DaVita Inc. — Q1 2022 Form 10-Q
Business and period. DaVita provides U.S. dialysis and related laboratory services, integrated kidney care and other ancillary services, including international operations. This unaudited report covers the three months ended March 31, 2022. Unless noted, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $2.818 billion | $2.820 billion | Down 0.1% |
| Operating income | $338 million | $443 million | Down 23.7% |
| Net income attributable to DaVita | $162 million | $237 million | Down 31.7% |
| Diluted EPS | $1.61 | $2.09 | Down 23.0% |
| Operating cash flow | $322 million | $154 million | Up $168 million |
| Capital expenditures | $123 million | $145 million | Down $22 million |
| Free cash flow (non-GAAP) | $147 million | $(17) million | Up $164 million |
- Consolidated operating margin was approximately 12.0%, versus 15.7% a year earlier. Patient care costs rose 4.1% to $2.019 billion; general and administrative expense rose 4.8% to $295 million; depreciation and amortization rose 4.4% to $173 million.
- U.S. dialysis revenue was $2.575 billion, down 0.6%. Treatments declined 2.4% to 7.11 million, while average patient service revenue per treatment increased 1.9% to $361.35. U.S. dialysis operating income fell 15.4% to $406 million; patient care cost per treatment rose 5.8% to $252.61.
- Ancillary services revenue increased 1.5% to $265 million, but the segment’s operating loss widened to $32 million from $12 million, reflecting primarily greater integrated kidney care investment and weaker other ancillary and international results.
- Debt expense increased 10.4% to $74 million. The effective tax rate was 21.7%, compared with 22.6%.
Liquidity, debt and capital allocation
- At March 31, cash and cash equivalents were $328 million; restricted cash was $93 million. Current assets were $3.129 billion and current liabilities were $2.420 billion.
- Debt principal outstanding was $8.927 billion ($8.873 billion carrying value); long-term debt carrying value was $8.687 billion. The company had an undrawn $1.0 billion revolving credit facility and approximately $108 million of letters of credit under a separate facility.
- Approximately 52% of total debt had fixed interest rates. The overall weighted-average effective interest rate was 3.35% for the quarter and 3.52% at quarter-end; $756 million of Term Loan A principal remained exposed to LIBOR-based rate changes.
- Operating cash flow increased year over year, partly because working-capital movements were less adverse. Cash, cash equivalents and restricted cash fell by $134 million during the quarter. DaVita repurchased 2.104 million shares for $233 million and paid $65 million in distributions to noncontrolling interests.
- Management stated that operating cash flow, available credit and capital-market access should be sufficient for debt service and other obligations for at least the next 12 months.
Changes, outlook and risks
- Compared with Q1 2021, revenue was nearly flat but operating income and DaVita-attributable earnings declined materially. Management cited lower treatment volumes, higher wages and other fixed operating costs, medical supply costs and legal fees. Treatment volume pressure was attributed largely to COVID-19-related patient mortality; higher reimbursement per treatment partly offset the volume decline.
- Sequentially, versus Q4 2021, revenue fell 4.3% and operating income fell 13.1%. The quarter had two fewer treatment days, and treatments declined 4.6%; revenue per treatment was nearly unchanged. Patient care cost per treatment increased 1.8%.
- Management said COVID-19’s effects on patient mortality, revenue and non-acquired growth may persist, while labor-market constraints, wage inflation, supply-chain disruption and elevated clinical supply costs continue to pressure costs. It described cost-saving efforts but gave no assurance they will offset these pressures.
- Medicare sequestration was suspended through March 31, 2022; a 1% reduction was scheduled for April 1 through June 30, followed by a 2% reduction beginning July 1, 2022. Management said the suspension had significantly increased revenue.
- The filing provides no specific numerical earnings or revenue guidance. Risks highlighted include reimbursement and commercial-payor mix, labor availability and costs, regulation, COVID-19, supply availability, execution of integrated kidney care initiatives, debt and refinancing, and legal proceedings.
- Recorded accruals for legal and regulatory matters were described as immaterial, net of anticipated recoveries; potential losses beyond accrued amounts could not generally be estimated. The filing describes multiple ongoing government investigations and a putative employee antitrust class action. After quarter-end, on April 15, 2022, a jury acquitted DaVita and its former CEO on all counts in the federal antitrust criminal case; the court entered judgments of acquittal on April 20. The class action and other identified matters remained unresolved as described in the filing.
Investor verification priorities
- Track dialysis treatment volume, patient mortality, treatment days and commercial/Medicare Advantage mix against per-treatment revenue and patient care costs.
- Assess whether wage, contract-labor, inflation and supply costs persist, and whether management’s cost-saving initiatives deliver measurable offsets.
- Monitor operating cash conversion, accounts receivable and collections: receivables rose to $2.044 billion, and days sales outstanding increased to approximately 66 from 62.
- Review debt maturities, variable-rate exposure, interest expense and the company’s continued use of cash for share repurchases; consider the $1.391 billion of noncontrolling interests subject to put provisions.
- Follow reimbursement changes, the scheduled Medicare sequestration reductions, ongoing investigations and litigation, and performance of the loss-making integrated kidney care business.