DaVita Inc. — Q1 2024 Form 10-Q
Business context and period: DaVita provides dialysis and related laboratory services, integrated kidney care, ancillary services, and international dialysis operations. This unaudited report covers the three months ended March 31, 2024; comparisons below are primarily with Q1 2023 unless noted. Dollar amounts are in U.S. dollars.
Key financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $3.071 billion | $2.873 billion | +6.9% |
| Operating income | $483.8 million | $311.6 million | +55.2% |
| Net income | $306.0 million | $170.7 million | +79.3% |
| Net income attributable to DaVita | $239.6 million | $115.5 million | +107.4% |
| Diluted EPS | $2.65 | $1.25 | +112.0% |
| Operating cash flow | $(134.8) million | $462.6 million | Down $597.4 million |
| Free cash flow (non-GAAP) | $(327) million | $265 million | Down $592 million |
- Operating margin was approximately 15.8%, compared with 10.8% a year earlier. Earnings benefited from stronger U.S. dialysis results and a $35.1 million noncash gain on obtaining control of a previously nonconsolidated dialysis partnership.
- U.S. dialysis revenue rose 5.5% to $2.756 billion. Revenue per treatment increased 5.0% to $384.54; treatments increased 0.5% year over year. U.S. dialysis segment operating margin increased to $525.7 million from $361.1 million.
- Ancillary-services revenue grew 20.4% to $341.6 million, while the segment reported an operating loss of $11.5 million, improved from a $24.9 million loss. IKC served approximately 68,600 patients in risk-based arrangements and another 14,200 in other integrated-care arrangements.
- Debt expense was $99.4 million. Total debt principal was $9.179 billion ($9.128 billion carrying value), up from $8.446 billion principal at year-end. The quarterly weighted-average effective interest rate on all debt was 4.51%.
- At March 31, cash and cash equivalents were $345.1 million, with another $85.7 million restricted. The $1.5 billion revolving facility had $765 million drawn and $735 million available at quarter-end. The company reported that the revolver was subsequently paid off using cash on hand and Change Healthcare-related funding.
- Accounts receivable was $2.595 billion, versus $1.987 billion at December 31. U.S. dialysis receivables rose to $2.180 billion from $1.632 billion, and related days sales outstanding increased to 73 from 54.
Material changes and notable items
- Revenue and operating income improved year over year, but operating cash flow and free cash flow turned negative, principally because the Change Healthcare outage delayed claims processing and collections.
- The outage also drove increased receivables and a $765 million revolver draw. DaVita received approximately $472 million under the temporary funding program by April 30. These amounts are subject to repayment within 45 business days after notice that claims and payment processing have been restored and affected payments are being processed. The company said receivables and DSO had begun to decline after quarter-end.
- DaVita repurchased 2.119 million shares for approximately $240 million in Q1 at an average price of $112.76. Approximately $1.073 billion remained authorized for repurchases as of May 2, subject to facility limitations.
- Q1 acquisitions included 9 U.S. and 67 international dialysis centers. Separately, an agreement to acquire dialysis operations in Chile, Ecuador, Colombia, and Brazil contemplated approximately $237 million in cash payments, subject to customary adjustments; only Chile had closed by quarter-end.
- U.S. dialysis center closure costs were approximately $14.6 million in Q1. Management expects elevated closure activity to continue during the current fiscal year. Adjusted operating income, a non-GAAP measure, was $463 million, up 31.5% year over year.
Outlook, risks, and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management expects collection delays and related DSO increases to continue improving over the following months, while noting that the ultimate effect of the Change Healthcare outage remains uncertain.
- Management cited ongoing wage and staffing pressures, inflation and supply-chain costs, patient census and mortality trends, commercial-payor mix and reimbursement pressure, and execution risks in cost-saving and integrated-kidney-care initiatives. Treatment volumes were relatively flat year over year; new-to-dialysis admissions had increased year over year for five consecutive quarters.
- DaVita believes cash flows and other liquidity sources will be sufficient for debt service and obligations over the next 12 months. It also planned a credit-agreement amendment expected to extend approximately $1.640 billion of Term Loan B-1 debt to 2031, subject to definitive documentation.
- Material legal and regulatory matters include a Colorado federal healthcare investigation for which DaVita reserved $40 million, a pending relator False Claims Act case, and other investigations and proceedings. Recorded accruals for legal and regulatory matters overall were described as immaterial; the company cautioned that some potential losses cannot be estimated and outcomes could materially affect results.
- In April 2024, the FTC issued two civil investigative demands concerning physician restrictive covenants. DaVita is cooperating. The company also discussed the FTC’s final rule generally restricting non-compete clauses, its legal challenges, and potential adverse business effects if implemented.
- The company had no indication that its own systems were infiltrated in the Change Healthcare incident, but said it had not been informed whether its or its patients’ protected or personally identifiable information may have been affected. Its investigation and data forensics remained ongoing.
Important facts for investors to verify
- Whether post-quarter claims collections continue to reduce receivables and DSO, and the timing and repayment terms of Change Healthcare-related funding.
- Whether the noncash ownership-change gain and other unusual items materially affect comparisons with recurring operating performance.
- Debt levels, variable-rate exposure, revolver status, and completion and terms of the proposed Term Loan B-1 extension.
- Progress and final costs for announced international acquisitions, clinic closures, and share repurchases, including the terms of the Berkshire Hathaway share repurchase agreement listed as an exhibit.
- Developments in government investigations, litigation, the FTC rule and related challenges, and any possible patient-data impact from the Change Healthcare incident.