 million and revenue of $3.288 billion.
- Cash from operations was lower year over year, with management citing lower Medicare collections and timing of working-capital and tax payments. Capital expenditures were $121 million, acquisitions $41 million, and share repurchases $70 million.
Material changes and unusual items
- The $495 million estimated Vainer lawsuit contingency, including $450 million for settlement and $45 million for fees and costs, drove the reported operating loss and net loss. The settlement terms were not final at filing; the company could not assure settlement at or below the accrued amount. Management said guidance excludes this accrual and any potential settlement payment.
- Year-over-year revenue growth did not translate into higher adjusted operating income: adjusted operating income declined $10 million. Management cited labor and benefit costs, pharmaceutical costs, higher uncollectible-account provisions, and losses in ancillary businesses, partly offset by treatment growth, improved productivity, and higher dialysis revenue per treatment.
- Accounts receivable rose to $1.675 billion net on the balance sheet. Consolidated receivables represented approximately 53 days of revenue, versus 48 days at December 31, 2014; dialysis receivables represented approximately 56 days, versus 50 days. Management attributed the dialysis increase mainly to lower Medicare collections.
- HCP’s current and expected results had weakened, primarily because of Medicare Advantage reimbursement changes. The company estimated 2016 Medicare Advantage rates would reduce HCP’s average managed senior revenue by about 2%, with an estimated approximately $50 million impact to 2016 operating income. Three HCP reporting units remained at risk of goodwill impairment; no goodwill impairment was recorded in Q1.
Outlook, liquidity, and risks
- 2015 operating income guidance was raised to $1.800–$1.925 billion consolidated and $1.575–$1.650 billion for Kidney Care. HCP guidance remained $225–$275 million. Operating cash flow guidance remained $1.500–$1.700 billion. These ranges exclude the Vainer accrual and any potential settlement payment.
- At March 31, the company had $1.0 billion of undrawn revolving credit facilities, with approximately $95 million committed for letters of credit. Management said expected operating cash flow and available liquidity should fund debt service and other obligations for at least the next 12 months.
- In April 2015, the company issued $1.5 billion of 5.0% senior notes due 2025. Proceeds were intended principally to repurchase or redeem its $775 million of 6⅝% notes due 2020, with remaining proceeds for fees and general corporate purposes.
- In April, the board authorized an additional $726 million of share repurchases; combined with prior authorization, $1.0 billion remained available. The company also repurchased about $14 million of shares in April.
- The OIG asserted that the company breached its five-year Corporate Integrity Agreement due to three implementation deficiencies and demanded $450,000 in stipulated penalties. The company said it was working to address the concerns.
- Other significant legal and regulatory matters include a new OIG subpoena to HCP subsidiary JSA concerning Medicare Advantage risk-adjustment practices, a federal investigation into patient transportation medical necessity, and the pending appeal in the Swoben civil suit. The company said inquiries could entail significant costs and potentially substantial penalties or other consequences.
- Key business risks include commercial payor rate and patient-mix pressure, Medicare and Medicaid reimbursement changes, HCP medical-cost and risk-adjustment estimates, government investigations and compliance obligations, and the company’s substantial indebtedness. Management also identified potential future goodwill impairment at certain HCP units.
Important facts for investors to verify
- Whether the Vainer matter reaches a definitive settlement, its final terms, and the tax treatment of any payment.
- Actual HCP reimbursement and operating performance as 2016 Medicare Advantage rates take effect, including whether goodwill impairment is required.
- Whether Medicare collection trends and days sales outstanding improve, and whether the provision for uncollectible accounts remains elevated.
- The resolution of the Corporate Integrity Agreement dispute and the outcome or scope of the JSA and transportation investigations.
- Progress against 2015 operating income and cash flow guidance, which excludes the Vainer contingency and any potential settlement payment.
- Use of the April note proceeds, the resulting debt and interest burden, and the pace of authorized share repurchases.