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, 2008
Accounting Basis: U.S. GAAP
Business Overview: The Company is the world's largest kidney dialysis company, operating vertically integrated businesses in dialysis services (operating 2,388 clinics in over 30 countries) and dialysis products (manufacturing equipment and disposables sold in over 115 countries). Approximately 66% of 2008 revenue was derived from North America operations.
Key Financial Metrics
| Metric (in millions, except per share) | 2008 | 2007 |
|---|---|---|
| Net Revenues | $10,612 | $9,720 |
| Gross Profit | $3,629 | $3,356 |
| Operating Income | $1,672 | $1,580 |
| Net Income | $818 | $717 |
| Diluted EPS (Ordinary) | $2.75 | $2.42 |
| EBITDA | $2,088 | $1,944 |
| Cash from Operations | $1,016 | $1,200 |
| Total Assets | $14,920 | $14,170 |
| Total Long-Term Debt | $4,598 | $4,668 |
| Shareholders' Equity | $5,962 | $5,575 |
| Working Capital | $1,068 | $833 |
Key Ratios:
- Gross Margin: 34.2% (2008) vs 34.5% (2007)
- Operating Margin: 15.8% (2008) vs 16.3% (2007)
- Debt-to-Equity Ratio: 0.96 (as of Dec 31, 2008)
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 9% (8% at constant currency) driven by 7% organic growth and 1% from acquisitions. Dialysis care revenue grew 7%, while dialysis product revenue grew 15%.
- Profitability: Net income increased 14% to $818 million. Operating income increased 6% to $1,672 million. However, operating margins declined slightly due to reduced gross margins in the International segment and increased SG&A costs.
- Cost Pressures: Gross margins were impacted by higher personnel costs, increased raw material costs (specifically heparin), and unfavorable foreign currency transaction effects in the International segment. SG&A costs rose to $1,877 million (17.7% of revenue) due to higher personnel costs and bad debt expense ($214 million).
- Interest Expense: Decreased 10% to $336 million due to lower interest rates and the redemption of $678 million in Trust Preferred Securities at maturity.
- Dividends: Dividends paid in 2008 were €0.54 per Ordinary share and €0.56 per Preference share. A dividend of €0.58 per Ordinary share and €0.60 per Preference share was proposed for 2008 operations (payable in 2009).
Guidance, Outlook, and Risks
Guidance and Outlook
Management provided the following outlook for 2009:
- Net Revenues: Greater than $11,100 million.
- Net Income: $850 million to $890 million.
- Debt/EBITDA: Less than 2.7.
- Capital Expenditures: Approximately $550 million to $650 million.
- Acquisitions: Approximately $200 million to $300 million.
The Company's long-term strategy ("GOAL 10") targets revenue exceeding $11.5 billion by 2010 and an 18% share of the worldwide dialysis market.
Material Risks and Contingencies
- Reimbursement Risk: Approximately 35% of consolidated revenues are from U.S. Medicare/Medicaid. A significant decrease in reimbursement rates or the implementation of the new "bundled payment" system (mandated for 2011) could materially reduce revenue. The bundled system will include ESAs (EPO) and other drugs previously reimbursed separately.
- EPO Dependency: EPO administration accounts for ~20% of North America dialysis care revenue. The Company relies on a single U.S. manufacturer (Amgen). Risks include price increases without reimbursement offsets, supply interruptions, or reduced utilization.
- Legal Proceedings: The Company is subject to ongoing investigations by the U.S. Department of Justice and the Office of the Inspector General regarding billing practices, medical director compensation, and anemia management programs. A civil complaint was filed in 2007 seeking damages related to the operation of a supply company prior to the RCG acquisition.
- Global Economic Conditions: The 2008 financial crisis has led to payment delays from government entities and commercial payors, increasing Days Sales Outstanding (DSO) to 77 days (from 73 days in 2007).
- Patent Expirations: Key patents for in-line sterilization methods and biBag connectors are set to expire between 2010 and 2013, potentially exposing the Company to generic competition.
Investor Verification Checklist
- Bundled Payment Impact: Verify the Company's specific modeling of the 2011 Medicare bundled payment system, particularly regarding the inclusion of EPO and other pharmaceuticals, as this represents a significant structural change to revenue recognition.
- Receivables Quality: Review the aging of trade accounts receivable, noting the increase in DSO to 77 days and the specific exposure to government payors in the International segment facing payment delays due to the global financial crisis.
- Legal Exposure: Assess the potential financial impact of the ongoing DOJ/IG investigations and the civil complaint filed in the Eastern District of Missouri, including any potential settlements or penalties.
- Debt Covenants: Confirm continued compliance with the 2006 Senior Credit Agreement covenants, specifically the minimum consolidated fixed charge ratio and maximum consolidated leverage ratio, given the economic environment.
- PhosLo Competition: Evaluate the impact of the October 2008 launch of a generic phosphate binder on the sales trajectory of the Company's PhosLo product line.