DaVita Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
DaVita provides U.S. dialysis and related laboratory services, integrated kidney care and other ancillary services, and international kidney care. This unaudited report covers the quarter and six months ended June 30, 2022. The filing’s financial statements compare Q2 and first-half results with 2021; management’s Q2 discussion primarily compares Q2 with Q1.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $2.927B | $2.917B | $5.744B | $5.737B |
| Operating income | $432.7M | $490.5M | $771.0M | $933.1M |
| Net income attributable to DaVita | $224.8M | $293.8M | $386.9M | $531.2M |
| Diluted EPS | $2.30 | $2.64 | $3.90 | $4.72 |
| Operating cash flow | Not separately stated | Not separately stated | $510.3M | $834.0M |
| Free cash flow (company-defined, non-GAAP) | Not separately stated | Not separately stated | $242M | $485M |
Q2 operating margin was approximately 14.8%, versus 16.8% a year earlier; first-half margin was approximately 13.4%, versus 16.3%. These percentages are calculated from reported revenue and operating income. Q2 U.S. dialysis patient service revenue per treatment was $365.54, up 1.2% from Q1; first-half average was $363.47, up 1.7% year over year.
At June 30, cash and cash equivalents were $262.6M, restricted cash was $93.1M, and short-term investments were $100.5M. Total debt carrying value was $9.262B ($9.313B principal); operating lease liabilities totaled about $3.005B. The $1.0B revolving facility had $425M drawn and $575M available. First-half capital expenditures were $265.5M.
Material changes versus comparable periods
- Revenue was nearly flat year over year for both Q2 (+0.4%) and the first half (+0.1%), but operating income fell 11.8% in Q2 and 17.4% for the first half; DaVita-attributable net income declined about 23% and 27%, respectively.
- First-half U.S. dialysis treatments declined 2.2% year over year, which management attributed primarily to elevated patient mortality, believed largely related to COVID-19. Revenue per treatment rose, partly offsetting lower volume.
- First-half patient care costs rose 2.8%; patient care cost per treatment increased 5.1% to $249.85. Management cited wage increases and higher center operating costs. Q2 included approximately $23M in advocacy costs related to union policy efforts, including a California ballot initiative.
- First-half operating cash flow fell 38.8% and free cash flow fell 50.1%, reflecting lower operating results, tax-payment timing, and receivables/collection dynamics. Accounts receivable increased to $2.094B from $1.958B; days revenue outstanding rose to 66 from 62, primarily due to temporary billing holds and collection timing.
- Debt expense increased to $156.4M in the first half from $140.3M, as effective interest rates and credit-facility borrowings rose. The company repurchased $603M of stock in the first half, versus $563M a year earlier.
Outlook, risks, contingencies, and unusual items
- Management provided no specific company earnings or revenue guidance in the supplied filing text. CMS’s June proposed 2023 ESRD payment rule was estimated by CMS to increase average facility reimbursement by 3.1%; this was a proposal, not finalized company guidance.
- Management cited ongoing COVID-19 effects, excess patient mortality, missed treatments, staffing constraints, contract labor and incentive-pay costs, inflation, supply-chain challenges, and higher interest expense. It warned that staffing disruptions could affect center operations and that cost-saving initiatives may not offset pressures.
- The Supreme Court ruled in June 2022 that the employer health plan at issue in Marietta did not violate the Medicare Secondary Payer Act. DaVita said the ruling’s ultimate effect was uncertain and could encourage plan designs that reduce ESRD commercial coverage or reimbursement.
- Several government inquiries remain ongoing, including investigations involving pharmaceutical relationships, healthcare practices, physician arrangements and Medicare Advantage diagnosis codes. Recorded legal/regulatory accruals were described as immaterial, but losses beyond accrued amounts could not be estimated in some matters. The company was acquitted in April 2022 in the federal antitrust criminal case; a related putative class action remains pending.
- DaVita agreed with Medtronic to form an independent kidney-care medical device company, expected to close in 2023 subject to approvals. At closing, DaVita expects to pay Medtronic about $75M, contribute non-cash assets valued at about $25M, and invest about $200M in cash; up to $300M of additional consideration may be due if milestones are achieved in 2024–2028.
- Management stated that operating cash flow, available credit and capital-market access should fund scheduled debt service and other obligations for the foreseeable future, including the next 12 months. About 50% of total debt had fixed interest rates at quarter-end; remaining floating-rate exposure and rising rates are risks.
Most important facts for investors to verify
- Whether treatment volumes and patient mortality stabilize, and how that affects revenue growth and dialysis-center utilization.
- Whether wage, contract labor, supply and inflation costs moderate, and whether planned savings initiatives deliver results.
- Commercial and Medicare Advantage patient mix, commercial reimbursement trends, and the consequences of the Marietta ruling for coverage and rates.
- Receivables, billing holds, collections, operating cash flow, and free cash flow recovery.
- Debt balances, interest-rate exposure, revolver usage, and the scale and timing of stock repurchases relative to liquidity needs.
- Developments in the disclosed government investigations and class action, and the closing conditions, funding obligations, and milestone terms of the Medtronic transaction.