Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and nine months ended September 30, 2014
Business Overview: The Company is the world's largest kidney dialysis company, operating in dialysis care and dialysis products for end-stage renal disease (ESRD). Operations are segmented into North America and International (EMEALA and Asia-Pacific). The Company is vertically integrated, providing treatments at owned/operated clinics and supplying products to these clinics and third parties.
Key Financial Metrics (Nine Months Ended Sept 30, 2014)
| Metric | 2014 (in millions) | 2013 (in millions) | Change |
|---|---|---|---|
| Total Revenue | $11,511 | $10,743 | +7% |
| Operating Income | $1,591 | $1,595 | -0% |
| Operating Margin | 13.8% | 14.8% | -100 bps |
| Net Income (Shareholders) | $710 | $761 | -7% |
| EPS (Basic) | $2.35 | $2.50 | -6% |
| EBITDA | $2,105 | $2,074 | +1.5% |
| Free Cash Flow | $635 | $952 | -33% |
| Cash & Equivalents | $588 | $683 (Dec 31, 2013) | -14% |
| Total Debt | $8.64 billion | $8.26 billion (Dec 31, 2013) | +4.6% |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 7% (8% at constant currency). Growth was driven by acquisitions (5%), same-market treatment growth (4%), and organic revenue per treatment increases (1%), partially offset by foreign exchange fluctuations (-2%).
- Segment Performance:
- North America: Revenue up 7%; Operating income flat at $1.149 billion. Margins compressed to 15.1% from 16.5% due to ATRA reimbursement reductions, U.S. Sequestration, higher personnel costs, and FDA remediation costs.
- International: Revenue up 6% (9% at constant currency); Operating income up 11% to $692 million. Margins improved to 18.0% driven by Asia-Pacific growth and favorable currency effects.
- Profitability Pressure: Gross profit margin declined to 31.1% from 32.0%. SG&A expenses increased to 16.7% of revenue, driven by higher corporate legal/consulting fees and costs related to the closing of a manufacturing plant.
- Cash Flow: Operating cash flow decreased to $1.274 billion from $1.446 billion. Significant outflows included a $115 million payment for the W.R. Grace bankruptcy settlement and a $103 million tax payment related to a German audit.
- Investing Activities: Net cash used in investing activities increased significantly to $1.684 billion (from $773 million), primarily due to a $564 million investment in Sound Inpatient Physicians, Inc. and other acquisitions.
Guidance, Outlook, and Risks
2014 Full Year Outlook
- Revenue: ~$15.2 billion
- Operating Income: ~$2.2 billion (Margin ~14.5%)
- Net Income: $1.0 - $1.05 billion (Decrease of 5-10% vs. prior year)
- Capital Expenditures: ~$0.9 billion
- Acquisitions/Investments: ~$1.3 billion
- Debt/EBITDA Ratio: ~3.0
Note: Outlook excludes ~$500 million revenue from acquisitions completed in the first nine months of 2014.
Key Risks and Contingencies
- Regulatory & Reimbursement: Continued pressure from U.S. Medicare reimbursement changes (ESRD PPS, ATRA, Sequestration). The Protecting Access to Medicare Act (PAMA) stabilizes rates for 2015 but introduces future adjustments.
- Legal & Compliance:
- Ongoing internal and government investigations into potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) in the International segment. The Company has voluntarily advised the SEC and DOJ.
- Product liability litigation regarding Granuflo and NaturaLyte acid concentrate products.
- False Claims Act investigations regarding laboratory testing and vascular access procedures.
- Supply Chain: Negotiations are ongoing to renew the Epogen supply agreement with Amgen, which expires year-end 2014. Failure to secure reasonable pricing could materially impact results.
- Market Risk: Significant exposure to foreign currency fluctuations, particularly the Euro and other international currencies against the U.S. dollar.
Investor Verification Checklist
- Reimbursement Impact: Verify the specific financial impact of the ATRA drug utilization adjustments and U.S. Sequestration on the North America segment margins.
- FCPA Investigation Status: Monitor updates on the internal and government investigations regarding the International segment; assess potential for monetary penalties or operational restrictions.
- Amgen Contract Renewal: Confirm the terms of the renewed Epogen supply agreement with Amgen to ensure no adverse pricing impacts.
- Sound Inpatient Integration: Evaluate the integration progress and financial performance of the Sound Inpatient Physicians acquisition ($564 million investment).
- Working Capital Trends: Review Days Sales Outstanding (DSO) trends, particularly in the International segment (108 days), to assess collection risks.
- Debt Structure: Note the issuance of $900 million in Senior Notes in October 2014 to repay Term Loan A-2 and the impact on the Debt/EBITDA ratio.