DaVita Inc. (DVA) reported second-quarter net operating income of $114.4 million, or $1.17 per share, which exceeded the Zacks Consensus Estimate by 3 cents. The earnings were also higher than $110.4 million or $1.06 per share earned in the comparable quarter of 2010.
Earnings for the year-ago quarter exclude after-tax debt redemption charges of $2.5 million or 2 cents per share, while the reported quarter’s earnings exclude after-tax non-cash goodwill impairment charges of $14.4 million or 14 cents per share.
Net income, including the non-recurring items, was $100 million or $1.03 per share, showing a decline from $107.9 million or $1.04 per share in the year-ago quarter.
The increased income was attributable to better-than-expected revenues, reduced operating expenses and strong cash flows of the company.
Net operating revenues for the reported quarter climbed to $1.71 billion, beating the Zacks Consensus Estimate of $1.64 billion and surpassing the year-ago revenue of $1.59 billion. Total operating expenses and charges declined to $1.46 billion from $1.34 billion in the second quarter of 2010.
Segment wise, revenues from the Dialysis and related Lab Services segment for the quarter came in at $1.59 billion as against $1.50 billion in the prior-year quarter. Operating income for the segment increased to $283 million in the reported quarter from $254 million in the year-ago quarter.
Ancillary services and strategic initiatives generated revenues of $123 million, increasing substantially from $93 million in the year-ago quarter. The segment suffered an operating loss of $25 million in the reported quarter as against a loss of $2 million in the year-ago quarter.
DaVita provided administrative services across 1,669 outpatient dialysis centers serving approximately 131,000 patients as of June 30, 2011. DaVita acquired and opened a total of 27 centers during the reported quarter.
Total treatments for the reported quarter came in at approximately 4.8 million. This represents a per day increase of 7.1% over the year-ago quarter. The growth of non-acquired treatment in the quarter stood at 4.6%.
The company's effective tax rate was 35.7% 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%.
Financial Update
In the reported quarter operating cash flow was $204 million and free cash flow was $125 million, both showing sharp declines from $296 million and $250 million, respectively, in the prior-year quarter.
Total assets at the end of June were $8.19 billion, up from $ 8.11 billion on December 31, 2010. The total long-term debt on June 30, 2011 declined marginally to $4.21 billion from $4.23 billion as of December 31, 2010.
Stock Update
DaVita repurchased 3.7 million shares for $316.1 million at an average price of $85.20 during the first half of the year. In addition, DaVita also repurchased 84,600 shares of common stock from July 1, 2011 through July 31, 2011 for $7.3 million at an average price of $85.83.
As a result of these transactions, the remaining board authorization for share repurchases as of July 31, 2011 is approximately $358 million.
Acquisition Update
DaVita is expected to complete the acquisition of its competitor DSI Renal Inc. ("DSI") during 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.
Outlook for 2011
DaVita expects its operating income for the year to be in the range of $1,080 million to $1,120 million and its operating cash flows to be in the range of $900 million to $980 million.
For fiscal year 2012, DaVita expects operating income in the range of $1,200 million to $1,300 million.
Our Take
DaVita is showing sharp earnings growth in both its business segments coupled with strong expected free cash flow, declining costs and the potential for meaningful mergers and acquisitions, which convinces us that the company will continue its growth story.
Moreover, we believe the acquisition of DSI will provide access to new areas of work for DaVita in the Midwestern, Southern and some Western states.
DaVita carries a Zacks #2 Rank, implying a short-term Buy rating.
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