DaVita Inc. 2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018; the filing also provides unaudited fourth-quarter results. DaVita’s continuing operations primarily comprise U.S. dialysis and related laboratory services, with ancillary services and international operations. DaVita Medical Group (DMG) was classified as held for sale and reported as discontinued operations in all periods presented.
At year-end, DaVita operated or managed 2,664 U.S. outpatient dialysis centers serving approximately 202,700 patients, and 241 international centers serving approximately 25,000 patients. U.S. dialysis represented about 90% of consolidated revenue.
Financial and operating performance
- Revenue: Consolidated revenue was $11.405 billion, up 4.9% from $10.877 billion in 2017. U.S. dialysis and lab revenue rose 10.4% to $10.336 billion; ancillary and strategic initiatives revenue declined 25.1% to $1.196 billion.
- Operating profit and margins: GAAP operating income fell 15.8% to $1.526 billion from $1.813 billion; operating margin was approximately 13.4%, versus 16.7%. Management’s adjusted operating income, a non-GAAP measure, was $1.513 billion versus $1.616 billion.
- Net income: Income from continuing operations was $790 million, including $624 million attributable to DaVita Inc. A $457 million after-tax discontinued-operations loss—principally related to DMG—left net income attributable to DaVita Inc. of $159 million, down from $664 million in 2017. Diluted EPS was $0.92, compared with $3.47.
- Dialysis operations: U.S. treatments increased 4.1% to 29.4 million. Average U.S. net revenue per treatment rose to $350.47 from $330.38, primarily reflecting calcimimetics reimbursement and Medicare bad-debt revenue. Patient-care cost per treatment increased to $247 from $224, putting pressure on margins. Government programs generated 69% of U.S. dialysis patient-service revenue; commercial payors generated 31%.
- Cash flow and investment: Operating cash flow was $1.772 billion, versus $1.913 billion in 2017; management reported $1.5 billion from continuing operations. Capital expenditures were $987 million and acquisitions used $183 million.
- Debt and liquidity: Debt principal outstanding was $10.154 billion; balance-sheet debt, net of discounts and financing costs, was $10.102 billion. Cash and cash equivalents were $323 million in continuing operations; DMG, classified as held for sale, had a separate $415 million cash balance. The company had $175 million drawn on its $1 billion revolving facility. Working capital was $3.533 billion, including held-for-sale balances.
- Shareholder returns: DaVita repurchased 16.8 million shares for $1.154 billion during 2018. No fourth-quarter repurchases were reported.
Fourth quarter: Revenue was $2.821 billion and operating income was $388 million. Income from continuing operations attributable to DaVita Inc. was $160 million, while the discontinued-operations loss was $310 million, resulting in a net loss attributable to DaVita Inc. of $150 million. The comparable 2017 quarter reported revenue of $2.781 billion, operating income of $150 million, and net income attributable to DaVita Inc. of $303 million.
Material changes versus 2017
- Revenue growth was led by U.S. dialysis volume and calcimimetics, which shifted to DaVita’s financial responsibility for Medicare patients in 2018 under a transitional Part B payment arrangement. Management expects the drug to enter the ESRD bundled payment system after the transition period.
- U.S. dialysis adjusted operating income declined to $1.682 billion from $1.768 billion. Higher labor and benefit costs, other center costs, and advocacy expenses more than offset volume and revenue gains. The 2017 comparison included a $530 million net gain from a VA settlement; 2018 included a $28 million gain on an ownership change.
- Ancillary and strategic initiatives continued to report an adjusted operating loss, $78 million versus $107 million. Pharmacy revenue and costs declined as DaVita restructured its pharmacy business and transferred customer-service and fulfillment functions to third parties.
- DMG’s 2018 discontinued-operations loss increased from $245 million to $457 million. DaVita recorded $317 million in disposal-group valuation adjustments, $42 million in goodwill impairment, and related tax expense. The DMG sale price was amended from $4.900 billion to $4.340 billion.
- Comparability is affected by adoption of ASC Topic 606 in 2018: prior-period results were not restated, and the accounting changed presentation of revenue and uncollectible accounts. Management also cited a $36 million 2018 benefit from a revenue-recognition policy election related to Medicare bad debt.
Outlook, risks, contingencies, and unusual items
Management expected 2019 dialysis treatment volume to increase and U.S. revenue per treatment to rise slightly. The expected 1.2% Medicare ESRD rate increase was partly offset by anticipated commercial rate pressure, including a shift of out-of-network patients to in-network arrangements. Management expected inflation and tight clinical labor markets to raise costs, continued advocacy spending, and further margin pressure; international expansion would require investment.
The DMG sale remained subject to regulatory approval and other closing conditions. The FTC had issued a second request for information, and the agreement allowed termination if the sale was not completed by June 30, 2019. DaVita said the sale proceeds were intended in part for debt repayment and share repurchases, but warned that delays or failure to close could adversely affect liquidity and results.
Key risks include dependence on commercial-payor economics for nearly all U.S. dialysis profits; Medicare, Medicaid, and commercial reimbursement changes; labor shortages and cost inflation; supplier and drug reimbursement risk; and extensive healthcare regulation. DaVita had approximately $1.845 billion of secured credit-facility debt scheduled to mature in June 2019 and said it planned to refinance it, with no assurance of acceptable financing. The company also faced government investigations and audits, including matters involving pharmaceutical relationships, charitable premium assistance, laboratory testing, and healthcare billing. It remained subject to a Corporate Integrity Agreement. Accrued legal and regulatory liabilities were described as immaterial, but the company said outcomes and potential losses could not always be estimated.
Other notable matters include a September 2018 $270 million settlement resolving DOJ/OIG Medicare Advantage coding and risk-adjustment matters, paid from acquisition escrow, and a $25.5 million settlement of Granuflo-related lawsuits; recovery of the remaining settlement cost from insurers and others was uncertain. DaVita reported effective internal control over financial reporting and received unqualified audit opinions on its financial statements and internal controls.
Most important facts for investors to verify
- Whether the DMG sale closed, its final proceeds and adjustments, and how proceeds were applied to debt and repurchases.
- Refinancing of the June 2019 secured debt maturity and subsequent debt, interest expense, and liquidity levels.
- Whether commercial-payor rates and patient mix sustain dialysis revenue per treatment as labor and treatment costs rise.
- The realized reimbursement and cost impact of calcimimetics, including its future treatment under the Medicare ESRD bundle.
- Developments in government investigations, the Corporate Integrity Agreement, and legal matters, including any material payments or business restrictions.
- The effect of ASC 606 and the Medicare bad-debt policy election on comparisons of reported revenue, receivables, and cash collection trends.