QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2019
Commission File Number: 1-14106
DAVITA INC.
Delaware
51-0354549
(State of incorporation)
(I.R.S. Employer Identification No.)
2000 16th Street
Denver, CO 80202
Telephone number (720) 631-2100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading symbol(s):
Name of each exchange on which registered:
Common Stock, $0.001 par value
DVA
New York Stock Exchange
As of May 3, 2019, the number of shares of the Registrant’s common stock outstanding was approximately 166.4 million shares.
Note: Items 3 and 4 of Part II are omitted because they are not applicable.
i
DAVITA INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands, except per share data)
Three months ended March 31,
2019
2018
Dialysis and related lab patient service revenues
$
2,635,152
$
2,591,074
Provision for uncollectible accounts
(5,463
)
25,545
Net dialysis and related lab patient service revenues
2,629,689
2,616,619
Other revenues
113,423
232,825
Total revenues
2,743,112
2,849,444
Operating expenses and charges:
Patient care costs
1,964,935
2,035,585
General and administrative
250,813
266,529
Depreciation and amortization
148,528
142,799
Equity investment income
(2,708
)
(155
)
Provision for uncollectible accounts
—
(6,000
)
Goodwill impairment charges
41,037
—
Total operating expenses and charges
2,402,605
2,438,758
Operating income
340,507
410,686
Debt expense
(131,519
)
(113,516
)
Other income, net
6,940
4,582
Income from continuing operations before income taxes
215,928
301,752
Income tax expense
56,746
70,737
Net income from continuing operations
159,182
231,015
Net income (loss) from discontinued operations, net of tax
30,305
(5,786
)
Net income
189,487
225,229
Less: Net income attributable to noncontrolling interests
(40,198
)
(46,543
)
Net income attributable to DaVita Inc.
$
149,289
$
178,686
Earnings per share attributable to DaVita Inc.:
Basic net income from continuing operations per share
$
0.72
$
1.07
Basic net income per share
$
0.90
$
1.00
Diluted net income from continuing operations per share
$
0.72
$
1.05
Diluted net income per share
$
0.90
$
0.98
Weighted average shares for earnings per share:
Basic
166,387,958
178,957,865
Diluted
166,780,657
181,834,547
Amounts attributable to DaVita Inc.:
Net income from continuing operations
$
120,254
$
191,015
Net income (loss) from discontinued operations
29,035
(12,329
)
Net income attributable to DaVita Inc.
$
149,289
$
178,686
See notes to condensed consolidated financial statements.
1
DAVITA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
Three months ended March 31,
2019
2018
Net income
$
189,487
$
225,229
Other comprehensive income, net of tax:
Unrealized (losses) gains on interest rate cap agreements:
Unrealized (losses) gains
(580
)
1,050
Reclassifications of net realized losses into net income
1,606
1,537
Unrealized (losses) gains on foreign currency translation:
Foreign currency translation adjustments
(13,653
)
19,881
Other comprehensive (loss) income
(12,627
)
22,468
Total comprehensive income
176,860
247,697
Less: Comprehensive income attributable to noncontrolling interests
(40,198
)
(46,543
)
Comprehensive income attributable to DaVita Inc.
$
136,662
$
201,154
See notes to condensed consolidated financial statements.
2
DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
March 31, 2019
December 31, 2018
ASSETS
Cash and cash equivalents
$
459,242
$
323,038
Restricted cash and equivalents
102,192
92,382
Short-term investments
4,035
2,935
Accounts receivable, net
1,953,422
1,858,608
Inventories
104,236
107,381
Other receivables
489,581
469,796
Income tax receivable
42,650
68,614
Prepaid and other current assets
64,770
111,840
Current assets held for sale, net
6,004,948
5,389,565
Total current assets
9,225,076
8,424,159
Property and equipment, net of accumulated depreciation of $3,538,992 and $3,524,098
3,392,266
3,393,669
Operating lease right-of-use assets
2,736,536
—
Intangible assets, net of accumulated amortization of $82,265 and $80,566
118,324
118,846
Equity method and other investments
226,309
224,611
Long-term investments
34,414
35,424
Other long-term assets
73,651
71,583
Goodwill
6,799,368
6,841,960
$
22,605,944
$
19,110,252
LIABILITIES AND EQUITY
Accounts payable
$
365,192
$
463,270
Other liabilities
572,944
595,850
Accrued compensation and benefits
495,327
658,913
Current portion of operating leases liabilities
367,413
—
Current portion of long-term debt
4,676,691
1,929,369
Current liabilities held for sale
1,753,310
1,243,759
Total current liabilities
8,230,877
4,891,161
Long-term operating leases liabilities
2,625,776
—
Long-term debt
5,787,013
8,172,847
Other long-term liabilities
143,756
450,669
Deferred income taxes
588,805
562,536
Total liabilities
17,376,227
14,077,213
Commitments and contingencies:
Noncontrolling interests subject to put provisions
1,143,044
1,124,641
Equity:
Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued)
—
—
Common stock ($0.001 par value, 450,000,000 shares authorized; 166,396,147 and 166,387,307 shares issued and outstanding, respectively)
166
166
Additional paid-in capital
990,380
995,006
Retained earnings
2,932,359
2,743,194
Accumulated other comprehensive loss
(47,551
)
(34,924
)
Total DaVita Inc. shareholders' equity
3,875,354
3,703,442
Noncontrolling interests not subject to put provisions
211,319
204,956
Total equity
4,086,673
3,908,398
$
22,605,944
$
19,110,252
See notes to condensed consolidated financial statements.
3
DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Three months ended March 31,
2019
2018
Cash flows from operating activities:
Net income
$
189,487
$
225,229
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
148,528
142,799
Impairment charges
41,037
—
Stock-based compensation expense
12,110
9,685
Deferred income taxes
41,372
43,617
Equity investment (loss) income, net
(337
)
3,564
Other non-cash charges, net
1,720
9,959
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
Accounts receivable
(132,292
)
(63,701
)
Inventories
3,324
57,621
Other receivables and other current assets
1,199
(34,120
)
Other long-term assets
(1,997
)
2,054
Accounts payable
(38,537
)
(62,830
)
Accrued compensation and benefits
(173,583
)
(62,550
)
Other current liabilities
17,236
49,379
Income taxes
32,502
30,772
Other long-term liabilities
(465
)
11,061
Net cash provided by operating activities
141,304
362,539
Cash flows from investing activities:
Additions of property and equipment
(198,878
)
(232,443
)
Acquisitions
(11,274
)
(16,582
)
Proceeds from asset and business sales
13,903
18,535
Purchase of other debt and equity investments
(3,290
)
(2,646
)
Purchase of investments held-to-maturity
(209
)
(3,586
)
Proceeds from sale of other debt and equity investments
3,302
5,151
Proceeds from investments held-to-maturity
—
31,454
Purchase of equity investments
(4,067
)
(2,476
)
Distributions received on equity investments
155
2,465
Net cash used in investing activities
(200,358
)
(200,128
)
Cash flows from financing activities:
Borrowings
17,133,464
13,306,898
Payments on long-term debt and other financing costs
(16,776,267
)
(13,202,225
)
Purchase of treasury stock
—
(290,377
)
Distributions to noncontrolling interests
(44,230
)
(45,467
)
Stock award exercises and other share issuances, net
1,517
(1,185
)
Contributions from noncontrolling interests
18,947
12,009
Purchases of noncontrolling interests
(8,480
)
(2,200
)
Net cash provided by (used in) financing activities
324,951
(222,547
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(921
)
6,668
Net increase (decrease) in cash, cash equivalents and restricted cash
264,976
(53,468
)
Less: Net increase in cash, cash equivalents and restricted cash from discontinued operations
118,962
17,834
Net increase (decrease) in cash, cash equivalents and restricted cash from continuing operations
146,014
(71,302
)
Cash, cash equivalents and restricted cash of continuing operations at beginning of the year
415,420
518,920
Cash, cash equivalents and restricted cash of continuing operations at end of the period
$
561,434
$
447,618
See notes to condensed consolidated financial statements.
4
DAVITA INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(dollars and shares in thousands)
Non- controlling interests subject to put provisions
DaVita Inc. Shareholders’ Equity
Non- controlling interests not subject to put provisions
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive income
Shares
Amount
Shares
Amount
Total
Balance at January 1, 2018
$
1,011,360
182,462
$
182
$
1,042,899
$
3,633,713
—
$
—
$
13,235
$
4,690,029
$
196,037
Cumulative effect of change in accounting principle
8,368
(8,368
)
—
Comprehensive income:
Net income
24,107
178,686
178,686
22,436
Other comprehensive income
22,468
22,468
Stock unit shares issued
4
—
Stock-settled SAR shares issued
195
1
(4,887
)
(4,886
)
Stock-settled stock-based compensation expense
9,682
9,682
Changes in noncontrolling interest from:
Distributions
(26,166
)
(19,301
)
Contributions
9,508
2,501
Acquisitions and divestitures
688
76
76
(66
)
Partial purchases
(1,994
)
(1,994
)
(206
)
Fair value remeasurements
15,004
(15,004
)
(15,004
)
Purchase of treasury stock
(4,197
)
(298,377
)
(298,377
)
Balance at March 31, 2018
$
1,034,501
182,661
$
183
$
1,030,772
$
3,820,767
(4,197
)
$
(298,377
)
$
27,335
$
4,580,680
$
201,401
Non- controlling interests subject to put provisions
DaVita Inc. Shareholders’ Equity
Non- controlling interests not subject to put provisions
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive loss
Shares
Amount
Shares
Amount
Total
Balance at January 1, 2019
$
1,124,641
166,387
$
166
$
995,006
$
2,743,194
—
$
—
$
(34,924
)
$
3,703,442
$
204,956
Cumulative effect of change in accounting principle
(38
)
39,876
39,876
(6
)
Comprehensive income:
Net income
25,389
149,289
149,289
14,809
Other comprehensive loss
(12,627
)
(12,627
)
Stock unit shares issued
9
(104
)
(104
)
Stock-settled SAR shares issued
—
—
Stock-settled stock-based compensation expense
12,091
12,091
Changes in noncontrolling interest from:
Distributions
(27,565
)
(16,665
)
Contributions
6,415
12,532
Acquisitions and divestitures
1,762
—
—
—
Partial purchases
(1,967
)
(2,206
)
(2,206
)
(4,307
)
Fair value remeasurements
14,407
(14,407
)
(14,407
)
Balance at March 31, 2019
$
1,143,044
166,396
$
166
$
990,380
$
2,932,359
—
$
—
$
(47,551
)
$
3,875,354
$
211,319
See notes to condensed consolidated financial statements
5
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars and shares in thousands, except per share data)
Unless otherwise indicated in this Quarterly Report on Form 10-Q "the Company", "we", "us", "our" and similar terms refer to DaVita Inc. and its consolidated subsidiaries.
The condensed consolidated interim financial statements included in this report are prepared by the Company without audit. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations are reflected in these condensed consolidated interim financial statements. All significant intercompany accounts and transactions have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve revenue recognition and accounts receivable, leases, impairments of goodwill and investments, accounting for income taxes, consolidation of variable interest entities and certain fair value estimates. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the operating results for the full year. The condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (10-K). Prior year balances and amounts have been reclassified to conform to the current year presentation. The Company has evaluated subsequent events through the date these condensed consolidated financial statements were issued and has included all necessary adjustments and disclosures.
2.
Revenue recognition
The Company’s allowance for doubtful accounts related to performance obligations satisfied in years prior was $42,235 and $52,924 as of March 31, 2019 and December 31, 2018, respectively.
There are significant uncertainties associated with estimating revenue, which generally take several years to resolve. These estimates are subject to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payor issues, as well as patient issues including determining applicable primary and secondary coverage, changes in patient coverage and coordination of benefits. As these estimates are refined over time, both positive and negative adjustments to revenue are recognized in the current period. As a result of changes in these estimates, additional revenue of $27,179 was recognized during the three months ended March 31, 2019 associated with performance obligations satisfied prior to January 1, 2019. Additional revenue of $67,410 was recognized during the three months ended March 31, 2018 associated with performance obligations satisfied prior to January 1, 2018, which included $24,000 from electing to apply ASC Topic 606 only to contracts not substantially completed as of January 1, 2018.
The following table summarizes the Company's segment revenues by primary payor source:
For the three months ended
March 31, 2019
March 31, 2018
U.S. dialysis and related lab services
Other - Ancillary services and strategic initiatives
Consolidated
U.S. dialysis and related lab services
Other - Ancillary services and strategic initiatives
Consolidated
Patient service revenues:
Medicare and Medicare Advantage
$
1,493,516
$
—
$
1,493,516
$
1,485,192
$
—
$
1,485,192
Medicaid and Managed Medicaid
154,190
—
154,190
157,496
—
157,496
Other government
106,127
84,475
190,602
107,119
82,537
189,656
Commercial
788,413
33,388
821,801
782,979
19,718
802,697
Other revenues:
Medicare and Medicare Advantage
—
61,700
61,700
—
142,758
142,758
Medicaid and Managed Medicaid
—
6
6
—
15,791
15,791
Commercial
—
32,619
32,619
—
40,420
40,420
Other(1)
4,905
17,750
22,655
5,114
38,941
44,055
Eliminations of intersegment revenues
(30,641
)
(3,336
)
(33,977
)
(18,422
)
(10,199
)
(28,621
)
Total
$
2,516,510
$
226,602
$
2,743,112
$
2,519,478
$
329,966
$
2,849,444
(1)
Other consists of management fees and revenue from the Company's ancillary services and strategic initiatives.
6
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
Dialysis and related lab patient service revenues
Dialysis and related lab services patient service revenues are recognized in the period services are provided. Revenues consist primarily of payments from Medicare, Medicaid and commercial health plans for dialysis and related lab services provided to patients. A usual and customary fee schedule is maintained for the Company’s dialysis treatments and related lab services; however, actual collectible revenue is normally recognized at a discount from the fee schedule.
Other revenues
Other revenues consist of the revenues associated with the ancillary services and strategic initiatives, management and administrative support services that are provided to outpatient dialysis centers that the Company does not own or in which the Company owns a noncontrolling interest, and administrative and management support services to certain other non-dialysis joint ventures in which the Company owns a noncontrolling interest.
7
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
3.
Earnings per share
Basic earnings per share is calculated by dividing net income attributable to the Company, adjusted for any change in noncontrolling interest redemption rights in excess of fair value, by the weighted average number of common shares outstanding, net of the weighted average shares held in escrow that under certain circumstances may have been returned to the Company.
Diluted earnings per share includes the dilutive effect of outstanding stock-settled stock appreciation rights (SSARs) and unvested stock units (under the treasury stock method) as well as the weighted average shares held in escrow that were outstanding during the period.
The reconciliations of the numerators and denominators used to calculate basic and diluted earnings per share were as follows:
Three months ended
March 31,
2019
2018
Numerators:
Net income from continuing operations attributable to DaVita Inc.
$
120,254
$
191,015
Net income (loss) from discontinued operations attributable to DaVita Inc.
29,035
(12,329
)
Net income attributable to DaVita Inc. for earnings per share calculation
$
149,289
$
178,686
Basic:
Weighted average shares outstanding during the period
166,388
181,152
Weighted average contingently returnable shares held in escrow for the DaVita HealthCare Partners merger
—
(2,194
)
Weighted average shares for basic earnings per share calculation
166,388
178,958
Basic net income (loss) attributable to DaVita Inc. from:
Continuing operations per share
$
0.72
$
1.07
Discontinued operations per share
0.18
(0.07
)
Basic net income per share attributable to DaVita Inc.
$
0.90
$
1.00
Diluted:
Weighted average shares outstanding during the period
166,388
181,152
Assumed incremental shares from stock plans
393
683
Weighted average shares for diluted earnings per share calculation
166,781
181,835
Diluted net income (loss) attributable to DaVita Inc. from:
Continuing operations per share
$
0.72
$
1.05
Discontinued operations per share
0.18
(0.07
)
Diluted net income per share attributable to DaVita Inc.
$
0.90
$
0.98
Anti-dilutive stock-settled awards excluded from calculation(1)
6,150
3,453
(1)
Shares associated with stock-settled stock appreciation rights excluded from the diluted denominator calculation because they are anti-dilutive under the treasury stock method.
4.
Restricted cash and equivalents
The Company had restricted cash and cash equivalents at March 31, 2019 and December 31, 2018. There has been no material change in the nature of the Company's restricted cash and cash equivalents from that described in Note 4 to the Company's consolidated financial statements included in the 10-K.
8
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars and shares in thousands, except per share data)
5.
Short-term and long-term investments
The Company’s short-term and long-term debt and equity investments consist of the following:
March 31, 2019
December 31, 2018
Debt securities
Equity securities
Total
Debt securities
Equity securities
Total
Certificates of deposit and other time deposits
$
2,235
$
—
$
2,235
$
2,235
$
—
$
2,235
Investments in mutual funds and common stock
—
36,214
36,214
—
36,124
36,124
$
2,235
$
36,214
$
38,449
$
2,235
$
36,124
$
38,359
Short-term investments
$
2,235
$
1,800
$
4,035
$
2,235
$
700
$
2,935
Long-term investments
—
34,414
34,414
—
35,424
35,424
$
2,235
$
36,214
$
38,449
$
2,235
$
36,124
$
38,359
Debt securities: The Company's short-term debt investments are principally bank certificates of deposit with contractual maturities longer than three months but shorter than one year. These debt securities are accounted for as held to maturity and recorded at amortized cost, which approximates their fair values at March 31, 2019 and December 31, 2018.
Equity securities: The Company's equity investments in mutual funds and common stock are held within a trust to fund existing obligations associated with several of the Company’s non-qualified deferred compensation plans. During the three months ended March 31, 2019, the Company recognized pre-tax net gains in the income statement of $1,893 associated with changes in the fair value of these equity securities, comprised of pre-tax realized gains of $170 and a net increase in unrealized gains of $1,723. During the three months ended March 31, 2018, the Company recognized pre-tax realized gains in the income statement of $86 associated with changes in the fair value of these equity securities, comprised of pre-tax realized gains of $3,746 and a net decrease in unrealized gains of $3,660.
6.
Equity method and other investments
Equity investments in nonconsolidated businesses over which the Company maintains significant influence, but which do not have readily determinable fair values, are carried on the equity method.
The Company maintains equity method and minor adjusted cost method investments in the private securities of certain other healthcare and healthcare-related businesses. The Company classifies these investments as "Equity method and other investments" on its consolidated balance sheet.
The Company's equity method and other investments were comprised of the following:
