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, 2009
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). Approximately 75% of revenue is generated from dialysis treatment, with a significant portion reimbursed by government programs like Medicare.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 | Change |
|---|---|---|---|
| Net Revenue | $2,560 million | $2,512 million | +2% (+8% at constant exchange rates) |
| Gross Profit Margin | 33.7% | 34.1% | -0.4 percentage points |
| Operating Income | $396 million | $389 million | +2% |
| Operating Margin | 15.5% | 15.5% | Unchanged |
| Net Income (Attributable to FMC) | $198 million | $186 million | +7% |
| EBITDA | $501 million | $485 million | +3% |
| Cash from Operations | $156 million | $192 million | -19% |
| Cash and Equivalents | $203 million | $220 million (Dec 31, 2008) | -8% |
| Working Capital | $1,231 million | $1,068 million (Dec 31, 2008) | +15% |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 2% primarily due to growth in dialysis care revenue (+4%), partially offset by a 5% decrease in dialysis product revenue. The product decline was driven by unfavorable currency fluctuations and the launch of a generic version of PhosLo in the U.S.
- Segment Performance:
- North America: Revenue increased 6% to $1,774 million. Operating income remained flat at $272 million due to higher personnel and pharmaceutical costs (heparin) offset by increased commercial payor revenue.
- International: Reported revenue decreased 7% to $786 million due to significant currency headwinds (-18% impact), though organic growth was 10% and operating income increased 2% to $147 million.
- Costs: SG&A expenses decreased to $444 million (17.3% of revenue) from $448 million (17.8% of revenue). R&D expenses increased to $23 million from $19 million due to new product development.
- Interest Expense: Decreased 11% to $78 million due to lower short-term interest rates.
- Days Sales Outstanding (DSO): Improved to 75 days from 77 days at year-end 2008, driven by collections in North America, though International DSO increased slightly due to payment delays from government entities.
Guidance, Outlook, and Risks
2009 Full Year Outlook
- Net Revenues: Greater than $11,100 million.
- Net Income: $850 million to $890 million.
- Debt/EBITDA: Less than 2.7.
- Capital Expenditures: Approximately $550 million to $650 million.
- Acquisitions: Approximately $200 million to $300 million.
Management Commentary and Risks
- Reimbursement Changes: A major risk is the mandated implementation of an expanded "bundled" reimbursement system for Medicare dialysis services beginning January 1, 2011. This will consolidate payments for drugs, lab tests, and services, potentially impacting profitability. The Company cannot yet estimate the full effect.
- Legal Proceedings:
- Baxter Litigation: Ongoing patent infringement disputes regarding hemodialysis machines. The Company is appealing a court order requiring royalty payments and an injunction on the 2008K machine. Design modifications have been made to mitigate exposure.
- W.R. Grace Settlement: A $115 million payment obligation related to the W.R. Grace bankruptcy settlement is pending final confirmation.
- Tax Audits: Ongoing audits in the U.S. and Germany regarding prior year deductions and impairment charges. Adverse outcomes could materially affect results.
- Liquidity: The Company maintains a solid financial position with sufficient credit facilities. A dividend of €0.58 per ordinary share (approx. $230 million total) is proposed for 2008 earnings, payable in 2009.
Investor Verification Checklist
- Currency Impact: Verify the extent to which reported revenue declines in the International segment are masked by strong organic growth but obscured by the strengthening Euro and Yen.
- PhosLo Generic Competition: Assess the long-term revenue impact of the generic PhosLo launch in the U.S. market on the product segment.
- 2011 Bundled Payment: Review the Company's specific modeling and contingency plans for the 2011 Medicare bundled payment reform, which will fundamentally alter the reimbursement structure for drugs and services.
- Legal Contingencies: Monitor the status of the Baxter patent appeal and the W.R. Grace settlement confirmation, as these represent significant potential cash outflows or royalty obligations.
- Debt Covenants: Confirm continued compliance with the 2006 Senior Credit Agreement covenants, specifically the fixed charge ratio and leverage ratio, given the proposed dividend and refinancing activities.