FINANCIAL POSITION
Financial management policies and goals
Ensuring financial flexibility is the key to the financing strategy of the Fresenius Group. We achieve this flexibility through a broad spectrum of financing instruments and the wide diversification of our investors. The maturity profile is characterized by a broad spread of maturities with a large proportion of mid- to long-term financing.
Sufficient financial cushion is assured for the Fresenius Group by the revolving syndicated credit lines that are only partly drawn and the unused bilateral credit lines at our disposal. Market capacity, investor diversification, flexibility, credit covenants, and the current maturity profile are all taken into consideration when selecting financing instruments. At the same time, we seek to optimize our financing costs.
In line with the Group’s structure, financing for Fresenius Medical Care and for the rest of the Fresenius Group is administered separately. There are no joint loans or credit agreements and no mutual guarantees. The Fresenius Kabi and Fresenius ProServe business segments were financed primarily through Fresenius SE in order to avoid any structural subordination.
Financing
Fresenius meets its financing needs through a combination of operating cash flows generated in the business segments and short-, mid-, and long-term debt. In addition to traditional bank financing, important financing instruments include the issuance of senior notes, Euro notes, trust preferred securities, a commercial paper program, and an accounts receivable securitization program.
In 2007, Group financing activities were confined to refinancing operations. The manner in which the refinancing operations were structured widened our financing scope and increased our financial flexibility.
Two capital market transactions were undertaken and were successfully completed before the conditions on the debt markets deteriorated sharply in the third quarter of 2007 in the wake of the subprime mortgage crisis in the United States and the difficulties experienced in the syndication of banks’ extensive loan commitments for financing large debt-leveraged takeover deals:
- On July 2, 2007, a € 200 million private placement with European investors was completed. A syndicated senior unsecured Euro note was offered in four tranches. The placement was divided into tranches of € 100 million, with maturities of five and seven years respectively, with a fixed-rate tranche and floating rate tranche. The Euro note was issued by Fresenius Finance B.V. and guaranteed by Fresenius SE. The proceeds were used, among other things, to refinance a € 126 million Euro note issued in 2004. The very positive response in the capital market and strong interest among investors led to the originally planned volume being several times oversubscribed. Therefore, we were able to place a slightly higher volume on very attractive terms.
- Fresenius Medical Care issued US$ 500 million of senior notes on July 2, 2007, mostly placed with institutional investors in the United States. These were senior unsecured bonds with a maturity of ten years and a coupon of 6 7/8%. The senior note was issued by Fresenius Medical Care Finance III S.A. (Luxembourg) with guarantees from Fresenius Medical Care AG & Co.KGaA, Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care Deutschland GmbH. The net proceeds from the issue were used to reduce the loans (Term Loan A and Term Loan B) drawn under the US$ 4.6 billion credit agreement of March 31, 2006 by US$ 150 million each and for a temporary reduction of the Fresenius Medical Care accounts receivable securitization program. The financial cushion provided by the receivables program has been used to redeem the subordinated trust preferred securities with a coupon of 7 7/8%due in February 2008. At Fresenius Group further refinancing on a big scale is only due from 2011 on.
Fresenius SE has a commercial paper program under which up to € 250 million in short-term notes can be issued. No commercial papers were outstanding as of December 31, 2007 and as of December 31, 2006.
The Fresenius Group has drawn about € 2.7 billion of bilateral and syndicated credit lines. In addition, the Group had more than € 1.5 billion in unused credit lines as of December 31, 2007 (including committed credit lines of € 1.1 billion) at its disposal. These credit facilities are generally used for general corporate purposes and are – except for the Fresenius Medical Care credit agreement – usually unsecured.
As of December 31, 2007, both Fresenius SE and Fresenius Medical Care AG & Co.KGaA, including all subsidiaries, complied with the covenants under all credit agreements.
Effect of off-balance-sheet financing instruments on our financial position and assets and liabilities
Fresenius is not involved in any off-balance-sheet transactions that could have or will have a significant impact on its financial position, expenses or earnings, results of operations, liquidity, investments, assets, or capitalization.
Liquidity analysis
In 2007, key sources of liquidity were operating cash flows and short-, medium-, and long-term debt. Cash flow from operations is influenced by the profitability of Fresenius’ business and by working capital, especially accounts receivable. Cash flow can be generated from short-term borrowings through the sale of receivables under the Fresenius Medical Care accounts receivable securitization program, by using the commercial paper program and by drawing on bilateral bank credit agreements. Medium and long-term funding is provided by the revolving credit facilities of Fresenius Medical Care and Fresenius SE, and by senior notes as well as by various other financing instruments.
Fresenius believes that existing credit facilities, as well as the operating cash flows and additional sources of shortterm funding, are sufficient to meet the Company’s foreseeable liquidity needs.
| FINANCIAL POSITION – 5-YEARS OVERVIEW | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| in million € | 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Cash flow | 1,296 | 1,052 | 780 | 851 | 776 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| in % of sales | 11.4 | 9.8 | 9.9 | 11.7 | 11.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments in property, plan and equipment, net | 666 | 571 | 331 |
286 | 322 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash flow before acquisitions and dividends | 630 | 481 | 449 | 565 | 454 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| in % of sales | 5.5 | 4.5 | 5.7 | 7.8 | 6.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend
The Management and Supervisory Boards will propose a dividend increase to the Annual General Meeting. For 2007, a dividend of € 0.66 per ordinary share and € 0.67 per preference share is proposed. This is an increase of about 15%. The total dividend distribution will be € 103.2 million (2006: € 88.8 million).
Cash flow analysis
The Group cash flow statement shows a positive development: Cash flow increased by 17% to € 1,223 million in 2007 (2006: € 1,045 million). This was mainly due to the excellent growth in earnings. In 2006, cash flow was influenced by tax payments and other payments related to the divestiture of dialysis clinics and the acquisition of Renal Care Group, as well as by a US tax liability for the years 2000 and 2001. The change in working capital was € 73 million (2006: € 7 million).
Operating cash flow was € 1,296 million in 2007 (2006: € 1,052 million), more than sufficient to meet all the financing needs for investing activities, excluding acquisitions. Cash used for capital expenditure was € 704 million, while proceeds from the sale of property, plant, and equipment amounted to € 38 million (2006: € 589 million and € 18 million, respectively). Cash flow before acquisitions and dividends increased by 31% to € 630 million (2006: € 481 million), sufficient to finance all Group dividends and net acquisitions in 2007. Cash from financing activities (excluding dividend payments) was € 83 million (2006: € 2,931 million). In addition to the acquisition expenditure, Group dividend payments led to a cash outflow of € 205 million in 2007 (2006: € 171 million).
| CASH FLOW STATEMENT (SUMMARY) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| in million € | 2007 | 2006 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income before minority interest | 793 | 635 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 421 | 399 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in pension provisions | 9 | 11 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash flow | 1,223 | 1,045 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in working capital | 73 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating cash flow | 1,296 | 1,052 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, plant and equipment | -704 | -589 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from the sale of property, plant and equipment | 38 | 18 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash flow before acquisitions and dividends | 630 | 481 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash used for acquisitions/proceeds from disposals | -392 | -3,219 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | -205 | -171 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash flow after acquisitions and dividends | 33 | - 2,909 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash provided by/used for financing activities (without dividends paid) | 83 | 2,931 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | -16 | -13 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in cash and cash equivalents | 100 | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The detailed cash flow statement is shown in the consolidated financial statements. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Fresenius SE dividend accounted for € 89 million (2006: € 76 million). Cash and cash equivalents amounted to € 361 million as of December 31, 2007 (December 31, 2006: € 261 million).
Investments and acquisitions
The Fresenius Group invested € 1,318 million in 2007 (2006: € 4,314 million). Investment in property, plant and equipment, and in intangible assets was € 705 million (2006: € 600 million). This was well above the level of depreciation of € 421 million, constituting the basis for preserving the Company’s value over the long term and for expansion. Of the total investment volume in 2007, about 53% was spent on maintenance investments and about 47% on expansion investments. € 613 million was invested in acquisitions (2006: € 3,714 million, mainly for the acquisition of Renal Care Group). Of the total investment volume, 53% was invested in property, plant and equipment, and in intangible assets. 47% was spent on acquisitions.
The table shows the distribution of investments for each business segment. The chart shows the regional breakdown.
The cash outflow for acquisitions related mainly to the expansion of our global dialysis care business and to renal pharmaceuticals at Fresenius Medical Care. At Fresenius Kabi, acquisitions were made both to increase its international presence and to extend the market position and product portfolio. At Fresenius Helios, the expenditure was primarily for the acquisition of hospitals.
The main investments in property, plant and equipment, and in intangible assets were as follows:
- Start-up of new dialysis clinics, primarily in the United States, and expansion and modernization of existing clinics
- Expansion and optimization of production sites at Fresenius Medical Care and Fresenius Kabi
- Hospital modernization at Fresenius Helios. The largest single investment was the construction of the new clinic in Berlin-Buch which was finalized in 2007.
Investments in property, plant and equipment of € 89 million will be made in 2008 to continue with the major investment projects already underway on the reporting date. These are chiefly investment obligations for hospitals at Fresenius Helios as well as investments to expand and optimize production plants. These projects will be financed from operating cash flow.
| INVESTMENTS BY BUSINESS SEGMENT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| in million € | 2007 | 2006 | Thereof property, plant and equipment and intangible assets |
Thereof acquisitions |
Change | % of total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius Medical Care | 680 | 3,933 | 423 | 257 | -83% | 52% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius Kabi | 294 | 127 | 116 | 178 | 131% | 22% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius ProServe | 328 | 245 | 153 | 175 | 34% | 25% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| - thereof Fresenius Helios | 323 | 214 | 149 | 174 | 51% | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| - thereof Fresenius Vamed | 10 | 5 | 4 | 6 | 100% | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate/Other | 16 | 9 | 13 | 3 | 78% | 1% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 1,318 | 4,314 | 705 | 613 | -69% | 100% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
