FMS

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, 2015
Business Overview: The world's largest kidney dialysis company, providing dialysis care services and manufacturing dialysis products. The company operates in four segments: North America, EMEA, Asia-Pacific, and Latin America. In 2015, the company reclassified its reporting segments from three to four to align with management structure.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Driven primarily by a 14% increase in Net Health Care revenue ($3,182 million), fueled by acquisitions (12%), same-market treatment growth (4%), and organic revenue per treatment increases (3%). Dialysis product revenue remained flat at $778 million.
• Segment Performance:
  • North America: Revenue up 16% to $2,771 million. Care Coordination revenue surged 191% to $434 million due to acquisitions, though margins declined to 3.5%.
  • Asia-Pacific: Revenue up 45% to $353 million, with operating income jumping 148% to $85 million, driven by acquisitions and growth in China.
  • EMEA: Reported revenue down 14% to $629 million due to unfavorable exchange rates, though operating income rose 11% to $141 million.
• Costs and Margins: Gross profit margin decreased slightly to 29.9% from 30.4%. SG&A expenses as a percentage of revenue improved to 16.5% from 17.4%.
• Interest Expense: Increased 45% to $162 million, largely due to the valuation of an embedded derivative on convertible debt issued in September 2014 and higher average debt levels.
• Noncontrolling Interests: Net income attributable to noncontrolling interests increased to $54 million from $42 million, reflecting new joint ventures and acquisitions.

Guidance, Outlook, and Risks

2015 Outlook

• Revenue Growth: 5% to 7%.
• Operating Income: Moderate growth.
• Net Income Growth: 0% to 5%.
• Capital Expenditures: Approximately $1.0 billion.
• Acquisitions: Approximately $0.4 billion.
• Free Cash Flow: Greater than 4% of revenue.
• Debt/EBITDA Ratio: Approximately 3.0.

2016 Outlook

• Revenue Growth: 9% to 12%.
• Net Income Growth: 15% to 20%.

Risks and Contingencies

• Regulatory & Reimbursement: Significant exposure to U.S. Medicare reimbursement rates (ESRD PPS), sequestration cuts, and the Protecting Access to Medicare Act (PAMA). Global reimbursement stability is generally expected but subject to legislative changes.
• Legal & Compliance: Ongoing investigations into potential violations of the Foreign Corrupt Practices Act (FCPA) and other anti-bribery laws outside the U.S. and Germany. The company is cooperating with the SEC and DOJ. Additionally, there are ongoing product liability litigations regarding Granuflo/Naturalyte acid concentrates and False Claims Act whistleblower actions.
• Currency: Significant impact from foreign exchange fluctuations, particularly on EMEA and Latin America segments.

Investor Verification Checklist

• Reimbursement Policy Changes: Monitor CMS updates regarding ESRD PPS rates, the implementation of the Comprehensive ESRD Care Model (ESCO), and the impact of PAMA on future drug reimbursement.
• Legal Settlements: Track the status of the Southern Florida (Miami) investigation settlement ($1.2 million) and the outcome of ongoing FCPA investigations and product liability lawsuits.
• Care Coordination Margins: Verify the profitability trajectory of the rapidly expanding Care Coordination segment, which currently operates at lower margins than the core dialysis business.
• Convertible Debt Impact: Assess the continued impact of the September 2014 convertible bond issuance on interest expense and earnings volatility.
• Acquisition Integration: Evaluate the integration and performance of recent acquisitions, particularly in the Asia-Pacific and North America Care Coordination sectors.