DaVita Inc. — Q3 2022 Form 10-Q
Business context and reporting period. DaVita provides dialysis and related laboratory services, principally in the U.S., and operates integrated kidney care, other ancillary and international businesses. This unaudited filing covers the quarter and nine months ended September 30, 2022. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $2,949 | $2,938 | $8,693 | $8,675 |
| Operating income | $312 | $475 | $1,083 | $1,408 |
| Net income attributable to DaVita | $105 | $260 | $492 | $791 |
| Diluted EPS | $1.13 | $2.36 | $5.07 | $7.08 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,221 | $1,401 |
| Free cash flow (non-GAAP) | Not stated for quarter | Not stated for quarter | $742 | $843 |
- Revenue was nearly unchanged year over year in Q3 (+0.4%) and the first nine months (+0.2%). Q3 operating income fell 34%; nine-month operating income fell 23%. DaVita-attributable net income declined 59% in Q3 and 38% year to date.
- Operating margin was approximately 10.6% in Q3 versus 16.2% a year earlier; year-to-date margin was 12.5% versus 16.2%. Patient care costs rose to $2,086 in Q3 from $2,009, while G&A increased to $365 from $293.
- U.S. dialysis treatments declined 2.0% year to date. Normalized non-acquired treatment growth was negative 2.1% in Q3. Average patient service revenue per treatment increased 1.8% year to date, partly offsetting lower treatment volume and higher costs.
- At September 30, cash and cash equivalents were $368, restricted cash $95, and short-term investments $74. Long-term debt was $9,081 carrying value ($9,129 principal), including $214 current. The company had $725 available on its $1 billion revolving credit facility, with $275 drawn. Current assets were $3,202 and current liabilities $2,537.
- Accounts receivable was $2,089, or about 66 days of revenue outstanding, up from 62 days at year-end; management cited temporary billing holds and collection timing. Total liabilities were $14,889.
Material changes and management commentary
- Management attributed weaker treatment volumes to elevated patient mortality, missed treatments and reduced admissions associated with COVID-19, including Omicron and subvariant surges. It expects excess mortality effects to persist into 2023, while acknowledging substantial uncertainty.
- Labor costs, contract labor, training, supply costs, inflation and higher interest rates pressured results. Debt expense increased 20% year to date to $256; Q3 overall weighted average effective interest rate was 4.28%, versus 3.68% in Q2.
- Q3 U.S. dialysis center closure charges were approximately $40, including $7 patient care, $12 G&A and $21 depreciation and amortization. Year-to-date closure charges were $50. Management expects elevated closure activity over the next several quarters as it adjusts clinic capacity and utilization.
- U.S. dialysis G&A included advocacy costs of approximately $28 in Q3 and $51 year to date, related to union policy efforts, including California Proposition 29.
- Ancillary services revenue rose 3.9% year to date, but operating loss widened to $57 from $37, mainly reflecting higher integrated kidney care losses and investments. IKC revenue declined sequentially in Q3 due to lower shared savings and special-needs-plan revenue.
- Share repurchases were $788 for the first nine months, covering 8.095 million shares at an average $97.33 per share. Remaining authorization was approximately $1.596 billion as of October 27, 2022.
Outlook, risks and contingencies
- No specific consolidated earnings or revenue guidance is provided in the supplied filing text. Management said it expects liquidity sources to cover debt service and other obligations for the foreseeable future, including the next 12 months.
- Management cited continued risk from pandemic-related mortality and volume trends, staffing shortages and wage pressure, inflation, supply-chain disruptions, reimbursement and commercial-payor mix, regulatory changes, and execution of cost-saving and integrated-care initiatives.
- CMS’s proposed 2023 ESRD payment rule was estimated by CMS to increase average facility reimbursement by 3.1%; this was a proposal, not a final rate. Medicare sequestration returned to 2% beginning July 1, 2022.
- Several government investigations and regulatory matters remain ongoing, including inquiries involving physician relationships, insurance communications and historic business practices. The company said recorded legal and regulatory accruals were immaterial, but potential outcomes and losses in excess of accruals could not be estimated in some cases. A putative antitrust class action survived a motion to dismiss; DaVita and its former CEO were acquitted in a separate criminal antitrust case.
- A planned kidney-care medical-device venture with Medtronic is expected to close in 2023, subject to approvals and customary conditions. DaVita expects to pay about $75 and contribute assets valued at about $25, and each party expects to contribute about $200 in cash; additional consideration of up to $300 may be payable if milestones are achieved in 2024–2028.
Key facts investors should verify
- Whether patient mortality, missed treatments and admissions improve or continue to constrain treatment growth into 2023.
- Whether labor, supply and clinic-closure costs moderate, and whether announced cost-saving initiatives deliver expected benefits.
- Trends in commercial-payor mix, reimbursement per treatment, Medicare sequestration and final 2023 CMS payment policies.
- Debt balances, borrowing costs, refinancing needs and the effect of continued repurchases on liquidity and leverage.
- Developments in government investigations, the antitrust class action and other regulatory matters, including any changes to estimated exposure.
- Execution, funding and regulatory approval of the Medtronic venture, including potential milestone payments.