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, 2009
Business Overview: The Company is the world's largest kidney dialysis company, operating vertically integrated businesses in dialysis services (operating 2,553 clinics in over 35 countries) and dialysis products (manufacturing equipment and disposables sold in over 115 countries). The Company is a German partnership limited by shares (KGaA) with its general partner, Fresenius Medical Care Management AG, wholly owned by Fresenius SE.
Key Financial Metrics (2009)
| Metric | 2009 (in millions) | 2008 (in millions) | Change |
|---|---|---|---|
| Net Revenues | $11,247 | $10,612 | +6% (+9% constant currency) |
| Operating Income (EBIT) | $1,756 | $1,672 | +5% |
| Net Income (Attributable to FMC) | $891 | $818 | +9% |
| Diluted EPS (Ordinary) | $2.99 | $2.75 | +9% |
| Gross Margin | 34.1% | 34.2% | -0.1% |
| Operating Margin | 15.6% | 15.8% | -0.2% |
| Total Assets | $15,821 | $14,920 | +6% |
| Total Long-Term Debt | $5,084 | $4,598 | +11% |
| Shareholders' Equity | $7,030 | $6,123 | +15% |
| Working Capital | $2,118 | $1,068 | +98% |
| Cash from Operations | $1,339 | $1,016 | +32% |
Material Changes vs. Prior Period
- Revenue Growth: Driven by organic growth (8%) and acquisitions (1%). Dialysis care revenue grew 8% due to increased treatments (4%) and revenue per treatment (5%). Dialysis product revenue grew 1%, aided by new intravenous iron products but offset by generic competition for PhosLo.
- Profitability: Operating income increased 5% despite a slight decline in operating margin (15.6% vs 15.8%). Gross margin compression in North America was caused by higher pharmaceutical costs and generic competition, partially offset by lower production costs and economies of scale in the International segment.
- Segment Performance:
- North America: Revenue $7,612 million (+9%); Operating Income $1,250 million (+7%).
- International: Revenue $3,635 million (+1% reported, +9% constant currency); Operating Income $637 million (+3%).
- Liquidity: Working capital nearly doubled to $2.1 billion, primarily due to the repayment of short-term Euro Notes using proceeds from new long-term debt issuance and improved Days Sales Outstanding (DSO) in North America (52 days vs 60 days).
Guidance, Outlook, and Risks
Management Outlook (2010)
- Revenue: Expected to exceed $12.0 billion (7-9% growth).
- Net Income: Expected range of $950 million to $980 million (7-10% growth).
- Capital Expenditures: Estimated at $550 million to $650 million.
- Acquisitions: Up to $400 million.
- Dividends: Proposed dividend of €0.61 per Ordinary share and €0.63 per Preference share for 2009 operations (payable in 2010).
Key Risks and Contingencies
- Reimbursement Changes: Implementation of the expanded Medicare "bundled" payment system in 2011 poses significant uncertainty. The initial rate is set at 98% of estimated costs, potentially reducing revenue for separately billable drugs and services.
- Pharmaceutical Competition: Continued erosion of PhosLo revenues due to generic competition. Reliance on Amgen for EPO supply (sole U.S. manufacturer) creates supply chain risk.
- Legal Proceedings: Ongoing DOJ investigation and civil litigation regarding RCG's Method II supply company and physician relationships. Potential for significant penalties or exclusion from government programs.
- Tax Disputes: Disputes with U.S. IRS and German tax authorities regarding disallowed deductions could result in additional tax payments.
- Debt Covenants: The Company must maintain specific financial ratios (Fixed Charge Ratio and Leverage Ratio) under its 2006 Senior Credit Agreement. Breach could trigger defaults.
Investor Verification Checklist
- Bundled Payment Impact: Verify the final CMS regulations for the 2011 bundled payment system and model the potential revenue impact on the North America segment.
- PhosLo Revenue Trajectory: Monitor quarterly sales data for PhosLo to assess the long-term impact of generic competition on product margins.
- Legal Settlement Exposure: Review updates on the RCG litigation and DOJ investigation for any new accruals or settlement terms.
- Debt Refinancing: Confirm the Company's ability to refinance approximately $2.6 billion of debt maturing in 2011 (Term Loan A, Revolver, Trust Preferred Securities) under current market conditions.
- DSO Trends: Monitor International segment Days Sales Outstanding, which increased to 110 days, for signs of worsening collection issues in government payors.