DAVITA INC. Forward-looking statements This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains statements that are forward-looking statements within the meaning of the federal securities laws. All statements in this report, 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 Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, DaVita's response to and the expected future impacts of COVID-19, 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 of supplies, treatment volumes, 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, and our stock repurchase program. 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 report. 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. 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 impact of the dynamic and rapidly 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 economic downturn resulting
from the impacts of COVID-19, 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 subsequent legislation, 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 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 End Stage
Renal Disease program or other government-based programs and the impact
of the Medicare Advantage benchmark structure;
• risks arising from potential and proposed federal and/or statelegislation, regulation, ballot, executive action or other initiatives,
including such initiatives related to healthcare and/or labor matters;
• the impact of 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;
• our ability to successfully implement our strategy with respect to
home-based dialysis, including maintaining our existing business andfurther 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;
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• 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 careorganizations, 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
• uncertainties related to potential payments and/or adjustments under
certain provisions of the equity purchase agreement for the sale of our
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 ourindebtedness 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 wellas 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 inDaVita Inc.'s Annual Report on Form 10-K for the year endedDecember 31, 2019
and this Quarterly Report on Form 10-Q, and the risks and uncertainties
discussed in any subsequent reports that DaVita has filed or furnished
with the
The following should be read in conjunction with our condensed consolidated financial statements.
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Company Overview
Our principal business is to provide dialysis and related lab services to
patients in the United States , which we refer to as our U.S. dialysis business.
We also operate various ancillary services and strategic initiatives including
our international operations, which we collectively refer to as our ancillary
services, as well as our corporate administrative support. Our U.S. dialysis
business is a leading provider of kidney dialysis services in the U.S. for
patients suffering from chronic kidney failure, also known as end stage renal
disease (ESRD).
On June 19, 2019 , we completed the sale of our DaVita Medical Group (DMG)
business to Optum, a subsidiary of UnitedHealth Group Inc. As a result of this
transaction, DMG's results of operations have been reported as discontinued
operations for all periods presented and DMG is not included below in this
Management's Discussion and Analysis.
COVID-19 and its impact on our business
As a caregiving organization, we are exposed to and will continue to be impacted
by the effects of the COVID-19 pandemic. DaVita's team of over 65,000 teammates
includes, among others, dialysis nurses, patient care technicians, social
workers, dieticians and other caregivers who are on the front lines of the
ongoing COVID-19 pandemic providing essential, life-sustaining care for our
patients. During this time of great challenge, our top priorities continue to be
the health, safety and well-being of our patients, teammates and physician
partners and helping to ensure that our patients have the ability to maintain
continuity of care throughout this crisis, whether in the acute, outpatient or
home setting. We have implemented additional protocols in coordination with the
Centers for Disease Control and Prevention (CDC ) on infection control and
clinical best practices in response to COVID-19. In addition, we have been
collaborating with the U.S. Department of Health and Human Services (HHS), the
Centers for Medicare and Medicaid Services (CMS), the CDC , the American Society
of Nephrology , and dialysis providers nationwide to help ensure that the
dialysis community is able to support patients nationwide.
We have also maintained business process continuity during the pandemic by
enabling most back office teammates to work remotely, and as of the date of this
report, we have not experienced any material issues in billing or cash
collections. This transition, combined with our balance sheet, has helped us
avoid any material deterioration of our liquidity position as a result of the
COVID-19 crisis at this time.
We are closely monitoring the long-term impact of the pandemic and the resulting
economic downturn on all aspects of our business, including the impact on our
patients, teammates, physician partners, suppliers, vendors and business
partners. We may have extended, significant additional costs as a result of
COVID-19. For example, we may have increased costs and risk associated with a
high demand for our skilled clinical personnel. Additionally, the steps we have
taken designed to help safely maintain continuity of care for our patients and
help protect our caregivers, such as our policies to implement dedicated care
shifts for patients with confirmed or suspected COVID-19 and other enhanced
clinical practices, have increased, and are expected to continue to increase,
our expenses. Our response to COVID-19 has resulted in higher salary and wage
expense, and we are also providing financial support to over 50,000 of our
teammates to cover costs related to COVID-19. Furthermore, the effort needed to
procure certain of our equipment and clinical supplies and associated costs have
increased. These efforts are part of a wider Prepare, Prevent, Respond protocol
that we have implemented in connection with the pandemic, which also includes
operational initiatives such as the redistribution of teammates, machines and
supplies across the country as needed and increased investment in and
utilization of telehealth capabilities.
We may observe a negative impact on revenue and non-acquired growth from
COVID-19 due to lower treatment volumes, including from the impact of changes in
rates of mortality, as well as a decrease in new patient admissions due to the
impact of COVID-19 on the chronic kidney disease (CKD) population. Over the
longer term, we believe that changes in mortality in both the CKD and ESRD
populations due to COVID-19 will depend primarily on the infection rate, case
fatality rate and age and health status of affected patients. At this time we
cannot reasonably estimate the magnitude or duration of this impact, due in part
to testing and reporting limitations, but this adverse impact could be material.
Because our ESRD patients generally have comorbidities, several of which are
risk factors for COVID-19, we believe the mortality rate of infected patients
will be higher in the dialysis population than in the general population. In
addition, the COVID-19 pandemic and efforts to contain the virus have led to
global economic deterioration and rapid and sharp increases in unemployment
levels, which ultimately could result in a materially reduced share of our
patients being covered by commercial insurance plans, with more patients being
covered by lower-paying government insurance programs or being uninsured. These
effects may persist after the pandemic subsides, and in the event such a
reduction occurs, we believe that it would have a material adverse impact on our
business, results of operations, financial condition and cash flows. The global
nature of the pandemic may have varying impacts on our ongoing operations
outside the United States and our ability to expand our operations into other
parts of the world.
We believe the ultimate impact of this public health crisis on the Company will
depend on future developments that are highly uncertain and difficult to
predict, including among other things the severity and duration of the pandemic,
the impact on
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our patient population, the pandemic's impact on the U.S. and global economies
and unemployment, and the timing, scope and effectiveness of federal, state and
local governmental responses. At this time, we cannot reasonably estimate the
ultimate impact the COVID-19 pandemic will have on us, but the adverse impact
could be material.
A significant initial part of the federal government response to the COVID-19
pandemic is the CARES Act, a $2 trillion economic stimulus package that was
signed into law on March 27, 2020 . The CARES Act authorizes $100 billion in
funding to be distributed to healthcare providers through the federal Public
Health and Social Services Emergency Fund (Provider Relief Fund ). Under the
CARES Act, in April 2020 the government distributed approximately $250 million
to the Company and its joint venture partners from the Provider Relief Fund , and
these funds were only to be used for healthcare related expenses or lost
revenues attributable to COVID-19. At this time, the Company has elected not to
accept the funds available to it through this government financial support.
Since the Company initially received these payments after March 31 , the payments
had no impact on our financial condition or results reported for the three
months ended March 31, 2020 .
The CARES Act also included a provision that suspended the 2% Medicare
sequestration from May 1, 2020 through December 31, 2020 , and we currently
estimate that this suspension will increase our revenues.
For additional information on the potential impact of the COVID-19 pandemic on
us, see "Part II Item 1A Risk Factors."
Financial Results
The discussion below includes analysis of our financial condition and results of
operations for the quarter ended March 31, 2020 compared to the quarters ended
December 31, 2019 and March 31, 2019 .
Consolidated results of operations
The following table summarizes our revenues, operating income and adjusted
operating income by line of business. See the discussion of our results for each
line of business following this table:
Three months ended Q1 2020 vs. Q4 2019 Q1 2020 vs. Q1 2019
March 31, 2020 December 31, 2019 March 31, 2019 Amount Percent Amount Percent
(dollars in millions)
Revenues:
U.S. dialysis $ 2,617 $ 2,687 $ 2,547 $ (70 ) (2.6 )% $ 70 2.7 %
Other - ancillary
services 261 255 230 6 2.4 % 31 13.5 %
Elimination of
intersegment revenues (36 ) (43 ) (34 ) 7 16.3 % (2 ) (5.9 )%
Total consolidated
revenues $ 2,841 $ 2,899 $ 2,743 $ (58 ) (2.0 )% $ 98 3.6 %
Operating income
(loss):
U.S. dialysis $ 492 $ 508 $ 417 $ (16 ) (3.1 )% $ 75 18.0 %
Other - ancillary
services (3 ) (19 ) (58 ) 16 84.2 % 55 94.8 %
Corporate
administrative
support (24 ) (27 ) (19 ) 3 11.1 % (5 ) (26.3 )% Operating income $ 465 $ 463 $ 341$ 2 0.4 %$ 124 36.4 % Adjusted operating income (loss)(1): U.S. dialysis $ 492 $ 508 $ 417$ (16 ) (3.1 )%$ 75 18.0 % Other - ancillary services (3 ) (19 ) (17 ) 16 84.2 % 14 82.4 %
Corporate
administrative
support (24 ) (27 ) (19 ) 3 11.1 % (5 ) (26.3 )% Adjusted operating income $ 465 $ 463 $ 382$ 2 0.4 %$ 83 21.7 %
Certain columns, rows or percentages may not sum or recalculate due to the use
of rounded numbers.
(1) For a reconciliation of adjusted operating income (loss) by reportable
segment, see "Reconciliations of Non-GAAP measures" section below.
33--------------------------------------------------------------------------------U.S. dialysis business results of operations Revenues: Three months ended Q1 2020 vs. Q4 2019 Q1 2020 vs. Q1 2019 March 31, 2020 December 31, 2019 March 31, 2019 Amount Percent Amount Percent (dollars in millions, except per treatment data) Total revenues$ 2,617 $ 2,687 $
2,547
7,513,321 7,681,462 7,297,460 (168,141 ) (2.2 )% 215,861 3.0 % Average treatments per day 96,821
96,744 95,267 77 0.1 % 1,554 1.6 %
Treatment days 77.6 79.4 76.6 (1.8 ) (2.3 )% 1.0 1.3 %
Average patient service
revenue per
treatment $ 347.54 $ 348.31 $ 348.37 $ (0.77 ) (0.2 )% $ (0.83 ) (0.2 )%
Normalized non acquired
treatment growth(1) 2.3 % 2.1 % 2.4 % 0.2 % (0.1 )%
(1) Normalized non-acquired growth reflects year over year growth in treatment
volume, adjusted to exclude acquisitions and other similar transactions,
further adjusted to normalize for the number and mix of treatment days in a
given quarter versus the prior year quarter.
U.S. dialysis revenues in the first quarter of 2020 decreased over the fourth quarter of 2019 primarily due to a decrease of 2.2% in dialysis treatments and a decrease in our average patient service revenue per treatment. The decrease in ourU.S. dialysis treatments was driven by approximately 1.8 fewer treatment days and the deconsolidation of the two dialysis partnerships described below, partially offset by volume growth from additional treatments due to acquired and non-acquired treatments. OurU.S. dialysis average patient service revenue per treatment was negatively impacted by a Medicare rate decline related to calcimimetics as well as a seasonal decrease from co-insurance and deductibles. These decreases in our average patient service revenue per treatment were partially offset by an increase in base Medicare rates in 2020 and seasonally higher inpatient dialysis service revenue.U.S. dialysis revenues in the first quarter of 2020 increased over the first quarter of 2019 primarily due to an increase in dialysis treatments, partially offset by a decrease in our average patient service revenue per treatment. OurU.S. dialysis treatments increased due to volume growth from additional treatments of 3.0% due to acquired and non-acquired treatments and one additional treatment day in the first quarter of 2020, partially offset by a decrease in treatments related to the deconsolidation of the two dialysis partnerships described below. OurU.S. dialysis average patient service revenue per treatment was negatively impacted by a Medicare rate decline related to calcimimetics, partially offset by favorable changes in payor rates. Operating expenses and charges: Three months ended Q1 2020 vs. Q4 2019 Q1 2020 vs. Q1 2019 March 31, 2020 December 31, 2019 March 31, 2019 Amount Percent Amount Percent (dollars in millions, except per treatment data) Patient care costs$ 1,783 $ 1,824$ 1,797 $ (41 ) (2.2 )%$ (14 ) (0.8 )% General and administrative 204 209 197 (5 ) (2.4 )% 7 3.6 % Depreciation and amortization 146 150 141 (4 ) (2.7 )% 5 3.5 % Equity investment income (9 ) (5 ) (5 ) (4 ) 80.0 % (4 ) 80.0 % Total operating expenses and charges$ 2,125 $ 2,179$ 2,130 $ (54 ) (2.5 )%$ (5 ) (0.2 )% Patient care costs per treatment$ 237.35 $ 237.44$ 246.29 $ (0.09 ) - %$ (8.94 ) (3.6 )%
Certain columns, rows or percentages may not sum or recalculate due to the use
of rounded numbers.
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Patient care costs. U.S. dialysis patient care costs are those costs directly
associated with operating and supporting our dialysis centers and consist
principally of labor, benefits, pharmaceuticals, medical supplies and other
operating costs of the dialysis centers.
U.S. dialysis patient care costs per treatment in the first quarter of 2020
decreased slightly over the fourth quarter of 2019 primarily related to
decreases in other direct operating expenses associated with our dialysis
centers and pharmaceutical unit costs. These decreases were partially offset by
increases in labor and benefits costs, payroll taxes and pharmaceutical
intensity.
U.S. dialysis patient care costs per treatment in the first quarter of 2020
decreased over the first quarter of 2019 primarily due to a decrease in
calcimimetics unit costs as oral generic products entered the market in 2019
lowering the cost of products we acquire, as well as decreases in other
pharmaceutical unit costs and other direct operating expenses associated with
our dialysis centers.
General and administrative expenses. U.S. dialysis general and administrative
expenses in the first quarter of 2020 decreased over the fourth quarter of 2019
primarily due to decreases in long-term incentive compensation expense,
consulting fees and legal costs. These decreases were partially offset by
increases in payroll taxes and labor costs.
U.S. dialysis general and administrative expenses in the first quarter of 2020
increased over the first quarter of 2019 primarily due to increases in long-term
incentive compensation expense and consulting fees. These increases were
partially offset by decreases in benefit costs and payroll taxes.
Depreciation and amortization. Depreciation and amortization expense is directly
impacted by the number of dialysis centers we develop and acquire. U.S. dialysis
depreciation and amortization expenses in the first quarter of 2020 decreased
over the fourth quarter of 2019 primarily due to certain assets being fully
depreciated, partially offset by growth in the number of dialysis centers we
operate. U.S. dialysis depreciation and amortization expenses in the first
quarter of 2020 increased over the first quarter of 2019 primarily due to growth
in the number of dialysis centers we operate.
Equity investment income. U.S. dialysis equity investment income in the first
quarter of 2020 increased over the fourth quarter of 2019 primarily due to an
increase in the profitability at certain joint ventures as well as the
deconsolidation of two of our near 50%-owned dialysis partnerships at year-end
2019, based on a reassessment of relative rights and powers over these
partnerships. Our portion of these partnerships' earnings are now recognized in
equity investment income. U.S. dialysis equity investment income in the first
quarter of 2020 increased over the first quarter of 2019 primarily due to the
same reasons described above.
Operating income:
Three months ended Q1 2020 vs. Q4 2019 Q1 2020 vs. Q1 2019
December 31,
March 31, 2020 2019 March 31, 2019 Amount Percent Amount Percent
(dollars in millions)
Operating income $ 492 $ 508 $
417
U.S. dialysis operating income in the first quarter of 2020 decreased over the fourth quarter of 2019 primarily due to a decrease in our margin on calcimimetics and a decrease of 2.2% in dialysis treatments, as described above, as well as increases in payroll taxes and pharmaceutical intensity. These decreases toU.S. dialysis operating income were partially offset by an increase in our base Medicare rate, seasonally higher inpatient dialysis service revenue, as well as decreases in other direct operating expenses associated with our dialysis centers, pharmaceutical unit costs, and long-term compensation expense.U.S. dialysis operating income in the first quarter of 2020 increased over the first quarter of 2019 primarily due to an increase in dialysis treatments, as described above, favorable changes in payor rates, as well as a decrease in other pharmaceutical unit costs, partially offset by an increase in long-term incentive compensation expense. Other-Ancillary services Our other operations include ancillary services which are primarily aligned with our core business of providing dialysis services to our network of patients. As ofMarch 31, 2020 , these consisted primarily of integrated care and disease management, ESRD seamless care organizations (ESCOs), clinical research programs, vascular access services, physician services, and 35 -------------------------------------------------------------------------------- comprehensive kidney care, as well as our international operations. These ancillary services, including our international operations, generated approximately$261 million of revenues in the first quarter of 2020, representing approximately 9% of our consolidated revenues. If any of our ancillary services or strategic initiatives, such as our international operations, are unsuccessful, it could have a negative impact on our business, results of operations, financial condition and cash flows, and we may determine to exit that line of business, which could result in significant termination costs. In addition, we have in the past and may in the future incur a material write-off or an impairment of our investment, including goodwill, in one or more of these ancillary services. In that regard, we may in the future incur impairment and restructuring charges. We expect to add additional service offerings to our business and pursue additional strategic initiatives in the future as circumstances warrant, which could include healthcare services not related to dialysis. As ofMarch 31, 2020 , our international dialysis operations provided dialysis and administrative services through a total of 282 outpatient dialysis centers located in ten countries outside ofthe United States . Ancillary services results of operations Three months ended Q1 2020 vs. Q4 2019 Q1 2020 vs. Q1 2019 March 31, 2020 December 31, 2019 March 31, 2019 Amount Percent Amount Percent (dollars in millions) Revenues: U.S. ancillary $ 124 $ 122 $ 109$ 2 1.6 %$ 15 13.8 % International 137 132 120 5 3.8 % 17 14.2 % Total ancillary services revenues $ 261 $ 255 $ 230$ 6 2.4 %$ 31 13.5 % Operating (loss) income: U.S. ancillary $ (19 ) $ (21 ) $ (15 )$ 2 9.5 %$ (4 ) (26.7 )% International(1) 17 2
(43 ) 15 750.0 % 60 139.5 % Total ancillary services operating loss
$ (3 ) $ (19 ) $ (58 ) $ 16 84.2 % $ 55 94.8 %
Adjusted operating (loss)
income(2):
U.S. ancillary $ (19 ) $ (21 ) $ (15 ) $ 2 9.5 % $ (4 ) (26.7 )%
International(1) 17 2 (2 ) 15 750.0 % 19 950.0 % Total ancillary services adjusted operating loss $ (3 ) $
(19 ) $ (17 ) $ 16 84.2 % $ 14 82.4 %
Certain columns, rows or percentages may not sum or recalculate due to the use
of rounded numbers.(1) The reported operating income (loss) and adjusted operating income (loss) for
the three months ended
include approximately
respectively, of foreign currency gain (loss).
(2) For a reconciliation of adjusted operating income (loss) by reportable
segment, see "Reconciliations of non-GAAP measures" section below.
Revenues:
U.S. ancillary services revenues for the first quarter of 2020 increased over the fourth quarter of 2019 due to increases in revenues in our physician services and clinical research programs. These increases were partially offset by a decrease in revenues in our vascular access services. In addition, international revenues for the first quarter of 2020 increased over the fourth quarter of 2019 primarily due to acquired treatment growth as we continue to expand internationally.U.S. ancillary services revenues for the first quarter of 2020 increased over the first quarter of 2019 due to an increase in revenues at our integrated care and disease management business primarily due to an increase in special needs plans revenues, as well as increases in revenues in our physician services and clinical research programs. Our international revenues for the first quarter of 2020 increased over the first quarter of 2019 primarily due to acquired treatment growth as we continue to expand internationally. 36 -------------------------------------------------------------------------------- Charges impacting operating loss:Goodwill impairment charges. During the first quarter of 2019, we recognized a goodwill impairment charge of$41 million in our German kidney care business. This charge resulted primarily from a change in relevant discount rates, as well as a decline in then current and expected future patient census and an increase in then current and expected future costs, principally due to wage increases expected to result from recently announced legislation. See further discussion of these impairment charges and our reporting units that remain at risk of goodwill impairment in Note 6 to the condensed consolidated financial statements. Operating loss and adjusted operating loss:U.S. ancillary services operating losses for the first quarter of 2020 decreased over the fourth quarter of 2019. The decrease inU.S. ancillary services operating losses was due to increases in operating results for our integrated care and disease management business and our physician services, partially offset by a decrease in operating results at our ESCO joint ventures. International operating income for the first quarter of 2020 increased over the fourth quarter of 2019 primarily due to favorable foreign exchange rates.U.S. ancillary services operating losses for the first quarter of 2020 increased over the first quarter of 2019. The increase inU.S. ancillary services operating losses was primarily due to a decrease in operating results for our integrated care and disease management business due to an increase in medical costs. International operating results and adjusted operating results for the first quarter of 2020 increased over the first quarter of 2019 primarily due to favorable foreign exchange rates and growth in our international business. Corporate administrative support Corporate administrative support consists primarily of labor, benefits and long-term incentive compensation expense, as well as professional fees for departments which provide support to all of our various operating lines of business. Corporate administrative support expenses are included in general and administrative expenses on our consolidated income statement. Corporate administrative support expenses in the first quarter of 2020 decreased$3 million or 11.1% over the fourth quarter of 2019 primarily due to decreases in general and administrative expenses and long-term incentive compensation expense. Corporate administrative support expenses increased$5 million or 26.3% in the first quarter of 2020 over the first quarter of 2019 primarily due to an increase in long-term incentive compensation expense, partially offset by a decrease in general and administrative expenses. Corporate-level charges Three months ended Q1 2020 vs. Q4 2019 Q1 2020 vs. Q1 2019
March 31, 2020 December 31, 2019 March 31, 2019 Amount Percent Amount Percent
(dollars in millions)
Debt expense $ (89 ) $ (92 ) $
(132 )
- $ - $ 3 $ 3
Other (loss) income $ (4 ) $ 11 $
7
24.8 % 21.4 % 26.3 % 3.4 % (1.5 )%
Effective income tax rate
from continuing
operations attributable to
DaVita, Inc.(1) 28.5 % 25.2 % 32.0 % 3.3 % (3.5 )%
Net income attributable to
noncontrolling
interests $ (48 ) $ (58 ) $ (40 ) $ (10 ) (17.2 )% $ 8 20.0 %
(1) For a reconciliation of our effective income tax rate from continuing
operations attributable to
measures" section below.
Debt expense
Debt expense in the first quarter of 2020 decreased over the fourth quarter of
2019 primarily due to a decrease in our overall weighted average effective
interest rate on our debt partially offset by an increase in our outstanding
debt balance. Our overall weighted average effective interest rate in the first
quarter of 2020 was 4.35% compared to 4.55% in the fourth quarter
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of 2019. Debt expense decreased over the first quarter of 2019 primarily due to
a decrease in our outstanding debt balance and a decrease in our overall
weighted average effective interest rate on our debt. Our overall weighted
average effective interest rate in the first quarter of 2020 was 4.35% compared
to 5.16% in the first quarter of 2019. See Note 8 to the condensed consolidated
financial statements for further information on components of our debt.
Other (loss) income
Other (loss) income consists primarily of interest income on cash and cash
equivalents and short- and long-term investments, realized and unrealized gains
and losses recognized on investments, and foreign currency transaction gains and
losses. Other income decreased in the first quarter of 2020 over the fourth
quarter of 2019 primarily due to losses recognized on foreign currency
transactions and investments in the first quarter of 2020. Other income
decreased in the first quarter of 2020 over the first quarter of 2019 primarily
due to losses recognized on foreign currency transactions and investments in the
first quarter of 2020, partially offset by an increase in interest income.
Effective income tax rate
The effective income tax rate and effective income tax rate from continuing
operations attributable to DaVita Inc. increased in the first quarter of 2020 as
compared to the fourth quarter of 2019 primarily due to a tax benefit recognized
in the fourth quarter of 2019 for a reduction in our estimated blended state tax
rate, partially offset by an increase in uncertain tax positions. The effective
tax rate decreased in the first quarter of 2020 as compared to the first quarter
of 2019 primarily due to the impact of international goodwill impairments and
operations reflected in the first quarter of 2019.
Net income attributable to noncontrolling interests
The decrease in net income attributable to noncontrolling interests in the first
quarter of 2020 as compared to the fourth quarter of 2019 was primarily due to
approximately 1.8 fewer treatment days in the first quarter of 2020 as well as
the deconsolidation of the two dialysis partnerships described above. The
increase in net income attributable to noncontrolling interests in the first
quarter of 2020 and the first quarter of 2019 was due to improved earnings at
certain U.S. dialysis partnerships partially offset by the deconsolidation of
the two dialysis partnerships described above.
Accounts receivable
Our consolidated accounts receivable balances at March 31, 2020 and December 31,
2019 , were $1.820 billion and $1.796 billion , respectively, representing
approximately 59 days and 58 days sales outstanding (DSO), respectively, net of
allowance for uncollectible accounts. The increase in consolidated DSO was
primarily due to normal timing delays in billings and collections related to
certain payors. Our DSO calculation is based on the current quarter's average
revenues per day. There were no significant changes in the first quarter of 2020
from the fourth quarter of 2019 in the amount of unreserved accounts receivable
over one year old or the amounts pending approval from third-party payors.
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Liquidity and capital resources
The following table shows the summary of our major sources and uses of cash,
cash equivalents and restricted cash:
Three months ended Q1 2020 vs. Q1 2019
March 31, March 31,
2020 2019(1) Amount Percent
(dollars in millions)
Net cash provided by operating
activities:
Net income $ 288 $ 189 $ 99 52.4 %
Non-cash items 274 244 30 12.3 %
Working capital (205 ) (290 ) 85 29.3 %
Other 3 (2 ) 5 250.0 %
$ 360 $ 141 $ 219 155.3 %
Net cash used in investing activities:
Capital expenditures:
Routine maintenance/IT/other $ (82 ) $ (90 ) $ 8 8.9 %
Development and relocations (73 ) (109 ) 36 33.0 %
Acquisition expenditures (34 ) (11 ) (23 ) (209.1 )%
Proceeds from sale of self-developed
properties 27 12 15 125.0 %
Other (1 ) (2 ) 1 50.0 %
$ (163 ) $ (200 ) $ 37 18.5 %
Net cash provided by financing
activities:
Debt issuances (payments), net $ 466 $ 357 $ 109 30.5 %
Distributions to noncontrolling interest (58 ) (44 ) (14 ) (31.8 )%
Contributions from noncontrolling
interest 9 19 (10 ) (52.6 )%
Share repurchases (322 ) - (322 )
Other 2 (7 ) 9 128.6 %
$ 97 $ 325 $ (228 ) (70.2 )%
Total number of shares repurchased 4,052,298 - 4,052,298
Free cash flow from continuing operations(2)$ 184 $ (119 )
Certain columns or rows may not sum or recalculate due to the use of rounded numbers.
(1) Represents consolidated cash flow activity, including cash flows related to
discontinued operations.
(2) For a reconciliation of our free cash flow from continuing operations, see
"Reconciliations of Non-GAAP measures" section below.
Consolidated cash flows Consolidated cash flows from operating activities during the first quarter of 2020 were$360 million , all of which were from continuing operations, compared with consolidated operating cash flows for the first quarter of 2019 of$141 million , of which$73 million was from continuing operations. The increase in operating cash flows from continuing operations was primarily driven by an increase in operating results in the first quarter of 2020 as compared to the first quarter of 2019, as well as the timing of working capital items. Operating cash flows from continuing operations for the first quarter of 2020 were negatively impacted by one additional day in DSO as compared to the first quarter of 2019 which was negatively impacted by a four day increase in DSO in ourU.S. dialysis business. Free cash flow from continuing operations during the first quarter of 2020 increased over the first quarter of 2019 primarily due to an increase in net cash provided in operating activities, as described above, a decrease in capital expenditures for development and an increase in proceeds from the sale of self-developed properties, partially offset by an increase in cash outflows for acquisitions and an increase net distributions to non-controlling interest. 39 -------------------------------------------------------------------------------- Other significant changes in sources and uses of cash included a net draw on our revolving line of credit of$500 million and$400 million in the first quarter of 2020 and 2019, respectively. Net debt payments during the first quarter of 2020 primarily consisted of regularly scheduled mandatory principal payments under our senior secured credit facilities totaling approximately$11 million on Term Loan A and$7 million on Term Loan B-1 and additional required principal payments under other debt arrangements. In addition, we incurred refinancing costs related to the repricing of our Term Loan B-1 of approximately$3 million . See further discussion in Note 8 to the condensed consolidated financial statements related to debt activities. Cash flows used for share repurchases increased in the first quarter of 2020 as compared to the first quarter of 2019. Dialysis center capacity and growth The table below shows the growth in our dialysis operations by number of dialysis centers owned or operated: U.S. International Three months ended Three months ended March 31, March 31, 2020 2019 2020 2019 Number of centers operated at beginning of period 2,753 2,664 259 241 Acquired centers 2 2 22 2 Developed centers 22 27 2 - Net change in non-owned managed or administered centers(1) - (1 ) - - Sold and closed centers(2) (2 ) (2 ) - - Closed centers(3) (3 ) (1 ) (2 ) - Net change inAsia Pacific joint venture centers 1 -
Number of centers operated at end of period 2,772 2,689
282 243
(1) Represents dialysis centers for which we manage or provide administrative
services but in which we own a noncontrolling equity interest or which
are wholly-owned by third parties.
(2) Represents dialysis centers that were sold and/or closed for which
patients were not retained.
(3) Represents dialysis centers that were closed for which the majority of
patients were retained and transferred to one of our other existing
outpatient dialysis centers.
Stock repurchases
The following table summarizes our repurchases of our common stock during the
first quarter of 2020 and 2019:
Three months ended March 31, 2020 Three months ended March 31, 2019
Shares Amount paid Average paid Shares Amount paid Average paid per
repurchased (in millions) per share repurchased (in millions) share
Open market repurchases 4,052,298 $ 303 $ 74.81 - $ - $ -
See further discussion on our stock repurchases in Note 13 to the condensed
consolidated financial statements.
Available liquidity
As of March 31, 2020 , we had $500 million drawn on our $1.0 billion revolving
line of credit under our senior secured credit facilities. We also have
approximately $58 million of outstanding letters of credit under a separate
bilateral secured letter of credit facility.
See Note 8 to the condensed consolidated financial statements for components of
our long-term debt and their interest rates.
The COVID-19 pandemic and efforts to prevent its spread have dramatically
reduced global economic activity and negatively impacted the financial markets.
We have maintained business process continuity during the COVID-19 pandemic by
enabling most back office teammates to work remotely, and as of the date of this
report, we have not experienced any material issues in billing or cash
collections. This transition, combined with our balance sheet, has helped us to
avoid any material deterioration of our liquidity position as a result of the
COVID-19 crisis at this time. In addition, at this time we have elected not to
accept the funds available to us under the CARES Act Provider Relief Fund . The
ultimate impact of the pandemic will depend on future developments that are
highly uncertain and difficult to predict.
40--------------------------------------------------------------------------------
We believe that our cash flow from operations and other sources of liquidity, including from amounts available under our senior secured credit facilities and our access to the capital markets, will be sufficient to fund our scheduled debt service under the terms of our debt agreements and other obligations for the foreseeable future, including the next 12 months. Our primary recurrent sources of liquidity are cash from operations and cash from borrowings. Reconciliations of non-GAAP measures The following tables provide reconciliations of adjusted operating income to operating income as presented on aU.S. generally accepted accounting principles (GAAP) basis for ourU.S. dialysis reportable segment as well as for ourU.S. ancillary services, our international business, and for our total ancillary services which combines them and is disclosed as our other segments category. These non-GAAP or "adjusted" measures are presented because management believes these measures are useful adjuncts to, but not alternatives for, our GAAP results. Specifically, management uses adjusted operating income to compare and evaluate our performance period over period and relative to competitors, to analyze the underlying trends in our business, to establish operational budgets and forecasts and for incentive compensation purposes. We believe this non-GAAP measure is also useful to investors and analysts in evaluating our performance over time and relative to competitors, as well as in analyzing the underlying trends in our business. We also believe this presentation enhances a user's understanding of our normal operating income by excluding certain items which we do not believe are indicative of our ordinary results of operations. In addition, our effective income tax rate on income from continuing operations attributable toDaVita Inc. excludes noncontrolling owners' income, which primarily relates to non-tax paying entities. We believe this adjusted effective income tax rate is useful to management, investors and analysts in evaluating our performance and establishing expectations for income taxes incurred on our ordinary results attributable toDaVita Inc. Finally, our free cash flow from continuing operations represents net cash provided by operating activities from continuing operations less distributions to noncontrolling interests and all capital expenditures (including development capital expenditures, routine maintenance and information technology); plus contributions from noncontrolling interests and sale leaseback proceeds. Management uses this measure to assess our ability to fund acquisitions and meet our debt service obligations and we believe this measure is equally useful to investors and analysts as an adjunct to cash flows from operating activities from continuing operations and other measures under GAAP. It is important to bear in mind that these non-GAAP "adjusted" measures are not measures of financial performance under GAAP and should not be considered in isolation from, nor as substitutes for, their most comparable GAAP measures.
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