04.3
Results of Operations
The following tables summarize our financial performance and certain operating results by principal business segment for the periods indicated. Inter-segment sales primarily reflect sales of medical equipment and supplies from the International segment to the North America segment. We prepared the information using a management approach, consistent with the basis and manner in which our management internally disaggregates financial information to assist in making internal operating decisions and evaluating management performance.
| Table 04.3.1 | SEGMENT DATA |
| $ in million | 2008 | 2007 |
|---|---|---|
| Total revenue | ||
| North America | 7,007 |
6,664 |
| International | 3,688 |
3,134 |
| Corporate | 1 |
– |
| TOTAL | 10,696 |
9,798 |
| Inter-segment revenue | ||
| North America | 2 |
1 |
| International | 82 |
77 |
| TOTAL | 84 |
78 |
| Total net revenue | ||
| North America | 7,005 |
6,663 |
| International | 3,606 |
3,057 |
| Corporate | 1 |
– |
| TOTAL | 10,612 |
9,720 |
| Amortization and depreciation | ||
| North America | 238 |
220 |
| International | 171 |
141 |
| Corporate | 7 |
2 |
| TOTAL | 416 |
363 |
| Operating income | ||
| North America | 1,168 |
1,130 |
| International | 616 |
544 |
| Corporate | (112) |
(94) |
| TOTAL | 1,672 |
1,580 |
| Interest income | 25 | 29 |
| Interest expense | (361) |
(400) |
| Income tax expense | (489) |
(466) |
| Minority interest | (29) |
(26) |
| NET INCOME | 818 |
717 |
HIGHLIGHTS
Revenues increased by 9 % to $10,612 million (8 % at constant exchange rates) mainly due to organic growth at 7 % and acquisitions at 1 %.
Operating income (EBIT) increased 6 %.
Net Income increased by 14 %.
Trust Preferred Securities in the amount of $678 million were redeemed at maturity.
In July 2008, we entered into two separate and independent license and distribution agreements to market and distribute intravenous iron products, such as Venofer and Ferinject.
CONSOLIDATED FINANCIALS
| Table 04.3.2 | KEY INDICATORS FOR CONSOLIDATED FINANCIALS |
| 2008 | 2007 | Change as reported |
Change at constantexchange rates |
|
|---|---|---|---|---|
| Number of treatments | 27,866,573 |
26,442,421 |
5 % |
– |
| Same market treatment growth | 4.5 % |
3.9 % |
– |
– |
| Revenue in $ million | 10,612 |
9,720 |
9 % |
8 % |
| Gross profit in % of revenue | 34.2 % |
34.5 % |
– |
– |
| Selling, general and administrative costs in % of revenue | 17.7 % |
17.6 % |
– |
– |
| Net income in $ million | 818 |
717 |
14 % |
– |
We provided 27,866,573 treatments during the year ended December 31, 2008, an increase of 5 % over the same period in 2007. Same market treatment growth contributed 4 % and growth from acquisitions contributed 1 %.
At December 31, 2008, we owned, operated or managed (excluding those managed but not consolidated in the U.S.) 2,388 clinics compared to 2,238 clinics at December 31, 2007. During 2008, we acquired 48 clinics, opened 127 clinics and combined or closed 25 clinics. The number of patients treated in clinics that we own, operate or manage (excluding patients of clinics managed but not consolidated in the U.S.) increased by 6 % to 184,086 at December 31, 2008 from 173,863 at December 31, 2007. Including 32 clinics managed but not consolidated in the U.S., the total number of patients was 185,768.
Net revenue increased by 9 % (8 % at constant exchange rates) for the year ended December 31, 2008 over 2007 due to growth in revenue in both dialysis care and dialysis products.
Dialysis care revenue grew by 7 % to $7,737 million (6 % at constant exchange rates) in 2008 mainly due to growth in same market treatments (4 %), revenue per treatment (2 %), acquisitions (1 %), and exchange rate fluctuations (1 %), partially offset by sold or closed clinics (1 %).
Dialysis product revenue increased by 15 % to $2,875 million (11 % at constant exchange rates) mainly as a result of increased sales of hemodialysis machines, dialyzers, bloodlines, concentrates, and peritoneal dialysis products and higher revenues attributable to the phosphate binding drug, PhosLo and to the sales of the newly licensed intravenous iron products.
The decrease in gross margin reflects reductions in gross margin in the International segment. North America was impacted by higher personnel and other operating costs, decreased utilization of and reduced reimbursement rates for EPO, higher material costs, and increased costs for the anticoagulant drug heparin, fully offset by increased commercial payor revenue. International was affected by strong growth in dialysis care business which has lower than average margins and unfavorable foreign currency transaction effects related to purchases from Europe due to the appreciation of the Euro against local currencies. Both segments experienced higher depreciation expense in 2008 as compared to 2007 as a result of expansion of production capacities. The availability of these new capacities allowed a more normalized summer maintenance program in our International facilities, in contrast to the prior year’s shortened program.
Selling, general and administrative (“SG&A”) costs increased to $1,876 million in 2008 from $1,709 million in 2007. SG&A costs as a percentage of sales increased to 17.7 % in 2008 from 17.6 % in 2007. The percentage increased in the North America segment and decreased in the International segment. North America was impacted by higher personnel costs and higher bad debt expense, partially offset by economies of scale and gains on the sale of minority interests in subsidiaries. International benefited from lower foreign currency losses in Europe, lower bad debt expense and with respect to SG&A as a percentage of sales, from revenue growth in excess of the increase of SG&A. These were partially offset by higher corporate expenses relating to the operating expenses of Renal Solutions Inc., reported under corporate, and compensation expense for stock options. Bad debt expense for the year ended December 31, 2008 was $214 million as compared to $202 million in 2007, representing 2.0 % of sales for the year ended December 31, 2008 and 2.1 % for 2007.
Research and development (“R&D”) expenses increased to $80 million in 2008 from $67 million for the same period in 2007 mainly as a result of the additional R&D programs related to continued development of hemodialysis machines, field testing of new products and extracorporeal and home therapy programs.
Operating income increased to $1,672 million in 2008 from $1,580 million for 2007. Operating income margin decreased to 15.8 % for the year ended December 31, 2008 from 16.3 % for 2007 due to the decreased gross margins, increased SG&A as a percentage of sales, and increased R&D costs as discussed above.
Interest expense decreased 10 % to $361 million in 2008 from $400 million for 2007 mainly as a result of decreased interest rates and the more favorable financing structure following the repayment of a portion of our trust preferred securities. This was partially offset by the slightly increased debt level resulting from the acquisition of Renal Solutions, Inc. in the fourth quarter of 2007 as well as higher capital expenditures in 2008.
Income tax expense increased to $489 million for the year ended December 31, 2008 from $466 million in 2007 due to increased earnings. The effective tax rate for 2008 decreased to 36.6 % from 38.5 % for 2007 mainly due to a German corporate tax rate reduction which became effective January 1, 2008.
Net income for 2008 increased to $818 million from $717 million for 2007 mainly as a result of the combined effects of the items discussed above.
We employed 64,666 people (full-time equivalents) as of December 31, 2008 compared to 61,406 as of December 31, 2007, an increase of 5 % primarily due to our overall growth in business.
The following discussions pertain to our business segments and the measures we use to manage these segments.
NORTH AMERICA SEGMENT
| Table 04.3.3 | KEY INDICATORS FOR NORTH AMERICA SEGMENT |
| 2008 | 2007 | Change | |
|---|---|---|---|
| Number of treatments | 19,146,084 |
18,451,381 |
4 % |
| Same market treatment growth | 2.9 % |
2.9 % |
– |
| Revenue in $ million | 7,005 |
6,663 |
5 % |
| Depreciation and amortization in $ million | 238 |
220 |
8 % |
| Operating income in $ million | 1,168 |
1,130 |
3 % |
| Operating income margin | 16.7 % |
17.0 % |
– |
REVENUE
Treatments increased by 4 % for the year ended December 31, 2008 as compared to 2007 due to same market growth (3 %) and acquisitions (1 %). At December 31, 2008, 125,857 patients (a 4 % increase over the same period in the prior year) were being treated in the 1,686 clinics that we own or operate in the North America segment, compared to 121,431 patients treated in 1,602 clinics at December 31, 2007. Average North America revenue per treatment was $326 for the year ended December 31, 2008 and $323 for 2007. In the U.S., the average revenue per treatment was $330 for the year ended December 31, 2008 and $327 in 2007, mainly due to increased commercial payor revenue.
Net revenue for the North America segment for 2008 increased as a result of increases in dialysis care revenue by 4 % to $6,247 million from $6,002 million in 2007 and in dialysis product revenue by 15 % to $758 million from $661 million in 2007.
The dialysis care revenue increase was driven by same market treatment growth of 3 %, increased revenue per treatment (1 %), and 1 % resulting from acquisitions partially offset by the effects of sold or closed clinics (1 %). The administration of EPO represented approximately 20 % and 21 % of total North America dialysis care revenue for 2008 and 2007, respectively.
The product revenue increase was driven mostly by a higher sales volume of dialysis machines, concentrate, bloodlines, dialyzers, and peritoneal products, as well as increased pricing and sales of the newly licensed intravenous iron products and higher sales attributable to the phosphate binding drug, PhosLo, which we acquired in late 2006. However, we experienced substantial reductions in our PhosLo sales following a competitor’s launch of a generic version of PhosLo in the U.S. in October 2008.
OPERATING INCOME
Operating income increased by 3 % to $1,168 million for 2008 from $1,130 million for 2007. Operating income margin decreased to 16.7 % for 2008 as compared to 17.0 % for 2007 primarily due to increased personnel and other operating costs, higher raw material costs, decreased utilization of and reduced reimbursement rates for EPO, heparin cost increases, and higher depreciation expense due to expansion of production capacities, partially offset by increased commercial payor revenue. Cost per treatment increased to $273 in 2008 from $267 in 2007.
INTERNATIONAL SEGMENT
| Table 04.3.4 | KEY INDICATORS FOR INTERNATIONAL SEGMENT |
| 2008 | 2007 | Change as reported |
Change at constant exchange rates |
||
|---|---|---|---|---|---|
| Number of treatments | 8,720,489 |
7,991,040 |
9 % |
– |
|
| Same market treatment growth | 8.6 % |
6.2 % |
– |
– |
|
| Revenue in $ million | 3,606 |
3,057 |
18 % |
13 % |
|
| Depreciation and amortization in $ million | 171 |
141 |
21 % |
– |
|
| Operating income in $ million | 616 |
544 |
13 % |
– |
|
| Operating income margin | 17.1 % |
17.8 % |
– |
– |
|
REVENUE
Treatments increased by 9 % in 2008 over 2007 mainly due to same market growth (9 %), and acquisitions (1 %), partially offset by sold or closed clinics (1 %). As of December 31, 2008, 58,229 patients (a 11 % increase over the prior year) were being treated at 702 clinics that we own, operate or manage in the International segment compared to 52,432 patients treated at 636 clinics at December 31, 2007. Average revenue per treatment increased to $171 from $152 due to increased reimbursement rates and changes in country mix ($11) and the strengthening of local currencies against the U.S. dollar ($8).
The increase in net revenues for the International segment for 2008 over 2007 resulted from increases in both dialysis care and dialysis product revenues. Organic growth during the period was 12 % and acquisitions contributed approximately 1 %. Exchange rate fluctuations contributed 5 %.
Including the effects of acquisitions, European region revenue increased 19 % (12 % at constant exchange rates), Latin America region revenue increased 23 % (19 % at constant exchange rates), and Asia-Pacific region revenue increased 12 % (11 % at constant exchange rates).
Total dialysis care revenue for the International segment increased during 2008 by 23 % (18 % at constant exchange rates) to $1,490 million from $1,211 million for 2007. This increase is a result of same market treatment growth of 9 % and a 1 % increase in contributions from acquisitions and one additional dialysis day (1 %), partially offset by sold or closed clinics (1 %). Increases in revenue per treatment contributed 8 % and exchange rate fluctuations contributed approximately 5 %.
Total dialysis product revenue for 2008 increased by 15 % (10 % at constant exchange rates) to $2,117 million mostly due to higher dialyzer and machine sales.
OPERATING INCOME
Operating income increased by 13 % to $616 million primarily as a result of increases in the number of treatments, revenue per treatment and increases in units of products sold. Operating income margin decreased to 17.1 % for the year ended December 31, 2008 from 17.8 % in 2007. The margin decrease resulted from the effects of stronger growth in dialysis care business which has lower than average margins and higher depreciation expense due to expansion of production capacities. The availability of these new capacities allowed a more normalized summer maintenance program in our facilities in 2008, in contrast to the prior year’s shortened program. In addition, the International margin was impacted by unfavorable foreign currency transaction effects in Asia-Pacific related to purchase of products from Europe due to the appreciation of the Euro against local currencies.
