DaVita Inc. — Q2 2019 Form 10-Q
Period: Three and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise. DaVita’s core business is U.S. dialysis and related laboratory services, alongside ancillary and international operations.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $2,842.7 | $2,887.0 | $5,585.8 | $5,736.4 |
| Operating income | $461.9 | $438.2 | $802.4 | $848.9 |
| Operating margin | 16.2% | 15.2% | 14.4% | 14.8% |
| Continuing-operations net income attributable to DaVita | $194.2 | $199.6 | $314.5 | $390.6 |
| Net income attributable to DaVita, including discontinued operations | $273.6 | $267.3 | $422.8 | $446.0 |
| Diluted EPS, continuing operations / total | $1.16 / $1.64 | $1.15 / $1.53 | $1.89 / $2.54 | $2.19 / $2.51 |
- Q2 revenue fell 1.5% year over year, while operating income rose about 5%. First-half revenue declined 2.6% and operating income declined about 5.5%.
- U.S. dialysis segment revenue was $2.64 billion in Q2, up about 1.9% year over year; segment operating income was $499 million versus $449 million. Treatment growth and lower patient-care costs helped, while net revenue per treatment declined about $2 year over year.
- Ancillary and strategic-initiative revenue fell to $239 million in Q2 from $328 million a year earlier, primarily reflecting the pharmacy distribution shutdown and the prior sale of the direct primary care business. The segment recorded a $15 million operating loss.
- Operating cash flow was $751 million for the first half, versus $925 million a year earlier; continuing-operations operating cash flow was $647 million versus $812 million. Capital expenditures were $374 million versus $474 million. The company attributed weaker continuing cash flow chiefly to higher days sales outstanding and other working-capital uses.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $3.576 billion, or $3.682 billion including restricted cash of continuing operations. Total debt principal was $9.004 billion; debt expense was $264 million for the first half.
- Current debt was $3.591 billion at quarter-end, including amounts subsequently repaid from DMG sale proceeds. By July 31, Term Loans A and A-2 had been paid in full and Term Loan B had a $502 million remaining balance. The company also reported $550 million drawn on its $1.0 billion revolving credit line at June 30.
- Operating lease right-of-use assets were $2.791 billion and operating lease liabilities totaled $3.062 billion following adoption of the new lease standard. The filing states adoption did not materially affect earnings or cash flows.
- Management said operating cash flow, available credit and capital-market access were expected to be sufficient for debt service and other obligations for the foreseeable future, including the next 12 months.
Material changes, unusual items and outlook
- DaVita completed the sale of DaVita Medical Group (DMG) to Optum on June 19 for an aggregate purchase price of $4.340 billion. Preliminary net cash proceeds were $3.825 billion after cash and restricted cash sold. The company recorded a preliminary $23 million pretax sale loss; post-closing adjustments and indemnification obligations could change proceeds. DMG is reported as discontinued operations for all periods presented.
- First-half results included a $41 million goodwill impairment in Germany, reflecting discount-rate changes, lower patient census expectations and higher expected costs, including wage legislation. The company said Brazil and Germany remained at risk of further impairment under adverse assumptions.
- Q2 included $12 million of debt prepayment and amendment charges. These were associated with mandatory debt repayments and the extension of certain loan maturities.
- Management expects revenue per treatment and operating income from calcimimetics to decline beyond 2019 as CMS adjusts reimbursement closer to lower drug acquisition costs. No formal consolidated earnings or revenue guidance is provided in the filing.
- The company planned a new credit agreement with at least $5.25 billion in lender commitments, intended in part to refinance remaining facilities, redeem 5.75% notes due 2022 and fund a tender offer. A modified Dutch auction tender offer for up to $1.2 billion was launched in July, subject to financing conditions; completion was not assured. The board also authorized $2.0 billion in share repurchases.
- Key risks include Medicare and Medicaid reimbursement changes, pressure on commercial rates and the mix of commercially insured patients, labor and supply costs, and regulatory compliance. The filing describes ongoing government investigations and lawsuits, including False Claims Act matters and securities/derivative litigation; recorded legal accruals were described as immaterial, but potential outcomes and losses could not generally be estimated.
Important facts for investors to verify
- Final DMG sale proceeds, post-closing adjustments and any indemnification payments.
- Completion and terms of the proposed credit facility, subsequent debt repayments, and the tender offer and repurchase activity.
- Whether accounts-receivable collection delays and elevated days sales outstanding improve.
- Future Medicare and commercial reimbursement, including calcimimetic payment changes and new kidney-care payment models.
- Developments in the Germany and Brazil goodwill assessments and the disclosed government investigations and litigation.