DaVita HealthCare Partners Inc. (DVA - Analyst Report) reported third-quarter 2014 adjusted operating earnings of $1.01 per share that surpassed the Zacks Consensus Estimate of 91 cents. However, earnings declined from the year-ago quarter figure of $1.10 per share.

The year-over-year downside was largely owing to a rise in expenses and lower operating income at the HCP segment.

Including extra-ordinary items, DaVita Healthcare’s net income came in at 85 cents per share, up from 64 cents in the year-ago quarter.

Operational Update

Total net revenue increased 8.4% to approximately $3.3 billion. The top line also managed to beat the Zacks Consensus Estimate of $3.2 billion. The year-over-year increase was mainly attributable to rise in patient service revenues, capitated revenues and other revenues.

Total operating expenses and charges of DaVita Healthcare were $2.8 billion in the reported quarter, up 7.3% year over year. This was primarily due to rise in patient care costs and other costs, general and administrative charges as well as depreciation and amortization expenses.

Total U.S. dialysis treatments in the reported quarter came in at approximately 6.3 million or 80,300 treatments per day. This represents a per day increase of 5.1% from the year-ago quarter. Growth of non-acquired treatment in the reported quarter was 4.4%.

In third-quarter 2014, DaVita Healthcare opened 29 dialysis centers in the U.S. Additionally, the company took over 15 dialysis centers, divested 1 dialysis center, closed 1 dialysis center and merged 9 dialysis centers with the existing ones in the U.S. Moreover, DaVita Healthcare bought one dialysis center and opened two dialysis centers outside the U.S.

DaVita Healthcare’s adjusted effective tax rate was 34.7% for the third quarter of 2014, lower than 38.7% in the prior-year quarter. The third-party owners’ income, attributable to non-tax paying entities, impacted the effective tax rate. The adjusted effective tax rate attributable to DaVita Healthcare in the reported quarter was 38.7%, higher than 38.3% in the year-ago period.

Segment Update

Revenues from the Dialysis and Related Lab Services segment amounted to $2.1 billion, up 4.7% year over year. Operating income at the segment also increased 30.7% year over year to $400 million in the reported quarter.

HealthCare Partners (HCP)generated revenues of $892 million in the quarter, surging 11.1% year over year. Moreover, operating income in the segment decreased to $47 million from $98 million a year ago.

Ancillary services and strategic initiatives recorded revenues of $300 million, higher than $226 million in the third quarter of 2013. Operating loss during the reported quarter was $6 million, narrower than a loss of $8 million in the third quarter of 2013.

Financial Update

Total cash and cash equivalents of DaVita Healthcare increased to $1.5 billion as of Sep 30, 2014, from $946.2 million at the end of 2013.

Net cash flow from operating activities in the third quarter of 2014 came in at $808.6 million, up 15.7% year over year.

DaVita Healthcare’s long-term debt as of Sep 30, 2014 was $8.4 billion, up from $8.1 billion as of Dec 31, 2013.

Guidance

2014

DaVita Healthcare raised the lower end of its operating income guidance to $1.785 billion from $1.755 billion and lowered the upper end of its guidance to $1.835 billion from $1.840 billion. Thus, the new guidance range stands at $1.785–$1.835 billion, against the previous projection of $1.755–$1.840 billion. This guidance is higher than the 2013 consolidated operating income of $1.55 billion.

Additionally, DaVita Healthcare raised the operating income guidance for the dialysis services and related ancillary businesses, including corporate level expenses (together referred to as Kidney Care) for 2014 to $1.58–$1.61 billion from $1.55–$1.60 billion.

DaVita Healthcare also lowered the upper end of the 2014 operating income guidance for HCP to $225 million from $240 million. Thus, the updated guidance now stands at $205–$225 million versus $205–$240 million guided earlier. This also compares unfavorably with $385 million reported at 2013-end.

Total operating cash flow projection for 2014 was raised to $1.7–$1.8 billion from $1.45–$1.55 billion. The raised guidance is almost in line with the 2013 operating cash flow of $1.77 billion.

Effective tax rate for 2014 was lowered to 39.5%–40.0% from 40.0%–41.0%.

2015

Operating income for 2015 is expected in the range of $1.75–$1.90 billion. For Kidney Care, operating income is expected in the $1.525–$1.625 billion range while for HCP, it is projected to be $225–$275 million.    

Operating cash flow is likely to be in the band of $1.5–$1.7 billion.

Performance of Other Healthcare Service Stocks

WellPoint Inc. (WLP - Analyst Report) posted third-quarter 2014 adjusted income of $2.36 per share, beating the Zacks Consensus Estimate of $2.28.

Molina Healthcare Inc. (MOH - Analyst Report) reported third-quarter 2014 operating earnings of 79 cents per share, handily beating the Zacks Consensus Estimate of 41 cents.

Gentiva Health Services, Inc.’s (GTIV - Analyst Report) third-quarter 2014 adjusted earnings of 28 cents per share missed the Zacks Consensus Estimate by a penny.

Zacks Rank

DaVita Healthcare presently carries a Zacks Rank #3 (Hold).   

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