DaVita Inc. 4th Quarter 2017 Results

DENVER, Feb. 13, 2018 /PRNewswire/ -- DaVita Inc. (NYSE: DVA) today announced results for the quarter and year ended December 31, 2017.

• Net income from continuing operations attributable to DaVita Inc. for the quarter and year ended December 31, 2017 was $156 million, or $0.85 per share, and $901 million, or $4.71 per share, respectively. Net income from continuing operations attributable to DaVita Inc. for the quarter and year ended December 31, 2016 was $143 million, or $0.73 per share, and $1.032 billion, or $5.04 per share, respectively.
• Adjusted net income from continuing operations attributable to DaVita Inc. for the quarter and year ended December 31, 2017 was $170 million, or $0.92 per share, and $635 million, or $3.32 per share, respectively. Adjusted net income from continuing operations attributable to DaVita Inc. for the quarter and year ended December 31, 2016 was $177 million, or $0.90 per share, and $692 million, or $3.38 per share, respectively.

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

Financial and operating highlights include:

On December 5, 2017, we entered into an agreement to sell our DMG division to Optum, a subsidiary of UnitedHealth Group Inc. This transaction is subject to regulatory approvals and other customary closing conditions. As a result, the DMG business has been reclassified as held for sale and the results of operations are reported as discontinued operations. In addition, prior periods have been revised to conform to the current period presentation.

Cash flow:  For the year ended December 31, 2017, consolidated operating cash flow was $1.907 billion, of which $1.556 billion was from continuing operations. For the three months ended December 31, 2017, consolidated operating cash flow was $343 million, of which $287 million was from continuing operations. Free cash flow from continuing operations was $150 million and $1.042 billion for the quarter and year ended December 31, 2017, respectively.

Operating income and adjusted operating income:  Operating income for the quarter ended December 31, 2017 was $150 million, and adjusted operating income for the same period was $430 million. Operating income for the year ended December 31, 2017 was $1.813 billion, and adjusted operating income for the same period was $1.616 billion.

Operating income for the quarter ended December 31, 2016 was $363 million, and adjusted operating income for the same period was $423 million. Operating income for the year ended December 31, 2016 was $2.030 billion, and adjusted operating income for the same period was $1.715 billion.

Volume:  Total U.S. dialysis treatments for the fourth quarter of 2017 were 7,244,555, or 92,287 treatments per day, representing a per day increase of 5.8% over the fourth quarter of 2016. Normalized non-acquired treatment growth in the fourth quarter of 2017 as compared to the fourth quarter of 2016 was 3.5%.

Impairment charges:  During the quarter ended December 31, 2017, we recognized a non-cash other-than-temporary impairment charge of $280 million on our investment in our Asia Pacific joint venture (APAC JV). This charge resulted from changes in expectations for the joint venture based on the APAC JV's continuing market research and assessments concerning the available market opportunities.

Effective income tax rate:  Our effective income tax rate attributable to continuing operations was (320.9)% and 23.1% for the quarter and year ended December 31, 2017, respectively. The effective income tax rate attributable to DaVita Inc. was (2,590.5)% and 26.4% for the quarter and year ended December 31, 2017, respectively.

As a result of the recent U.S. tax reform legislation, we recorded a reduction in tax expense of $252 million for the quarter and year ended December 31, 2017 related to the remeasurement of our net deferred tax liabilities to the new federal tax rate. Our effective income tax rate for the quarter and year ended December 31, 2017 was also impacted by the non-deductible portion of impairment charges on our investment in our APAC JV and the amount of third-party owners' income attributable to non-tax paying entities.

The adjusted effective income tax rate attributable to DaVita Inc. for the quarter and year ended December 31, 2017 excluding these items was 40.4% and 39.1%, respectively.

Center activity:  As of December 31, 2017, we provided dialysis services to a total of approximately 220,600 patients at 2,747 outpatient dialysis centers, of which 2,510 centers were located in the United States and 237 centers were located in 11 countries outside of the United States. During the fourth quarter of 2017, we acquired nine dialysis centers, opened a total of 36 new dialysis centers, and closed four centers in the United States. We also acquired six dialysis centers, opened two dialysis centers and closed one dialysis center outside of the United States.

Share repurchases:  We repurchased a total of 12,966,672 shares of our common stock during the year ended December 31, 2017 for a total of $811 million at an average price of $62.54 per share. During the quarter ended December 31, 2017, we repurchased a total of 7,409,849 shares of our common stock for approximately $462 million at an average price of $62.37 per share. We have also repurchased 857,234 shares of our common stock for $65 million at an average price of $75.58 per share from January 1, 2018 through February 12, 2018.

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 February 12, 2018, we have a total of approximately $1.054 billion in outstanding Board repurchase authorizations remaining under our stock repurchase program. These share repurchase authorizations have no expiration dates.

Outlook

The following forward-looking measures and the underlying assumptions involve significant risks and uncertainties, including those described herein, and actual results may vary significantly from these current forward-looking measures. The guidance below does not include the impact of currency fluctuations.

• We still expect our Kidney Care consolidated operating income for 2018 to be in the range of $1.5 billion to $1.6 billion.
• We expect our operating cash flow from continuing operations for 2018 to be in the range of $1.4 billion to $1.6 billion.
• We are updating our 2018 effective tax rate attributable to DaVita Inc. to be approximately 26.5% to 27.5%.
  Our previous guidance for 2018 effective tax rate attributable to DaVita Inc. was approximately 26.0% to 27.5%.

We will be holding a conference call to discuss our results for the fourth quarter ended December 31, 2017 on February 13, 2018 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., and provide the operator the password 'Earnings'. A replay of the conference call will be available on our website at investors.davita.com, for the following 30 days.

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, recent federal tax reform legislation, and gains and charges associated with settlements; and (ii) 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 from continuing operations attributable to DaVita Inc., adjusted diluted net income from continuing operations attributable to DaVita Inc. per share, adjusted operating income, effective income tax rate attributable to DaVita Inc., adjusted effective income tax rate attributable to DaVita Inc., and free cash flow from continuing operations 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.

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 2018 Kidney Care consolidated operating income, our 2018 operating cash flows from continuing operations and our 2018 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 September 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;
• uncertainties related to the impact of federal tax reform legislation;
• changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing;
• legal compliance risks, including, without limitation, 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 restructurings;
• our ability to maintain contracts with physician medical directors, changing affiliation models for physicians, and the emergence of new models of care introduced by the government or private sector that may erode our patient base and reimbursement rates, such as accountable care organizations, independent practice associations and integrated delivery systems;
• our ability to complete acquisitions, mergers or dispositions that we might announce or be considering, on terms favorable to us or at all, or to integrate and successfully operate any business we may acquire or have acquired, or to successfully expand our operations and services to markets outside the United States, or to businesses outside of dialysis;
• 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;
• factors that may impact our ability to repurchase stock under our stock repurchase program and the timing of any such stock repurchases, including market conditions, the price of our common stock, our cash flow position and leverage ratios, and legal, regulatory and contractual requirements;
• 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 assets;
• the risks and uncertainties associated with the timing, conditions and receipt of regulatory approvals and satisfaction of other closing conditions of the DMG sale transaction, potential disruption in connection with the DMG sale transaction making it more difficult to maintain business and operational relationships, and uncertainties related to our use of proceeds from the DMG sale transaction, including our ability to repurchase stock;
• 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.

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

Note 1: Calculation of the Leverage Ratio

Under the senior secured credit facilities (Credit Agreement), the leverage ratio is defined as all funded debt plus the face amount of all letters of credit issued, minus cash and cash equivalents, including short-term investments, divided by "Consolidated EBITDA". The leverage ratio determines the interest rate margin payable by the Company for its Term Loan A and revolving line of credit under the Credit Agreement by establishing the margin over the base interest rate (LIBOR) that is applicable. The following leverage ratio was calculated using "Consolidated EBITDA" as defined in the Credit Agreement. The calculation below is based on the last twelve months of "Consolidated EBITDA", pro forma for routine acquisitions that occurred during the period. The Company's management believes the presentation of "Consolidated EBITDA" is useful to users to enhance their understanding of the Company's leverage ratio under its Credit Agreement. The leverage ratio calculated by the Company is a non-GAAP measure and should not be considered a substitute for debt to net income attributable to DaVita Inc., net income attributable to DaVita Inc. or total debt as determined in accordance with United States generally accepted accounting principles (GAAP). The Company's calculation of its leverage ratio might not be calculated in the same manner as, and thus might not be comparable to, similarly titled measures by other companies.

In accordance with the Credit Agreement, the Company's leverage ratio cannot exceed 4.50 to 1.00 as of December 31, 2017. At that date the Company's leverage ratio did not exceed 4.50 to 1.00.

DAVITA INC.
RECONCILIATIONS FOR NON-GAAP MEASURES
(unaudited)
(dollars in thousands, except for per share data)

Note 2:   Adjusted net income from continuing operations and adjusted diluted net income from continuing operations per share attributable to DaVita Inc.

We believe that adjusted net income from continuing operations and adjusted diluted net income from continuing operations per share attributable to DaVita Inc., excluding the impact of recent federal tax reform legislation, goodwill impairment charges, investment and other asset impairment charges, restructuring charges, a net settlement gain, gain on the APAC JV ownership changes, and estimated accruals for certain legal matters, enhances a user's understanding of our normal net income from continuing operations attributable to DaVita Inc. and diluted net income from continuing operations per share attributable to DaVita Inc. for these periods by providing a measure that is meaningful because it excludes certain items which we do not believe are indicative of our ordinary results, and accordingly, is comparable to prior periods and indicative of normal net income from continuing operations attributable to DaVita Inc. and diluted net income from continuing operations per share attributable to DaVita Inc. These measures are not measures of financial performance under GAAP and should not be considered as an alternative to net income from continuing operations attributable to DaVita Inc. and diluted net income from continuing operations per share attributable to DaVita Inc.