DaVita Inc. — Q1 2023 Form 10-Q
Business context and reporting period
DaVita provides U.S. dialysis and related laboratory services, along with integrated kidney care, other ancillary services and international operations. This unaudited filing covers the three months ended March 31, 2023; comparisons below are primarily with Q1 2022.
Financial results and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $2.873 billion | $2.818 billion | Up 2.0% |
| Operating income | $311.6 million | $338.3 million | Down 7.7% |
| Net income | $170.7 million | $205.7 million | Down 17.0% |
| Net income attributable to DaVita | $115.5 million | $162.1 million | Down 28.7% |
| Diluted earnings per share | $1.25 | $1.61 | Down 22.4% |
| Cash from operating activities | $462.6 million | $322.2 million | Up 43.6% |
| Free cash flow (non-GAAP) | $265 million | $147 million | Up 80.3% |
Dialysis patient service revenue was $2.760 billion; other revenue was $112.7 million. U.S. dialysis revenue increased 1.4% year over year, while ancillary-services revenue increased 7.2%. U.S. dialysis treatments rose 0.1%; average patient service revenue per treatment increased 1.3% to $366.14. Consolidated operating margin was approximately 10.8%, versus 12.0% in Q1 2022.
Operating cash flow benefited from improved collections and working-capital movements. Capital expenditures were $147.7 million. Cash, cash equivalents and restricted cash totaled $411.4 million at quarter-end. Accounts receivable was $2.058 billion, equivalent to 65 days sales outstanding, down from 68 days at year-end 2022.
Long-term debt principal outstanding was $8.701 billion ($8.660 billion carrying value), compared with $8.969 billion principal at December 31, 2022. Q1 debt expense increased to $100.8 million from $73.8 million, primarily due to higher effective interest rates. The company reported an undrawn $1.0 billion revolver at March 31 and approximately $151 million of letters of credit under a separate facility. Approximately 93% of total debt was fixed or economically fixed at quarter-end.
Material changes versus comparable periods
- Revenue grew modestly, but operating income and DaVita-attributable net income declined year over year. U.S. dialysis operating income was $361 million, down 11.1%; adjusted operating income, a non-GAAP measure, was $400 million, down 2.7%.
- Higher compensation and wage costs, severance, center closure costs, travel and IT expenses pressured U.S. dialysis results. Patient care costs per treatment increased 1.9% year over year to $257.34.
- Q1 included $22.2 million of U.S. dialysis center closure charges and $16.9 million of severance and related costs. Management said clinic closures are expected to remain elevated over the next several quarters.
- Operating cash flow rose substantially, supported by lower days sales outstanding and other working-capital changes. DaVita made no share repurchases in Q1, compared with $236 million used for repurchases in Q1 2022.
- Compared with Q4 2022, revenue was down 1.5%, while operating income increased 21.9%; the sequential treatment decline was attributed mainly to two fewer treatment days.
Outlook, commentary, risks and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management expects COVID-19-related patient mortality effects, labor and supply costs, inflation and broader economic conditions to continue affecting the business in 2023. It noted improved labor costs in Q1, primarily from reduced contract-labor use, but expects some elevated costs to persist. Cost-saving efforts include administrative efficiencies, clinic optimization and procurement initiatives; management cautioned that execution and expected savings are not assured.
Management stated that operating cash flow, available credit facilities and capital-market access should be sufficient for scheduled debt service and other obligations for at least the next 12 months. Risks include commercial reimbursement pressure, government payment changes, patient census and mortality trends, labor availability and costs, supply-chain disruption, execution of integrated kidney care initiatives, and the company’s substantial debt and refinancing needs.
DaVita disclosed ongoing government inquiries and legal matters, including False Claims Act and antitrust-related proceedings. Recorded legal and regulatory accruals were described as immaterial, but the company said outcomes and any potential losses cannot generally be predicted and could materially affect results. The DOJ closed its investigation concerning former DaVita Medical Group diagnosis coding in February 2023. The company was acquitted in the 2021 criminal antitrust case, while a related putative class action remains pending.
Subsequent events: DaVita’s formation of Mozarc Medical with Medtronic closed effective April 1, 2023. DaVita paid $44.7 million, contributed other assets, and each partner contributed $224.4 million in cash to launch the venture; up to $300 million of additional consideration may be due if specified milestones are achieved. April amendments transitioned certain debt pricing from LIBOR to SOFR and refinanced Term Loan A and the revolver, including a new revolver of up to $1.5 billion. The company also entered forward interest-rate caps after quarter-end.
Important facts for investors to verify
- Whether treatment volumes and patient census continue recovering, and how mortality trends affect admissions and non-acquired growth.
- Whether labor, supply and inflation costs moderate, and whether announced cost-saving initiatives offset those pressures.
- Commercial and government reimbursement trends, including Medicare Advantage mix and payment rates.
- Debt refinancing terms, interest-rate exposure and compliance with credit-facility covenants after the post-quarter amendments.
- Developments and potential financial exposure in the disclosed investigations, claims and litigation.
- Cash requirements and milestone obligations related to Mozarc Medical, and the timing of any future share repurchases; approximately $1.596 billion remained under the repurchase authorization as of May 8, 2023.