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DVA > SEC Filings for DVA > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for DAVITA HEALTHCARE PARTNERS INC.

Form 10-Q for DAVITA HEALTHCARE PARTNERS INC.


7-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking statements within the meaning of the federal securities laws. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements that do not concern historical facts are forward-looking statements and include, among other things, statements about our expectations, beliefs, intentions and/or strategies for the future. These forward-looking statements include statements regarding our future operations, financial condition and prospects, expectations for treatment growth rates, revenue per treatment, expense growth, levels of the provision for uncollectible accounts receivable, operating income, cash flow, operating cash flow, estimated tax rates, capital expenditures, the development of new dialysis centers and dialysis center acquisitions, government and commercial payment rates, revenue estimating risk and the impact of our level of indebtedness on our financial performance, including earnings per share, and incorporation of HCP's operating results into the Company's consolidated operating results. These statements involve substantial known and unknown risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements, including but not limited to, risks resulting from the concentration of profits generated by the continued downward pressure on average realized payment rates from, and a reduction in the number of patients under, higher-paying commercial payor plans, which may result in the loss of revenues or patients, a reduction in government payment rates under the Medicare ESRD program or other government-based programs, the impact of health care reform legislation that was enacted in the U.S. in March 2010, the impact of the Center for Medicare and Medicaid Services (CMS) 2014 Medicare Advantage benchmark structure, the impact of the American Taxpayer Relief Act, the impact of the sequester that went into effect on April 1, 2013, changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing, legal compliance risks, including our continued compliance with complex government regulations and current or potential investigations by various government entities and related government or private-party proceedings, including risks relating to the resolution of the 2010 and 2011 U.S. Attorney Physician Relationship Investigations, continued increased competition from large and medium-sized dialysis providers that compete directly with us, our ability to maintain contracts with physician medical directors, changing affiliation models for physicians, and the emergence of new models of care introduced by the government or private sector that may erode our patient base and reimbursement rates such as accountable care organizations (ACOs), independent practice associations (IPAs) and integrated delivery systems, or to businesses outside of dialysis and HCP's business, our ability to complete any acquisitions, mergers or dispositions that we might be considering or announce, or to integrate and successfully operate any business we may acquire or have acquired, including HCP, or to expand our operations and services to markets outside the U.S., variability of our cash flows, risks arising from the use of accounting estimates, judgments and interpretations in our financial statements, loss of key HCP employees, potential disruption from the HCP transaction making it more difficult to maintain business and operational relationships with customers, partners, associated physicians and physician groups, hospitals and others, the risk that laws regulating the corporate practice of medicine could restrict the manner in which HCP conducts its business, the fact that HCP faces certain competitive threats that could reduce its profitability, the risk that the cost of providing services under HCP's agreements may exceed our compensation, the risk that reductions in reimbursement rates, including Medicare Advantage rates, and future regulations may negatively impact HCP's business, revenue and profitability, the risk that HCP may not be able to successfully establish a presence in new geographic regions or successfully address competitive threats that could reduce its profitability, the risk that a disruption in HCP's healthcare provider networks could have an adverse effect on HCP's operations and profitability, the risk that reductions in the quality ratings of health maintenance organization plan customers of HCP could have an adverse effect on HCP's business, or the risk that health plans that acquire health maintenance organizations may not be willing to contract with HCP or may be willing to contract only on less favorable terms, and the other risk factors set forth in Part II, Item 1A. of this Quarterly Report on Form 10-Q. We base our forward-looking statements on information currently available to us, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in underlying factors, new information, future events or otherwise.


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The following should be read in conjunction with our condensed consolidated financial statements.

Consolidated results of operations

We primarily operate two major lines of business and, to a lesser extent, various other ancillary services and strategic initiatives, which includes our international dialysis operations. Our largest line of business is our U.S. dialysis and related lab services business, which is a leading provider of kidney dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as ESRD. Our other major line of business is HealthCare Partners (HCP), which is a patient- and physician-focused integrated health care delivery and management company with nearly three decades of providing coordinated, outcomes-based medical care in a cost-effective manner.

Following is a summary of our consolidated operating results for the second quarter of 2013 compared with the prior sequential quarter and the same quarter of 2012, as well as the six months ended June 30, 2013 compared to the same period in 2012, for reference in the discussion that follows. The operating results of HCP are included in our operating results effective November 1, 2012.

                                                                    Three months ended                                                   Six months ended
                                             June 30,                   March 31,                    June 30,                  June 30,                    June 30,
                                               2013                        2013                        2012                      2013                        2012
                                                                                   (dollar amounts rounded to nearest million)
Net revenues:
Patient service revenues                $ 2,048                     $ 1,980                     $ 1,813                   $ 4,028                     $ 3,579
Less: Provision for uncollectible
accounts                                    (72 )                       (70 )                       (54 )                    (142 )                      (107 )

Net patient service revenues              1,976                       1,910                       1,759                     3,886                       3,472
HCP capitated revenues                      693                         746                          -                      1,438                          -
Other revenues                              203                         174                         154                       377                         291

Total consolidated net revenues           2,872        100 %          2,830        100 %          1,913         100 %       5,701        100 %          3,763         100 %

Operating expenses and charges:
Patient care costs                        2,015         70 %          1,961         69 %          1,300          68 %       3,975         70 %          2,549          68 %
General and administrative                  268         10 %            284         10 %            213          11 %         553         10 %            418          11 %
Depreciation and amortization               131          4 %            126          4 %             77           4 %         256          4 %            153           4 %
Provision for uncollectible accounts          1         -                 1         -                 1          -              2         -                 2          -
Equity investment income                     (8 )       -                (9 )       -                (3 )        -            (17 )       -                (5 )        -
Loss contingency reserve and other
legal settlement expenses                    -          -               300         11 %             78           4 %         300          5 %             78           2 %
Contingent earn-out obligation
adjustment                                  (57 )       (2 %)            -          -                -           -            (57 )       (1 %)            -           -

Total operating expenses and charges      2,350         82 %(1)       2,663         94 %(1)       1,666          87 %       5,012         88 %(1)       3,195          85 %

Operating income                        $   522         18 %        $   167          6 %        $   247          13 %     $   689         12 %        $   568          15 %


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The following table summarizes consolidated net revenues for our U.S. dialysis and related lab services segment, HCP and our other ancillary services and strategic initiatives:

                                                  Three months ended                        Six months ended
                                       June 30,        March 31,        June 30,        June 30,         June 30,
                                         2013            2013             2012            2013             2012
                                                      (dollar amounts rounded to nearest million)
Net revenues:
U.S. dialysis and related lab
services patient service revenues     $    1,988      $     1,916      $    1,813      $     3,905      $    3,580
Less: Provision for uncollectible
accounts                                     (69 )            (67 )           (54 )           (137 )          (107 )

U.S. dialysis and related lab
services net patient service
revenues                              $    1,919      $     1,849      $    1,759      $     3,768      $    3,473
Other revenues                                 3                3               3                6               6

Total net U.S. dialysis and related
lab services revenues                      1,922            1,852           1,762            3,774           3,479

HCP capitated revenues                       693              746              -             1,439              -
HCP net patient service revenues
(less provision for uncollectible
accounts)                                     49               54              -               103              -
Other revenues                                19                4              -                23              -

Total net HCP revenues                       761              804              -             1,565              -

Other-Ancillary services and
strategic initiatives revenues               184              169             153              353             289
Other-Ancillary services and
strategic initiatives net patient
service revenues                              16               15               5               31               8

Total net other-ancillary services
and strategic initiatives revenues           200              184             158              384             297

Total net segment revenues                 2,883            2,840           1,920            5,723           3,776
Elimination of intersegment
revenues                                     (11 )            (10 )            (7 )            (22 )           (13 )

Consolidated net revenues             $    2,872      $     2,830      $    1,913      $     5,701      $    3,763


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The following table summarizes consolidated operating income and adjusted consolidated operating income:

                                               Three months ended                           Six months ended
                                 June 30,           March 31,          June 30,         June 30,         June 30,
                                   2013               2013               2012             2013             2012
                                                    (dollar amounts rounded to nearest million)
U.S. dialysis and related
lab services                     $     404         $        87         $     291       $      491        $     650
HCP services                            81                 108                -               190               -
Other-Ancillary services
and strategic initiatives
loss                                    (7 )               (15 )             (21 )            (22 )            (39 )

Total segment operating
income                                 478                 180               270              659              611
Reconciling items:
Contingent earn-out
obligation adjustment                   57                  -                 -                57               -
Corporate support costs                (13 )               (13 )             (13 )            (27 )            (27 )
Transaction expenses                    -                   -                (10 )             -               (16 )

Consolidated operating
income                                 522                 167               247              689              568
Reconciliation of non-GAAP
measure:
Add:
Contingent earn-out
obligation adjustment                  (57 )                -                 -               (57 )             -
Loss contingency reserve
and other legal settlement
expenses                                -                  300                78              300               78
Transaction expenses                    -                   -                 10               -                16

Adjusted consolidated
operating income(1)              $     465         $       467         $     335       $      932        $     662

(1) For the three months and six months ended June 30, 2013, we have excluded $57 million related to a decrease in HCP's contingent earn-out obligation. For the three months ended March 31, 2013 and for the six months ended June 30, 2013, we have excluded $300 million of expenses related to an estimated loss contingency reserve. For the three and six months ended June 30, 2012, we have excluded $78 million of expenses related to a legal settlement and we have also excluded $10 million and $16 million, respectively, of transaction expenses associated with the acquisition of HCP from operating expenses and operating income. These are non-GAAP measures and are not intended as substitutes for the GAAP equivalent measures. We have presented these adjusted amounts because management believes that these presentations enhance a user's understanding of our normal consolidated operating income by excluding an unusual adjustment of $57 million for a decrease in HCP's contingent earn-out obligation, an estimated $300 million loss contingency reserve related to the 2010 and 2011 U.S. Attorney Physician Relationship Investigations (see note 7 to the condensed consolidated financial statements), $78 million of expenses relating to a legal settlement we reached in the second quarter of 2012 with the U.S. District Court in the Eastern District of Texas to resolve federal program claims regarding erythropoietin (EPO) that were or could have been raised in the complaint relating to historical EPO practices dating back to 1997, and an unusual amount of transaction expenses totaling $10 million and $16 million in the respective periods that resulted from the acquisition of HCP. We therefore consider these adjusted consolidated operating income amounts meaningful and comparable to our prior period results.

Consolidated net revenues

Consolidated net revenues for the second quarter of 2013 increased by approximately $42 million, or approximately 1.5%, as compared to the first quarter of 2013. The increase in consolidated net revenues was primarily due to an increase of approximately $70 million associated with the dialysis and related lab services net


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revenues, principally due to strong volume growth from additional treatments from non-acquired growth and acquisitions. In addition, the ancillary services and strategic initiatives net revenues increased by approximately $16 million. HCP's net revenues decreased by approximately $43 million primarily due to both a seasonal decline in the average premiums for senior capitated members and from a decrease in Medicare reimbursements due to sequestration that went into effect on April 1, 2013.

Consolidated net revenues for the second quarter of 2013 increased by approximately $959 million, or approximately 50.1%, as compared to the second quarter of 2012. The increase in consolidated net revenues was primarily due to the acquisition of HCP which generated approximately $761 million in net revenues during the second quarter of 2013, an increase of $160 million in the dialysis and related lab services net revenues, primarily due to strong volume growth from additional treatments from non-acquired treatment growth in existing and new centers and growth through acquisitions, and an increase in our average dialysis revenue per treatment of approximately $6. In addition, the increase in consolidated net revenues was also due to an increase of approximately $42 million in our ancillary services and strategic initiatives, primarily from growth in our pharmacy services and in our international operations.

Consolidated net revenues for the six months ended June 30, 2013 increased by approximately $1,938 million, or approximately 51.5%, as compared to the same period in 2012. The increase in consolidated net revenues was primarily due to the acquisition of HCP which generated approximately $1,565 million in net revenues, an increase of $295 million in the dialysis and related lab services net revenues, primarily due to strong volume growth from additional treatments from non-acquired treatment growth in existing and new centers, and growth through acquisitions, partially offset by one and a half fewer treatment days during the six months ended June 30, 2013 and an increase in our average dialysis revenue per treatment of approximately $7. In addition, the increase in consolidated net revenues was also due to an increase of approximately $87 million in our ancillary services and strategic initiatives, primarily from growth in our pharmacy services and in our international operations.

Consolidated operating income

Consolidated operating income for the second quarter of 2013 increased by approximately $355 million, or approximately 212.6%, as compared to the first quarter of 2013, including the contingent earn-out obligation adjustment of $57 million in the second quarter of 2013 and the estimated loss contingency reserve of $300 million in the first quarter of 2013. Excluding these items from their respective periods, adjusted consolidated operating income would have decreased by $2 million. The decrease in the adjusted consolidated operating income was primarily due to a decrease in HCP's net revenues as described above and a decrease of approximately $1 in the average dialysis revenue per treatment primarily due to sequestration, partially offset by an increase in our commercial mix, as well as an increase in our professional fees and benefit costs. Adjusted consolidated operating income was positively impacted by strong volume growth in the number of treatments, which includes one and a half additional treatment days during the second quarter of 2013 as compared to the first quarter of 2013, an overall decrease in pharmaceutical costs, mainly from a decline in the intensities of physician-prescribed pharmaceuticals, a decrease in payroll taxes, improvements in productivity and improved operating performance of certain ancillary services and strategic initiatives, primarily our pharmacy services.

Consolidated operating income for the second quarter of 2013 increased by approximately $275 million, or approximately 111.3%, as compared to the second quarter of 2012 including the contingent earn-out obligation adjustment of $57 million in the second quarter of 2013 and the legal settlement expenses of $78 million and the transaction expenses of $10 million in the second quarter of 2012 associated with the acquisition of HCP. Excluding these items from their respective periods, adjusted consolidated operating income would have increased by $130 million. The increase in adjusted operating income was primarily due to the acquisition of


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HCP, which generated $81 million in operating income, an increase of approximately $6 in our average dialysis revenue per treatment, strong volume growth in the number of treatments and an overall decrease in pharmaceutical costs, mainly from a decline in the intensities of physician-prescribed pharmaceuticals. In addition, adjusted consolidated operating income also increased as a result of improved operating performance of certain ancillary services and strategic initiatives, primarily our pharmacy services and our international operations. Adjusted consolidated operating income was negatively impacted by higher labor costs and related payroll taxes, an increase in professional fees for compliance matters and information technology initiatives, higher long-term incentive compensation and a decline in productivity.

Consolidated operating income for the six months ended June 30, 2013 increased by approximately $121 million, or approximately 21.3%, as compared to the same period in 2012 including the contingent earn-out obligation adjustment of $57 million in the first six months of 2013, the estimated loss contingency reserve of $300 million in the first six months of 2013 and including the legal settlement expenses of $78 million and transaction expenses of $16 million in the first six months of 2012 associated with the acquisition of HCP. Excluding these items from their respective periods, adjusted consolidated operating income would have increased by $270 million. The increase in adjusted operating income was primarily due to the acquisition of HCP, which generated $190 million in operating income, an increase of approximately $7 in our average dialysis revenue per treatment, strong volume growth in the number of treatments, an overall decrease in pharmaceutical costs, mainly from a decline in the intensities of physician-prescribed pharmaceuticals and lower professional fees for legal and compliance matters. In addition, adjusted consolidated operating income also increased as a result of improved operating performance of certain ancillary services and strategic initiatives, primarily our pharmacy services and our international operations. Adjusted consolidated operating income was negatively impacted by one and a half fewer treatment days during the six months ended June 30, 2013, higher labor costs and related payroll taxes, higher long-term incentive compensation, an increase in benefit costs and a decline in productivity.


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U.S. dialysis and related lab services business

Results of operations

                                               Three months ended                                  Six months ended
                               June 30,              March 31,           June 30,            June 30,            June 30,
                                 2013                  2013                2012                2013                2012
                                         (dollar amounts rounded to nearest million, except per treatment data)
Net revenues:
Dialysis and related lab
services patient service
revenues                     $       1,988         $       1,916        $     1,813        $      3,905        $      3,580
Less: Provision for
uncollectible accounts                 (69 )                 (67 )              (54 )              (137 )              (107 )

Dialysis and related lab
services net patient
service revenues             $       1,919         $       1,849        $     1,759        $      3,768        $      3,473
Other revenues                           3                     3                  3                   6                   6

Total net dialysis and
related lab services
revenues                     $       1,922         $       1,852        $     1,762        $      3,774        $      3,479

Operating expenses and
charges:
Patient care costs                   1,265                 1,216              1,166               2,481               2,294
General and
administrative                         167                   167                154                 334                 313
Depreciation and
amortization                            89                    85                 76                 174                 149
Loss contingency reserve
and other legal
settlement expenses                     -                    300                 78                 300                  78
Equity investment income                (3 )                  (3 )               (3 )                (6 )                (5 )

Total operating expenses
and charges                          1,518                 1,765              1,471               3,283               2,829

Operating income             $         404         $          87        $       291        $        491        $        650

Dialysis treatments              5,867,973             5,628,799          5,451,901          11,496,772          10,766,176
Average dialysis
treatments per treatment
day                                 75,230                73,579             69,896              74,413              69,014
Average dialysis and
related lab services
revenue per treatment        $         339         $         340        $       333        $        340        $        333

Net revenues

Dialysis and related lab services' net revenues for the second quarter of 2013 increased by approximately $70 million, or approximately 3.8%, as compared to the first quarter of 2013. The increase in dialysis and related lab services' net revenues was due to an increase in the number of treatments as a result of strong non-acquired treatment growth in existing and new centers and growth through acquisitions, as well as one and a half additional treatment days in the second quarter of 2013 as compared to the first quarter of 2013. However, the dialysis and related lab services' net revenues were negatively impacted by a decline in the average dialysis revenue per treatment of approximately $1 due to lower Medicare reimbursements as a result of sequestration that went into effect on April 1, 2013, partially offset by an increase in our commercial mix.

Dialysis and related lab services' net revenues for the second quarter of 2013 increased by approximately $160 million, or approximately 9.1%, as compared to . . .

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