Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three months ended March 31, 2016
Business Overview: The world's largest kidney dialysis company, providing dialysis care, products, and "Care Coordination" services (pharmacy, vascular, cardiovascular, etc.) in over 120 countries. Operations are segmented into North America, EMEA, Asia-Pacific, and Latin America.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total Revenue | $4,205 million | $3,960 million | +6% (+9% Constant Currency) |
| Operating Income | $540 million | $504 million | +7% |
| Operating Margin | 12.8% | 12.7% | +0.1 pp |
| Net Income (Shareholders) | $228 million | $210 million | +9% |
| Diluted EPS | $0.75 | $0.69 | +8% |
| EBITDA | $722 million | $680 million | +6% |
| Free Cash Flow | ($66 million) | $250 million | Significant Decline |
| Cash & Equivalents | $518 million | $623 million (Q1 2015) | -17% |
| Total Debt (Long-term + Current) | $8.53 billion | $8.52 billion (Dec 2015) | Stable |
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 7% increase in Health Care revenue and 2% in Dialysis Products. Health Care growth was fueled by a 4% increase in same-market treatments and higher organic revenue per treatment.
- Segment Performance:
- North America: Revenue up 10% to $3.04 billion; Operating Income up 28% to $436 million. Margins improved due to lower supply costs and favorable commercial payor mix.
- EMEA: Revenue flat at $631 million; Operating Income down 8% to $130 million due to unfavorable foreign exchange effects.
- Asia-Pacific: Revenue up 6% to $374 million; Operating Income down 23% to $65 million due to FX impacts and increased sales development costs.
- Latin America: Revenue down 23% to $153 million; Operating Income down 39% to $11 million, heavily impacted by currency devaluation and clinic closures in Venezuela.
- Cost Structure: SG&A expenses increased to 18.0% of revenue (from 16.5%) due to compliance investigation costs and FX impacts. R&D expenses rose 21% to $37 million.
- Cash Flow: Operating cash flow dropped significantly to $180 million (from $447 million) due to invoicing timing adjustments and working capital changes. Free cash flow turned negative ($66 million) due to higher capital expenditures ($246 million) and acquisitions ($91 million).
Outlook, Risks, and Contingencies
2016 Guidance
- Revenue Growth: 7–10% at Constant Exchange Rates.
- Net Income Growth: 15–20%.
- Capital Expenditures: $1.0–$1.1 billion.
- Acquisitions: Approximately $0.75 billion.
- Debt/EBITDA Ratio: Target < 3.0.
Key Risks and Contingencies
- Regulatory & 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 & Compliance:
- GranuFlo/NaturaLyte Litigation: Reached an agreement in principle for a $250 million settlement fund (insurers to fund $220 million; Company to fund $60 million net of legal fees).
- FCPA Investigations: Ongoing internal and government investigations (SEC/DOJ) regarding potential violations of the Foreign Corrupt Practices Act outside the U.S. and Germany. The Company cannot currently estimate the range of possible loss.
- False Claims Act: Various whistleblower actions and government inquiries regarding billing practices (e.g., Hepatitis B tests, Vascular Care utilization).
- Currency: Significant volatility in Latin American and European currencies materially impacts reported results.
Investor Verification Checklist
- Reimbursement Stability: Verify the impact of the 2016 CMS ESRD PPS rate (approx. 4% net reduction offset by case mix adjustments) on North America margins.
- Legal Accruals: Confirm the finalization of the GranuFlo/NaturaLyte settlement and monitor the status of FCPA investigations for potential additional accruals.
- Cash Flow Sustainability: Assess the drivers behind the sharp decline in operating cash flow and the negative free cash flow position in Q1 2016.
- Latin America Exposure: Review the extent of asset write-downs or divestitures related to the economic crisis in Venezuela.
- Noncontrolling Interests: Note that a significant portion of operating income ($69 million) is attributable to noncontrolling interests, reducing net income available to shareholders.