DaVita Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. DaVita primarily provides U.S. dialysis and related laboratory services, with ancillary and international operations. The DaVita Medical Group (DMG) sale closed in June 2019; its results are reported as discontinued operations.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $2.841 billion | $2.743 billion | +3.6% |
| Operating income | $465.4 million | $340.5 million | +36.4% |
| Operating margin | 16.4% | 12.4% | +4.0 percentage points |
| Net income attributable to DaVita | $239.6 million | $149.3 million | +60.5% |
| Diluted EPS | $1.89 | $0.90 | +110% |
| Operating cash flow | $360.4 million | $141.3 million | +$219.1 million |
| Company-defined free cash flow from continuing operations | $184 million | ($119) million | +$303 million |
- Continuing-operations net income attributable to DaVita was $229.6 million, versus $120.3 million a year earlier. Q1 2020 includes $10.0 million of DMG-sale-related tax benefits recognized under the CARES Act in discontinued operations.
- U.S. dialysis revenue increased 2.7% year over year. Treatments rose 3.0%; average patient service revenue per treatment declined slightly to $347.54 from $348.37. Patient care cost per treatment fell 3.6% to $237.35.
- Cash and cash equivalents were $1.382 billion at March 31, 2020; restricted cash was another $106.7 million. Current assets were $4.024 billion and current liabilities $2.221 billion.
- Long-term debt principal outstanding was $8.657 billion, including $500 million drawn on a $1.0 billion revolver; $8.588 billion was the balance-sheet carrying amount before the current portion. Debt principal increased from $8.181 billion at year-end 2019. About 41.8% of total debt had fixed interest rates.
Material changes and notable items
- Compared with Q1 2019, operating income improved partly because ancillary-services results were substantially better and the prior-year period included a $41.0 million goodwill impairment in the German kidney care business. No goodwill impairment was recorded in Q1 2020.
- Compared with Q4 2019, revenue declined 2.0% and operating income was roughly flat. U.S. dialysis treatments fell 2.2%, partly reflecting 1.8 fewer treatment days; lower calcimimetic margins and seasonal patient cost-sharing also affected revenue.
- DaVita repurchased 4.05 million shares for $303.1 million, averaging $74.81 per share. The share count was materially below the prior-year quarter, contributing to EPS growth; $1.4 billion remained under the repurchase authorization as of May 4, 2020.
- In February 2020, the company repriced its Term Loan B into Term Loan B-1 at LIBOR plus 1.75%, with a 2026 maturity, and recorded $2.9 million of refinancing charges. No additional proceeds were received.
- Ancillary services revenue grew 13.5% year over year to $261 million. The segment’s operating loss narrowed to $2.6 million from $57.6 million, including the prior-year impairment.
Outlook, risks and contingencies
- Management said dialysis operations continued as an essential service and reported no material billing or collection issues or material COVID-19-related deterioration in liquidity as of the filing. The ultimate pandemic impact could nevertheless be material and could not be reasonably estimated.
- COVID-19 risks include higher clinical staffing, wage, supply and infection-control costs; treatment-volume and new-patient declines; elevated patient mortality; and patients shifting from higher-paying commercial coverage to lower-paying government coverage or becoming uninsured.
- In April, the government distributed approximately $250 million to DaVita and joint venture partners through the CARES Act Provider Relief Fund. DaVita elected not to accept the available funds. The report also estimated that the temporary suspension of the 2% Medicare sequestration from May through December 2020 would increase revenue.
- Management believed operating cash flow, available credit and capital-market access would fund scheduled debt service and other obligations for the foreseeable future, including the next 12 months.
- Significant legal and regulatory matters include multiple federal healthcare investigations, a California Department of Insurance investigation, a securities class action and derivative litigation. Recorded legal and regulatory accruals were described as immaterial; outcomes and potential losses beyond accruals could not generally be estimated.
- Other exposures include $1.228 billion of noncontrolling interests subject to put provisions, substantial lease commitments, supplier purchase commitments, and possible DMG sale adjustments and indemnification obligations.
Important facts for investors to verify
- How COVID-19 affected treatment volumes, patient mix, staffing and supply costs in subsequent quarters, and whether commercial-insurance coverage weakened.
- Whether operating cash flow and collections remained strong, and how debt balances, revolver use, interest costs and liquidity changed after quarter-end.
- Whether share repurchases continued and how they affected cash, leverage and diluted share count.
- Whether DMG sale adjustments or indemnification claims changed retained proceeds, and whether CARES Act-related support or sequestration changes affected later results.
- Developments in the disclosed investigations and litigation, including any new estimates of potential losses or regulatory consequences.