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, 2014
Business Overview: The Company is the world's largest kidney dialysis company, operating in dialysis care and dialysis products for end-stage renal disease (ESRD). Operations are segmented into North America and International (EMEALA and Asia-Pacific).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 3% (4% at constant currency). Dialysis care revenue rose 4% driven by a 4% increase in treatments and acquisitions. Dialysis product revenue declined 1% due to lower machine sales.
• Margin Compression: Gross profit margin decreased from 32.0% to 30.4%. This was primarily driven by the North America segment due to higher personnel expenses, FDA remediation costs, freight costs, and reimbursement reductions (ATRA and Sequestration).
• Operating Expenses: SG&A expenses increased to $620 million (17.4% of revenue) from $593 million (17.1%). Increases were driven by unfavorable foreign exchange effects in the International segment and higher corporate costs related to Management Board changes.
• Cash Flow: Net cash provided by operating activities dropped significantly to $112 million from $315 million. This decrease was mainly due to the payment of the W.R. Grace bankruptcy settlement, increased inventory levels, and lower cash collections.
• Segment Performance:
  • North America: Operating income fell 8% to $336 million; margin declined to 14.0%.
  • International: Operating income fell 6% to $180 million; margin declined to 15.5% due to currency effects and an accrual related to an internal investigation.

Outlook, Risks, and Contingencies

2014 Full Year Guidance

• Revenue: ~$15.2 billion
• Operating Income: ~$2.2 billion (Margin ~14.5%)
• Net Income: $1.0 - $1.05 billion (Decrease of 5-10%)
• Free Cash Flow: >4% of revenue
• Debt/EBITDA Ratio: ~3.0

Key Risks and Contingencies

• Regulatory & Reimbursement: The Company faces ongoing pressure from U.S. Medicare reimbursement changes, including the ESRD Prospective Payment System (PPS), Sequestration cuts, and the American Taxpayer Relief Act (ATRA). The Protecting Access to Medicare Act of 2014 modified some future reductions but stability remains a key risk.
• Legal & Investigations:
  • FCPA Investigation: An internal review is ongoing regarding potential violations of the U.S. Foreign Corrupt Practices Act in the International segment. The Company has recorded a non-material accrual but cannot estimate the total potential loss.
  • Product Liability: Consolidated multidistrict litigation regarding Granuflo and NaturaLyte acid concentrate products alleging wrongful death and personal injury.
  • Patent Litigation: Ongoing disputes with Baxter International regarding hemodialysis machine patents.
• Management Changes: Effective March 31, 2014, Dr. Emanuele Gatti and Dr. Rainer Runte resigned from the Management Board. Successors have been appointed for specific regions and interim roles.

Investor Verification Checklist

• Reimbursement Impact: Verify the specific financial impact of the ATRA drug utilization adjustments and Sequestration on the North America segment margins.
• FCPA Investigation Status: Monitor updates on the internal investigation regarding potential FCPA violations and any resulting regulatory penalties or settlements.
• Cash Flow Volatility: Review the sustainability of operating cash flows given the significant drop in Q1 2014 due to the W.R. Grace settlement and working capital changes.
• Product Liability Litigation: Track the progress of the Granuflo/NaturaLyte multidistrict litigation and potential exposure.
• Management Transition: Assess the impact of recent Management Board resignations and the integration of new leadership on strategic execution.