Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA (FMC)
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three months ended March 31, 2013
Business Overview: FMC 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 (combining International and Asia-Pacific). The company operates approximately 3,180 clinics globally.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net Revenue | $3,464 million | $3,249 million | +7% |
| Gross Profit Margin | 32.0% | 32.9% | -0.9 pp |
| Operating Income | $493 million | $503 million | -2% |
| Operating Margin | 14.2% | 15.5% | -1.3 pp |
| Net Income (Shareholders) | $225 million | $370 million | -39% |
| Cash from Operations | $315 million | $481 million | -35% |
| Cash & Equivalents | $535 million | $580 million (Q1 2012) | -8% |
| EBITDA | $650 million | $646 million | +1% |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 7% (7% at constant exchange rates), driven by a 5% increase in treatments (9.68 million vs. 9.21 million). Growth was fueled by acquisitions (including the 2012 Liberty Dialysis acquisition) and same-market treatment growth of 3.3%.
- Profitability Decline: Net income attributable to shareholders dropped 39% to $225 million. This decrease is primarily due to the absence of a $127 million non-taxable investment gain recorded in Q1 2012 related to the Liberty Acquisition.
- Margin Compression: Gross profit margin decreased to 32.0% from 32.9%. The International Segment faced lower average sales prices and reimbursement reductions, while the North America Segment saw higher personnel expenses.
- Cash Flow: Operating cash flow decreased significantly to $315 million from $481 million, largely due to a $100 million payment related to the Venofer agreement amendment and higher tax payments in Germany.
- Segment Performance:
- North America: Operating income increased 6% to $369 million, driven by the Liberty Acquisition and Medicare rate increases, though margins dipped slightly.
- International: Operating income decreased 6% to $184 million, impacted by the devaluation of the Venezuelan Bolivar and reimbursement cuts.
Guidance, Outlook, and Risks
2013 Full-Year Outlook
- Revenue: Greater than $14.6 billion (>6% growth).
- Operating Income: $2.3 billion to $2.5 billion.
- Net Income: $1.1 billion to $1.2 billion (attributable to shareholders).
- Capital Expenditures: Approximately $0.7 billion.
- Acquisitions: Approximately $0.3 billion.
- Debt/EBITDA Ratio: Approximately 3.0.
Note: The net income guidance assumes the U.S. government reverses the effect of sequestration, which would add approximately $45 million to net income.
Management Commentary & Unusual Items
- Share Buyback: Announced a plan to buy back up to €385 million (~$500 million) of ordinary shares.
- Share Conversion: Seeking shareholder approval to convert all outstanding preference shares to ordinary shares.
- Venezuela: Recorded a pre-tax loss of $9.6 million due to the revaluation of the Venezuelan Bolivar in a hyperinflationary economy.
Risks and Contingencies
- Regulatory & Reimbursement: Significant exposure to U.S. Medicare reimbursement rates (ESRD PPS) and potential cuts from the Budget Control Act (sequestration). Ongoing investigations into billing practices and compliance with the False Claims Act.
- Legal Proceedings:
- FCPA Investigation: Internal review ongoing regarding potential violations of the Foreign Corrupt Practices Act in the International segment.
- Product Liability: Consolidated multidistrict litigation regarding Granuflo and NaturaLyte dialysate products.
- Patent Litigation: Ongoing disputes with Baxter International regarding hemodialysis machine patents.
- Currency: Exposure to foreign exchange fluctuations, particularly in the International segment.
Investor Verification Checklist
- Reimbursement Policy Changes: Verify the final impact of the 2013 ESRD PPS rates and the potential reversal of sequestration cuts on North America margins.
- FCPA Investigation Status: Monitor updates on the internal review regarding the International segment and potential fines or settlements.
- Venezuela Exposure: Assess the ongoing financial impact of hyperinflation and currency devaluation in Venezuela on the International segment.
- Product Liability Litigation: Track developments in the Granuflo/NaturaLyte multidistrict litigation for potential liability exposure.
- Capital Allocation: Confirm execution of the announced €385 million share buyback and preference share conversion.