Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA (FMC)
Reporting Period: Three months ended March 31, 2019 (Q1 2019)
Business Overview: FMC is 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. A significant event in this period was the acquisition of NxStage Medical, Inc. on February 21, 2019, and the implementation of the new lease accounting standard, IFRS 16, effective January 1, 2019.
Key Financial Metrics
| Metric (in € millions) | Q1 2019 | Q1 2018 |
|---|---|---|
| Total Revenue | 4,133 | 3,976 |
| Operating Income (EBIT) | 537 | 497 |
| Operating Margin | 13.0% | 12.5% |
| Net Income (Attributable to Shareholders) | 271 | 279 |
| Basic EPS | 0.88 | 0.91 |
| Net Cash from Operating Activities | 76 | (45) |
| Free Cash Flow | (123) | (263) |
| Net Debt | 12,273 | 5,400 (Dec 2018) |
| Net Leverage Ratio | 3.2x | 1.8x (Dec 2018) |
Note: Net Debt and Leverage Ratio increased significantly due to the IFRS 16 implementation and the NxStage acquisition. Adjusted for IFRS 16, the Net Leverage Ratio was 2.5x.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 4% as reported, driven by a 5% positive impact from foreign currency translation. At constant currency, revenue decreased 1%.
- Profitability: Operating income increased 8% to €537 million. However, Net Income attributable to shareholders decreased 3% to €271 million, primarily due to higher interest expenses and tax rates.
- Segment Performance:
- North America: Revenue up 4%; Operating income up 3%. Dialysis revenue grew 14% (5% constant currency), while Care Coordination revenue dropped 40% due to the prior-year divestiture of Sound Inpatient Physicians.
- EMEA: Revenue up 3%; Operating income surged 26% to €138 million, aided by a reduction in contingent consideration liabilities.
- Asia-Pacific: Revenue up 9%; Operating income up 28%.
- Latin America: Revenue down 5% (14% growth at constant currency); Operating income down 19% due to hyperinflation in Argentina.
- Accounting Changes: Implementation of IFRS 16 resulted in the recognition of €4.3 billion in right-of-use assets and €4.6 billion in lease liabilities, significantly impacting the balance sheet and leverage ratios.
- Acquisition: The acquisition of NxStage Medical added revenue but contributed an operating loss of €11 million in the first quarter due to integration costs and accounting adjustments.
Outlook, Risks, and Management Commentary
Guidance and Outlook (2019)
Management provided the following full-year 2019 outlook (at constant currency, excluding NxStage effects):
- Revenue Growth: 3% to 7%
- Operating Income Growth: (1)% to 3%
- Net Income Growth: (2)% to 2%
- Capital Expenditures: €1.0 to €1.2 billion
- Acquisitions/Investments: €0.4 to €0.6 billion
- Net Leverage Ratio: Target < 2.5x
Risks and Contingencies
- Regulatory & Reimbursement: Significant uncertainty remains regarding U.S. Medicare reimbursement rates (ESRD PPS) and potential changes to the Affordable Care Act. The company is involved in ongoing litigation regarding premium assistance programs (American Kidney Fund).
- Legal Settlements: On March 29, 2019, the company entered into a non-prosecution agreement with the DOJ and a separate agreement with the SEC to resolve FCPA investigations, agreeing to pay approximately $231.7 million in penalties and disgorgement.
- Product Liability: Ongoing litigation related to GranuFlo/Naturalyte acid concentrate products, though a major settlement was reached in 2017, with some state-level cases still pending.
- Currency Fluctuations: Approximately 70% of revenue is generated in U.S. dollars, exposing the company to significant foreign exchange risk.
Key Facts for Investor Verification
- IFRS 16 Impact: Verify the adjusted Net Leverage Ratio (2.5x) rather than the reported ratio (3.2x) to assess true debt burden, as the reported figure is inflated by the new lease accounting standard.
- NxStage Integration: Monitor the integration progress of NxStage Medical, which is expected to be accretive to revenue but initially dilutive to operating income due to integration costs.
- FCPA Settlement: Confirm the finalization of the $231.7 million settlement with U.S. authorities and the appointment of the independent compliance monitor.
- North America Care Coordination: Assess the stability of the Care Coordination segment following the divestiture of Sound Inpatient Physicians, which caused a significant revenue drop in the prior year comparison.
- Latin America Exposure: Review the impact of hyperinflation in Argentina on the Latin America segment's operating margins and asset valuations.