Medical Industry Improves Free Cash Flow

Free cash flow improvement exceeds reduction in capital expenditures, signaling continued medical industry growth.


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Gardner Intelligence reviewed 67 publicly-traded firms in the medical-devices and medical-instruments and supply industries. At the time this article went to print, nearly 40 percent of those firms had reported fourth-quarter results. Evaluating the fourth-quarter data from one-year ago, as well as on a 12/12 rate-of-change basis (comparing the last 12 months with the preceding 12 months), we see evidence of an industry that continues to perform well despite a myriad of economic concerns, both domestic and international.

Interestingly, top-line revenue growth was more than double overall economic growth.  Among the firms analyzed, the average year-on-year fourth-quarter revenue growth was nearly 9 percent, with the median result at 6 percent. This is more than double the expected rate of overall U.S. economic growth that quarter of 2.4 percent, as reported by CNBC and Moody’s Analytics.

During the fourth quarter of 2018, our sample of firms experienced strong free cash flow growth, raising the 12/12 rate of change to 15 percent. An examination of individual corporate results indicates that the median 12/12 rate of change was slightly less than 7 percent. Total free cash held by the industry firms in our research set their most recent cumulative low during the third quarter of 2017 but reversed course and have since increased quarterly free cash flows, culminating in a multi-year high at the end of 2018.

Part of the explanation for the fourth-quarter growth in free cash flow is attributable to a simultaneous reduction in capital expenditures. Free cash flow, in its simplest calculation, is defined as cash flow from operating activities less capital expenditures. Of the $1 billion increase in free cash flow among the firms Gardner studied, the reduction in capital expenditures only accounted for approximately 20-percent of the change. In the fourth quarter, the average firm increased their capital expenditure 0.4 percent from the same quarter a year ago – a 3/12 rate of change – while the median result for the same time period was a 1.6-percent contraction. This fourth-quarter investment behavior belies the encouraging capital expenditure growth experienced earlier in 2018.

That current and projected revenue growth are both well above overall economic growth levels, however, should give suppliers to the industry reason for resolve. Retained cash generated in recent quarters may quickly be deployed in the future if business sentiment changes.