DaVita Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. DaVita primarily provides U.S. dialysis and related laboratory services, with integrated kidney care (IKC), other ancillary services, and international operations. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $3.000 billion | $2.927 billion | $5.873 billion | $5.744 billion |
| Operating income | $405 million | $433 million | $717 million | $771 million |
| Net income attributable to DaVita | $179 million | $225 million | $294 million | $387 million |
| Diluted EPS | $1.91 | $2.30 | $3.17 | $3.90 |
| Operating margin | 13.5% | 14.8% | 12.2% | 13.4% |
Q2 revenue increased 2.5% year over year, while operating income fell 6.3% and DaVita-attributable net income fell 20.5%. For the first half, revenue grew 2.2%, but operating income declined 7.0% and attributable net income declined 24.0%. Higher debt expense and operating costs weighed on earnings; Q2 also included $8 million of debt prepayment and refinancing charges. Q2 patient service revenue per U.S. dialysis treatment was $376.73, up 2.9% from Q1, while treatment volume rose 1.6% sequentially. First-half U.S. dialysis treatments declined 0.2% year over year.
- Cash flow: First-half cash from operations was $913 million, versus $510 million a year earlier. Capital expenditures were $272 million; company-defined free cash flow was $525 million versus $242 million.
- Liquidity: At June 30, cash and cash equivalents were $327 million, restricted cash was $95 million, and short-term investments were $12 million. Accounts receivable was $2.010 billion, down from $2.132 billion at year-end; days revenue outstanding declined to 62 from 68.
- Debt: Debt principal outstanding was $8.760 billion ($8.699 billion carrying value). DaVita refinanced its prior Term Loan A and revolving facility in April, establishing a $1.250 billion Term Loan A-1 and a $1.500 billion revolving facility; $285 million was drawn and $1.215 billion remained available. First-half debt expense rose to $204 million from $156 million.
- Capital and investments: No shares were repurchased in the first half; approximately $1.596 billion remained under the repurchase authorization as of August 3, subject to facility restrictions. The Mozarc Medical investment was recorded at approximately $360 million at June 30; DaVita may owe up to $300 million more if milestones are achieved.
Material changes and management commentary
- Management reported a second consecutive quarter of sequential treatment-volume improvement, attributed mainly to higher patient census and admissions, while the cumulative pandemic-related mortality impact continued to weigh on year-over-year volume and revenue.
- First-half U.S. dialysis operating income declined 6.5%. Higher compensation, center costs, supplies, professional fees, and clinic-closure charges offset higher revenue per treatment and lower pharmaceutical, advocacy, and contract labor costs. Adjusted operating income, a non-GAAP measure, was approximately flat at $887 million versus $890 million.
- DaVita incurred $43 million of U.S. dialysis center-closure charges in the first half, compared with $11 million a year earlier, and expects elevated closure activity over the next several quarters. It also recorded $22 million of severance and other costs related to efficiency initiatives.
- IKC continued to report operating losses: $77 million for the first half, versus $59 million a year earlier, reflecting ongoing support-function investment. Ancillary-services revenue increased 4.9% for the period.
- CMS’s proposed 2024 Medicare ESRD payment rule estimated a 1.6% average reimbursement increase for ESRD facilities; this is a proposed rule, not company guidance.
Outlook, risks, and contingencies
DaVita did not provide a specific earnings or revenue forecast in the supplied filing text. Management expects macroeconomic and marketplace conditions to continue affecting the business in 2023. It cited wage and labor pressures, inflation, supply-chain costs, staffing availability, treatment-volume and patient-census uncertainty, commercial-payor mix and reimbursement pressure, and the execution risks of cost-saving and IKC initiatives. Management stated that operating cash flow, available credit, and capital-market access should be sufficient to meet obligations, including over the next 12 months.
The company reported ongoing government investigations and litigation, including a Colorado federal investigation, California insurance-department and District of Columbia inquiries, and a putative employee antitrust class action. The company disputes the class-action allegations; it filed a motion to dismiss in July 2023. Recorded legal accruals, net of expected recoveries, were described as immaterial, but the company stated that outcomes and potential impacts cannot generally be predicted and could be material. The filing reported no material changes to previously disclosed risk factors. Interest-rate exposure remains relevant: approximately 92% of debt was fixed or economically fixed at quarter-end, while $690 million was variable-rate debt not subject to caps.
Most important facts for investors to verify
- Whether sequential treatment-volume gains persist and translate into year-over-year census and revenue growth.
- Whether reimbursement and payor mix improvements can offset wage, supply, and other operating-cost pressures.
- The trajectory of center closures, closure charges, and the expected benefits of cost-saving initiatives.
- Debt balances, refinancing terms, interest expense, covenant compliance, and remaining revolving-credit availability.
- Developments in government investigations and litigation, along with the potential cost and operational consequences.
- Final valuation and milestone obligations for Mozarc, and performance of DaVita’s IKC investments.