Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA (FMC)
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and nine months ended September 30, 2012
Business Overview: FMC is the world's largest kidney dialysis company, providing dialysis services and manufacturing/distributing products for end-stage renal disease (ESRD). The company operates in over 120 countries with two primary segments: North America and International (aggregated International and Asia-Pacific). A significant event during the period was the acquisition of Liberty Dialysis Holdings, Inc. (LD Holdings) on February 28, 2012, for approximately $2.18 billion.
Key Financial Metrics
| Metric (in millions) | 9 Months Ended Sept 30, 2012 | 9 Months Ended Sept 30, 2011 | 3 Months Ended Sept 30, 2012 | 3 Months Ended Sept 30, 2011 |
|---|---|---|---|---|
| Net Revenue | $10,095 | $9,306 | $3,418 | $3,184 |
| Operating Income | $1,659 | $1,488 | $568 | $534 |
| Net Income (Attributable to Shareholders) | $930 | $761 | $270 | $279 |
| Cash from Operations | $1,467 | $950 | N/A | N/A |
| Capital Expenditures | $438 | $380 | N/A | N/A |
| Cash and Equivalents (Sept 30, 2012) | $619 | N/A | N/A | N/A |
| EBITDA (9 Months) | $2,106 | $1,902 | N/A | N/A |
Margins (9 Months 2012): Gross Profit Margin was 32.8%; Operating Income Margin was 16.4%.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 8% year-over-year for the nine months ended September 30, 2012 (11% at constant exchange rates). Growth was driven by the Liberty Acquisition (contributing 12% to dialysis care revenue) and same-market treatment growth (4%).
- Profitability: Net income attributable to shareholders rose 22% to $930 million for the nine-month period. This increase was significantly aided by a non-taxable investment gain of $140 million related to the fair valuation of the company's prior investment in Renal Advantage Partners during the Liberty Acquisition.
- Operating Income: Operating income increased 11% to $1,659 million. The margin improved to 16.4% from 16.0%, driven by the gain on the sale of clinics (divestitures required by the FTC) and higher gross margins in North America.
- Interest Expense: Interest expense increased 37% to $351 million for the nine-month period, primarily due to increased debt incurred to finance the Liberty Acquisition.
- Segment Performance:
- North America: Revenue increased 12% and operating income increased 16% due to the Liberty Acquisition and higher Medicare reimbursement rates.
- International: Revenue increased 2% (10% at constant currency) and operating income increased 3%. Reported revenue was negatively impacted by foreign exchange fluctuations (-8%).
Guidance, Outlook, and Risks
2012 Full Year Outlook: Management confirmed its outlook for the full year 2012 at the lower end of the anticipated range:
- Net Revenues: ~$14,000 million
- Net Income (Attributable to Shareholders): ~$1,140 million (excluding the $140 million investment gain and potential charges of up to $70 million related to Venofer renegotiation and donations).
- Debt/EBITDA Ratio: < 3.0
- Capital Expenditures: ~$0.7 billion
- Acquisitions (net of divestitures): ~$1.8 billion
Key Risks and Contingencies:
- Regulatory & Reimbursement: Significant exposure to U.S. Medicare reimbursement rates under the ESRD Prospective Payment System (PPS). Potential automatic budget cuts (sequestration) starting in 2013 could reduce Medicare payments by up to 2% annually.
- Legal Proceedings:
- IRS Litigation: A jury verdict in August 2012 granted additional tax deductions of $95 million; the court is finalizing the refund amount.
- W.R. Grace Settlement: A $115 million payment obligation related to the 1996 merger remains pending final confirmation of the bankruptcy reorganization plan.
- FCPA Investigation: An internal review is ongoing regarding allegations of conduct in the International segment that may violate the U.S. Foreign Corrupt Practices Act.
- Venofer Renegotiation: Plans to renegotiate the Venofer iron product agreement may result in a charge of up to $65 million (after tax).
- Financing: On October 30, 2012, the company entered into a new $3.85 billion credit facility to replace the 2006 agreement, consisting of a $1.25 billion revolving facility and a $2.6 billion term loan.
Investor Verification Checklist
- Investment Gain Impact: Verify the sustainability of earnings by excluding the one-time $140 million non-taxable investment gain from the Liberty Acquisition.
- Reimbursement Rates: Monitor CMS updates regarding the ESRD PPS and the potential impact of the 2013 sequestration on Medicare payments.
- Legal Exposure: Track the finalization of the $95 million IRS tax refund and the status of the $115 million W.R. Grace settlement payment.
- FCPA Investigation: Review updates on the internal investigation into potential Foreign Corrupt Practices Act violations in the International segment.
- Debt Structure: Assess the terms and covenants of the new $3.85 billion credit facility entered into in October 2012.
- Venofer Charges: Confirm if the anticipated $65 million charge related to the Venofer agreement renegotiation materializes in the fourth quarter.