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 the novel coronavirus (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 Coronavirus Aid, Relief, and Economic Security (CARES) Act or other government programs, availability 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, and our ongoing 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 continuing 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 extended 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 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 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,
such as Proposition 23 in
• 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 CareAct, 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;
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• 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 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;
• 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 , Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 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 novel coronavirus (COVID-19) pandemic. DaVita's teammates
include, 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 , 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 have had, and expect to continue to have, extended, significant
additional costs as a result of COVID-19. For example, we have had, and expect
to continue to 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 and use of
personal protective equipment. Our response to COVID-19 has resulted in higher
salary and wage expense, and we have provided, and may provide in the future,
substantial financial support to our teammates to cover some of the 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 and 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. Our COVID-19 response has reduced certain expenses,
such as those related to teammate travel, and the pandemic has also delayed
certain of our planned capital expenditures. Certain temporary changes made in
response to the COVID-19 pandemic could become permanent, which could have an
adverse impact on our business.
We have observed and expect to continue to 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 is, and will continue to 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
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global nature of the pandemic may have varying impacts on our ongoing operations
outside the United States as well as 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 our patient population, the pandemic's continuing 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 was the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a
$2 trillion economic stimulus package that was signed into law on March 27,
2020 . The CARES Act authorized $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
affiliated joint ventures from the Provider Relief Fund , and these funds were
only to be used for healthcare related expenses or lost revenues attributable to
COVID-19. While we elected not to accept the funds available to us through this
government financial support and returned these funds in May 2020 , there can be
no assurance that we will be able to continue to forego the receipt of financial
or other assistance under the CARES Act or similar subsequent legislation or
that similar assistance will be available from the government if we have a need
for such assistance in the future.
The CARES Act also included a provision that suspended the 2% Medicare
sequestration from May 1, 2020 through December 31, 2020 , and in the second
quarter of 2020 our revenues increased due to this suspension as further
described below. We continue to estimate that this temporary suspension will
increase our revenues while it remains in effect.
For additional information on the potential impact of the COVID-19 pandemic on
us, see the risk factors in "Part II Item 1A Risk Factors" as set forth in our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 .
Financial Results
The discussion below includes analysis of our financial condition and results of
operations for the quarter ended June 30, 2020 compared to the quarters ended
March 31, 2020 and June 30, 2019 and for the six months ended June 30, 2020
compared to the six months ended June 30, 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 Q2 2020 vs. Q1 2020 Q2 2020 vs. Q2 2019
June 30, 2020 March 31, 2020 June 30, 2019 Amount Percent Amount Percent
(dollars in millions)
Revenues:
U.S. dialysis $ 2,675 $ 2,617 $ 2,637 $ 58 2.2 % $ 38 1.4 %
Other - ancillary
services 245 261 239 (16 ) (6.1 )% 6 2.5 % Elimination of intersegment revenues
(40 ) (36 ) (34 ) (4 ) (11.1 )% (6 ) (17.6 )%
Total consolidated
revenues $ 2,880 $ 2,841 $ 2,843 $ 39 1.4 % $ 37 1.3 %
Operating income
(loss):
U.S. dialysis $ 523 $ 492 $ 499 $ 31 6.3 % $ 24 4.8 %
Other - ancillary
services (40 ) (3 ) (15) (37 ) (1,233.3 )% (25 ) (166.7 )% Corporate administrative support
(73 ) (24 ) (22 ) (49 ) (204.2 )% (51 ) (231.8 )% Operating income $ 410 $ 465 $ 462
Adjusted operating income (loss)(1): U.S. dialysis $ 523 $ 492 $ 499$ 31 6.3 %$ 24 4.8 % Other - ancillary services (23 ) (3 ) (15
) (20 ) (666.7 )% (8 ) (53.3 )% Corporate administrative support
(38 ) (24 ) (22 ) (14 ) (58.3 )% (16 ) (72.7 )%
Adjusted operating
income $ 461 $ 465 $ 462 $ (4 ) (0.9 )% $ (1 ) (0.2 )%
Certain columns, rows or percentages may not sum or recalculate due to the use
of rounded numbers.
37
--------------------------------------------------------------------------------(1) For a reconciliation of adjusted operating income (loss) by reportable
segment, see "Reconciliations of Non-GAAP measures" section below.
Six months ended YTD Q2 2020 vs. YTD Q2 2019
June 30, 2020 June 30, 2019 Amount Percent
(dollars in millions)
Revenues:
U.S. dialysis $ 5,292 $ 5,185 $ 107 2.1 %
Other - ancillary services 506 469 37 7.9 %
Elimination of intersegment revenues (76 ) (68 ) (8 ) (11.8 )%
Total consolidated revenues
135 2.4 %
Operating income (loss):
U.S. dialysis $ 1,014 $ 916 $ 98 10.7 %
Other - ancillary services (42 ) (73 ) 31 42.5 %
Corporate administrative support (97 ) (41 ) (56 ) (136.6 )%
Operating income $ 875 $ 802 $ 73 9.1 %
Adjusted operating income (loss)(1):
U.S. dialysis $ 1,014 $ 916 $ 98 10.7 %
Other - ancillary services (26 ) (32 ) 6 18.8 %
Corporate administrative support (62 ) (41 ) (21 ) (51.2 )%
Adjusted operating income $ 927 $ 843 $ 84 10.0 %
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.
U.S. dialysis results of operations Revenues: Three months ended
Q2 2020 vs. Q1 2020 Q2 2020 vs. Q2 2019
June 30, 2020 March 31, 2020 June 30, 2019 Amount Percent Amount Percent
(dollars in millions, except per treatment data)
Total revenues $ 2,675 $ 2,617 $ 2,637 $ 58 2.2 % $ 38 1.4 %
Dialysis
treatments 7,570,908 7,513,321 7,520,587 57,587 0.8 % 50,321 0.7 %
Average
treatments per
day 97,063 96,821 96,418 242 0.2 % 645 0.7 %
Treatment days 78.0 77.6 78.0 0.4 0.5 % - - %
Average patient
service
revenue per
treatment $ 352.26 $ 347.54 $ 349.97 $ 4.72 1.4 % $ 2.29 0.7 %
Normalized
non-acquired
treatment
growth(1) 1.6 % 2.3 % 2.1 %
(1) Normalized non-acquired treatment 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.
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Six months ended June 30, YTD Q2 2020 vs. YTD Q2 2019
2020 2019 Amount Percent
(dollars in millions, except per treatment data)
Total revenues $ 5,292 $ 5,185 $ 107 2.1 %
Dialysis treatments 15,084,229 14,818,046 266,183 1.8 %
Average treatments per day 96,942 95,848 1,094 1.1 %
Treatment days 155.6 154.6 1.0 0.6 %
Average patient service revenue
per treatment $ 349.91 $ 349.18 $ 0.73 0.2 %
U.S. dialysis revenues for the second quarter of 2020 increased from the first
quarter of 2020 primarily due to an increase in our average patient service
revenue per treatment and an increase in dialysis treatments. Our U.S. dialysis
average patient service revenue per treatment benefited from normal seasonality
driven by patients meeting their co-insurance and deductibles, favorable changes
in government and commercial payor mix and an increase in Medicare rates due to
the temporary suspension of Medicare sequestration. The increase in our U.S.
dialysis treatments was primarily driven by volume growth from a slight increase
in treatment days. These increases were partially offset by a Medicare rate
decline related to calcimimetics and a decrease in inpatient dialysis service
revenue.
U.S. dialysis revenues for the second quarter of 2020 increased from the second
quarter of 2019 primarily due to an increase in our average patient service
revenue per treatment and an increase in dialysis treatments. Our U.S. dialysis
average patient service revenue per treatment increased primarily due to an
increase in base Medicare rates in 2020 and an increase in Medicare rates due to
the temporary suspension of Medicare sequestration. Our U.S. dialysis treatments
increased primarily due to volume growth from acquired and non-acquired
treatment growth, partially offset by the deconsolidation of two dialysis
partnerships, as described below under the heading "Equity investment income".
These increases were partially offset by a decline in Medicare rates related to
calcimimetics.
U.S. dialysis revenues for the six months ended June 30, 2020 increased from the
six months ended June 30, 2019 primarily due to an increase in dialysis
treatments and an increase in our average patient service revenue per treatment.
The increase in our U.S. dialysis treatments was driven by one additional
treatment day in the six months ended June 30, 2020 and volume growth from
acquired and non-acquired treatment growth, partially offset by the
deconsolidation of the two dialysis partnerships, as described below under the
heading "Equity investment income". Our U.S. dialysis average patient service
revenue per treatment increased primarily due to favorable changes in payor
rates and an increase in Medicare rates due to the temporary suspension of
Medicare sequestration, partially offset by a decline in Medicare rates related
to calcimimetics.
In July 2020 , CMS issued a proposed rule to update the Medicare ESRD Prospective
Payment System payment rate and policies. Among other things, the proposed rule
outlines the inclusion of calcimimetics in the ESRD bundled payment, the
transitional drug add-on payment to certain new renal dialysis drugs and
biological products, and amends the reporting measures in the ESRD Quality
Incentive Program. CMS estimates that the overall impact of the proposed rule
will increase ESRD facilities' average reimbursement by 1.6% in 2021.
Operating expenses and charges:
Three months ended Q2 2020 vs. Q1 2020 Q2 2020 vs. Q2 2019
June 30, 2020 March 31, 2020 June 30, 2019 Amount Percent Amount Percent
(dollars in millions, except per treatment data)
Patient care costs $ 1,802 $ 1,783 $ 1,785 $ 19 1.1 % $ 17 1.0 %
General and
administrative 210 204 216 6 2.9 % (6 ) (2.8 )%
Depreciation and
amortization 148 146 145 2 1.4 % 3 2.1 %
Equity investment income (8 ) (9 ) (7 ) 1 11.1 % (1 ) 14.3 %
Total operating expenses
and charges $ 2,152 $ 2,125 $ 2,139 $ 27 1.3 % $ 13 0.6 %
Patient care costs per
treatment $ 238.02 $ 237.35 $ 237.34 $ 0.67 0.3 % $ 0.68 0.3 %
Certain columns, rows or percentages may not sum or recalculate due to the use
of rounded numbers.
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Six months ended June 30, YTD Q2 2020 vs. YTD Q2 2019
2020 2019 Amount Percent
(dollars in millions, except per treatment data)
Patient care costs $ 3,585 $ 3,582 $ 3 0.1 %
General and administrative 414 413 1 0.2 %
Depreciation and amortization 295 285 10 3.5 %
Equity investment income (17 ) (12 ) (5 ) (41.7 )%
Total operating expenses and
charges $ 4,277 $ 4,269 $ 8 0.2 %
Patient care costs per
treatment $ 237.69 $ 241.75 $ (4.06 ) (1.7 )%
Certain columns, rows or percentages may not sum or recalculate due to the use
of rounded numbers.
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 compensations including labor and benefits, pharmaceuticals,
medical supplies and other operating costs of the dialysis centers.
U.S. dialysis patient care costs per treatment for the second quarter of 2020
increased from the first quarter of 2020 primarily due to an increase in
COVID-19-related costs including compensation and other medical supplies. These
increases were partially offset by decreases in health benefit expenses due to
reduced claims volume, other direct dialysis center operating expense and other
pharmaceutical intensity.
U.S. dialysis patient care costs per treatment for the second quarter of 2020
increased from the second quarter of 2019 primarily due to an increase in
COVID-19-related costs, as described above. These increases were partially
offset by a decrease in calcimimetics unit costs, as well as decreases in other
pharmaceutical unit costs and intensity, other direct dialysis center operating
expenses, and health benefit expenses due to reduced claims volume.
U.S. dialysis patient care costs per treatment for the six months ended June 30,
2020 decreased from the six months ended June 30, 2019 primarily due to a
decrease in calcimimetics unit costs, as well as decreases in other
pharmaceutical unit costs, other direct dialysis center operating expenses, and
health benefit expenses due to reduced claims volume. These decreases were
partially offset by an increase in COVID-19-related costs, as described above.
General and administrative expenses. U.S. dialysis general and administrative
expenses from the second quarter of 2020 increased from the first quarter of
2020 primarily due to an increase in compensation costs, including
COVID-19-related compensation, as well as increases in legal and consulting
costs. These increases were partially offset by decreases in travel and
entertainment expense, health benefit expenses due to reduced claims volume, and
long-term incentive compensation expense.
U.S. dialysis general and administrative expenses for the second quarter of 2020
decreased from the second quarter of 2019 primarily due to decreases in travel
and entertainment expense, long-term incentive compensation expense, payroll
taxes and health benefit expenses due to reduced claims volume. These decreases
were partially offset by an increase in compensation expense including costs
related to COVID-19.
U.S. dialysis general and administrative expenses for the six months ended
June 30, 2020 increased from the six months ended June 30, 2019 due to an
increase in compensation expense including costs related to COVID-19 and an
increase in consulting costs. These increases were partially offset by decreases
in travel and entertainment expense, payroll taxes, health benefit expenses due
to reduced claims volume, and long-term incentive compensation expense.
Depreciation and amortization. Depreciation and amortization expense is directly
impacted by the number of dialysis centers we develop and acquire. The increase
in U.S. dialysis depreciation and amortization expenses for the quarter ended
June 30, 2020 compared to the quarters ended March 31, 2020 and June 30, 2019 ,
and for the six months ended June 30, 2020 compared to the six months ended
June 30, 2019 , were primarily due to growth in the number of dialysis centers we
operate.
Equity investment income. U.S. dialysis equity investment income for the second
quarter of 2020 decreased from the first quarter of 2020 primarily due to a
decrease in the profitability of certain joint ventures.
U.S. dialysis equity investment income for the second quarter of 2020 increased
from the second quarter of 2019 primarily due to 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.
This increase in equity investment income was partially offset by a decrease in
the profitability of certain joint ventures.
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U.S. dialysis equity investment income for the six months ended June 30, 2020
increased from the six months ended June 30, 2019 primarily due to the
deconsolidation of two dialysis partnerships at year-end 2019, as described
above.
Operating income:
Three months ended Q2 2020 vs. Q1 2020 Q2 2020 vs. Q2 2019
June 30, 2020 March 31, 2020 June 30, 2019 Amount Percent Amount Percent
(dollars in millions)
Operating income $ 523 $ 492 $ 499 $ 31 6.3 % $ 24 4.8 %
Six months ended June 30, YTD Q2 2020 vs. YTD Q2 2019
2020 2019 Amount Percent
(dollars in millions)
Operating income $ 1,014 $ 916 $ 98 10.7 %
U.S. dialysis operating income for the second quarter of 2020 increased from the
first quarter of 2020 primarily due to an increase in our average patient
service revenue per treatment, as described above, an increase in dialysis
treatments, as well as decreases in health benefit expenses, other direct
dialysis center operating expenses, and travel and entertainment expense. These
increases to operating income were partially offset by a decline in
calcimimetics margin and an increase in COVID-19-related costs, as described
above.
U.S. dialysis operating income for the second quarter of 2020 increased from the
second quarter of 2019 primarily due to an increase in our average patient
service revenue per treatment, as described above, an increase in dialysis
treatments, as well as decreases in health benefit expenses, other
pharmaceutical unit costs and intensity, other direct dialysis center operating
expenses, travel and entertainment expense, long-term incentive compensation
expense and payroll taxes. These increases to operating income were partially
offset by a decline in calcimimetics margin and an increase in COVID-19-related
costs, as described above.
U.S. dialysis operating income for the six months ended June 30, 2020 increased
from the six months ended June 30, 2019 primarily due to approximately one
additional treatment day and volume growth from additional treatments in the six
months ended June 30, 2020 . In addition, the increase in operating income was
due to an increase in our average patient service revenue per treatment, as
described above, as well as decreases in health benefit expenses, other
pharmaceutical unit costs, other direct dialysis center operating expenses,
travel and entertainment expense and payroll taxes. These increases to operating
income were partially offset by a decline in calcimimetics margin and an
increase in COVID-19-related costs, as described above.
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
of June 30, 2020 , these consisted primarily of integrated care and disease
management, ESRD seamless care organizations (ESCOs), clinical research programs
and physician services, as well as our international operations. These ancillary
services, including our international operations, for the second quarter of 2020
generated approximately $245 million of revenues, representing approximately 8%
of our consolidated revenues, and for the six months ended June 30, 2020
generated approximately $506 million of revenues, 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 material restructuring, write-off or impairment
charges on our investment in one or more of these ancillary services, including
our investments in goodwill.
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 of June 30, 2020 , our international dialysis operations provided dialysis and
administrative services through a total of 287 outpatient dialysis centers
located in ten countries outside of the United States .
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--------------------------------------------------------------------------------Ancillary services results of operations
Three months ended Q2 2020 vs. Q1 2020 Q2 2020 vs. Q2 2019
June 30, 2020 March 31, 2020 June 30, 2019 Amount Percent Amount Percent
(dollars in millions)
Revenues:
U.S. ancillary $ 116 $ 124 $ 114 $ (8 ) (6.5 )% $ 2 1.8 %
International 129 137 125 (8 ) (5.8 )% 4 3.2 %
Total ancillary services
revenues $ 245 $ 261 $
239
Operating (loss) income: U.S. ancillary $ (41 ) $ (19 ) $
(16 )
1 17 1 (16 ) (94.1 )% - - %
Total ancillary services
operating loss $ (40 ) $ (3 ) $
(15 )
Adjusted operating (loss) income(2): U.S. ancillary $ (25 ) $ (19 )$ (16 ) $ (6 ) (31.6 )%$ (9 ) (56.3 )% International(1) 1 17 1 (16 ) (94.1 )% - - %
Total ancillary services
adjusted operating loss $ (23 ) $ (3 )
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 June 30, 2020 , March 31, 2020 and June 30, 2019 ,
include approximately $(4) million , $10 million and $(0.5) million ,
respectively, of foreign currency (loss) gain.
(2) For a reconciliation of adjusted operating income (loss) by reportable
segment, see the "Reconciliations of non-GAAP measures" section below.
Six months ended June 30, YTD Q2 2020 vs. YTD Q2 2019
2020 2019 Amount Percent
(dollars in millions)
Revenues:
U.S. ancillary $ 240 $ 224 $ 16 7.1 %
International 265 245 20 8.2 %
Total ancillary services revenues
7.9 %
Operating (loss) income:
U.S. ancillary $ (60 ) $ (31 ) $ (29 ) (93.5 )%
International(1) 18 (42 ) 60 142.9 %
Total ancillary services operating
(loss) income $ (42 ) $ (73 ) $ 31 42.5 %
Adjusted operating (loss) income(2):
U.S. ancillary $ (44 ) $ (31 ) $ (13 ) (41.9 )%
International(1) 18 (1 ) 19 1,900.0 %
Total ancillary services adjusted
operating loss $ (26 ) $ (32 ) $ 6 18.8 %
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 six months ended
(2) For a reconciliation of adjusted operating income (loss) by reportable
segment, see the "Reconciliations of non-GAAP measures" section below.
42--------------------------------------------------------------------------------
Revenues:
U.S. ancillary services revenues for the second quarter of 2020 decreased from the first quarter of 2020 due to a decrease in revenues in our clinical research programs and a decrease in revenues due to the sale ofRMS Lifeline, Inc. (Lifeline), as described below. These decreases were partially offset by an increase in revenues in our integrated care and disease management business primarily due to an increase in special needs plan revenues. In addition, international revenues for the second quarter of 2020 decreased from the first quarter of 2020 primarily due to a decrease in dialysis and other medical revenues related to COVID-19, partially offset by acquired treatment growth.U.S. ancillary services revenues for the second quarter of 2020 increased from the second 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 plan revenues, as well as an increase in revenues in our physician services business. These increases were partially offset by a decrease in revenues due to the sale of Lifeline, as described below, and a decrease in revenue in our clinical research programs. Our international revenues for the second quarter of 2020 increased from the second quarter of 2019 primarily due to acquired treatment growth.U.S. ancillary services revenues for the six months endedJune 30, 2020 increased from the six months endedJune 30, 2019 due to an increase in revenues at our integrated care and disease management business primarily due to an increase in special needs plan revenues, as well as an increase in revenues in our physician services business, partially offset by a decrease in revenues due to the sale of Lifeline, as described below. Our international revenues for the six months endedJune 30, 2020 increased from the six months endedJune 30, 2019 primarily due to acquired treatment growth. Charges impacting operating loss: Loss on changes in ownership interests, net. We sold 100% of the stock of Lifeline, our vascular access business, effectiveMay 1, 2020 and recognized a loss of approximately$16 million on this transaction.Goodwill impairment charges. During the six months endedJune 30, 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, 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 legislation announced at that time. See further discussion of this impairment charge 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: The changes inU.S. ancillary services operating losses for the quarter endedJune 30, 2020 compared to the quarters endedMarch 31, 2020 andJune 30, 2019 , and for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , were negatively impacted by the sale of Lifeline as described above, in addition to items included in the following discussion.U.S. ancillary services operating losses and adjusted operating losses for the second quarter of 2020 increased from the first quarter of 2020 primarily due to an increase in medical costs in our integrated care and disease management business. International operating income for the second quarter of 2020 decreased from the first quarter of 2020 primarily due to foreign exchange losses recognized in the second quarter of 2020 as compared to foreign currency gains recognized in the first quarter of 2020.U.S. ancillary services operating losses and adjusted operating losses for the second quarter of 2020 increased from the second quarter of 2019 primarily due to an increase in medical costs in our integrated care and disease management business. International operating income for the second quarter of 2020 was flat compared to the second quarter of 2019 driven by growth in our international business offset by an increase in foreign exchange losses recognized in the second quarter of 2020 as compared to the second quarter of 2019.U.S. ancillary services operating losses and adjusted operating losses for the six months endedJune 30, 2020 increased from the six months endedJune 30, 2019 primarily due to an increase in medical costs in our integrated care and disease management business. International operating results and adjusted operating results for the six months endedJune 30, 2020 increased from the six months endedJune 30, 2019 primarily due to foreign exchange gains recognized in the six months endedJune 30, 2020 , growth in our international business and other one-time items. 43 -------------------------------------------------------------------------------- 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. Three months ended Q2 2020 vs. Q1 2020 Q2 2020 vs. Q2 2019 June 30, 2020 March 31, 2020 June 30, 2019 Amount Percent Amount Percent (dollars in millions) Corporate administrative support $ (73 ) $ (24 ) $
(22 )
(22 )
Six months ended YTD Q2 2020 vs. YTD Q2 2019
June 30, 2020 June 30, 2019 Amount Percent
(dollars in millions)
Corporate administrative
support $ (97 ) $ (41 ) $ (56 ) (136.6 )%
Adjusted corporate
administrative support(1) $ (62 ) $ (41 ) $ (21 ) (51.2 )%
(1) For a reconciliation of adjusted operating income (loss) by reportable
segment, see the "Reconciliations of non-GAAP measures" section below.
Charges impacting corporate administrative support: Accruals for legal matters. During the second quarter of 2020, we recorded a net charge for legal matters of$35 million which is included in general and administrative expenses. The changes in corporate administrative support expenses for the quarter endedJune 30, 2020 compared to the quarters endedMarch 31, 2020 andJune 30, 2019 , and for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , were impacted by accruals for legal matters as described above. In addition, corporate administrative support expenses and adjusted corporate administrative support expenses for the second quarter of 2020 increased from the first quarter of 2020 related to an increase in severance accruals associated with our senior executive leadership transition. Corporate administrative support expenses for the second quarter of 2020 increased from the second quarter of 2019 and increased for the six months endedJune 30, 2020 from the six months endedJune 30, 2019 related to an increase in severance accruals and long-term compensation expense associated with our senior executive leadership transition. Corporate-level charges Three months ended Q2 2020 vs. Q1 2020 Q2 2020 vs. Q2 2019 June 30, 2020 March 31, 2020 June 30, 2019 Amount Percent Amount Percent (dollars in millions) Debt expense$ (81 ) $ (89 )$ (132 ) $ (8 ) (9.0 )%$ (51 ) (38.6 )% Debt prepayment and refinancing charges $ - $ (3 ) $ (12 )$ (3 ) 100.0 %$ (12 ) (100.0 )% Other income (loss) $ 10 $ (4 ) $ 6$ 14 350.0 %$ 4 66.7 % Effective income tax rate 24.6 % 24.8 % 23.5 % (0.2 )% 1.1 % Effective income tax rate from continuing operations attributable to DaVita Inc.(1) 29.2 % 28.5 % 28.0 % 0.7 % 1.2 % Net income attributable to noncontrolling interests$ (53 ) $ (48 ) $ (54 )$ 5 10.4 %$ (1 ) (1.9 )% 44
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Six months ended June 30, YTD Q2 2020 vs. YTD Q2 2019
2020 2019 Amount Percent
(dollars in millions)
Debt expense $ (170 ) $ (263 ) $ (93 ) (35.4 )%
Debt prepayment and refinancing
charges $ (3 ) $ (12 ) $ (9 ) (75.0 )%
Other income (loss) $ 5 $ 13 $ (8 ) (61.5 )%
Effective income tax rate 24.7 % 24.6 % 0.1 %
Effective income tax rate from
continuing
operations attributable to
DaVita Inc.(1) 28.8 % 29.6 % (0.8 )%
Net income attributable to
noncontrolling
interests $ (102 ) $ (94 ) $ 8 8.5 %
(1) For a reconciliation of our effective income tax rate from continuing
operations attributable to
measures" section below.
Debt expense
Debt expense for the second quarter of 2020 decreased from the first quarter of
2020 primarily due to a decrease in our overall weighted average effective
interest rate on our debt, partially offset by an increase in our average
outstanding debt balance, including from the issuance in June 2020 of our new
senior notes due 2030. Debt expense for the second quarter of 2020 decreased
from the second quarter of 2019 and decreased for the six months ended June 30,
2020 from the six months ended June 30, 2019 primarily due to a decrease in our
overall weighted average effective interest rate on our debt and a decrease in
our average outstanding debt balance.
Our overall weighted average effective interest rate for the second quarter of
2020 was 3.64% compared to 4.35% for the first quarter of 2020 and 5.17% in the
second quarter of 2019. See Note 8 to the condensed consolidated financial
statements for further information on components of our debt.
Other income (loss)
Other income (loss) 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 increased for the second quarter of 2020 from the first quarter of
2020 and from the second quarter of 2019 primarily due to gains recognized on
foreign currency transactions and investments, partially offset by a decrease in
interest income in the second quarter of 2020. Other income decreased for the
six months ended June 30, 2020 from the six months ended June 30, 2019 primarily
due to losses recognized on foreign currency transactions and a decrease in
interest income in the six months ended June 30, 2020 .
Effective income tax rate
The effective income tax rate for the second quarter of 2020 was relatively flat
compared to the first quarter of 2020. The sale of Lifeline in the second
quarter of 2020 increased the effective income tax rate from continuing
operations attributable to DaVita Inc. compared to that in the first quarter of
2020, as well as the effective income tax rate and effective income tax rate
from continuing operations attributable to DaVita Inc. in the second quarter of
2020 compared to that in the second quarter of 2019.
The six months ended June 30, 2020 effective income tax rate was relatively flat
as compared to the six months ended June 30, 2019 . The effective income tax rate
from continuing operations attributable to DaVita Inc. for the six months ended
June 30, 2020 was lower than that for the six months ended June 30, 2019
primarily due to a goodwill impairment charge recognized during the first
quarter of 2019.
Net income attributable to noncontrolling interests
The increase in net income attributable to noncontrolling interests for the
second quarter of 2020 compared to the first quarter of 2020 was primarily due
to improved earnings at certain U.S. dialysis partnerships in the second quarter
of 2020, including, among other things, reimbursements we made to certain of our
U.S. dialysis partnerships for certain COVID-19-
45
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related expenses. The decrease in net income attributable to noncontrolling
interests for the second quarter of 2020 compared to the second quarter of 2019
was primarily due to the deconsolidation of two dialysis partnerships at
year-end 2019, as described above. The increase in net income attributable to
noncontrolling interests for the six months ended June 30, 2020 compared to the
six months ended June 30, 2019 was primarily due to improved earnings at certain
U.S. dialysis partnerships, partially offset by the deconsolidation of the two
dialysis partnerships.
Accounts receivable
Our consolidated accounts receivable balances at June 30, 2020 and December 31,
2019 , were $1.772 billion and $1.796 billion , respectively, representing
approximately 57 days and 58 days sales outstanding (DSO), respectively, net of
allowances for uncollectible accounts. The decrease in consolidated DSO was
primarily due to improved collections from certain payors, partially offset by a
delay in billing to certain other payors. Our DSO calculation is based on the
current quarter's average revenues per day. There were no significant changes in
the second quarter of 2020 from the first quarter of 2020 in the amount of
unreserved accounts receivable over one year old or the amounts pending approval
from third-party payors.
Liquidity and capital resources
The following table shows the summary of our major sources and uses of cash,
cash equivalents and restricted cash:
Six months ended June 30, YTD Q2 2020 vs. YTD Q2 2019
2020 2019(1) Amount Percent
(dollars in millions)
Net cash provided by operating activities:
Net income $ 543 $ 517 $ 26 5.0 %
Non-cash items 491 483 8 1.7 %
Working capital (11 ) (230 ) 219 (95.2 )%
Other (11 ) (19 ) 8 (42.1 )%
$ 1,012 $ 751 $ 261 34.8 %
Net cash (used in) provided by investing
activities:
Capital expenditures:
Routine maintenance/IT/other $ (156 ) $ (161 ) $ 5 (3.1 )%
Development and relocations (136 ) (213 ) 77 (36.2 )%
Acquisition expenditures (44 ) (66 ) 22 (33.3 )%
Proceeds from sale of self-developed
properties 69 27 42 155.6 %
DMG sale net proceeds received at closing,
net of DMG cash divested - 3,825 (3,825 ) (100.0 )%
Other (140 ) (9 ) (131 ) 1,455.6 %
$ (407 ) $ 3,403 $ (3,810 ) (112.0 )%
Net cash provided by (used in) financing
activities:
Debt issuances net of (payments) and
financing costs $ 1,668 $ (1,164 ) $ 2,832 (243.3 )%
Distributions to noncontrolling interest (119 ) (96 ) (23 ) 24.0 %
Contributions from noncontrolling interest 21 31 (10 ) (32.3 )%
Share repurchases (322 ) (73 ) (249 ) 341.1 %
Other (8 ) (9 ) 1 (11.1 )%
$ 1,240 $ (1,311 ) $ 2,551 (194.6 )%
Total number of shares repurchased 4,052,298 2,059,976 1,992,322 96.7 %
Free cash flow from continuing operations(2)
152.2 %
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.
46-------------------------------------------------------------------------------- Consolidated cash flows Consolidated cash flows from operating activities during the six months endedJune 30, 2020 were$1.012 billion , all of which were from continuing operations, compared to consolidated operating cash flows for the six months endedJune 30, 2019 of$751 million , of which$647 million was from continuing operations. The increase in operating cash flows from continuing operations was primarily driven by an increase in operating results for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 , as well as lower cash taxes and timing of other working capital items. The six months endedJune 30, 2020 were positively impacted by one less day in DSO in ourU.S. dialysis business compared to that for the six months endedJune 30, 2019 , which was negatively impacted by a three day increase in DSO in ourU.S. dialysis business. Free cash flow from continuing operations during the six months endedJune 30, 2020 increased from the six months endedJune 30, 2019 primarily due to an increase in net cash provided by operating activities, as described above, a decrease in capital expenditures for development, a decrease in cash outflows for acquisitions and an increase in proceeds from the sale of self-developed properties, partially offset by an increase in net distributions to noncontrolling interests. Other significant changes in sources and uses of cash included our issuance of$1.750 billion in aggregate principal amount of 4 ?% senior notes due 2030 inJune 2020 , a$500 million draw on our revolving line of credit in the first quarter of 2020 and the subsequent repayment in full of our revolving line of credit in the second quarter of 2020. Other net debt payments during the six months endedJune 30, 2020 primarily consisted of regularly scheduled mandatory principal payments under our senior secured credit facilities totaling approximately$22 million on Term Loan A and$14 million on Term Loan B-1 and additional required principal payments under other debt arrangements. In addition, we incurred bond issuance costs of approximately$20 million and 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 financing activities. By comparison, the same period in 2019 included the receipt of$4.465 billion in preliminary net cash proceeds from Optum at close of the DMG sale, or$3.825 billion net of cash and restricted cash included in DMG net assets sold, and net prepayments of$1.164 billion on debt in the six months endedJune 30, 2019 . Net debt payments primarily consisted of the mandatory payments of term debt under our senior secured credit facility funded by all of the net proceeds from the DMG sale, net of advances on our revolving line of credit. Cash flows used for share repurchases increased in the six months endedJune 30, 2020 as compared to the six months endedJune 30, 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 Six months ended Three months ended Six months ended June 30, June 30, June 30, June 30, 2020 2019 2020 2019 2020 2019 2020 2019 Number of centers operated at beginning of period 2,772 2,689 2,753 2,664 282 243 259 241 Acquired centers 1 3 3 5 3 5 25 7 Developed centers 28 33 50 60 2 - 4 - Net change in non-owned managed or administered centers(1) - - - (1 ) - - - - Sold and closed centers(2) (2 ) (1 ) (4 ) (3 ) - - - - Closed centers(3) (4 ) (1 ) (7 ) (2 ) - - (2 ) - Net change inAsia Pacific joint venture centers - - 1 - Number of centers operated at end of period 2,795 2,723 2,795 2,723 287 248 287 248
(1) Represents dialysis centers which we manage or provide administrative
services to 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.
47-------------------------------------------------------------------------------- Stock repurchases The following table summarizes our repurchases of our common stock during the three and six months endedJune 30, 2020 and 2019: Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Open market repurchases: (dollars in millions, except for per share) Shares - 2,059,976 4,052,298 2,059,976 Amount paid $ - $ 112 $ 303 $ 112 Average paid per share $ -$ 54.46 $
74.81
See further discussion on our stock repurchases in Note 12 to the condensed consolidated financial statements. Available liquidity As ofJune 30, 2020 , we had an undrawn$1.0 billion revolving line of credit under our senior secured credit facilities. Credit available under this revolving line of credit is reduced by the amount of any letters of credit outstanding. There are currently no letters of credit outstanding under the senior secured credit facilities. We separately have approximately$57 million of outstanding letters of credit under a separate bilateral secured letter of credit facility. We may from time to time seek to obtain funds or refinance existing debt through additional unsecured debt financings or other capital alternatives. OnJuly 15, 2020 , we used the net proceeds from the 4 ?% senior notes due 2030 that we issued inJune 2020 , together with cash on hand, to redeem in full all$1.750 billion aggregate principal amount outstanding of our 5 ?% senior notes due 2024, plus accrued interest and redemption premium. In connection with this transaction we incurred debt redemption premium charges of$30 million and deferred financing costs write-offs of$10 million , which will be recognized in the third quarter of 2020, along with advisory costs incurred in connection with this redemption. 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 driven increased volatility in 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, we elected not to accept approximately$250 million in funds available to us through theCARES Act Provider Relief Fund and returned these funds inMay 2020 . There can be no assurance that we will be able to continue to forego the receipt of financial or other assistance under the CARES Act or similar subsequent legislation or that similar assistance will be available from the government if we have a need for such assistance in the future. The ultimate impact of the pandemic will depend on future developments that are highly uncertain and difficult to predict. 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 48
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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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