DaVita Inc. (DVA) reported third-quarter income
from continuing operations of $138.2 million, or $1.45 per share,
which exceeded the Zacks Consensus Estimate by a penny. The
earnings were also higher than $119.5 million or $1.15 per share
earned in the comparable quarter of 2010.
Net income was $135.4 million or $1.42 per share, showing a hike
from $119.4 million or $1.15 per share in the year-ago quarter.
The increased income was attributable to better-than-expected
revenues and higher income from discontinued operations, which were
partly offset by higher expenses.
Net operating revenues for the reported quarter climbed to $1.81
billion, surpassing the year-ago revenue of $1.65 billion. Total
operating expenses and charges climbed to $1.49 billion from $1.39
billion in the third quarter of 2010.
Segment wise, revenues from the Dialysis and related
Lab Services segment for the quarter came in at $1.68
billion, against $1.55 billion in the prior-year quarter.
Operating income for the segment increased to $328 million in
the reported quarter from $266 million in the year-ago quarter.
Ancillary services and strategic
initiatives generated revenues of $137 million,
increasing substantially from $101 million in the year-ago quarter.
The segment recorded operating income of $2 million in the reported
quarter, while there was no operating income in the year-ago
quarter.
Income from discontinued operations in the reported quarter was
$1.08 million, showing a substantial surge
from a loss of $0.095 million in the year-ago quarter. However, the
company also recorded a loss of $3.69 million on disposal of
discontinued operations.
DaVita provided administrative services across 1,777 outpatient
dialysis centers serving approximately 138,000 patients as of
September 30, 2011. However, only 1,745 centers were consolidated
in the financial statements in the third quarter of 2011.
DaVita acquired and opened a total of 138 centers during the
reported quarter, of which 113 centers were associated with the DSI
acquisition. Additionally, the company divested 28 centers in order
to complete the acquisition.
Total treatments for the reported quarter came in at
approximately 5.01 million. This represents a per day increase of
9.6% over the year-ago quarter. The growth of non-acquired
treatment in the quarter stood at 5.0%.
The company's effective tax rate was 36.4% in the reported
quarter. The third party owners’ income attributable to non-tax
paying entities impacted the effective tax rate. The effective tax
rate attributable to DaVita in the reported quarter was 40.5%.
Financial Update
In the reported quarter operating cash flow was $495 million and
free cash flow was $408 million, both showing substantial increment
from $161 million and $91 million, respectively, in the prior-year
quarter.
Total assets at the end of September 2011 were $8.71 billion, up
from $8.11 billion on December 31, 2010. The total long-term debt
on September 30, 2011 increased to $4.42 billion from $4.23 billion
as of December 31, 2010.
Loan Update
On August 26, 2011, DaVita entered into an Increase Joinder
Agreement under the existing senior secured credit agreement,
pursuant to which the company increased the revolving credit
facility by $100 million, taking the total to $350 million. DaVita
also entered into a $200 million Term Loan A-2, which will mature
in October 2016.
Acquisition Update
On September 2, 2011, DaVita completed the acquisition of its
competitor DSI Renal Inc. (DSI). The deal was announced on February
4, 2011, with Credit Suisse Group (CS) acting as
the financial advisor.
DaVita purchased DSI for approximately $724 million in net cash
and took over certain liabilities of DSI, subject to certain
post-close adjustments.
The operating results of DSI have been consolidated with
DaVita’s earnings from September 1, 2011 onwards. Additionally, the
operating results of those DSI centers which have been divested or
will be divested are included in the financial statements as
discontinued operations from September 1, 2011 onwards, along with
the results of all other divested centers of DaVita.
Outlook
DaVita affirmed its previously disclosed operating income
guidance of $1.125-1.155 billion for fiscal 2011. The guidance
excludes a non-cash goodwill impairment charge recorded in the
second quarter of 2011. The company also affirmed the operating
income guidance range of $1.2-1.3 billion for 2012.
Additionally, the company raised the 2011 operating cash flow
guidance range to $1.02-1.10 billion. For 2012, DaVita expects
operating cash flow to remain flat or decline marginally from
2011.
The company expects the effective tax rate attributable to
DaVita to be in the range of 30-40% for fiscal 2011.
Our Take
DaVita is showing sharp earnings growth in both its business
segments coupled with strong cash flows. Income from discontinued
operations also increased due to disposal of DSI centers.
Further, the acquisition of DSI will provide access to new areas
of work for DaVita in the Midwestern, Southern and some Western
states, further improving its operational performance.
Additionally, the strong cash position expands the potential for
meaningful mergers and acquisitions in future.
DaVita carries a Zacks #2 Rank, implying a short-term Buy
rating.
CREDIT SUISSE (CS): Free Stock Analysis Report
DAVITA INC (DVA): Free Stock Analysis Report
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