DVA DaVita Inc

DENVER, Nov. 7, 2017 /PRNewswire/ -- DaVita Inc. (NYSE: DVA) today announced results for the quarter ended September 30, 2017.

• Net loss attributable to DaVita Inc. for the quarter ended September 30, 2017 was $(214) million, or $(1.14) per share, which included non-cash goodwill impairment charges related to our DMG reportable segment, and net income for the nine months ended September 30, 2017 was $360 million, or $1.86 per share.
• Adjusted net income attributable to DaVita Inc. for the quarter ended September 30, 2017 was $155 million, or $0.81 per share, and for the nine months ended September 30, 2017 was $487 million, or $2.52 per share.
• Adjusted net income attributable to DaVita Inc., further adjusted to exclude amortization for the quarter ended September 30, 2017, was $185 million, or $0.97 per share, and for the nine months ended September 30, 2017, was $575 million, or $2.97 per share.
• Net income attributable to DaVita Inc. for the quarter ended September 30, 2016 was $571 million, or $2.76 per share, and for the nine months ended September 30, 2016 was $722 million, or $3.48 per share.
• Adjusted net income attributable to DaVita Inc. for the quarter ended September 30, 2016 was $197 million, or $0.95 per share, and for the nine months ended September 30, 2016 was $597 million, or $2.88 per share.
• Adjusted net income attributable to DaVita Inc., further adjusted to exclude amortization for the quarter ended September 30, 2016 was $223 million, or $1.08 per share, and for the nine months ended September 30, 2016 was $675 million, or $3.25 per share.

For the definitions of non-GAAP financial measures such as adjusted net income attributable to DaVita Inc. and adjusted net income attributable to DaVita Inc., as further adjusted to exclude amortization, see the note titled "Note on Non-GAAP Financial Measures" below.

Financial and operating highlights include:

Cash flow:  For the rolling twelve months ended September 30, 2017, operating cash flow was $2.047 billion and free cash flow was $1.486 billion. For the three months ended September 30, 2017, operating cash flow was $553 million and free cash flow was $405 million.

Operating (loss) income and adjusted operating income:  Operating loss for the three months ended September 30, 2017 was $(193) million, and adjusted operating income for the same period was $399 million. Operating income for the nine months ended September 30, 2017 was $1.074 billion, and adjusted operating income for the same period was $1.227 billion.

Operating income for the three months ended September 30, 2016 was $819 million, and adjusted operating income for the same period was $472 million. Operating income for the nine months ended September 30, 2016 was $1.513 billion, and adjusted operating income for the same period was $1.405 billion.

Volume:  Total U.S. dialysis treatments for the third quarter of 2017 were 7,186,280, or 90,966 treatments per day, representing a per day increase of 4.3% over the third quarter of 2016. Normalized non-acquired treatment growth in the third quarter of 2017 as compared to the third quarter of 2016 was 3.3%.

The number of member months for which DMG provided care during the third quarter of 2017 was approximately 2.3 million, of which approximately 1.0 million, 1.1 million and 0.3 million related to senior, commercial and Medicaid members, respectively. 

Goodwill impairment charges:  During the quarter ended September 30, 2017, we recognized non-cash goodwill impairment charges of $601 million in our DMG reportable segment. This charge relates predominantly to our DMG California reporting unit and results primarily from reimbursement pressures, continuing increases in medical costs, and other market factors. This includes a $218 million increase to the goodwill impairment charge, and reduction to deferred tax expense, for the deferred tax assets that the impairment itself generates. As such, the effect of this is a $601 million charge to operating (loss) income and a $218 million credit to tax expense, for a net $383 million impact on net (loss) income.

We also recognized a reduction in equity earnings of $6 million as a result of goodwill impairment charges recognized by our Asia Pacific joint venture (APAC JV) in the third quarter of 2017.

Gain on changes in ownership interests:  Effective July 1, 2017, our DMG business acquired Magan Medical Clinic, Inc. (Magan). As part of the Magan acquisition, we acquired 100% ownership of a DMG-Magan joint venture of which we previously owned only a noncontrolling 50% interest.  As a result, we recognized a non-cash gain of $17 million on DMG's previously held 50% interest in this joint venture based on its fair value at the time of the acquisition.

Restructuring charges:  During the three and nine months ended September 30, 2017, we recognized restructuring charges of $12 million related to our DMG and international businesses, of which $11 million are included in general and administrative expense and $1 million is included in equity investment losses as it relates to our APAC JV. DMG recognized a restructuring charge of $10 million due to a reduction in force across all DMG markets and its corporate location. Our international business recognized restructuring charges of $2 million to reduce our global general and administrative footprint.

Effective tax rate:  Our effective tax rate was 42.2% and 36.0% for the three and nine months ended September 30, 2017, respectively. The effective tax rate attributable to DaVita Inc. was 37.0% and 43.3% for the three and nine months ended September 30, 2017, respectively.

Our effective tax rate for the three and nine months ended September 30, 2017 was impacted by the non-deductible portion of goodwill impairment charges in our DMG reporting units and APAC JV's reporting units, the non-cash gain associated with the Magan acquisition, a state tax refund, reversal of non-deductible estimated accruals for legal matters and the amount of third-party owners' income attributable to non-tax paying entities. The effective tax rate for the nine months ended September 30, 2017 was also impacted by an adjustment to true-up the gain on the formation of our APAC JV.

The adjusted effective tax rate attributable to DaVita Inc. for the three and nine months ended September 30, 2017, excluding these items was 38.3% and 39.3%, respectively.

Center activity:  As of September 30, 2017, we provided dialysis services to a total of approximately 218,200 patients at 2,700 outpatient dialysis centers, of which 2,470 centers were located in the United States and 230 centers were located in 11 countries outside of the United States. During the third quarter of 2017, we acquired one dialysis center, opened a total of 34 new dialysis centers, and closed or merged ten centers in the United States. We also acquired eight dialysis centers, opened six new dialysis centers and closed one dialysis center outside of the United States.

Share repurchases:  As of November 7, 2017 we have repurchased a total of 11,446,307 shares of our common stock during the year for a total of $702 million at an average price of $61.30 per share. During the quarter ended September 30, 2017, we repurchased a total of 1,982,250 shares of our common stock for approximately $117 million at an average price of $59.09 per share. During the nine months ended September 30, 2017, we repurchased a total of 5,556,823 shares of our common stock for $349 million at an average price of $62.77 per share. We have also repurchased 5,889,484 shares of our common stock for $353 million at an average price of $59.92 per share subsequent to September 30, 2017.

On October 10, 2017, our Board of Directors approved an additional share repurchase authorization in the amount of approximately $1.253 billion. This recently approved authorization was in addition to the amounts remaining at that time under our Board of Directors' prior share repurchase authorization announced in July 2016. As of November 7, 2017, we have a total of approximately $1.228 billion in outstanding Board repurchase authorizations remaining under our stock repurchase program. These share repurchase authorizations have no expiration dates.

Note on Non-GAAP Financial Measures

As used in this press release the term "adjusted" refers to non-GAAP measures as follows, each as reconciled to the most comparable GAAP measure in the non-GAAP reconciliations in the notes to this press release: (i) for income measures, the term "adjusted" refers to operating performance measures that exclude certain items such as impairment charges, gains (losses) on ownership changes, restructuring charges, accruals for legal matters, and gains and charges associated with settlements; (ii) the term "adjusted net income excluding amortization" represents the Company's net income excluding the foregoing items as well as amortization of intangibles associated with acquisitions; and (iii) the term "adjusted effective income tax rate attributable to DaVita Inc." represents the Company's effective tax rate excluding applicable non-GAAP items and noncontrolling owners' income that primarily relates to non-tax paying entities.

These non-GAAP or "adjusted" measures are presented because management believes these measures are useful adjuncts to GAAP results. Non-GAAP or "adjusted" measures should not be considered an alternative to the corresponding measures determined under GAAP. Management uses these non-GAAP measures 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 that these non-GAAP measures are 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.

The Company's adjusted net income attributable to DaVita Inc., adjusted diluted net income per share, adjusted net income attributable to DaVita Inc. excluding amortization, adjusted diluted net income per share excluding amortization, adjusted operating income, adjusted effective income tax rate attributable to DaVita Inc., and free cash flow discussed in this press release are reconciled to their most comparable GAAP measures at Notes 2, 3, 4, and 5 at the end of this press release.

Outlook

The following forward-looking measures and the underlying assumptions involve significant risks and uncertainties, including those described below, and actual results may vary significantly from these current forward-looking measures. We do not provide guidance for consolidated operating income, Kidney Care operating income, DMG operating income or effective tax rate attributable to DaVita Inc. on a GAAP basis nor a reconciliation of those forward-looking non-GAAP financial measures to the most directly comparable GAAP financial measures on a forward-looking basis because we are unable to predict certain items contained in the GAAP measures without unreasonable efforts. These non-GAAP financial measures do not include certain items, including the gain related to the settlement with the U.S. Department of Veterans Affairs (VA), goodwill and asset impairment charges, restructuring charges, an adjustment to the accrual for legal matters, the gain on the Magan acquisition and APAC JV ownership changes, and currency fluctuations.

• We are updating our adjusted consolidated operating income guidance for 2017 to be in the range of $1.620 billion to $1.685 billion.
  Our previous adjusted consolidated operating income guidance for 2017 was in the range of $1.675 billion to $1.775 billion.
• We are updating our adjusted operating income guidance for Kidney Care for 2017 to be in the range of $1.570 billion to $1.600 billion.
  Our previous adjusted operating income guidance for Kidney Care for 2017 was in the range of $1.565 billion to $1.625 billion.
• We expect our operating income guidance for Kidney Care for 2018 to be in the range of $1.500 billion to $1.600 billion.
• We are updating our adjusted consolidated operating income guidance for DMG for 2017 to be in the range of $50 million to $85 million.
  Our previous adjusted consolidated operating income guidance for DMG for 2017 was in the range of $110 million to $150 million.
• We still expect our consolidated operating cash flow guidance for 2017 to be in the range of $1.750 billion to $1.950 billion, which includes the net benefit of the VA settlement.
• We still expect our 2017 guidance for adjusted effective tax rate attributable to DaVita Inc. to be approximately 39.0% to 40.0%.

We will be holding a conference call to discuss our results for the third quarter ended September 30, 2017 on November 7, 2017 at 5:00 p.m. Eastern Time. To join the conference call, please dial (877) 918-6630 from the U.S. or (517) 308-9087 from outside the U.S. A replay of the conference call will be available on our website at investors.davita.com, for the following 30 days.

DaVita Inc. and its representatives may from time to time make written and oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), including statements in this release, filings with the Securities and Exchange Commission ("SEC"), reports to stockholders and in meetings with investors and analysts. All such statements in this release, during the related presentation or other meetings, other than statements of historical fact, are forward-looking statements and as such are intended to be covered by the safe harbor for "forward-looking statements" provided by the PSLRA. Without limiting the foregoing, statements including the words "expect," "will," "plan," "anticipate," "believe," "forecast," "guidance," "outlook," "goals," and similar expressions are intended to identify forward-looking statements.

The forward-looking statements should be considered in light of these risks and uncertainties. All forward-looking statements in this release are based on information available to us on the date of this presentation. We undertake no obligation to publicly update or revise any of our guidance, the assessment of the underlying assumptions or other forward-looking statements, whether as a result of changed circumstances, new information, future events or otherwise.

These forward-looking statements could include but are not limited to statements related to our guidance and expectations for our 2017 adjusted consolidated operating income, our 2017 Kidney Care adjusted operating income, our 2018 Kidney Care operating income, DMG's 2017 adjusted operating income, our 2017 consolidated operating cash flows and our 2017 adjusted effective tax rate attributable to DaVita Inc., and uncertainties associated with the other risk factors set forth in our most recent quarterly report on Form 10-Q for the quarter ended June 30, 2017, and the other risks discussed in our subsequent periodic and current reports filed with the SEC from time to time.

Our actual 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, and are qualified in their entirety by reference to the full text of those risk factors in our SEC filings relating to:

• 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 of patients under such plans, including 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;
• the extent to which the ongoing implementation of healthcare exchanges or changes in or new legislation, regulations or guidance, or enforcement thereof, including among other things those regarding the exchanges, results in a reduction in reimbursement rates for our services from and/or the number of patients enrolled in higher-paying commercial plans;
• a reduction in government payment rates under the Medicare End Stage Renal Disease program or other government-based programs;
• the impact of the Medicare Advantage benchmark structure;
• risks arising from potential and proposed federal and/or state legislation or regulation, including healthcare-related and labor-related legislation or regulation, that could have a material adverse effect on our operations and profitability;
• the impact of the changing political environment and related developments on the current health care marketplace and on our business, including with respect to the future of the Affordable Care Act, the exchanges and many other core aspects of the current health care marketplace;
• changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing;
• legal compliance risks, including our continued compliance with complex government regulations and the provisions of our current corporate integrity agreement and current or potential investigations by various government entities and related government or private-party proceedings, and restrictions on our business and operations required by our corporate integrity agreement and other current or potential settlement terms, and the financial impact thereof and our ability to recover any losses related to such legal matters from third parties;
• continued increased competition from large- and medium-sized dialysis providers that compete directly with us;
• our ability to reduce administrative expenses while maintaining targeted levels of service and operating performance, including our ability to achieve anticipated savings from our recent DMG restructuring;
• our ability to maintain contracts with physician medical directors, changing affiliation models for physicians, and the emergence of new models of care introduced by the government or private sector that may erode our patient base and reimbursement rates, such as accountable care organizations, independent practice associations and integrated delivery systems;
• our ability to complete acquisitions, mergers or dispositions that we might be considering or announce, or to integrate and successfully operate any business we may acquire or have acquired, including DMG, or to successfully expand our operations and services to markets outside the United States, or to businesses outside of dialysis and DMG's business;
• noncompliance by us or our business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information;
• the variability of our cash flows;
• the risk that we might invest material amounts of capital and incur significant costs in connection with the growth and development of our international operations, yet we might not be able to operate them profitably anytime soon, if at all;
• risks arising from the use of accounting estimates, judgments and interpretations in our financial statements;
• impairment of our goodwill or other intangible assets;
• the risk that laws regulating the corporate practice of medicine could restrict the manner in which DMG conducts its business;
• the risk that the cost of providing services under DMG's agreements may exceed our compensation;
• the risk that reductions in reimbursement rates, including Medicare Advantage rates, and future regulations may negatively impact DMG's business, revenue and profitability;
• the risk that DMG may not be able to successfully establish a presence in new geographic regions or successfully address competitive threats that could reduce its profitability;
• the risk that a disruption in DMG's healthcare provider networks could have an adverse effect on DMG's business operations and profitability;
• the risk that reductions in the quality ratings of health maintenance organization plan customers of DMG could have an adverse effect on DMG's business; and
• the risk that health plans that acquire health maintenance organizations may not be willing to contract with DMG or may be willing to contract only on less favorable terms.