Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA (FMC)
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and six months ended June 30, 2012
Business Overview: FMC is the world's largest kidney dialysis company, providing dialysis services and manufacturing/distributing products for end-stage renal disease (ESRD). The company operates in three segments: North America, International (aggregated from International and Asia-Pacific), and Corporate. A significant event during the period was the acquisition of Liberty Dialysis Holdings, Inc. on February 28, 2012.
Key Financial Metrics
Revenue (Six Months Ended June 30, 2012): $6.68 billion (up 9% from $6.12 billion in 2011).
Net Income Attributable to Shareholders: $660 million (up 37% from $481 million in 2011).
Operating Income: $1.09 billion (up 14% from $955 million in 2011).
Operating Margin: 16.4% (up from 15.6% in 2011).
Cash Flow from Operations: $932 million (up from $487 million in 2011).
Liquidity: Cash and cash equivalents totaled $677 million as of June 30, 2012.
Debt: Total debt obligations were approximately $8.63 billion. The Amended 2006 Senior Credit Agreement ($2.67 billion) is due March 31, 2013, and is expected to be refinanced.
EBITDA: $1.39 billion (20.8% of revenue).
Material Changes vs. Prior Period
- Acquisition Impact: The 14% increase in total treatments and 9% revenue growth were primarily driven by the Liberty Dialysis acquisition, which added 263 clinics and contributed significantly to North America segment results.
- Investment Gain: A non-taxable investment gain of $140 million was recorded related to the fair value re-measurement of the Liberty acquisition, significantly boosting net income.
- Divestitures: In connection with the Liberty acquisition, the company divested 24 clinics, resulting in a pre-tax gain of $33 million.
- Interest Expense: Increased 37% to $236 million due to higher debt levels associated with the acquisition.
- Segment Performance:
- North America: Revenue increased 12% to $4.35 billion; Operating income increased 18% to $779 million.
- International: Revenue increased 4% to $2.31 billion (11% at constant exchange rates); Operating income increased 7% to $402 million.
Guidance, Outlook, and Risks
2012 Full Year Outlook:
- Net Revenues: ~$14.0 billion
- Net Income Attributable to Shareholders: ~$1.14 billion (excluding the $140 million investment gain).
- Debt/EBITDA Ratio: < 3.0
- Capital Expenditures: ~$0.7 billion
- Acquisitions (net of divestitures): ~$1.8 billion
Key Risks and Contingencies:
- Reimbursement Rates: Approximately 76% of revenue comes from dialysis services, heavily reliant on government payors (31% from U.S. federal programs). Changes in Medicare reimbursement (ESRD PPS) or the Budget Control Act could materially impact results.
- Legal Proceedings:
- W.R. Grace: A $115 million settlement obligation related to the W.R. Grace bankruptcy is pending final confirmation of the reorganization plan.
- Tax Litigation: Ongoing litigation with the IRS regarding disallowed deductions; trial scheduled for August 2012.
- FCPA Investigation: Internal review of allegations regarding potential violations of the Foreign Corrupt Practices Act.
- Currency Fluctuations: Significant impact on International segment revenue; reported growth was lower than constant currency growth due to exchange rate movements.
Investor Verification Checklist
- Verify the finalization of the Liberty Dialysis acquisition accounting and the potential for adjustments to goodwill or the investment gain.
- Monitor the outcome of the W.R. Grace bankruptcy plan confirmation and the associated $115 million payment obligation.
- Assess the impact of the U.S. Budget Control Act and potential automatic spending cuts on Medicare reimbursement rates starting in 2013.
- Review the status of the IRS tax litigation trial scheduled for August 2012.
- Confirm the refinancing plans for the $2.67 billion Senior Credit Agreement maturing in March 2013.
- Track the progress of the internal FCPA investigation and any potential regulatory outcomes.