Kidney dialysis company, Fresenius Medical Care FMS reported adjusted earnings of 40 cents per American Depositary Share (ADS) in the second quarter of 2015, lower than the Zacks Consensus Estimate of 42 cents. The bottom line, however, increased by a penny from the year-ago quarter.
The Quarter in Details
Revenues increased 9.5% (15% at constant currency) on a year-over-year basis to $4.20 billion, surpassing the Zacks Consensus Estimate of $4.11 billion. Worldwide organic revenue growth was 8%.
Net Healthcare revenues grew 13.4% (18% at constant currency) to $3.35 billion, with significant contribution from the North American market. Dialysis product revenues decreased 4% to $854 million, primarily due to unfavorable foreign exchange rates. On a constant currency basis, revenues generated from dialysis products increased 8%.
By geography, North America revenues rose 16.8% year over year to $2.95 billion. Organic revenue growth was 7%.
International revenues decreased 4% (up 14% at constant currency) on a year-over-year basis to $1.25 billion. Organic revenue growth was 9%.
Gross margin contracted 70 basis points (bps) on a year-over-year basis to 30.9%.
Selling, general and administrative expenses increased 14.6% on a year-over-year basis to $723 million. Research and development (R&D) expenses spiked 12.3% to $34 million.
Operating income declined 1.7% to $547 million due to higher operating expense. Operating margin contracted 150 bps on a year-over-year basis to 13%.
Financial Details
Net cash provided by operating activities in the second quarter of 2015 was $385 million, compared with $447 million in the preceding quarter. Free cash flow was $171 million in, compared with $250 million in the first quarter of 2015.
Guidance
Fresenius reaffirmed its financial guidance for the current year. For 2015, the company estimates revenue growth of 5–7% (10–12% at constant currency). Net income attributable to shareholders of the company is anticipated to increase zero to 5% in 2015.
The company expects to incur approximately $1 billion in capital expenditure and about $400 million on buyout-related activities in 2015. The debt/EBITDA ratio is expected to be around 3.0 by the end of this year.
For 2016, revenues are now expected to increase 7–10%, compared with the previous range of 9–12%.
Net income attributable to shareholders in 2016 is estimated to grow by 15–20%.
The company expects revenues to increase at an average annual growth rate of about 10% through 2020 and net income in high single digits.
Our Take
Fresenius’s organic growth is a key positive in our opinion. Strong revenues generated from dialysis products in North America and Asia Pacific are expected to help the company, going forward. Moreover, a positive long-term growth outlook bodes well for investors’ confidence. However, declining margins remain as a major headwind.
Zacks Rank
Currently, Fresenius Medical carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the broader medical sector include LeMaitre Vascular LMAT, LDR Holding Corp LDRH and Abaxis ABAX. All the stocks sport a Zacks Rank #1 (Strong Buy).
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