DaVita Inc. (DVA) reported third-quarter net operating income, excluding debt redemption charges of $119.4 million, or $1.15 per share, exceeding the Zacks Consensus Estimate of $1.13. DaVita earned $110.9 million or $1.06 per share in the comparable quarter of 2009.
Net operating revenues for the reported quarter climbed 5.1% year-over-year to $1.65 billion, exceeding the Zacks Consensus Estimate of $1.62 billion.
Segment wise, revenues from the Dialysis and related Lab Services segment for the quarter came in at $1.55 billion as against $1.50 billion in the prior-year quarter. Operating income for the segment increased to $266 million in the reported quarter from $254 million in the year-ago quarter.
Ancillary services and strategic initiatives generated revenues of $98 million as against $91 million in the year-ago quarter. The segment suffered an operating loss of $2 million in the year-ago quarter. DaVita's quarterly consolidated operating income, including stock based compensation and equity investment income climbed approximately 6.2% year-over-year to $257 million.
Operating income margin for the reported quarter stood at 15.5% as opposed to15.3% in the year-ago quarter. Total operating expenses and charges for the quarter climbed 5.0% year-over-year to $1.40 billion.
DaVita provided administrative services across 1,598 outpatient dialysis centers serving approximately 124,000 patients as of September 30, 2010. DaVita acquired 10 centers, opened 12 new centers, closed 7 centers during the reported quarter.
Total treatments for the reported quarter came in at approximately 4.6 million. This represents a per day increase of 5.5% over the year-ago quarter. The growth of non-acquired treatment in the quarter stood at 3.7%.
The company's effective tax rate was 34.4% 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 38.5%.
Evaluation of Financial Strength
DaVita‘s operating cash flow stood at $872 million for the rolling twelve months ended September 30, 2010 and free cash flow stood at $658 million. For the reported quarter, operating cash flow came in at $161 million and free cash flow stood at $91 million. The total long-term debt for the reported quarter came down to $3.27 billion from $3.53 billion in the year-ago period.
Capital expenditures from routine maintenance for the reported quarter came in at $46.7 million as opposed to $25.0 million in the year-ago quarter, up 86.8%.
Development and relocations expenditure in the reported quarter dropped 45.0% year-over-year to $23.3 million, and acquisition expenditures rose to $45.9 million from $20.7 million in the year-ago quarter.
DaVita repurchased a total of 1.45 million shares for $98.5 million, or an average price of $68.02 per share during the reported quarter. In addition, DaVita also repurchased a total of 4.24 million shares from October 1, 2010 through October 22, 2010 for $301.5 million, or an average price of $71.03 per share, which completed all of the previous board authorizations for share repurchases.
On November 3, 2010, the board of DaVita authorized an additional $800 million of share repurchases of its common stock.
On October 20, 2010, DaVita also completed its $4.55 billion debt refinancing transactions.
Outlook
DaVita revised its earlier guidance for 2010 operating income and operating cash flows. The company narrows operating income in the range of $995 million to $1.02 billion in 2010, as compared to the previously expected guidance of $950 million to $1.02 billion.
Furthermore, DaVita's operating cash flows for 2010 are expected between $800 million and $875 million in 2010, as compared to the previous guidance of $725 million to $825 million. The increase in the operating cash flow guidance was primarily due to reduced tax payments resulting from accelerated tax deductions.
DaVita did not provide any specific guidance for fiscal 2011 due to the uncertainties of operatons under the new Medicare bundled payment system and the ongoing uncertainties associated with the payor mix.
Our Recommendation
Overall, the headwinds from the DaVita's debt refinancing coupled with the ongoing concerns related to payor mix and the uncertainties of operating under the new Medicare bundled payment system continue to raise caution on earnings volatility in the near-term. Nonetheless, with strong expected free cash flow from DaVita, the potential for meaningful mergers and acquisitions and the longer-term benefits of the bundle, we believe a downside from current levels is likely limited.
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