DaVita Inc. — FY2019 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2019; it also provides unaudited quarterly results, including Q4 2019. DaVita’s continuing business is primarily U.S. dialysis and related laboratory services, with ancillary and international operations. At year-end, it served approximately 206,900 U.S. patients through 2,753 outpatient centers and approximately 28,700 patients through 259 centers in ten countries. DaVita completed the sale of DaVita Medical Group (DMG) to Optum on June 19, 2019; DMG is reported as discontinued operations.
Financial and operating performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $11.388 billion | $11.405 billion |
| Operating income | $1.643 billion | $1.526 billion |
| Operating margin | 14.4% | 13.4% |
| Continuing-operations net income | $915.8 million | $790.1 million |
| Net income attributable to DaVita | $811.0 million | $159.4 million |
| Diluted continuing-operations EPS attributable to DaVita | $4.60 | $3.62 |
| Operating cash flow | $2.072 billion | $1.772 billion |
FY2019 revenue was essentially flat overall, while U.S. dialysis revenue grew 2.2% to $10.563 billion. Total dialysis treatments increased 2.5% to 30.17 million; average net patient service revenue per treatment declined 0.4% to $349.02. U.S. dialysis operating income rose 12.6% to $1.925 billion. Reported operating income includes $124.9 million of goodwill impairment charges, principally in Germany.
FY2019 net income attributable to DaVita includes $105.5 million of income from discontinued operations, compared with a $457.0 million discontinued-operations loss in 2018. Continuing-operations net income attributable to DaVita was $706.8 million, versus $624.3 million. The year-over-year comparison therefore reflects both improved continuing results and the changed DMG discontinued-operations impact.
Q4 2019: Revenue was $2.899 billion, operating income was $462.6 million, continuing-operations net income attributable to DaVita was $242.2 million, and net income attributable to DaVita was $244.9 million.
Margins and costs. U.S. dialysis patient-care cost per treatment fell 3.3% to $239.27, principally due to lower calcimimetic and other pharmaceutical costs; labor, benefits, and other center costs partly offset the savings. U.S. dialysis general and administrative expense was 8.1% of revenue in both years. Consolidated debt expense was $443.8 million, down from $487.4 million.
Debt and liquidity. Year-end debt principal was $8.181 billion, with reported debt carrying value of $8.108 billion before current/long-term classification; long-term debt was $7.978 billion. Cash and cash equivalents were $1.102 billion, restricted cash was $106.3 million, and short-term investments were $11.6 million. The company had a $1.0 billion undrawn revolving facility, subject to approximately $13 million of letters of credit. Management said available cash flow and borrowing sources should fund scheduled debt service and other obligations for at least the next 12 months. Operating cash flow from continuing operations was $1.973 billion.
Investing cash flow included $3.825 billion of net DMG sale proceeds. Financing cash flow included $2.384 billion of share repurchases and net debt payments. DaVita repurchased 41.0 million shares for $2.402 billion in 2019, reducing year-end shares outstanding to approximately 125.8 million. Working capital was $1.318 billion, down from $3.533 billion; the comparison is affected by DMG’s 2018 held-for-sale classification and sale.
Material changes versus the prior year
- U.S. dialysis growth and improved operating results lifted consolidated operating income 7.7%; adjusted operating income, a non-GAAP measure, rose 16.9% to $1.768 billion.
- Ancillary-services revenue fell 18.7% to $972 million, largely following the pharmacy distribution wind-down and prior sale of the direct primary care business. Ancillary operating loss widened to $189 million, including Germany goodwill impairments.
- DaVita sold DMG for an aggregate purchase price of $4.34 billion before adjustments and recorded a preliminary pre-tax sale loss of $23.0 million. Final proceeds remain subject to post-closing adjustments and indemnification obligations.
- The company entered a new $5.5 billion senior secured credit agreement, repaid prior facilities and redeemed its 5.75% senior notes, recording $33.4 million of refinancing and redemption charges. In February 2020, it repriced Term Loan B at LIBOR plus 1.75%, versus 2.25% previously.
- Shares repurchased increased from 16.8 million in 2018 to 41.0 million in 2019. The company reported no history of cash dividends since 1994 and no current plan to pay them.
Outlook, risks, contingencies, and unusual items
Management provided no numerical 2020 earnings or revenue guidance. It expected broadly similar U.S. dialysis conditions, modest aggregate reimbursement growth, continued wage and other cost inflation, and continued home-dialysis investment. Management anticipated materially lower calcimimetic income in 2020 as Medicare reimbursement declined, and potentially significant costs to oppose a proposed California ballot initiative. It also cited slowing industry treatment growth and competitive pressure.
Major risks include Medicare and Medicaid reimbursement changes, commercial payor rate pressure and a decline in higher-paying commercially insured patients, restrictions on charitable premium assistance, labor shortages and rising costs, regulatory and billing compliance, legal proceedings, cybersecurity and data privacy, and the substantial debt burden. Medicare sequestration cuts are scheduled to continue through 2027. CMS’s proposed mandatory home-dialysis and transplant payment model and other kidney-care models could affect reimbursement and operations; the filing described important model details as unresolved.
Several investigations and lawsuits remained pending, including government inquiries concerning pharmacy claims, physician relationships, laboratory testing, and charitable premium assistance, as well as shareholder litigation. The company stated that recorded accruals for legal and regulatory matters were immaterial at year-end, but it could not reliably estimate possible losses in excess of accruals for certain matters. The five-year Corporate Integrity Agreement expired in October 2019, but OIG retained enforcement rights pending review and closeout of final reports.
Other items to note include $124.9 million of goodwill impairments, primarily in Germany, with a $98.3 million net-income impact after related tax effects; $36 million of additional Medicare bad-debt revenue recognized in 2018 under a revenue-accounting policy election; and estimated U.S. dialysis revenue subject to material collection and coverage estimates. The auditor identified U.S. dialysis revenue recognition, Germany goodwill impairment, and legal proceedings as critical audit matters. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much 2020 earnings and cash flow depend on commercial payor rates, commercial patient mix, and the transition of calcimimetics into the Medicare bundle.
- The ultimate DMG sale proceeds after working-capital and other post-closing adjustments, and any indemnification payments to Optum.
- Progress and potential financial exposure from pending legal, regulatory, and government matters, including CIA closeout.
- Whether Germany and Brazil reporting-unit performance could trigger further goodwill impairments.
- Debt maturities, variable-rate exposure, covenant headroom, and the company’s capacity to fund buybacks and other commitments while servicing debt.
- Whether the $1.180 billion of noncontrolling interests subject to put provisions, purchase commitments, and long-term lease obligations create material future cash requirements.