FMS

Business Context and Reporting Period

Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and six months ended June 30, 2019
Business Overview: The world's largest kidney dialysis company, providing dialysis care, related services, and manufacturing health care products globally. The company operates through four geographic segments: North America, EMEA, Asia-Pacific, and Latin America.

Key Financial Metrics (Six Months Ended June 30, 2019)

Note: Net Leverage Ratio increased primarily due to the implementation of IFRS 16 (Leases) and higher debt levels. Adjusted for IFRS 16, the ratio was 2.6x.

Material Changes vs. Prior Period

• Divestiture Impact: The significant decline in Operating Income and Net Income is largely attributable to the absence of the €820 million gain from the divestiture of Sound Inpatient Physicians (Care Coordination) in the prior year. In 2019, the gain related to divestitures was only €11 million.
• Acquisition Impact: The company acquired NxStage Medical, Inc. in February 2019. This contributed to revenue growth in health care products (home hemodialysis) but added integration costs and operating losses in the short term.
• Accounting Changes: Implementation of IFRS 16 resulted in the recognition of right-of-use assets (€4.2 billion) and lease liabilities, increasing reported debt and interest expense while reclassifying rent payments from operating to financing cash flows.
• Segment Performance:
  • North America: Operating income dropped 51% (€801M vs €1,648M) primarily due to the Sound divestiture. Dialysis operations remained relatively stable.
  • Latin America: Operating income fell 32% due to hyperinflation in Argentina and higher bad debt expenses.
  • EMEA & Asia-Pacific: Both segments showed modest growth in operating income (9% and 8% respectively).

Guidance, Outlook, and Risks

Outlook (2019 Full Year at Constant Currency)

• Revenue Growth: 3% to 7%
• Operating Income Growth: (1)% to 3%
• Net Income Growth: (2)% to 2%
• Capital Expenditures: €1.0 to €1.2 billion
• Net Leverage Ratio Target: Below 2.5x

Note: Outlook excludes the effects of the NxStage acquisition and adjusts for the Sound divestiture and IFRS 16 implementation to ensure comparability.

Key Risks and Contingencies

• Reimbursement Risk: Approximately 33% of revenue is from U.S. federal programs (Medicare/Medicaid). Changes in the ESRD Prospective Payment System (PPS) or the repeal of the Affordable Care Act could materially impact results.
• Legal Proceedings:
  • FCPA Settlement: Entered into a non-prosecution agreement with the DOJ and SEC in March 2019 regarding foreign corruption investigations, agreeing to pay approximately $231.7 million in penalties and disgorgement.
  • False Claims Act: Multiple ongoing investigations regarding billing practices, joint ventures, and pharmaceutical kickbacks.
  • Product Liability: Ongoing litigation regarding GranuFlo/Naturalyte acid concentrate products.
• Regulatory Changes: Potential changes to the ESRD Treatment Choices (ETC) model and other value-based care models could alter payment structures.

Investor Verification Checklist

• Adjusted EBITDA: Verify the reconciliation of Non-IFRS measures (Delivered EBIT, Adjusted Operating Income) to understand core operational performance excluding one-time divestiture gains and acquisition costs.
• IFRS 16 Impact: Assess the long-term effect of lease capitalization on reported debt levels, interest expenses, and operating margins.
• NxStage Integration: Monitor the timeline for NxStage to move from an operating loss to profitability and the realization of synergies.
• Latin America Exposure: Review the specific impact of hyperinflation in Argentina on the recoverability of assets and future cash flows in the region.
• Legal Reserves: Confirm the adequacy of litigation reserves, particularly regarding the FCPA settlement and ongoing False Claims Act investigations.