LNCR Lincare Holdings Inc. (MM)

DaVita Inc. (DVA) reported second-quarter 2012 operating earnings of $1.49 per share, beating the Zacks Consensus Estimate by 2 cents. Earnings per share were substantially higher than $1.17 in the prior-year quarter.

Including legal proceeding contingency accrual and related expenses of $78 million or 50 cents per share, the company reported net income of $95.3 million or 99 cents, contracting from the prior-year quarter net income of $100.0 million or $1.03 per share.

Total comprehensive income came in at $119.4 million, up 8% from $110.6 million in the prior-year quarter.

Operational Update

Net operating revenue in the reported quarter surged 16.2% year over year to $1.93 billion from $1.66 billion. Top line was in line with the Zacks Consensus Estimate.

Total operating expenses and charges also climbed 18.9% to $1.68 billion from $1.41 billion in the second quarter of 2011.

DaVita provided administrative services across 1,884 outpatient dialysis centers in the US, serving approximately 149,000 patients during the reported quarter. Additionally, the company provided administrative services in 19 outpatient dialysis centers in four non-U.S. countries.

During the reported quarter, DaVita acquired 33 centers and opened 14 centers in the U.S., while 4 centers were opened outside the U.S.

Total U.S. treatments for the reported quarter came in at approximately 5.45 million or 69,896 treatments per day. This represents a per day increase of 14.3% over the year-ago quarter. The growth of non-acquired treatment in the quarter stood at 4.7%.

The company's effective tax rate was 36.2% 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 41.5%.

Segment Update    

Segment wise, total revenue from the Dialysis and related Lab Services segment came in at $1.76 billion during the quarter, against $1.54 billion in the prior-year quarter.

Operating income for the segment exhibited a slight decline of 0.7% year over year to $286 million in the reported quarter from $288 million in the year-ago quarter.

Ancillary services and strategic initiatives generated revenues of $175 million, up from $123 million in the year-ago quarter. However, the segment recorded operating loss of $19 million in the reported quarter, narrower than $30 million loss incurred in the year-ago quarter.

Financial Update

Operating cash flow amounted to $202.1 million during the quarter under review, reflecting a marginal decrease from $204.4 million in the prior-year quarter.

Free cash flow was $111.4 million reflecting a 15.7% decrease from $132.1 million in the prior-year quarter.

Total assets at the end of June 2012 were $9.25 billion, up from $8.89 billion as of December 31, 2011, while long-term debt decreased to $4.39 billion from $4.42 billion as of December 31, 2011. Shareholders’ equity as of June 30, 2012 amounted to $2.38 billion, up from $2.14 billion at 2011 end.

Acquisition

In May the company entered into an agreement to purchase HealthCare Partners, for about $4.42 billion. The transaction amount comprised of $3.66 billion in cash and about 9.38 million shares of DaVita.  

The purchase consideration is subject to post-close adjustments and contingent consideration. Moreover, the shareholders of HealthCare Partners will get an additional $275 million on achieving certain performance targets by the company in 2012 and 2013. DaVita is expected to borrow funds to finance the acquisition, apart from using its free cash balance and senior secured credit facility.

Guidance

Concurrently, DaVita raised its operating income guidance for 2012 to $1.28–1.33 billion from the previous outlook of $1.23–1.31 billion. Additionally, the company affirmed its operating cash flow guidance of $0.95–1.05 billion. The company expects the effective tax rate attributable to DaVita to be in the range of 40–41% for 2012.

Peer Take

DaVita’s peer, Lincare Holdings Inc. (LNCR), reported its second quarter 2012 adjusted earnings per share of 56 cents, beating the Zacks Consensus Estimate by a penny and surpassing the year-ago earnings per share of 45 cents (up 24.4%). In the quarter, profit increased 11.9% to $47.9 million, led by higher sales.

Our Take

DaVita is experiencing revenue upsides in both its business segments, which, in turn is driving the top line and cutting the losses. However, higher expenses emerged as a dampener for the quarter.

Nevertheless, the company has strong cash flows and a sturdy balance sheet. We expect cash flows to remain strong in the upcoming quarters as well, based on higher-than-expected cash flow during the last few quarters.

The shares of DaVita currently retain a Zacks #3 Rank, implying a short-term ‘Hold’ rating. We also maintain a long-term ‘Neutral’ recommendation on the shares.

 
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