Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA (FMC-AG)
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and six months ended June 30, 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 is subject to significant regulatory oversight, particularly regarding Medicare reimbursement in the U.S., with a transition to a bundled payment system (PPS) mandated for 2011.
Key Financial Metrics (Six Months Ended June 30, 2010)
| Metric | 2010 (in millions) | 2009 (in millions) |
|---|---|---|
| Net Revenue | $5,828 | $5,323 |
| Gross Profit | $1,976 | $1,794 |
| Operating Income | $888 | $813 |
| Net Income (Attributable to FMC-AG) | $459 | $419 |
| Cash from Operations | $643 | $437 |
| EBITDA | $1,134 | $1,029 |
| Cash and Cash Equivalents | $573 | $301 |
| Total Debt (Current + Long-term) | $4,815 | $4,586 |
Margins (Six Months 2010):
- Gross Profit Margin: 33.9%
- Operating Income Margin: 15.2%
- Effective Tax Rate: 34.1%
Material Changes vs. Prior Period
Revenue Growth: Net revenue increased 9% (8% at constant exchange rates) driven by growth in both dialysis care (11%) and dialysis products (6%).
- Treatment Volume: Total treatments increased 6% to 15.3 million. Same-market treatment growth was 4.3%, with acquisitions contributing 2%.
- North America: Revenue grew 9% to $3,986 million. Operating income increased 12% to $636 million, with margins improving to 16.0% due to higher revenue per treatment and economies of scale.
- International: Revenue grew 10% (6% at constant exchange rates) to $1,842 million. Operating income increased 8% to $324 million. Margins decreased slightly to 17.6% due to a one-time revaluation of Venezuelan operations and a reimbursement cut in Taiwan.
Costs and Expenses:
- SG&A expenses increased to $1,043 million (17.9% of revenue) from $939 million (17.6% of revenue), primarily due to higher personnel expenses in North America and patent litigation costs at Corporate.
- Interest expense decreased 7% to $149 million due to lower short-term interest rates.
Guidance, Outlook, and Risks
2010 Full Year Outlook:
- Net Revenues: Greater than $12,000 million.
- Net Income (Attributable to FMC-AG): $950 - $980 million.
- Debt/EBITDA: Less than 2.5x.
- Capital Expenditures: Approximately $550 - $650 million.
- Acquisitions: Up to $500 million (increased from previous $400 million estimate).
Key Risks and Contingencies:
- Reimbursement Changes: Implementation of the Medicare ESRD Prospective Payment System (PPS) beginning January 1, 2011, which bundles payments for drugs and services. The Company is evaluating whether to adopt fully in 2011 or phase in over four years.
- Healthcare Reform: The Patient Protection and Affordable Care Act (PPACA) introduces a 2.3% excise tax on medical devices (starting 2013) and industry fees on pharmaceuticals, expected to adversely impact product business earnings.
- Legal Proceedings:
- IRS Litigation: Ongoing disputes regarding disallowed tax deductions for civil settlement payments and intercompany preferred shares. A motion for summary judgment was denied in June 2010.
- W.R. Grace Settlement: Obligation to pay $115 million to the W.R. Grace bankruptcy estate upon plan confirmation.
- Patent Litigation: Ongoing disputes with Baxter International and Gambro regarding hemodialysis machine patents.
- Foreign Exchange: Operations in Venezuela were reclassified as highly inflationary, resulting in a one-time pre-tax loss of approximately $11.6 million in 2010.
Investor Verification Checklist
- PPS Adoption Strategy: Confirm the Company's final decision on the timing of the Medicare bundled payment system implementation (2011 vs. phased 2014) and its projected financial impact.
- IRS Litigation Exposure: Monitor the status of the U.S. District Court case regarding disallowed tax deductions, as an adverse ruling could materially impact liquidity.
- Debt Maturities: Verify refinancing plans for the $1.39 billion revolving credit facility and Term Loan A due March 2011, and the $592 million Trust Preferred Securities due June 2011.
- Acquisition Pipeline: Track progress against the increased acquisition guidance of up to $500 million for 2010.
- PPACA Impact: Assess the long-term financial modeling for the 2.3% medical device excise tax and pharmaceutical industry fees.