DaVita HealthCare Partners Inc. (DVA) reported second-quarter 2014 adjusted operating earnings of 95 cents per share that surpassed the Zacks Consensus Estimate of 88 cents. Earnings also improved from the year-ago quarter figure of 92 cents per share.
The upside was driven by improvement in the Kidney Care segment, strong clinical outcomes and Medicare Advantage revenues.
Including post tax debt financing charges and a contingent earn-out obligation adjustment, DaVita Healthcare’s net income came in at 68 cents per share, down from 85 cents in the year-ago quarter.
Operational Update
Total net revenue increased 10.5% to approximately $3.2 billion. The top line also managed to beat the Zacks Consensus Estimate of $3.1 billion. The year-over-year increase was mainly attributable to rise in patient service revenues, capitated revenues and other revenues.
Total operating expenses and charges were $2.7 billion in the reported quarter, up 14.4% year over year. This was primarily due to rise in patient care costs and other costs as well as general and administrative charges.
Total U.S. dialysis treatments in the reported quarter came in at approximately 6.2 million or 79,441 treatments per day. This represents a per day increase of 5.6% from the year-ago quarter. Growth of non-acquired treatment in the reported quarter was 5%.
In second-quarter 2014, DaVita Healthcare opened 22 dialysis centers in the U.S. Additionally, the company took over three dialysis centers and opened six dialysis centers outside the U.S.
DaVita Healthcare’s adjusted effective tax rate was 35.7% as of Jun 30, 2014, lower than 40.5% in the prior-year quarter. The third-party owners’ income, attributable to non-tax paying entities, impacted the effective tax rate. The adjusted effective tax rate attributable to DaVita Healthcare in the reported quarter was 40.5%, higher than 39.5% in the year-ago period.
Segment Update
Revenues from the Dialysis and Related Lab Services segment amounted to $2 billion, up 5.4% year over year. Operating income at the segment also increased 1.5% year over year to $408 million in the reported quarter.
HealthCare Partners (HCP) generated revenues of $887 million in the quarter, surging 16.6% year over year. Moreover, operating income in the segment increased to $82 million from $81 million in the year-ago quarter.
Ancillary services and strategic initiatives recorded revenues of $274 million, higher than $200 million in the second quarter of 2013. Operating loss during the reported quarter was $2 million, narrower than a loss of $7 million in the second quarter of 2013.
Financial Update
Total cash and cash equivalents of DaVita Healthcare increased to $1.4 billion as of Jun 30, 2014 from $946.2 million at the end of 2013.
Net cash flow from operating activities in the second quarter of 2014 came in at $262.4 million, down 14.5% year over year.
DaVita Healthcare’s long-term debt as of Jun 30, 2014 was $8.4 billion, up from $8.1 billion as of Dec 31, 2013.
2014 Guidance
DaVita Healthcare raised the lower end of its operating income guidance to $1.755 billion from $1.725 billion. Thus, the new guidance range stands at $1.755–$1.840 billion, compared with the previous projection of $1.725–$1.840 billion. This guidance not only exceeds the previous forecast of the company but also translates into a 13.5%–18.7% year-over-year improvement.
Additionally, DaVita Healthcare raised the operating income guidance for the dialysis services and related ancillary businesses, including corporate level expenses (together referred to as Kidney Care) for 2014 to $1.55–$1.60 billion from $1.520–$1.580 billion.
DaVita Healthcare lowered the upper end of the 2014 operating income guidance for HCP to $240 million. Thus, the updated guidance now stands at $205–$240 million, compared with $205–$260 million guided earlier. This also compares unfavorably with $385 million reported at end-2013.
DaVita Healthcare reiterated its total operating cash flow projection for 2014 at $1.45 billion to $1.55 billion. This is lower than the 2013 operating cash flow of $1.77 billion.
Effective tax rate for 2014 was reiterated at 40.0%–41.0%.
Our Take
DaVita Healthcare’s second-quarter earnings not only exceeded our expectations but also improved year over year, mainly based on a strong Kidney Care business. Additionally, the quarter witnessed growth of patients in the Medicare Advantage front, which pulled up the bottom line to some extent.
However we remain concerned about the company’s high debt levels, which should weigh on its debt expense, thereby pressurizing margin expansion.
Nevertheless, the company’s incessant efforts to upgrade services and become the pioneer in providing many services in various nations are commendable. For instance, Davita Healthcare became the first stand-alone dialysis center in Malaysia to obtain a four-year accreditation in chronic dialysis treatment from the Malaysian Society for Quality in Health (MSQH) and the first provider of hemodiafiltration treatment to patients in the United States, both in May 2014. Such steps should help the company strengthen its operations and increase the confidence of patients, which would open up avenues for further growth..
Performance of Other Healthcare Service Stocks
Humana Inc. (HUM) posted second-quarter 2014 operating earnings of $2.19 per share, which was in line with the Zacks Consensus Estimate.
WellPoint Inc. (WLP) reported second-quarter 2014 adjusted income of $2.44 per share, beating the Zacks Consensus Estimate of $2.28.
Aetna Inc.’s (AET) second-quarter 2014 earnings of $1.69 per share beat the Zacks Consensus Estimate of $1.61.
Zacks Rank
DaVita Healthcare presently carries a Zacks Rank #3 (Hold).
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