DaVita Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY 2021. This is an annual 10-K, not a standalone fourth-quarter report. DaVita is a kidney-care provider whose U.S. dialysis business generated about 91% of consolidated revenue. At year-end, it operated 2,724 U.S. outpatient centers serving approximately 199,400 patients and 350 international centers in 11 countries.
Financial and operating results
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Consolidated revenue | $11.610 billion | $11.619 billion | Down 0.1% |
| Operating income | $1.339 billion | $1.797 billion | Down 25.5% |
| Operating margin | 11.5% | 15.5% | Down about 4.0 percentage points |
| Net income attributable to DaVita | $560 million | $978 million | Down 42.7% |
| Diluted EPS | $5.85 | $8.90 | Down 34.3% |
| Cash from operations | $1.565 billion | $1.931 billion | Down 19.0% |
| Free cash flow, company-defined | $817 million | $1.133 billion | Down 27.9% |
U.S. dialysis revenue was $10.600 billion, down 0.6%; ancillary-services revenue increased 5.2% to $1.101 billion. U.S. dialysis treatments declined 2.3% to 28.95 million, while average patient-service revenue per treatment rose 1.7% to $365.24. U.S. dialysis operating income fell 20.8% to $1.565 billion. The company’s adjusted operating income, a non-GAAP measure, declined 20.1% to $1.450 billion.
Profitability was pressured by lower treatment volumes, higher labor and other operating costs, advocacy spending, center-closure charges, increased depreciation and amortization, and higher interest expense. FY 2022 included approximately $86 million of U.S. dialysis center-closure charges and $51 million of advocacy costs. Debt expense rose 25.3% to $357 million; the weighted-average effective interest rate on all debt was 3.96%, versus 3.28% in 2021.
Balance sheet and liquidity
- Cash and cash equivalents were $244 million and short-term investments were $78 million at year-end.
- Long-term debt principal outstanding was approximately $8.969 billion; the balance-sheet carrying amount, net of discounts and financing costs and excluding current debt, was $8.693 billion. The company also reported $165 million drawn on its $1.0 billion revolving facility, leaving $835 million available.
- Accounts receivable increased to $2.132 billion from $1.958 billion; days sales outstanding rose to 68 from 62, mainly due to collection delays, temporary billing holds and a shift toward Medicare Advantage.
- Management said available liquidity and expected operating cash flow were sufficient for scheduled debt service and other obligations for at least the next 12 months. This is management’s assessment, not a guarantee.
Material changes and business developments
- Despite higher revenue per treatment, lower treatment volume and cost inflation drove a material decline in operating income, net income and cash generation.
- The company repurchased 8.095 million shares for approximately $788 million, at an average $97.33 per share; share count fell 7.1% year over year. About $1.596 billion remained under the authorization as of February 22, 2023. DaVita has not paid cash dividends since its 1994 IPO and reported no current plan to do so.
- The U.S. IKC business served 42,000 patients in risk-based arrangements and another 15,000 in other integrated-care arrangements. IKC revenue grew 8.3%, but its operating loss widened to $125 million, reflecting investment in support capabilities.
- The U.S. dialysis network had a net decrease of 91 centers, primarily reflecting closures and sold centers; international operations added 11 centers through acquisitions on a net basis.
Outlook, risks and contingencies
Management expected COVID-19 and macroeconomic conditions to continue affecting FY 2023, but did not provide quantified company-wide earnings or revenue guidance in the supplied filing text. It anticipated continued treatment-volume pressure from mortality, missed treatments, admissions, slower industry growth and competition. Revenue per treatment was expected to benefit from Medicare rate increases and Medicare Advantage enrollment, partly offset by a full year of Medicare sequestration. Management also expected continued wage and other cost pressure, partially offset by pharmaceutical savings and lower depreciation and amortization, and significantly lower advocacy costs than in 2022. Investment in home dialysis and integrated/value-based care initiatives was expected to continue.
- Payor mix and reimbursement: Government programs accounted for 67% of U.S. dialysis patient-service revenue, while commercial payors accounted for 33%. Management states that commercial rates are generally higher and generate nearly all profits. The Supreme Court’s 2022 Marietta decision upheld an employer plan’s uniform limited dialysis benefits under the Medicare Secondary Payer Act; potential effects on commercial coverage, rates and patient mix remain uncertain.
- Labor, inflation and operations: Higher clinical wage rates, turnover, contract labor, supply costs and staffing constraints could continue to pressure margins and service capacity. COVID-19-related mortality and missed treatments also affected volumes.
- Regulation and litigation: The business is exposed to changes in Medicare and Medicaid payment rules and extensive healthcare compliance requirements. Multiple government inquiries and legal matters remained ongoing. Recorded accruals for legal and regulatory matters were described as immaterial, but the company said some outcomes and potential losses could not be estimated. The DOJ closed its DMG diagnosis-coding investigation in February 2023; other inquiries continued.
- Debt and commitments: Variable-rate debt creates interest-rate exposure; the company estimated that a 100-basis-point increase would have reduced 2022 net income by about $21 million, net of tax and interest-rate caps. Contractual obligations also include debt, leases, supplier purchase commitments and potential partner put obligations.
- Other notable items: A planned Medtronic transaction to form an independent kidney-care medical-device company was expected to close in 2023, subject to approvals and other conditions. DaVita expected to pay approximately $75 million and contribute approximately $200 million in cash at closing, with potential additional payments of up to $300 million tied to milestones. Germany’s kidney-care reporting unit was identified as at risk of goodwill impairment under specified assumptions.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. KPMG identified U.S. dialysis patient-service revenue recognition and evaluation of legal proceedings and regulatory matters as critical audit matters. Revenue estimation is complex; management generally expected its U.S. dialysis revenue-estimation range to be within 1% of segment revenue.
Important facts for investors to verify
- Whether patient volumes stabilize and the extent to which mortality, missed treatments and new admissions affect treatment growth.
- Whether higher labor, supply and other costs are offset by reimbursement increases and cost-saving initiatives.
- Changes in commercial insurance mix, contracted rates and Medicare Advantage enrollment, including developments following the Marietta decision.
- Cash conversion, receivable aging and collection performance, alongside debt levels, interest costs, maturities and covenant capacity.
- Progress and funding requirements for the Medtronic transaction, IKC and home-dialysis initiatives, and any material developments in legal or regulatory matters.