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, 2012
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).
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net Revenue | $3,249 million | $2,984 million | +9% (+10% constant currency) |
| Operating Income | $503 million | $445 million | +13% |
| Operating Margin | 15.5% | 14.9% | +60 bps |
| Net Income (Shareholders) | $370 million | $221 million | +68% |
| EPS (Diluted) | $1.21 | $0.73 | +66% |
| Cash from Operations | $481 million | $175 million | +175% |
| EBITDA | $646 million | $581 million | +11% |
| Cash & Equivalents | $580 million | $457 million (Dec 31, 2011) | N/A |
| Total Debt | $8.69 billion | $7.08 billion (Dec 31, 2011) | +23% |
Note: Net Income includes a non-taxable investment gain of approximately $127 million related to the Liberty Acquisition.
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 13% increase in treatments (9.2 million vs. 8.2 million), attributed to acquisitions (8%), same-market growth (4%), and one additional treatment day. Dialysis care revenue rose 11%, while product revenue rose 3%.
- Liberty Acquisition: The Company acquired Liberty Dialysis Holdings, Inc. (263 clinics) for approximately $2.16 billion in total consideration ($1.69 billion cash). This resulted in a $127 million non-taxable investment gain due to the fair value remeasurement of a previously held 49% interest.
- Segment Performance:
- North America: Revenue increased 9% to $2,105 million; Operating Income increased 11% to $348 million. Growth driven by Medicare reimbursement updates and the Liberty acquisition.
- International: Revenue increased 8% (12% constant currency) to $1,136 million; Operating Income increased 14% to $195 million. Growth driven by acquisitions and organic expansion, partially offset by currency fluctuations.
- Costs: SG&A expenses increased to $553 million (17.0% of revenue) from $484 million (16.2%), primarily due to personnel expenses and one-time Liberty acquisition costs. Interest expense rose 45% to $119 million due to increased debt levels.
Guidance, Outlook, and Risks
Full Year 2012 Outlook
- Net Revenues: ~$14,000 million
- Net Income (Shareholders): ~$1,140 million (excludes the Q1 $127 million investment gain)
- Debt/EBITDA Ratio: < 3.0
- Capital Expenditures: ~$0.7 billion
- Acquisitions (net): ~$1.8 billion
Management Commentary & Risks
- Reimbursement Environment: The Company faces pressure from the U.S. ESRD Prospective Payment System (PPS) and potential automatic budget cuts (sequestration) under the Budget Control Act of 2011, which could cap Medicare payment reductions at 2% annually starting in 2013.
- Regulatory & Legal: Ongoing litigation includes patent disputes with Baxter International (affirmed non-infringement verdict in Feb 2012) and False Claims Act investigations. The Company is also subject to tax audits in the U.S. and Germany.
- Liquidity: Working capital decreased to $207 million due to the reclassification of long-term debt to current liabilities (Amended 2006 Senior Credit Agreement maturing March 31, 2013). The Company intends to refinance this obligation.
Investor Verification Checklist
- Liberty Acquisition Accounting: Verify the finalization of the acquisition accounting and the sustainability of the $127 million non-taxable gain.
- Debt Refinancing: Monitor the refinancing of the $2.77 billion Amended 2006 Senior Credit Agreement maturing in March 2013.
- Reimbursement Rates: Assess the impact of the ESRD PPS quality incentive program (QIP) and potential U.S. federal budget sequestration on future margins.
- Legal Contingencies: Review the status of the W.R. Grace bankruptcy settlement ($115 million payment obligation) and ongoing False Claims Act investigations.
- Working Capital: Track Days Sales Outstanding (DSO), particularly in the International segment where DSO increased to 124 days.