Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three months ended March 31, 2010
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 operates approximately 2,580 clinics globally.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total Net Revenue | $2,882 million | $2,560 million | +13% (+10% constant currency) |
| Gross Profit Margin | 33.5% | 33.7% | -0.2 percentage points |
| Operating Income | $423 million | $396 million | +7% |
| Operating Margin | 14.7% | 15.5% | -0.8 percentage points |
| Net Income (Attributable to FMC) | $211 million | $198 million | +7% |
| EBITDA | $548 million | $501 million | +9% |
| Cash from Operations | $349 million | $156 million | +124% |
| Cash and Equivalents (End of Period) | $264 million | $203 million | N/A |
| Working Capital | $767 million | $2,118 million (Dec 2009) | Decreased due to debt reclassification |
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 7% increase in the number of treatments (7.5 million vs. 7.0 million). Growth was attributed to 4% same-market treatment growth, 2% from acquisitions, and 1% from holiday scheduling effects. Dialysis care revenue grew 13% and product revenue grew 12%.
- Margin Compression: Operating income margin declined to 14.7% from 15.5%. This was primarily due to a decrease in gross profit margin in the International segment (partially offset by North America) and increased Selling, General, and Administrative (SG&A) expenses as a percentage of revenue (18.0% vs. 17.3%).
- International Segment Impact: The International segment recorded a one-time pre-tax loss of approximately $12.5 million due to the revaluation of the balance sheet of operations in Venezuela, classified as a highly inflationary economy. This reduced the segment's operating income margin to 16.4% from 18.7%.
- North America Segment: Operating income increased 13% to $306 million, with margins improving to 15.6%. Revenue per treatment increased to $348 (from $332), driven by higher commercial payor revenue and pharmaceutical utilization.
- Debt Structure: Working capital decreased significantly from year-end 2009 levels primarily due to the reclassification of $1.386 billion of long-term debt (Revolving Credit Facility and Term Loan A) to short-term debt as they mature in March 2011.
Guidance, Outlook, and Risks
2010 Full Year Outlook
- Net Revenues: Greater than $12,000 million.
- Net Income (Attributable to FMC): $950 million to $980 million.
- Debt/EBITDA: Less than 2.5x.
- Capital Expenditures: Approximately $550 million to $650 million.
- Acquisitions: Up to $400 million.
Key Risks and Contingencies
- Reimbursement Changes: The Company faces the implementation of an expanded "bundled" Medicare reimbursement system for dialysis services beginning January 1, 2011. The final impact on business cannot be estimated until final CMS regulations are adopted. Additionally, the Patient Protection and Affordable Care Act (PPACA) introduces a medical device excise tax (starting 2013) and pharmaceutical industry fees (starting 2011) that will adversely impact product business earnings.
- Legal Proceedings:
- W.R. Grace: A settlement agreement requires a payment of $115 million to the W.R. Grace bankruptcy estate upon plan confirmation.
- Tax Disputes: Ongoing disputes with the IRS regarding disallowed deductions for civil settlement payments and intercompany preferred shares. The Company is also contesting German tax authority decisions regarding a 1997 impairment.
- Patent Litigation: Ongoing litigation with Baxter International regarding hemodialysis machine patents, though recent rulings have invalidated several asserted patents.
- Currency and Inflation: Significant exposure to foreign exchange fluctuations. The Venezuelan bolivar devaluation and inflationary accounting requirements resulted in a material one-time charge in Q1 2010.
Investor Verification Checklist
- Reimbursement Policy: Verify the final CMS regulations regarding the 2011 bundled payment system and its specific impact on the Company's revenue per treatment.
- Debt Maturity: Confirm the refinancing status of the $1.54 billion in debt maturing in March 2011 (Revolving Credit Facility and Term Loan A).
- Venezuela Operations: Monitor the ongoing economic situation in Venezuela and potential further revaluation impacts on the International segment.
- Legal Settlements: Track the confirmation status of the W.R. Grace bankruptcy plan to determine the timing of the $115 million payment obligation.
- Tax Litigation: Review updates on the IRS audit outcomes regarding intercompany preferred shares and civil settlement deductions, as adverse rulings could materially affect liquidity.