DaVita Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; filed August 3, 2021. DaVita’s principal business is U.S. dialysis and related laboratory services, with ancillary and international operations. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $2,916.5 | $2,880.0 | $5,736.5 | $5,721.2 |
| Operating income | $490.5 | $409.9 | $933.1 | $875.3 |
| Net income attributable to DaVita | $293.8 | $201.6 | $531.2 | $441.2 |
| Diluted EPS | $2.64 | $1.62 | $4.72 | $3.52 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $834.0 | $1,011.5 |
| Free cash flow (non-GAAP) | Not presented quarterly | Not presented quarterly | $485 | $691 |
- Q2 revenue increased 1.3% year over year; operating income rose about 20%, and DaVita-attributable net income rose about 46%. Operating margin was approximately 16.8%, versus 14.2% in Q2 2020.
- For the first half, revenue increased 0.3%, operating income increased 6.6%, and attributable net income increased 20.4%. Operating margin was approximately 16.3%, versus 15.3%.
- Q2 U.S. dialysis revenue was $2.676 billion, roughly flat year over year. Treatments fell 2.1% year over year, while average patient service revenue per treatment rose 2.2% to $360.14. First-half treatments declined 2.5%.
- At June 30, cash and cash equivalents were $1.044 billion; restricted cash was $163 million. Long-term debt carrying value was $8.798 billion, with $184 million current; total debt principal outstanding was $9.046 billion. The company also had an undrawn $1 billion revolver and $69 million of letters of credit under a separate facility.
- Six-month capital expenditures were $294 million. Cash flow from operations declined 17.6% year over year, primarily from working-capital changes, including higher days sales outstanding. Free cash flow declined 29.8%.
- DaVita repurchased 5.019 million shares for $563 million in the first half, averaging $112.21 per share. The balance-sheet presentation shows $563 million of treasury stock at June 30.
Material changes versus comparable periods
- Profitability improved despite lower treatment volumes. Management attributed the gains principally to higher revenue per treatment, favorable government reimbursement and mix, and lower COVID-related costs and certain other expenses.
- U.S. dialysis operating income was $534 million in Q2, up from $523 million a year earlier; first-half operating income was approximately unchanged at $1.014 billion.
- Ancillary services revenue grew 6.5% in Q2, supported by international acquisition-related growth, but the segment reported an $18 million operating loss. U.S. ancillary revenue was lower, including due to fewer members in special-needs plans and the prior sale of Lifeline.
- Debt expense decreased year over year in the first half, reflecting lower borrowing costs and refinancing, partly offset by the February 2021 issuance of $1 billion of additional 4.625% notes due 2030. Debt principal increased from December 31, 2020.
- The effective tax rate fell to 18.8% in Q2 from 24.6%, and to 20.6% for the first half from 24.7%, primarily due to higher stock-compensation tax benefits and lower nondeductible advocacy expenses.
Outlook, commentary, and risks
- Management expects COVID-19 to continue affecting 2021 performance. It cited pandemic-related patient mortality and resulting census pressure, elevated PPE and labor costs, and uncertainty around future infection rates, variants, vaccines, and patient insurance mix. Management said the pandemic could materially affect results, cash flows, or liquidity, though it had not experienced material liquidity deterioration as of the report date.
- The 2% Medicare sequestration suspension was extended through December 31, 2021; management said the suspension significantly increases revenue while in effect. A July 2021 CMS proposed rule estimated a 1.2% average 2022 reimbursement increase for ESRD facilities; this was a proposal, not company guidance.
- The filing does not provide a specific company earnings or revenue forecast. Management stated that operating cash flow, available credit, and capital-market access should be sufficient to meet debt service and other obligations for the foreseeable future, including the next 12 months.
- Key risks include reimbursement and commercial-payor mix pressure, treatment-volume trends, labor availability and wage inflation, regulation and compliance, execution of value-based and integrated kidney care initiatives, and the company’s substantial indebtedness and share repurchases.
- Several government investigations and claims remained ongoing. The company reported immaterial recorded accruals for legal and regulatory matters but cautioned that outcomes and losses cannot reliably be predicted. On July 14, 2021, after quarter-end, a federal grand jury indicted DaVita and its former CEO over alleged agreements not to solicit senior employees; the company disputes the allegations. A related putative class action was filed July 16. Potential consequences could be material, but the filing does not provide a clear estimate of loss.
- Notable comparative items include a $16 million loss on the 2020 Lifeline sale and a $35 million 2020 legal accrual. In Q2 2021, DaVita recognized $8.3 million in unrealized investment gains on investments that became publicly traded.
Investor verification checklist
- Track U.S. patient census, COVID-related mortality, treatment growth, and revenue per treatment, including government versus commercial mix.
- Assess whether higher reimbursement and the Medicare sequestration suspension offset lower volumes, labor inflation, and elevated supply costs.
- Monitor operating cash conversion, receivables and days sales outstanding, capital spending, and free cash flow.
- Review debt growth, interest-rate exposure, the $1 billion revolver, and the pace of share repurchases relative to cash generation.
- Follow developments and potential financial or operational consequences of the antitrust indictment, other government inquiries, and payor or reimbursement proceedings.
- Evaluate the performance and investment returns of ancillary, international, and integrated-care operations.