FMS

Business Context and Reporting Period

Company: Fresenius Medical Care AG & Co. KGaA (FMC)

Filing Type: Form 6-K (Interim Report)

Reporting Period: Three and six months ended June 30, 2015

Business Overview: FMC is the world's largest kidney dialysis company, providing dialysis care services and manufacturing dialysis products. The company operates in four segments: North America, EMEA (Europe, Middle East, Africa), Asia-Pacific, and Latin America. In 2015, the company reclassified its reporting segments from three to four to align with management structure.

Key Financial Metrics (Six Months Ended June 30, 2015)

Segment Performance (Six Months 2015):

• North America: Revenue $5,717M (+16%); Operating Income $768M (+4%).
• EMEA: Revenue $1,297M (-15% reported, +4% constant currency); Operating Income $275M (-7%).
• Asia-Pacific: Revenue $729M (+32%); Operating Income $152M (+70%).
• Latin America: Revenue $401M (+4%); Operating Income $34M (-12%).

Material Changes vs. Prior Period

• Revenue Growth: Driven primarily by a 14% increase in Net Health Care revenue (18% at constant currency) due to acquisitions (12%), same-market treatment growth (4%), and organic revenue per treatment increases (3%). Dialysis product revenue decreased 2% reported but increased 9% at constant currency.
• Margin Compression: Gross profit margin decreased to 30.4% from 31.0%, and operating margin decreased to 12.9% from 13.5%. This was attributed to higher personnel expenses, increased SG&A (driven by legal/compliance costs), and unfavorable foreign exchange effects in EMEA and Latin America.
• Interest Expense: Increased 24% to $277M due to the valuation of embedded derivatives on convertible debt issued in September 2014 and higher average debt levels.
• Noncontrolling Interests: Net income attributable to noncontrolling interests increased to $124M from $89M, driven by Care Coordination acquisitions and new joint ventures.

Guidance, Outlook, and Risks

2015 Outlook Targets:

• Revenue Growth: 5% – 7%
• Operating Income: Moderate growth
• Net Income Growth: 0% – 5%
• Capital Expenditures: ~$1.0 billion
• Acquisitions: ~$0.4 billion
• Debt/EBITDA Ratio: ~3.0

2016 Projections: Revenue growth expected at 7-10% (revised down from 9-12%); Net income growth expected at 15-20%.

Key Risks and Contingencies:

• Reimbursement: Significant exposure to U.S. Medicare reimbursement rates (approx. 32% of consolidated revenue). Risks include the ESRD Prospective Payment System (PPS), Sequestration cuts, and the Protecting Access to Medicare Act (PAMA).
• Legal & Regulatory: Ongoing investigations into potential violations of the Foreign Corrupt Practices Act (FCPA) and other anti-bribery laws outside the U.S. and Germany. The company is cooperating with the SEC and DOJ. Additionally, there are pending product liability litigations regarding Granuflo/NaturaLyte acid concentrates and False Claims Act investigations.
• Divestiture: Expected to incur a non-tax deductible loss of ~$30M from the divestiture of the dialysis service business in Venezuela in the second half of 2015.

Investor Verification Checklist

• Reimbursement Policy Changes: Monitor CMS final rules for 2016 ESRD PPS rates and the impact of PAMA on market basket adjustments.
• Legal Settlements: Track the status of FCPA investigations and potential penalties, as well as the outcome of Granuflo/NaturaLyte product liability litigation.
• Currency Impact: Verify the extent of foreign exchange headwinds in EMEA and Latin America, as reported results differ significantly from constant currency results.
• Care Coordination Margins: Assess the profitability trajectory of the rapidly growing Care Coordination segment, which currently operates at lower margins than the core dialysis business.
• Venezuela Divestiture: Confirm the timing and final financial impact of the Venezuela asset sale in the second half of 2015.