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, 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. Approximately 32% of consolidated revenues are attributable to U.S. federally-funded programs (Medicare/Medicaid).

Key Financial Metrics (Six Months Ended June 30, 2016)

Material Changes vs. Prior Period

• Revenue Growth: Driven by Health Care revenue (+7%) and Dialysis Products (+1%). Health Care growth was fueled by same-market treatment growth (+4%) and organic revenue per treatment increases (+3%).
• Segment Performance:
  • North America: Revenue +9%, Operating Income +24%. Strong performance in Dialysis (Operating Income +28%) offset by a decline in Care Coordination operating income (-32%) due to infrastructure costs.
  • EMEA: Revenue +1% (as reported), Operating Income -2%. Growth in treatments offset by unfavorable foreign exchange effects.
  • Asia-Pacific: Revenue +6%, Operating Income -8%. Revenue growth driven by favorable FX and treatment volume, but margins compressed by management board changes and manufacturing costs.
  • Latin America: Revenue -18% (as reported), Operating Income -19%. Significant negative impact from currency fluctuations and clinic closures in Venezuela.
• Costs: SG&A expenses increased to 17.3% of revenue (from 16.9%) due to higher legal/consulting costs related to compliance investigations and unfavorable FX in Asia-Pacific/EMEA.
• Interest Expense: Decreased 15% to $236 million due to lower valuation impacts of embedded derivatives in convertible bonds.

Guidance, Outlook, and Risks

2016 Outlook Targets

• Revenue Growth: 7–10% (at Constant Exchange Rates).
• Operating Income & Delivered EBIT: Growth greater than revenue growth.
• Net Income Growth: 15–20%.
• Capital Expenditures: $1.0–$1.1 billion.
• Acquisitions: Approximately $0.75 billion.
• Free Cash Flow: >4% of revenue.

Key Risks and Contingencies

• Reimbursement Risk: U.S. Medicare reimbursement rates (ESRD PPS) remain a primary risk. The 2016 rate saw a net 4% reduction in the base rate, partially offset by case mix adjustments. Future legislative changes (PAMA) could further impact rates.
• Legal & Regulatory:
  • GranuFlo/NaturaLyte Litigation: Reached an agreement in principle for a $250 million settlement fund (insurers to fund $220 million; Company to accrue $60 million net expense).
  • FCPA Investigations: Ongoing internal and government investigations regarding potential violations of the Foreign Corrupt Practices Act outside the U.S. and Germany. The Company cannot currently estimate the range of possible losses.
  • False Claims Act: Various whistleblower actions and government subpoenas regarding billing practices and joint ventures.
• Currency Fluctuations: Significant impact on reported results, particularly in Latin America and EMEA.

Investor Verification Checklist

• Reimbursement Rates: Verify the final impact of the 2016 ESRD PPS rate and the proposed 2017 rate on North America margins.
• Legal Settlements: Confirm the finalization of the GranuFlo/NaturaLyte settlement and the status of ongoing FCPA investigations.
• Care Coordination Margins: Monitor the profitability trajectory of the Care Coordination segment, which saw significant margin compression in H1 2016.
• Latin America Exposure: Assess the extent of operational and financial impact from the economic situation in Venezuela.
• Constant Currency Growth: Distinguish between reported growth and constant currency growth to evaluate organic performance vs. FX headwinds.