FMS

Business Context and Reporting Period

Company: Fresenius Medical Care AG & Co. KGaA (FMC-AG & Co. KGaA)
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and six months ended June 30, 2013
Business Overview: The Company is the world's largest kidney dialysis company, providing dialysis services, pharmacy services, vascular access surgery, and manufacturing/distributing dialysis products. Operations are segmented into North America and International (EMEALA and Asia-Pacific).

Key Financial Metrics (Six Months Ended June 30, 2013)

Margins (Six Months 2013 vs 2012):
- Gross Profit Margin: 32.0% (down from 32.9%)
- Operating Income Margin: 14.7% (down from 16.4%)

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 6% (6% at constant exchange rates) driven by a 5% increase in treatments and organic revenue growth per treatment. North America revenue grew 7%, while International grew 4% (5% at constant currency).
• Profitability Decline: Net income attributable to shareholders decreased 26% to $488 million. This decline is primarily due to the absence of a $140 million non-taxable investment gain recorded in the first half of 2012 related to the Liberty Dialysis acquisition.
• Margin Compression: Gross profit margins decreased due to a lower commercial payor mix, price reductions from commercial contracting, and the impact of U.S. sequestration (2% Medicare cut). SG&A expenses as a percentage of revenue increased to 16.8% from 16.4%.
• Operating Income: Decreased to $1,038 million from $1,092 million, impacted by lower gross margins, higher SG&A, and a significantly lower gain on the sale of dialysis clinics ($9 million in 2013 vs. $34 million in 2012).
• Cash Flow: Operating cash flow decreased by $91 million, largely due to a $100 million payment related to the Venofer license agreement amendment.

Guidance, Outlook, and Risks

2013 Full Year Outlook

• Revenue: Greater than $14.6 billion (>6% growth).
• Operating Income: $2.3 billion to $2.4 billion.
• Net Income (Shareholders): $1.1 billion to $1.15 billion (representing a 5-10% increase over 2012 excluding the one-time investment gain).
• Capital Expenditures: Approximately $0.7 billion.
• Acquisitions: Approximately $0.5 billion.
• Debt/EBITDA Ratio: Approximately 3.0.

Key Risks and Contingencies

• Reimbursement Risk: CMS proposed a 12% reduction in the ESRD PPS base rate effective January 1, 2014, which could materially adversely impact operating income and cash flows if finalized. The Company is actively commenting on this proposal.
• Legal and Regulatory: Ongoing investigations into potential violations of the Foreign Corrupt Practices Act (FCPA) in the International segment. Multiple qui tam (whistleblower) lawsuits and government investigations regarding billing practices and product liability (Granuflo/Naturalyte) are pending.
• Currency Fluctuations: Significant exposure to foreign exchange, including hyperinflationary conditions in Venezuela which resulted in a $11.5 million pre-tax loss in the first half of 2013.
• Share Repurchase: The Company announced a buyback program of up to €385 million ($500 million). As of June 30, 2013, €190 million ($249 million) had been repurchased.

Investor Verification Checklist

• ESRD PPS Rate Reduction: Verify the final status of the proposed 12% Medicare reimbursement cut for 2014 and its potential impact on the North America segment.
• FCPA Investigation: Monitor updates on the internal review regarding potential FCPA violations in the International segment and any resulting fines or settlements.
• Product Liability Litigation: Track the status of the multidistrict litigation regarding Granuflo and Naturalyte dialysate products.
• Share Buyback Execution: Confirm the completion of the announced €385 million share repurchase program.
• Venezuela Operations: Assess the ongoing impact of hyperinflation and currency devaluation on the International segment's financial results.