Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Unaudited results for the three and six months ended June 30, 2007.
Business Overview: The world's largest kidney dialysis company, operating vertically integrated dialysis services and manufacturing dialysis products. Operations are segmented into North America and International (aggregating International and Asia Pacific).
Key Financial Metrics (Six Months Ended June 30, 2007)
| Metric | 2007 (6 Months) | 2006 (6 Months) | Change |
|---|---|---|---|
| Net Revenue | $4,724.9 million | $3,912.4 million | +21% |
| Gross Profit | $1,621.7 million | $1,307.3 million | +24% |
| Gross Margin | 34.3% | 33.4% | +0.9 pts |
| Operating Income | $755.7 million | $615.6 million | +23% |
| Operating Margin | 16.0% | 15.7% | +0.3 pts |
| Net Income | $339.0 million | $245.5 million | +38% |
| Diluted EPS | $1.14 | $0.83 | +37% |
| Cash from Operations | $507.7 million | $312.4 million | +63% |
| Cash & Equivalents (End) | $207.0 million | $101.1 million | +105% |
| Total Debt (Short + Long Term) | $4,361.5 million | $4,320.7 million | ~0% |
Note: Debt figures include short-term borrowings, current portion of long-term debt, and long-term debt. 2006 debt includes significant acquisition-related financing.
Material Changes vs. Prior Period
- Revenue Growth: Driven by the Renal Care Group (RCG) acquisition (completed March 2006), organic growth in treatment volumes (4% same-market growth), and increased revenue per treatment. Dialysis Care revenue grew 22% and Dialysis Products revenue grew 18%.
- Profitability: Net income increased 38% year-over-year. The effective tax rate decreased to 38.0% in 2007 from 45.4% in 2006, largely due to the absence of tax charges related to clinic divestitures that impacted the 2006 period.
- Segment Performance:
- North America: Revenue up 20% to $3,297 million; Operating Income up 22% to $543 million. Growth driven by RCG integration and improved commercial payor rates.
- International: Revenue up 23% to $1,428 million; Operating Income up 23% to $251 million. Growth driven by acquisitions and strong same-market treatment growth (6.8%).
- Working Capital: Working capital decreased from $1 billion (Dec 31, 2006) to $400 million (June 30, 2007) primarily due to the reclassification of $645 million in Trust Preferred Securities to short-term liabilities (due Feb 2008).
Guidance, Outlook, and Risks
Outlook (2007 Full Year)
- Revenue Growth: 12% to $9.5 billion.
- Net Income: $685 million to $705 million (28-31% growth).
- Adjusted Net Income Growth: 19-23%.
- Capital Expenditures & Acquisitions: Approximately $650 million.
- Effective Tax Rate: Approximately 38-39%.
- Debt/EBITDA: Under 3.0.
Management Commentary & Recent Actions
- Debt Refinancing: On July 2, 2007, the company issued $500 million of 6 7/8% Senior Notes due 2017. Proceeds were used to prepay $300 million of term indebtedness and reduce the accounts receivable facility.
- Share Split: A three-for-one share split became effective June 15, 2007.
- Divestiture: Sold the U.S. perfusion business unit in Q2 2007 (deconsolidated May 9, 2007).
Risks and Contingencies
- Legal Proceedings:
- W.R. Grace Settlement: Obligation to pay $115 million to the W.R. Grace bankruptcy estate upon plan confirmation (accrued in 2001).
- Baxter Litigation: Court granted Baxter's motion to retry patent infringement claims previously dismissed in Fresenius' favor; Fresenius plans to appeal.
- Government Investigations: Ongoing DOJ investigations regarding RCG's supply company operations, anemia management programs, and PTH/vitamin D testing. A civil complaint was filed July 16, 2007, seeking damages and penalties.
- Regulatory: Dependence on government reimbursements (approx. 37% of revenue from U.S. federal programs). CMS policies on EPO/Aranesp utilization and dosage limits pose risks to revenue.
- Liquidity: $645 million in Trust Preferred Securities mature in February 2008; management expects cash flow and credit facilities to cover this obligation.
Investor Verification Checklist
- Reimbursement Rates: Verify the impact of the 1.6% Medicare composite rate increase and drug add-on adjustments on North America margins.
- Legal Exposure: Monitor the status of the W.R. Grace bankruptcy plan confirmation and the outcome of the Baxter patent retrial.
- Government Investigations: Track developments in the DOJ investigations regarding RCG's supply company and anemia management, specifically potential penalties.
- Liquidity Management: Confirm the company's ability to refinance or repay the $645 million Trust Preferred Securities maturing in early 2008.
- EBITDA Covenants: Verify compliance with the Senior Credit Agreement's leverage ratio (Debt/EBITDA under 3.0) and fixed charge coverage ratio.