Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: The Company is the world's largest kidney dialysis company, operating vertically integrated businesses in dialysis services (operating 2,757 clinics in over 35 countries) and dialysis products (manufacturing equipment and disposables sold in over 120 countries). The Company serves approximately 214,648 patients.
Key Financial Metrics (2010)
| Metric | 2010 Value | 2009 Value |
|---|---|---|
| Net Revenues | $12,053 million | $11,247 million |
| Operating Income | $1,924 million | $1,756 million |
| Net Income (Attributable to FMC) | $979 million | $891 million |
| Diluted EPS (Ordinary) | $3.24 | $2.99 |
| Gross Margin | 34.4% | 34.1% |
| Operating Margin | 16.0% | 15.6% |
| Cash Flow from Operations | $1,368 million | $1,339 million |
| Total Assets | $17,095 million | $15,821 million |
| Total Long-Term Debt | $4,310 million | $5,084 million |
| Shareholders' Equity | $7,524 million | $6,798 million |
| Working Capital | $1,363 million | $2,118 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 7% (7% at constant exchange rates), driven by organic growth of 6% and acquisitions. Dialysis care revenue grew 9%, while dialysis product revenue grew 3%.
- Profitability: Operating income increased 10% to $1,924 million. Net income attributable to the Company increased 10% to $979 million.
- Segment Performance:
- North America: Revenue increased 7% to $8,130 million; Operating income increased 11% to $1,386 million. Growth was driven by same-market treatment growth and increased revenue per treatment.
- International: Revenue increased 8% to $3,923 million; Operating income increased 6% to $678 million. Growth was driven by acquisitions (9% contribution) and same-market growth (5%).
- Acquisitions: Total acquisitions and investments were $922 million in 2010, a significant increase from $192 million in 2009. Notable acquisitions included Asia Renal Care Ltd., Gambro AB's peritoneal dialysis business, and various clinic networks.
- Debt Reduction: Total long-term debt decreased by approximately $774 million compared to 2009, partly due to the reclassification of Trust Preferred Securities ($626 million) to short-term debt as they matured in 2011.
Guidance, Outlook, and Risks
Outlook and Guidance
- 2011 Revenue: Projected between $12.8 billion and $13.0 billion (6-8% growth in constant currency).
- 2011 Net Income: Projected between $1,035 million and $1,055 million.
- Capital Expenditures: Expected to be approximately 5% of revenue.
- Acquisitions: Expected to be approximately $1,200 million in 2011, including the pending acquisition of International Dialysis Centers (IDC).
- Dividends: Proposed dividend for 2010 operations (payable 2011) is €0.65 per Ordinary share and €0.67 per Preference share.
Key Risks and Contingencies
- Reimbursement Changes (ESRD PPS): Effective January 1, 2011, the U.S. Medicare program implemented an expanded "bundled" payment system (ESRD PPS). Management expects this to result in lower average reimbursement rates, though nearly all U.S. facilities elected to participate fully. The Company is implementing cost-saving measures and protocol changes to mitigate impact.
- Healthcare Reform (ACA): The Patient Protection and Affordable Care Act introduces an industry fee on pharmaceutical companies (starting 2011) and a 2.3% excise tax on medical device sales (starting 2013), which will adversely impact product business earnings.
- Legal Proceedings:
- RCG Litigation: A judgment of approximately $23 million was entered against the Company in Tennessee regarding the Renal Care Group (RCG) acquisition. The Company appealed, and the case was remanded. An indicative ruling suggested potential False Claims Act liability of approximately $104 million if the case were remanded, though the Company contests this.
- Tax Disputes: Ongoing disputes with the IRS and German tax authorities regarding disallowed deductions could result in additional tax payments.
- EPO Supply and Cost: Erythropoietin (EPO) accounted for 19% of North America dialysis care revenue. Under the new bundled payment system, EPO costs are no longer separately reimbursed, increasing the risk associated with price increases or supply interruptions from the sole manufacturer, Amgen.
Investor Verification Checklist
- ESRD PPS Impact: Verify the actual financial impact of the new Medicare bundled payment system on 2011 margins compared to management's mitigation plans.
- RCG Litigation Status: Monitor the outcome of the remanded False Claims Act litigation regarding the RCG acquisition, specifically the potential $104 million exposure.
- Acquisition Integration: Assess the integration progress and financial performance of major 2010 acquisitions (Asia Renal Care, Gambro PD business) and the pending IDC acquisition.
- Debt Maturity Wall: Confirm refinancing plans for the $626 million Trust Preferred Securities maturing in June 2011 and the $485 million IDC acquisition payment.
- ACA Tax Exposure: Quantify the specific impact of the new pharmaceutical industry fee and medical device excise tax on future product segment profitability.