DaVita Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; financial amounts below are in U.S. dollars. DaVita’s continuing operations primarily comprise U.S. dialysis and related lab services and ancillary and strategic businesses. DaVita Medical Group (DMG) was classified as held for sale and discontinued operations following the pending sale to Optum.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenues, continuing operations | $2.849 billion | $2.631 billion |
| Operating income | $410.7 million | $875.9 million |
| Net income from continuing operations | $231.0 million | $493.9 million |
| Net income attributable to DaVita | $178.7 million | $447.7 million |
| Diluted EPS | $0.98 | $2.29 |
| Operating cash flow, consolidated | $362.5 million | $865.2 million |
- Revenue increased 8.3% year over year. U.S. dialysis and related lab services revenue rose 11.8% to approximately $2.538 billion; ancillary and strategic initiatives revenue fell 10.1% to approximately $340 million.
- Q1 2018 operating margin was approximately 14.4%, versus 33.3% in Q1 2017. The comparison is heavily affected by the prior-year $527 million VA settlement gain (approximately $530 million including the company’s share of joint-venture income). Excluding specified unusual items, management’s non-GAAP adjusted operating income was $411 million in Q1 2018 versus $380 million in Q1 2017.
- Management reported continuing-operations operating cash flow of approximately $206 million in Q1 2018, compared with approximately $770 million in Q1 2017. The consolidated cash-flow statement includes discontinued operations; Q1 2018 DMG contributed $156 million of operating cash flow. Management attributed the continuing-operations decline mainly to the prior-year VA settlement receipt and timing of taxes and working capital.
- Capital expenditures were $232 million, including $114 million for new center development and relocations and $119 million for maintenance and IT. Investing activities used $200 million. Financing activities used $223 million, including $298 million of share repurchases and $45 million of distributions to noncontrolling interests.
Balance sheet, debt and liquidity
- At March 31, 2018, cash and cash equivalents were $358.9 million; restricted cash was $88.7 million, including approximately $78.3 million placed in trust for insurance and regulatory requirements. Continuing-operations cash, cash equivalents and restricted cash totaled $447.6 million.
- Total debt principal outstanding was $9.526 billion; balance-sheet debt, net of discounts and financing costs, was $9.464 billion. Debt expense was $113.5 million for the quarter. The overall weighted-average effective interest rate was 4.87% during the quarter and 4.98% at quarter-end; approximately 51% of total debt had fixed interest rates.
- The $1.0 billion revolving facility was undrawn at quarter-end, apart from approximately $14.4 million committed for letters of credit. DaVita stated it expected operating cash flows and available liquidity to be sufficient for scheduled debt service and other obligations for the foreseeable future, including the next 12 months.
- Accounts receivable increased to $1.831 billion from $1.715 billion; days sales outstanding rose to 59 from 57. Total liabilities were $13.126 billion. Noncontrolling interests subject to put provisions were $1.035 billion.
Changes, drivers and unusual items
- Effective January 1, 2018, DaVita adopted ASC Topic 606 using the cumulative-effect method for contracts not substantially completed at adoption. The new presentation changes revenue and uncollectible-account accounting; prior periods remain under the former standard and are not fully comparable. Q1 included $67.4 million of additional revenue relating to services provided in earlier years, including a $24 million benefit related to the adoption election.
- From January 1, 2018, Medicare Part B became responsible for payment for calcimimetics administered to Medicare dialysis patients, initially through a pass-through payment. This increased dialysis revenue and patient-care costs while reducing pharmacy-business volume and revenue. CMS indicated it intended to include calcimimetics in the ESRD bundle in approximately two years.
- Q1 2018 dialysis treatments totaled 7.174 million, up from 6.804 million in Q1 2017. Average net revenue per treatment was $353.05 versus $333.00; patient-care cost per treatment was approximately $248, up about $21 year over year, primarily reflecting calcimimetics and higher labor and benefit costs.
- Q1 2018 included no goodwill or investment impairment charges. Q1 2017 included $24 million of goodwill impairment, $15 million of other asset impairment, and the VA settlement gain. Q4 2017 included a $280 million impairment of the Asia Pacific joint-venture investment.
- DaVita repurchased 4.197 million shares for $298 million in Q1, at an average $71.09 per share. It repurchased a further 4.350 million shares for $276 million after quarter-end through May 2, 2018; approximately $545 million remained authorized for repurchases as of that date.
Outlook, risks and contingencies
- DaVita agreed to sell DMG to Optum for $4.9 billion in cash, subject to customary adjustments, regulatory approvals and closing conditions. The transaction was expected to close in 2018. The filing cautions that delay or failure to close could harm results and investor confidence; the company had incurred additional debt in anticipation of sale proceeds.
- Management gave no specific numerical earnings or revenue guidance in the supplied filing text. It said it expected sufficient liquidity for the foreseeable future and planned to continue evaluating strategic alternatives for certain portfolio assets.
- Major risks include reimbursement changes and commercial-payor rate or patient-mix pressure; regulation of charitable premium assistance; rising labor, supply and pharmaceutical costs; substantial debt and floating-rate exposure; and the uncertainty of the DMG sale.
- DaVita disclosed ongoing government investigations and subpoenas involving, among other matters, Medicare Advantage diagnosis coding and risk adjustment, pharmacy billing and manufacturer relationships, charitable patient assistance, and laboratory testing. The company said it was cooperating. It had settled a related DaVita Rx qui tam matter in December 2017 for $63.7 million, which had previously been accrued; the pharmaceutical-manufacturer investigation remained ongoing.
- The company also disclosed securities class-action and derivative litigation. Recorded accruals for legal and regulatory matters were described as immaterial, but DaVita said losses could be material and that it could not estimate possible losses or ranges in some matters.
- Goodwill at Kidney Care Germany, Portugal and Poland remained at risk of impairment if reimbursement, growth or valuation assumptions deteriorate. The filing also identifies potentially material put obligations, leases, purchase commitments and other contingencies.
Important facts for investors to verify
- Whether the Optum transaction closed on expected terms, and how proceeds were used to repay debt, fund repurchases or support other corporate purposes.
- How much of reported dialysis revenue growth reflects calcimimetics pass-through reimbursement, prior-period revenue adjustments and the new ASC 606 presentation, versus underlying treatment growth and pricing.
- Whether higher treatment costs, labor and benefits, and commercial-payor pressure offset revenue and productivity improvements.
- Updates and potential financial, operational or compliance consequences from government investigations, litigation and DaVita’s Corporate Integrity Agreement.
- Debt reduction, interest-rate exposure, cash generation after capital expenditures and repurchases, and potential cash requirements from put provisions and commitments.