DaVita Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. Financial amounts below are in U.S. dollars; amounts are rounded to millions unless stated otherwise. Interim financial statements are unaudited.
Business context and reporting period
DaVita operates Kidney Care, including U.S. dialysis and related lab services, and DaVita Medical Group (DMG), an integrated healthcare business. The filing compares second-quarter 2017 with second-quarter 2016 and reports year-to-date results against the same 2016 period.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total net revenue | $3,877 | $3,718 | $7,575 | $7,299 |
| Operating income | $378 | $329 | $1,267 | $694 |
| Net income attributable to DaVita | $127 | $53 | $575 | $151 |
| Diluted EPS | $0.65 | $0.26 | $2.95 | $0.73 |
| Operating cash flow | $146 | $517 | $1,011 | $946 |
- Q2 operating margin was approximately 9.8%, compared with 8.9% a year earlier. Six-month margin was approximately 16.7%, versus 9.5%; the 2017 year-to-date result includes a large one-time settlement gain.
- Management’s non-GAAP adjusted operating income was $436 million for Q2, down from $475 million in Q2 2016; for the six months it was $828 million, down from $933 million. These measures exclude specified unusual items and are not GAAP results.
- At June 30, cash and cash equivalents were $712 million, short-term investments $211 million, and working capital approximately $1.25 billion. Total debt principal was $9.17 billion; balance-sheet debt, net of discounts and financing costs, was $9.09 billion. The company had $1.0 billion of undrawn revolving facilities, with approximately $94.6 million committed for letters of credit.
- Six-month capital expenditures were $399 million and acquisition spending was $620 million. Cash declined by $201 million from year-end 2016 to $712 million.
- DaVita repurchased 3.57 million shares for $232 million during the first half, at an average $64.81 per share; approximately $445 million remained authorized for repurchases at June 30.
Material changes versus comparable periods
- Q2 revenue rose 4.3% year over year. U.S. dialysis revenue grew on treatment-volume growth, including acquisitions, but average revenue per treatment fell about $6, partly reflecting a less favorable commercial-payor mix.
- DMG revenue increased 12.8% year over year. A significant driver was conversion of contracts from shared risk to global risk, which changed revenue and care-cost presentation from net to gross; growth therefore should not be read as purely volume-driven. DMG reported a Q2 operating loss of $13 million, including $51 million of goodwill impairment charges.
- Ancillary and strategic initiatives revenue declined 6.9% year over year, primarily due to lower pharmacy-services volume. The segment reported a Q2 operating loss of $48 million, including a $10 million vascular-access goodwill impairment.
- Reported six-month net income was substantially higher chiefly because of a $527 million net gain on settlement with the U.S. Department of Veterans Affairs for historical dialysis services. DaVita received $538 million in cash in Q1; the settlement is nonrecurring.
- Q2 goodwill impairment charges totaled $61 million, compared with $176 million in Q2 2016. Six-month charges were $85 million versus $253 million. The filing identifies DMG Florida and New Mexico and vascular access among the affected reporting units; vascular-access goodwill was fully impaired by June 30.
- Cash from operations for the first half increased to $1.01 billion from $946 million, but Q2 cash from operations fell to $146 million from $517 million. Management attributed the quarterly decline to lower collections, tax payments related to the VA settlement, and working-capital timing.
Outlook, management commentary, risks and unusual items
- Management said it expects sufficient liquidity and operating cash flow to fund debt service and other obligations for the foreseeable future, including the next 12 months. The filing provides no clear numeric earnings or revenue guidance.
- DaVita estimated 2018 Medicare Advantage rates applicable to DMG would be nearly flat versus 2017, below CMS’s approximately 0.45% industry-average increase. The company cited its exposure to counties with lower-than-average benchmark increases.
- Four DMG reporting units remained identified as at risk of goodwill impairment. Further reimbursement reductions, higher medical costs or utilization, or adverse valuation assumptions could lead to additional charges.
- Key business risks include pressure on commercial dialysis reimbursement and commercial patient mix, Medicare and Medicaid rate changes, healthcare-policy uncertainty, and DMG’s ability to manage medical costs under capitated arrangements. DaVita also cited competition, labor availability and costs, acquisition and international expansion risks, supplier dependence, variable interest rates and substantial indebtedness.
- The filing describes ongoing government inquiries involving Medicare Advantage diagnosis coding and risk adjustment, DaVita Rx prescription-drug billing, and charitable patient assistance, among other matters. It also reports shareholder litigation related to charitable premium assistance and patient insurance practices. The company disputes allegations in the described suits and says it is cooperating with government inquiries; outcomes and potential losses are uncertain. Recorded legal and regulatory accruals were approximately $62 million at June 30, net of anticipated third-party recoveries.
- The company early-adopted simplified goodwill impairment accounting in 2017. It expects to adopt the new lease standard in 2019 and stated that it will materially affect the balance sheet, though not expected to materially affect results of operations or liquidity.
Important facts for investors to verify
- How much of reported earnings growth reflects the one-time VA settlement, and how underlying operating trends compare using consistent adjustments.
- Whether dialysis treatment growth can offset declining revenue per treatment and commercial-payor mix pressure.
- DMG’s margins and medical-cost performance after global-risk contract conversions, alongside membership declines and Medicare Advantage reimbursement changes.
- Potential additional goodwill impairments, particularly at the at-risk DMG reporting units, and the operational outlook for vascular access and pharmacy services.
- Cash collection and working-capital trends, acquisition and capital-spending requirements, debt service, and the company’s ability to maintain liquidity while repurchasing shares.
- Developments in the government investigations and litigation, including possible financial, reimbursement, compliance, or operating consequences not covered by current accruals.