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, 2017
Accounting Standard: IFRS (Effective Jan 1, 2017; discontinued U.S. GAAP reporting)
Reporting Currency: Euro (€)

Fresenius Medical Care is the world's largest kidney dialysis company, providing dialysis care, products, and "Care Coordination" services (pharmacy, vascular, and physician services) in over 120 countries. The company operates four geographic segments: North America, EMEA, Asia-Pacific, and Latin America.

Key Financial Metrics (Six Months Ended June 30, 2017)

Key Drivers: Revenue growth was driven by organic revenue per treatment, same-market treatment growth, and acquisitions. A significant one-time factor was a €98 million reimbursement from the U.S. Department of Veterans Affairs (VA Agreement).

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 14% (11% at constant currency). Health Care Services revenue grew 15%, while Health Care Products grew 9%.
• Profitability: Operating income margin improved to 13.7% from 13.5%. Excluding the VA Agreement, the margin would have decreased slightly to 12.8%.
• Segment Performance:
  • North America: Revenue +14%; Operating Income +16%. Care Coordination revenue surged 35%, but operating income dropped 72% due to higher bad debt and costs.
  • EMEA: Revenue +7%; Operating Income -6% due to foreign currency transaction effects and reimbursement pressure.
  • Asia-Pacific: Revenue +15%; Operating Income +27%, driven by growth in China and acquisitions.
  • Latin America: Revenue +22%; Operating Income +11%, mitigated by inflationary costs.
• Cash Flow: Net cash from operating activities rose to €1.052 billion (12% of revenue) from €767 million (10% of revenue), largely due to the VA payment.

Guidance, Outlook, and Risks

2017 Outlook (Confirmed):

• Revenue Growth: 8–10% at constant currency.
• Net Income Growth: 7–9% at constant currency.
• Capital Expenditures: €1.1–1.2 billion.
• Acquisitions: Approximately €0.75 billion.
• Debt/EBITDA: Target < 2.5x.

Key Risks and Contingencies:

• Regulatory/Reimbursement: Ongoing uncertainty regarding U.S. Medicare reimbursement rates (ESRD PPS) and potential changes under the Trump administration. CMS proposed a 0.8% rate increase for 2018.
• Legal Investigations:
  • FCPA: Substantially concluded investigations into conduct outside the U.S. potentially violating the Foreign Corrupt Practices Act; resolution discussions ongoing.
  • GranuFlo/NaturaLyte Litigation: Reached an agreement in principle for a $250 million settlement fund (€60 million net expense accrued) to resolve product liability claims.
  • False Claims Act: Multiple ongoing investigations regarding billing practices, joint ventures, and interactions with the American Kidney Fund (AKF).
• Currency: Significant exposure to USD/EUR fluctuations; approximately 73% of revenue is generated in U.S. dollars.

Investor Verification Checklist

• VA Agreement Impact: Verify the sustainability of earnings excluding the one-time €98 million VA reimbursement, which significantly boosted H1 2017 results.
• Care Coordination Margins: Monitor the North America Care Coordination segment, which saw revenue growth but a sharp decline in operating income (to a loss position in H1 2017) due to bad debt and cost pressures.
• Legal Settlements: Track the finalization of the GranuFlo/NaturaLyte settlement and the outcome of ongoing FCPA and False Claims Act investigations.
• Reimbursement Rates: Watch for finalization of the 2018 ESRD PPS rate and any legislative changes to the Affordable Care Act affecting Medicare Advantage plans.
• Debt Covenants: Confirm the Debt/EBITDA ratio remains below the 2.5x target to maintain investment-grade status and credit facility access.