Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA (FMC-AG & Co. KGaA)
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and nine months ended September 30, 2013
Business Overview: The Company is the world's largest kidney dialysis company, providing dialysis services (including pharmacy and vascular access surgery) and manufacturing/distributing dialysis products. Operations are segmented into North America and International (EMEALA and Asia-Pacific).
Key Financial Metrics (Nine Months Ended Sept 30, 2013)
| Metric | 2013 (9 Months) | 2012 (9 Months) | Change |
|---|---|---|---|
| Net Revenue | $10,743 million | $10,095 million | +6.4% |
| Operating Income | $1,595 million | $1,659 million | -3.9% |
| Net Income (Shareholders) | $761 million | $930 million | -18.2% |
| Operating Margin | 14.8% | 16.4% | -160 bps |
| EBITDA | $2,074 million | $2,106 million | -1.5% |
| Cash from Operations | $1,446 million | $1,467 million | -1.4% |
| Cash & Equivalents (Sept 30) | $602 million | $688 million (Dec 31, 2012) | -12.5% |
| Debt/EBITDA Ratio | < 3.0 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 5% increase in treatments (4% same-market growth, 3% acquisitions) and organic revenue per treatment growth. North America revenue grew 8%, while International grew 4% (5% at constant currency).
- Profitability Decline: Operating income decreased primarily due to:
- U.S. Sequestration: A 2% cut in Medicare payments effective April 1, 2013, reduced operating income by approximately $38 million year-to-date.
- Margin Compression: Gross profit margin fell to 32.0% from 32.8% due to higher personnel expenses, unfavorable commercial payor mix, and lower margins in Expanded Services.
- SG&A Increase: Selling, general, and administrative expenses rose to 16.5% of revenue, driven by legal/consulting costs and foreign exchange impacts (notably Venezuela).
- One-Time Items: The prior year (2012) included a non-taxable investment gain of $140 million from the Liberty Dialysis acquisition. Excluding this, 2013 net income declined only slightly ($761M vs. $790M adjusted 2012).
- Shareholder Returns: The Company completed a share buyback program in Q3 2013, repurchasing 7.55 million shares for $505 million. Dividends paid totaled $296 million.
Guidance, Outlook, and Risks
2013 Full-Year Outlook:
- Revenue: > $14.6 billion (>6% growth).
- Operating Income: $2.3 billion – $2.4 billion.
- Net Income: $1.1 billion – $1.15 billion (likely at the lower end).
- Capital Expenditures: ~$0.7 billion.
- Acquisitions: ~$0.5 billion.
Key Risks and Contingencies:
- Reimbursement Risk: CMS proposed a 12% reduction in the ESRD PPS base rate effective Jan 1, 2014, which could materially impact operating income if finalized. The Company is actively commenting on this proposal.
- Legal & Regulatory: Ongoing internal and government investigations regarding potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) in the International segment. The Company has voluntarily disclosed these matters to the SEC and DOJ.
- Litigation: Significant patent litigation with Baxter International (largely resolved in Company's favor regarding older patents, but new suits filed) and multidistrict litigation regarding dialysate concentrate products (Granuflo/Naturalyte).
- Currency: Hyperinflation in Venezuela resulted in a $12 million pre-tax loss in the first nine months of 2013.
Investor Verification Checklist
- ESRD PPS Rate Cut: Verify the final status of the proposed 12% Medicare reimbursement reduction for 2014 and its potential impact on the North America segment.
- FCPA Investigation: Monitor updates on the internal review and dialogue with the SEC/DOJ regarding anti-corruption allegations in the International segment.
- Adjusted Earnings: Compare reported net income against the adjusted figure excluding the 2012 Liberty investment gain to assess true operational performance trends.
- Venezuela Exposure: Assess the ongoing financial impact of the hyperinflationary economy and currency devaluation in Venezuela on the International segment.
- Sequestration Impact: Confirm the full-year financial impact of the U.S. federal government spending cuts on Medicare reimbursement.