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, 2015
Business Overview: The world's largest kidney dialysis company, providing dialysis care, related services ("Care Coordination"), and manufacturing dialysis products. The company operates in four segments: North America, EMEA, Asia-Pacific, and Latin America.
Key Financial Metrics (Nine Months Ended Sept 30, 2015)
| Metric | 2015 (in millions) | 2014 (in millions) | Change |
|---|---|---|---|
| Total Net Revenue | $12,390 | $11,511 | +8% (+13% at constant currency) |
| Operating Income | $1,665 | $1,591 | +5% |
| Operating Margin | 13.4% | 13.8% | -40 bps |
| Net Income (Shareholders) | $713 | $710 | +0.4% |
| Basic EPS | $2.34 | $2.35 | -0.4% |
| Free Cash Flow | $776 | $635 | +22% |
| Cash & Equivalents | $621 | $634 | -2% |
| Total Debt (Long-term + Current) | $8,927 | $9,394 | -5% |
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 11% increase in Net Health Care revenue (15% at constant currency) due to acquisitions, same-market treatment growth, and organic revenue per treatment increases. Dialysis product revenue decreased 5% (7% increase at constant currency) due to currency headwinds.
- Segment Performance:
- North America: Revenue up 15%; Operating income up 12%. Strong growth in Care Coordination revenue (+114%) and Dialysis treatments (+4%).
- EMEA: Revenue down 15% (4% increase at constant currency) due to foreign exchange impacts. Operating income margin improved to 20.7%.
- Asia-Pacific: Revenue up 18% (29% at constant currency) driven by acquisitions. Operating income up 22%.
- Latin America: Revenue down 4% (17% at constant currency). Operating income fell 62% to $25 million, impacted by the divestiture of the Venezuela business and inflation.
- Cost Structure: SG&A expenses increased to 17.1% of revenue (from 16.7%) due to higher legal/consulting costs and inflation in Latin America. Gross profit margin improved slightly to 31.2%.
- Unusual Items:
- Loss of $26.9 million (after-tax) from the divestiture of the dialysis service business in Venezuela.
- Gain of $4.8 million (after-tax) from the sale of European marketing rights for renal pharmaceuticals.
Guidance, Outlook, and Risks
2015 Full Year Outlook:
- Revenue Growth: 5% – 7%
- Operating Income: Moderate growth
- Net Income Growth: 0% – 5%
- Capital Expenditures: ~$1.0 billion
- Acquisitions: ~$0.3 billion
- Debt/EBITDA Ratio: ~3.0
2016 Projections: Revenue growth expected at 7% – 10%; Net income growth expected at 15% – 20%.
Key Risks and Contingencies:
- Reimbursement: Approximately 32% of revenue is from U.S. federal programs (Medicare/Medicaid). 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 False Claims Act. Product liability litigation regarding GranuFlo and NaturaLyte acid concentrates.
- Currency: Significant exposure to foreign exchange fluctuations, particularly the Euro and Latin American currencies.
Investor Verification Checklist
- Constant Currency Impact: Verify the distinction between reported growth and constant currency growth, as currency headwinds significantly masked organic performance in EMEA and Latin America.
- Venezuela Divestiture: Confirm the final accounting treatment and any remaining contingent liabilities associated with the sale of the Venezuelan dialysis business.
- FCPA Investigations: Monitor updates on the internal and external investigations regarding anti-bribery compliance, as potential penalties could be material.
- 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.
- Medicare Reimbursement Rates: Track CMS final rules for 2016 ESRD PPS rates, as proposed reductions could impact North America margins.