DaVita Inc. (DVA) reported first-quarter net operating income of $94.5 million, or 96 cents per share, exceeding the Zacks Consensus Estimate by a penny. However, DaVita lagged the earnings of $109.4 million or $1.04 per share in the comparable quarter of 2010.
This was attributable to better-than-expected revenues and strong cash flows of the company. However, higher operating expenses resulted in the decline.
Net operating revenues for the reported quarter climbed 3.0% year-over-year to $1.61 billion, beating the Zacks Consensus Estimate of $1.60 billion.
Total operating expenses and charges for the quarter climbed 4.3% year-over-year to $1.37 billion.
DaVita’s quarterly consolidated operating income, including stock based compensation and equity investment income plummeted approximately 2.9% year-over-year to $236 million. Operating income margin for the reported quarter stood at 14.7% as opposed to15.6% in the year-ago quarter.
Segment wise, revenues from the Dialysis and related Lab Services segment for the quarter came in at $1.51 billion as against $1.48 billion in the prior-year quarter. Operating income for the segment decreased to $250 million in the reported quarter from $253 million in the year-ago quarter.
Ancillary services and strategic initiatives generated revenues of $106 million as against $84 million in the year-ago quarter. The segment suffered an operating loss of $6 million in the reported quarter as against the loss of $2 million in the year-ago quarter.
DaVita provided administrative services across 1,642 outpatient dialysis centers serving approximately 128,000 patients as of March 31, 2011. DaVita acquired and opened a total of 33 centers, closed 2 and sold 1 center during the reported quarter.
Total treatments for the reported quarter came in at approximately 4.6 million. This represents a per day increase of 7.2% over the year-ago quarter. The growth of non-acquired treatment in the quarter stood at 4.0%.
The company's effective tax rate was 35.5% 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 40.0%.
Evaluation of Financial Strength
DaVita‘s operating cash flow stood at $908 million for the year for the period ended March 31, 2011 and free cash flow stood at $643 million. In the reported quarter, operating cash flow was $330 million and free cash flow was $267 million. The total long-term debt at the end of March 31, 2011 declined marginally to $4.22 billion from $4.23 billion as of December 31, 2010.
DaVita repurchased a total of 162,300 shares for $13.6 million, or an average price of $84.02 during the reported quarter.
In addition, DaVita also repurchased a total of 969,100 shares of common stock from April 1, 2011 through April 30, 2011 for $84.4 million, or an average price of $87.08. As a result of these transactions, the remaining board authorization for share repurchases as of April 30, 2011 is approximately $583.5 million.
Acquisition Update
DaVita is expected to complete the acquisition of its competitor DSI Renal, Inc. (“DSI”) by the second or the third quarter of 2011. The deal was announced on February 4, 2011, for approximately $690 million, subject to customary closing conditions.
DaVita will require the Hart-Scott-Rodino antitrust clearance to complete the deal. In addition, DaVita believes that it will have to divest some of its centers as a condition of the transaction. Credit Suisse Group (CS) is acting as its financial advisor in the deal.
Outlook
DaVita expects its operating income for the fiscal year 2011 to be in the range of $1,040 million to $1,100 million and expects its operating cash flows for 2011 to be in the range of $840 million to $940 million.
For fiscal year 2012, DaVita expects operating income in the range of $1,100 million to $1,200 million.
Our Recommendation
Nonetheless, with strong expected free cash flow, the potential for meaningful mergers and acquisitions and the longer-term benefits, we believe a downside for DaVita from current levels is likely limited.
Moreover, we believe the acquisition of DSI to bring in new areas of work for DaVita in the Midwestern, Southern and some Western states will continue to improve the quality of life of DSI’s patients and provide high quality care.
CREDIT SUISSE (CS): Free Stock Analysis Report
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