Improving Health, Health Care and Quality of Life
Net income for the three months ended March 31, 2006 included after-tax stock-based compensation expense of $2.8 million or $0.025 per share as a result of implementing SFAS No. 123®.
Financial and operating highlights include: -- Cash Flow: For the rolling 12-months ended March 31, 2006 operating cash flow was $412 million and free cash flow was $336 million, in each case excluding the tax benefit from stock option exercises and an $85 million income tax payment associated with the divestiture of centers in conjunction with the Gambro Healthcare acquisition. Operating cash flow for the three months ended March 31, 2006 was $61 million and free cash flow was $41 million, in each case excluding the tax benefit from stock option exercises and the $85 million income tax payment. -- Operating Income: Operating income for the three months ended March 31, 2006, was $162 million, as compared to $159 million for the fourth quarter of 2005. -- Volume: Total treatments for the three months ended March 31, 2006 were 3,501,032 or 45,468 treatments per day, as compared to 3,498,231 or 44,281 treatments per day for the fourth quarter of 2005. Non-acquired treatment growth in the quarter was 4.6%. -- Center Activity: As of March 31, 2006, we operated or provided administrative services at 1,241 outpatient centers serving approximately 98,000 patients. During the first quarter of 2006 we acquired 6 centers, opened 6 new centers, and provided administrative services to 2 additional centers. We also completed the divestiture of 3 centers related to the Gambro Healthcare acquisition and closed 3 centers. Outlook
Our operating income guidance for 2006 is projected to be in the $600-680 million range after the impact of FASB No. 123R related to stock option expensing. 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.
DaVita will be holding a conference call to discuss its results for the first quarter ended March 31, 2006 on May 3, 2006 at 10:00 AM Eastern Time. The dial in number is 800-399-4406. A replay of the conference call will be available on DaVita's official web page, www.davita.com, for the following 30 days.
This release contains forward-looking statements, including statements related to our 2006 operating results. Factors which could impact future results include the uncertainties associated with governmental regulations, general economic and other market conditions, acquisitions and the risk factors set forth in the Company's SEC filings, including its Form 10-K for the year ended December 31, 2005. The forward-looking statements should be considered in light of these risks and uncertainties.
These risks and uncertainties include those relating to: -- the concentration of profits generated from preferred provider organizations and private indemnity patients, -- possible reductions in private and government payment rates, -- changes in pharmaceutical practice patterns, payment policies, or pharmaceutical pricing, -- our ability to maintain contracts with physician medical directors, legal compliance risks, including our continued compliance with complex government regulations and the ongoing review by the U.S. Attorney's Office for the Eastern District of Pennsylvania and the OIG, the subpoena from the U.S. Attorney's Office for the Eastern District of New York, the subpoenas from the U.S. Attorney's Office for the Eastern District of Missouri and DVA Renal Healthcare's (formerly known as Gambro Healthcare, Inc.) compliance with its corporate integrity agreement, -- our ability to complete and integrate acquisitions of businesses, and -- the successful integration of DVA Renal Healthcare, including its billing and collection operations.
We undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in underlying factors, new information, future events or otherwise.
This release contains non-GAAP financial measures. For reconciliations of these non-GAAP financial measures to their most comparable measure calculated and presented in accordance with GAAP, see the attached reconciliation schedules.
DAVITA INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited) (dollars in thousands, except per share data) Three months ended March 31, 2006 2005 Net operating revenues $1,163,188 $578,626 Operating expenses and charges: Patient care costs 817,773 387,515 General and administrative 104,168 54,263 Depreciation and amortization 41,891 23,845 Provision for uncollectible accounts 30,080 10,325 Minority interests and equity income, net 7,201 3,818 Total operating expenses and charges 1,001,113 479,766 Operating income 162,075 98,860 Debt expense (70,459) (17,531) Swap valuation gain 8,392 Refinancing charges (6,872) Other income, net 3,874 1,617 Income from continuing operations before income taxes 95,490 84,466 Income tax expense 37,710 32,496 Income from continuing operations 57,780 51,970 Discontinued operations Income from operations of discontinued operations, net of tax 4,364 Loss on disposal of discontinued operations, net of tax (311) Net income $57,469 $56,334 Earnings per share: Basic earnings per share from continuing operations $0.56 $0.52 Basic earnings per share $0.56 $0.57 Diluted earnings per share from continuing operations $0.55 $0.50 Diluted earnings per share $0.55 $0.55 Weighted average shares for earnings per share: Basic 102,581,455 99,399,612 Diluted 105,388,419 103,150,299 DAVITA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (dollars in thousands) Three months ended March 31, 2006 2005 Cash flows from operating activities: Net income $57,469 $56,334 Adjustments to reconcile net income to cash (used in) provided by operating activities: Depreciation and amortization 41,891 24,848 Stock-based compensation expense 5,692 841 Tax benefits from stock option exercises 983 15,093 Deferred income taxes (2,425) (5,814) Minority interests in income of consolidated subsidiaries 8,104 4,410 Distributions to minority interests (5,180) (3,518) Equity investment income (903) (394) Loss (gain) on other divestitures 298 (193) Gain on disposal of discontinued operations (961) -- Non-cash debt and other expenses 5,321 625 Refinancing charges -- 6,872 Swap valuation gain -- (8,392) Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: Accounts receivable (5,558) (10,188) Inventories (18,911) (2,820) Other receivables and other current assets (17,850) (989) Other long term assets (1,210) 385 Accounts payable (32,723) (4,865) Accrued compensation and benefits 5,223 5,421 Other current liabilities (1,350) 9,088 Income taxes (63,828) 28,500 Other long-term liabilities 2,354 (3,838) Net cash (used in) provided by operating activities (23,564) 111,406 Cash flows from investing activities: Additions of property and equipment, net (47,991) (25,625) Acquisitions (22,845) (4,798) Proceeds from divestitures 17,734 2,297 Investments in and advances to affiliates, net 2,635 2,677 Intangible assets (5,015) (395) Net cash used in investing activities (55,482) (25,844) Cash flows from financing activities: Borrowings 785,231 1,741,183 Payments on long-term debt (898,443) (1,748,663) Deferred financing costs (2) (29,213) Excess tax benefits from stock-based compensation 18,532 -- Stock option exercises and other share issuances, net 21,063 17,031 Net cash used in financing activities (73,619) (19,662) Net (decrease) increase in cash and cash equivalents (152,665) 65,900 Cash and cash equivalents at beginning of period 431,811 251,979 Cash and cash equivalents at end of period $279,146 $317,879 DAVITA INC. CONSOLIDATED BALANCE SHEETS (unaudited) (dollars in thousands, except per share data) March 31, December 31, 2006 2005 ASSETS Cash and cash equivalents $279,146 $431,811 Accounts receivable, less allowance of $144,968 and $138,598 859,138 853,560 Inventories 88,255 69,130 Other receivables 135,974 116,620 Other current assets 22,622 38,463 Deferred income taxes 152,304 144,824 Total current assets 1,537,439 1,654,408 Property and equipment, net 759,853 750,078 Amortizable intangibles, net 230,981 235,944 Investments in third-party dialysis businesses 3,028 3,181 Other long-term assets 52,752 41,768 Goodwill 3,605,401 3,594,383 $6,189,454 $6,279,762 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $178,298 $212,049 Other liabilities 381,193 381,964 Accrued compensation and benefits 236,266 231,994 Current portion of long-term debt 5,237 71,767 Income taxes payable 28,131 91,959 Total current liabilities 829,125 989,733 Long-term debt 4,039,333 4,085,435 Other long-term liabilities 26,367 26,416 Alliance and product supply agreement and other intangibles, net 153,995 163,431 Deferred income taxes 84,500 75,499 Minority interests 93,602 88,639 Commitments and contingencies Shareholders' equity: Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued) Common stock ($0.001 par value, 195,000,000 shares authorized; 134,862,283 shares issued) 135 135 Additional paid-in capital 594,285 569,751 Retained earnings 897,399 839,930 Treasury stock, at cost (31,566,292 and 32,927,026 shares) (550,291) (574,013) Accumulated comprehensive income valuations 21,004 14,806 Total shareholders' equity 962,532 850,609 $6,189,454 $6,279,762 DAVITA INC. SUPPLEMENTAL FINANCIAL DATA (unaudited) (dollars in millions, except for per share and per treatment data) Three months ended March 31, December 31, March 31, 2006 2005 2005 Financial Results: Net income $57.5 $64.1 $56.3 Income from continuing operations $57.8 $56.4 $52.0 Diluted earnings per share $0.55 $0.61 $0.55 Diluted earnings per share from continuing operations $0.55 $0.54 $0.50 Operating income $162.1 $158.8 $98.9 Operating income margin 13.9% 14.0% 17.1% Other comprehensive income Unrealized gain on securities, net of tax expense of $3.9, $2.4, and $6.9 $6.2 $3.8 $10.9 Business Metrics: Volume Treatments 3,501,032 3,498,231 1,761,530 Number of treatment days 77.0 79.0 77.0 Treatments per day 45,468 44,281 22,877 Per day year over year increase 98.7% 95.8% 13.6% Non-acquired growth 4.6% 2.8% 5.6% Revenue Total operating revenue $1,163 $1,133 $579 Dialysis revenue per treatment $316.70 $310.62 $312.14 Per treatment increase (decrease) from previous quarter 2.0% (2.0%) -- Per treatment increase (decrease) from previous year 1.5% (0.6%) 0.2% Expenses A. Patient care costs Percent of revenue 70.3% 70.5% 67.0% Per treatment $233.58 $228.48 $219.99 Per treatment increase (decrease) from previous quarter 2.2% 1.3% (0.9%) Per treatment increase from previous year 6.2% 2.9% 0.1% B. General & administrative expenses Percent of revenue 9.0% 8.6% 9.4% Per treatment $29.75 $27.88 $30.80 Per treatment increase (decrease) from previous quarter 6.7% (11.6%) 3.5% Per treatment (decrease) increase from previous year (3.4%) (6.3%) 12.8% C. Bad debt expense as a percent of current-period revenue 2.6% 2.6% 1.8% D. Consolidated effective tax rate from continuing operations 39.5% 35.7% 38.5% DAVITA INC. SUPPLEMENTAL FINANCIAL DATA-continued (unaudited) (dollars in millions, except for per share and per treatment data) Three months ended March 31, December 31, March 31, 2006 2005 2005 Cash Flow Operating cash flow $(23.6) $183.3 $111.4 Operating cash flow, excluding tax benefit from stock option exercises and the income tax payment on divested centers $60.8 $179.3 $96.3 Free cash flow $(43.3) $151.6 $103.8 Free cash flow, excluding tax benefit from stock option exercises and the income tax payment on divested centers $41.1 $147.5 $88.7 Capital expenditures: Development $26.3 $27.8 $18.1 Routine maintenance/IT/other $21.7 $32.3 $7.6 Acquisition expenditures $22.8 $3,072.3 $4.8 Accounts Receivable Net receivables $859 $854 $464 DSO 69 71 71 Debt/Capital Structure Total debt $4,045 $4,157 $1,368 Net debt, net of cash and cash equivalents $3,765 $3,725 $1,050 Leverage ratio - (see Note 1) 4.29x 4.45x -- Clinical (quarterly averages) Dialysis adequacy - % of patients with Kt/V > 1.2 93% 94% 94% Patients with arteriovenous fistulas 49% 45% 43% DAVITA INC. SUPPLEMENTAL FINANCIAL DATA-continued (unaudited) (dollars in thousands) Note 1: Calculation of the Leverage Ratio
Under the Company's current credit agreement (Credit Agreement), the leverage ratio is defined as all funded debt plus the face amount of all letters of credit issued, minus cash and cash equivalents, divided by "Consolidated EBITDA". The leverage ratio determines the interest rate margin payable by the Company under the Credit Agreement by establishing the margin over the base interest rate (LIBOR) that is applicable. The following leverage ratio was calculated using "Consolidated EBITDA" as defined in the Credit Agreement, except that pro forma incremental "EBITDA" relating to routine acquisitions that occurred during the current quarter, which is included in the calculation of "EBITDA" under the Credit Agreement, is excluded from the calculation below. The calculation below is based on the last twelve-months of Consolidated "EBITDA", pro forma for the DVA Renal Healthcare acquisition and related divestitures. The Company's management believes that the presentation of "Consolidated EBITDA" is useful to investors to enhance their understanding of the Company's leverage ratio under its Credit Agreement.
Rolling 12-months ended March 31, 2006 Income from continuing operations $242,118 Income taxes 154,341 Debt expense 278,671 Depreciation and amortization 171,781 Minority interests and equity income, net 28,030 Swap valuation losses 3,896 Refinancing charges 2,276 Other 1,298 Stock-based compensation expense 7,497 "Consolidated EBITDA" calculated as described above $889,908 March 31, 2006 Total debt $4,044,570 Letters of credit issued 50,345 4,094,915 Less: cash and cash equivalents (279,146) Consolidated net debt $3,815,769 Last twelve months "Consolidated EBITDA" calculated as described above $889,908 Leverage ratio 4.29x
In accordance with the Company's Credit Agreement, the Company's leverage ratio can not exceed 6.25 to 1.0 as of March 31, 2006. At that date, the Company's leverage ratio did not exceed 6.25 to 1.0.
DAVITA INC. RECONCILIATIONS FOR NON-GAAP MEASURES (unaudited) (dollars in thousands) 1. Operating cash flow, excluding tax benefit from stock option exercises and income tax payment on divested centers: We believe that operating cash flow excluding tax benefit from stock option exercises and income tax payment on divested centers enhances a user's understanding of our normal operating cash flows for these periods by providing a measure that is more meaningful because it is comparable to prior periods and indicative of consistent operating cash flow items, and because it excludes non-recurring transactions that can cause unusual fluctuations in our operating cash flows. This measure is not a measure of financial performance under United States generally accepted accounting principles and should not be considered as an alternative to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Rolling 12-months Three months ended ended March 31, December 31, March 31, March 31, 2006 2005 2005 2006 Cash (used in) provided by operating activities $(23,564) $183,344 $111,406 $350,584 Less: Tax benefit from stock option exercises (983) (4,064) (15,093) (24,374) Income tax payment on divested centers 85,328 85,328 $60,781 $179,280 $96,313 $411,538 2. Free cash flow and free cash flow, excluding tax benefit from stock option exercises and income tax on divested centers: Free cash flow represents net cash provided by operating activities less
expenditures for routine maintenance and information technology. We believe
free cash flow is a useful adjunct to cash flow from operating activities and other measurements under generally accepted accounting principles in the United States since it is a meaningful measure of our ability to fund acquisition and development activities and meet our debt service requirements.Free cash flow is not a measure of financial performance under United States generally accepted accounting principles and should not be considered as an alternative to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Rolling 12-months Three months ended ended March 31, December 31, March 31, March 31, 2006 2005 2005 2006 Cash (used in) provided by operating activities $(23,564) $183,344 $111,406 $350,584 Less: Expenditures for routine maintenance and information technology (19,726) (31,735) (7,634) (75,731) Free cash flow (43,290) 151,609 103,772 274,853 Less: Tax benefit from stock option exercises (983) (4,064) (15,093) (24,374) Income tax payments on divested centers 85,328 85,328 $41,055 $147,545 $88,679 $335,807
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