FMS

Business Context and Reporting Period

Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three months ended March 31, 2008
Business Overview: The Company is the world's largest kidney dialysis company, providing dialysis services and manufacturing/distributing products for end-stage renal disease (ESRD). Operations are segmented into North America and International (aggregating International and Asia Pacific).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Driven by a 5% increase in total treatments (6.72 million vs. 6.41 million). Same-market treatment growth was 3.9%, with acquisitions contributing 1%. Dialysis product revenue surged 19% due to higher sales of machines, dialyzers, and the phosphate binder PhosLo.
• Segment Performance:
  • North America: Revenue up 2% to $1,668 million; Operating Income up 5% to $273 million. Growth driven by same-market treatment increases and product sales, partially offset by decreased revenue per treatment due to lower EPO utilization.
  • International: Revenue up 23% (10% at constant exchange rates) to $844 million; Operating Income up 19% to $143 million. Growth driven by treatment volume, revenue per treatment, and product sales.
• Costs and Expenses: SG&A expenses increased to $448 million (17.8% of revenue) from $406 million (17.5%), driven by corporate expenses, legal fees for patent litigation, and stock option compensation. R&D expenses rose to $19 million from $13 million.
• Cash Flow: Operating cash flow decreased 32% primarily due to an increase in Days Sales Outstanding (DSO) to 76 days and significant income tax payments in Germany.

Guidance, Outlook, and Risks

Outlook and Guidance

Management confirmed its full-year 2008 outlook:

• Revenue: Greater than $10.4 billion (>7% increase over 2007).
• Net Income: $805 million to $825 million.
• Capital Expenditures: $650 million to $750 million.
• Acquisitions: $150 million to $250 million.
• Debt/EBITDA: Projected to decrease below 2.8 by year-end.

Management Commentary and Risks

• Reimbursement Environment: CMS increased the drug add-on adjustment for 2008, but the composite rate was not updated. The Company faces pressure from reduced EPO utilization and reimbursement rates due to FDA safety warnings and CMS monitoring policies.
• Supply Chain: Baxter Healthcare recalls of sodium heparin forced the Company to switch suppliers, resulting in material increases in acquisition costs. Continued supply interruptions could materially impact operations.
• Legal Proceedings:
  • Baxter Litigation: A court ruled FMCH infringed Baxter patents, establishing a royalty (10% on machines, 7% on disposables) and an injunction effective Jan 1, 2009. FMCH has appealed and estimates potential royalties of $2-4 million per month if unsuccessful.
  • W.R. Grace Settlement: A $115 million payment obligation remains pending confirmation of a bankruptcy reorganization plan.
  • Tax Audits: Ongoing audits in the U.S. and Germany; the Company is contesting IRS disallowances of tax deductions related to prior civil settlements.

Investor Verification Checklist

• DSO Trends: Verify the sustainability of the increase in Days Sales Outstanding (76 days vs. 73 days prior year) and its impact on future operating cash flow.
• Heparin Supply Costs: Assess the long-term impact of increased heparin acquisition costs following the Baxter recall and supplier switch.
• Baxter Patent Appeal: Monitor the status of the appeal regarding the Baxter patent infringement ruling and potential royalty liabilities.
• EPO Utilization: Track the continued effect of FDA safety warnings and CMS monitoring policies on EPO revenue and reimbursement rates.
• Debt Covenants: Confirm continued compliance with the 2006 Senior Credit Agreement covenants, specifically the fixed charge and leverage ratios.