DaVita Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unless stated otherwise, financial amounts below are in millions of dollars. DaVita provides U.S. dialysis and related laboratory services, along with ancillary and international services. Its former DaVita Medical Group is reported as discontinued operations.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $2,820 | $2,841 | Down 0.7% |
| Operating income | $443 | $465 | Down 4.7%; operating margin approximately 15.7%, versus 16.4% |
| Income before tax | $377 | $369 | Up 2.0% |
| Net income attributable to DaVita | $237 | $240 | Down 0.9%; Q1 2020 included $10 of discontinued-operations income |
| Diluted EPS | $2.09 | $1.89 | Continuing-operations diluted EPS was $2.09 versus $1.81 |
| Operating cash flow | $154 | $360 | Down 57.2% |
| Free cash flow (company-defined, non-GAAP) | $(17) | $184 | Lower mainly due to operating cash flow decline |
Revenue and operations: U.S. dialysis revenue was $2,590, down 1.0% year over year. Treatments fell 3.0% to 7.287 million, while average patient service revenue per treatment rose 2.0% to $354.50. Management cited higher mortality, fewer treatment days, and winter-storm-related missed treatments as volume pressures; higher Medicare rates, suspended Medicare sequestration, and favorable payer mix supported revenue per treatment. Ancillary-services revenue was approximately $261, broadly flat, while its operating loss widened to $12 from $3. U.S. dialysis operating income was $480, down 2.4%.
Costs and margins: Consolidated patient care costs declined to $1,938 from $1,975, while general and administrative expense increased to $281 from $264 and depreciation and amortization rose to $166 from $155. At the U.S. dialysis segment, patient-care cost per treatment increased 0.6% year over year to $238.69, reflecting labor and COVID-related costs, partly offset by lower pharmaceutical, utility, benefit, and travel costs. Lower debt expense helped lift pretax income despite lower operating income.
Cash, debt, and liquidity
- Cash and cash equivalents were $884 at March 31, 2021, versus $325 at year-end; restricted cash was $177. Cash, cash equivalents, and restricted cash totaled $1,061.
- Operating cash flow fell to $154, principally due to working-capital movements, including a $224 increase in accounts receivable. Accounts receivable rose to $2,041 from $1,824; days sales outstanding increased to 66 from 59, partly reflecting temporary billing holds and calcimimetics reimbursement changes.
- Capital expenditures were $145. Investing activities used $124; financing activities provided $537, including the $1 billion senior-note add-on offering, partly offset by debt repayments and $316 of share repurchases.
- Total debt principal outstanding was $9,063, versus $8,164 at December 31, 2020. Long-term debt carrying value was $8,998. The overall weighted-average effective interest rate was 3.08% for the quarter; approximately 51% of debt was fixed-rate at quarter-end.
- DaVita reported an undrawn $1 billion revolving credit facility and stated that cash flows and available liquidity should cover debt service and other obligations for the foreseeable future, including the next 12 months. Management reported no material liquidity deterioration from COVID-19 as of the filing.
Material changes and capital allocation
- Compared with Q4 2020, revenue declined 2.9%, but operating income increased 16.0% to $443, principally reflecting lower COVID-related costs and higher revenue per treatment; Q1 had fewer treatment days and lower treatment volume.
- In February, DaVita issued $1 billion of additional 4.625% senior notes due 2030. Debt expense was $67, down from $89 in Q1 2020, largely reflecting lower borrowing costs and refinancing activity.
- DaVita repurchased 2.949 million shares for $322 at an average $109.28 per share. The board’s current authorization was $2 billion; $1.499 billion remained available as of April 28, 2021. Repurchases are subject to credit-agreement limitations.
- Q1 2021 included no discontinued-operations income; Q1 2020 included a $10 tax benefit related to the former DaVita Medical Group sale.
Outlook, risks, and contingencies
Management expects COVID-19 to continue affecting performance during 2021. It highlighted ongoing mortality and treatment-volume pressure, elevated medical-supply and labor costs, and uncertainty about patient insurance coverage and commercial payer mix. Management said COVID-19 case counts in its dialysis population had declined from the winter surge, but expected pandemic-related mortality changes could continue to weigh on revenue and non-acquired growth. No specific earnings or revenue guidance was provided.
The 2% Medicare sequestration suspension increased Q1 revenue; legislation enacted April 14, 2021 extended the suspension through December 31, 2021. Management also identified proposed California legislation on employee bonuses and proposed Oregon legislation that would cap private dialysis reimbursement as potential risks if enacted substantially as proposed. Other key risks include government and commercial reimbursement changes, regulation, competition, labor and supply costs, patient mix, and the ability to service or refinance debt.
The company is subject to multiple government investigations and legal proceedings, including inquiries involving prescription-drug relationships, dialysis and laboratory practices, physician arrangements, insurance-related matters, and Medicare Advantage diagnosis codes. Recorded legal accruals, net of expected recoveries, were described as immaterial; the company said some potential losses cannot be estimated. A securities class-action settlement received final court approval in April 2021, and a derivative-litigation settlement was approved in January 2021. DaVita said it was cooperating with government inquiries and disputes certain allegations.
Important facts for investors to verify
- Whether treatment volume, patient census, and mortality recover as pandemic effects ease, and how these trends affect revenue and non-acquired growth.
- Whether higher reimbursement per treatment—including the temporary sequestration benefit—offsets volume pressure, and how commercial payer mix and rates evolve.
- Whether accounts-receivable growth and elevated DSO reverse, restoring operating cash flow and free cash flow.
- Debt levels, interest-rate exposure, refinancing capacity, and the balance between debt service and continued share repurchases.
- Developments in government investigations, litigation, and proposed state legislation, including any financial, operational, or reimbursement impact.