DVA DaVita Inc

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.

 
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