DaVita Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. DaVita provides kidney dialysis and related laboratory services; U.S. dialysis generated approximately 91% of consolidated revenue. Results exclude DaVita Medical Group (DMG), sold in June 2019 and reported as discontinued operations.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $11.551 billion | $11.388 billion | +1.4% |
| Operating income | $1.695 billion | $1.643 billion | +3.1% |
| Net income from continuing operations attributable to DaVita | $783 million | $707 million | +10.8% |
| Diluted EPS from continuing operations | $6.39 | $4.60 | +38.9% |
| Operating cash flow from continuing operations | $1.979 billion | $1.973 billion | +$6 million |
| Free cash flow from continuing operations (non-GAAP) | $1.188 billion | $1.127 billion | +5.4% |
- Adjusted operating income, a non-GAAP measure, was $1.746 billion, down 1.2%. U.S. dialysis operating income was $1.918 billion, down 0.4%; ancillary services reported a $76 million operating loss.
- Consolidated operating margin was approximately 14.7%, versus 14.4% in 2019. The filing does not present this as a headline margin.
- U.S. dialysis revenue increased 0.9% to $10.660 billion. Treatments rose 0.5% and average revenue per treatment rose 0.4% to $350.31. Normalized non-acquired treatment growth slowed to 1.0% from 2.2%.
- Debt expense fell to $304 million from $444 million; the weighted-average effective interest rate was 3.59%, versus 5.01%. Debt prepayment, refinancing and redemption charges were $89 million.
- Year-end cash and cash equivalents were $325 million, short-term investments $20 million, and working capital $673 million (versus $1.318 billion). Principal debt outstanding was $8.164 billion; $925 million was available on the $1 billion revolving facility.
- Accounts receivable was $1.824 billion, or 59 days of revenue, compared with 58 days a year earlier. The increase was attributed mainly to delayed COVID-related cohort claims and hurricane-affected claims.
Material changes and notable items
- COVID-19 contributed to higher patient mortality, fewer new admissions and treatment-volume pressure, alongside increased staffing, compensation, PPE and supply costs. The company said commercial mix was relatively flat year over year, but the eventual pandemic impact remained uncertain.
- Revenue benefited from higher average reimbursement, including the Medicare sequestration suspension through March 31, 2021. The suspension increased 2020 revenue; the filing does not quantify the full-year benefit.
- DaVita issued $1.75 billion of 4.625% notes due 2030 and $1.5 billion of 3.75% notes due 2031, using proceeds and cash to redeem higher-rate 5.125% and 5.0% notes. It also repriced its Term Loan B-1.
- The company repurchased 16.5 million shares for $1.447 billion in 2020, reducing year-end shares outstanding to 109.9 million from 125.8 million. No cash dividend is planned.
- International revenue rose 11.0%, including acquisition-related growth; the company operated 321 centers in ten countries. It acquired 66 international centers and eight U.S. centers, and sold its Lifeline vascular-access business, recording a $16 million loss.
- There were no goodwill impairment charges in 2020. The Germany kidney-care reporting unit remained at risk, with only 2.3% estimated fair-value headroom. The company recorded $125 million of goodwill impairment in 2019.
- Reported net income attributable to DaVita, including discontinued operations, was $774 million versus $811 million in 2019. The 2020 figure included a $10 million discontinued-operations loss; continuing-operations earnings improved.
Outlook, risks and contingencies
- Management gave no specific numeric earnings or revenue guidance in the provided filing text. For 2021, it expected continued COVID-related effects and costs, treatment-volume pressure, inflation in wages and other costs, and modest aggregate reimbursement growth, partly offset by the scheduled resumption of Medicare sequestration after March 31.
- Management expected lower advocacy costs in 2021 than in 2020 and continued investment in home dialysis, integrated kidney care and value-based care. Calcimimetics entered the Medicare bundled payment in January 2021; the ETC mandatory payment model also launched that month in selected clinics.
- Key business risks include dependence on government reimbursement and higher-paying commercial insurance, commercial rate negotiations, Medicare policy changes, labor and supply constraints, COVID-19, competition, regulatory compliance, cybersecurity, and substantial debt. The company is predominantly self-insured for certain liability and employee-health risks.
- Legal and regulatory matters include ongoing government investigations and qui tam litigation concerning, among other things, billing, laboratory testing, physician joint ventures and medical-director arrangements, charitable premium assistance, and former DMG practices. Recorded legal accruals, net of anticipated recoveries, were described as immaterial; outcomes and potential losses in excess of accruals were often not estimable.
- The company reported a $35 million net accrual for legal matters in 2020. It also agreed to a $47 million additional payment to Optum in finalizing the DMG sale purchase price and retains continuing indemnification obligations whose potential payments could be significant but are uncertain.
- Management said cash from operations, available credit and capital-market access should fund debt service and other obligations for the foreseeable future, including the next 12 months. It declined and returned approximately $250 million of Provider Relief Fund support.
Important facts for investors to verify
- How COVID-related mortality, admissions and treatment volumes develop, and whether added care, labor and supply costs persist.
- Changes in commercial-insurance patient mix, contracted rates and network access, alongside Medicare and Medicare Advantage reimbursement and sequestration policy.
- Debt service, variable-rate exposure, refinancing needs, covenant headroom and the company’s capacity to sustain substantial share repurchases.
- Developments in government investigations, litigation, DMG indemnities and other contingencies, including whether potential losses exceed recorded accruals.
- Performance of the Germany kidney-care unit relative to its narrow goodwill impairment cushion, and returns from international acquisitions and other ancillary businesses.