Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2006 (unaudited)
Business Overview: The world's largest kidney dialysis company, operating in dialysis services and products. The company is vertically integrated, owning clinics and supplying products. A major event during the period was the acquisition of Renal Care Group, Inc. (RCG) on March 31, 2006, for approximately $4.15 billion, and the subsequent divestiture of 105 clinics to comply with FTC requirements.
Key Financial Metrics
| Metric | Nine Months Ended Sept 30, 2006 | Nine Months Ended Sept 30, 2005 |
|---|---|---|
| Net Revenue | $6,146.7 million | $4,999.4 million |
| Gross Profit | $2,058.1 million | $1,626.9 million |
| Gross Margin | 33.5% | 32.5% |
| Operating Income | $964.4 million | $695.1 million |
| Operating Margin | 15.7% | 13.9% |
| Net Income | $384.7 million | $339.4 million |
| Diluted EPS (Ordinary) | $3.91 | $3.48 |
| Cash from Operations | $465.0 million | $470.0 million |
| Total Debt (Long-term + Current) | $4,209.0 million | $954.5 million |
| Cash and Equivalents | $127.6 million | $85.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 23% year-over-year, driven primarily by the RCG acquisition (contributing ~18% to dialysis care revenue growth) and organic growth in same-market treatments (4%).
- Profitability: Operating income rose 39% to $964.4 million. Operating margin improved to 15.7% from 13.9%, aided by higher treatment rates in North America and favorable operational performance in Latin America, partially offset by higher personnel costs and RCG restructuring charges.
- Debt Levels: Long-term debt increased significantly from $707.1 million to $3,894.5 million due to the financing of the RCG acquisition. Interest expense nearly doubled, rising 96% to $270.0 million.
- Divestitures: The company divested 105 clinics (96 to DSI Holding Company, 9 later) to satisfy FTC conditions, generating $506.7 million in cash proceeds and a $40.2 million gain on the sale of legacy clinics.
- Tax Rate: The effective tax rate increased to 44.3% from 40.0%, largely due to the tax impact of the legacy clinic divestiture (book gain vs. tax loss) and disallowed expenses from a finalized German tax audit.
Guidance, Outlook, and Risks
Outlook and Guidance
- Net Income: Management expects 2006 net income (excluding RCG transaction costs, restructuring, FAS 123(R) impacts, and financing fee write-offs) to be at least 18% higher than the adjusted 2005 net income of $472 million.
- Acquisition Impact: The RCG acquisition is expected to be earnings neutral to slightly accretive in 2006 and accretive from 2007 onward.
- Investing: Total capital expenditures and acquisitions (excluding RCG) for 2006 are projected to be in the range of $550 million.
- Subsequent Event: On October 12, 2006, the company agreed to acquire the PhosLo product line from Nabi Biopharmaceuticals for $65 million cash plus milestones.
Risks and Contingencies
- Legal Proceedings:
- W.R. Grace: A settlement agreement requires a $115 million payment to the W.R. Grace bankruptcy estate upon plan confirmation.
- DOJ Investigations: The company is cooperating with multiple U.S. Department of Justice investigations regarding clinical quality, physician relationships, anemia management, and PTH testing/vitamin D therapies.
- Patent Litigation: Successfully defended against Baxter International patent infringement claims (judgment entered July 2006).
- Regulatory: Significant dependence on government reimbursements (approx. 38% of revenue from U.S. federal programs). CMS monitoring policies for Epogen/Aranesp dosages could impact revenue.
- Debt Covenants: The company is subject to strict financial covenants under its $4.6 billion 2006 Credit Agreement, including limits on dividends and capital expenditures.
Investor Verification Checklist
- RCG Integration: Verify the realization of cost synergies and the timeline for full integration of the RCG acquisition.
- Debt Servicing: Confirm compliance with the 2006 Credit Agreement covenants, specifically the consolidated leverage ratio and fixed charge coverage ratio, given the significant increase in debt.
- Tax Liabilities: Monitor the status of the $115 million W.R. Grace settlement payment and the outcome of ongoing IRS and German tax audits.
- Regulatory Exposure: Track the results of the DOJ investigations into billing practices and physician relationships, which could lead to fines or operational restrictions.
- Reimbursement Rates: Assess the impact of CMS policies on EPO dosages and potential changes in Medicare composite rates on North America margins.