FMS

Business Context and Reporting Period

Company: Fresenius Medical Care AG & Co. KGaA (FMC)

Filing Type: Form 6-K (Interim Report)

Reporting Period: Three months ended March 31, 2020

Overview: FMC is the world's largest kidney dialysis company by revenue and patient volume. The company operates four geographic segments: North America, EMEA, Asia-Pacific, and Latin America. The reporting period coincides with the onset of the global COVID-19 pandemic, which introduced significant operational challenges, including increased costs for patient safety measures and potential revenue volatility due to economic downturns.

Key Financial Metrics

Cash Flow: Net cash provided by operating activities was €584 million, a substantial increase from €76 million in Q1 2019, driven by working capital improvements. Free cash flow turned positive at €304 million (6.8% of revenue) compared to a negative €123 million in the prior year.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 9% (7% at constant currency). Health care services revenue grew 8%, driven by a 5% increase in dialysis treatments and organic revenue growth. Health care products revenue rose 10%, with non-dialysis products surging 53% due to higher acute cardiopulmonary sales.
• Segment Performance:
  • North America: Revenue +10%, Operating Income +24%. Growth driven by same-market treatment growth and the NxStage acquisition integration.
  • EMEA: Revenue +4%, Operating Income -27%. The decline was primarily due to a prior-year reduction in contingent consideration liability (Xenios) and higher bad debt expenses related to COVID-19.
  • Asia-Pacific: Revenue +4%, Operating Income -19%. Impacted by unfavorable currency transaction effects and lower product sales in China.
  • Latin America: Revenue +4%, Operating Income -40%. Driven by unfavorable foreign currency effects and higher bad debt expenses.
• Cost Structure: SG&A expenses as a percentage of revenue increased by 1.6 percentage points to 19.0%, driven by COVID-19 related costs, compliance monitor expenses, and higher bad debt provisions.
• COVID-19 Impact: Management estimates a negative impact of approximately €40 million on net income attributable to shareholders for the quarter due to the pandemic.

Guidance, Outlook, and Risks

Outlook and Guidance: The filing does not provide specific full-year 2020 financial guidance. Management states it is currently impossible to estimate or quantify the prospective negative effects of the COVID-19 pandemic on future business results. Capital expenditure guidance for 2020 remains €1.1 to €1.3 billion, with expected acquisitions and investments of €500 to €700 million.

Management Commentary:

• Liquidity: The company maintains strong liquidity with €1.4 billion in cash and cash equivalents and approximately €1.9 billion in unutilized credit facilities as of March 31, 2020. Additional credit lines were secured post-period, increasing headroom by €500 million.
• Reimbursement: The U.S. CARES Act provides relief, including a suspension of the 2% Medicare sequestration reduction and accelerated payments, though these may not fully offset lost revenues and increased costs.

Risks and Contingencies:

• COVID-19: Risks include increased mortality in the patient population, supply chain disruptions, absenteeism, and higher costs for isolation and safety measures.
• Legal Proceedings: Ongoing investigations include False Claims Act inquiries regarding dialysis facility joint ventures, pharmaceutical kickbacks, and billing practices. A material weakness in internal controls regarding revenue recognition for fee-for-service arrangements under legal consideration continues to exist.
• Regulatory: Potential changes to U.S. Medicare reimbursement rates and the Affordable Care Act remain a significant risk.

Investor Verification Checklist

• COVID-19 Financial Impact: Verify the €40 million estimated negative impact on net income and monitor for updates on patient mortality rates and treatment volumes in subsequent quarters.
• Internal Control Weakness: Review the status of the material weakness in revenue recognition controls (specifically regarding fee-for-service arrangements under legal consideration) and the effectiveness of remediation steps.
• Bad Debt Provisions: Monitor the trajectory of bad debt expenses, particularly in EMEA and Latin America, as economic conditions deteriorate due to the pandemic.
• Liquidity Position: Confirm the utilization of the €1.9 billion credit facility headroom and the sufficiency of cash reserves given the uncertainty of future cash flows.
• Reimbursement Policy Changes: Track legislative developments regarding the U.S. ESRD Prospective Payment System (PPS) and the impact of the CARES Act on long-term revenue stability.