DaVita Inc. — Q3 2021 Form 10-Q
Business context and period. DaVita provides U.S. dialysis and related laboratory services, alongside ancillary services that include international operations and integrated care. This unaudited report covers the three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless stated otherwise.
Financial performance
Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $2,938m | $2,924m | $8,675m | $8,645m |
| Operating income | $475m | $438m | $1,408m | $1,313m |
| Net income attributable to DaVita | $260m | $159m | $791m | $600m |
| Diluted EPS attributable to DaVita | $2.36 | $1.28 | $7.08 | $4.80 |
| Net cash from operating activities | — | $1,401m | $1,494m | |
| Free cash flow (non-GAAP) | — | $843m | $977m |
- Q3 revenue rose 0.5% and operating income rose 8.4%; operating margin was approximately 16.2%, compared with 15.0% a year earlier. Nine-month revenue increased 0.3% and operating income 7.2%.
- Q3 diluted EPS increased 84%; nine-month diluted EPS increased 48%. The comparisons benefited from lower average diluted shares following repurchases, lower taxes, and the absence of 2020 debt-refinancing charges. Q3 2020 included $86m of debt prepayment, refinancing and redemption charges.
- U.S. dialysis revenue was $2,698m in Q3, nearly flat year over year. Treatments declined 2.5% year over year, while average patient service revenue per treatment increased 3.1% to $360.54. Nine-month treatments fell 2.5%; revenue per treatment rose 2.5% to $358.42.
- Q3 patient care cost per treatment was $242.09, up 4.1% year over year, primarily reflecting wage, benefit and supply cost increases. U.S. dialysis operating income rose 8.3% year over year to $510m.
- Ancillary services generated $262m of Q3 revenue and a $7m operating loss. Nine-month ancillary revenue was $785m, with a $37m operating loss.
Balance sheet, cash flow and liquidity
- Cash and cash equivalents were $1,046m at September 30, 2021, versus $325m at year-end 2020; restricted cash was $93m. The release of legal-settlement escrow contributed to the decrease in restricted cash.
- Long-term debt carrying value was $8,938m, including $167m current debt; principal outstanding was $8,997m, up from $8,164m at year-end. The company issued $1,000m of additional 4.625% senior notes due 2030 in February. Approximately 51% of debt had fixed interest rates; the overall weighted-average effective rate was 3.34% at quarter-end.
- DaVita had an undrawn $1,000m revolving credit facility and approximately $69m of letters of credit under a separate facility. Management stated that operating cash flow and other liquidity sources should cover debt service and obligations for at least the next 12 months.
- Nine-month operating cash flow declined 6.2% and free cash flow declined 13.7%. The company cited higher days sales outstanding, legal settlement payments and tax payments. Accounts receivable increased to $2,028m from $1,824m; DSO rose to 64 days from 59.
- DaVita repurchased 7.75m shares for $899m in the first nine months, at an average $116.06 per share. Approximately $891m remained under the repurchase authorization as of October 27, 2021.
Changes, outlook and risks
- Management said COVID-19 continued to pressure treatment volumes and patient census through elevated mortality; the Delta-related surge increased incremental mortality in Q3 versus Q2, though infections had declined after quarter-end. The company expects pandemic effects to continue weighing on revenue and non-acquired growth.
- Management reported elevated clinical labor and supply costs, staffing shortages, and potential additional costs from vaccination and workplace-safety requirements. Staffing disruption could impair operations or lead to center closures.
- Revenue per treatment benefited from Medicare rate changes and the temporary suspension of Medicare sequestration, which was extended through December 31, 2021. CMS proposed a 1.2% average increase in ESRD facility reimbursement for 2022; this was a proposal, not final guidance.
- No company-wide numerical earnings or revenue guidance is provided in the supplied filing text. Management said it had not experienced material COVID-related deterioration in liquidity and had returned or declined approximately $250m of CARES Act Provider Relief Fund support.
- Legal and regulatory matters include a federal antitrust indictment alleging employee non-solicitation agreements, related class-action litigation, and multiple government inquiries. A False Claims Act complaint concerning historic pharmaceutical relationships was unsealed in September 2021; DaVita disputes the allegations. Recorded accruals for legal and regulatory matters were described as immaterial, but the company said potential outcomes and losses could be material and are not reliably estimable in some cases.
- Other comparison factors include 2020 advocacy costs of approximately $66m in Q3 and $67m year to date, a $35m legal accrual in Q2 2020, a $16m loss on the Lifeline sale in 2020, and $10m of 2020 tax benefits related to the former DaVita Medical Group business. Nine-month 2021 results also reflect increased labor and supply costs and lower treatment volumes.
Important facts for investors to verify
- Whether treatment volumes, patient census and mortality trends recover, and how much of the continuing volume pressure is attributable to COVID-19.
- Whether commercial payor mix and reimbursement rates remain favorable, and the final 2022 Medicare ESRD payment rule.
- Whether labor shortages, wage inflation, supply costs and vaccination requirements affect margins, staffing or center operations.
- Whether DSO and collections improve, given the increase in receivables and the reported temporary billing holds and collection delays.
- Debt refinancing capacity, variable-rate exposure, liquidity needs and the pace of share repurchases relative to cash generation.
- Developments and potential financial or operational consequences of the disclosed legal, regulatory and antitrust matters; the filing does not provide a clear estimate of possible losses for certain proceedings.