DaVita Inc. 3rd Quarter 2020 Results

DENVER, Oct. 29, 2020 /PRNewswire/ -- DaVita Inc. (NYSE: DVA) announced financial and operating results for the third quarter ended September 30, 2020. During the quarter, notwithstanding the challenges of responding to COVID-19, the Company delivered strong financial and operating results, and continued its focus on patient care and the safety of its patients, caregivers, teammates, and physician partners.

"I am proud of the hard work and dedication of our 65,000 teammates in delivering essential, life-preserving care to our patients," said Javier Rodriguez, CEO of DaVita Inc. "Due to their efforts, we have been able to sustain continuity of care despite the disruption caused by the pandemic, while maintaining our strategic focus on leading the transformation of kidney care."

Financial results for the quarter ended September 30, 2020:

• Consolidated revenues of $2.924 billion.
• Operating income of $438 million or 15.0% operating margin.
• Diluted earnings per share from continuing operations of $1.28 and adjusted diluted earnings per share from continuing operations of $1.80.
• Operating cash flow from continuing operations of $483 million and free cash flow from continuing operations of $287 million.
• Refinanced $1.5 billion of 5% senior notes with $1.5 billion of new 3.75% senior notes in August.
• Deployed proceeds from issuance of $1.75 billion of 4.625% senior notes in June to redeem $1.75 billion of 5.125% senior notes in July.
• Repurchased 8,231,679 shares of our common stock at an average cost of $88.13 per share, including 7,981,679 shares purchased in a "modified" Dutch auction tender offer in September.

U.S. dialysis metrics:

Volume: Total U.S. dialysis treatments for the third quarter of 2020 were 7,656,173, or an average of 96,914 treatments per day, representing a per day decrease of 0.2% compared to the third quarter of 2019. Normalized non-acquired treatment growth in the third quarter of 2020 compared to the third quarter of 2019 was 0.6%.

Primary drivers of the changes in the table above were as follows:

Revenue: The quarter change was primarily due to a decrease in commercial revenue per treatment, unfavorable changes in government payor mix and a decline in calcimimetics revenue per treatment, partially offset by increases in inpatient dialysis service revenue and Medicare rates due to the temporary suspension of Medicare sequestration. The year to date change was primarily due to favorable changes in government and commercial revenue per treatment, including an increase in Medicare rates due to the base rate increase in 2020 and the temporary suspension of Medicare sequestration, and an increase in inpatient dialysis services revenue, partially offset by a decline in calcimimetics revenue per treatment.

Patient care costs: The quarter change was primarily due to decreases in COVID-19-related costs, including compensation expense, and pharmaceutical intensity, partially offset by increases in health benefit expenses and other direct dialysis center operating expenses. The year to date change was primarily due to decreases in pharmaceutical unit costs, other direct dialysis center operating expenses, and health benefit expenses, partially offset by an increase in labor costs and COVID-19-related costs, including compensation expense.

General and administrative: The quarter change was primarily due to increases in advocacy costs, as described below, contributions to our charitable foundation and compensation expense. The year to date change was primarily due to increases in advocacy costs, as described below, contributions to our charitable foundation and compensation expense including costs related to COVID-19. These increases were partially offset by decreases in travel expenses, long-term incentive compensation expense and health benefit expenses.

Certain items impacting the quarter:

Share repurchases: The following table summarizes our common stock repurchases during the three months ended September 30, 2020.

Subsequent to September 30, 2020 through October 28, 2020, we repurchased 1,827,836 shares of our common stock for $161 million at an average cost of $87.96 per share.

Debt transactions: In August 2020, we issued $1.5 billion in aggregate principal amount of 3.75% senior notes due 2031 and used the net proceeds from these 3.75% senior notes, together with cash on hand, to redeem in full all $1.5 billion in aggregate principal amount of our outstanding 5% senior notes due 2025, including payment of accrued interest and a redemption premium. We also redeemed in full our $1.75 billion in aggregate principal amount of our outstanding 5.125% senior notes due 2024, including payment of accrued interest and a redemption premium, in July 2020 with the proceeds from our $1.75 billion in aggregate principal amount of 4.625% senior notes due 2030 issued in June 2020, together with cash on hand.

Advocacy costs: During the three months ended September 30, 2020, we incurred advocacy costs of approximately $66 million to counter union policy efforts, including a California ballot initiative. These costs are included in the U.S. dialysis segment's general and administrative expenses.

Financial and operating metrics:

Center activity: As of September 30, 2020, we provided dialysis services to a total of approximately 238,200 patients at 3,100 outpatient dialysis centers, of which 2,809 centers were located in the United States and 291 centers were located in nine countries outside of the United States. During the third quarter of 2020, we opened a total of 17 new dialysis centers, acquired five dialysis centers and closed eight dialysis centers in the United States. We also acquired eleven dialysis centers, opened one new dialysis center and sold or closed eight dialysis centers outside of the United States during the third quarter of 2020.

Outlook:

The following forward-looking measures and the underlying assumptions involve significant known and unknown risks and uncertainties, including those described below, and actual results may vary materially from these forward-looking measures. In particular, the widespread impact of the COVID-19 pandemic continues to generate significant risk and uncertainty, and as a result, our future results could vary materially from the guidance provided below. We do not provide guidance for diluted net income from continuing operations per share attributable to DaVita Inc., effective income tax rate on income from continuing operations or free cash flow from continuing operations on a basis consistent with United States generally accepted accounting principles (GAAP) nor a reconciliation of forward-looking non-GAAP financial measures to the most directly comparable GAAP financial measures on a forward-looking basis because we are unable to predict certain items contained in the GAAP measures without unreasonable efforts. These non-GAAP financial measures do not include certain items, including loss on changes in ownership interests, accruals for legal matters, refinancing charges and foreign currency fluctuations, which may be significant. The guidance for our effective income tax rate on adjusted income from continuing operations attributable to DaVita Inc. also excludes the amount of third party owners' income and related taxes attributable to non-tax paying entities.

We will be holding a conference call to discuss our results for the third quarter ended September 30, 2020, on October 29, 2020, at 5:00 p.m. Eastern Time. To join the conference call, please dial (877) 918-6630 from the U.S. or (517) 308-9042 from outside the U.S., and provide the operator the password 'Earnings'. A replay of the conference call will be available on our website at investors.davita.com for the following 30 days.

DaVita Inc. and its representatives may from time to time make written and oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), including statements in this release, filings with the Securities and Exchange Commission ("SEC"), reports to stockholders and in meetings with investors and analysts. All statements in this release, during the related presentation or other meetings, other than statements of historical fact, are forward-looking statements and as such are intended to be covered by the safe harbor for "forward-looking statements" provided by the PSLRA. These forward-looking statements could include, among other things, DaVita's response to and the expected future impacts of COVID-19, including statements about our balance sheet and liquidity, our expenses, revenues, billings and collections and future results, potential need, ability or willingness to use any funds under the CARES Act or other government programs, availability or cost of supplies, treatment volumes, mix expectation, such as the percentage or number of patients under commercial insurance, and overall impact on our patients, as well as other statements regarding our future operations, financial condition and prospects, government and commercial payment rates, our ongoing stock repurchase program, and statements related to our guidance and expectations for future periods and the assumptions underlying any such projections. Without limiting the foregoing, statements including the words "expect," "intend," "will," "could," "plan," "anticipate," "believe," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on DaVita's current expectations and are based solely on information available as of the date of this release. DaVita undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of changed circumstances, new information, future events or otherwise, except as may be required by law. Actual future events and results could differ materially from any forward-looking statements due to numerous factors that involve substantial known and unknown risks and uncertainties. These risks and uncertainties include, among other things:

• the continuing impact of the dynamic and evolving COVID-19 pandemic, including, without limitation, on our patients, teammates, physician partners, suppliers, business, operations, reputation, financial condition and results of operations, the government's response to the COVID-19 pandemic, and the consequences of an extended economic downturn resulting from the impacts of COVID-19, such as a potential negative impact on our commercial mix, any of which may also have the effect of heightening many of the other risks and uncertainties discussed below;
• our need, ability and willingness to utilize any funds received under the CARES Act or other government programs, and the consequences of our decisions with respect thereto;
• the concentration of profits generated by higher-paying commercial payor plans for which there is continued downward pressure on average realized payment rates, and a reduction in the number or percentage of our patients under such plans, including without limitation as a result of restrictions or prohibitions on the use and/or availability of charitable premium assistance, which may result in the loss of revenues or patients, or our making incorrect assumptions about how our patients will respond to any change in financial assistance from charitable organizations;
• noncompliance by us or our business associates with any privacy or security laws or any security breach by us or a third party involving the misappropriation, loss or other unauthorized use or disclosure of confidential information;
• the extent to which the ongoing implementation of healthcare reform, or changes in or new legislation, regulations or guidance, enforcement thereof or related litigation, result in a reduction in coverage or reimbursement rates for our services, a reduction in the number of patients enrolled in higher-paying commercial plans or that are enrolled in or select Medicare Advantage plans, or other material impacts to our business; or our making incorrect assumptions about how our patients will respond to any such developments;
• a reduction in government payment rates under the Medicare program or other government-based programs and the impact of the Medicare Advantage benchmark structure;
• risks arising from potential and proposed federal and/or state legislation, regulation, ballot, executive action or other initiatives, including such initiatives related to healthcare and/or labor matters, such as AB290 and Proposition 23 in California;
• the impact of the upcoming election cycle, the political environment and related developments on the current healthcare marketplace and on our business, including with respect to the future of the Affordable Care Act, the exchanges and many other core aspects of the current healthcare marketplace, as well as the composition of the U.S. Supreme Court;
• our ability to successfully implement our strategy with respect to home-based dialysis, including maintaining our existing business and further developing our capabilities in a complex and highly regulated environment;
• changes in pharmaceutical practice patterns, reimbursement and payment policies and processes, or pharmaceutical pricing, including with respect to calcimimetics;
• legal and compliance risks, such as our continued compliance with complex government regulations;
• continued increased competition from dialysis providers and others, and other potential marketplace changes;
• our ability to maintain contracts with physician medical directors, changing affiliation models for physicians, and the emergence of new models of care introduced by the government or private sector that may erode our patient base and reimbursement rates, such as accountable care organizations, independent practice associations and integrated delivery systems;
• our ability to complete acquisitions, mergers or dispositions that we might announce or be considering, on terms favorable to us or at all, or to integrate and successfully operate any business we may acquire or have acquired, or to successfully expand our operations and services in markets outside the United States, or to businesses outside of dialysis;
• uncertainties related to potential payments and/or adjustments under certain provisions of the equity purchase agreement for the sale of our DaVita Medical Group (DMG) business, such as post-closing adjustments and indemnification obligations;
• the variability of our cash flows, including without limitation any extended billing or collections cycles; the risk that we may not be able to generate or access sufficient cash in the future to service our indebtedness or to fund our other liquidity needs; and the risk that we may not be able to refinance our indebtedness as it becomes due, on terms favorable to us or at all;
• factors that may impact our ability to repurchase stock under our stock repurchase program and the timing of any such stock repurchases, as well as our use of a considerable amount of available funds to repurchase stock;
• risks arising from the use of accounting estimates, judgments and interpretations in our financial statements;
• impairment of our goodwill, investments or other assets; and
• uncertainties associated with the other risk factors set forth in DaVita Inc.'s Annual Report on Form 10-K for the year ended December 31, 2019 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and the risks and uncertainties discussed in any subsequent reports that DaVita has filed or furnished with the SEC from time to time.

The financial information presented in this release is unaudited and is subject to change as a result of subsequent events or adjustments, if any, arising prior to the filing of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020.

DAVITA INC.
SUPPLEMENTAL FINANCIAL DATA-continued
(unaudited)
(dollars in thousands)

Note 1: Calculation of the Leverage Ratio

Under our senior secured credit facilities (the "Credit Agreement") dated August 12, 2019, the leverage ratio is defined as (a) all funded debt plus the face amount of all letters of credit issued, minus unrestricted cash and cash equivalents (including short-term investments) not to exceed $750,000 divided by (b) "Consolidated EBITDA." The leverage ratio determines the interest rate margin payable by the Company for its Term Loan A and revolving line of credit under the Credit Agreement by establishing the margin over the base interest rate (LIBOR) that is applicable. The calculation below is based on the last twelve months of "Consolidated EBITDA," as of the end of the reported period and pro forma for acquisitions or divestitures that occurred during the period, and "Consolidated net debt" at the end of the reported period, each as defined in the Credit Agreement. The Company's management believes the presentation of "Consolidated EBITDA" is useful to investors to enhance their understanding of the Company's leverage ratio under its Credit Agreement. The leverage ratio calculated by the Company is a non-GAAP measure and should not be considered a substitute for the ratio of total debt to operating income, determined in accordance with GAAP. The Company's calculation of its leverage ratio might not be calculated in the same manner as, and thus might not be comparable to, similarly titled measures of other companies.