Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2007
Business Overview: The world's largest kidney dialysis company, operating in dialysis services and products for end-stage renal disease (ESRD). The company is vertically integrated, owning clinics and supplying products. Results for the period include the operations of Renal Care Group (RCG), acquired in March 2006, making year-over-year comparisons significantly impacted by this acquisition.
Key Financial Metrics
| Metric (in millions) | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Revenue | $2,321 | $1,747 |
| Gross Profit | $784 | $578 |
| Gross Margin | 33.8% | 33.1% |
| Operating Income | $365 | $244 |
| Operating Margin | 15.7% | 14.0% |
| Net Income | $160 | $116 |
| Diluted EPS | $1.62 | $1.18 |
| Cash from Operations | $283 | $162 |
| Cash and Equivalents (End of Period) | $208 | $364 |
| Total Debt (Short + Long Term) | $4,278 | $4,321 |
Note: Debt figures include short-term borrowings, current portion of long-term debt, and long-term debt. Q1 2006 debt was heavily influenced by financing for the RCG acquisition.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 33% (31% at constant exchange rates). Growth was driven by the RCG acquisition (approx. 20% contribution), same-market treatment growth (4%), and increased revenue per treatment.
- Profitability: Operating income rose 49% to $365 million. Margins improved due to higher treatment rates, RCG's higher gross margins, and economies of scale, partially offset by higher personnel expenses.
- Interest Expense: Increased 61% to $98 million, primarily due to debt incurred for the RCG acquisition. Q1 2006 included a $15 million one-time write-off of financing fees.
- Operating Volume: Number of treatments increased 28% to 6.41 million. The company operated 2,194 clinics at March 31, 2007, compared to 1,698 in the prior year.
- Segment Performance:
- North America: Revenue up 37%; Operating income up 57% to $258 million.
- International: Revenue up 24% (17% at constant rates); Operating income up 26% to $121 million.
Guidance, Outlook, and Risks
Outlook and Guidance
Management provided the following outlook for 2007 and 2008:
- 2007 Revenue Growth: 11% (Target: $9.4 billion).
- 2007 Net Income Growth: 26% - 29% (Adjusted: 18% - 21%).
- 2008 Revenue Growth: 6% - 9%.
- 2008 Net Income Growth: >10%.
- Capital Expenditures & Acquisitions: Approximately $650 million for both 2007 and 2008.
- Debt/EBITDA: Target to remain under 3.0.
- Dividends: Proposed dividend of €1.41 per ordinary share for 2006 (payable 2007).
Risks and Contingencies
- Legal Proceedings:
- W.R. Grace Bankruptcy: Company agreed to pay $115 million to the bankruptcy estate upon plan confirmation. This amount was accrued in 2001.
- Baxter Litigation: A previous jury verdict in favor of Fresenius regarding patent infringement was set aside by the court in February 2007, requiring a retrial. An adverse judgment could materially impact operations.
- Gambro Litigation: Ongoing dispute in Australia regarding patent infringement of the Gambro Bicart device; damages are being disputed.
- Government Investigations:
- DOJ Subpoenas: Ongoing investigations regarding anemia management programs, physician relationships, and stock option practices (RCG). A qui tam complaint regarding RCG's supply company was partially unsealed in March 2007.
- Tax Audits: Ongoing audits in the U.S. and Germany. The company is contesting certain disallowances, including a $99 million tax assessment paid in 2006.
- Regulatory Environment: Dependence on government reimbursements (Medicare/Medicaid). Changes in reimbursement rates or EPO utilization policies could materially affect revenue.
Investor Verification Checklist
- RCG Integration: Verify the realization of synergies and cost savings from the Renal Care Group acquisition to ensure projected margin improvements are sustainable.
- Legal Exposure: Monitor the status of the Baxter patent retrial and the W.R. Grace bankruptcy plan confirmation, as these represent significant contingent liabilities.
- Government Investigations: Track the outcome of DOJ investigations into anemia management and billing practices, which could result in fines or operational restrictions.
- Reimbursement Rates: Assess the impact of CMS policy changes regarding EPO utilization and the 2007 Medicare composite rate adjustments on future cash flows.
- Debt Covenants: Confirm continued compliance with the 2006 Senior Credit Agreement covenants, specifically the leverage ratio and fixed charge coverage ratio.