DaVita HealthCare announces results for third quarter 2013

Nov 6 2013

DaVita HealthCare Partners Inc. (NYSE: DVA) today announced results for the quarter ended September 30, 2013. Adjusted income from continuing operations attributable to DaVita HealthCare Partners Inc. for the three and nine months ended September 30, 2013 was $211.0 million and $605.3 million, or $0.98 and $2.82 per share, respectively, excluding a loss contingency reserve. In addition, adjusted income from continuing operations attributable to DaVita HealthCare Partners Inc. for the nine months ended September 30, 2013 excluded a contingent earn-out obligation adjustment. Income from continuing operations attributable to DaVita HealthCare Partners Inc. for the three and nine months ended September 30, 2013 including these items was $136.6 million and $407.9 million, or $0.64 per share and $1.90 per share, respectively.

Adjusted income from continuing operations attributable to DaVita HealthCare Partners Inc. for the three and nine months ended September 30, 2012 was $147.5 million and $438.6 million, or $0.76 and $2.28 per share, respectively, excluding transaction expenses associated with the acquisition of HCP, debt refinancing charges and a legal settlement and related expenses. Income from continuing operations attributable to DaVita HealthCare Partners Inc. for the three and nine months ended September 30, 2012 including these items was $144.7 million and $380.0 million, or $0.75 and $1.98 per share, respectively.

Financial and operating highlights include:

• Cash Flow: For the rolling twelve months ended September 30, 2013, operating cash flow was $1.62 billion and free cash flow was $1.24 billion. For the three months ended September 30, 2013, operating cash flow was $733 million and free cash flow was $643 million. Operating cash flow in the third quarter of 2013 benefited from the timing of compensation payments, other working capital items and cash taxes. For a definition of free cash flow see Note 4 to the reconciliations of non-GAAP measures.
• Adjusted Operating Income: Adjusted operating income for the three and nine months ended September 30, 2013 was $482 million and $1.41 billion, respectively, which is operating income adjusted for a loss contingency reserve, a contingent earn-out obligation adjustment and an adjustment to reduce a tax asset associated with the HCP acquisition escrow provisions.
  
  In connection with the acquisition of HCP, we recorded a receivable to offset potential tax liabilities. We reduced this asset during the third quarter of 2013 which negatively impacted operating income by $7.7 million and is included in our general and administrative expenses. The reduction in operating income was directly offset by a corresponding reduction in income tax expense. This asset may be similarly reduced in the future if the underlying tax liabilities are no longer required.
  
  Adjusted operating income for the three and nine months ended September 30, 2012 was $344 million and $1.00 billion, respectively, which is operating income adjusted for transaction expenses associated with the acquisition of HCP and a legal settlement and related expenses.

• Operating Income: Operating income for the three and nine months ended September 30, 2013 was $377 million and $1.07 billion, respectively.
  
  Operating income for the three and nine months ended September 30, 2012 was $341 million and $909 million, respectively.

• Volume: Total U.S. dialysis treatments for the third quarter of 2013 were 6,034,647, or 76,388 treatments per day, representing a per day increase of 7.3% over the third quarter of 2012. Non-acquired treatment growth in the quarter was 5.5% over the third quarter of 2012. Normalized non-acquired treatment growth in the quarter was 5.4% over the third quarter of 2012.
  
  The number of member months for which HCP provided capitated care during the third quarter of 2013 was approximately 2.2 million representing an increase of 15.3% as compared to the third quarter of 2012, inclusive of growth contributed from acquisitions. These calculations include data prior to our merger with HCP on November 1, 2012.

• Effective Tax Rate: Our effective tax rate was 37.3% and 32.9% for the three and nine months ended September 30, 2013, respectively. This effective tax rate is impacted by the amount of third party owners' income attributable to non-tax paying entities. The effective tax rate attributable to DaVita HealthCare Partners Inc. was 42.5% and 37.5% for the three and nine months ended September 30, 2013, respectively. The effective tax rate attributable to DaVita HealthCare Partners Inc. for the three and nine months ended September 30, 2013, excluding a contingent earn-out obligation adjustment, a loss contingency reserve and an income tax adjustment related to the reduction in a tax asset associated with the HCP acquisition escrow provisions, was 38.3% and 39.5%, respectively.
  
  We expect our 2013 effective tax rate attributable to DaVita HealthCare Partners Inc. to be in the range of 38.0% to 39.0%. In addition, we expect our 2013 effective tax rate attributable to DaVita HealthCare Partners Inc. excluding a contingent earn-out obligation adjustment, a loss contingency reserve and the income tax adjustment related to a reduction in a tax asset associated with the HCP acquisition escrow provisions to be in the range of 39.0% to 40.0%.

• Loss Contingency Reserve: We are engaged in good faith discussions with the attorneys from the United States Attorney's Office for the District of Colorado, the Civil Division of the United States Department of Justice and the Office of the Inspector General in an effort to find a mutually acceptable resolution to the 2010 and the 2011 U.S. Attorney Physician Relationship Investigations. Discussions have advanced to a point where we believed it was appropriate to accrue an additional $97 million to our estimated loss contingency reserve in the current quarter, which brings the total estimated loss contingency reserve to $397 million as of September 30, 2013, in connection with offers to settle the related civil, administrative and criminal matters. However, the discussions are ongoing, and until concluded, there can be no certainty about the timing or likelihood of a definitive resolution or the scope of any potential restrictions or impact on future operations that may be agreed upon in connection with a settlement. As these discussions proceed and additional information becomes available to us, the amount of the estimated loss contingency reserve may need to be adjusted further to reflect this new information.
• Stock Split: In the third quarter of 2013, the Board of Directors approved a two-for-one stock split of our common stock in the form of a stock dividend payable on September 6, 2013 to stockholders of record on August 23, 2013. Our common stock began trading on a post-split basis on September 9, 2013. All share and per share data for all periods presented have been adjusted to reflect the effects of the stock split.
• Contingent Earn-out Obligation: During the third quarter of 2013, we reached agreement with the representative of the former owners and option holders of HealthCare Partners Holdings, LLC (HCP) to settle certain post-closing adjustments, including the 2013 contingent earn-out obligation for $68.8 million, an amount equal to its carrying value at June 30, 2013. Accordingly, this settlement had no impact to our consolidated statements of income during the third quarter of 2013.
• Center Activity: As of September 30, 2013, we provided dialysis services to a total of approximately 166,000 patients at 2,108 outpatient dialysis centers, of which 2,042 centers are located in the United States and 66 centers are located in ten countries outside of the United States. During the third quarter of 2013, we acquired 10 dialysis centers and opened a total of 25 dialysis centers in the United States. We also acquired 18 dialysis centers outside of the United States.

Outlook

• We are narrowing our consolidated income guidance for 2013 to now be in the range of $1.88 billion to $1.92 billion. Our previous consolidated operating income guidance for 2013 was in the range of $1.83 billion to $1.93 billion.
• We are updating our operating income guidance for our dialysis services and related ancillary businesses for 2013 to now be in the range of $1.50 billion to $1.52 billion. Our previous operating income guidance for 2013 was in the range of $1.45 billion to $1.50 billion.
• We are also narrowing our operating income guidance for HCP for 2013 to now be in the range of $380 million to $400 million. Our previous operating income guidance for HCP for 2013 was in the range of $380 million to $430 million.
• We are also updating our consolidated operating cash flow guidance for 2013 to now be in the range of $1.60 billion to $1.70 billion. Our previous consolidated operating cash flow guidance for 2013 was in the range of $1.40 billion to $1.50 billion.

The consolidated and dialysis services and related ancillary businesses operating income guidance amounts exclude an estimated loss contingency reserve of $397 million which we accrued during the first nine months of 2013 in connection with the 2010 and 2011 U.S. Attorney Physician Relationship Investigations and the consolidated cash flow guidance amounts exclude any potential payment of this reserve. In addition, the consolidated operating income guidance amounts exclude a contingent earn-out obligation adjustment of approximately $57 million that we recorded in the second quarter of 2013 related to the remeasurement of the fair value of HCP's 2013 contingent earn-out obligation and excludes the adjustment to reduce a tax asset associated with the HCP acquisition escrow provisions that was established as a receivable to offset any potential tax liabilities. These projections and the underlying assumptions involve significant risks and uncertainties, including those described below and actual results may vary significantly from these current projections.

Source: DaVita HealthCare Partners Inc.