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, 2018
Business Overview: The world's largest kidney dialysis company, providing dialysis care, related services, and manufacturing health care products globally. The company operates through four geographic segments: North America, EMEA, Asia-Pacific, and Latin America.

Key Financial Metrics

Note: Revenue and operating income were negatively impacted by foreign currency translation (approx. 12-13% negative impact on revenue). At constant currency, revenue decreased by 1% and operating income by 15%.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenue fell 13% primarily due to foreign currency translation, the implementation of IFRS 15 (reducing revenue by recognizing implicit price concessions), and the absence of a one-time revenue recognition from a prior-year agreement with the U.S. Department of Veterans Affairs (VA Agreement).
• Margin Compression: Gross profit margin decreased by 4.7 percentage points. This was driven by the IFRS 15 implementation, the PAMA oral-only provision (reducing reimbursement for certain drugs), and higher costs in the North America segment.
• Segment Performance:
  • North America: Revenue down 18% (as reported); Operating income down 31%. Dialysis treatments grew 3%.
  • EMEA: Revenue up 4%; Operating income down 5%.
  • Asia-Pacific: Revenue up 4%; Operating income down 9%.
  • Latin America: Revenue down 4%; Operating income flat.
• Cash Flow: Net cash used in operating activities was €45 million compared to €170 million provided in the prior year, largely due to the timing of the VA Agreement payment in 2017 and increased inventory levels.

Guidance, Outlook, and Risks

2018 Outlook (Constant Currency)

• Revenue Growth: 5% - 7% (Adjusted downward from ~8% due to faster-than-expected reduction in calcimimetic drug dosing).
• Operating Income Growth: 12% - 14%.
• Net Income Growth: 13% - 15% (excluding specific one-time impacts).
• Capital Expenditures: €0.9 - €1.0 billion.
• Acquisitions: €1.0 - €1.2 billion.
• Net Leverage Ratio: < 2.5x.

Management Commentary & Risks

• Accounting Changes: The company adopted IFRS 15 and IFRS 9 in Q1 2018, impacting revenue recognition and financial asset classification.
• Reimbursement Risks: Significant exposure to U.S. Medicare reimbursement rates (approx. 32% of consolidated revenue). Risks include the PAMA oral-only provision and potential changes to the Affordable Care Act.
• Legal & Regulatory:
  • Ongoing investigations regarding the Foreign Corrupt Practices Act (FCPA); a €200 million charge was recorded in Q4 2017, with settlement discussions ongoing.
  • False Claims Act investigations regarding billing practices and interactions with the American Kidney Fund.
  • Product liability litigation regarding GranuFlo/NaturaLyte products was largely settled in late 2017.
• Divestiture: On April 20, 2018, the company signed an agreement to divest its controlling interest in Sound Inpatient Physicians for approximately €1.76 billion ($2.15 billion).

Investor Verification Checklist

• IFRS 15 Impact: Verify the specific revenue reduction amounts attributed to implicit price concessions and the reclassification of bad debt expenses.
• FX Sensitivity: Assess the impact of the strong Euro on future earnings, given that ~70% of revenue is generated in U.S. dollars.
• Sound Divestiture: Monitor the closing of the Sound Inpatient Physicians sale and the associated tax implications and proceeds.
• FCPA Settlement: Track the status of ongoing settlement discussions with U.S. government agencies regarding FCPA violations.
• Reimbursement Policy: Review updates on the PAMA oral-only provision and its effect on calcimimetic drug revenue in the U.S. dialysis business.