Fresenius Misses by a Whisker - Analyst Blog

Fresenius Medical Care (FMS), a leading provider of dialysis products and services, reported third-quarter earnings per ADS of 82 cents, missing the Zacks Consensus Estimate of 83 cents while exceeding the year-ago earnings of 76 cents. Net income (attributable to the company) climbed 10% year over year to $248 million riding on higher sales.

Revenues

Net revenues lifted 6% year over year to $3,058 million, but narrowly missed the Zacks Consensus Estimate of $3,069 million. Organic revenue growth stood at 6% on a global basis. Geographically, revenues from the North American markets leapt 6% to $2,071 million while overseas revenues grew 5% to $987 million. Sales were boosted by higher Dialysis services revenues.

Segment Results    

Dialysis services revenues increased 8% year over year to $2,321 million with domestic and international sales rising 7% and 13%, respectively, to $1,863 million and $458 million. Average revenue per treatment for domestic clinics improved to $359 from $348 a year-ago, attributable to growth in reimbursement and higher utilization of pharmaceuticals.

Consolidated dialysis product revenues fell 0.7% to $736.9 million. Dialysis product sales in both domestic and international markets declined modestly to $208 million and $529 million, respectively. Higher sales of bloodlines and machines were offset by changes in the product mix and pricing pressure.

Margins

Operating margin in the reported quarter increased to 16.1% from 15.6% a year-ago. In North America, operating margin climbed to 18.1% from 16.7%. The margin improvement was led by an increase in revenue per treatment as well as better economies of scale.

However, operating margin for overseas markets declined to 15.8% from 16.7% as favorable foreign exchange translation and improved economies of scale were more than offset by higher bad debt expenses, lower gross margins of acquired clinics in Europe and Asia-Pacific and the impact of hyperinflation in Venezuela.

Cash Flows

Fresenius generated operating cash flows of $384 million (roughly 13% of revenues) in the reported quarter, down 13% year over year. The company spent $121 million on capital expenditure in the quarter. Free cash flows (prior to acquisitions and divestiture) decreased 13.5% year over year to $263 million.

Outlook

Fresenius Medical continues to expect revenues to grow to more than $12 billion in 2010. However, the company has raised the lower-end of its net income guidance for the year based on the healthy nine-month performance. It now expects net income in the range of $960 million to $980 million versus the earlier projection of $950 million to $980 million.

The company still expects capital expenditure between $550 million and $650 million for 2010. Moreover, it aims to spend $500 million on acquisitions for the full year.

Germany-based Fresenius Medical is the world's largest provider of products and services for patients undergoing dialysis treatment. The company inked an agreement with Stockholm-based medical technology company Gambro AB in August 2010 to purchase the latter's global peritoneal dialysis (PD) business.

Fresenius is using this opportunity to expand its activities in the homecare market, especially in the European Union and Asia-Pacific. The transaction is subject to the requisite regulatory approvals from concerned antitrust authorities.

Fresenius operated a network of 2,716 dialysis clinics (up 8% year over year) across North America and overseas markets at the end of the third quarter. It has provided dialysis treatment to 210,191 patients ((up 9%) worldwide as of September 30, 2010. The company's principal competitor in the U.S. is DaVita Inc. (DVA), which provides dialysis services for patients suffering from chronic kidney failure or end stage renal disease.