filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
101K characters. Original on sec.gov · Markdown
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 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 could include, among other things, statements about our balance sheet and liquidity, our expenses, revenues, billings and collections, patient census, availability or cost of supplies, treatment volumes, mix expectation, such as the percentage or number of patients under commercial insurance, the effects of the recent Change Healthcare (CHC) cybersecurity outage on us or our operations, current macroeconomic, marketplace and labor market conditions, and overall impact on our patients and teammates, as well as other statements regarding our future operations, financial condition and prospects, capital allocation plans, expenses, cost saving initiatives, other strategic initiatives, use of contract labor, government and commercial payment rates, expectations related to value-based care (VBC), integrated kidney care (IKC), Medicare Advantage (MA) plan enrollment and our international operations, expectations regarding increased competition and marketplace changes, including those related to new or potential entrants in the dialysis and pre-dialysis marketplace and the potential impact of innovative technologies, drugs, or other treatments on the dialysis industry, expectations regarding the impact of our continuing cost-savings initiatives and our stock repurchase program. All statements in this report, other than statements of historical fact, are forward-looking statements. 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, except as may be required by law. Actual future events and results could differ materially from any forward-looking statements due to numerous factors that involve substantial known and unknown risks and uncertainties. These risks and uncertainties include, among other things:
*•*current macroeconomic and marketplace conditions, including without limitation, the impact of global events and political or governmental volatility; the impact of the domestic political environment and related developments on the current healthcare marketplace and on our business; the continuing impact of the COVID-19 pandemic on our operations, reputation, financial condition and the chronic kidney disease (CKD) population and our patient population; the potential impact of new or potential entrants in the dialysis and pre-dialysis marketplace and potential impact of innovative technologies, drugs, or other treatments on our patients and industry; supply chain challenges and disruptions, including without limitation with respect to certain of our equipment and clinical supplies; elevated teammate turnover or labor costs; the impact of continued increased competition from dialysis providers and others; and our ability to respond to challenging U.S. and global economic and marketplace conditions, including, among other things, our ability to successfully identify cost saving opportunities and to invest in and implement cost saving initiatives;
*•*the concentration of profits generated by higher-paying commercial payor plans for which there is continued downward pressure on average realized payment rates; a reduction in the number or percentage of our patients under commercial plans, including, without limitation, as a result of continuing legislative efforts to restrict or prohibit the use and/or availability of charitable premium assistance, or as a result of payor's implementing restrictive plan designs;
*•*risks arising from potential changes in or new laws, regulations or requirements applicable to us, including, without limitation, those related to healthcare, antitrust matters, including, among others, non-competes and other restrictive covenants, and acquisition, merger, joint venture or similar transactions and/or labor matters, and potential impacts of changes in enforcement thereof or related litigation impacting, among other things, coverage or reimbursement rates for our services or the number of patients enrolled in or that select higher-paying commercial plans, and the risk that we make incorrect assumptions about how our patients will respond to any such developments;
*•*our ability to attract, retain and motivate teammates and our ability to manage operating cost increases or productivity decreases whether due to union organizing activities, legislative or other changes, demand for labor, volatility and uncertainty in the labor market, the current challenging and highly competitive labor market conditions, or other reasons;
*•*our ability to successfully implement our strategies with respect to IKC and VBC initiatives and home based dialysis in the desired time frame and in a complex, dynamic and highly regulated environment;
*•*a reduction in government payment rates under the Medicare End Stage Renal Disease program, state Medicaid or other government-based programs and the impact of the MA benchmark structure;
*•*noncompliance by us or our business associates with any privacy or security laws or any security breach by us or a third party, such as the recent cyberattack on CHC, including, among other things, any such non-compliance or breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information;
*•*legal and compliance risks, such as compliance with complex, and at times, evolving government regulations and requirements, and with additional laws that may apply to our operations as we expand geographically or enter into new lines of business;
*•*changes in pharmaceutical practice patterns, reimbursement and payment policies and processes, or pharmaceutical pricing, including with respect to oral phosphate binders, among other things;
*•*our reliance on significant suppliers, service providers and other third party vendors to provide key support to our business operations and enable our provision of services to patients, such as, among others, CHC and suppliers of certain pharmaceuticals or critical clinical products;
*•*our ability to develop and maintain relationships with physicians and hospitals, changing affiliation models for physicians, and the emergence of new models of care or other initiatives that, among other things, may erode our patient base and impact reimbursement rates;
*•*our ability to complete and successfully integrate and operate acquisitions, mergers, dispositions, joint ventures or other strategic transactions on terms favorable to us or at all; and our ability to successfully expand our operations and services in markets outside the United States, or to businesses or products outside of dialysis services;
*•*the variability of our cash flows, including, without limitation, any extended billing or collections cycles including, without limitation, due to defects or operational issues in our billing systems or in the billing systems or services of third parties on which we rely, such as the operational issues at CHC resulting from a recent cyberattack; the risk that we may not be able to generate or access sufficient cash in the future to service our indebtedness or to fund our other liquidity needs; and the risk that we may not be able to refinance our indebtedness as it becomes due, on terms favorable to us or at all;
*•*factors that may impact our ability to repurchase stock under our stock repurchase program and the timing of any such stock repurchases, as well as any use by us of a considerable amount of available funds to repurchase stock;
*•*our aspirations, goals and disclosures related to environmental, social and governance (ESG) matters, including, among other things, evolving regulatory requirements affecting ESG standards, measurements and reporting requirements; and
*•*the other risk factors, trends and uncertainties set forth in our Annual Report on Form 10-K for the year ended December 31, 2023 (2023 10-K), and the risks and uncertainties discussed in any subsequent reports that we file or furnish with the Securities and Exchange Commission (SEC) from time to time.
The following should be read in conjunction with our condensed consolidated financial statements.
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 our U.S. integrated kidney care (IKC) business, our U.S. other ancillary services, and our international operations, which we collectively refer to as our ancillary services, as well as our corporate administrative support functions. 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) or end stage kidney disease (ESKD).
Recent Developments
Change Healthcare
As previously reported, due to a cybersecurity breach that affected Change Healthcare (CHC), a subsidiary of UnitedHealth Group (United) that served as an intermediary for processing the vast majority of our payment claims for domestic commercial and government payors, we suspended all claims processing activity with CHC (CHC Outage). As a result of the CHC Outage, we were unable to submit payment claims through CHC's platform as of February 2024, and therefore, we experienced a significant reduction in cash flow during the period of time in the first and second quarters beginning after the notice of breach was received on February 21, 2024. As a result of the suspension of claims processing activity with CHC, we set up alternative methods to submit Medicare claims for processing and worked to establish additional alternative methods for claim processing. In addition, we worked to mitigate the impact of the outage through other means, including, for example, by securing certain interest-free funding from United and its affiliates (CHC Funding Arrangement).
Based on information provided by CHC and officials investigating the CHC Outage, we have no indication that our systems were infiltrated by the same threat actor that caused the CHC Outage. CHC began to restore claims submission functionality on March 28, 2024, and CHC subsequently presented us with security protocols that had been put in place following the cybersecurity breach. Following an evaluation of these protocols, and in reliance thereon, we resumed claims submissions and billing processes through CHC's information technology systems. As of the date of this filing, through a combination of CHC's platform and the aforementioned alternate billing processes, we are current on our primary claims submissions. However, the CHC Outage, and the resultant delay in claims submissions, led to an increase in our days sales outstanding (DSOs), among other things. While we have been able to submit claims through CHC after March 28, 2024, we continue to experience payment collection delays, and it is too early to know whether we will receive the full expected value for the claims submitted through CHC that were delayed in their original submission as a result of the outage. The bulk of the initial DSO increase related to the CHC Outage has subsided, and we believe DSOs will continue to decline over the next few months as we continue claims submissions and cash collections in the ordinary course.
CHC recently reported that it identified protected health information (PHI), or personally identifiable information (PII), from users of the CHC systems that was potentially impacted by the CHC Outage. To date, we have not been informed that any of our data, including any PHI or PII from our patients, was impacted by the CHC Outage. We understand that the CHC investigation and data forensics is still ongoing and that there is a potential that our data and PHI or PII from our patients may have been impacted by the CHC Outage.
Since receiving the initial notice from CHC regarding the CHC Outage, we have been reviewing and monitoring our information technology infrastructure and network environment, including specifically for the indicators of compromise identified by CHC and its agents. While there can be no assurances, we do not believe our information technology systems have been affected based on the information available to date. We have dedicated and expect to continue to dedicate resources to help resolve the impact of this temporary outage, including, among other things, administrative processes related to collections for services rendered and resolution of disputes such as retractions from and refunds to commercial and government payors, and the CHC Outage may continue to increase the risks associated with billing and collections. While the CHC Outage has not impacted our ability to provide care to our patients in the ordinary course and we do not currently expect the outage to have a material impact on our operations, financial condition or results of operation, the ultimate impact of the CHC Outage remains subject to future developments and risks that are difficult to predict. These risks may include, among other things, a recurrence of system outages or service suspensions or the risk that our information technology systems or our proprietary information and sensitive or confidential data, including PHI or PII, may have been compromised through the CHC Outage, any of which may have a material adverse effect on our business, results of operations, financial condition, cash flows or reputation. For a further discussion of the risks associated with outages, disruptions or incidents at third parties on which we rely, see the risk factors in Part I, Item 1A of our 2023 10-K under the headings, "Failing to effectively maintain, operate or upgrade our information systems or those of third-party service providers upon which we rely..." and "Privacy and information security laws are complex…"
General Economic and Marketplace Conditions; Legal and Regulatory Developments
Developments in general economic and market conditions have directly and indirectly impacted the Company and in the future could have a material adverse impact on our patients, teammates, physician partners, suppliers, business, operations, reputation, financial condition, results of operations, share price, cash flows and/or liquidity. Many of these external factors and conditions are interrelated, including, among other things, inflation, potential interest rate volatility and other economic conditions, labor market conditions, wage pressure, the impact of COVID-19 on the mortality rates of our patients and other ESKD or CKD patients, supply chain challenges and the potential impact and application of innovative technologies, drugs or other treatments. Certain of these impacts could be further intensified by concurrent global events such as the ongoing conflicts between Russia and Ukraine and in Israel, Gaza and the surrounding areas, which have continued to drive sociopolitical and economic uncertainty across the globe.
Operational and Financial Impacts
In the second quarter of 2024, treatment per day volumes were higher compared to the first quarter of 2024. While census gains in the quarter helped to drive this increase, we continue to experience a negative impact on revenue and treatment volume due to, among other things, elevated mortality rates of our patients in comparison to the periods prior to the pandemic and the associated adverse impact on our patient census. Treatment volumes during the year have been and may continue to be adversely impacted by higher than expected missed treatment rates, which to date have been driven primarily by severe weather events. In addition, new-to-dialysis admission rates, treatment volumes, future revenues and non-acquired growth, among other things, could continue to be negatively impacted over time to the extent that the ESKD and CKD populations experience sustained elevated mortality levels. The magnitude of these cumulative impacts could have a material adverse impact on our results of operations, financial condition and cash flows.
Ongoing global economic conditions and political and regulatory developments, such as general labor, supply chain and inflationary pressures have increased, and will likely continue to increase, our expenses, including, among others, staffing, labor, and supply costs. We have significant suppliers and service providers, with a substantial portion of our total vendor spend concentrated with a limited number of third party suppliers and service providers. These third party suppliers and service providers include, without limitation, providers performing certain key functions for us such as claims processing functions, suppliers of pharmaceuticals or clinical products that may be the primary source of products critical to the services we provide, or to which we have committed obligations to make purchases, sometimes at particular prices. It may be difficult, costly and time consuming for us to transition away from any of these significant suppliers and service providers. We have experienced service disruptions relating to key business functions and supply chain shortages with respect to certain of our equipment and clinical supplies, including critical supplies, and there can be no assurance that our third party suppliers and service providers will provide, or continue to provide, the services or products that we require. If our significant suppliers and service providers do not meet our needs, and we are not able to find adequate alternative sources for these products or services on a timely basis, it could require us to make significant operational changes, could impact our ability to provide dialysis services we offer, and could otherwise have a material adverse impact on our business, results of operations, financial condition and cash flows. We continue to evaluate the risk of future supply chain shortages, including by assessing alternative sources for supplies critical to the services we provide. For further discussion of the risks related to our supplier needs, see the discussion in the risk factors in Part I, Item 1A Risk Factors of our 2023 10-K under the heading, "If certain of our suppliers do not meet our needs..."
We continue to experience elevated levels of compensation compared to the prior year. We expect certain of these increased staffing and labor costs to continue, due to, among other factors, the continuation of a challenging healthcare labor market. The cumulative impact of these increased costs could be material. In addition, potential staffing shortages or other potential developments or disruptions related to our teammates, if material, could ultimately lead to the unplanned closures of certain centers or adversely impact clinical operations, or may otherwise have a material adverse impact on our ability to provide dialysis services or the cost of providing those services, among other things. Our industry has also experienced increased union organizing activities, including the filing of petitions by a union at certain of our clinics in California and at certain of our competitors' clinics, with certain of our competitors' clinics ultimately voting to unionize. We are engaging with our teammates at clinics where union petitions have been filed to respond to these petitions and future elections. Regardless of the outcome of these discussions, other teammates at other clinics may file similar petitions in the future, and these petitions, if filed, may lead to additional elections. If a significant portion of our teammates were to become unionized, we could experience, among other things, potential work stoppages or other business disruptions; adverse impacts to our financial results due to the costs of bargaining or implementing a grievance procedure and processing grievances; decreases in our operational flexibility and efficiency; or negative impacts on our employee culture. In addition, we are and may continue to be subject to targeted corporate campaigns by union organizers in response to which we have been and expect to continue to be required to expend substantial resources, both time and financial. Any of these events or circumstances, including our responses to such events or circumstances, could have a material adverse effect on our employee relations, treatment growth, productivity,
business, results of operations, financial condition, cash flows and reputation. For further discussion of the risks related to rising labor costs and union organizing activities, see the discussion in the risk factors in Part I, Item 1A Risk Factors of our 2023 10-K under the heading, "Our business is labor intensive..."
The impact of the pandemic on our patient population combined with the cost inflation trends and the inability of government reimbursement rates to keep pace with these cost trends, have put pressure on our existing cost structure, and we expect that certain of those increased costs will persist as inflationary and supply chain pressures and challenging labor market conditions continue, each as noted above. During the second quarter of 2024, we continued to invest in and implement cost savings initiatives designed to help mitigate these cost and volume pressures. These include identified cost savings related to the achievement of general and administrative cost efficiencies through ongoing initiatives, including, among others, those that increase our use of third party service providers to perform certain activities. These opportunities and investments also include, among others, initiatives relating to clinic optimization, capacity utilization improvement and procurement opportunities, as well as investments in revenue cycle management. We have incurred, and expect to continue to incur, charges in connection with the continued implementation of certain of these initiatives. There can be no assurance that we will be able to successfully execute these initiatives or that they will achieve expectations or succeed in helping offset the impact of these challenging conditions.
Legal and Regulatory Developments
As previously reported, on April 23, 2024, the Federal Trade Commission (FTC) published a final rule that would generally ban all post-employment non-compete clauses with employees and prohibit employers from enforcing existing non-compete clauses in contracts with workers, with limited exceptions. The rule has been enjoined in at least one legal challenge, with a final decision expected in that case by August 30, 2024. The legal challenge may impact FTC's targeted effective date of September 4, 2024. We are continuing to assess the potential impact of the rule on our business, but if the final rule is implemented as currently contemplated, it could have an adverse impact on, among other things, our agreements with teammates, our arrangements with medical directors, or the terms of our existing agreements with physicians. There are also other legislative efforts, including in Congress and more than half of the states' legislatures, that seek to place restrictions on non-compete agreements between employers and workers. While few of these states have passed such legislation that impacted our business, it is possible that similar legislation could be introduced in 2024. Any failure on our part to adequately adjust to this rule, any state follow-on regulations and the potential impact thereof could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation.
We believe that the aforementioned recent developments and general economic and marketplace conditions will continue to impact the Company in the future. Their ultimate impact depends on future developments that are highly uncertain and difficult to predict.
Financial Results
The discussion below includes analysis of our financial condition and results of operations for the three months ended June 30, 2024 compared to the three months ended March 31, 2024, and the year-to-date periods for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Consolidated results of operations
The following tables summarize our revenues, operating income (loss) and adjusted operating income (loss) by line of business. See the discussion of our results for each line of business following the tables. When multiple drivers are identified in the following discussion of results, they are listed in order of magnitude:
| Three months ended | Q2 2024 vs. Q1 2024 | ||||||||||||||||||||||
| June 30, 2024 | March 31, 2024 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| U.S. dialysis | $ | 2,841 | $ | 2,756 | $ | 85 | 3.1 | % | |||||||||||||||
| Other — Ancillary services | 362 | 342 | 20 | 5.8 | % | ||||||||||||||||||
| Elimination of intersegment revenues | (17) | (27) | 10 | 37.0 | % | ||||||||||||||||||
| Total consolidated revenues | $ | 3,187 | $ | 3,071 | $ | 116 | 3.8 | % | |||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| U.S. dialysis | $ | 550 | $ | 526 | $ | 24 | 4.6 | % | |||||||||||||||
| Other — Ancillary services | (19) | (12) | (7) | (58.3) | % | ||||||||||||||||||
| Corporate administrative support | (25) | (30) | 5 | 16.7 | % | ||||||||||||||||||
| Operating income | $ | 506 | $ | 484 | $ | 22 | 4.5 | % | |||||||||||||||
| Adjusted operating income (loss)(1): | |||||||||||||||||||||||
| U.S. dialysis | $ | 550 | $ | 491 | $ | 59 | 12.0 | % | |||||||||||||||
| Other — Ancillary services | (19) | (12) | (7) | (58.3) | % | ||||||||||||||||||
| Corporate administrative support | (25) | (30) | 5 | 16.7 | % | ||||||||||||||||||
| Adjusted operating income | $ | 506 | $ | 449 | $ | 57 | 12.7 | % |
Certain columns, rows or percentages may not sum due to the presentation of rounded numbers.
(1)For a reconciliation of adjusted operating income (loss) by reportable segment, see the "Reconciliations of Non-GAAP measures" section below.
| Six months ended | YTD Q2 2024 vs. YTD Q2 2023 | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| U.S. dialysis | $ | 5,597 | $ | 5,343 | $ | 254 | 4.8 | % | |||||||||||||||
| Other — Ancillary services | 704 | 575 | 129 | 22.4 | % | ||||||||||||||||||
| Elimination of intersegment revenues | (44) | (45) | 1 | 2.2 | % | ||||||||||||||||||
| Total consolidated revenues | $ | 6,257 | $ | 5,873 | $ | 384 | 6.5 | % | |||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| U.S. dialysis | $ | 1,076 | $ | 822 | $ | 254 | 30.9 | % | |||||||||||||||
| Other — Ancillary services | (30) | (46) | 16 | 34.8 | % | ||||||||||||||||||
| Corporate administrative support | (56) | (58) | 2 | 3.4 | % | ||||||||||||||||||
| Operating income | $ | 990 | $ | 717 | $ | 273 | 38.1 | % | |||||||||||||||
| Adjusted operating income (loss)(1): | |||||||||||||||||||||||
| U.S. dialysis | $ | 1,041 | $ | 844 | $ | 197 | 23.3 | % | |||||||||||||||
| Other — Ancillary services | (30) | (46) | 16 | 34.8 | % | ||||||||||||||||||
| Corporate administrative support | (56) | (57) | 1 | 1.8 | % | ||||||||||||||||||
| Adjusted operating income | $ | 955 | $ | 740 | $ | 215 | 29.1 | % |
Certain columns, rows or percentages may not sum due to the presentation of rounded numbers.
(1)For a reconciliation of adjusted operating income (loss) by reportable segment, see the "Reconciliations of Non-GAAP measures" section below.
U.S. dialysis results of operations
Treatment volume:
| Three months ended | Q2 2024 vs. Q1 2024 | ||||||||||||||||||||||
| June 30, 2024 | March 31, 2024 | Amount | Percent | ||||||||||||||||||||
| Dialysis treatments | 7,265,444 | 7,151,512 | 113,932 | 1.6 | % | ||||||||||||||||||
| Average treatments per day | 93,147 | 92,159 | 988 | 1.1 | % | ||||||||||||||||||
| Treatment days | 78 | 78 | — | — | % | ||||||||||||||||||
| Normalized non-acquired treatment growth(1) | 0.4 | % | 0.4 | % |
Certain columns, rows or percentages may not sum due to the presentation of rounded numbers.
(1)Normalized non-acquired treatment growth reflects year over year growth in treatment volume, adjusted to exclude acquisitions and other similar transactions, and further adjusted to normalize for the number and mix of treatment days in a given quarter versus the prior year quarter.
| Six months ended | YTD Q2 2024 vs. YTD Q2 2023 | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | Amount | Percent | ||||||||||||||||||||
| Dialysis treatments | 14,416,956 | 14,348,669 | 68,287 | 0.5 | % | ||||||||||||||||||
| Average treatments per day | 92,654 | 92,572 | 82 | 0.1 | % | ||||||||||||||||||
| Treatment days | 156 | 155 | 1 | 0.6 | % | ||||||||||||||||||
Certain columns, rows or percentages may not sum due to the presentation of rounded numbers.
Our U.S. dialysis treatment volume is directly correlated with our operating revenues and expenses. The increase in our U.S. dialysis treatments for the second quarter of 2024 from the first quarter of 2024 was primarily driven by increased average treatments per day due to increased patient count from acquired treatment growth.
The increase in our U.S. dialysis treatments for the six months ended June 30, 2024 from the six months ended June 30, 2023 was primarily driven by one additional treatment day and increased patient count from acquired and non-acquired treatment growth.
Revenues:
| Three months ended | Q2 2024 vs. Q1 2024 | ||||||||||||||||||||||
| June 30, 2024 | March 31, 2024 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions, except per treatment data) | |||||||||||||||||||||||
| Total revenues | $ | 2,841 | $ | 2,756 | $ | 85 | 3.1 | % | |||||||||||||||
| Average patient service revenue per treatment | $ | 390.22 | $ | 384.54 | $ | 5.68 | 1.5 | % |
Certain columns, rows or percentages may not sum due to the presentation of rounded numbers.
| Six months ended | YTD Q2 2024 vs. YTD Q2 2023 | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions, except per treatment data) | |||||||||||||||||||||||
| Total revenues | $ | 5,597 | $ | 5,343 | $ | 254 | 4.8 | % | |||||||||||||||
| Average patient service revenue per treatment | $ | 387.40 | $ | 371.48 | $ | 15.92 | 4.3 | % |
Certain columns, rows or percentages may not sum due to the presentation of rounded numbers.
U.S. dialysis average patient service revenue per treatment for the second quarter of 2024 compared to the first quarter of 2024 increased primarily due to normal seasonal improvements driven by patients meeting their co-insurance and deductibles and increases in average reimbursement rates due to normal annual rate increases, partially offset by unfavorable changes in mix.
U.S. dialysis average patient service revenue per treatment for the six months ended June 30, 2024 increased compared to the six months ended June 30, 2023 primarily driven by the increase in average reimbursement rates from normal annual rate increases including Medicare rate increases, as well as revenue cycle improvements, favorable changes in mix and an increase in hospital inpatient dialysis rates.
In June 2024, Centers for Medicare & Medicaid Services (CMS) issued a proposed rule to update the Medicare ESRD Prospective Payment System payment rate and policies for calendar year 2025. Among other things, the proposed rule, if finalized, would allow Medicare payment for dialysis in the home setting for beneficiaries with acute kidney injury and update requirements for the ESRD Quality Incentive Program. CMS estimates that the overall impact of the proposed rule will increase ESRD freestanding facilities’ average reimbursement by 2.1% in 2025.
Operating expenses:
| Three months ended | Q2 2024 vs. Q1 2024 | ||||||||||||||||||||||
| June 30, 2024 | March 31, 2024 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions, except per treatment data) | |||||||||||||||||||||||
| Patient care costs | $ | 1,855 | $ | 1,825 | $ | 30 | 1.6 | % | |||||||||||||||
| General and administrative | 282 | 275 | 7 | 2.5 | % | ||||||||||||||||||
| Depreciation and amortization | 160 | 173 | (13) | (7.5) | % | ||||||||||||||||||
| Equity investment income | (6) | (6) | — | — | % | ||||||||||||||||||
| Gain on changes in ownership interest | — | (35) | 35 | 100.0 | % | ||||||||||||||||||
| Total operating expenses and charges | $ | 2,291 | $ | 2,230 | $ | 61 | 2.7 | % | |||||||||||||||
| Patient care costs per treatment | $ | 255.25 | $ | 255.13 | $ | 0.12 | — | % |
Certain columns, rows or percentages may not sum or recalculate due to the presentation of rounded numbers.
| Six months ended | YTD Q2 2024 vs. YTD Q2 2023 | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions, except per treatment data) | |||||||||||||||||||||||
| Patient care costs | $ | 3,679 | $ | 3,658 | $ | 21 | 0.6 | % | |||||||||||||||
| General and administrative | 556 | 538 | 18 | 3.3 | % | ||||||||||||||||||
| Depreciation and amortization | 333 | 339 | (6) | (1.8) | % | ||||||||||||||||||
| Equity investment income | (12) | (14) | 2 | 14.3 | % | ||||||||||||||||||
| Gain on changes in ownership interest | (35) | — | (35) | (100.0) | % | ||||||||||||||||||
| Total operating expenses and charges | $ | 4,521 | $ | 4,521 | $ | — | — | % | |||||||||||||||
| Patient care costs per treatment | $ | 255.19 | $ | 254.94 | $ | 0.25 | 0.1 | % |
Certain columns, rows or percentages may not sum or recalculate due to the presentation of rounded numbers.
Charges impacting operating income
Closure costs. During the third quarter of 2023, we continued the strategic review of our outpatient clinic capacity requirements and utilization, which have been significantly impacted by declines in our patient census due to the COVID-19 pandemic. This continuing review, begun in the third quarter of 2022, has resulted in higher than normal charges for center capacity closures over the last several quarters. These capacity closure costs include net losses on assets retired, lease termination costs, asset impairments and accelerated depreciation and amortization.
During the second quarter of 2024, we incurred charges for U.S. dialysis center closures of approximately $15.3 million, which increased our patient care costs by $6.5 million, our general and administrative expenses by $8.7 million and our depreciation and amortization expense by $0.1 million. By comparison, during the first quarter of 2024, U.S. dialysis center closures were approximately $14.6 million, which increased our patient care costs by $3.3 million, our general and administrative expenses by $7.1 million and our depreciation and amortization expense by $4.2 million.
During the six months ended June 30, 2024, U.S. dialysis center closures were approximately $29.9 million, which increased our patient care costs by $9.8 million, our general and administrative expenses by $15.8 million and our depreciation and amortization expense by $4.3 million. By comparison, during the six months ended June 30, 2023, U.S. dialysis center
closures were approximately $43.3 million, which increased our patient care costs by $18.3 million, our general and administrative expenses by $12.6 million and our depreciation and amortization expense by $12.4 million.
We will continue to optimize our U.S. dialysis center footprint through center mergers and/or closures and expect our center closure rates to remain at elevated levels over the remainder of 2024.
Severance costs. During the fourth quarter of 2022, we committed to a plan to increase efficiencies and cost savings in certain general and administrative support functions. As a result of this plan, we recognized expenses related to termination and other benefit commitments in our U.S. dialysis business. This plan included additional charges of $21.9 million during the six months ended June 30, 2023.
Patient care costs. U.S. dialysis patient care costs per treatment for the second quarter of 2024 increased from the first quarter of 2024 primarily due to increases in other direct operating expenses associated with our dialysis centers, health benefit expense, medical supplies expense, insurance costs and center closure costs. These increases were partially offset by decreased compensation expenses including seasonal decreases in payroll taxes and decreased travel costs. Additionally, our fixed other direct operating expenses positively impacted patient care costs per treatment due to increased treatments in the second quarter of 2024, as well as decreased professional fees and decreased pharmaceutical unit costs.
U.S. dialysis patient care costs per treatment for the six months ended June 30, 2024 increased from the six months ended June 30, 2023 primarily due to increased compensation expenses, including increased wage rates and headcount, as well as increases in insurance costs, medical supplies expense and health benefits expense. These increases were partially offset by decreased contract wages, contributions to charitable organizations, other direct operating expenses associated with our dialysis centers and center closure costs. Patient care costs per treatment were also favorably impacted by decreased IT-related costs, pharmaceutical unit costs, tax and license costs and professional fees. In addition, our fixed other direct operating expenses favorably impacted patient care costs per treatment due to increased treatments in 2024.
General and administrative expenses. U.S. dialysis general and administrative expenses in the second quarter of 2024 increased from the first quarter of 2024 primarily due to increased compensation expenses, professional fees, center closure costs and long-term incentive compensation. These increases were partially offset by a decrease in advocacy costs.
U.S. dialysis general and administrative expenses for the six months ended June 30, 2024 increased from the six months ended June 30, 2023 due to increased advocacy costs, primarily related to a refund received in 2023 related to 2022 advocacy costs, as well as increases in IT-related costs and compensation expenses including increased wage rates. Other drivers of this change include increased professional fees and center closure costs. These increases were partially offset by decreased severance costs, as described above.
Depreciation and amortization. U.S. dialysis depreciation and amortization expenses for the quarter ended June 30, 2024 decreased compared to the quarter ended March 31, 2024 primarily due to decreases in depreciation related to corporate IT projects and accelerated depreciation related to center closures.
U.S. dialysis depreciation and amortization expenses for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 decreased primarily due to decreased accelerated depreciation related to center closures.
Equity investment income. U.S. dialysis equity investment income remained relatively flat for the second quarter of 2024 compared to the first quarter of 2024. Equity investment income for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 decreased due to the consolidation of a previously nonconsolidated dialysis partnership in the first quarter of 2024.
Gain on changes in ownership interests. During the first quarter of 2024, we acquired a controlling interest in a previously nonconsolidated dialysis partnership for which we recognized a non-cash gain of $35.1 million on our prior investment upon consolidation.
Operating income and adjusted operating income:
| Three months ended | Q2 2024 vs. Q1 2024 | ||||||||||||||||||||||
| June 30, 2024 | March 31, 2024 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Operating income | $ | 550 | $ | 526 | $ | 24 | 4.6 | % | |||||||||||||||
| Adjusted operating income(1) | $ | 550 | $ | 491 | $ | 59 | 12.0 | % |
(1)For a reconciliation of adjusted operating income by reportable segment, see "Reconciliations of Non-GAAP measures" section below.
| Six months ended | YTD Q2 2024 vs. YTD Q2 2023 | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Operating income | $ | 1,076 | $ | 822 | $ | 254 | 30.9 | % | |||||||||||||||
| Adjusted operating income(1) | $ | 1,041 | $ | 844 | $ | 197 | 23.3 | % |
(1)For a reconciliation of adjusted operating income by reportable segment, see the "Reconciliations of Non-GAAP measures" section below.
U.S. dialysis operating income for the second quarter of 2024 compared to the first quarter of 2024 was impacted by a gain on changes in ownership interest, as described above. U.S. dialysis operating income and adjusted operating income for the second quarter of 2024 compared to the first quarter of 2024 were positively impacted by increased average patient service revenue per treatment and dialysis treatments, as described above. Operating income and adjusted operating income were also positively impacted by decreases in depreciation, as described above, travel costs and compensation expenses, as described above. Operating income and adjusted operating income were negatively impacted by increased other direct operating expenses associated with our dialysis centers, medical supplies expense, health benefit expense and insurance costs.
U.S. dialysis operating income for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was impacted by a gain on changes in ownership interest and severance costs, as described above. U.S. dialysis operating income and adjusted operating income for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 were positively impacted by an increase in average patient service revenue per treatment and dialysis treatments, as described above. Operating income and adjusted operating income for the six months ended June 30, 2024 were also positively impacted by decreases in center closure costs, contributions to charitable organizations, contract wages, other direct operating expenses associated with our dialysis centers and pharmaceutical unit costs. Operating income and adjusted operating income were negatively impacted by increases in compensation expenses, insurance costs, medical supplies expense, advocacy costs including the refund described above, and health benefit expense.
Other—Ancillary services
Our other operations include ancillary services that are primarily aligned with our core business of providing dialysis services to our network of patients. As of June 30, 2024, these consisted principally of our U.S. IKC business, certain U.S. other ancillary businesses (including our clinical research programs, transplant software business, and venture investment group), and our international operations.
As of June 30, 2024, DaVita IKC provided integrated care and disease management services to approximately 71,300 patients in risk-based integrated care arrangements and to an additional 15,200 patients in other integrated care arrangements. We also expect to add additional service offerings to our business and pursue additional strategic initiatives in the future as circumstances warrant, which could include, among other things, healthcare services not related to kidney disease.
For a discussion of the risks related to IKC and our ancillary services, see the discussion in the risk factors in Part I, Item 1A Risk Factors of our 2023 10-K under the headings, "The U.S. integrated kidney care, U.S. other ancillary services and international operations that we operate or invest in now or in the future..." and "If we are not able to successfully implement our strategy with respect to our integrated kidney care and value-based care initiatives..."
As of June 30, 2024, our international dialysis operations provided dialysis and administrative services through a total of 452 outpatient dialysis centers located in 13 countries outside of the United States.
Ancillary services results of operations
| Three months ended | Q2 2024 vs. Q1 2024 | ||||||||||||||||||||||
| June 30, 2024 | March 31, 2024 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| U.S. IKC | $ | 114 | $ | 116 | $ | (2) | (1.7) | % | |||||||||||||||
| U.S. other ancillary | 7 | 6 | 1 | 16.7 | % | ||||||||||||||||||
| International | 242 | 219 | 23 | 10.5 | % | ||||||||||||||||||
| Total ancillary services revenues | $ | 362 | $ | 342 | $ | 20 | 5.8 | % | |||||||||||||||
| Operating (loss) income: | |||||||||||||||||||||||
| U.S. IKC | $ | (34) | $ | (26) | $ | (8) | (30.8) | % | |||||||||||||||
| U.S. other ancillary | (2) | (2) | — | — | % | ||||||||||||||||||
| International(1) | 17 | 16 | 1 | 6.3 | % | ||||||||||||||||||
| Total ancillary services operating loss | $ | (19) | $ | (12) | $ | (7) | (58.3) | % | |||||||||||||||
Certain columns, rows or percentages may not sum due to the presentation of rounded numbers.
(1)The reported operating income and adjusted operating income for the three months ended June 30, 2024 and March 31, 2024 includes foreign currency gains embedded in equity method income recognized from our APAC JV of approximately $0.4 million and $1.5 million, respectively.
| Six months ended | YTD Q2 2024 vs. YTD Q2 2023 | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| U.S. IKC | $ | 230 | $ | 193 | $ | 37 | 19.2 | % | |||||||||||||||
| U.S. other ancillary | 13 | 14 | (1) | (7.1) | % | ||||||||||||||||||
| International | 461 | 369 | 92 | 24.9 | % | ||||||||||||||||||
| Total ancillary services revenues | $ | 704 | $ | 575 | $ | 129 | 22.4 | % | |||||||||||||||
| Operating (loss) income: | |||||||||||||||||||||||
| U.S. IKC | $ | (60) | $ | (77) | $ | 17 | 22.1 | % | |||||||||||||||
| U.S. other ancillary | (3) | (5) | 2 | 40.0 | % | ||||||||||||||||||
| International(1) | 33 | 35 | (2) | (5.7) | % | ||||||||||||||||||
| Total ancillary services operating (loss) income | $ | (30) | $ | (46) | $ | 16 | 34.8 | % | |||||||||||||||
| Adjusted operating (loss) income(2): | |||||||||||||||||||||||
| U.S. IKC | $ | (60) | $ | (76) | $ | 16 | 21.1 | % | |||||||||||||||
| U.S. other ancillary | (3) | (5) | 2 | 40.0 | % | ||||||||||||||||||
| International(1) | 33 | 35 | (2) | (5.7) | % | ||||||||||||||||||
| Total ancillary services adjusted operating (loss) income | $ | (30) | $ | (46) | $ | 16 | 34.8 | % |
Certain columns, rows or percentages may not sum due to the presentation of rounded numbers.
(1)The reported operating income and adjusted operating income for the six months ended June 30, 2024 and June 30, 2023 includes foreign currency gains embedded in equity method income recognized from our Asia Pacific joint venture (APAC JV) of approximately $1.9 million and $0.5 million, respectively.
(2)For a reconciliation of adjusted operating (loss) income by reportable segment, see the “Reconciliations of Non-GAAP measures” section below.
Revenues
IKC revenues for the second quarter of 2024 decreased compared to the first quarter of 2024 due to a decrease in revenues from our special needs plans, partially offset by a net increase in shared savings. U.S. other ancillary revenues for the second quarter of 2024 remained relatively flat compared to the first quarter of 2024. International revenues for the second quarter of 2024 increased compared to the first quarter of 2024 due to acquired treatment growth.
IKC revenues for the six months ended June 30, 2024 increased compared to the six months ended June 30, 2023 due to a net increase in shared savings. U.S. other ancillary services revenues for the six months ended June 30, 2024 remained relatively flat compared to the six months ended June 30, 2023. Our international revenues for the six months ended June 30, 2024 increased from the six months ended June 30, 2023 due to acquired and non-acquired treatment growth and average reimbursement rate increases in certain countries.
Charges impacting operating income
Severance and other costs. During the fourth quarter of 2022, similar to U.S. dialysis, we committed to a plan to increase efficiencies and cost savings in certain general and administrative support functions and other overhead costs. As a result of this plan, we recognized expenses related to termination and other benefit commitments in our IKC business of $0.4 million during the six months ended June 30, 2023.
Operating (loss) income and adjusted operating (loss) income
IKC operating loss for the second quarter of 2024 compared to the first quarter of 2024 was impacted by decreased revenues and increased medical expenses related to our special needs plans, partially offset by a net increase in shared savings. U.S. other ancillary services operating loss for the second quarter of 2024 was relatively flat compared to the first quarter of 2024. International operating income for the second quarter of 2024 increased from the first quarter of 2024 primarily due to increased revenues, as described above, partially offset by acquisition-related costs.
IKC operating loss and adjusted operating loss for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 decreased, primarily due to increases in revenue, as described above, partially offset by continued investments in our integrated care support functions and increased expenses at IKC. Other U.S. ancillary services operating loss for the six months ended June 30, 2024 remained relatively flat compared to the six months ended June 30, 2023. International operating income for the six months ended June 30, 2024 decreased compared to the six months ended June 30, 2023 primarily driven by increased acquisition-related costs, partially offset by increases in revenue, as described above.
Corporate administrative support
| Three months ended | Q2 2024 vs. Q1 2024 | ||||||||||||||||||||||
| June 30, 2024 | March 31, 2024 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Corporate administrative support | $ | (25) | $ | (30) | $ | 5 | 16.7 | % | |||||||||||||||
| Six months ended | YTD Q2 2024 vs. YTD Q2 2023 | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Corporate administrative support | $ | (56) | $ | (58) | $ | 2 | 3.4 | % | |||||||||||||||
Corporate administrative support expenses for the quarter ended June 30, 2024 compared to the quarter ended March 31, 2024 decreased primarily due to decreased professional fees and a seasonal decrease in payroll taxes. Corporate administrative support expenses for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 decreased primarily due to decreased long-term incentive compensation, partially offset by increased compensation expenses.
Corporate-level charges
| Three months ended | Q2 2024 vs. Q1 2024 | ||||||||||||||||||||||
| June 30, 2024 | March 31, 2024 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Debt expense | $ | 98 | $ | 99 | $ | (1) | (1.0) | % | |||||||||||||||
| Debt extinguishment and modification costs | $ | 10 | $ | — | $ | 10 | 100.0 | % | |||||||||||||||
| Other (loss) income, net | $ | (27) | $ | (13) | $ | (14) | (107.7) | % | |||||||||||||||
| Effective income tax rate | 19.3 | % | 17.7 | % | 1.6 | % | |||||||||||||||||
| Effective income tax rate attributable to DaVita Inc.(1) | 24.2 | % | 21.5 | % | 2.7 | % | |||||||||||||||||
| Net income attributable to noncontrolling interests | $ | 77 | $ | 66 | $ | 11 | 16.7 | % |
(1)For a reconciliation of our effective income tax rate attributable to DaVita Inc., see the "Reconciliations of Non-GAAP measures" section below.
| Six months ended | YTD Q2 2024 vs. YTD Q2 2023 | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Debt expense | $ | 197 | $ | 204 | $ | (7) | (3.4) | % | |||||||||||||||
| Debt extinguishment and modification costs | $ | 10 | $ | 8 | $ | 2 | 25.0 | % | |||||||||||||||
| Other (loss) income, net | $ | (40) | $ | 5 | $ | (45) | (900.0) | % | |||||||||||||||
| Effective income tax rate | 18.5 | % | 18.2 | % | 0.3 | % | |||||||||||||||||
| Effective income tax rate attributable to DaVita Inc.(1) | 22.9 | % | 23.9 | % | (1.0) | % | |||||||||||||||||
| Net income attributable to noncontrolling interests | $ | 143 | $ | 123 | $ | 20 | 16.3 | % |
(1)For a reconciliation of our effective income tax rate attributable to DaVita Inc., see the "Reconciliations of Non-GAAP measures" section below.
Debt expense
Debt expense for the second quarter of 2024 compared to the first quarter of 2024 and for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 decreased primarily due to a decrease in our weighted average effective interest rate, driven by the Change HealthCare interest-free temporary funding assistance.
Our overall weighted average effective interest rate for the three months ended June 30, 2024 was 4.27% compared to 4.51% for the three months ended March 31, 2024. See Note 7 to the condensed consolidated financial statements for further information on the components of our debt.
Debt prepayment, extinguishment and modification costs
The three and six months ended June 30, 2024 included debt prepayment, extinguishment and modifications costs of $10 million comprised partially of fees incurred in connection with the extension of the maturity date of a portion of our Term Loan B-1 from August 2026 to May 2031 (the Term Loan B-1 Extension) and partially of deferred financing costs and original issue discount written off for the portion of debt considered extinguished and reborrowed as a result of the Term Loan B-1 Extension. See Note 7 to the condensed consolidated financial statements for further information on the Term Loan B-1 Extension and the components of our debt.
Other (loss) income, net
Other loss for the second quarter of 2024 increased compared to the first quarter of 2024 primarily due to an increase in equity investment losses at Mozarc Medical Holding LLC (Mozarc). Other loss for the six months ended June 30, 2024 compared to other income for the six months ended June 30, 2023 was primarily driven by increased equity investment losses in Mozarc, including the $14.0 million gain recognized in the second quarter of 2023 on the non-cash assets contributed to Mozarc, partially offset by a decrease in net losses on other investments.
Effective income tax rate
The effective income tax rate and the effective income tax rate attributable to DaVita Inc. increased for the second quarter of 2024 compared to the first quarter of 2024 primarily due to benefits recognized in the first quarter of 2024 from stock-based compensation.
The effective income tax rate for the six months ended June 30, 2024 increased compared to the six months ended June 30, 2023 primarily due to a reduction in benefits recognized for the portion of our earnings attributable to non-controlling interests, partially offset by an increase in benefits recognized in 2024 for forecasted tax credits and a nontaxable noncash gain on change in ownership.
The effective income tax rate attributable to DaVita Inc. for the six months ended June 30, 2024 decreased compared to the six months ended June 30, 2023 primarily due to an increase in benefits recognized in 2024 for forecasted tax credits and a nontaxable noncash gain on change in ownership.
Net income attributable to noncontrolling interests
The increase in net income attributable to noncontrolling interests for the second quarter of 2024 from the first quarter of 2024 and for the six months ended June 30, 2024 from the six months ended June 30, 2023 was due to increased profitability at certain U.S. dialysis partnerships.
U.S. dialysis accounts receivable
Our U.S. dialysis accounts receivable balances at June 30, 2024 and December 31, 2023 were $1.812 billion and $1.632 billion, respectively, representing approximately 59 and 54 days of revenue outstanding (DSO), respectively. The increase in DSO is primarily due to payment collection delays related to the CHC Outage, described above. Our DSO calculation is based on the current quarter’s average revenues per day. There were no significant changes from the first quarter of 2024 to the second quarter of 2024 in the carrying amount of accounts receivable outstanding over one year old.
Liquidity and capital resources
The following table summarizes our major sources and uses of cash, cash equivalents and restricted cash:
| Six months ended June 30, | YTD Q2 2024 vs. YTD Q2 2023 | ||||||||||||||||||||||
| 2024 | 2023 | Amount | Percent | ||||||||||||||||||||
| (dollars in millions and shares in thousands) | |||||||||||||||||||||||
| Net cash provided by operating activities: | |||||||||||||||||||||||
| Net income | $ | 606 | $ | 417 | $ | 189 | 45.3 | % | |||||||||||||||
| Non-cash items in net income | 422 | 417 | 5 | 1.2 | % | ||||||||||||||||||
| Other working capital changes | (353) | 88 | (441) | (501.1) | % | ||||||||||||||||||
| Other | (10) | (9) | (1) | (11.1) | % | ||||||||||||||||||
| $ | 664 | $ | 913 | $ | (249) | (27.3) | % | ||||||||||||||||
| Net cash used in investing activities: | |||||||||||||||||||||||
| Maintenance capital expenditures(1) | $ | (171) | $ | (194) | $ | 23 | 11.9 | % | |||||||||||||||
| Development capital expenditures(2) | (74) | (78) | 4 | 5.1 | % | ||||||||||||||||||
| Acquisition expenditures | (158) | (3) | (155) | (5,166.7) | % | ||||||||||||||||||
| Proceeds from sale of self-developed properties | 9 | 2 | 7 | 350.0 | % | ||||||||||||||||||
| Other | 18 | (191) | 209 | 109.4 | % | ||||||||||||||||||
| $ | (377) | $ | (464) | $ | 87 | 18.8 | % | ||||||||||||||||
| Net cash used in financing activities: | |||||||||||||||||||||||
| Debt issuances (payments), net | $ | 600 | $ | (210) | $ | 810 | 385.7 | % | |||||||||||||||
| Deferred and debt related financing costs | (20) | (45) | 25 | 55.6 | % | ||||||||||||||||||
| Distributions to noncontrolling interests | (107) | (124) | 17 | 13.7 | % | ||||||||||||||||||
| Contributions from noncontrolling interests | 8 | 7 | 1 | 14.3 | % | ||||||||||||||||||
| Stock award exercises and other share issuances | (86) | (44) | (42) | (95.5) | % | ||||||||||||||||||
| Share repurchases | (613) | — | (613) | (100.0) | % | ||||||||||||||||||
| Other | (26) | 43 | (69) | (160.5) | % | ||||||||||||||||||
| $ | (244) | $ | (373) | $ | 129 | 34.6 | % | ||||||||||||||||
| Total number of shares repurchased | 4,774 | — | 4,774 | 100.0 | % | ||||||||||||||||||
| Free cash flow(3) | $ | 327 | $ | 525 | $ | (198) | (37.7) | % |
Certain columns or rows may not sum due to the presentation of rounded numbers.
(1)Maintenance capital expenditures represent capital expenditures to maintain the productive capacity of the business and include those made for investments in information technology, dialysis center renovations, capital asset replacements, and any other capital expenditures that are not development or acquisition expenditures.
(2)Development capital expenditures principally represent capital expenditures (other than acquisition expenditures) made to expand the productive capacity of the business and include those for new U.S. and international dialysis center developments, dialysis center expansions and relocations, and new or expanded contracted hospital operations.
(3)For a reconciliation of our free cash flow, see the "Reconciliations of Non-GAAP measures" section below.
Consolidated cash flows
Consolidated cash flows from operating activities during the six months ended June 30, 2024 decreased compared to the six months ended June 30, 2023. The decrease was principally due to decreased cash collections resulting from the CHC Outage, described above, combined with increased cash taxes paid and decreases in other working capital items, partially offset by improved operating results.
CHC began to restore claims submission functionality on March 28, 2024 and we have resumed submission of most of our commercial claims through CHC's platform, although we continue to experience payment collection delays. As of June 30, 2024, the CHC Outage, described above, continue to affect our ability to submit some claims, resulting in an increase in our
patient accounts receivable balances and DSO, which ultimately negatively impacted our net cash provided by operating activities and resulted in an increase in outstanding borrowings. During the second quarter of 2024, accounts receivable balances and DSO have declined and are expected to continue to decline.
Free cash flow during the six months ended June 30, 2024 decreased as compared to the six months ended June 30, 2023 primarily due to a decrease in net cash provided by operating activities, as described above, partially offset by a decrease in capital expenditures.
Significant sources of cash during the period included the extension of the maturity date from August 2026 to May 2031 for a portion of our Term Loan B-1 (the Extended Term Loan B-1 transaction) in the aggregate principal amount of approximately $1,640 million, (such portion referred to as the Extended Term Loan B-1), Change Healthcare temporary funding assistance of $393 million, net, pursuant to the CHC Funding Arrangement and a net draw of $260 million on our revolving line of credit in the six months ended June 30, 2024. Significant uses of cash during that same period included debt prepayments on Term Loan B-1 of $1,640 million as part of the Extended Term Loan B-1 transaction, and regularly scheduled principal payments under our senior secured credit facilities totaling approximately $16 million on our Term Loan A-1 and $14 million on Term Loan B-1, as well as additional required payments under other debt arrangements. Additionally, we recognized financing cash outflows of $13 million in deferred financing costs and discount related to the Fourth Amendment to the Senior Secured Credit Agreement Extended Term Loan B-1 transaction and $7 million in cap premium fees for our 2024 forward interest cap agreements. In addition, during the six months ended June 30, 2024 we used cash to repurchase 4,774,415 shares of our common stock.
By comparison, the same period in 2023 included the pay off of the remaining principal balance outstanding on our prior Term Loan A and prior revolving line of credit in the amount of $1,444 million and $150 million, respectively, and regularly scheduled and other principal payments under our senior secured credit facilities totaling approximately $54 million on our prior Term Loan A and $43 million on Term Loan B-1, as well as additional required payments under other debt arrangements. Additionally, we recognized financing cash outflows of $30 million in deferred financing costs related to the Second and Third Amendments to the Senior Secured Credit Agreement and $15 million in cap premium fees for our 2023 forward interest cap agreements. Significant sources of cash during the period included the refinancing of our prior Term Loan A and revolving line of credit with a secured Term Loan A-1 facility in the aggregate principal amount of $1,250 million and a secured revolving line of credit with a net draw of $285 million in the six months ended June 30, 2023.
Dialysis center footprint
The table below shows the footprint of our dialysis operations by number of dialysis centers owned or operated:
| U.S. | International | ||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended June 30, | Six months ended June 30, | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||
| Number of centers operated at beginning of period | 2,665 | 2,707 | 2,675 | 2,724 | 427 | 351 | 367 | 350 | |||||||||||||||||||||||||||||||||||||||
| Acquired centers | 3 | — | 12 | — | 23 | 2 | 90 | 2 | |||||||||||||||||||||||||||||||||||||||
| Developed centers | 7 | 10 | 9 | 13 | 1 | 2 | 1 | 5 | |||||||||||||||||||||||||||||||||||||||
| Net change in non-owned managed or administered centers(1) | — | 2 | (8) | 2 | 3 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Sold and closed centers(2) | (1) | (3) | (9) | (3) | (2) | — | (2) | (2) | |||||||||||||||||||||||||||||||||||||||
| Closed centers(3) | (2) | (13) | (7) | (33) | — | (2) | (4) | (2) | |||||||||||||||||||||||||||||||||||||||
| Number of centers operated at end of period | 2,672 | 2,703 | 2,672 | 2,703 | 452 | 353 | 452 | 353 |
(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, including our APAC JV centers.
(2)Represents dialysis centers that were sold and/or closed for which the majority of 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 common stock repurchases during the three and six months ended June 30, 2024:
| Three months ended June 30, 2024 | Six months ended June 30, 2024 | ||||||||||||||||||||||||||||||||||
| Shares repurchased | Amount paid (in millions) | Average paid per share | Shares repurchased | Amount paid (in millions) | Average paid per share | ||||||||||||||||||||||||||||||
| Open market repurchases: | 2,655,000 | $ | 376 | $ | 140.14 | 4,774,415 | $ | 616 | $ | 127.98 |
The Company did not repurchase any shares during the three and six months ended June 30, 2023.
Available liquidity
As of June 30, 2024, we had $1,240 million available and $260 million drawn on our $1.5 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 thereunder, of which there were none as of June 30, 2024. We separately had approximately $154 million in letters of credit outstanding under a separate bilateral secured letter of credit facility.
See Note 7 to the condensed consolidated financial statements for components of our long-term debt and their interest rates.
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. From time to time, depending on market conditions, our capital requirements and the availability of financing, among other things, we may seek to refinance our existing debt and may incur additional indebtedness. Our primary recurrent sources of liquidity are cash from operations and cash from borrowings, which are subject to general, economic, financial, competitive, regulatory and other factors that are beyond our control, as described in Part I, Item 1A Risk Factors of our 2023 10-K*.*
Reconciliations of Non-GAAP measures
The following tables provide reconciliations of adjusted operating income (loss) to operating income (loss) as presented on a U.S. generally accepted accounting principles (GAAP) basis for our U.S. dialysis reportable segment as well as for our U.S. IKC business, our U.S. other ancillary services, our international business, and for our total ancillary services which combines them and is disclosed as our other segments category, in addition to our corporate administrative support.
In connection with a comment letter from the Securities and Exchange Commission Staff, beginning in the second quarter of 2024, we have updated the presentation of our non-GAAP measures to no longer exclude center closure costs for all periods presented. To facilitate comparisons, the non-GAAP measures presented for prior periods also have been conformed to the presentation of the non-GAAP measures for the current period.
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 (loss) 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 attributable to DaVita 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 to DaVita Inc.
Finally, our free cash flow represents net cash provided by operating activities less distributions to noncontrolling interests, development capital expenditures, and maintenance capital expenditures; plus contributions from noncontrolling interests and proceeds from the sale of self-developed properties. 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 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.
| Three months ended June 30, 2024 | |||||||||||||||||||||||||||||||||||||||||
| U.S. dialysis | Ancillary services | Corporate administration | Consolidated | ||||||||||||||||||||||||||||||||||||||
| U.S. IKC | U.S. Other | International | Total | ||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 550 | $ | (34) | $ | (2) | $ | 17 | $ | (19) | $ | (25) | $ | 506 | |||||||||||||||||||||||||||
| Adjusted operating income (loss)(3) | $ | 550 | $ | (34) | $ | (2) | $ | 17 | $ | (19) | $ | (25) | $ | 506 |
| Three months ended March 31, 2024 | |||||||||||||||||||||||||||||||||||||||||
| U.S. dialysis | Ancillary services | Corporate administration | Consolidated | ||||||||||||||||||||||||||||||||||||||
| U.S. IKC | U.S. Other | International | Total | ||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 526 | $ | (26) | $ | (2) | $ | 16 | $ | (12) | $ | (30) | $ | 484 | |||||||||||||||||||||||||||
| Gain on changes in ownership interest(1) | (35) | (35) | |||||||||||||||||||||||||||||||||||||||
| Adjusted operating income (loss)(3) | $ | 491 | $ | (26) | $ | (2) | $ | 16 | $ | (12) | $ | (30) | $ | 449 |
| Six months ended June 30, 2024 | |||||||||||||||||||||||||||||||||||||||||
| U.S. dialysis | Ancillary services | Corporate administration | Consolidated | ||||||||||||||||||||||||||||||||||||||
| U.S. IKC | U.S. Other | International | Total | ||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 1,076 | $ | (60) | $ | (3) | $ | 33 | $ | (30) | $ | (56) | $ | 990 | |||||||||||||||||||||||||||
| Gain on changes in ownership interest(1) | (35) | (35) | |||||||||||||||||||||||||||||||||||||||
| Adjusted operating income (loss)(3) | $ | 1,041 | $ | (60) | $ | (3) | $ | 33 | $ | (30) | $ | (56) | $ | 955 |
| Six months ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| U.S. dialysis | Ancillary services | Corporate administration | Consolidated | ||||||||||||||||||||||||||||||||||||||
| U.S. IKC | U.S. Other | International | Total | ||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 822 | $ | (77) | $ | (5) | $ | 35 | $ | (46) | $ | (58) | $ | 717 | |||||||||||||||||||||||||||
| Severance and other costs(2) | 22 | — | — | 1 | 23 | ||||||||||||||||||||||||||||||||||||
| Adjusted operating income (loss)(3) | $ | 844 | $ | (76) | $ | (5) | $ | 35 | $ | (46) | $ | (57) | $ | 740 |
Certain columns or rows in the above tables may not sum or recalculate due to the presentation of rounded numbers.
(1)Represents a non-cash gain recognized on the acquisition of a controlling financial interest in a previously nonconsolidated dialysis partnership. See additional discussion above under the heading "Gain on changes in ownership interests" within "U.S. dialysis results of operations". This gain to mark the investment to fair value prior to consolidation does not represent a normal and recurring cost of operating our business or generating revenues and may obscure analysis of underlying trends and financial performance.
(2)Includes severance and other termination costs related to a prior strategic restructuring initiative and associated transition of certain general and administrative support functions to a third party. See additional discussion above under the heading "Severance costs" within "U.S. dialysis results of operations" and "Severance and other costs" within "Ancillary services results of operations".
(3)In connection with the conclusion of a comment letter from the Securities and Exchange Commission Staff in July 2024, beginning in the second quarter 2024, we have updated the presentation of our non-GAAP measures to no longer exclude center closure costs for all periods presented. To facilitate comparisons, the non-GAAP measures presented for prior periods also have been conformed to the presentation of the non-GAAP measures for the current period.
| Three months ended | Six months ended | |||||||||||||||||||||||||
| June 30, 2024 | March 31, 2024 | June 30, 2024 | June 30, 2023 | |||||||||||||||||||||||
| (dollars in millions) | (dollars in millions) | |||||||||||||||||||||||||
| Income before income taxes | $ | 371 | $ | 372 | $ | 743 | $ | 510 | ||||||||||||||||||
| Less: Noncontrolling owners' income primarily attributable to non-tax paying entities | (78) | (66) | (144) | (123) | ||||||||||||||||||||||
| Income before income taxes attributable to DaVita Inc. | $ | 294 | $ | 305 | $ | 599 | $ | 386 | ||||||||||||||||||
| Income tax expense | $ | 72 | $ | 66 | $ | 137 | $ | 93 | ||||||||||||||||||
| Less: Income tax attributable to noncontrolling interests | — | — | (1) | (1) | ||||||||||||||||||||||
| Income tax expense attributable to DaVita Inc. | $ | 71 | $ | 66 | $ | 137 | $ | 92 | ||||||||||||||||||
| Effective income tax rate on income attributable to DaVita Inc. | 24.2 | % | 21.5 | % | 22.9 | % | 23.9 | % |
Certain columns or rows may not sum or recalculate due to the presentation of rounded numbers.
| Six months ended | |||||||||||
| June 30, 2024 | June 30, 2023 | ||||||||||
| (dollars in millions) | |||||||||||
| Net cash provided by operating activities | $ | 664 | $ | 913 | |||||||
| Adjustments to reconcile net cash provided by operating activities to free cash flow: | |||||||||||
| Distributions to noncontrolling interests | (107) | (124) | |||||||||
| Contributions from noncontrolling interests | 8 | 7 | |||||||||
| Maintenance capital expenditures | (171) | (194) | |||||||||
| Development capital expenditures | (74) | (78) | |||||||||
| Proceeds from sale of self-developed properties | 9 | 2 | |||||||||
| Free cash flow | $ | 327 | $ | 525 |
Certain columns or rows may not sum due to the presentation of rounded numbers.
Off-balance sheet arrangements and aggregate contractual obligations
In addition to the debt obligations and operating lease liabilities reflected on our balance sheet, we have commitments associated with letters of credit, as well as certain working capital funding obligations associated with our equity investments in nonconsolidated dialysis ventures that we manage and some that we manage which are wholly-owned by third parties. For additional information see Note 8 to the condensed consolidated financial statements.
We also have potential obligations to purchase the noncontrolling interests held by third parties in many of our majority-owned dialysis partnerships and other nonconsolidated entities. These obligations are in the form of put provisions that are exercisable at the third-party owners’ discretion within specified periods as outlined in each specific put provision. For additional information on these obligations and how we measure and report them, see Note 13 to the condensed consolidated financial statements included in this report and Notes 16 and 23 to the consolidated financial statements included in our 2023 10-K.
For information on the maturities and other terms of our long-term debt, see Note 7 to the condensed consolidated financial statements.
As of June 30, 2024, we have outstanding letters of credit in the aggregate amount of approximately $154 million under a bilateral secured letter of credit facility separate from our senior secured credit facilities.
As of June 30, 2024, we have outstanding purchase agreements with various suppliers to purchase set amounts of dialysis equipment, parts, pharmaceuticals and supplies. If we fail to meet the minimum purchase commitments under these contracts during any year, we are required to pay the difference to the supplier, as described further in Note 16 to the Company's consolidated financial statements included in our 2023 10-K.
On March 5, 2024, we entered into four separate purchase agreements with Fresenius Medical Care to acquire their dialysis service operations in Chile, Ecuador, Colombia and Brazil. Chile and Ecuador closed during the first six months of 2024. Colombia and Brazil are expected to close during the second half of 2024 and remain subject to customary closing
conditions and regulatory approval as of June 30, 2024. Expected cash payments for these remaining transactions are approximately $180 million, subject to certain customary adjustments.
New Accounting Standards
See discussion of new accounting standards in Note 15 to the condensed consolidated financial statements.
Previous: Cover and table of contents · Next: Item 3. Quantitative and Qualitative Disclosures about Market Risk