DaVita Inc. — Form 10-Q summary
Reporting period: Quarter ended September 30, 2018; comparisons include the three and nine months ended September 30, 2017. Amounts below are in millions of dollars unless stated otherwise. DaVita’s continuing business is primarily U.S. dialysis and related lab services. DaVita Medical Group (DMG) was classified as held for sale and discontinued operations while its proposed sale to Optum remained pending.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total continuing revenues | $2,847 | $2,765 | $8,584 | $8,096 |
| Operating income | $289 | $395 | $1,138 | $1,662 |
| Income from continuing operations attributable to DaVita | $73 | $153 | $464 | $745 |
| Net income (loss) attributable to DaVita, including discontinued operations | $(137) | $(214) | $309 | $360 |
| Diluted continuing-operations EPS | $0.44 | $0.80 | $2.66 | $3.85 |
Operating margin was approximately 10.2% in Q3 2018 versus 14.3% in Q3 2017, and 13.3% for the first nine months versus 20.5% a year earlier. Management’s non-GAAP adjusted operating income was $314 million for Q3 and $1,143 million for nine months, compared with $404 million and $1,185 million, respectively, in the comparable 2017 periods.
For the first nine months, operating cash flow was $1,382 million consolidated, including $1,174 million from continuing operations; the comparable continuing-operations amount in 2017 was $1,269 million. Capital expenditures were $706 million. Cash, cash equivalents and restricted cash of continuing operations totaled $540 million at September 30, 2018.
Debt principal outstanding was $10,278 million, up from $9,400 million at year-end 2017. The company had drawn $275 million on its $1.0 billion revolving facility; approximately $14 million was committed for letters of credit. Management said cash flow, available credit and other sources were expected to cover obligations for the foreseeable future, including the next 12 months. Approximately $1.645 billion of secured debt was due in June 2019, and refinancing was planned.
Material changes and unusual items
- Q3 revenue increased 3.0% year over year, while nine-month revenue increased 6.0%. U.S. dialysis revenue growth reflected calcimimetic drug administration and treatment-volume growth; ancillary-services revenue declined, particularly due to lower pharmacy volume and reimbursement changes.
- U.S. dialysis net revenue per treatment was $348.62 in Q3, versus $329.19 a year earlier. Patient-care cost per treatment was approximately $247, about $23 higher year over year. U.S. dialysis operating income fell to $390 million from $443 million in Q3 2017.
- Operating income comparisons were affected by the $530 million net gain from the VA settlement recognized in 2017. Q3 2018 also included pharmacy restructuring charges of $11 million, other asset impairment charges of $6 million, and a $6 million equity-investment loss related to the APAC joint venture.
- DaVita adopted ASC Topic 606 on January 1, 2018 using the cumulative-effect method. Revenue and bad-debt presentation changed, while prior periods were not fully recast; year-over-year comparisons therefore have a presentation-related comparability limitation. The filing reports $77 million of additional nine-month revenue tied to services from prior years, including a $36 million benefit from the transition election.
- Q3 discontinued-operations net loss was $212 million. It included a $98 million DMG held-for-sale valuation adjustment and $118 million of related tax expense. The DMG sale remained subject to regulatory approvals and other closing conditions.
- The company repurchased 16.8 million shares for $1.154 billion during the first nine months, at an average $68.48 per share. As of November 5, approximately $1.356 billion remained authorized for repurchases.
Outlook, management commentary and risks
- CMS’s November 2018 final rule set a 1.6% increase in the 2019 ESRD bundled payment rate relative to 2018. Management noted that calcimimetics moved to Medicare Part B reimbursement in 2018, with CMS indicating they could enter the ESRD bundle two years after the transition.
- DaVita was winding down its pharmacy distribution operation and transitioning customer-service and fulfillment functions to third parties. Management expected continued losses during the transition in Q4 2018 and said the plan’s net financial impact was not expected to be material; additional restructuring charges remained possible.
- Management cited higher advocacy spending, including opposition to proposed state initiatives, as a cost pressure. California Proposition 8 did not pass in the November 2018 election; similar measures or legislation could be proposed again.
- Key risks include dependence on higher-paying commercial insurance, government reimbursement and regulatory changes; ongoing federal investigations and litigation; labor and operating-cost pressures; variable-rate debt and refinancing requirements; and uncertainty around the timing, conditions and proceeds of the proposed DMG sale.
- The company settled the 2015 Medicare Advantage coding investigation with DOJ and HHS on September 28, 2018; the $270 million settlement was paid from acquisition escrow funds. Other government investigations remained ongoing. A jury verdict in three Granuflo-related cases was followed by a reported $25.5 million settlement, with recovery from insurers and indemnitors not assured.
Important facts for investors to verify
- Whether and when the DMG sale closed, its final proceeds and adjustments, and any resulting debt repayment or change in liquidity.
- Progress on refinancing the approximately $1.645 billion secured debt due in June 2019, and the company’s subsequent borrowing costs and leverage.
- Whether dialysis treatment economics, calcimimetic reimbursement and commercial-payor mix support recovery in operating margins.
- Actual pharmacy wind-down costs and any additional restructuring, impairment or exit charges.
- Developments in remaining government investigations, litigation, potential penalties and insurance or indemnification recoveries.
- For period comparisons, the effects of ASC 606 adoption and prior-period revenue estimates; 2017 included a significant one-time VA settlement gain.