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Dialysis company Fresenius Medical Care (FMS) announced second quarter 2013 adjusted earnings of 44 cents per American Depositary Share (ADS), which was lower than the Zacks Consensus Estimate of 46 cents per ADS. Adjusted earnings exclude one-time items such as acquisition-related expenses associated with the buyout of Liberty Dialysis Holdings and impact from sequestration implemented from Apr 2013. Adjusted earnings remained flat year over year.

Net income attributable to the company dropped 9% year over year to $263 million in the quarter.

Quarter in Detail

Net revenue grew 5% (up 6% in terms of constant currency) year over year to $3,613 million in the reported quarter. Revenues marginally missed the Zacks Consensus Estimate of $3,615 million. Organic sales growth was 5% on a global basis.

On a geographic basis, revenues from the North American markets rose 6% to $2,375 million in the quarter while overseas revenues increased 5% (up 6% in terms of constant currency) to $1,228 million.

Dialysis services revenues increased 5% (up 6% in terms of constant currency) year over year to $2,743 million with U.S. sales spurting 6% year over year to $2,157 million and international sales ascending 4% (up 7% in terms of constant currency) year over year to $586 million.

Consolidated dialysis product revenues increased 6% (up 5% in terms of constant currency) year over year to $870 million. Dialysis product sales in the U.S. market rose 6% to $218 million. International dialysis product sales increased 5% (up 5% in terms of constant currency) to $642 million.

Operating Statistics

Fresenius operated a network of 3,212 dialysis clinics (up 3% year over year) across North America and overseas markets, as of Jun 30, 2013. The number of clinics in North America and offshore dialysis clinics both increased 3% year over year.

Fresenius provided dialysis treatment to 264,290 patients (up 3% year over year) on a global scale, as of Jun 30, 2013. Patients in North America increased 3% whereas number of patients in international markets increased 4% year over year.

The company provided 19.7 million dialysis treatments (up 5% year over year) globally, as of Jun 30, 2013. Fresenius’ North American franchise rose 5% while the international segment improved 3% year over year.

Margins

Operating margin dropped to 15.1% from 17.2% in the prior year quarter. In North America, operating margin was lower at 10.9% from 12.6% a year ago while operating margin for overseas markets decreased to 5.8% from 6.0% in the year-ago period. On an adjusted basis, operating margin was 15.4%, down from 16.6% in the prior year quarter.

Balance Sheet

Fresenius concluded the second quarter with cash from operations of $525 million (14.5% of sales), representing an increase of 16% year over year.

The company spent $173 million on capital expenditure in the quarter. Free cash flow, prior to acquisitions, was $352 million versus $300 million a year ago. The company spent $13 million on acquisitions and investments, net of divestitures. Free cash flow, post acquisitions, divestitures and investments, was $339 million compared with $306 million in the prior-year period.

Fresenius initiated a share repurchase program on May 20, 2013, which is expected to end in the third quarter of 2013. The board has authorized to buy back up to $500 million of its common stock. As of Jun 30, 2013, the company repurchased 3.58 million shares worth $249 million.

Guidance

Fresenius reaffirmed its revenue forecast for 2013. The company envisions sales of over $14,600 million for 2013, up 6% year over year. It raised the upper end of its net income guidance (for shareholders) for 2013 to $1,100-$1,500 million from $1,100-$1,200 million. The company expects capital expenditure of roughly $700 million and plans to spend around $500 million (earlier $300 million) on acquisitions. The guidance assumes the impact from sequestration.

Our Take

We are disappointed with Fresenius’ second quarter results, which missed the Zacks Consensus Estimate on both fronts. Moderate sales growth was dampened by declining margins. Macroeconomic issues such as a budget cut in the U.S. (sequestration) is likely to add more pressure on the company’s margins.

The company’s principal competitor in the U.S. is DaVita HealthCare Partners (DVA), which provides dialysis services for patients suffering from chronic kidney failure or end stage renal disease. Fresenius also competes with Baxter International (BAX).

The stock carries a Zacks Rank #4 (Sell). Right now, IDEXX Laboratories (IDXX) looks attractive with a Zacks Rank #2 (Buy).
 

 
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