Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and nine months ended September 30, 2016
Business Overview: The world's largest kidney dialysis company, providing dialysis care services and manufacturing dialysis products. Operations are segmented into North America, EMEA, Asia-Pacific, and Latin America, with a vertically integrated model combining health care services and product sales.
Key Financial Metrics
Revenue (Nine Months Ended Sept 30, 2016): $13.22 billion (7% increase vs. prior year; 8% at constant exchange rates).
Net Income Attributable to Shareholders: $855 million (20% increase vs. prior year).
Operating Income: $1.85 billion (11% increase vs. prior year).
Operating Margin: 14.0% (up from 13.4% in the prior year).
Basic Earnings Per Share (EPS): $2.80 (19% increase vs. prior year).
Free Cash Flow: $562 million (4.3% of revenue, down from 6.3% in the prior year).
Cash and Cash Equivalents: $630 million as of September 30, 2016.
Debt: Total long-term debt and capital lease obligations were approximately $8.07 billion (including current portion) as of September 30, 2016.
Material Changes vs. Prior Period
- Revenue Growth: Driven by organic revenue per treatment growth, same-market treatment growth, and acquisitions. Health Care revenue increased 8% and Dialysis Products revenue increased 2%.
- Profitability: Operating income margin improved to 14.0% due to increased gross profit margin and income from equity method investees, partially offset by higher SG&A expenses.
- Segment Performance:
- North America: Revenue up 9%; Operating income up 16%. Care Coordination revenue grew 23%, though operating income declined 22% due to infrastructure costs.
- EMEA: Revenue up 1% (4% at constant currency); Operating income down 3% due to prior-year gains and manufacturing costs.
- Asia-Pacific: Revenue up 8%; Operating income up 3%.
- Latin America: Revenue down 10% (13% increase at constant currency) due to exchange rates and clinic closures in Venezuela; Operating income up 86% due to the absence of prior-year divestment losses.
- Cash Flow: Net cash provided by operating activities decreased to $1.296 billion from $1.412 billion, primarily due to a $100 million discretionary pension contribution and higher tax payments.
Guidance, Outlook, and Risks
2016 Outlook Targets:
- Revenue Growth: 7% – 10% (at constant exchange rates).
- Operating Income & Delivered EBIT Growth: Greater than revenue growth.
- Net Income Growth: 15% – 20%.
- Capital Expenditures: $1.0 – $1.1 billion.
- Acquisitions and Investments: Approximately $0.75 billion.
- Debt/EBITDA Ratio: Less than 3.0.
- Reimbursement: Significant exposure to U.S. Medicare reimbursement rates (ESRD PPS). A proposed CMS rule for 2017 could materially decrease rates for Fresenius Vascular Care procedures.
- Legal and Regulatory: Ongoing investigations into potential violations of the Foreign Corrupt Practices Act (FCPA) and other anti-bribery laws outside the U.S. and Germany. A settlement agreement in principle was reached for GranuFlo/NaturaLyte product liability litigation, with a net expense accrual of $60 million.
- Currency: Significant impact from foreign exchange fluctuations, particularly in Latin America and EMEA.
- Compliance: Risks related to the Anti-Kickback Statute, False Claims Act, and Stark Law.
Investor Verification Checklist
- Verify the final outcome of the proposed CMS 2017 Physician Fee Schedule rule regarding Fresenius Vascular Care reimbursement cuts.
- Monitor the status of the FCPA investigations and potential monetary penalties or sanctions.
- Assess the impact of the GranuFlo/NaturaLyte settlement finalization and any related insurance coverage disputes.
- Review the sustainability of Care Coordination margins in North America given the recent decline in operating income despite revenue growth.
- Confirm the company's ability to meet the 2016 net income growth target of 15-20% amidst currency headwinds and reimbursement pressures.