DaVita Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019. DaVita’s continuing operations primarily comprise U.S. dialysis and related laboratory services and ancillary and international businesses. DaVita Medical Group (DMG) was classified as held for sale, with results presented as discontinued operations. Unless noted otherwise, amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Continuing-operations revenue | $2.743 billion | $2.849 billion | Down 3.7% |
| Operating income | $340.5 million | $410.7 million | Down 17.1% |
| Operating margin | 12.4% | 14.4% | Down 2.0 percentage points |
| Income from continuing operations | $159.2 million | $231.0 million | Down 31.1% |
| Net income attributable to DaVita | $149.3 million | $178.7 million | Down 16.4% |
| Diluted EPS, continuing operations | $0.72 | $1.05 | Down $0.33 |
| Diluted EPS, including discontinued operations | $0.90 | $0.98 | Down $0.08 |
| Cash from operating activities, consolidated | $141.3 million | $362.5 million | Down $221.2 million |
| Capital expenditures | $198.9 million | $232.4 million | Down $33.6 million |
Q1 2019 net income included $30.3 million from discontinued operations, compared with a $5.8 million loss in Q1 2018. Diluted EPS from discontinued operations was $0.18 in 2019 versus a $0.07 loss in 2018; continuing-operations EPS better reflects the change in ongoing results.
At March 31, 2019, cash and cash equivalents were $459.2 million, restricted cash was $102.2 million, and total debt principal was $10.512 billion. Debt expense was $131.5 million, versus $113.5 million a year earlier. Operating lease liabilities were $2.993 billion and finance lease liabilities were $276.6 million. The filing does not provide a single current-ratio or net-debt measure.
Material changes and operating trends
- Revenue fell $106 million year over year, principally because ancillary and strategic-initiative revenue declined about $110 million. Pharmacy distribution had ceased, the direct primary-care business had been sold, and DaVita Health Solutions revenue was lower. These declines were partly offset by growth in U.S. dialysis and international operations.
- U.S. dialysis and related lab revenue increased about 0.4% year over year to approximately $2.547 billion. Treatments rose to 7.297 million from 7.174 million, while average net revenue per treatment decreased to $348.37 from $353.05. Management cited a prior-year $24 million Medicare bad-debt revenue benefit, lower calcimimetic revenue, and offsetting Medicare-rate and acute-revenue increases.
- U.S. dialysis operating income was $417 million, down about $16 million year over year. Patient-care costs decreased roughly $2 per treatment, but lower revenue per treatment, one fewer treatment day, and higher labor and benefit costs weighed on results.
- Ancillary and strategic-initiative operations recorded a $57.6 million operating loss, including a $41.0 million Germany goodwill impairment. Adjusted for the impairment and other specified items, management reported a $17 million operating loss, versus $7 million in Q1 2018.
- Consolidated operating cash flow declined to $141 million, including $73 million from continuing operations versus $206 million a year earlier. Management attributed the continuing-operations decline mainly to four additional days of sales outstanding, payment of the 2018 401(k) match early in 2019, and other working-capital movements. Capital spending remained substantial at $199 million.
- Accounts receivable increased to $1.953 billion from $1.859 billion; days sales outstanding rose to 65 from 62, primarily due to billing and collection delays for certain payors.
Outlook, debt, risks and unusual items
- DMG sale and debt. The sale to Optum remained pending, subject to regulatory approval and other closing conditions; the agreement’s termination date was June 30, 2019. DaVita expected a near-term closing and planned to use a portion of proceeds to repay debt. It classified $2.373 billion of expected Term Loan B prepayments as current, contributing to $4.677 billion of current debt. On May 6, 2019, the company extended the Term Loan A, Term Loan A-2 and revolver maturities to December 24, 2019. Management stated that operating cash flow, credit availability, anticipated refinancing and potential DMG sale proceeds should cover obligations for the foreseeable future, including the next 12 months; this depends in part on the sale and financing assumptions.
- Impairment risk. The $41.0 million Germany kidney-care goodwill charge reflected changed discount rates, declining current and expected patient census, and higher expected costs, including wage increases anticipated from legislation. The reporting unit remained at risk of further impairment; the filing identifies further census deterioration, cost increases, reimbursement reductions, or weaker growth and cash-flow assumptions as potential triggers.
- Leverage and interest rates. Total debt principal was $10.512 billion, and $575 million was drawn on a $1 billion revolver. The overall weighted-average effective interest rate was 5.14%; about 46.3% of debt had fixed interest rates. Variable-rate debt exposes the company to rate changes. The company’s senior secured facilities and senior notes are guaranteed by substantial domestic subsidiaries, with the secured facilities backed by substantial assets.
- No quantified company-wide guidance. The filing discusses forward-looking expectations and risks but does not provide a clear numerical full-year earnings or cash-flow forecast. Management expects to continue pursuing ancillary services and strategic initiatives, while noting they may incur losses, impairment charges, or exit costs.
- Regulatory and reimbursement exposure. A substantial share of dialysis revenue depends on government programs, while commercial payors generate a disproportionate share of dialysis profits. Risks include Medicare and Medicaid rate changes, commercial rate pressure, restrictions on charitable premium assistance, labor-cost inflation, and evolving care models.
- Legal contingencies. Recorded accruals for legal and regulatory matters were described as immaterial, but potential losses beyond accruals could not generally be estimated. Government investigations and audits continued, including matters involving pharmacy practices, charitable assistance, laboratory testing, and other healthcare practices. A securities class-action motion to dismiss was denied in March 2019, and a derivative-action motion to dismiss was denied in April 2019; DaVita disputes the claims and intends to defend them. The filing warns that adverse outcomes could entail substantial penalties, business-practice changes, or exclusion from federal healthcare programs.
- Accounting and unusual items. DaVita adopted the new lease standard on January 1, 2019, recording $2.784 billion in operating right-of-use assets and $3.001 billion in operating lease liabilities, with no material earnings or cash-flow impact. Continuing-operations effective tax rate was 26.3%, compared with 23.4% a year earlier. The goodwill impairment generated an $8.9 million tax benefit and a net-income impact of $32.2 million.
Most important facts for investors to verify
- Whether and when the DMG sale closed, final proceeds and adjustments, and the resulting debt repayment, refinancing, liquidity and share-repurchase plans.
- Whether Germany’s patient census, wage and other operating costs, reimbursement, and valuation assumptions lead to further goodwill impairment.
- Whether operating cash flow improves as receivable collections and working capital normalize, and whether DSO remains elevated.
- Trends in commercial-payor mix and rates, government reimbursement, treatment volumes, and net revenue per treatment.
- Developments in government investigations and shareholder litigation, including any outcomes or liabilities beyond recorded accruals.
- Debt maturities, refinancing terms, revolver availability, interest-rate exposure, and the burden of lease obligations.