FMS

Business Context and Reporting Period

Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and nine months ended September 30, 2018
Business Overview: The world's largest kidney dialysis company, providing dialysis care, related services, and manufacturing health care products. Operations are segmented into North America, EMEA, Asia-Pacific, and Latin America. The company recently divested its controlling interest in Sound Inpatient Physicians, Inc. (a Care Coordination business) on June 28, 2018.

Key Financial Metrics (Nine Months Ended Sept 30, 2018)

Note: Revenue decreased due to foreign currency translation and the implementation of IFRS 15. Operating income and Net Income were significantly boosted by a €830M gain from the divestiture of Care Coordination activities.

Material Changes vs. Prior Period

• Divestiture Impact: The sale of Sound Inpatient Physicians generated a pre-tax gain of approximately €830M, which was the primary driver for the 32% increase in Operating Income and 76% increase in Net Income.
• Revenue Decline: Reported revenue fell 8% year-over-year. On a constant currency basis, the decline was 2%. The decrease was driven by the implementation of IFRS 15 (reducing revenue by recognizing implicit price concessions), the divestiture of Sound, and foreign currency headwinds (€ vs. USD).
• Segment Performance:
  • North America: Operating income rose 47% (driven by the divestiture gain). Dialysis revenue grew 2% at constant currency.
  • Latin America: Operating income dropped 47% to €24M due to hyperinflation in Argentina and unfavorable currency effects.
  • EMEA & Asia-Pacific: Operating income declined in both segments (10% and 8% respectively) due to currency effects and higher personnel costs.
• Cash Flow: Net cash provided by operating activities decreased to €1,220M (from €1,664M) due to increased receivables from Medicare (PAMA oral-only provision) and higher inventory levels. Free cash flow dropped to €518M.

Guidance, Outlook, and Risks

2018 Full Year Outlook (Constant Currency):

• Revenue Growth: 2-3%
• Operating Income Growth: 5-6%
• Delivered EBIT Growth: 6-7%
• Net Income Growth: 11-12% (excluding one-time items); 2-3% (including one-time items)
• Capital Expenditures: €0.9 - €1.0 billion
• Acquisitions: €400 - €500 million

Key Risks and Contingencies:

• Regulatory & Reimbursement: Ongoing uncertainty regarding U.S. Medicare reimbursement rates (ESRD PPS), potential changes to the Affordable Care Act, and state ballot initiatives (e.g., California) that could impose staffing requirements or margin caps.
• Legal Investigations:
  • FCPA: Discussions with U.S. government agencies regarding potential bribery and corruption in the products business. A provision of €243M has been recorded as of Sept 30, 2018.
  • False Claims Act: Multiple ongoing investigations regarding billing practices, joint ventures with physicians, and pharmaceutical utilization.
• Currency: Significant exposure to the U.S. Dollar; a stronger Euro negatively impacts reported results.
• Hyperinflation: Continued economic instability in Argentina impacting the Latin America segment.

Investor Verification Checklist

• Divestiture Gain Sustainability: Verify that the €830M gain from the Sound divestiture is treated as a one-time item and does not reflect recurring operational performance.
• FCPA Settlement Terms: Monitor the status of negotiations with the SEC and DOJ regarding the Foreign Corrupt Practices Act investigation to assess potential additional fines or penalties beyond the €243M accrual.
• U.S. Reimbursement Policy: Track the outcome of the California ballot initiative and CMS final rules for 2019 ESRD PPS rates, as these directly impact the North America segment's margins.
• Argentina Exposure: Review the specific impact of IAS 29 (Hyperinflationary Economies) on the Latin America segment's financial statements and future cash flows.
• IFRS 15 Impact: Confirm the long-term effect of IFRS 15 on revenue recognition, specifically regarding implicit price concessions, to ensure accurate year-over-year comparisons.