Business context and reporting period
DaVita Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Its principal business is U.S. dialysis and related laboratory services; ancillary services include international dialysis and other kidney-care offerings. DaVita Medical Group was sold in June 2019 and is reported as discontinued operations.
Financial performance
Amounts below are in millions of dollars unless stated otherwise. Comparisons are with the corresponding 2019 period unless noted.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2,924.1 | $2,904.1 | $8,645.3 | $8,489.9 |
| Operating income | $437.7 | $378.3 | $1,313.0 | $1,180.7 |
| Net income attributable to DaVita | $158.7 | $143.3 | $599.9 | $566.1 |
| Diluted EPS | $1.28 | $0.95 | $4.80 | $3.50 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1,494.2 | $1,391.8 |
| Free cash flow from continuing operations (company-defined non-GAAP) | Not provided | Not provided | $977 | $711 |
- Q3 revenue rose 0.7% year over year; operating income increased 15.9%, while net income attributable to DaVita rose 10.8%. Nine-month revenue increased 1.8%, operating income 11.2%, and attributable net income 6.0%.
- Operating margin was approximately 15.0% in Q3 2020 versus 13.0% in Q3 2019, and 15.2% versus 13.9% for the nine-month periods. Attributable net margin was approximately 5.4% versus 4.9% in Q3 and 6.9% versus 6.7% year to date.
- U.S. dialysis generated $2,694 million of Q3 revenue and $471 million of operating income. Q3 treatments were 7.66 million, down 0.2% year over year; average patient-service revenue per treatment was $349.63, up 0.1%. Nine-month treatments increased 1.1% and revenue per treatment increased 0.2%.
- Cash and cash equivalents were $710.5 million at September 30, down from $1,102.4 million at year-end; restricted cash was $106.8 million. Total current assets were $3,429.7 million and current liabilities $2,499.2 million.
- Long-term debt principal outstanding was $8,111.3 million; balance-sheet debt net of discounts and financing costs was $8,030.3 million. DaVita had an undrawn $1.0 billion revolving credit facility. Approximately 45% of total debt had fixed interest rates.
Material changes and notable items
- Q3 GAAP operating income increased versus 2019, when the company recorded $83.9 million of goodwill impairment in the quarter. Company-defined adjusted operating income was $438 million in Q3 2020 versus $462 million in Q3 2019, reflecting weaker U.S. dialysis results and other costs; the filing cautions that adjusted measures are non-GAAP.
- U.S. dialysis operating income fell 6.0% year over year in Q3. Management cited fewer treatments, lower calcimimetic margins, higher advocacy and COVID-related costs, labor costs, and charitable-foundation contributions. The nine-month U.S. dialysis operating income increased 4.8%.
- Q3 U.S. dialysis general and administrative expense included approximately $66 million of advocacy costs, principally opposing union policy efforts, including a California ballot initiative. Nine-month advocacy costs were approximately $67 million.
- Debt expense declined to $73.7 million in Q3 from $88.6 million a year earlier, and to $243.6 million for the nine-month period from $351.8 million. However, Q3 included $86.1 million of debt prepayment, refinancing and redemption charges; nine-month charges were $89.0 million.
- DaVita issued $1.75 billion of 4.625% notes due 2030 and $1.50 billion of 3.75% notes due 2031, using proceeds and cash to redeem $3.25 billion of notes due 2024 and 2025. The company also refinanced and repriced its Term Loan B.
- Share repurchases totaled $1,028.6 million for the first nine months, including a $704.2 million Q3 tender offer. After quarter-end, the company repurchased another $160.8 million of shares through October 28; approximately $515.9 million remained under its authorization as of that date.
- Operating cash flow improved year over year, while investing cash flow was a $487.3 million use, versus $3,134.0 million provided in 2019, which included proceeds from the Medical Group sale. Financing activities used $1,381.7 million, including buybacks and debt payments.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management stated that operating cash flow, available credit and capital-market access should be sufficient to fund debt service and other obligations for the foreseeable future, including the next 12 months.
- Management described dialysis as essential care and said operations continued through the COVID-19 pandemic. It reported no material deterioration in liquidity to the filing date, but could not estimate the pandemic’s ultimate impact. Risks include higher staffing, personal protective equipment and supply costs; treatment-volume and new-admission declines; mortality impacts; and a possible shift from higher-paying commercial coverage to government coverage or uninsured status.
- The company returned approximately $250 million of CARES Act Provider Relief Fund payments in May 2020. Management noted that the temporary suspension of the 2% Medicare sequestration through December 31, 2020 increased revenue and was expected to continue doing so while in effect.
- Key regulatory and reimbursement uncertainties include Medicare and Medicare Advantage policy, the ESRD Treatment Choices model, commercial-payor rates, charitable premium assistance restrictions, and California Proposition 23. DaVita warned that changes could reduce commercial coverage or reimbursement, raise operating costs, or require clinic closures or consolidation.
- Government investigations and litigation remain important uncertainties, including inquiries involving physician arrangements, laboratory testing, charitable premium assistance and other alleged healthcare or claims practices. Recorded accruals for legal and regulatory matters were described as immaterial, but the company said outcomes could result in material penalties, payments, operational changes or other adverse effects.
- The company’s sale of RMS Lifeline in May 2020 resulted in a $16.3 million loss. Medical Group sale proceeds remain subject to post-closing adjustments and indemnification obligations, which could affect proceeds retained.
- Controls and procedures were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19 continues to affect treatment volume, patient mortality, staffing and supply costs, and the commercial-insurance mix.
- How much of reported earnings improvement reflects underlying operations versus prior-year impairment charges, refinancing effects, and share-count reduction.
- The company’s capacity to service approximately $8.1 billion of debt principal, and the effects of variable rates, refinancing and future maturities.
- Whether the large Q3 advocacy expense is recurring, and the eventual outcome and cost of related state policy and ballot initiatives.
- Developments in pending government investigations, litigation settlements, the Medical Group sale adjustments, and other contingencies.
- The timing and financial impact of Medicare policy changes, the ESRD Treatment Choices model, and changes to commercial or Medicare Advantage reimbursement and coverage.