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, 2017
Accounting Standard: IFRS (Effective Jan 1, 2017, the Company discontinued U.S. GAAP reporting)
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.
Key Financial Metrics
| Metric (€ millions) | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total Revenue | 4,548 | 3,916 | +16% |
| Operating Income (EBIT) | 651 | 497 | +31% |
| Operating Margin | 14.3% | 12.7% | +1.6 pp |
| Net Income (Attributable to Shareholders) | 308 | 213 | +45% |
| Basic EPS | €1.01 | €0.70 | +44% |
| EBITDA | 841 | 662 | +27% |
| Net Cash from Operating Activities | 170 | 163 | +4% |
| Free Cash Flow | (25) | (60) | Improvement |
| Debt/EBITDA Ratio (LTM) | 2.5x | 2.6x | -0.1x |
| Cash and Cash Equivalents | 671 | 709 | -5% |
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 14% constant currency increase in Health Care Services and a 6% increase in Health Care Products. A significant one-time factor was approximately €100 million in revenue recognized from the U.S. Department of Veterans Affairs (VA) agreement.
- Profitability: Operating income margin expanded to 14.3% from 12.7%. Excluding the VA agreement impact, the margin would have decreased slightly to 12.4%. Gross profit margin improved by 1.9 percentage points.
- Segment Performance:
- North America: Revenue +18%, Operating Income +31%. Dialysis operating income margin rose to 19.6% (16.5% excluding VA agreement). Care Coordination revenue grew 39% but reported an operating loss of €1 million.
- EMEA: Revenue +7%, Operating Income -3% (€114m vs €118m) due to acquisition impacts and higher overhead.
- Asia-Pacific: Revenue +11%, Operating Income +38% (€82m) driven by growth in China.
- Latin America: Revenue +28%, Operating Income +47% (€14m) driven by reimbursement increases.
- Interest Expense: Increased 15% to €121 million, primarily due to the valuation of embedded derivatives in convertible bonds and higher average debt levels.
Guidance, Outlook, and Risks
2017 Outlook (Constant Currency)
- Revenue Growth: 8% – 10%
- Operating Income Growth: Approximately equal to revenue growth
- Net Income Growth: 7% – 9%
- Capital Expenditures: €1.1 – €1.2 billion
- Acquisitions: Approximately €0.75 billion
- Debt/EBITDA Ratio: < 2.5x
- ROIC: Approximately 8.0%
Note: Outlook excludes the effects of the VA agreement.
Key Risks and Contingencies
- Regulatory & Reimbursement: Significant exposure to U.S. Medicare reimbursement changes (ESRD PPS). Uncertainty regarding the Trump administration's potential repeal of the Affordable Care Act (ACA) and its impact on value-based care models (ESCO, BPCI).
- Legal Investigations:
- GranuFlo/NaturaLyte Litigation: Settlement agreement in principle reached for $250 million; Company accrued $60 million net expense. Insurers agreed to fund $220 million.
- FCPA/Anti-Bribery: Ongoing internal and government investigations (SEC/DOJ) regarding conduct outside the U.S. Remedial actions taken; loss range cannot be reasonably estimated.
- Premium Assistance: Subpoena received regarding interactions with the American Kidney Fund (AKF). A CMS Interim Final Rule threatening patient coverage was preliminarily enjoined by a federal court.
- Currency: Approximately 74% of revenue is generated in U.S. dollars; results are sensitive to EUR/USD fluctuations.
Investor Verification Checklist
- VA Agreement Impact: Verify the sustainability of earnings excluding the one-time €100 million VA reimbursement, which significantly boosted Q1 margins.
- Care Coordination Profitability: Monitor the path to profitability for the Care Coordination segment, which currently reports operating losses despite high revenue growth.
- Legal Settlements: Track the finalization of the GranuFlo/NaturaLyte settlement and the outcome of ongoing FCPA investigations.
- Reimbursement Policy: Assess the impact of potential U.S. healthcare policy changes (ACA repeal, ESRD PPS adjustments) on the North America segment.
- Debt Levels: Confirm the Company maintains its Debt/EBITDA ratio below 2.5x as acquisitions and capital expenditures proceed.