DaVita Offers Full 2013 Earnings Outlook Including HCP Acquisition

DaVita Inc. (NYSE: DVA) has been running very well and it was no mystery as to why  Warren Buffett’s new portfolio managers have continued accumulating shares on behalf of Berkshire Hathaway Inc. (NYSE: BRK-A). Now we have the third-quarter earnings report and it is a bit garbled and harder to interpret because of items in the release and because of how a pending merger will impact its profits and sales in 2013.

Net income in the quarter was $144.7 million, or $1.50 per share, and but that operating result for the quarter includes an additional $5.4 million of after-tax debt expense, or $0.06 per share. For the three months ended September 30, 2012, operating cash flow was $367 million and free cash flow was $271 million. Operating income for the three months was $341 million on sales of $1.96 billion. Thomson Reuters was calling for earning of $1.56 EPS on sales of $2.01 billion.

Total U.S. treatments for the third quarter of 2012 were 5,550,645, or 71,162 treatments per day, representing a per day increase of 12.3% over the third quarter of 2011. On a “Non-acquired treatment growth” basis was up 4.4% over a year ago.

As a reminder, DaVita entered into a definitive merger agreement back in May to acquire HealthCare Partners (HCP), one of the country’s largest operators of medical groups and physician networks, for some $3.66 billion in cash and approximately 9.38 million shares of DaVita common stock along with up to $275 million of additional cash consideration in the form of two separate earn-out payments. The company has adjusted its credit limits and facility agreements to allow additional borrowings of $3.0 billion to be used to finance a portion of the HCP transaction.

DaVita updated its operating income guidance for 2012 for the dialysis services and related ancillary businesses in a range of $1.315 billion to $1.33 billion. The prior operating income was projected to be $1.275 billion to $1.325 billion. After the HCP acquisition closes in the coming month, DaVita expects the incremental operating income contribution from the acquired operations to be $25 million to $30 million per month for the remainder of the year. The company said, “Our operating income guidance for our dialysis services and related ancillary businesses for 2012 excludes the legal proceeding contingency accrual and related expenses of $78 million and transaction expenses related to the HCP acquisition.”

Consolidated operating income guidance for 2013 is expected to be in the range of $1.75 to $1.9 billion if you include HCP’s operating results. Operating income guidance for 2013 for the dialysis services and related ancillary businesses should be in the range of $1.35 billion to $1.45 billion, and the HCP operating income guidance for 2013 is $400 to $450 million. Cash flows for 2013 are now expected to be $1.35 to $1.5 billion.

After closing at $111.02, DaVita’s 52-week trading range was $66.91 to $113.48. The pre-earnings consensus price target objective was almost $108 according to Thomson Reuters before the effects of this earnings report.

JON C. OGG