DaVita Inc. — Q2 2020 Form 10-Q
Business and period: DaVita provides U.S. dialysis and related laboratory services, with ancillary and international operations. This unaudited report covers the quarter and six months ended June 30, 2020. The 2019 comparison includes DaVita Medical Group (DMG) as discontinued operations; DaVita sold DMG in June 2019.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $2.880 billion | $2.843 billion | $5.721 billion | $5.586 billion |
| Operating income | $410 million | $462 million | $875 million | $802 million |
| Net income attributable to DaVita | $202 million | $274 million | $441 million | $423 million |
| Continuing-operations diluted EPS attributable to DaVita | $1.62 | $1.16 | $3.44 | $1.89 |
| Cash from operating activities | Not separately stated for quarter | Not separately stated for quarter | $1.012 billion | $751 million |
- Q2 revenue rose 1.3% year over year; operating income declined 11.3%. Operating margin was approximately 14.2%, versus 16.3% in Q2 2019. Management reported adjusted operating income of $461 million, approximately flat with $462 million a year earlier; this is a non-GAAP measure.
- Q2 continuing-operations net income attributable to DaVita was $202 million versus $194 million in Q2 2019. The lower reported total net income primarily reflects the absence of DMG’s 2019 discontinued-operations earnings.
- For the first half, revenue increased 2.4% and operating income increased 9.1%. Continuing-operations net income attributable to DaVita was $431 million versus $314 million; reported totals also include $10 million of 2020 discontinued-operations tax benefit and $109 million of 2019 discontinued-operations income.
- U.S. dialysis revenue increased 1.4% in Q2 year over year. Average patient service revenue per treatment was $352.26, up 0.7%; treatments increased 0.7%. Normalized non-acquired treatment growth was 1.6%, down from 2.1% a year earlier.
- Six-month free cash flow from continuing operations, a company-defined non-GAAP measure, was $691 million versus $274 million. Capital expenditures were $292 million, down from $374 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $2.929 billion, restricted cash $107 million, and short-term investments $154 million. Current assets were $5.780 billion and current liabilities $4.275 billion.
- Long-term debt principal outstanding was $9.886 billion, including $1.907 billion classified as current; carrying value after discounts and financing costs was $9.801 billion. Operating lease liabilities totaled approximately $3.070 billion.
- DaVita reported an undrawn $1.0 billion revolving credit facility and approximately $57 million of letters of credit under a separate facility. Management said operating cash flow, credit availability and capital-markets access should fund scheduled debt service and other obligations for the foreseeable future, including the next 12 months.
- Cash, cash equivalents and restricted cash increased $1.827 billion during the first half. The company issued $1.750 billion of 4.625% senior notes due 2030 in June and, on July 15, used the proceeds and cash on hand to redeem $1.750 billion of 5.125% notes due 2024. The redemption will result in approximately $40 million of premium and financing-cost write-offs, plus advisory costs, in Q3.
- The company repurchased 4.05 million shares for $303 million in the first half, all in Q1; there were no Q2 repurchases. As of July 29, approximately $1.4 billion remained under the authorization.
Changes, outlook and notable items
- COVID-19 increased clinical labor, compensation and supply costs, while lowering treatment volumes and new patient admissions; the company said the pandemic’s ultimate financial impact could be material and could not be reliably estimated. It reported no material billing or collections problems and no material liquidity deterioration to date.
- DaVita returned approximately $250 million of CARES Act Provider Relief Fund payments in May, having elected not to retain them. The temporary suspension of the 2% Medicare sequestration from May through December 2020 increased Q2 revenue. CMS proposed a 1.6% increase in average ESRD facility reimbursement for 2021; this is a proposed regulatory estimate, not company guidance.
- Q2 included a $16 million loss on the May sale of vascular-access business RMS Lifeline and a $35 million corporate legal accrual. Corporate costs also reflected severance and compensation associated with a senior leadership transition. The company recognized no goodwill impairment in H1 2020; H1 2019 included a $41 million impairment in its Germany kidney care business.
- Key risks include changes in government reimbursement and healthcare regulation, pressure on higher-paying commercial insurance and patient payor mix, COVID-related mortality and volume effects, clinical staffing and supply costs, and ongoing legal and regulatory proceedings. Recorded accruals for legal and regulatory matters were described as immaterial, but outcomes and potential losses may be material and are often not estimable.
- Proceedings disclosed include government investigations relating to healthcare claims, laboratory testing, physician arrangements and compliance, as well as shareholder litigation. In July 2020, the company reached agreements in principle to resolve securities class and derivative actions, subject to required approvals; it expects the class settlement to be primarily insurance-funded and says the derivative settlement requires no financial contribution.
- DMG sale proceeds remain subject to purchase-price adjustments and indemnification obligations that could materially affect retained proceeds. Other commitments include purchase commitments of about $901 million and put provisions for noncontrolling interests valued at $1.242 billion; timing and ultimate cash requirements can vary.
Investor verification priorities
- Track COVID-19’s effect on patient volumes, mortality, staffing and supply costs, commercial insurance coverage, and collections.
- Verify payor mix, reimbursement changes—including the temporary sequestration suspension and final 2021 CMS rules—and trends in treatment growth and revenue per treatment.
- Review debt maturities, variable-rate exposure, revolving-credit availability and the costs and completed terms of the July 2020 refinancing.
- Monitor the outcomes and potential financial effects of government investigations, litigation, the DMG sale adjustments and indemnification, and noncontrolling-interest put obligations.
- Separate GAAP results from adjusted operating income and free cash flow, and account for the DMG discontinued-operations comparison when assessing year-over-year earnings.