Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA (FMC-AG)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Interim results for the three and nine months ended September 30, 2009.
Business Overview: The Company is the world's largest kidney dialysis company, providing dialysis services and manufacturing/distributing products for end-stage renal disease (ESRD). Operations are segmented into North America and International (aggregating International and Asia Pacific). The Company also performs clinical laboratory testing in the U.S.
Key Financial Metrics
Revenue (Nine Months Ended Sept 30, 2009): $8.21 billion (up 4% reported, 9% at constant exchange rates).
- North America: $5.60 billion (up 9%).
- International: $2.61 billion (down 5% reported, up 9% at constant exchange rates).
Profitability:
- Net Income Attributable to FMC-AG: $645 million (up 7% vs. prior year).
- Operating Income: $1.265 billion (up 2% vs. prior year).
- Operating Margin: 15.4% (down from 15.7% in prior year).
- Gross Profit Margin: 33.8% (down from 34.1% in prior year).
Cash Flow and Liquidity:
- Cash from Operations: $880 million (up from $716 million in prior year).
- Cash and Cash Equivalents: $224 million as of September 30, 2009.
- Working Capital: $2.08 billion.
- Current Ratio: 1.8.
Debt and Capital Structure:
- Total Debt: Includes $3.65 billion under the 2006 Senior Credit Agreement, $493 million in Senior Notes, and $293 million in Euro Notes.
- Debt/EBITDA: Projected to be less than 2.7 for full year 2009.
- EBITDA: $1.60 billion (19.5% of revenue) for the nine-month period.
Material Changes vs. Prior Period
Operational Growth: Total treatments increased 6% to 21.8 million for the nine months. Same-market treatment growth was 4.3%, with acquisitions contributing 2%.
Revenue Drivers:
- Dialysis Care: Revenue grew 6% (9% at constant rates) driven by same-market growth and increased revenue per treatment.
- Dialysis Products: Revenue decreased 2% reported (up 8% at constant rates) due to unfavorable currency translation, partially offset by increased pharmaceutical sales (intravenous iron) and offset by lower sales of PhosLo due to generic competition.
Margin Compression: Gross profit margin decreased primarily due to North America cost increases (pharmaceuticals, personnel, depreciation) and unfavorable foreign exchange transaction effects in the International segment (appreciation of Euro/Yen).
Interest Expense: Decreased 11% to $242 million due to lower short-term interest rates.
Tax Rate: Effective tax rate decreased to 33.2% from 36.1%, aided by a $16.8 million tax benefit related to a German tax court complaint.
Guidance, Outlook, and Risks
2009 Full Year Outlook (Improved):
- Net Revenues: ~$11.2 billion.
- Net Income: $865 million – $890 million.
- Capital Expenditures: $550 million – $650 million.
- Acquisitions: $200 million – $250 million.
Key Risks and Contingencies:
- Reimbursement Changes: Mandated transition to an expanded "bundled" Medicare reimbursement system beginning January 1, 2011, which will materially affect payment for pharmaceuticals and services. The Company cannot yet estimate the overall effect.
- Legal Proceedings: Ongoing patent litigation with Baxter International (hemodialysis machines) and Gambro (medical solution devices). A settlement with W.R. Grace asbestos creditors requires a $115 million payment upon plan confirmation.
- Tax Litigation: Ongoing disputes with the IRS regarding deductions for civil settlement payments and intercompany preferred shares, and with German tax authorities regarding a 1997 impairment.
- Currency Fluctuations: Significant exposure to foreign exchange rates, particularly the Euro and Yen against local currencies in the International segment.
Investor Verification Checklist
- Bundled Payment Impact: Verify the final CMS regulations for the 2011 bundled payment system and the Company's specific modeling of its impact on margins.
- Pharmaceutical Mix: Monitor the erosion of PhosLo revenue due to generic competition versus the uptake of new intravenous iron products.
- Currency Hedging: Review the effectiveness of hedging strategies given the volatility of the Euro and Yen against the USD.
- Legal Resolutions: Track the status of the W.R. Grace bankruptcy plan confirmation (triggering the $115M payment) and the outcome of the Baxter patent appeals.
- Debt Covenants: Confirm continued compliance with the 2006 Senior Credit Agreement covenants, specifically the fixed charge and leverage ratios.