DaVita Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. DaVita provides U.S. dialysis and related laboratory services, plus ancillary and international services. The June 2019 sale of DaVita Medical Group (DMG) means its results are reported as discontinued operations.
Financial performance
- Q3 revenue: $2.904 billion, up 2.0% year over year. U.S. dialysis revenue growth more than offset lower ancillary-services revenue, primarily following the cessation of pharmacy distribution operations.
- Q3 earnings: Operating income was $378 million, versus $289 million. This included $84 million of goodwill impairment charges. Management’s non-GAAP adjusted operating income was $462 million, versus $314 million. Net income attributable to DaVita was $143 million, compared with a $137 million loss; continuing-operations income attributable to DaVita was $150 million, versus $73 million. Diluted EPS was $0.95, versus a loss of $0.82.
- Nine-month results: Revenue was $8.490 billion, down 1.1%; operating income was $1.181 billion, up from $1.138 billion; and net income attributable to DaVita was $566 million, versus $309 million. Diluted EPS was $3.50, versus $1.77.
- Dialysis operations: U.S. dialysis treatments rose 4.4% year over year in Q3 to 7.67 million. Average net revenue per treatment was $349.41, compared with $348.62; patient-care costs were approximately $236 per treatment, about $10 lower year over year. U.S. dialysis operating income was $501 million, versus $390 million.
- Cash flow: Nine-month operating cash flow was $1.392 billion, including $1.295 billion from continuing operations. Capital expenditures were $547 million. Investing cash flow included $3.864 billion of proceeds from asset and business sales, largely related to DMG.
- Debt and liquidity: At September 30, cash and cash equivalents were $1.253 billion; long-term debt carrying value was $8.014 billion, with $121 million current. The company had a $1.0 billion undrawn revolving facility, subject to letters of credit. Management said cash flows and available liquidity should cover debt service and other obligations for the foreseeable future, including the next 12 months.
Material changes and significant transactions
- DMG was sold to Optum on June 19 for a stated purchase price of $4.340 billion. DaVita recorded a preliminary $23 million pretax loss on sale; final proceeds remain subject to post-closing adjustments and indemnification obligations.
- In August, DaVita refinanced its secured credit facilities with new term loans totaling $4.5 billion and a $1.0 billion revolver. It repaid prior debt and redeemed all $1.25 billion of its 5.75% senior notes due 2022, recording $33 million of debt prepayment, refinancing and redemption charges year to date.
- DaVita repurchased 32.7 million shares for $1.860 billion in the first nine months, including a tender offer. As of November 6, a new $2.0 billion repurchase authorization was available.
- Adoption of lease accounting added $2.781 billion of operating lease right-of-use assets and $3.056 billion of operating lease liabilities at September 30.
Outlook, commentary and risks
- Management attributed much of the year-over-year operating-income improvement to higher calcimimetics margins and lower advocacy costs. It cautioned that it does not expect the same level of calcimimetics operating income beyond 2019 as reimbursement adjusts to lower drug costs.
- Goodwill impairment charges totaled $125 million year to date, primarily in Germany. Management said the Germany kidney-care and other-health reporting units remained at risk of further impairment, citing patient census, wage costs, market conditions and outlook assumptions.
- Risks include government and commercial reimbursement changes, the proportion of patients with higher-paying commercial coverage, healthcare regulation and compliance, competition, labor costs, and the performance of international and ancillary businesses. The filing also describes ongoing government investigations and shareholder litigation; recorded legal and regulatory accruals were immaterial, but outcomes and potential losses were uncertain.
- The filing provides no clear formal earnings or revenue guidance. It discusses expected policy and reimbursement developments, including proposed kidney-care payment models, and notes uncertainty around DMG sale adjustments and indemnities.
Important facts for investors to verify
- Whether the DMG sale’s final proceeds, working-capital adjustments or indemnification claims differ materially from current estimates.
- Whether Germany operations improve or require additional goodwill impairments.
- How quickly calcimimetics reimbursement changes affect treatment revenue and margins after 2019.
- Developments in healthcare payment rules, commercial insurance coverage, charitable premium assistance and pending legal or government matters.
- Debt repayment capacity and the pace of further share repurchases, including limits under credit agreements and note indentures.