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Fresenius Misses Estimates in 2Q

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World's largest dialysis company Fresenius Medical Care (FMS) reported second quarter 2012 earnings per share of 91 cents missing the Zacks Consensus Estimate by a penny and surpassing the year-ago earnings of 86 cents per share. Adjusted income excludes gain from investments.

Net income including the investment gain (attributable to the company) edged up 11% year over year to $289 million. The increase was backed by a non-taxable investment gain of $13 million associated with the takeover of Liberty Dialysis Holdings.

Revenue Analysis

Net revenues increased 9% (up 13% in terms of constant currency) year over year to $3,428 million, trailing the Zacks Consensus Estimate of $3,525 million. Organic revenue growth was 4% on a global basis.

On a geographic basis, revenues from the North American markets improved 14% to $2,249 million in the quarter while overseas revenues clambered 1% (up 11% in terms of constant currency) to $1,171 million.

Dialysis services revenues soared 13% (up 16% in terms of constant currency) year over year to $2,605 million with U.S. sales rising 15% year over year to $2,043 million and international sales ascending 5% (up 16% in terms of constant currency) year over year to $562 million. Average revenue per treatment for U.S. clinics grew to $351 from $348 a year ago.

Consolidated dialysis product revenues declined 1% (up 6% in terms of constant currency) year over year to $823 million. Dialysis product sales in the U.S. market increased 3% to $206 million primarily based on robust sales of hemodialysis products. International dialysis product sales rose 3% to $609 million, boosted by higher sales of dialysis machines and dialyzers.

Operating Statistics

Fresenius operated a network of 3,123 dialysis clinics (up 10% year over year) across North America and the overseas markets, as of June 30, 2012. It has provided dialysis treatment to 256,456 patients (up 14% year over year) on a global scale, as of June 30, 2012. The company provided 18.89 million dialysis treatments (up 14% year over year) globally, as of June 30, 2012.


Operating margin rose to 17.2% from 16.2% in the prior year quarter. In North America, operating margin improved to 19.2% from 17.7% a year ago while operating margin for overseas markets increased to 17.7% from 17.5% in the year-ago period.

Cash Flows

Fresenius ended the second quarter with cash (from operations) of $451 million (13.2% of sales) representing 45% year over year surge. The cash flow generation was helped by development of outstanding days sales.

The company spent $151 million on capital expenditures in the quarter. Free cash flow, prior to acquisitions, was $300 million versus $194 million a year ago. The company generated $6 million from divestitures, net of acquisitions. Free cash flow, post acquisitions, divestures and investments, was $306 million compared with $(590) million in the prior-year period.


Fresenius reaffirmed its forecast for 2012. The company continues to envision sales of roughly $14 billion for 2012. Expected net income for 2012 remains unchanged at $1.3 billion and net income (attributable to shareholders) is pegged at $1.14 billion. Net income excludes gain on investments of about $140 million for the first half of the year. The company expects capital expenditure of roughly $700 million and plans to spend around $1.8 billion on acquisitions.

Fresenius is the largest provider of products and services for patients undergoing dialysis treatment on the planet. 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. Fresenius also competes with Baxter International (BAX) in certain niches such as the peritoneal dialysis products.

The company continues to register strong operating results in the North American as well as overseas markets. The integration of recent acquisitions is also expected to be accretive to Fresenius’ earnings in the near term. However, the contagion of economic problems remains a matter of concern. Despite cost controlling measures to combat the sluggish global economy, the company’s higher level of financial debt is another overhang.

The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. 

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