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, 2011
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). A significant portion of U.S. revenue is reimbursed by Medicare under the new End-Stage Renal Disease Prospective Payment System (ESRD PPS), which was fully implemented for nearly all U.S. facilities starting January 1, 2011.
Key Financial Metrics
| Metric (in millions) | 9 Months Ended Sept 30, 2011 | 9 Months Ended Sept 30, 2010 | 3 Months Ended Sept 30, 2011 | 3 Months Ended Sept 30, 2010 |
|---|---|---|---|---|
| Total Net Revenue | $9,473 | $8,886 | $3,242 | $3,058 |
| Operating Income | $1,488 | $1,385 | $534 | $493 |
| Net Income Attributable to FMC-AG | $761 | $707 | $279 | $248 |
| Diluted EPS (Ordinary Shares) | $2.50 | $2.35 | $0.92 | $0.82 |
| Operating Margin | 15.7% | 15.6% | 16.5% | 16.1% |
| EBITDA | $1,902 | $1,754 | N/A | N/A |
| Cash from Operations | $950 | $1,027 | N/A | N/A |
| Cash and Cash Equivalents (Sept 30, 2011) | $396 | N/A | N/A | N/A |
| Total Debt (Long-term + Current) | $6,461 | $4,574 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net revenue increased 7% (4% at constant exchange rates) for the nine months ended September 30, 2011. Growth was driven by a 5% increase in dialysis care revenue and an 11% increase in dialysis product revenue.
- Segment Performance:
- North America: Revenue remained flat (0% change) due to a decrease in revenue per treatment caused by the ESRD PPS implementation, offset by a 4% increase in treatment volume. Operating income increased 2% to $1,035 million.
- International: Revenue increased 20% (14% at constant exchange rates), driven by acquisitions (IDC, ARC, Gambro peritoneal dialysis business) and same-market growth. Operating income increased 21% to $579 million.
- Profitability: Gross profit margin improved to 35.0% (from 34.1%) primarily due to pharmaceutical cost savings from anemia management protocol changes and manufacturing variances. Operating income margin improved to 15.7% (from 15.6%).
- Expenses: Selling, general, and administrative (SG&A) expenses increased to 18.6% of revenue (from 17.8%) due to higher bad debt, freight costs, and the impact of lower revenue rates in North America. Interest expense increased 14% to $257 million due to higher debt levels.
- Acquisitions: Significant cash outflows for acquisitions ($1,171 million in the first nine months) included International Dialysis Centers (IDC) and the Gambro peritoneal dialysis business.
Guidance, Outlook, and Risks
- 2011 Full Year Outlook:
- Net Revenues: > $13,000 million
- Net Income attributable to FMC-AG: $1,070 - $1,090 million
- Debt/EBITDA: < 3.0x
- Capital Expenditures: ~5% of revenue
- Acquisitions: ~$1,900 million
- Management Commentary: Management expects generally stable reimbursements for dialysis services following the ESRD PPS implementation. Strategies to mitigate PPS impacts include protocol changes, pharmaceutical cost savings, and efficiency initiatives. The company aims to maintain $300-$500 million in committed, unutilized credit facilities.
- Risks and Contingencies:
- Reimbursement: Continued pressure on healthcare costs and potential changes in Medicare/Medicaid reimbursement rates.
- Legal/Tax: Ongoing litigation with Baxter International regarding patent infringement; IRS audits regarding disallowed deductions for civil settlement payments and intercompany preferred shares; German tax authority disputes regarding impairment charges.
- Grace Chapter 11: A $115 million settlement payment obligation related to W.R. Grace & Co. bankruptcy proceedings is pending final court confirmation.
- Currency: Exposure to foreign exchange fluctuations, particularly in the International segment.
Investor Verification Checklist
- ESRD PPS Impact: Verify the long-term sustainability of cost savings from anemia management protocols against the permanent reduction in revenue per treatment in the U.S.
- Acquisition Integration: Assess the accretive nature of recent acquisitions (IDC, Gambro, Liberty Dialysis pending) and the associated goodwill ($8.7 billion total).
- Debt Levels: Monitor the Debt/EBITDA ratio as the company targets <3.0x, given the increase in total debt to $6.46 billion to fund acquisitions.
- Legal Exposure: Track the status of the W.R. Grace settlement ($115 million) and the outcome of the IRS tax litigation regarding disallowed deductions.
- Days Sales Outstanding (DSO): Note the increase in consolidated DSO to 80 days (from 76 days), driven by the International segment, which may impact future cash flow.