CORPORATE FOCUS– DaVita Inc

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A new name, a new outlook on life.

DaVita Inc., the country’s second-largest provider of kidney dialysis services, has been picking up some steam of late, and Wall Street is taking notice. The Torrance-based company has seen its stock rebound from a 52-week low of $2.06 a share in March to a high of $10.88 two weeks ago. It was holding near that level last week.

The recent rise comes on the heels of an announcement by DaVita that it would beat its third-quarter earnings projection, news that caused two analysts that follow the company to upgrade their rating on the stock. This despite the fact that its second-quarter performance was less than impressive. DaVita posted a net loss of $15.4 million (19 cents per diluted share), barely better than the net loss of $22.1 million (27 cents a share) in the same quarter a year ago. Last year, the company posted a net loss of $147.3 million ($1.82 a share), worse than the revised net loss of $9.4 million (12 cents) in 1998.

But all of that occurred when the company was called Total Renal Care, which was changed earlier this month. And while the name change may be superficial, it highlights a revival under new management that is less than a year old but has industry watchers impressed.

“This is a turnaround story,” said William Bonello, senior analyst at U.S. Bancorp Piper Jaffray, who just upgraded the stock to a “strong buy.” “They’ve done a phenomenal job of righting the ship.”

Total Renal Care was created through a leveraged buyout of a health care company in 1994 and grew at an astonishing rate, buying one company after another. An acquisition in 1998 of Renal Treatment Centers doubled the company’s customer base. In five years, the company grew from having fewer than 40 kidney dialysis facilities and around $75 million in annual revenue into an owner/operator of almost 500 facilities with 40,000 patients and $1.5 billion in annual revenues.

But the spending spree came at a price. The 1998 acquisition weighed significantly on Total Renal Care, as neither company’s infrastructure could support the merged operations. Accounts went uncollected and clients were often undercharged for services rendered. And all the acquisitions required borrowing a lot of money.

“The old Total Renal Care was a disaster of a company,” said Todd Richter, an analyst at Banc of America Securities. “All they did was buy things instead of focus on running the company.”

By 1999 the company was $1.5 billion in debt and defaulting on its loans to its creditors. In the spring, the company announced its earnings would fall far short of expectations. The stock plummeted, shareholder lawsuits sprung up from angry investors, and both the CEO and chief financial officer resigned.

In November 1999, Kent Thiry was appointed chairman and chief executive of the struggling Total Renal Care. He brought in new managers from the outside and promoted people from within to new responsibilities.

“He stabilized operations,” said DaVita CFO Richard Whitney. “It was basically crisis time.”

Thiry decided to jettison the company’s international operations and Whitney shepherded the sale of those assets to a Swedish company in June for around $135 million. At the same time, the new CEO entered into negotiations with the company’s lenders, paid down $35 million and got a new line of credit. The horrible 1999 earnings statement reflected a decision to absorb charges related to uncollectable accounts, but the company worked to improve the collection of accounts receivable. Cash flow improved, helping to bring down the long-term debt to just below $1.2 billion.

The company also settled its shareholder lawsuits, which resulted in special charges for the second quarter of the year, but calmed analysts and investors. And a tattered reputation began to mend.

“I’m extremely impressed with Thiry,” analyst Bonello said. “He clearly understands the dialysis business. He has an analytical approach, which I find reassuring.”

The biggest sign of the company’s renewal was its recent announcement that it now expects third-quarter EBITDA (earnings before interest, taxes, depreciation and amortization) of between $72 million and $78 million, up from the previous forecast of $62 million to $66 million. The company declined to discuss how this might translate into net income, but Bonello is now projecting earnings per share of around 14 cents, which would be the highest in six quarters.

All this renewal convinced the company to change its name, and employees voted for DaVita, an Italian phrase that roughly translates as “to give life.”

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