DaVita Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. DaVita provides U.S. dialysis and related laboratory services, alongside integrated kidney care (IKC), other ancillary services, and international operations. Unless otherwise stated, financial figures below are in U.S. dollars.
Financial results
- Third-quarter revenue: $3.121 billion, up 5.9% from $2.949 billion a year earlier. Dialysis patient service revenue was $2.952 billion; other revenue was $169 million.
- Third-quarter operating income: $496 million, versus $312 million. Operating margin was approximately 15.9%, compared with 10.6%.
- Third-quarter net income attributable to DaVita: $247 million, versus $105 million; diluted EPS was $2.62, versus $1.13. Consolidated net income was $309 million, including $63 million attributable to noncontrolling interests.
- Nine-month revenue: $8.994 billion, up 3.5%. Operating income was $1.213 billion, up 12.0%; operating margin was approximately 13.5%, versus 12.5%.
- Nine-month net income attributable to DaVita: $541 million, versus $492 million; diluted EPS was $5.80, versus $5.07. Consolidated net income was $726 million.
- Cash flow, nine months: Operating cash flow was $1.574 billion, compared with $1.221 billion. Capital expenditures were $409 million. Company-defined free cash flow was $979 million, versus $742 million.
- Liquidity and debt at September 30: Cash and cash equivalents were $449 million, with restricted cash of $96 million. Total debt principal outstanding was $8.451 billion; balance-sheet long-term debt, net of discounts and financing costs, was $8.394 billion. The $1.5 billion revolving credit facility was undrawn. Management said expected operating cash flow and other liquidity sources should fund obligations for the foreseeable future, including the next 12 months.
- Receivables: U.S. dialysis accounts receivable was $1.708 billion, or 57 days of revenue outstanding, down from $1.899 billion and 66 days at December 31, 2022; management attributed the improvement primarily to better collections from certain payers.
Changes and operating trends
- U.S. dialysis revenue rose 2.3% year over year for the first nine months, while treatments declined 0.3%. Average patient service revenue per treatment increased 2.6% to $374.46.
- Third-quarter dialysis treatments rose 1.0% from the second quarter, primarily reflecting one additional treatment day and non-acquired growth; treatment volume was approximately flat sequentially on a treatment-days-adjusted basis, according to management.
- Ancillary services revenue increased 15.0% year over year for the first nine months, led by IKC and international growth. Ancillary services recorded an $18 million operating loss, improved from a $57 million loss a year earlier; IKC alone recorded a $66 million operating loss.
- Debt expense increased to $302 million for the first nine months from $256 million, primarily due to a higher weighted-average effective interest rate. The company refinanced its prior Term Loan A and revolving facility in 2023 and recorded $8 million of debt extinguishment and modification costs.
- Operating cash flow benefited from improved operating results, collections, lower cash taxes, and other working-capital movements. Unlike the comparable 2022 period, the company made no share repurchases in the first nine months of 2023.
Outlook, commentary, and risks
- No company earnings or revenue guidance is stated in the provided filing text. CMS’s October 2023 final rule estimated an average 2.1% increase in ESRD facility reimbursement for 2024.
- Management reported that COVID-19-related cumulative patient mortality impacts continued to weigh on patient census, treatment volume, revenue, and non-acquired growth, and may persist after mortality rates normalize. Third-quarter treatment volume improved sequentially, while management noted ongoing uncertainty about future patient volumes.
- Labor, wage, inflation, and supply-chain pressures continued to raise costs. Management reported slight wage improvement in the quarter but expected some staffing and labor cost increases to persist. Cost-saving initiatives include clinic optimization, procurement, and greater use of third-party service providers; their success is not assured.
- DaVita incurred $24 million of U.S. dialysis center closure charges in the third quarter and $67 million in the first nine months. Management expects elevated closure activity over the next several quarters. The company also recorded $26 million of severance and related costs in the first nine months.
- Potential impacts from new drugs or treatments, including GLP-1 medicines, are uncertain and could affect kidney-disease prevalence or dialysis demand. The filing also highlights commercial payor mix and reimbursement pressure, government payment and regulatory risks, labor availability, and refinancing and interest-rate risks.
- Legal matters include ongoing government inquiries and related proceedings concerning healthcare practices and charitable premium assistance, plus a putative employee antitrust class action. The 2021 criminal antitrust case ended in acquittals; the class action remains contested. Recorded accruals for legal and regulatory matters were described as immaterial, but some potential losses cannot be estimated and outcomes could materially affect results.
- DaVita’s Mozarc Medical investment increased equity-method and other investments; the company may owe Medtronic up to $300 million of additional consideration if specified milestones are achieved from 2024 through 2028. The investment’s recorded cost and related estimates remain subject to finalization.
Key facts for investors to verify
- Whether patient census and treatment volumes stabilize, and how mortality trends affect future non-acquired growth.
- Whether improved revenue per treatment and cost initiatives can offset persistent wage, staffing, closure, and other operating costs.
- Progress and profitability of IKC and other ancillary services, including the drivers of quarterly volatility.
- Debt maturities, variable-rate exposure, refinancing conditions, covenant headroom, and the effect of interest-rate caps.
- Developments in government investigations, the antitrust class action, payor disputes, and other regulatory matters.
- Final Mozarc valuation and purchase-price adjustments, potential milestone payments, and performance of the investment.