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, 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 (Six Months Ended June 30, 2018)
| Metric | 2018 (€M) | 2017 (€M) | Change |
|---|---|---|---|
| Revenue | 8,189 | 9,019 | (9%) |
| Operating Income | 1,898 | 1,235 | +54% |
| Net Income (Shareholders) | 1,273 | 577 | +121% |
| Operating Margin | 23.2% | 13.7% | +9.5 pp |
| Free Cash Flow | 165 | 664 | (75%) |
| Net Debt | 5,607 | 6,470 | (13%) |
| Net Leverage Ratio | 2.0x | 2.1x | -0.1x |
Note: Revenue decreased primarily due to foreign currency translation (-10%) and the implementation of IFRS 15. Operating income and net income were significantly boosted by a one-time gain from divestitures.
Material Changes vs. Prior Period
- Divestiture of Care Coordination Activities: The company divested its controlling interest in Sound Inpatient Physicians, Inc. on June 28, 2018, recognizing a pre-tax gain of approximately €820 million. This gain was the primary driver for the increase in operating income and net income.
- Accounting Standard Changes: Implementation of IFRS 15 (Revenue from Contracts with Customers) resulted in a reduction of reported revenue due to the recognition of implicit price concessions. Implementation of IFRS 9 (Financial Instruments) impacted the allowance for doubtful accounts.
- Currency Impact: A strong euro negatively impacted reported revenue by approximately 10% and operating income by 15% compared to the prior year.
- Segment Performance:
- North America: Revenue declined 13% (as reported) due to currency and IFRS 15, but operating income surged 66% driven by the Sound divestiture gain.
- EMEA, Asia-Pacific, Latin America: Operating income declined slightly in all three segments (as reported) due to currency headwinds and cost pressures, despite organic growth in treatment volumes.
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 one-time items).
- Capital Expenditures: €0.9 – €1.0 billion.
- Acquisitions: €600 – €800 million.
Key Risks and Contingencies:
- Regulatory & Reimbursement: Ongoing uncertainty regarding U.S. Medicare reimbursement rates (ESRD PPS), the PAMA oral-only provision impact on calcimimetics, and potential changes to the Affordable Care Act.
- Legal Investigations: The company is cooperating with multiple U.S. government investigations (DOJ, SEC) regarding the Foreign Corrupt Practices Act (FCPA) and False Claims Act. A €200 million charge was recorded in 2017 related to potential settlements; discussions continue.
- Product Liability: Litigation regarding acid concentrate products (GranuFlo/Naturalyte) has been substantially resolved, but coverage disputes with insurers remain.
Investor Verification Checklist
- Divestiture Impact: Verify the sustainability of earnings by excluding the €820 million one-time gain from the Sound divestiture when assessing core operational performance.
- IFRS 15 Adjustments: Review the reconciliation of revenue to understand the impact of implicit price concessions on reported top-line growth.
- Currency Sensitivity: Assess the company's exposure to the U.S. dollar, as approximately 70% of revenue and 87% of operating income are generated in USD.
- Legal Exposure: Monitor the status of FCPA and False Claims Act investigations for potential future settlements or penalties beyond the 2017 accrual.
- Calcimimetic Dosing: Confirm the impact of the PAMA oral-only provision on future revenue per treatment in the U.S. dialysis segment.