DaVita Lags, Raises Guidance

DaVita Inc. ( DVA - Analyst Report ) reported third-quarter 2012 operating earnings of $1.50 per share, lagging the Zacks Consensus Estimate of $1.55. Nevertheless, operating earnings were substantially higher than $1.45 per share reported in the prior-year quarter.

Net income attributable to DaVita’s shareholders amounted to $144.7 million or $1.50 per share, increasing from $135.4 million or $1.42 per share in the year-ago quarter.

Operational Update

Net operating revenue in the reported quarter increased 11.7% year over year to $1.96 billion from $1.76 billion. Top line lagged the Zacks Consensus Estimate of $2.02 billion.

Total operating expenses and charges also climbed 12.5% to $1.62 billion from $1.44 billion in the third quarter of 2011.

DaVita provided administrative services across 1,912 outpatient dialysis centers in the U.S., serving approximately 150,000 patients during the reported quarter. Additionally, the company provided administrative services in 24 outpatient dialysis centers in five non-U.S. countries.

During the reported quarter, DaVita acquired 10 centers and opened 21 centers in the U.S., while 2 centers were opened outside the U.S.

Total U.S. treatments for the reported quarter came in at approximately 5.55 million or 71,162 treatments per day. This represents a per day increase of 12.3% over the year-ago quarter. The growth of non-acquired treatment in the quarter stood at 4.4%.

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%.

Segment Update

Segment wise, total revenue from the Dialysis and Related Lab Services segment came in at $1.79 billion during the quarter, against $1.63 billion in the prior-year quarter.

Operating income for the segment expanded 8.4% year over year to $361 million in the reported quarter from $333 million in the year-ago quarter.

Ancillary Services and Strategic Initiatives generated revenues of $185 million, up from $137 million in the year-ago quarter. However, the segment recorded operating loss of $11 million in the reported quarter, narrower than $19 million loss incurred in the year-ago quarter.

Financial Update

Operating cash flow amounted to $367 million during the quarter under review, reflecting a 26% decrease from $495 million in the prior-year quarter.

Free cash flow was $271 million, reflecting a 36% decrease from $423 million in the prior-year quarter.

Total assets at the end of September 2012 were $10.82 billion, up from $8.89 billion as of December 31, 2011, while long-term debt increased to $5.62 billion from $4.42 billion as of December 31, 2011. Shareholders’ equity as of September 30, 2012 amounted to $2.54 billion, up from $2.14 billion at 2011 end.

Guidance

Concurrently, DaVita raised its operating income guidance for dialysis services and related ancillary businesses for 2012 to $1.32–$1.33 billion from the previous outlook of $1.28–$1.33 billion. The guidance excludes legal proceeding contingency accrual and related expenses of $78 million and transaction expenses related to the HealthCare Partners (HCP) acquisition.

Operating income from HCP acquisition is expected to be $25–$30 million per month from November 2012. The company expects the effective tax rate attributable to DaVita to be in the range of 40%–41% for 2012.

Operating income for 2013 is expected to be around $1.75–$1.90 billion, including the operating income from HCP. Operating cash flow guidance for 2013 stands at $1.35–$1.50 billion

Zacks Rank

The shares of DaVita, which competes with HealthSouth Corporation ( HLS - Snapshot Report ) , currently retain a Zacks #1 Rank, implying a short-term Strong Buy rating.