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Total Renal Stock Dives on Profit Forecast

Earnings: Investors react to company's revelations of lagging revenue and executive resignations. Share price has fallen 71% this year.

July 20, 1999|JAMES F. PELTZ

Shares of once-highflying Total Renal Care Holdings Inc. on Monday crashed for the second time this year, after the big chain of dialysis centers again stunned Wall Street with a disappointing profit outlook--and said its chief executive is quitting and its chief financial officer has resigned.

Investors promptly erased another one-third of Total Renal Care's market value, driving the stock down $4.25 to a close of $8.63 in heavy composite trading on the New York Stock Exchange.

That means the company's stock, which had tripled in price between 1995 and early 1998 as Total Renal rapidly expanded, has plunged a whopping 71% just this year, wiping out $1.7 billion of market value.

The Torrance-based concern said late Sunday that its second-quarter results would trail forecasts for several reasons, including higher operating costs and less-than-expected revenue for U.S. dialysis treatments.

It also said it will have to boost its reserves against patient account receivables--or what it was expected to be eventually paid by patients and their health insurers--that will require charges against its second-quarter performance.

The result will be second-quarter earnings per share in the range of 20 cents to 22 cents before the charges, the company said, compared with the 36 cents Wall Street had expected.

At least four analysts slashed their full-year earnings estimates for Total Renal to 94 cents a share from the $1.46 previously expected, said Chuck Hill, research director at First Call Corp., which tracks corporate earnings.

Analysts said the mounting problems also are the likely reason that Chief Executive Victor M.G. Chaltiel is leaving the company, even though Chaltiel on Sunday issued a statement citing "compelling personal and family reasons" for resigning.

Asked if Chaltiel's departure and Total Renal Care's latest bad news were a coincidence, analyst William Bonello of U.S. Bancorp Piper Jaffray in Minneapolis said, "Absolutely not."

Chaltiel and other executives referred calls to a company spokesman, who said Chaltiel was still running the company Monday while it looks for his successor. The company's president and chief operating officer is George B. DeHuff III, who joined the company in May.

The company also said its chief financial officer, John King, has resigned.

Although Total Renal Care finds itself in disarray, analysts said its business remains steady, viable and profitable and that the problems are resulting from poor management, oversight procedures and excessive optimism that are creating gaps between what the company hopes to generate financially and what it actually generates.

"It's really a management and accounting and control problem," Bonello said. "This is very definitely a real business with a recurring revenue stream and an active patient base of well over 40,000 people who have no alternative but to go to dialysis treatments."

John Sullivan, an analyst with investment firm Tucker Anthony in Boston, said that "the issue here was poor controls" and Total Renal Care's need for "better internal information flow, so that this news wouldn't have come as such a devastating surprise to investors."

The lack of controls indicates that certain patient receivables "went too long without being written off and that the company didn't have a clear idea of what its costs of doing business were," Sullivan said.

Total Renal Care, whose revenue soared 58% last year to $1.2 billion, runs 564 outpatient dialysis sites in 35 states; Washington, D.C.; Puerto Rico; Guam; Argentina; and several European countries. The chain had nearly $40 million in cash available as of March 31. But it also had $1.3 billion of long-term debt on the books.

The second-quarter shortfall is only the latest in a string of recent miscues at the company that have occurred since it purchased another chain, Renal Treatment Centers Inc., last year for $1.3 billion in stock.

Total Renal Care's stock also collapsed in February after it announced earnings for fourth-quarter 1998 that were below expectations. The results especially stung Wall Street because investors hadn't been forewarned of the shortfall, analysts said.

Shortly thereafter, Total Renal Care was hit with several investor lawsuits that alleged the company and its management violated securities laws by issuing false or misleading statements regarding its business. The company has denied all of the allegations.

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Another Slide

Total Renal Holdings' stock has lost 71% of its value this year. Monthly closes and latest on the NYSE:

Monday: $8.63, down $4.25

Source: Bloomberg News

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