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DVA > SEC Filings for DVA > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for DAVITA HEALTHCARE PARTNERS INC.

Form 10-Q for DAVITA HEALTHCARE PARTNERS INC.


1-Aug-2014

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. 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, and including earnings per share. 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 higher-paying commercial payor plans for which there is continued downward pressure on average realized payment rates, and a reduction in the number of patients under such 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 the Center for Medicare and Medicaid Services (CMS) 2014 Medicare Advantage benchmark structure, risks arising from potential federal and/or state legislation that could have an adverse effect on our operations and profitability, 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, such as restrictions on our business and operations required by a corporate integrity agreement and other settlement terms, and the financial impact thereof, 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 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, the risk that we might invest material amounts of capital and incur significant costs in connection with the growth and development of our international operations, yet we might not be able to operate them profitably anytime soon, if at all, 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 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 business 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 operate two major divisions, Kidney Care and HealthCare Partners (HCP). Our Kidney Care division is comprised of our U.S. dialysis and related lab services business, our ancillary services and strategic initiatives including our international operations, and our corporate support expenses. Our HCP division is comprised of our HCP business.

Our largest major line of business is our U.S. dialysis and related lab services, 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 HCP, which is a patient- and physician-focused integrated health care delivery and management company.

Following is a summary of our consolidated operating results for the second quarter of 2014 compared with the prior sequential quarter and the same quarter of 2013, as well as the six months ended June 30, 2014 compared to the same period in 2013, for reference in the discussion that follows.

                                                            Three months ended                                            Six months ended
                                         June 30,               March 31,                June 30,                 June 30,                June 30,
                                           2014                    2014                    2013                     2014                    2013
                                                                        (dollar amounts rounded to nearest million)
Net revenues:
Patient service revenues            $ 2,187                 $ 2,114                 $ 2,049                  $ 4,301                 $ 4,028
Less: Provision for uncollectible
accounts                                (88 )                   (83 )                   (72 )                   (171 )                  (142 )

Net patient service revenues          2,099                   2,031                   1,977                    4,130                   3,886
Capitated revenues                      799                     788                     710                    1,587                   1,473
Other revenues                          274                     224                     185                      498                     342

Total consolidated net revenues       3,172        100 %      3,043        100 %      2,872        100 %       6,215        100 %      5,701        100 %

Operating expenses and charges:
Patient care costs                    2,247         71 %      2,180         71 %      2,015         70 %       4,426         71 %      3,975         70 %
General and administrative              298          9 %        284          9 %        268          9 %         582          9 %        553         10 %
Depreciation and amortization           146          5 %        142          5 %        131          5 %         288          5 %        256          4 %
Provision for uncollectible
accounts                                  3         -             3         -             1         -              6         -             2         -
Equity investment income                 (6 )       -            (7 )       -            (8 )       -            (13 )       -           (17 )       -
Loss contingency reserve                 -          -            -          -            -          -             -          -           300          5 %
Contingent earn-out obligation
adjustment                               -          -            -          -           (57 )       (2 %)         -          -           (57 )       (1 %)

Total operating expenses and
charges                               2,688         85 %      2,602         85 %      2,350         82 %       5,289         85 %      5,012         88 %

Operating income                    $   484         15 %    $   441         15 %    $   522         18 %     $   926         15 %    $   689         12 %


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The following table summarizes consolidated net revenues for our Kidney Care division and our HCP division:

                                                  Three months ended                        Six months ended
                                       June 30,        March 31,        June 30,        June 30,         June 30,
                                         2014            2014             2013            2014             2013
                                                      (dollar amounts rounded to nearest million)
Net revenues:
Kidney Care:
U.S. dialysis and related lab
services patient service revenues     $    2,106      $     2,037      $    1,988      $     4,142      $    3,905
Less: Provision for uncollectible
accounts                                     (84 )            (82 )           (69 )           (166 )          (137 )

U.S. dialysis and related lab
services net patient service
revenues                              $    2,022      $     1,955      $    1,919      $     3,976      $    3,768
Other revenues                                 3                3               3                7               6

Total net U.S. dialysis and related
lab services revenues                      2,025            1,958           1,922            3,983           3,774

Other-Ancillary services and
strategic initiatives revenues               229              214             166              442             319
Other-Capitated revenues                      16               16              18               32              34
Other-Ancillary services and
strategic initiatives net patient
service revenues (less provision
for uncollectible accounts)                   29               27              16               56              31

Total net other-ancillary services
and strategic initiatives revenues           274              257             200              530             384
Elimination of intersegment and
division revenues                            (14 )            (13 )           (11 )            (26 )           (22 )

Total Kidney Care net revenues             2,285            2,202           2,111            4,487           4,136

HCP:
HCP capitated revenues                       783              772             693            1,555           1,439
HCP net patient service revenues
(less provision for uncollectible
accounts)                                     58               56              49              114             103
Other revenues                                46               13              19               59              23

Total net HCP revenues                       887              841             761            1,728           1,565

Total consolidated net revenues       $    3,172      $     3,043      $    2,872      $     6,215      $    5,701


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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,
                                          2014             2014             2013             2014             2013
                                                         (dollar amounts rounded to nearest million)
Operating income:
Kidney Care:
U.S. dialysis and related lab
services                                $     408       $       387       $     402       $      795        $     486
Other-Ancillary services and
strategic initiatives (losses)
income                                         (2 )               2              (7 )             -               (22 )
Contingent earn-out obligation
adjustment                                     -                 -               57               -                57
Corporate support costs                        (4 )              (2 )           (11 )             (5 )            (22 )

Total kidney care operating income            402               387             441              790              499
HCP services                                   82                54              81              136              190

Total consolidated operating income           484               441             522              926              689
Reconciliation of non-GAAP measures:
Add:
Contingent earn-out obligation
adjustment                                     -                 -              (57 )             -               (57 )
Loss contingency reserve                       -                 -               -                -               300

Adjusted consolidated operating
income(1)                               $     484       $       441       $     465       $      926        $     932

(1) For the three and six months ended June 30, 2013, we have excluded $57 million related to an adjustment to decrease HCP's contingent earn-out obligation. In addition, for the six months ended June 30, 2013, we have excluded $300 million of expenses related to an estimated loss contingency reserve. 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 and an estimated $300 million loss contingency reserve related to the 2010 and 2011 U.S. Attorney Physician Relationship Investigations (see Note 9 to the condensed consolidated financial statements). 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 2014 increased by approximately $129 million, or approximately 4.2%, as compared to the first quarter of 2014. The increase in consolidated net revenues was primarily due to an increase of approximately $67 million associated with the U.S. dialysis and related lab services net revenues, principally due to one and a half additional treatment days in the second quarter of 2014 as compared to the first quarter of 2014 and strong non-acquired growth, partially offset by a decrease of $1 in the average dialysis revenue per treatment mainly due to a seasonal decrease in acute services. In addition, HCP's net operating revenues increased by approximately $46 million, mainly from the recognition of additional HCP revenues related to the maintenance of existing physician networks, additional senior capitated members and the timing of revenue from its annual premium reconciliation for senior capitated members which previously occurred in the third quarter of 2013. The increase in consolidated net revenues was also due to an increase of approximately $17 million associated with our ancillary services and strategic initiatives revenues primarily from additional pharmacy revenues.

Consolidated net revenues for the second quarter of 2014 increased by approximately $300 million, or approximately 10.4%, as compared to the second quarter of 2013. The increase in consolidated net revenues was mostly due to an increase of $103 million in the U.S. dialysis and related lab services net revenues, primarily as a


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result of strong volume growth from non-acquired treatment growth in existing and new centers and an increase of $1 in the average dialysis revenue per treatment, driven by changes in the mix of our government reimbursements and an increase in some of our commercial payment rates. The increase in consolidated net revenues was also due to an increase in HCP net revenues of $126 million due to acquired growth, an increase in senior capitated members in the second quarter of 2014 and from the recognition of additional HCP revenues related to the maintenance of existing physician networks, as well as the timing of revenue from its annual premium reconciliation for senior capitated members which previously occurred in the third quarter of 2013, partially offset by a reduction in HCP's Medicare Advantage payments. In addition, the increase in consolidated net revenues was also due to an increase of approximately $74 million in our ancillary services and strategic initiatives, mainly from growth in our pharmacy services and in our international operations.

Consolidated net revenues for the six months ended June 30, 2014 increased by approximately $514 million, or approximately 9.0%, as compared to the same period in 2013. The increase in consolidated net revenues was primarily due to an increase of $209 million in the U.S. dialysis and related lab services net revenues, largely as a result of strong volume growth from non-acquired treatment growth in existing and new centers, and an increase in HCP net revenues of $163 million, primarily due to an increase in senior capitated members in the first quarter of 2014 and from the recognition of additional HCP revenues related to the maintenance of existing physician networks, as well as the timing of revenue from its annual premium reconciliation for senior capitated members which previously occurred in the third quarter of 2013, partially offset by a reduction in HCP's Medicare Advantage payments. In addition, the increase in consolidated net revenues was also due to an increase of approximately $146 million in our ancillary services and strategic initiatives, largely due to growth in our pharmacy services and in our international operations.

Consolidated operating income

Consolidated operating income for the second quarter of 2014 increased by approximately $43 million, or approximately 9.8%, as compared to the first quarter of 2014. The increase in the consolidated operating income was for the most part due to an increase in U.S. dialysis and related lab services net revenues due to strong volume growth primarily from one and a half additional treatment days in the second quarter of 2014 as compared to the first quarter of 2014, lower payroll taxes, improved productivity, as well as improved operating results in HCP mainly from the recognition of additional revenues as described above, and an increase in HCP senior capitated members. Consolidated operating income was negatively impacted by an increase in pharmaceutical costs, an increase in the intensities of physician prescribed pharmaceuticals, higher labor costs, an increase in travel costs for management meetings, higher long-term incentive compensation and an increase in HCP's medical claims expense as a result of additional senior and Medicaid members who have higher utilization.

Consolidated operating income for the second quarter of 2014 decreased by approximately $38 million, or approximately 7.3%, as compared to the second quarter of 2013, including the contingent earn-out obligation adjustment of $57 million in the second quarter of 2013. Excluding this item, adjusted consolidated operating income would have increased by $19 million. The increase in adjusted consolidated operating income was primarily due to strong volume growth in the number of treatments from non-acquired growth and acquisitions, and from improved productivity. In addition, adjusted consolidated operating income was also positively impacted by improved operating performance of certain ancillary services and strategic initiatives, mainly our pharmacy services, and the recognition of additional HCP revenues as described above, partially offset by the impact of lower HCP Medicare Advantage payments, an increase in HCP's medical claims expenses as a result of additional senior capitated members, higher pharmaceutical unit costs, an increase in the intensities of physician-prescribed pharmaceuticals, an increase in the provision for uncollectible accounts, higher labor costs and related payroll taxes, and higher long-term incentive compensation.

Consolidated operating income for the six months ended June 30, 2014 increased by approximately $237 million, or approximately 34.4%, as compared to the same period in 2013, which includes the accrued estimated loss contingency reserve of $300 million and the contingent earn-out obligation adjustment of $57 million.


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Excluding these items, adjusted consolidated operating income would have decreased by $6 million. The decrease in adjusted operating income was primarily due to the impact of lower HCP operating results, largely from lower Medicare Advantage payments, partially offset by the recognition of additional HCP revenues as described above. In addition, the decrease in adjusted consolidated operating income was also due to higher pharmaceutical unit costs, an increase in the intensities of physician-prescribed pharmaceuticals, an increase in the provision for uncollectible accounts, higher labor costs and related payroll taxes, an increase in benefit costs, higher long-term incentive compensation and an increase in HCP's medical claims expenses, as a result of additional senior capitated members. The decrease in adjusted consolidated operating income was partially offset by strong volume growth in the number of treatments from non-acquired growth, improved productivity and lower professional fees for legal and compliance matters. In addition, adjusted consolidated operating income was also positively impacted by improved operating performance of certain ancillary services and strategic initiatives, primarily from growth in our pharmacy services.

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,
                                2014               2014               2013                2014                2013
                                                    (dollar amounts rounded to nearest million,
                                                            except per treatment data)
Net revenues:
Dialysis and related lab
services patient service
revenues                     $     2,106        $     2,037        $     1,988        $      4,142        $      3,905
Less: Provision for
uncollectible accounts               (84 )              (82 )              (69 )              (166 )              (137 )

Dialysis and related lab
services net patient
service revenues             $     2,022        $     1,955        $     1,919        $      3,976        $      3,768
Other revenues                         3                  3                  3                   7                   6

Total net dialysis and
related lab services
revenues                     $     2,025        $     1,958        $     1,922        $      3,983        $      3,774

Operating expenses and
charges:
Patient care costs                 1,358              1,323              1,265               2,680               2,482
General and
administrative                       164                155                169                 319                 338
Depreciation and
amortization                          99                 96                 89                 196                 174
Loss contingency reserve              -                  -                  -                   -                  300
Equity investment income              (4 )               (3 )               (3 )                (7 )                (6 )

Total operating expenses
and charges                        1,617              1,571              1,520               3,188               3,288

Operating income             $       408        $       387        $       402        $        795        $        486

Dialysis treatments            6,196,394          5,975,627          5,867,973          12,172,021          11,496,772
Average dialysis
treatments per treatment
day                               79,441             78,215             75,230              78,834              74,413
Average dialysis and
related lab services
revenue per treatment        $       340        $       341        $       339        $        340        $        340

Net revenues

Dialysis and related lab services' net revenues for the second quarter of 2014 increased by approximately $67 million, or approximately 3.4%, as compared to the first quarter of 2014. The increase in dialysis and related lab services' net revenues was due to an increase in the number of treatments as a result of one and a half


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additional treatment days in the second quarter of 2014 as compared to the first quarter of 2014 and strong non-acquired treatment growth in existing and new centers, partially offset by a decrease in the average dialysis revenue per treatment of approximately $1. The decrease in the average dialysis revenue per treatment was primarily due to a seasonal decrease in our acute services, partially offset by an increase in our commercial mix and an increase in some of our commercial payment rates.

Dialysis and related lab services' net revenues for the second quarter of 2014 increased by approximately $103 million, or approximately 5.4%, as compared to the second quarter of 2013. The increase in net revenues in the second quarter of 2014 was principally due to strong volume growth from additional treatments. The increase in the number of treatments was primarily attributable to strong non-acquired treatment growth at existing and new centers. The average dialysis revenue per treatment also increased by approximately $1 in the second quarter of 2014 as compared to the second quarter of 2013. The increase in our average dialysis revenue per treatment was primarily due to an increase as a result of changes in the mix of our government reimbursements and an increase in some of our average commercial payment rates, partially offset by a decrease in our commercial mix and an increase in the provision for uncollectible accounts.

Dialysis and related lab services' net revenues for the six months ended . . .

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