Annual Report • May 15, 2017
Annual Report
Open in ViewerOpens in native device viewer
Interim Report on IFRS, 2017, First Quarter, Fresenius Medical Care AG & Co. KGaA, Hof an der Saale Germany
57 Note 13. Segment and Corporate Information
59 Note 14. Supplementary Cash Flow Information
3
You should read the following discussion and analysis of the results of operations of Fresenius Medical Care AG & Co. KGaA ("FMC AG & CO. KGAA", or the "Company") and its subsidiaries in conjunction with our unaudited Consolidated Financial Statements and related notes contained elsewhere in this report and our disclosures and discussions in our Consolidated Financial Statements for the year ended December 31, 2016 in accordance with sections 315 and 315a of the German Commercial Code ("HGB") as well as the German Accounting Standards Numbers 17 and 20. The information within this Interim Management Report is unaudited. In this report, "FMC AG & CO. KGAA", or the "Company", "we", "us" or "our" refers to the Company or the Company and its subsidiaries on a consolidated basis, as the context requires. The term "North America Segment" refers to our North America operating segment; the term "EMEA Segment" refers to the Europe, Middle East and Africa operating segment, the term "Asia-Pacific Segment" refers to our Asia-Pacific operating segment, and the term "Latin America Segment" refers to our Latin America operating segment. The term "Corporate" includes certain headquarters' overhead charges, including accounting and finance, centrally managed production, asset management, quality management, procurement and research and development. The term "Constant Currency" or at "Constant Exchange Rates" means that we have translated local currency revenue or operating income for the current reporting period into euro using the prior year exchange rates to ensure a comparable analysis without effect from exchange rate fluctuations on translation, as described below under Section II ."Discussion of Measures – Non-IFRS Measures – Constant Currency" of the chapter "Report of Economic Position".
This report contains forward-looking statements. When used in this report, the words "outlook", "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates" and similar expressions are generally intended to identify forward looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated, and future events and actual results, financial and otherwise, could differ materially from those set forth in or contemplated by the forward-looking statements contained elsewhere in this report. We have based these forward-looking statements on current estimates and assumptions made to the best of our knowledge. By
their nature, such forward-looking statements involve risks, uncertainties, assumptions and other factors which could cause actual results, including our financial condition and profitability, to differ materially positively or negatively relative to the results expressly or implicitly described in or suggested by these statements. Moreover, forward-looking estimates or predictions derived from third parties' studies or information may prove to be inaccurate. Consequently, we cannot give any assurance regarding the future accuracy of the opinions set forth in this report or the actual occurrence of the projected developments described herein. In addition, even if our future results meet the expectations expressed here, those results may not be indicative of our performance in future periods.
These risks, uncertainties, assumptions, and other factors, including associated costs, could cause actual results to differ from our projected results include, among others, the following:
product liability risks;
risks relating to our ability to continue to make acquisitions;
Important factors that could contribute to such differences are noted in the chapter "Report on Economic Position", section I. "Macroeconomic and sector-specific environment" below, in Note 11 of this report, in Note 22 of the Notes to Consolidated Financial Statements as well as chapter E. "Report on Risk and Opportunities", section II. "Risks" in the Group Management Report of the Consolidated Financial Statements as of December 31, 2016 in accordance with section 315a HGB.
Our business is also subject to other risks and uncertainties that we describe from time to time in our public filings. Developments in any of these areas could cause our results to differ materially from the results that we or others have projected or may project.
Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that are the basis of our financial statements. The actual accounting policies, the judgments made in the selection and application of these policies as well as the sensitivities of
reported results to changes in accounting policies, assumptions and estimates are factors to be considered along with our financial statements and the discussion under "Results of Operations, financial position and net assets" below. There have been no significant changes during the three months ended March 31, 2017 to the items disclosed within the critical accounting policies and estimates in Notes 1 and 2 of the Consolidated Financial Statements as of December 31, 2016 in accordance with section 315a HGB.
Rounding adjustments applied to individual numbers and percentages shown in this and other reports may result in these figures immaterially differing from their absolute values.
nterim M anagement R eport
We are the world's largest kidney dialysis company, based on publicly reported sales and number of patients treated. We provide dialysis care and related services to persons who suffer from end stage renal disease ("ESRD") as well as other health care services. We develop and manufacture a full range of health care products, which includes both dialysis and non-dialysis products. Our dialysis products include dialysis machines, systems and disposable products while our non-dialysis products include acute cardiopulmonary and apheresis products. We sell our health care products to customers in more than 120 countries and also use then in our internal health care service operations. Our dialysis business is therefore vertically integrated. We describe certain of our other health care services as "Care Coordination." Care Coordination currently includes coordinated delivery of pharmacy services, vascular, cardiovascular and endovascular specialty services, non-dialysis laboratory testing services, physician nephrology and cardiology services, hospitalist and intensivist services, health plan services, ambulatory surgery center services and urgent care services, which, together with dialysis care and related services represent our health care services. We estimated the volume of the global dialysis market was approximately €68 billion in 2016. Due to the complexity and evolving nature of care coordination services, we are currently unable to estimate the global volume of this market. Dialysis patient growth results from factors such as the aging population and increased life expectancies; shortage of donor organs for kidney transplants; increasing incidence of kidney disease and better treatment of and survival of patients with diabetes, hypertension and other illnesses, which frequently lead to the onset of chronic kidney disease; improvements in treatment quality, new pharmaceuticals and product technologies, which prolong patient life; and improving standards of living in developing countries, which make life-saving dialysis treatment available.
As a global company delivering health care services and products, we face the challenge of addressing the needs of a wide variety of stakeholders, such as patients, customers, payors, regulators and legislators in many different economic environments and health care systems. In general, government-funded
programs (in some countries in coordination with private insurers) pay for certain health care items and services provided to their citizens. Not all health care systems provide for dialysis treatment. Therefore, the reimbursement systems and ancillary services utilization environment in various countries significantly influence our business.
The majority of health care services we provide are paid for by governmental institutions. For the first three months ended March 31, 2017, approximately 35% of our consolidated revenue is attributable to U.S. federally-funded health care benefit programs, such as Medicare and Medicaid reimbursement, under which reimbursement rates are set by the Centers for Medicare & Medicaid Services ("CMS"). Legislative changes could affect Medicare reimbursement rates for a significant portion of the services we provide. To date, while we have generally experienced stable reimbursement globally, the stability of reimbursement in the U.S. has been affected by (i) the implementation of the ESRD prospective payment system ("ESRD PPS") in the U.S. in January 2011, (ii) the U.S. federal government across the board spending cuts in payments to Medicare providers commonly referred to as "U.S. Sequestration", (iii) the reduction to the ESRD PPS rate to account for the decline in utilization of certain drugs and biologicals associated with dialysis pursuant to the American Taxpayer Relief Act of 2012 ("ATRA") as subsequently modified under the Protecting Access to Medicare Act of 2014 ("PAMA") and (iv) CMS's 2016 final rule on the Physician Fee Schedule with material decreases in reimbursement for certain procedures. Please see the broader discussion of these legislative developments below:
There is presently considerable uncertainty regarding possible future changes in health care regulation, including the regulation of reimbursement for dialysis services.
On November 6, 2015, CMS published a final rule to update payment policies and rates under the ESRD PPS for renal dialysis services furnished on or after January 1, 2016. In this final rule, CMS clarified that once any non-oral drug in a category previously considered "oral only" is approved by the FDA, such category of drugs will cease to be considered oral only. At such time, CMS will issue a change notice and a health care common procedure coding system code for the new injectable or intravenous drug and will include both the oral and any non-oral version of the drug in the ESRD PPS. However, for at least two years after the issuance of the change notice, CMS will pay for both oral and non-oral versions of the drug using a transition drug add-on payment adjustment, such as average sales price plus 6%, or some other mechanism set in accordance with Section 1847A of the Social Security Act. During this transition period, CMS will not pay outlier payments for these drugs, but will collect data reflecting utilization of both the oral and injectable or intravenous forms of the drugs, as well as payment patterns, in order to more accurately determine the appropriate payment rate to be included in the ESRD PPS for these drugs. At the end of this transition period, CMS will add payment for the oral and non-oral versions of the drug into the ESRD PPS through public rulemaking process similar to that used to set annual ESRD PPS rates.
On February 7, 2017, Amgen Inc. announced that the U.S. Food and Drug Administration had approved Parsabiv™, an intravenous calcimimetic for the treatment of secondary hyperparathyroidism in adult patients with chronic kidney disease on dialysis. As such, CMS is expected to follow its regulatory process described above. If CMS fails to make appropriate adjustments to the reimbursement rate for Parsabiv™ and other calcimimetics as outlined in the November 6, 2016 final rule, this development could have a material adverse effect on our business, results of operations and financial condition.
On August 18, 2016, CMS issued a request for information ("RFI") seeking public comment on concerns about providers' steering patients inappropriately to individual plans offered on the Patient Protection and Affordable Care Act individual health insurance market. We and other dialysis providers, commercial insurers and other industry participants responded to the RFI, and in that response, we reported that we do not engage in such steering. On January 3, 2017, we received a subpoena from the United States Attorney for the District of Massachusetts inquiring into our interactions and relationships with the American Kidney Fund ("AKF" or "the Fund"), including our charitable contributions to the Fund and the Fund's financial assistance to patients for insurance premiums. On December 14, 2016, CMS published an Interim Final Rule ("IFR") titled "Medicare Program; Conditions for Coverage for End-Stage Renal Disease Facilities-Third Party Payment" that would amend the Conditions for Coverage for dialysis providers, like Fresenius Medical Care North America ("FMCNA"). The IFR would have effectively enabled insurers to reject premium payments made by patients who received grants for individual market coverage from the AKF and therefore, could have resulted in those patients losing their individual market health insurance coverage. The loss of individual market coverage for these patients would have a material and adverse impact on our operating results. On January 25, 2017, a federal district court in Texas, responding to litigation initiated by a patient advocacy group and dialysis providers including FMCNA, preliminarily enjoined CMS from implementing the IFR. Dialysis Patient Citizens v. Burwell (E.D. Texas, Sherman Div.). The preliminary injunction is based on CMS' failure to follow appropriate notice-and-comment procedures in adopting the IFR. The preliminary injunction will remain in place in the absence of a contrary ruling by the district or appellate courts. CMS has requested, and been granted by the court, until June 23, 2017 to determine its position with respect to the subject matter of the litigation. The operation of charitable assistance programs is also receiving increased attention by state regulators, including State Departments of Insurance. The result may be a regulatory framework that differs from state to state. Even in the absence of the IFR or similar administrative actions, insurers are expected to continue to take steps to thwart the premium assistance provided to our patients for individual market plans as well as other insurance coverages. This would also have a material adverse impact on our operating results.
On November 4, 2016, CMS issued the final rule updating the ESRD PPS rate for 2017. We and other large dialysis organizations will experience a 0.7% increase in payments. The base rate per treatment is \$231.55, 0.5% above the 2016 base rate of \$230.39. The 2017 final rule reflects a net payment rate update of 0.55% (2.1% less a 1.25% PAMA reduction and 0.3% productivity adjustment), application of a wage index budget-neutrality adjustment factor of 0.999781 and application of a training budget-neutrality adjustment factor of 0.999737.
As a consequence of the pressure to decrease health care costs, government reimbursement rate increases in the U.S. have historically been limited and are expected to continue in this fashion. We have generally experienced stable reimbursement globally, including the balancing of unfavorable reimbursement changes in certain countries with favorable changes in other countries. However, any significant decreases in Medicare or commercial reimbursement rates or patient access to commercial insurance plans could have material adverse effects on our health care services business and, because the demand for dialysis products is affected by Medicare reimbursement, on our products business. To the extent that increases in operating costs that are affected by inflation, such as labor and supply costs, are not fully reflected in a compensating increase in reimbursement rates, our business and results of operations may be adversely affected.
Twenty-four of our dialysis organizations participate in CMS's Comprehensive ESRD Care Model (the "Model"), which involves ESRD Seamless Care Organizations, or "ESCOs." This Model seeks to deliver better health outcomes for ESRD patients while lowering Medicare's costs. ESCOs that achieve the program's minimum quality thresholds and generate reductions in CMS's cost of care above certain thresholds for the ESRD patients covered by the ESCO will receive a share of the cost savings. Our ESCOs also share in the risk of cost increases and are obligated to reimburse CMS for a share of any such increases if actual costs rise above set thresholds. For six of our ESCOs, the Model commenced on October 1, 2015, and for the other eighteen ESCOs, the Model commenced on January 1, 2017. The initial agreement period for all ESCOs participating in the Model lasts through 2018. As originally specified, CMS and an ESCO would then have the option of extending the ESCO's agreement for an additional two years based on the ESCO's performance. CMS relied on authority granted by ACA to implement this project. Congress is expected to continue to pursue efforts to repeal or revise the ACA, and the posture of CMS in the Trump administration toward projects of this sort may differ from that of the Obama administration. Such changes may affect the project's future prospects in ways which we cannot predict.
The Bundled Payments for Care Improvement ("BPCI") initiative is a CMS three-year pilot initiative involving bundled payments for the individual services, including acute inpatient hospital services, physician services, and post-acute services, furnished to Medicare beneficiaries during a single episode of illness or course of treatment. Our majority-owned subsidiary, Sound Inpatient Physicians, Inc. ("Sound"), commenced participation under BPCI in April 2015 in several markets. Under the BPCI, Sound has the ability to receive additional payments from CMS if its physicians are able to deliver quality care at a cost that is lower than certain established benchmarks, but it also has the risk of incurring financial penalties if it is unsuccessful. Should Sound fail to perform as required under its BCPI agreement, CMS may terminate Sound's participation in the BPCI program, in whole or in part. This project was also implemented under ACA authority and is subject to the same caveats and uncertainties noted above.
We have entered into various arrangements which involve taking risk for the complete care of certain ESRD patients in exchange for set payments. CMS approved our application to offer Medicare Advantage ESRD Chronic Special Needs Plans ("MA-CSNPs") in five states as of January 1, 2017. MA-CSNPs
are Medicare Advantage health plans offered by private companies that contract with Medicare to provide patients with Medicare benefits. Enrollment in these plans is limited to special needs individuals with specific severe or disabling chronic conditions, such as ESRD. Our MA-CSNPs will provide services, including Care Coordination services, and receive capitated payments from Medicare for the complete care of enrolled ESRD patients.
We have also entered into sub-capitation and other shared savings arrangements with certain Medicare Advantage plans under which we assume risk in providing care to the plans' ESRD patients (those patients that develop ESRD while they are plan members) while paid on a per patient per month basis. The 21st Century Cures Act, enacted December 13, 2016, removes the prohibition that previously barred individuals who already have ESRD from enrolling in a Medicare Advantage plan beginning 2021. We anticipate that this provision may present us with expanded business opportunities, but we cannot quantify its impact on our business at this time.
Our operating segments are the North America Segment, the EMEA Segment, the Asia-Pacific Segment and the Latin America Segment. The operating segments are determined based upon how we manage our businesses with geographical responsibilities. All segments are primarily engaged in providing health care services and the distribution of products and equipment for the treatment of ESRD and other extracorporeal therapies. Our management evaluates each segment using measures that reflect all of the segment's controllable revenues and expenses. With respect to the performance of business operations, our management believes that the most appropriate IFRS measures are revenue, operating income and operating income margin. We do not include income taxes as we believe this is outside the segments' control. Financing is a corporate function which our segments do not control. Therefore, we do not include interest expense relating to financing as a segment measurement. Similarly, we do not allocate certain costs which relate primarily to certain headquarters' overhead charges, including accounting and finance, because we believe that these costs are also not within the control of the individual segments. Production of products, production asset management, quality management and procurement related to production are centrally managed at Corporate. Our global research and development is also centrally managed at Corporate. These Corporate activities do not fulfill the definition of a segment according to IFRS 8. Products are transferred to the segments at cost; therefore no internal profit is generated. The associated internal revenue for the product transfers and their elimination are recorded as Corporate activities (See Note 13 of this report). Capital expenditures for production are based on the expected demand of the segments and consolidated profitability considerations. In addition, certain revenues, investments and intangible assets, as well as any related expenses, are not allocated to a segment but accounted for as Corporate. Accordingly, all of these items are excluded from our analysis of segment results and are discussed below in the discussion of our consolidated results of operations.
Certain discussions and analyses set out in this report include measures which are not defined by IFRS. We believe this information, along with comparable IFRS measurements, is useful to our investors as it provides a basis for measuring our performance. Non-IFRS financial measures should not be viewed or interpreted as a substitute for financial information presented in compliance with IFRS. Wherever appropriate and practical, we provide reconciliations to relevant IFRS measures.
Changes in revenue, operating income, net income attributable to shareholders of FMC AG & CO. KGAA and other items include the impact of changes in foreign currency exchange rates. We use the non-IFRS financial measure at Constant Exchange Rates or Constant Currency in our filings to show changes in our revenue, operating income, net income attributable to shareholders of FMC AG & CO. KGAA and other items without giving effect to period-to-period currency fluctuations. Under IFRS, amounts received in local (non-euro) currency are translated into euro at the average exchange rate for the period presented. Once we translate the local currency for the Constant Currency, we then calculate the change, as a percentage, of the current period using the prior period exchange rates versus the prior period. This resulting percentage is a non-IFRS measure referring to a change as a percentage at Constant Currency.
We believe that the non-IFRS financial measure Constant Currency is useful to investors, lenders, and other creditors because such information enables them to gauge the impact of currency fluctuations on a company's revenue, operating income, net income attributable to shareholders of FMC AG & CO. KGAA and other items from period to period. However, we also believe that the usefulness of data on Constant Currency period-over-period changes is subject to limitations, particularly if the currency effects that are eliminated constitute a significant element of our revenue, operating income, net income attributable to shareholders of FMC AG & CO. KGAA or other items and significantly impact our performance. We therefore limit our use of Constant Currency period-over-period changes to a measure for the impact of currency fluctuations on the translation of local currency into euro. We do not evaluate our results and performance without considering both Constant Currency period-over-period changes in non-IFRS
10
revenue, operating income, net income attributable to shareholders of FMC AG & CO. KGAA and other items and changes in revenue, operating income, net income attributable to shareholders of FMC AG & CO. KGAA and other items prepared in accordance with IFRS. We caution the readers of this report to follow a similar approach by considering data on Constant Currency period-over-period changes only in addition to, and not as a substitute for or superior to, changes in revenue, operating income, net income attributable to shareholders of FMC AG & CO. KGAA and other items prepared in accordance with IFRS. We present the growth rate derived from IFRS measures next to the growth rate derived from non-IFRS measures such as revenue, operating income, net income attributable to shareholders of FMC AG & CO. KGAA and other items. As the reconciliation is inherent in the
disclosure, we believe that a separate reconciliation would not provide any additional benefit.
As a result of the significance of noncontrolling interest holders in our operations, we believe a measure that is meaningful to investors is operating income less noncontrolling interests ("Delivered EBIT"). Delivered EBIT approximates the operating income attributable to the shareholders of FMC AG & CO. KGAA. As such, we believe that operating income, or EBIT, is the closest comparable IFRS measure.
Below is a table showing the reconciliation of Operating Income to Delivered EBIT for each of our reporting segments:
| Three months ended March 31, | ||
|---|---|---|
| 2017 | 2016 | |
| Total | ||
| Operating income (EBIT) | 651 | 497 |
| less noncontrolling interests | (69) | (62) |
| Delivered EBIT | 582 | 435 |
| North America Segment | ||
| Operating income (EBIT) | 526 | 402 |
| less noncontrolling interests | (67) | (60) |
| Delivered EBIT | 459 | 342 |
| Dialysis | ||
| Operating income (EBIT) | 527 | 391 |
| less noncontrolling interests | (60) | (52) |
| Delivered EBIT | 467 | 339 |
| Care Coordination | ||
| Operating income (EBIT) | (1) | 11 |
| less noncontrolling interests | (7) | (8) |
| Delivered EBIT | (8) | 3 |
| EMEA Segment | ||
| Operating income (EBIT) | 114 | 118 |
| less noncontrolling interests | 0 | (1) |
| Delivered EBIT | 114 | 117 |
| Asia-Pacific Segment | ||
| Operating income (EBIT) | 82 | 59 |
| less noncontrolling interests | (2) | (1) |
| Delivered EBIT | 80 | 58 |
| Latin America Segment | ||
| Operating income (EBIT) | 14 | 10 |
| less noncontrolling interests | 0 | 0 |
| Delivered EBIT | 14 | 10 |
DELIVERED EBIT RECONCILIATION
11
The ratio of debt to EBITDA is a key financial performance indicator used for overseeing the Company. To determine the total debt to EBITDA ratio, financial debt is compared to EBITDA for the last twelve months (adjusted for acquisitions with a purchase price above a \$50 million threshold as defined in the
Amended 2012 Credit Agreement and non-cash charges). We believe this ratio provides more reliable information regarding the extent to which we are able to meet our payment obligations than considering only the total amount of financial debt. The following table shows the reconciliation of debt to EBITDA ratio as of March 31, 2017 and December 31, 2016.
| RECONCILIATION OF DEBT TO EBITDA in € millions, except where otherwise specified |
||
|---|---|---|
| March 31, 2017 | December 31,2016 | |
| Debt | 8,270 | 8,132 |
| Cash | 671 | 709 |
| Net Debt | 7,599 | 7,423 |
| Operating Income1, 2 |
2,558 | 2,398 |
| Depreciation and amortization1, 2 |
733 | 710 |
| Non-cash charges2 | 74 | 65 |
| EBITDA1, 2 |
3,365 | 3,173 |
| DEBT/EBITDA RATIO | 2.5 | 2.6 |
| NET DEBT/EBITDA RATIO | 2.3 | 2.3 |
1 Including adjustments for acquisitions made within the reporting period with a purchase price above a \$50 M threshold as defined in the
Amended 2012 Credit Agreement. 2 Last 12 months.
ROIC is the ratio of operating income, for the last twelve months, after tax ("Net Operating Profit After Tax" or "NOPAT") to average invested capital of the last five balance sheet dates and expresses how efficiently we allocate the capital under our control or how well we employ our capital with regard to a specific investment project which is presented in the table below. Additionally, the table below presents a reconciliation of invested capital to the IFRS measure total assets, which we believe to be the most directly comparable IFRS financial measure (see page 12).
Our consolidated statement of cash flows indicates how we generated and used cash and cash equivalents. When used in conjunction with the other primary financial statements, it provides information that helps us evaluate the changes in our net assets and our financial structure (including our liquidity and solvency). The net cash provided by (used in) operating activities is used to assess whether our business can generate the cash required to make replacement and expansion investments. Net cash provided by (used in) operating activities is impacted by the profitability of our business and development of working capital, principally receivables. The financial key performance indicator of net cash provided by (used in) operating activities in percentage of revenue shows the percentage of our revenue that is available in terms of financial resources.
in € millions, except where otherwise specified
| March 31, 2017 |
December 31, 20162 |
September 30, 20162 |
June 30, 20162 |
March 31, 20162 |
|
|---|---|---|---|---|---|
| 2017 | |||||
| Total assets | 25,780 | 25,604 | 24,165 | 24,198 | 23,357 |
| Plus: Cumulative goodwill amortization | 438 | 444 | 422 | 424 | 413 |
| Minus: Cash and cash equivalents | (671) | (709) | (566) | (653) | (466) |
| Minus: Loans to related parties | (199) | (199) | (150) | (158) | (203) |
| Minus: Deferred tax assets | (310) | (291) | (263) | (249) | (246) |
| Minus: Accounts payable | (496) | (575) | (473) | (518) | (496) |
| Minus: Accounts payable to related parties | (271) | (264) | (233) | (198) | (209) |
| Minus: Provisions and other current liabilities1 | (2,782) | (2,858) | (2,571) | (2,581) | (2,340) |
| Minus: Income tax payable | (276) | (242) | (228) | (228) | (245) |
| INVESTED CAPITAL | 21,213 | 20,910 | 20,103 | 20,037 | 19,565 |
| Average invested capital as of March 31, 2017 | 20,366 | ||||
| Operating income2, 3 |
2,558 | ||||
| Income tax expense3, 4 |
(944) | ||||
| NOPAT 3 | 1,614 | ||||
| ROIC in % | 7.9 | ||||
| 2016 | December 31, 2016 |
September 30, 20162 |
June 30, 20162 |
March 31, 20162 |
December 31, 20152 |
| Total assets | 25,504 | 24,074 | 24,108 | 23,262 | 23,680 |
| Plus: Cumulative goodwill amortization | 444 | 422 | 424 | 413 | 431 |
| Minus: Cash and cash equivalents | (709) | (566) | (653) | (466) | (516) |
| Minus: Loans to related parties | (199) | (144) | (152) | (197) | (182) |
| Minus: Deferred tax assets | (291) | (262) | (248) | (245) | (261) |
| Minus: Accounts payable | (576) | (473) | (518) | (495) | (585) |
| Minus: Accounts payable to related parties | (264) | (231) | (196) | (208) | (141) |
| Minus: Provisions and other current liabilities 1 | (2,857) | (2,573) | (2,583) | (2,341) | (2,470) |
| Minus: Income tax payable | (242) | (228) | (228) | (245) | (216) |
| INVESTED CAPITAL | 20,810 | 20,019 | 19,954 | 19,478 | 19,740 |
| Average invested capital as of December 31, 2016 |
20,000 | ||||
| Operating income 2, 3 |
2,398 | ||||
| Income tax expense 3, 4 |
(840) | ||||
| NOPAT 3 | 1,558 | ||||
| ROIC in % | 7.8 | ||||
1 Including non-current provisions and variable payments outstanding for acquisitions and excluding pension liabilities and noncontrolling
interests subject to put provisions.
2 Including adjustments for acquisitions made within the reporting period with a purchase price above a \$50 M threshold as defined in the Amended 2012 Credit Agreement.
3 Last 12 months.
4 Adjusted for noncontrolling partnership interests.
Free cash flow is the cash flow provided by (used in) operating activities after capital expenditures for property, plant and equipment but before acquisitions and investments. The key performance indicator used by management is free cash flow in percentage of revenue. This represents the percentage of revenue that is available for acquisitions, dividends to shareholders, or the reduction of debt financing.
The following table shows the significant cash flow key performance indicators for the three months ended March 31, 2017 and 2016 and reconciles free cash flow and free cash flow as a % of revenue to Net cash provided by (used in) operating activities and Net cash provided by (used in) operating activities as a % of revenue, respectively:
| CASH FLOW MEASURES in € millions, except where otherwise specified |
||
|---|---|---|
| For the three months ended March 31, | ||
| 2017 | 2016 | |
| Revenue | 4,548 | 3,916 |
| Net cash provided by (used in) operating activities | 170 | 163 |
| Capital expenditures | (197) | (227) |
| Proceeds from sale of property, plant and equipment | 2 | 4 |
| Capital expenditures, net | (195) | (223) |
| Free Cash Flow | (25) | (60) |
| Net cash provided by (used in) operating activities as | ||
| a % of revenue | 4 % | 4 % |
| Free cash flow as a % of revenue | (1 %) | (2 %) |
The measures for our North America Segment discussed below include current and future programs that we will be participating in and will be reflected in the discussion of our business within the North America Segment. Currently, sub-capitation, BPCI, ESCO programs, MA-CSNP's and other shared savings programs are included within the Member Months and Medical Cost Under Management calculations below. In the future, there may be other programs that could be included in the following metrics. These metrics may be developed further in future periods. Note that due to the timing required by CMS to review the BPCI and ESCO program data that we provide, estimates have been used in order to report these metrics in a timely manner.
Member months under medical cost management is calculated by multiplying the number of members who are included in value-based reimbursement programs, such as Medicare Advantage plans or other value-based programs in the U.S., by the corresponding number of months these members participate in those programs ("Member Months"). In the aforementioned programs, we are assuming the risk of generating savings. The financial results will be recorded in earnings as our performance is determined. The membership offerings within Care Coordination are sub-capitation arrangements, MA-CSNP's, ESCO and BPCI programs as well as other shared savings programs. An increase in patient membership may indicate future earnings or losses as our performance is determined through these managed care programs.
Medical cost under management represent the management of medical costs associated with our patient membership in value-based programs. For ESCO, BPCI and other shared savings programs, this is calculated by multiplying the Member Months in each program by the benchmark of expected medical cost per member per month. The sub-capitation and MA-CSNPs calculation multiplies the premium per member of the program per month by the number of Member Months associated with the plan, as noted above.
Care Coordination patient encounters represents the total patient encounters and procedures conducted by certain of our Care Coordination activities and, we believe, is an indicator of the revenue generated. Specifically, Care Coordination patient encounters is the sum of all encounters and procedures completed during the period by Sound, MedSpring Urgent Care, Fresenius Vascular Care, and National Cardiovascular Partners as well as patients in our Fresenius Medical Care Rx Bone Mineral Metabolism ("Rx BMM") program.
The following sections summarize our results of operations, financial position and net assets as well as key performance indicators by reporting segment and Corporate for the periods indicated. We prepared the information using a management approach, consistent with the basis and manner in which our management internally disaggregates financial information to assist in making internal operating decisions and evaluating management performance.
| SEGMENT DATA (INCLUDING CORPORATE) in € millions |
||
|---|---|---|
| For the three months ended March 31, | ||
| 2017 | 2016 | |
| Total revenue | ||
| North America | 3,375 | 2,862 |
| EMEA | 614 | 572 |
| Asia-Pacific | 378 | 340 |
| Latin America | 177 | 139 |
| Corporate | 4 | 3 |
| TOTAL | 4,548 | 3,916 |
| Operating income | ||
| North America | 526 | 402 |
| EMEA | 114 | 118 |
| Asia-Pacific | 82 | 59 |
| Latin America | 14 | 10 |
| Corporate | (85) | (92) |
| TOTAL | 651 | 497 |
| Interest income | 29 | 10 |
| Interest expense | (121) | (106) |
| Income tax expense | (182) | (126) |
| NET INCOME | 377 | 275 |
| Less: Net Income attributable to noncontrolling interests | (69) | (62) |
| NET INCOME ATTRIBUTABLE TO SHARE HOLDERS OF FMC AG & CO. KGAA |
308 | 213 |
The first quarter of 2017 as compared to 2016 was impacted by the development of the euro against the U.S. dollar as approximately 74% of revenue and 81% of operating income were generated in U.S. dollars. In addition, revenue and operating income generated in countries outside the eurozone are subject to currency fluctuations.
in € millions, except where otherwise specified
| For the three months ended March 31, | Change in % | |||
|---|---|---|---|---|
| 2017 | 2016 | As reported |
Constant Currency1 |
|
| Revenue in € million | 4,548 | 3,916 | 16 % | 12 % |
| Health Care Services | 3,769 | 3,199 | 18 % | 14 % |
| Health Care Products | 779 | 717 | 8 % | 6 % |
| Number of dialysis treatments | 11,744,442 | 11,273,342 | 4 % | |
| Same market treatment growth in % | 3.0 % | 4.0 % | ||
| Gross profit as a % of revenue | 35.0 % | 33.1 % | ||
| Selling, general and administrative costs as a % of revenue | 20.3 % | 19.9 % | ||
| Operating income in € million | 651 | 497 | 31 % | 28 % |
| Operating income margin in % | 14.3 % | 12.7 % | ||
| Delivered EBIT2 in € million | 582 | 435 | 34 % | 31 % |
| Net income attributable to shareholders of FMC AG&CO.KGaA | 308 | 213 | 45 % | 41 % |
| Basic earnings per share in € million | 1.01 | 0.70 | 44 % | 41 % |
1 For further information on Constant Exchange Rates, see "II. Discussion of Measures – Non – IFRS Measures – Constant Currency" above. 2 For further information on Delivered EBIT, including a reconciliation of Delivered EBIT to Operating Income on a consolidated basis and for
each of our operating segments, see "II. Discussion of Measures – Non – IFRS Measures – Delivered EBIT" above.
Health care services revenue increased by 18%. Foreign currency translation effects represented 4% of the increase. At Constant Exchange Rates, health care services revenue increased by 14% driven by increases in organic revenue per treatment (6%), growth in same market treatments (3%), an increase due to the revenue recognized from the agreement with the United States Departments of Veterans Affairs and Justice for reimbursement of services performed during the period of January 2009 through February 15, 2011 ("VA Agreement") of approximately €100 million (3%) and contributions from acquisitions (3%), partially offset by a decrease in dialysis days (1%).
Dialysis treatments increased by 4% as a result of growth in same market treatments (3%) and contributions from acquisitions (3%), partially offset by a decrease in dialysis days (1%) and the effect of closed or sold clinics (1%).
At March 31, 2017, we owned, operated or managed (excluding those managed but not consolidated in the U.S.) 3,654 dialysis clinics compared to 3,432 dialysis clinics at March 31, 2016. During the three months ended March 31, 2017, we acquired 20 dialysis clinics, opened 19 dialysis clinics and combined or closed 9 clinics. The number of patients treated in dialysis clinics that we own, operate or manage (excluding patients of dialysis clinics managed but not
consolidated in the U.S.) increased by 6% to 310,473 at March 31, 2017 from 294,043 at March 31, 2016.
Health care product revenue increased by 8%. Foreign currency translation effects represented 2% of the increase. At Constant Exchange Rates, health care product revenue increased by 6%. Dialysis product revenue increased by 8%. Foreign currency translation effects represented 3% of the increase. At Constant Exchange Rates, dialysis product revenue increased by 5% due to by higher sales of dialyzers, machines, renal pharmaceuticals and products for acute care treatments. Non-dialysis product revenue increased by 63% with no foreign currency translation effects. The increase of 63% was due to by acquisition driven sales of acute cardiopulmonary products.
The increase period over period in the gross profit margin was 1.9 percentage points including a negative foreign currency translation effect of 0.1 percentage points in the current period. The increase primarily reflects an increase in the North America Segment. The gross profit margin increase in the North America Segment was mainly due to the VA Agreement, higher revenue from commercial payors, a favorable impact due to earnings recognized from the BPCI initiative related to hospitalist and intensivist services, and lower costs for health care supplies, partially offset by higher personnel expense, higher cost
16
in our pharmacy services business and the impact from lower revenue for vascular services.
The increase period over period in the selling, general and administrative ("SG & A") expenses as a percentage of revenue was 0.4 percentage points. There was no effect from foreign currency translation in the current period. The increase was primarily driven by an increase in the North America Segment, partially offset by smaller negative effects attributable to the Asia-Pacific Segment, varying margins across our four reporting segments as well as effects from Corporate. The increase in the North America Segment was mainly driven by higher bad debt expense and higher personnel expense, partially offset by the impact from higher revenue resulting from VA Agreement and reimbursement from commercial payors. The decrease in the Asia-Pacific Segment was largely driven by the prior year impact from costs associated with changes in the Management Board and favorable foreign currency transaction effects. The decrease at Corporate was due to lower legal and consulting costs related to compliance investigations we are conducting (for further information, see Note 11 of this report).
Research and development expenses decreased by 7% to €32 million from €34 million. The decrease period over period as a percentage of revenue was 0.2 percentage points, largely driven by capitalized development costs.
Income from equity method investees decreased by 12% to €15 million from €17 million. The decrease is primarily driven by lower income from Vifor Fresenius Medical Care Renal Pharma Ltd., an entity in which we have ownership of 45%, due to increased product development and launch preparation costs.
The increase period over period in the operating income margin was 1.6 percentage points including a negative foreign currency translation effect of 0.1 percentage points in the current period. The increase was largely driven by increased gross profit margin and decreased research and development expenses, as a percentage of revenue, partially offset by an increase in SG & A, as a percentage of revenue, and a decrease in income from equity method investees, as discussed above. Excluding the VA Agreement impact of approximately €99 million, the operating income margin decreased 0.3 percentage points to 12.4% from 12.7%, including a negative foreign currency translation effect of 0.1 percentage points.
Delivered EBIT increased by 34%. Foreign currency translation effects represented 3% of the increase. At Constant Exchange Rates, delivered EBIT increased by 31% largely as a result of increased operating income.
Interest expense increased by 15% to €121 million from €106 million. Foreign currency translation effects represented 2% of the increase. At Constant Exchange Rates, the increase of 13% was due to the valuation of the embedded derivative related to the equity- neutral convertible bonds ("Convertible Bonds") issued in September 2014 and the related call option on our shares as well as higher average debt levels, partially offset by the replacement of interest bearing Euro-denominated Senior Notes repaid in 2016 by debt instruments at lower interest rates.
Interest income increased by 185% to €29 million from €10 million. Foreign currency translation effects represented a 2% reduction of the increase. At Constant Exchange Rates, the increase of 187% was mainly due to the valuation of the derivative embedded in the Convertible Bonds and the related call option on our shares.
Income tax expense increased by 44% to €182 million from €126 million. The effective tax rate increased to 32.5% from 31.4% for the same period of 2016 mainly driven by a lower portion of tax-free income attributable to noncontrolling interests compared to income before taxes as well as higher tax expense related to the VA Agreement, approximately €38 million, as the tax rate in the U.S. is higher than the average tax rate outside of the U.S., partially offset by lower taxes for prior years. Excluding the impact from the VA Agreement, the effective tax rate decreased slightly to 31.3% from 31.4% largely driven by lower taxes for prior years, partially offset by a lower portion of tax-free income attributable to noncontrolling interests compared to income before taxes.
Net income attributable to noncontrolling interests increased by 10% to €69 million from €62 million. Foreign currency translation effects represented 3% of the increase. At Constant Exchange Rates, the increase of 7% was primarily driven by the portion of the VA Agreement reimbursement attributable to clinics in which we have ownership of less than 100%, approximately €2 million, as well as the creation of new clinics in the North America Segment in which we have ownership of less than 100%, partially offset by decreased noncontrolling interest expense related to Care Coordination.
Net income attributable to shareholders of FMC AG & CO. KGAA increased by 45% to €308 million from €213 million. Foreign currency translation effects represented 4% of the increase. At Constant Exchange Rates, the increase of 41% was driven by the combined effects of the items discussed above. Excluding the impact of the VA Agreement of approximately €59 million, after tax, the net income attributable to shareholders of FMC AG & CO. KGAA increased by 17%. Foreign currency translation effects represented 3% of the increase. At Constant Exchange Rates, the increase in net income attributable to shareholders of FMC AG & CO. KGAA, excluding the VA Agreement, was 14%.
Basic earnings per share increased by 44%. For eign currency translation effects represented 3% of the increase. At Constant Exchange Rates, the increase of 41% was primarily due to the increase in net income attributable to shareholders of FMC AG & CO. KGAA described above. The average weighted number of shares outstanding for the peri od was approximately 306.2 million in 2017 (305.3 mil lion in 2016).
We employed 110,530 people (full-time equiva lents) as of March 31, 2017 compared to 104,687 as of March 31, 2016, an increase of 6%, primarily due to organic growth in our business and acquisitions.
The following discussions pertain to the North America Segment, the EMEA Segment, the Asia-Pacific Segment and the Latin America Segment and the measures we use to manage these segments. Since the fiscal year 2017 these measures are based on IFRS. In previous years US -GAAP based figures were used to control the segments. Thus, the segment information was given in accordance with US -GAAP .
| For the three months ended March 31, | Change in % | |||
|---|---|---|---|---|
| 2017 | 2016 | As reported |
Constant Currency1 |
|
| Total North America Segment | ||||
| Revenue in € million | 3,375 | 2,862 | 18 % | 14 % |
| Health Care Services | 3,165 | 2,671 | 19 % | 15 % |
| Health Care Products | 210 | 191 | 9 % | 6 % |
| Operating income in € million | 526 | 402 | 31 % | 27 % |
| Operating income margin in % | 15.6 % | 14.0 % | ||
| Delivered EBIT in € million2 | 459 | 342 | 35 % | 30 % |
| Dialysis | ||||
| Revenue in € million | 2,684 | 2,363 | 14 % | 10 % |
| Number of Dialysis treatments | 7,246,232 | 7,053,114 | 3 % | |
| Same market treatment growth in % | 2.6 % | 4.0 % | ||
| Operating income in € million | 527 | 391 | 35 % | 30 % |
| Operating income margin in % | 19.6 % | 16.5 % | ||
| Delivered EBITin € million2 | 467 | 339 | 38 % | 34 % |
| Care Coordination | ||||
| Revenue in € million | 691 | 499 | 39 % | 34 % |
| Operating income in € million | (1) | 11 | (108 %) | (107 %) |
| Operating income margin in % | (0.1 %) | 2.2 % | ||
| Delivered EBIT2 | (8) | 3 | (343 %) | (335 %) |
| Member Months Under Medical Cost Management3, 4 |
155,622 | 93,375 | 67 % | |
| Medical Cost Under Managementin € million 3, 4 |
1,064 | 599 | 78 % | 72 % |
| Care Coordination Patient Encounters3, 4 |
1,608,179 | 1,307,076 | 23 % | |
1 For further information on Constant Exchange Rates, see "II. Discussion of Measures – Non – IFRS Measures – Constant Currency" above.
2 For further information on Delivered EBIT, including a reconciliation of Delivered EBIT to Operating Income on a consolidated basis and for each
of our operating segments, see "II. Discussion of Measures – Non – IFRS Measures – Delivered EBIT" above.
3 For further information on these metrics, please refer to the discussion above of our Care Coordination measures under "Business Metrics for Care Coordination."
4 The metrics may be understated due to a physician mapping issue related to the BPCI program within a CMS system which has not yet been resolved. Additionally, data presented for the BPCI and ESCO metrics are subject to finalization by CMS, which may result in changes from previously reported metrics.
Dialysis care revenue increased by 14% to €2,474 million from €2,172 million. Foreign currency translation effects represented 4% of the increase. At Constant Exchange Rates, dialysis care revenue increased by 10% mainly due to an increase related to the VA Agreement, approximately €100 million, (4%), same market treatment growth (3%), increases in organic revenue per treatment (3%) and contributions from acquisitions (1%), partially offset by a decrease in dialysis days (1%).
Dialysis treatments increased by 3% primarily due to same market treatment growth (3%) and contributions from acquisitions (1%), partially offset by a decrease in dialysis days (1%). At March 31, 2017, 190,480 patients (4% increase from March 31, 2016) were being treated in the 2,323 dialysis clinics that we own or operate in the North America Segment, compared to 182,808 patients treated in 2,224 dialysis clinics at March 31, 2016.
In the U.S., the average revenue per treatment, excluding the VA Agreement of approximately \$15 per treatment, increased to \$356 (€323 at Constant Exchange Rates) from \$348 (€315). The increase was mainly attributable to a favorable impact from commercial payors.
Cost per treatment in the U.S. increased to \$290 (€263 at Constant Exchange Rates) from \$281 (€255). This increase was largely driven by higher personnel expense, increased bad debt expense and an increase in depreciation expense due to facility improvements as well as various other costs such as housekeeping, legal and property, partially offset lower cost for health care supplies.
Dialysis product revenue increased by 9%. Foreign currency translation effects represented 3% of the increase. At Constant Exchange Rates, dialysis product revenue increased by 6% driven by higher sales of machines, peritoneal dialysis products, hemodialysis solutions and concentrates, renal pharmaceuticals and dialyzers.
The increase period over period in the dialysis operating income margin was 3.1 percentage points including a negative foreign currency translation effect of 0.1 percentage points in the current period. The increase was largely driven by the VA Agreement, approximately €99 million, higher revenue from commercial payors and lower costs for health care supplies, partially offset by higher personnel expense. Excluding the VA Agreement, the dialysis operating income margin remained stable at 16.5% as compared to the prior period.
Dialysis delivered EBIT increased by 38%. Foreign currency translation effects represented 4% of the increase. At Constant Exchange Rates, dialysis delivered EBIT increased by 34% mainly as the result of increased operating income, partially offset by increased noncontrolling interests driven by the portion of the VA Agreement reimbursement attributable to clinics in which we have ownership of less than 100%, approximately €2 million, as well as the creation of new clinics in in the North America Segment which we have ownership of less than 100%.
Care Coordination revenue increased by 39%. Foreign currency translation effects represented 5% of the increase. At Constant Exchange Rates, Care Coordination revenue increased by 34% driven by increases in organic revenue growth (27%) and contributions from acquisitions (7%).
The decrease period over period in the Care Coordination operating income margin was 2.3 percentage points. There was virtually no effect from foreign currency translation in the current period. The decrease was mainly driven by higher bad debt expense, the impact from lower revenue for vascular services, and increased costs for pharmacy services, partially offset by earnings recognized from the BPCI initiative related to hospitalist and intensivist services.
Care Coordination delivered EBIT decreased by 343%. Foreign currency translation effects represented 8% of the decrease. At Constant Exchange Rates, Care Coordination delivered EBIT decreased by 335% mainly as the result of decreased operating income partially offset by decreased noncontrolling interest effects.
The increase in member months under medical cost management was primarily attributable to an increase in our participation in ESCO programs from 6 to 24 dialysis organizations in 2017 as well as the contribution from shared savings programs due to two new program partnerships. See note 4 to the table "Key Indicators and Business Metrics for North America Segment", above.
Care Coordination's medical cost under management increased by 78%. Foreign currency translation effects represented 6% of the increase. At Constant Exchange Rates, Care Coordination's medical cost under management increased by 72% primarily attributable to an increase in our participation in ESCO programs from 6 to 24 dialysis organizations in 2017 as well as the contribution from shared savings programs due to two new program partnerships. See note 4 to the table "Key Indicators and Business Metrics for North America Segment", above.
The increase in patient encounters was primarily driven by increased encounters for hospitalist and intensivist services. See note 4 to the table "Key Indicators and Business Metrics for North America Segment", above.
| KEY INDICATORS FOR EMEA SEGMENT | ||||
|---|---|---|---|---|
| For the three months ended March 31, | Change in % | |||
| 2017 | 2016 | As reported |
Constant Currency1 |
|
| Revenue in € million | 614 | 572 | 7 % | 6 % |
| Health Care Services | 303 | 273 | 11 % | 9 % |
| Health Care Products | 311 | 299 | 4 % | 4 % |
| Number of dialysis treatments | 2,271,334 | 2,095,610 | 8 % | |
| Same market treatment growth in % | 3.9 % | 3.8 % | ||
| Operating income in € million | 114 | 118 | (3 %) | (2 %) |
| Operating income margin in % | 18.7 % | 20.6 % | ||
| Delivered EBIT in € million2 | 114 | 117 | (3 %) | (2 %) |
1 For further information on Constant Exchange Rates, see "II. Discussion of Measures – Non – IFRS Measures – Constant Currency" above.
2 For further information on Delivered EBIT, including a reconciliation of Delivered EBIT to Operating Income on a consolidated basis and for each
of our operating segments, see "II. Discussion of Measures – Non – IFRS Measures – Delivered EBIT" above.
Health care service revenue increased by 11%. Foreign currency translation effects represented 2% of the increase. At Constant Exchange Rates, health care service revenue increased by 9% as a result of contributions from acquisitions (8%) and same market treatment growth (4%), partially offset by a decrease in dialysis days (1%), the effect of closed or sold clinics (1%) and decreases in organic revenue growth per treatment (1%).
Dialysis treatments increased by 8% mainly due to contributions from acquisitions (6%) and same market treatment growth (4%), partially offset by the effect of closed or sold clinics (1%) and a decrease in dialysis days (1%). As of March 31, 2017, we had 60,168 patients (9% increase from March 31, 2016) being treated at the 722 dialysis clinics that we own, operate or manage in the EMEA Segment compared to 55,197 patients treated at 658 clinics at March 31, 2016.
Health care product revenue increased by 4%. Dialysis product revenue increased by 1%. There was no impact resulting from foreign exchange currency translation on either health care product revenue or dialysis product revenue. The increase in dialysis product revenue was due to higher sales of dialyzers, partially offset by lower sales of hemodialysis solutions and concentrates. Non-Dialysis product revenue increased by 62% with no effect from foreign currency translation effects. The increase was due to acquisition driven sales of acute cardiopulmonary products.
The decrease period over period in the operating income margin was 1.9 percentage points including a negative foreign currency translation effect of 0.3 percentage points in the current period. The decrease was mainly due to an unfavorable impact from acquisitions, higher overhead largely due to compliance expenses, the impact from one less dialysis day, lower income from equity method investees and higher IT project costs, partially offset by a favorable impact from manufacturing as well as favorable foreign currency transaction effects.
Delivered EBIT decreased by 3%. Foreign currency translation effects represented 1% of the decrease. At Constant Exchange Rates, delivered EBIT decreased by 2% due to decreased operating income.
eport on E conomic P osition
| KEY INDICATORS FOR ASIA-PACIFIC SEGMENT | ||||
|---|---|---|---|---|
| For the three months ended March 31, | Change in % | |||
| 2017 | 2016 | As reported |
Constant Currency1 |
|
| Revenue in € million | 378 | 340 | 11 % | 7 % |
| Health Care Services | 169 | 153 | 11 % | 5 % |
| Health Care Products | 209 | 187 | 11 % | 8 % |
| Number of dialysis treatments | 1,042,046 | 970,296 | 7 % | |
| Same market treatment growth in % | 3.8 % | 6.7 % | ||
| Operating income in € million | 82 | 59 | 38 % | 35 % |
| Operating income margin in % | 21.7 % | 17.5 % | ||
| Delivered EBIT in € million2 | 80 | 58 | 38 % | 35 % |
1 For further information on Constant Exchange Rates, see "II. Discussion of Measures – Non – IFRS Measures – Constant Currency" above. 2 For further information on Delivered EBIT, including a reconciliation of Delivered EBIT to Operating Income on a consolidated basis and for each
of our operating segments, see "II. Discussion of Measures – Non – IFRS Measures – Delivered EBIT" above.
Health care service revenue increased by 11%. Foreign currency translation effects represented 6% of the increase. At Constant Exchange Rates, health care service revenue increased by 5% as a result of same market treatment growth (4%) and contributions from acquisitions (1%).
Dialysis treatments increased by 7% mainly due to contributions from acquisitions (5%) and same market treatment growth (4%), partially offset by the effect of closed or sold clinics (2%). As of March 31, 2017, we had 29,639 patients (11% increase from March 31, 2016) being treated at the 377 dialysis clinics that we own, operate or manage in the Asia-Pacific Segment compared to 26,713 patients treated at 323 clinics at March 31, 2016.
Health care product revenue increased by 11%. Foreign currency translation effects represented 3% of the increase. At Constant Exchange Rates, health care product revenue increased by 8% as a result of increased sales of dialyzers, machines, and products for acute care treatments.
The increase period over period in the operating income margin was 4.2 percentage points including a negative foreign currency translation effect of 0.3 percentage points in the current period. The increase was largely due to a favorable impact from business growth mainly in China, the prior year impact from costs associated with changes in the Management Board and a positive impact from manufacturing.
Delivered EBIT increased by 38%. Foreign currency translation effects represented 3% of the increase. At Constant Exchange Rates, delivered EBIT increased by 35% due to increased operating income with virtually no change in noncontrolling interests.
| For the three months ended March 31, | Change in % | |||
|---|---|---|---|---|
| 2017 | 2016 | As reported |
Constant Currency1 |
|
| Revenue in € million | 177 | 139 | 28 % | 17 % |
| Health Care Services | 132 | 102 | 29 % | 22 % |
| Health Care Products | 45 | 37 | 23 % | 6 % |
| Number of dialysis treatments | 1,184,830 | 1,154,322 | 3 % | |
| Same market treatment growth in % | 2.5 % | 2.2 % | ||
| Operating income in € million | 14 | 10 | 47% | 43% |
| Operating income margin in % | 8.1 % | 7.0 % | ||
| Delivered EBIT in € million2 | 14 | 10 | 47% | 43% |
1 For further information on Constant Exchange Rates, see "II. Discussion of Measures – Non – IFRS Measures – Constant Currency" above.
2 For further information on Delivered EBIT, including a reconciliation of Delivered EBIT to Operating Income on a consolidated basis and for each of our operating segments, see "II. Discussion of Measures – Non – IFRS Measures – Delivered EBIT" above.
Health care service revenue increased by 29%. Foreign currency translation effects represented 7% of the increase. At Constant Exchange Rates, health care service revenue increased by 22% as a result of increases in organic revenue per treatment (18%), contributions from acquisitions (4%) and same market treatment growth (2%), partially offset by the effect of closed or sold clinics (1%) and a decrease in dialysis days (1%).
Dialysis treatments increased by 3% mainly due to contributions from acquisitions (4%) and same market treatment growth (2%), partially offset by the effect of closed or sold clinics (2%) and a decrease in dialysis days (1%). As of March 31, 2017, we had 30,186 patients (an 3% increase from March 31, 2016) being treated at the 232 dialysis clinics that we own, operate or manage in the Latin America Segment compared to 29,325 patients treated at 227 clinics at March 31, 2016.
Health care product revenue increased by 23%. Foreign currency translation effects represented 17% of the increase. At Constant Exchange Rates, health care product revenue increased by 6% primarily driven by higher sales of machines.
The increase period over period in the operating income margin was 1.1 percentage points including a negative foreign currency translation effect of 0.5 percentage points in the current period. The increase was mainly due to reimbursement increases in the region, partially offset by increased treatment costs, higher overhead costs, increased inflation related costs and higher bad debt expense.
Delivered EBIT increased by 47%. Foreign currency translation effects represented 4% of the increase. At Constant Exchange Rates, delivered EBIT increased by 43% due to increased operating income with virtually no change in noncontrolling interests.
Our primary sources of liquidity are typically cash provided by operating activities, cash provided by shortterm debt from third parties and related parties, as well as proceeds from the issuance of long-term debt and equity securities. We require this capital primarily to finance working capital needs, fund acquisitions and clinics in which we have ownership of less than 100%, develop free-standing renal dialysis clinics and other health care facilities, purchase equipment for existing or new renal dialysis clinics and production sites, repay debt, pay dividends and repurchase shares (see "Net Cash Provided By (Used In) Investing Activities" and "Net Cash Provided By (Used In) Financing Activities" below).
In our long-term financial planning, we focus primarily on the leverage ratio, defined as debt/ EBITDA ratio, a non-IFRS measure, see "II. Discussion of Measures – Non – IFRS Measures – Debt/EBITDA" above. At March 31, 2017 and December 31, 2016, the debt/ EBITDA ratio was 2.5 and 2.6, respectively. At both March 31, 2017 and December 31, 2016, the net debt/EBITDA ratio, was 2.3.
23
At March 31, 2017, we had cash and cash equivalents of €671 million compared to €709 at December 31, 2016.
Free cash flow (Net cash provided by (used in) operating activities, after capital expenditures, before acquisitions and investments) amounted to €(25) million and €(60) million at March 31, 2017 and March 31, 2016, respectively. Free cash flow is a non-IFRS measure and can be seen reconciled to the closest approximate IFRS measure in "II. Discussion of Measures – Non – IFRS Measures – Cash flow measures" above. Free cash flow in percent of revenue was – 1% and – 2% for three months 2017 and 2016, respectively.
In the first three months of 2017 and 2016, we generated net cash provided by operating activities of €170 million and €163 million, respectively. Net cash provided by operating activities in percent of revenue remained stable at 4% for the first three months of 2017 as compared to the same period in 2016.
Cash provided by operating activities is impacted by the profitability of our business, the development of our working capital, principally inventories, receivables and cash outflows that occur due to a number of specific items as discussed below. The increase in net cash provided by operating activities was largely driven by the payment from the United States Departments of Veterans Affairs and Justice for reimbursement, offset by seasonality in invoicing.
The profitability of our business depends significantly on reimbursement rates. Approximately 83% of our revenue is generated by providing health care services, a major portion of which is reimbursed by either public health care organizations or private insurers. For the three months ended March 31, 2017, approximately 35% of our consolidated revenue was attributable to U.S. federal health care benefit programs, such as Medicare and Medicaid reimbursement. Legislative changes could affect Medicare reimbursement rates for a significant portion of the services we provide, as well as the scope of Medicare coverage. A decrease in reimbursement rates or the scope of coverage could have a material adverse effect on our business, financial condition and results of operations and thus on our capacity to generate cash flow. See section I. "Macroeconomic and Sector-specific environment", above.
We intend to continue to address our current cash and financing requirements using cash provided by operating activities, our existing and future credit agreements, issuances under the Commercial Paper Program (See Note 7 of this report) as well as the issuance of debt securities. In addition, when funds are required for acquisitions or to meet other needs, we expect to successfully complete long-term financing arrangements, such as the issuance of senior notes. We aim to preserve financial resources with a minimum €500 million of committed and unutilized credit facilities.
Cash provided by operating activities depends on the collection of accounts receivable. Commercial customers and governments generally have different payment cycles. A lengthening of their payment cycles could have a material adverse effect on our capacity to generate cash flow. In addition, we could face difficulties in enforcing and collecting accounts receivable under some countries' legal systems and due to the economic conditions in some countries. Accounts receivable balances, net of valuation allowances, represented Days Sales Outstanding ("DSO") of 73 at March 31, 2017, an increase as compared to 70 at December 31, 2016.
DSO by segment is calculated by dividing the segment's accounts receivable, as converted to euro using the average exchange rate for the period presented, less any value added tax included in the receivables, by the average daily sales for the last twelve months of that segment, as converted to euro using the average exchange rate for the period. Receivables and sales are adjusted for amounts related to significant acquisitions made during the periods presented. The development of DSO by reporting segment is shown in the table below:
| DSO BY REPORTING SEGMENT | ||
|---|---|---|
| March 31, 2017 |
December 31, 2016 |
|
| North America days sales outstanding | 60 | 54 |
| EMEA days sales outstanding | 102 | 101 |
| Asia-Pacific days sales outstanding | 97 | 105 |
| Latin America days sales outstanding | 134 | 143 |
| FMC AG & CO. KGAA AVERAGE DAYS SALES OUTSTANDING | 73 | 70 |
The DSO increase in the North America Segment is largely due to seasonality in invoicing, partially offset by the impact of the VA Agreement. The DSO increase in the EMEA Segment was due to payment fluctuations in the region. The Asia-Pacific Segment's DSO decrease reflects an improvement of payment collections in China. The Latin America Segment's DSO decrease reflects collections from public health care organizations in certain countries.
Due to the fact that a large portion of our reimbursement is provided by public health care organizations and private insurers, we expect that most of our accounts receivable will be collectible.
We used net cash of €355 million and €306 million in investing activities in the three months ended March 31, 2017 and 2016, respectively.
Capital expenditures for property, plant and equipment, net of proceeds from sales of property, plant and equipment were €195 million and €223 million in the first three months of 2017 and 2016, respectively. In the first three months of 2017, capital expenditures were €117 million in the North America Segment, €40 million at Corporate, €26 million for the EMEA Segment, €6 million for the Asia-Pacific Segment and €6 million for the Latin America Segment. Capital expenditures in the first three months of 2016 were €139 million in the North America Segment, €48 million at Corporate, €25 million for the EMEA Segment, €7 million for the Asia-Pacific Segment and €4 million for the Latin America Segment. The majority of our capital expenditures were used for maintaining existing clinics, equipping new clinics, maintenance and expansion of production facilities (primarily in the North America Segment, France and Germany) and capitalization of machines provided to our customers and for Care Coordination. Additionally, for the first three months of 2017, capitalized development costs of €4 million were recognized at Corporate. Capital expenditures were approximately 4% of total revenue in the first three months of 2017 as compared to 6% for the same period in 2016.
In addition to the capital expenditures discussed above, we invested approximately €160 million cash in the first three months of 2017, virtually all in the North America Segment. The investment in the North America Segment was mainly driven by acquisitions of dialysis clinics. In the first three months of 2016, we invested in the dialysis business approximately €83 million cash, virtually all in the North America Segment. The investment in the North America Segment was mainly driven by acquisitions in our hospitalist and intensivists business, acquisitions of dialysis clinics, available for sale financial assets, and a loan provided to an equity method investee.
We anticipate capital expenditures of €1.1 to €1.2 billion and expect to make acquisitions of approximately €0.75 billion in 2017. See "Outlook" below.
Net cash provided by financing activities was €146 million in the first three months of 2017 compared to net cash provided by financing activities of €104 million in the first three months of 2016.
In the first three months of 2017, cash was mainly provided by proceeds from short-term debt and short-term debt from related parties, partially offset by distributions to noncontrolling interests as well as repayments of long-term debt and capital lease obligations. In the first three months of 2016, cash was mainly provided by proceeds from short-term debt and short-term debt from related parties, partially offset by distributions to noncontrolling interests, repayments of short-term debt and long-term debt and capital lease obligations as well as a reduction in the Accounts Receivable Facility.
Management's General Assessment
Total assets as of March 31, 2017 increased to €25.8 billion from €25.5 billion as compared to December 31, 2016. Current assets as a percent of total assets remained stable at 27% at March 31, 2017 as compared to December 31, 2016. The equity ratio, the ratio of our equity divided by total liabilities and shareholders' equity, increased to 44% at March 31, 2017 from 43% at December 31, 2016. ROIC increased to 7.9% at March 31, 2017 from 7.8% at December 31, 2016.
We saw a very positive start to the year. While both our dialysis services and products business showed strong growth, our Care Coordination activities confirmed its high growth potential. We are shaping our activities in this area and expect the profitability to improve in the course of the year. We are clearly on track to deliver on our ambitious targets for 2017.
Please refer to Note 15 of this report.
The Management Board oversees our Company by setting strategic and operational targets as well as measuring various financial key performance indicators used for internal management determined in euro based on IFRS (see chapter A. "Fundamental information about the Group", section II. "Internal management system" in the Group Management Report of the Consolidated Financial Statements as of December 31, 2016 in accordance with section 315a HGB). The following outlook is based on this data base.
Below is a table showing our growth outlook for 2017. The outlook for 2017 is based on exchange rates prevailing at the beginning of 2017:
| OUTLOOK 2017 | |
|---|---|
| Targets 2017 | |
| Revenue1 | Growth 8 – 10 % (at Constant Exchange Rates) |
| Operating income1 | Growth ≥ revenue growth |
| Delivered EBIT1 | Growth ~ revenue growth |
| Net income growth1, 2 |
7 – 9 % (at Constant Exchange Rates) |
| Basic earnings per share growth1, 2 |
based on development of net income |
| Capital Expenditures | €1.1 – 1.2 billion |
| Acquisitions and investments | ~ €0.75 billion |
| Net cash provided by (used in) operating activities in % of revenue |
> 10 % |
| Free cash flow in % of revenue | > 4 % |
| Debt/ EBITDA Ratio | < 2.5 % |
| ROIC | ≥ 8.0 % |
| Employees3 | > 117,000 |
| Research and development expenses | €150 – 160 million |
1 Targets 2017 exclude the effects of the agreement with the United States Departments of Veterans Affairs and Justice resolving reimbursement
for services provided to veterans between January 2009 and February 2011.
2 Net income attributable to shareholders of FMC AG & Co. KGaA. 3 Full-time equivalents.
We confirm the outlook above for 2017.
For information regarding our risks please refer to Note 11 and 12 and the chapter "Interim Management Report", specifically the Forward-looking statements and the Macroeconomic and sector-specific environment in this report. For additional information please see chapter E "Report on Risk and Opportunities" on pages 39–52 in the Group Management Report of the Consolidated Financial Statements as of December 31, 2016 in accordance with section 315a HGB.
In comparison to the information contained within the Annual Report 2016, there have been no material changes for the first quarter of 2017. Please refer to chapter E. "Report on Risk and Opportunities Report" on pages 52–55 in the Group Management Report of the Consolidated Financial Statements as of December 31, 2016 in accordance with section 315a HGB.
in € thousands, except per share data, unaudited
| For the three months ended March 31, | ||||
|---|---|---|---|---|
| Note | 2017 | 2016 | ||
| Revenue | ||||
| Health Care Services | 3,769,339 | 3,198,606 | ||
| Health Care Products | 778,781 | 717,775 | ||
| TOTAL | 13 | 4,548,120 | 3,916,381 | |
| Costs of revenue | ||||
| Health Care Services | 2,630,241 | 2,308,766 | ||
| Health Care Products | 326,218 | 313,025 | ||
| TOTAL | 2,956,459 | 2,621,791 | ||
| Gross profit | 1,591,661 | 1,294,590 | ||
| Operating (income) expenses | ||||
| Selling, general and administrative | 923,131 | 780,102 | ||
| Research and development | 2a | 32,136 | 34,424 | |
| Income from equity method investees | (14,885) | (16,852) | ||
| OPERATING INCOME | 651,279 | 496,916 | ||
| Other (income) expense | ||||
| Interest income | (28,686) | (10,055) | ||
| Interest expense | 121,414 | 105,599 | ||
| Income before income taxes | 558,551 | 401,372 | ||
| Income tax expense | 181,568 | 125,884 | ||
| Net income | 376,983 | 275,488 | ||
| Net income attributable to noncontrolling interests | 68,808 | 62,324 | ||
| NET INCOME ATTRIBUTABLE TO SHAREHOLDERS OF | ||||
| FMC AG & CO. KGAA | 308,175 | 213,164 | ||
| BASIC EARNINGS PER SHARE | 2b | 1.01 | 0.70 | |
| FULLY DILUTED EARNINGS PER SHARE | 2b | 1.00 | 0.70 |
See accompanying notes to unaudited Consolidated Financial Statements.
F
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME in € thousands, unaudited |
|||
|---|---|---|---|
| For the three months ended March 31, | |||
| Note | 2017 | 2016 | |
| NET INCOME | 376,983 | 275,488 | |
| Other comprehensive income (loss): | |||
| Components that may be reclassified subsequently to profit or loss: | |||
| Gain (loss) related to foreign currency translation | (61,369) | (345,617) | |
| Gain (loss) related to cash flow hedges | 9,369 | 4,144 | |
| Income tax (expense) benefit related to components of other comprehensive income that may be reclassified |
(2,978) | (1,305) | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | (54,978) | (342,778) | |
| TOTAL COMPREHENSIVE INCOME | 322,005 | (67,290) | |
| Comprehensive income attributable to noncontrolling interests | 56,080 | 23,556 | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREHOLDERS OF FMC AG & CO. KGAA |
265,925 | (90,846) | |
See accompanying notes to unaudited Consolidated Financial Statements.
| CONSOLIDATED BALANCE SHEETS in € thousands, except share data |
|||
|---|---|---|---|
| Note | March 31, 2017 (unaudited) |
December 31, 2016 (audited) |
|
| Assets | |||
| Cash and cash equivalents | 4 | 670,575 | 708,882 |
| Trade accounts receivable less allowance for doubtful accounts of €528.917 in 2017 and €482,461 in 2016 |
5 | 3,572,975 | 3,343,819 |
| Accounts receivable from related parties | 3 | 211,485 | 209,465 |
| Inventories | 6 | 1,345,215 | 1,337,477 |
| Other current assets | 1,276,389 | 1,284,306 | |
| TOTAL CURRENT ASSETS | 7,076,639 | 6,883,949 | |
| Property, plant and equipment, net | 3,593,992 | 3,579,626 | |
| Intangible assets | 817,852 | 803,120 | |
| Goodwill | 12,920,417 | 12,955,574 | |
| Deferred taxes | 309,550 | 291,394 | |
| Investment in equity method investees | 13 | 613,239 | 598,154 |
| Other non-current assets | 447,983 | 391,723 | |
| TOTAL NON-CURRENT ASSETS | 18,703,033 | 18,619,591 | |
| TOTAL ASSETS | 25,779,672 | 25,503,540 | |
See accompanying notes to unaudited Consolidated Financial Statements.
| CONSOLIDATED BALANCE SHEETS | |||
|---|---|---|---|
| in € thousands, except share data | |||
| Note | March 31, 2017 (unaudited) |
December 31, 2016 (audited) |
|
| Liabilities | |||
| Accounts payable | 496,285 | 575,556 | |
| Accounts payable to related parties | 3 | 271,412 | 264,069 |
| Current provisions and other current liabilities | 2,922,743 | 3,036,708 | |
| Short-term debt | 7 | 696,698 | 572,010 |
| Short-term debt from related parties | 7 | 119,015 | 3,000 |
| Current portion of long-term debt and capital lease obligations | 8 | 715,439 | 724,218 |
| Income tax payable | 154,914 | 123,336 | |
| TOTAL CURRENT LIABILITIES | 5,376,506 | 5,298,897 | |
| Long-term debt and capital lease obligations, less current portion | 8 | 6,738,891 | 6,832,886 |
| Non-current provisions and other non-current liabilities | 1,051,420 | 1,027,983 | |
| Pension liabilities | 524,214 | 512,539 | |
| Income tax payable | 121,536 | 118,182 | |
| Deferred taxes | 669,052 | 661,921 | |
| TOTAL NON-CURRENT LIABILITIES | 9,105,113 | 9,153,511 | |
| TOTAL LIABILITIES | 14,481,619 | 14,452,408 | |
| Shareholders' equity | |||
| Ordinary shares, no par value, €1.00 nominal value, 385,913,972 shares authorized, 307,303,855 shares issued and 306,303,904 outstanding as of March 31, 2017 and 385,913,972 shares authorized, 307,221,791 issued and 306,221,840 outstanding as of December 31, 2016 respectively |
307,304 | 307,222 | |
| Treasury stock, at cost | (50,993) | (50,993) | |
| Additional paid-in capital | 3,934,067 | 3,960,115 | |
| Retained earnings | 6,378,960 | 6,085,876 | |
| Accumulated other comprehensive income (loss) | (366,813) | (324,563) | |
| TOTAL FMC AG & CO. KGAA SHAREHOLDERS' EQUITY | 10,202,525 | 9,977,657 | |
| Noncontrolling interests | 1,095,528 | 1,073,475 | |
| TOTAL EQUITY | 11,298,053 | 11,051,132 | |
| TOTAL LIABILITIES AND EQUITY | 25,779,672 | 25,503,540 |
See accompanying notes to unaudited Consolidated Financial Statements.
in € thousands, unaudited
| Note | For the three months ended March 31, | ||
|---|---|---|---|
| 2017 | 2016 | ||
| Operating activities | |||
| Net income | 376,983 | 275,488 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | |||
| Depreciation and amortization | 13 | 189,908 | 165,326 |
| Change in deferred taxes, net | (17,124) | (11,165) | |
| (Gain) loss on sale of fixed assets and investments | 3,143 | 808 | |
| Compensation expense related to share-based plans | 14,607 | 5,092 | |
| Investments in equity method investees, net | (12,640) | (14,836) | |
| Changes in assets and liabilities, net of amounts from businesses acquired: | |||
| Trade accounts receivable, net | (243,073) | (241,067) | |
| Inventories | (11,690) | (17,461) | |
| Other current and non-current assets | (25,660) | 34,956 | |
| Accounts receivable from related parties | (2,127) | 587 | |
| Accounts payable to related parties | 8,086 | 69,864 | |
| Accounts payable, provisions and other current and non-current liabilities | (16,522) | (4,646) | |
| Paid interest | (141,995) | (137,643) | |
| Received interest | 13,280 | 6,695 | |
| Income tax payable | 187,225 | 81,931 | |
| Paid income taxes | (152,805) | (50,770) | |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 169,596 | 163,159 | |
See accompanying notes to unaudited Consolidated Financial Statements.
| For the three months ended March 31, | |||
|---|---|---|---|
| Note | 2017 | 2016 | |
| Investing activities | |||
| Purchases of property, plant and equipment | 13 | (197,548) | (227,022) |
| Proceeds from sale of property, plant and equipment | 2,480 | 3,557 | |
| Acquisitions and investments, net of cash acquired, and purchases of intangible assets | 13,14 | (160,211) | (82,630) |
| Proceeds from divestitures | 299 | 196 | |
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | (354,980) | (305,899) | |
| Financing activities | |||
| Proceeds from short-term debt | 144,118 | 259,083 | |
| Repayments of short-term debt | (13,692) | (52,669) | |
| Proceeds from short-term debt from related parties | 116,000 | 38,700 | |
| Proceeds from long-term debt and capital lease obligations | 2,053 | 54 | |
| Repayments of long-term debt and capital lease obligations | (29,277) | (48,544) | |
| Increase (decrease) of accounts receivable securitization program | (4,696) | (46,279) | |
| Proceeds from exercise of stock options | 4,436 | 2,309 | |
| Distributions to noncontrolling interests | (80,119) | (60,413) | |
| Contributions from noncontrolling interests | 7,562 | 12,068 | |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 146,385 | 104,309 | |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND | |||
| CASH EQUIVALENTS | 692 | (11,516) | |
| Cash and cash equivalents | |||
| Net increase (decrease) in cash and cash equivalents | (38,307) | (49,947) | |
| Cash and cash equivalents at beginning of period | 708,882 | 504,730 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | 4 | 670,575 | 454,783 |
See accompanying notes to unaudited Consolidated Financial Statements.
32
C
in € thousands, except share data, unaudited
| Ordinary Shares | Treasury Stock | ||||||
|---|---|---|---|---|---|---|---|
| Note | Number of shares |
No par value |
Number of shares |
Amount | Additional paid in capital |
Retained earnings |
|
| BALANCE AT DECEMBER 31, 2015 |
312,863,071 | 312,863 | (7,548,951) | (384,966) | 4,224,395 | 5,369,493 | |
| Proceeds from exercise of options and related tax effects |
52,798 | 53 | – | – | 2,478 | – | |
| Compensation expense related to stock options |
– | – | – | – | 5,065 | – | |
| Withdrawal of treasury stock | (6,549,000) | (6,549) | 6,549,000 | 333,973 | (327,424) | – | |
| Purchase/sale of noncontrolling interests |
– | – | – | – | 1,177 | – | |
| Contributions from/to noncontrolling interests |
– | – | – | – | – | – | |
| Noncontrolling interests subject to put provisions |
12 | – | – | – | – | – | (42,902) |
| Net Income | – | – | – | – | – | 213,164 | |
| Other comprehensive income (loss) related to: |
|||||||
| Foreign currency translation | – | – | – | – | – | – | |
| Cash flow hedges, net of related tax effects |
– | – | – | – | – | – | |
| Comprehensive income | – | – | – | – | – | – | |
| BALANCE AT MARCH 31, 2016 |
306,366,869 | 306,367 | (999,951) | (50,993) | 3,905,691 | 5,539,755 | |
| BALANCE AT | |||||||
| DECEMBER 31, 2016 | 307,221,791 | 307,222 | (999,951) | (50,993) | 3,960,115 | 6,085,876 | |
| Proceeds from exercise of options and related tax effects |
82,064 | 82 | – | – | 4,014 | – | |
| Compensation expense related to stock options |
– | 2,163 | – | ||||
| Purchase/sale of noncontrolling interests |
– | – | – | – | (32,225) | – | |
| Contributions from/to noncontrolling interests |
– | – | – | – | – | – | |
| Noncontrolling interests subject to put provisions |
12 | – | – | – | – | – | (15,091) |
| Net Income | – | – | – | – | – | 308,175 | |
| Other comprehensive income (loss) related to: |
|||||||
| Foreign currency translation | – | – | – | – | – | – | |
| Cash flow hedges, net of related tax effects |
– | – | – | – | – | ||
| Comprehensive income | – | – | – | – | – | – | |
| BALANCE AT MARCH 31, 2017 |
307,303,855 | 307,304 | (999,951) | (50,993) | 3,934,067 | 6,378,960 |
See accompanying notes to unaudited Consolidated Financial Statements.
in € thousands, except share data
| Accumulated other comprehensive income (loss) |
||||||||
|---|---|---|---|---|---|---|---|---|
| Note | Foreign currency translation |
Cash Flow Hedges |
Pensions | Total FMC AG&Co. KGaA shareholders' equity |
Noncontrol ling interests |
Total Equity | ||
| BALANCE AT DECEMBER 31, 2015 |
(364,636) | (55,271) | (232,311) | 8,869,567 | 936,024 | 9,805,591 | ||
| Proceeds from exercise of options and related tax effects |
– | – | – | 2,531 | – | 2,531 | ||
| Compensation expense related to stock options |
– | – | – | 5,065 | – | 5,065 | ||
| Withdrawal of treasury stock | – | – | – | – | – | – | ||
| Purchase/sale of noncontrolling interests |
– | – | – | 1,177 | 8,416 | 9,593 | ||
| Contributions from/to noncontrolling interests |
– | – | – | – | (53,134) | (53,134) | ||
| Noncontrolling interests subject to put provisions |
12 | – | – | – | (42,902) | – | (42,902) | |
| Net Income | – | – | – | 213,164 | 62,324 | 275,488 | ||
| Other comprehensive income (loss) related to: |
||||||||
| Foreign currency translation | (319,306) | 2,328 | 10,129 | (306,849) | (38,768) | (345,617) | ||
| Cash flow hedges, net of related tax effects |
– | 2,839 | – | 2,839 | – | 2,839 | ||
| Comprehensive income | – | – | – | (90,846) | 23,556 | (67,290) | ||
| BALANCE AT | ||||||||
| MARCH 31, 2016 | (683,942) | (50,104) | (222,182) | 8,744,592 | 914,862 | 9,659,454 | ||
| BALANCE AT DECEMBER 31, 2016 |
(26,019) | (38,107) | (260,437) | 9,977,657 | 1,073,475 | 11,051,132 | ||
| Proceeds from exercise of options and related tax effects |
– | – | – | 4,096 | – | 4,096 | ||
| Compensation expense related to stock options |
– | – | – | 2,163 | – | 2,163 | ||
| Purchase/sale of noncontrolling interests |
– | – | – | (32,225) | 17,337 | (14,888) | ||
| Contributions from/to noncontrolling interests |
– | – | – | – | (51,364) | (51,364) | ||
| Noncontrolling interests subject to put provisions |
12 | – | – | – | (15,091) | – | (15,091) | |
| Net Income | – | – | – | 308,175 | 68,808 | 376,983 | ||
| Other comprehensive income (loss) related to: |
||||||||
| Foreign currency translation | (50,440) | 18 | 1,781 | (48,641) | (12,728) | (61,369) | ||
| Cash flow hedges, net of related tax effects |
– | 6,391 | – | 6,391 | 6,391 | |||
| Comprehensive income | – | – | – | 265,925 | 56,080 | 322,005 | ||
| BALANCE AT MARCH 31, 2017 |
(76,459) | (31,698) | (258,656) 10,202,525 | 1,095,528 | 11,298,053 |
See accompanying notes to unaudited Consolidated Financial Statements.
(unaudited, in thousands, except share and per share data)
Fresenius Medical Care AG& Co. KGaA ("FMC AG & CO. KGAA" or the "Company"), a German partnership limited by shares (Kommanditgesellschaft auf Aktien) registered in the commercial registry of the Hof an der Saale under HRB 4019, with its business address at Else-Kröner-Str. 1, 61352 Bad Homburg v. d. Höhe, is the world's largest kidney dialysis company, based on publicly reported sales and number of patients treated. The Company provides dialysis treatment and related dialysis care services to persons who suffer from end-stage renal disease ("ESRD"), as well as other health care services. The Company also develops and manufactures a full range of health care products, which includes dialysis and non-dialysis products. The Company's dialysis products include hemodialysis machines, peritoneal cyclers, dialyzers, peritoneal solutions, hemodialysis concentrates, solutions and granulates, bloodlines, renal pharmaceuticals and systems for water treatment. The Company's non-dialysis products include acute cardiopulmonary and apheresis products. The Company supplies dialysis clinics it owns, operates or manages with a broad range of products and also sells dialysis products to other dialysis service providers. The Company describes certain of its other health care services as "Care Coordination." Care Coordination currently includes the coordinated delivery of pharmacy services, vascular, cardiovascular and endovascular specialty services, non-dialysis laboratory testing services, physician nephrology and cardiology services, hospitalist and intensivist services, health plan services, ambulatory surgery center services and urgent care services, which, together with dialysis care and related services represent the Company's health care services.
In these unaudited Consolidated Financial Statements, "FMC AG & CO. KGAA", or the "Company" refers to the Company or the Company and its subsidiaries on a consolidated basis, as the context requires. "Fresenius SE" and "Fresenius SE & Co. KGaA" refer to Fresenius SE & Co. KGaA, a German partnership limited by shares resulting from the change of legal form of Fresenius SE (effective as of January 2011), a European Company (Societas Europaea) previously called Fresenius AG, a German stock corporation. "Management AG" and the "General Partner" refer to Fresenius Medical Care Management AG which is FMC AG & CO. KGAA's general partner and is wholly owned by Fresenius SE. "Management Board" refers to the members of the management board of Management AG and, except as otherwise specified, "Supervisory Board" refers to the supervisory board of FMC AG & CO. KGAA. The term "North America Segment" refers to the North America operating segment; the term "EMEA Segment" refers to the Europe, Middle East and Africa operating segment, the term "Asia-Pacific Segment" refers to the Asia-Pacific operating segment, and the term "Latin America Segment" refers to the Latin America operating segment. For further discussion of the Company's operating segments, see Note 13.
The Company, as a stock exchange listed company with a domicile in a member state of the European Union ("EU"), fulfills its obligation to prepare and publish the Consolidated Financial Statements in accordance with the International Financial Reporting Standards ("IFRS"), as adopted by the EU, applying Section 315a of the German Commercial Code ("HGB").
The accompanying condensed Interim Financial Statements complys with the International Accounting Standard ("IAS") 34, Interim Financial Reporting. They have been prepared in accordance with the IFRS in force on the reporting date and adopted by the EU.
Furthermore, the Company prepares Consolidated Financial Statements as issued by the International Accounting Standards Board ("IASB") and includes the financial statements in the filing under Form 6-K with the Securities and Exchange Commission ("SEC"). At March 31, 2017, there were no International Financial Reporting Standards ("IFRS") or International Financial Reporting Interpretations Committee ("IFRIC") interpretations as endorsed by the European Union relevant for interim reporting that differed from IFRS as issued by the IASB.
The Consolidated Financial Statements at March 31, 2017 and for the three months ended March 31, 2017 and 2016 contained in this report are unaudited and should be read in conjunction with the Consolidated Financial Statements as of December 31, 2016 applying Section 315a HGB in accordance with IFRS. The preparation of Consolidated Financial Statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those estimates. Such financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments are of a normal recurring nature.
The accounting policies applied in the accompanying Consolidated Financial Statements are the same as those applied in the Consolidated Financial Statements as of December 31, 2016.
The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results of operations for the year ending December 31, 2017.
The Company has prepared its Consolidated Financial Statements at March 31, 2017 in conformity with IFRS in force for the interim periods on January 1, 2017.
In the first quarter of 2017, the Company did not apply any new standards which would be relevant for its business.
The IASB issued the following new standards which are relevant for the Company:
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers. This new standard specifies how and when companies reporting under IFRS will recognize revenue as well as providing users of financial statements with more informative and relevant disclosures. IFRS 15 supersedes IAS 18, Revenue, IAS 11, Construction Contracts and a number of revenue-related interpretations. While this standard applies to nearly all contracts with customers, the main exceptions are leases, financial instruments and insurance contracts. In September 2015, the IASB issued the amendment "Effective Date of IFRS 15", which defers the effective date of IFRS 15 by one year to fiscal years beginning on or after January 1, 2018. Earlier adoption is permitted. The Company decided that IFRS 15 will not be adopted early and is currently evaluating the impact of IFRS 15, in conjunction with all amendments to the standard, on its Consolidated Financial Statements. Based on findings the Company obtained so far, it expects differences to the current accounting mainly in the calculation of the transaction price for health care services provided. IFRS 15 requires the consideration of implicit price concessions when determining the transaction price. This will lead to a corresponding decrease of revenue from health care services and thus, the implicit price concessions will no longer be included in selling, general and administrative expenses as an allowance for doubtful accounts. The first analysis of this issue showed a decrease of revenue by approximately 2–3% without any effect on net income. A more detailed quantification of the impact of IFRS 15 is not yet possible. The Company is also evaluating accounting policy options and transition methods of IFRS 15.
In July 2014, the IASB issued a new version of IFRS 9, Financial Instruments. This IFRS 9 version is considered the final and complete version, thus, mainly replacing IAS 39 as soon IFRS 9 is applied. It includes all prior guidance on the classification and measurement of financial assets and financial liabilities as well as hedge accounting and introduces requirements for impairment of financial instruments as well as modified requirements for the measurement categories of financial assets. The impairment provisions reflect a model that relies on expected losses (expected loss model). This model comprises a two stage approach. Upon recognition an entity shall recognize losses that are expected within the next 12 months. If credit risk deteriorates significantly, from that point in time, impairment losses shall amount to lifetime expected losses. The provisions for classification and measurement are amended by introducing an additional third measurement category for certain debt instruments. Such instruments shall be measured at fair value with changes recognized in other comprehensive income (fair value through other comprehensive income). The standard is accompanied by additional disclosure requirements and is effective for fiscal years beginning on or after January 1, 2018. Earlier adoption is permitted. The Company decided that IFRS 9 will not be adopted early and is currently evaluating the impact on its Consolidated Financial Statements. In accordance with IAS 39, the majority of the non-derivative financial assets are measured at amortized costs. The analysis on the business model and the
37
contractual cash flow characteristics of each instrument is still ongoing. The requirements on the classification and measurement of non-derivative financial liabilities have not changed significantly. Thus, the Company expects a limited impact on its Consolidated Financial Statements. Derivatives not designated as hedging instruments will continue to be classified and measured at fair value through profit and loss. The Company intends to implement the simplified method to determine the provisions for risks from trade accounts receivable, receivables from lease contracts and capitalized contract costs according to IFRS 15. A quantification of the impact is not yet possible. Based on currently available information, derivative financial instruments presently designated as hedging instruments are also qualified for hedge accounting according to the requirements of IFRS 9. The Company also evaluates accounting policy choices and transition methods of IFRS 9.
In January 2016, the IASB issued IFRS 16, Leases, which supersedes the current standard on lease-accounting, IAS 17, as well as the interpretations IFRIC 4, SIC-15 and SIC-27. IFRS 16 significantly improves lessee accounting. For all leases, a lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Depreciation of the right-of-use asset and interest on the lease liability must be recognized in the income statement for every lease contract. Therefore, straight-line rental expenses will no longer be shown. The lessor accounting requirements in IAS 17 are substantially carried forward. The standard is effective for fiscal years beginning on or after January 1, 2019. Earlier application is permitted for entities that have also adopted IFRS 15 Revenue from Contracts with Customers. The Company expects a balance sheet extension due to the on balance sheet recognition of right of use assets and liabilities for agreed lease payment obligations, currently classified as operating leases, resulting in particular from leased clinics and buildings. Based on a first impact analysis as of December 31, 2015, using certain assumptions and simplifications, the Company expects a financial debt increase of approximately €4,000,000. Referring to the consolidated statement of income, the Company expects an operating income improvement due to the split of rent expenses in depreciation and interest expenses, by having unchanged cash outflows. The Company also expects that its Leverage Ratio (debt as compared to EBITDA, Earnings before Interest, Taxes, Depreciation and Amortization, adjusted for acquisitions made during the year with a purchase price above a \$50,000 threshold as defined in the Amended 2012 Credit Agreement and non-cash charges) will increase by about 0.5. The impact on the Company will depend on the contract portfolio at the effective date, as well as the transition method. Based on a first impact analysis, the Company decided to apply the modified retrospective method. Currently, the Company is evaluating the accounting policy options of IFRS 16.
In January 2016, the IASB issued amendments to IAS 7, Statement of Cash Flows. The amendments are intended to improve the information related to the change in a company's debt by providing additional annual disclosures. The standard is effective for fiscal years beginning on or after January 1, 2017. Earlier application is permitted. The Company will initially present the amendments to IAS 7 in the Consolidated Financial Statements as of December 31, 2017.
The EU Commission's endorsements of IFRS 16 and of the amendments to IAS 7 are still outstanding.
In the Company's view, all other pronouncements issued by the IASB do not have a material impact on the Consolidated Financial Statement, as expected.
Research and development expenses of €32,136 for the three months ended March 31, 2017 (for the three months ended March 31, 2016: €34,424) include expenditure for research and non-capitalizable development costs as well as depreciation and amortization expenses related to capitalized development costs of €104 (for the three months ended March 31, 2016: €418).
The following table contains reconciliations of the numerators and denominators of the basic and fully diluted earnings per share computations for 2017 and 2016:
| RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE in € thousands, except share and per share data |
||
|---|---|---|
| For the three months ended March 31, | ||
| 2017 | 2016 | |
| Numerator: | ||
| Net income attributable to shareholders of FMC AG&Co. KGaA | 308,175 | 213,164 |
| Denominators: | ||
| Weighted average number of shares outstanding | 306,241,321 | 305,325,185 |
| Potentially dilutive shares | 519,712 | 563,182 |
| Basic earnings per share | 1.01 | 0.70 |
| Fully diluted earnings per share | 1.00 | 0.70 |
By resolution of the Company's annual general meeting on May 12, 2011, the Company was authorized to conduct a share buy-back program to repurchase ordinary shares. The buy-back program commenced on May 20, 2013 and was completed on August 14, 2013 after 7,548,951 shares had been repurchased in the amount of €384,966. On February 16, 2016, the Company retired 6,549,000 of the repurchased shares from the buy-back program at an average weighted price of €51 per share.
Fresenius SE is also the Company's largest shareholder and owns 30.8% of the Company's outstanding shares, excluding treasury shares held by the Company, at March 31, 2017. The Company has entered into certain arrangements for services, leases and products with Fresenius SE or its subsidiaries and with certain of the Company's equity method investees as described in item a) below. The Company's terms related to the receivables or payables for these services, leases and products are generally consistent with the normal terms of the Company's ordinary course of business transactions with unrelated parties. Financing arrangements as described in item b) below have agreed upon terms which are determined at the time such financing transactions occur and reflect market rates at the time of the transaction. The relationship between the Company and its key management personnel who are considered to be related parties is described in item c) below. Our related party transactions are settled through Fresenius SE's cash management system where appropriate.
The Company is party to service agreements with Fresenius SE and certain of its affiliates (collectively the "Fresenius SE Companies") to receive services, including, but not limited to: administrative services, management information services, employee benefit administration, insurance, information technology services, tax services and treasury management services. The Company also provides central purchasing services to the Fresenius SE Companies. These related party agreements generally have a duration of 1–5 years and are renegotiated on an as needed basis when the agreement comes due. The Company provides administrative services to one of its equity method investees.
The Company is a party to real estate operating lease agreements with the Fresenius SE Companies, which mainly include leases for the Company's corporate headquarters in Bad Homburg, Germany and production sites in Schweinfurt and St. Wendel, Germany. The majority of the leases expire in 2027.
In addition to the above mentioned service and lease agreements, the Company sold products to the Fresenius SE Companies and made purchases from the Fresenius SE Companies and equity method investees. In addition, Fresenius Medical Care Holdings, Inc. ("FMCH") purchases heparin supplied by Fresenius Kabi USA, Inc. ("Kabi USA"), through an independent group purchasing organization ("GPO"). Kabi USA is an indirect, wholly-owned subsidiary of Fresenius SE. The Company has no direct supply agreement with Kabi USA and does not submit purchase orders directly to Kabi USA. FMCH acquires heparin from Kabi USA, through the GPO contract, which was negotiated by the GPO at arm's length on behalf of all members of the GPO.
In December 2010, the Company formed a renal pharmaceutical company with Galenica Ltd., named Vifor Fresenius Medical Care Renal Pharma Ltd., ("VFMCRP"), an equity method investee of which the Company owns 45%. The Company has entered into exclusive supply agreements to purchase certain pharmaceuticals from VFMCRP.
Below is a summary, including the Company's receivables from and payables to the indicated parties resulting from the above described transactions with related parties.
| in € thousands | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| For the three months ended March 31, 2017 |
For the three months ended March 31, 2016 |
March 31, 2017 | December 31, 2016 | ||||||
| Sales of goods and services |
Purchases of goods and services |
Sales of goods and services |
Purchases of goods and services |
Accounts Receivables |
Accounts Payables |
Accounts Receivables |
Accounts Payables |
||
| Service Agreements1 | |||||||||
| Fresenius SE | 54 | 5,454 | 44 | 4,787 | 228 | 17,102 | 132 | 51 | |
| Fresenius SE affiliates | 840 | 18,370 | 754 | 18,894 | 639 | 2,894 | 822 | 2,856 | |
| Equity method investees | 4,236 | – | 4,451 | – | 2,214 | – | 2,506 | – | |
| TOTAL | 5,130 | 23,824 | 5,249 | 23,681 | 3,081 | 19,996 | 3,460 | 2,907 | |
| Lease Agreements | |||||||||
| Fresenius SE | – | 2,211 | – | 2,302 | – | – | – | – | |
| Fresenius SE affiliates | – | 3,153 | – | 3,403 | – | – | – | – | |
| TOTAL | – | 5,364 | – | 5,705 | – | – | – | – | |
| Products | |||||||||
| Fresenius SE | – | – | 2 | – | – | – | – | – | |
| Fresenius SE affiliates | 7,456 | 10,221 | 5,488 | 9,901 | 9,831 | 5,041 | 7,948 | 4,787 | |
| Equity method investees | – | 98,363 | – | 100,359 | – | 62,514 | – | 55,329 | |
| TOTAL | 7,456 | 108,584 | 5,490 | 110,260 | 9,831 | 67,555 | 7,948 | 60,116 |
SERVICE AGREEMENTS, LEASE AGREEMENTS AND PRODUCTS
1 In addition to the above shown Accounts Payable, Accrued Expenses for Service Agreements with related parties amounted to €1,914 and €3,359 at March 31, 2017 and December 31, 2016.
The Company receives short-term financing from and provides short-term financing to Fresenius SE. The Company also utilizes Fresenius SE's cash management system for the settlement of certain intercompany receivables and payables with its subsidiaries and other related parties. As of March 31, 2017 and December 31, 2016, the Company had accounts receivable from Fresenius SE related to short-term financing in the amount of €198,573 and €197,883, respectively. As of March 31, 2017 and December 31, 2016, the Company had accounts payable to Fresenius SE related to short-term financing in the amount of €166,079 and €186,350, respectively. The interest rates for these cash management arrangements are set on a daily basis and are based on the then-prevailing overnight reference rate for the respective currencies.
On August 19, 2009, the Company borrowed €1,500 from the General Partner on an unsecured basis at 1.335%. The loan repayment has been extended periodically and is currently due August 22, 2017 with an interest rate of 1.054%. On November 28, 2013, the Company borrowed an additional €1,500 with an interest rate of 1.875% from the General Partner. This loan is due on November 25, 2017 with an interest rate of 1.021%.
At March 31, 2017 and December 31, 2016, a subsidiary of Fresenius SE held unsecured Senior Notes issued by the Company in the amount of €8,300 and €8,300, respectively. The Senior Notes were issued in 2011 and 2012, mature in 2021 and 2019, respectively, and each has a coupon rate of 5.25% with interest payable semiannually.
At March 31, 2017, the Company received a one-month short term advance from Fresenius SE in the amount of €116,000 on an unsecured basis at an interest rate of 1.100%. On December 31, 2016 the Company provided a cash advance to Fresenius SE in the amount of €36,245 on an unsecured basis at an interest rate of 0.771% which was repaid on January 2, 2017. For further information on this loan agreement, see Note 7.
Due to the legal form of a German partnership limited by shares, the General Partner holds a key management position within the Company. In addition, as key management personnel, members of the Management Board and the Supervisory Board, as well as their close relatives, are considered related parties.
The Company's Articles of Association provide that the General Partner shall be reimbursed for any and all expenses in connection with management of the Company's business, including remuneration of the members of the General Partner's supervisory board and the members of the Management Board. The aggregate amount reimbursed to the General Partner was €5,383 and €4,967, respectively, for its management services during the three months ended March 31, 2017 and 2016. As of March 31, 2017, the Company did not have any accounts receivable from the General Partner. As of December 31, 2016, the Company had accounts receivable from the General Partner in the amount of €174. As of March 31, 2017 and December 31, 2016, the Company had accounts payable to the General Partner in the amount of €17,782 and €14,696, respectively.
At March 31, 2017 and December 31, 2016, cash and cash equivalents consisted of the following:
| CASH AND CASH EQUIVALENTS in € thousands |
||
|---|---|---|
| March 31, 2017 |
December 31, 2016 |
|
| Cash | 658,207 | 667,139 |
| Securities and Time deposits (with a maturity of up to 90 days) | 12,368 | 41,743 |
| CASH AND CASH EQUIVALENTS | 670,575 | 708,882 |
At March 31, 2017 and December 31, 2016, trade accounts receivable consisted of the following:
| TRADE ACCOUNTS RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS in € thousands |
||
|---|---|---|
| March 31, 2017 |
December 31, 2016 |
|
| Trade accounts receivable | 4,101,892 | 3,826,280 |
| less allowance for doubtful accounts | 528,917 | 482,461 |
| TRADE ACCOUNTS RECEIVABLE, NET | 3,572,975 | 3,343,819 |
40
N
N
otes to C onsolidated F inancial S tatements
41
At March 31, 2017 and December 31, 2016, inventories consisted of the following:
| INVENTORIES in € thousands |
||
|---|---|---|
| March 31, 2017 |
December 31, 2016 |
|
| Finished goods | 732,016 | 687,615 |
| Health care supplies | 326,897 | 362,307 |
| Raw materials and purchased components | 210,931 | 214,286 |
| Work in process | 75,371 | 73,269 |
| INVENTORIES | 1,345,215 | 1,337,477 |
At March 31, 2017 and December 31, 2016, short-term debt and short-term debt from related parties consisted of the following:
| SHORT-TERM DEBT AND SHORT-TERM DEBT FROM RELATED PARTIES in € thousands |
||
|---|---|---|
| March 31, 2017 |
December 31, 2016 |
|
| Borrowings under lines of credit | 89,766 | 89,451 |
| Commercial Paper Program | 606,932 | 475,915 |
| Other | – | 6,644 |
| SHORT-TERM DEBT | 696,698 | 572,010 |
| Short-term debt from related parties (see Note 3.b) | 119,015 | 3,000 |
| SHORT-TERM DEBT AND SHORT-TERM DEBT FROM RELATED PARTIES | 815,713 | 575,010 |
The Company and certain consolidated entities operate a multi-currency notional pooling cash management system. The Company met the conditions to offset balances within this cash pool for reporting purposes. At March 31, 2017 and December 31, 2016, cash and borrowings under lines of credit in the amount of €313,728 and €325,485 were offset under this cash management system.
Commercial paper programs are flexible financing instruments to obtain short-term funding on the money market. Typically, commercial paper maturities range from a few days up to under two years. The Company established a commercial paper program on January 19, 2016 under which short-term notes of up to €1,000,000 can be issued. At March 31, 2017 and December 31, 2016, the outstanding commercial paper amounted to €607,000 and €476,000, respectively.
N
At March 31, 2017, the Company did not have other debt outstanding. At December 31, 2016, the Company had €6,644 of other debt which was mainly related to fixed payments outstanding for acquisitions.
The Company is party to an unsecured loan agreement with Fresenius SE under which the Company or its subsidiaries may request and receive one or more short-term advances up to an aggregate amount of \$400,000 until maturity on October 30, 2017. The interest on the advance(s) will be at a fluctuating rate per annum equal to LIBOR or EURIBOR as applicable plus an applicable margin. Advances can be repaid and reborrowed. At March 31, 2017, the Company received a one-month short term advance from Fresenius SE in the amount of €116,000. At December 31, 2016, there were no advances from Fresenius SE under this facility. For further information on short-term debt from related parties, see Note 3b).
As of March 31, 2017 and December 31, 2016, long-term debt and capital lease obligations consisted of the following:
| LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS in € thousands |
||
|---|---|---|
| March 31, 2017 |
December 31, 2016 |
|
| Amended 2012 Credit Agreement | 2,194,869 | 2,244,115 |
| Senior Notes | 4,620,861 | 4,670,786 |
| Convertible Bonds | 382,298 | 380,735 |
| Accounts Receivable Facility | 158,127 | 165,037 |
| Capital lease obligations | 43,742 | 43,775 |
| Other | 54,433 | 52,656 |
| LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS | 7,454,330 | 7,557,104 |
| Less current portion | (715,439) | (724,218) |
| LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION |
6,738,891 | 6,832,886 |
The following table shows the available and outstanding amounts under the Amended 2012 Credit Agreement at March 31, 2017 and December 31, 2016:
| Maximum Amount Available March 31, 2017 |
|||||
|---|---|---|---|---|---|
| Revolving Credit US \$ | 1,000,000 US\$ | 935,366 € | 42,948 US\$ | 40,172 € | |
| Revolving Credit EUR | 400,000 € | 400,000 € | – | – | |
| US \$ Term Loan | 2,050,000 US\$ | 1,917,501 € | 2,050,000 US\$ | 1,917,501 € | |
| EUR Term Loan | 246,000 € | 246,000 € | 246,000 € | 246,000 € | |
| TOTAL | 3,498,867€ | 2,203,673€ | |||
| Maximum Amount Available December 31, 2016 |
Balance Outstanding1 December 31, 2016 |
||||
| Revolving Credit US \$ | 1,000,000 US\$ | 948,676 € | 10,187 US\$ | 9,664 € | |
| Revolving Credit EUR | 400,000 € | 400,000 € | – | – | |
| US \$ Term Loan | 2,100,000 US\$ | 1,992,221 € | 2,100,000 US\$ | 1,992,221 € | |
| EUR Term Loan | 252,000 € | 252,000 € | 252,000 € | 252,000 € | |
1 Amounts shown are excluding debt issuance costs.
At March 31, 2017 and December 31, 2016, the Company had letters of credit outstanding in the amount of \$2,050 and \$3,550 (€1,918 and €3,368), respectively, under the USD revolving credit facility, which are not included above as part of the balance outstanding at those dates, but which reduce available borrowings under the applicable revolving credit facility.
The following table shows the available and outstanding amounts under the Accounts Receivable Facility at March 31, 2017 and at December 31, 2016:
| ACCOUNTS RECEIVABLE FACILITY – MAXIMUM AMOUNT AVAILABLE AND BALANCE OUTSTANDING in thousands |
||||
|---|---|---|---|---|
| Maximum Amount Available Balance Outstanding March 31, 20171 March 31, 20172 |
||||
| Accounts Receivable Facility | 800,000 US\$ | 748,293 € | 170,000 US\$ | 159,012 € |
| Maximum Amount Available December 31, 20161 |
Balance Outstanding December 31, 20162 |
|||
| Accounts Receivable Facility | 800,000 US\$ | 758,941 € | 175,000 US\$ | 166,018 € |
1 Subject to availability of sufficient accounts receivable meeting funding criteria.
2 Amounts shown are excluding debt issuance costs.
The Company also had letters of credit outstanding under the Accounts Receivable Facility in the amount of \$15,647 and \$15,647 at March 31, 2017 and December 31, 2016 (€14,636 and €14,844), respectively. These letters of credit are not included above as part of the balance outstanding at March 31, 2017 and December 31, 2016; however, they reduce available borrowings under the Accounts Receivable Facility.
N
otes to C onsolidated F inancial S tatements
At March 31, 2017 the total equity in percent of total assets was 43.8% and the financial debt in percent of total assets was 32.1%. A key financial performance indicator for the Company is the debt/EBITDA ratio which compares financial debt to EBITDA, for the last twelve months, adjusted for acquisitions made during the period with a purchase price above a \$50,000 threshold (as defined in the Amended 2012 Credit Agreement) and other non-cash charges. This ratio was 2.5 as of March 31, 2017. Additionally, at both March 31, 2017 and December 31, 2016, the net debt/EBITDA ratio was 2.3. Further information on the Company's capital management is available in the Consolidated Financial Statements as of December 31, 2016 applying Section 315a HGB in accordance with IFRS.
The Company is covered by the three leading rating agencies, Moody's, Standard & Poor's and Fitch. The Company currently has a BBB- rating from Standard & Poor's, a Ba1 rating from Moody's and a BBB– rating from Fitch.
| RATING1 | ||
|---|---|---|
| Corporate Credit Rating |
Outlook | |
| Standard & Poor's | BBB– | stable |
| Moody's | Ba1 | stable |
| Fitch | BBB– | stable |
1 A rating is not a recommendation to buy, sell or hold securities of the Company, and may be subject to suspension, change or withdrawal at any time by the assigning rating agency.
The Company currently has five principal pension plans, one for German employees, three for French employees and the other covering employees in the United States, the latter of which was curtailed in 2002. Plan benefits are generally based on years of service and final salary. As there is no legal requirement in Germany to fund defined benefit plans, the Company's pension obligations in Germany are unfunded. Each year FMCH contributes to the plan covering United States employees at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended. In 2017, FMCH did not have a minimum funding requirement. For the first three months of 2017, the Company voluntarily provided €309 to the defined benefit plan. For the remaining period of 2017, the Company expects further voluntarily contributions of €791.
The following table provides the calculations of net periodic benefit cost for the three months ended March 31, 2017 and 2016, respectively.
| NET PERIODIC BENEFIT COST in € thousands |
||
|---|---|---|
| For the three months ended March 31, |
||
| 2017 | 2016 | |
| Service cost | 7,107 | 6,390 |
| Net interest cost | 2,785 | 4,154 |
| NET PERIODIC BENEFIT COSTS | 9,892 | 10,544 |
44
N
45
The Company is routinely involved in claims, lawsuits, regulatory and tax audits, investigations and other legal matters arising, for the most part, in the ordinary course of its business of providing health care services and products. Legal matters that the Company currently deems to be material or noteworthy are described below. For the matters described below in which the Company believes a loss is both reasonably possible and estimable, an estimate of the loss or range of loss exposure is provided. For the other matters described below, the Company believes that the loss probability is remote and/or the loss or range of possible losses cannot be reasonably estimated at this time. The outcome of litigation and other legal matters is always difficult to predict accurately and outcomes that are not consistent with the Company's view of the merits can occur. The Company believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously. Nevertheless, it is possible that the resolution of one or more of the legal matters currently pending or threatened could have a material adverse effect on its business, results of operations and financial condition.
On April 5, 2013, the U.S. Judicial Panel on Multidistrict Litigation ordered that the numerous lawsuits pending in various federal courts alleging wrongful death and personal injury claims against FMCH and certain of its affiliates relating to FMCH's acid concentrate products NaturaLyte® and GranuFlo® be transferred and consolidated for pretrial management purposes into a consolidated multidistrict litigation in the United States District Court for the District of Massachusetts. See, In Re: Fresenius GranuFlo/NaturaLyte Dialysate Products Liability Litigation, Case No. 2013-md-02428. The Massachusetts state courts and the St. Louis City (Missouri) court subsequently established similar consolidated litigation for their cases. See, In Re: Consolidated Fresenius Cases, Case No. MICV 2013-03400-O (Massachusetts Superior Court, Middlesex County). Although similar cases were filed in other state courts, the Massachusetts federal and state courts and the St. Louis court are responsible, together, for more than 95% of all cases. The lawsuits alleged generally that inadequate labeling and warnings for these products caused harm to patients. On February 17, 2016, the Company reached with a committee of plaintiffs' counsel and reported to the courts an agreement in principle for settlement of potentially all cases. The agreement in principle calls for the Company to pay \$250,000 into a settlement fund in exchange for releases of substantially all the plaintiffs' claims, subject to the Company's right to void the settlement under certain conditions.
As subsequently agreed and refined between the Company and the plaintiff committee, and ordered by the courts, plaintiffs may enforce the settlement and compel payment by the Company if the total of cases electing to participate in the settlement and dismissed by the courts with prejudice, voluntarily or involuntarily, comes to comprise 97% of all cases as defined under the agreement. The three primary courts entered "Lone Pine" orders requiring plaintiffs, on pain of dismissal, who have not elected to participate in the settlement to submit specific justification satisfactory to the courts for their complaints, including attorney verification of certain material factual representations and expert medical opinions relating to causation. The Company may elect to void the settlement if the 97% threshold is not achieved or if plaintiffs' non-participation falls into suspect patterns. For cases not participating in the settlement and not dismissed under Lone Pine orders, active litigation may resume in the discretion of their respective courts.
The deadline for plaintiffs to elect participation in the settlement has passed, although the plaintiff committee and FMCH continue to entertain late requests for good cause by individual participants. Based on participation elections already received and Lone Pine orders already issued, the plaintiff committee and FMCH expect, and have advised the courts that they expect, the settlement to be consummated. However, because of difficulties and delays in assembling and verifying individual participation elections and in the courts' processing of individual Lone Pine dismissals for the required number of cases, the committee and FMCH have agreed that consummation will occur promptly upon sufficient verification of fulfillment of the participation threshold, providing only that consummation will not be required before June 1, 2017 and must occur by February 28, 2018. Court approval of the schedule revision is expected.
FMCH believes that a significant number of cases, in various jurisdictions, will not participate in the settlement and will require some level of additional litigation activity in their respective trial courts to resolve. Appeals by plaintiffs are pending in the two bellwether cases (Ogburn and Dial) that have been tried, in both of which jury verdicts were entered in FMCH's favor.
The Company's affected insurers have agreed to fund \$220,000 of the settlement fund if the settlement is not voided, with a reservation of rights regarding certain coverage issues between and among the Company and its insurers. The Company has accrued a net expense of \$60,000 for consummation of the settlement, including legal fees and other anticipated costs.
Following entry of the agreement in principle, the Company's insurers in the AIG group and the Company each initiated litigation against the other, in New York and Massachusetts state courts respectively, relating to the AIG group's coverage obligations under applicable policies. The affected carriers have confirmed that the coverage litigation does not impact their commitment to fund \$220,000 of the settlement with plaintiffs. In the coverage litigation, the AIG group seeks to reduce its obligation to less than \$220,000 and to be indemnified by the Company for a portion of its \$220,000 outlay; the Company seeks to confirm the AIG group's \$220,000 funding obligation, to recover defense costs already incurred by the Company, and to compel the AIG group to honor defense and indemnification obligations, if any, required for resolution of cases not participating in the settlement.
Certain of the complaints in the GranuFlo®/NaturaLyte® litigation named combinations of FMC AG & CO. KGAA, Management AG, Fresenius SE and Fresenius Management SE as defendants, in addition to FMCH and its domestic United States affiliates. The agreement in principle provides for dismissals and releases of claims encompassing the European defendants.
Four institutional plaintiffs have filed complaints against FMCH or its affiliates under state deceptive practices statutes resting on certain background allegations common to the GranuFlo®/NaturaLyte® personal injury litigation, but seeking as remedy the repayment of sums paid to FMCH attributable to the GranuFlo®/NaturaLyte® products. These cases implicate different legal standards, theories of liability and forms of potential recovery from those in the personal injury litigation and their claims will not be extinguished by the personal injury litigation settlement described above. The four plaintiffs are the Attorneys General for the States of Kentucky, Louisiana and Mississippi and the commercial insurance company Blue Cross Blue Shield of Louisiana in its private capacity. See, State of Mississippi ex rel. Hood, v. Fresenius Medical Care Holdings, Inc., No. 14-cv-152 (Chancery Court, DeSoto County); State of Louisiana ex re. Caldwell and Louisiana Health Service & Indemnity Company v. Fresenius Medical Care Airline, 2016 Civ. 11035 (U.S.D.C. D. Mass.); Commonwealth of Kentucky ex rel. Beshear v. Fresenius Medical Care Holdings, Inc. et al., No. 16-CI-00946 (Circuit Court, Franklin County).
On February 15, 2011, a whistleblower (relator) action under the False Claims Act against FMCH was unsealed by order of the United States District Court for the District of Massachusetts and served by the relator. See, United States ex rel. Chris Drennen v. Fresenius Medical Care Holdings, Inc., 2009 Civ. 10179 (D. Mass.). The relator's complaint, which was first filed under seal in February 2009, alleged that the Company sought and received reimbursement from government payors for serum ferritin and multiple forms of hepatitis B laboratory tests that were medically unnecessary or not properly ordered by a physician. Discovery on the relator's complaint closed in May 2015. Although the United States initially declined to intervene in the case, the government subsequently changed position. On April 3, 2017, the court allowed the government to intervene with respect only to certain Hepatitis B surface antigen tests performed prior to 2011, when Medicare reimbursement rules for such tests changed. The court rejected the government's request to conduct new discovery, but allowed FMCH to take discovery against the government as if the government had been intervened at the outset.
On October 6, 2015, the Office of Inspector General of the United States Department of Health and Human Services ("OIG") issued a subpoena to the Company seeking information about utilization and invoicing by Fresenius Vascular Care facilities as a whole for a period beginning after the Company's acquisition of American Access Care LLC in October 2011 ("AAC"). The Company is cooperating in the government's inquiry, which is being managed by the United States Attorney for the Eastern District of New York. Allegations against AAC arising in districts in Connecticut, Florida and Rhode Island relating to utilization and invoicing were settled in 2015.
The Company has received communications alleging conduct in countries outside the U.S. that may violate the U.S. Foreign Corrupt Practices Act ("FCPA") or other anti-bribery laws. The Company's Supervisory Board, through its Audit and Corporate Governance Committee is conducting investigations with the assistance of independent counsel. The Company voluntarily advised the U.S. Securities and Exchange Commission ("SEC") and the U.S. Department of Justice ("DOJ"). The Company's investigations and dialogue with the SEC and DOJ are ongoing. The Company is cooperating with the government investigations.
47
The Company has identified and reported to the government, and has taken remedial actions including employee disciplinary actions with respect to, conduct that may result in monetary penalties or other sanctions under the FCPA or other anti-bribery laws. In addition, the Company's ability to conduct business in certain jurisdictions could be negatively impacted. The Company has recorded in prior periods a non-material accrual for an identified matter. Given the current status of the investigations and remediation activities, the Company cannot reasonably estimate the range of possible loss that may result from identified matters or from the final outcome of the investigations or remediation activities.
The Company continues to implement enhancements to its anti-corruption compliance program, including internal controls related to compliance with international anti-bribery laws. The Company continues to be fully committed to FCPA and other anti-bribery law compliance.
In August 2014, FMCH received a subpoena from the United States Attorney for the District of Maryland inquiring into FMCH's contractual arrangements with hospitals and physicians, including contracts relating to the management of in-patient acute dialysis services. FMCH is cooperating in the investigation.
In July 2015, the Attorney General for Hawaii issued a civil complaint under the Hawaii False Claims Act alleging a conspiracy pursuant to which certain Liberty Dialysis subsidiaries of FMCH overbilled Hawaii Medicaid for Liberty's Epogen® administrations to Hawaii Medicaid patients during the period from 2006 through 2010, prior to the time of FMCH's acquisition of Liberty. See, Hawaii v. Liberty Dialysis – Hawaii, LLC et al., Case No. 15-1-1357-07 (Hawaii 1st Circuit). The State alleges that Liberty acted unlawfully by relying on incorrect and unauthorized billing guidance provided to Liberty by Xerox State Healthcare LLC, which acted as Hawaii's contracted administrator for its Medicaid program reimbursement operations during the relevant period. The amount of the overpayment claimed by the State is approximately \$8,000, but the State seeks civil remedies, interest, fines, and penalties against Liberty and FMCH under the Hawaii False Claims Act substantially in excess of the overpayment. FMCH filed third-party claims for contribution and indemnification against Xerox. The State's False Claims Act complaint was filed after Liberty initiated an administrative action challenging the State's recoupment of alleged overpayments from sums currently owed to Liberty. The civil litigation and administrative action are proceeding in parallel.
On August 31 and November 25, 2015, respectively, FMCH received subpoenas from the United States Attorneys for the District of Colorado and the Eastern District of New York inquiring into FMCH's participation in and management of dialysis facility joint ventures in which physicians are partners. On March 20, 2017, FMCH received a subpoena in the Western District of Tennessee inquiring into certain of the operations of dialysis facility joint ventures with the University of Tennessee Medical Group, including joint ventures in which FMCH's interests were divested to Satellite Dialysis in connection with FMCH's acquisition of Liberty Dialysis in 2012. FMCH is cooperating in these investigations.
On June 30, 2016, FMCH received a subpoena from the United States Attorney for the Northern District of Texas (Dallas) seeking information about the use and management of pharmaceuticals including Velphoro® as well as FMCH's interactions with DaVita Healthcare Partners, Inc. The Company understands that the subpoena relates to an investigation previously disclosed by DaVita and that the investigation encompasses DaVita, Amgen, and Sanofi. FMCH is cooperating in the investigation.
On November 18, 2016, FMCH received a subpoena from the United States Attorney for the Eastern District of New York seeking documents and information relating to the operations of Shiel Medical Laboratory, Inc., which FMCH acquired in October 2013. In the course of cooperating in the investigation and preparing to respond to the subpoena, FMCH identified falsifications and misrepresentations in documents submitted by a Shiel salesperson that relate to the integrity of certain invoices submitted by Shiel for laboratory testing for patients in long term care facilities. On February 21, 2017, FMCH terminated the employee and notified the United States Attorney of the termination and its circumstances. The terminated employee's conduct may subject the Company to liability for overpayments and penalties under applicable laws. The Company continues to cooperate in the government's ongoing investigation.
On January 3, 2017, the Company received a subpoena from the United States Attorney for the District of Massachusetts inquiring into the Company's interactions and relationships with the American Kidney Fund ("AKF" or "the Fund"), including the Company's charitable contributions to the Fund and the Fund's financial assistance to patients for insurance premiums. FMCH is cooperating in the investigation, which the Company understands to be part of a broader investigation into charitable contributions in the medical industry.
On December 14, 2016, CMS published an Interim Final Rule ("IFR") titled "Medicare Program; Conditions for Coverage for End-Stage Renal Disease Facilities-Third Party Payment" that would amend the Conditions for Coverage for dialysis providers, like Fresenius Medical Care North America ("FMCNA"). The IFR would have effectively enabled insurers to reject premium payments made by patients who received grants for individual
market coverage from the AKF and therefore, could have resulted in those patients losing their individual market coverage. The loss of individual market coverage for these patients would have had a material and adverse impact on the operating results of the Company.
On January 25, 2017, a federal district court in Texas, responding to litigation initiated by a patient advocacy group and dialysis providers including FMCNA, preliminarily enjoined CMS from implementing the IFR. Dialysis Patient Citizens v. Burwell (E.D. Texas, Sherman Div.). The preliminary injunction is based on CMS' failure to follow appropriate notice-and-comment procedures in adopting the IFR. The preliminary injunction will remain in place in the absence of a contrary ruling by the district or appellate courts.
CMS has requested, and been granted by the court, until June 23, 2017 to determine its position with respect to the subject matter of the litigation. The operation of charitable assistance programs is also receiving increased attention by state regulators, including State Departments of Insurance. The result may be a regulatory framework that differs from state to state. Even in the absence of the IFR or similar administrative actions, insurers are expected to continue to take steps to thwart the premium assistance provided to our patients for individual market plans as well as other insurance coverages. This would have a material adverse impact on the Company's operating results.
From time to time, the Company is a party to or may be threatened with other litigation or arbitration, claims or assessments arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters.
The Company, like other healthcare providers, insurance plans and suppliers, conducts its operations under intense government regulation and scrutiny. It must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the marketing and distribution of such products, the operation of manufacturing facilities, laboratories, dialysis clinics and other health care facilities, and environmental and occupational health and safety. With respect to its development, manufacture, marketing and distribution of medical products, if such compliance is not maintained, the Company could be subject to significant adverse regulatory actions by the U.S. Food and Drug Administration ("FDA") and comparable regulatory authorities outside the U.S. These regulatory actions could include warning letters or other enforcement notices from the FDA, and/or comparable foreign regulatory authority which may require the Company to expend significant time and resources in order to implement appropriate corrective actions. If the Company does not address matters raised in warning letters or other enforcement notices to the satisfaction of the FDA and/or comparable regulatory authorities outside the U.S., these regulatory authorities could take additional actions, including product recalls, injunctions against the distribution of products or operation of manufacturing plants, civil penalties, seizures of the Company's products and/or criminal prosecution. FMCH is currently engaged in remediation efforts with respect to one pending FDA warning letter. The Company must also comply with the laws of the United States, including the federal Anti-Kickback Statute, the federal False Claims Act, the federal Stark Law, the federal Civil Monetary Penalties Law and the federal Foreign Corrupt Practices Act as well as other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's interpretations or the manner in which it conducts its business. Enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence whistleblower actions. By virtue of this regulatory environment, the Company's business activities and practices are subject to extensive review by regulatory authorities and private parties, and continuing audits, subpoenas, other inquiries, claims and litigation relating to the Company's compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of whistleblower actions, which are initially filed under court seal.
The Company operates many facilities and handles personal health information of its patients and beneficiaries throughout the United States and other parts of the world. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliated companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. On occasion, the Company may identify instances where employees or other agents deliberately, recklessly or inadvertently contravene the Company's policies or violate applicable law. The actions of such persons may subject the Company and its subsidiaries to liability under the Anti-Kickback Statute, the Stark Law, the False Claims Act, Health Insurance Portability and Accountability Act, the Health Information
49
Technology for Economic and Clinical Health Act and the Foreign Corrupt Practices Act, among other laws and comparable laws of other countries.
Physicians, hospitals and other participants in the healthcare industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been and is currently subject to these suits due to the nature of its business and expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, it cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect upon it and the results of its operations. Any claims, regardless of their merit or eventual outcome, could have a material adverse effect on the Company's reputation and business.
The Company has also had claims asserted against it and has had lawsuits filed against it relating to alleged patent infringements or businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has, when appropriate, asserted its own claims, and claims for indemnification. A successful claim against the Company or any of its subsidiaries could have a material adverse effect upon its business, financial condition, and the results of its operations. Any claims, regardless of their merit or eventual outcome, could have a material adverse effect on the Company's reputation and business.
The Company is also subject to ongoing and future tax audits in the U.S., Germany and other jurisdictions. With respect to other potential adjustments and disallowances of tax matters currently under review, the Company does not anticipate that an unfavorable ruling could have a material impact on its results of operations. The Company is not currently able to determine the timing of these potential additional tax payments.
Other than those individual contingent liabilities mentioned above, the current estimated amount of the Company's other known individual contingent liabilities is immaterial.
The Company applies IFRS 7 (Financial Instruments: Disclosures). Thereby the following categories according to IAS 39 (Financial Instruments: Recognition and Measurement) are relevant: financial assets at fair value through profit or loss, loans and receivables, financial liabilities at fair value through profit or loss as well as financial liabilities recognized at amortized cost and available for sale financial assets.
The following table demonstrates the combination between categories and classes as well as the classes allocated to the balance sheet items:
| FINANCIAL INSTRUMENTS MATRIX | |||||
|---|---|---|---|---|---|
| Classes | |||||
| Cash and cash equivalents |
Noncontrolling interests subject to put provisions |
Derivatives not designated as hedging instruments |
Derivatives designated as hedging instruments |
||
| Financial Assets at fair value through profit or loss |
Other current and non-current assets |
||||
| Categories | Financial liabilities at fair value through profit or loss |
Current and non current provisions and other current and non-current liabilities |
|||
| Not assigned to a category |
Cash and cash equivalents |
Other current and non current liabilities |
Other current and non current assets, Current and non-current provisions and other current and non-current liabilities |
50
N
1 Excluding capital lease obligations.
The carrying amounts of financial instruments at March 31, 2017 and December 31, 2016, classified into categories according to IAS 39, can be seen in the following table.
| CARRYING AMOUNT OF FINANCIAL INSTRUMENT CATEGORIES in € thousands |
||
|---|---|---|
| March 31, 2017 |
December 31, 2016 |
|
| Loans and Receivables | 4,094,527 | 3,835,800 |
| Financial Liabilities recognized at amortized cost | (10,177,399) | (10,210,287) |
| Financial Assets at fair value through profit or loss | 88,278 | 132,406 |
| Financial Liabilities at fair value through profit or loss | (344,700) | (339,701) |
| Available for sale financial assets1 | 321,444 | 256,437 |
| Not assigned to a category | (224,396) | (194,176) |
1 The impact on the Consolidated Statements of Income and the Consolidated Statements of Shareholders' Equity is not material.
The following table presents the carrying amounts and fair values of the Company's financial instruments at March 31, 2017 and December 31, 2016.
| CARRYING AMOUNT AND FAIR VALUE OF FINANCIAL INSTRUMENTS in € thousands |
||||
|---|---|---|---|---|
| March 31, 2017 | December 31, 2016 | |||
| Carrying amount |
Fair Value | Carrying amount |
Fair Value | |
| Non-derivative Financial Instruments | ||||
| Cash and cash equivalents | 670,575 | 670,575 | 708,882 | 708,882 |
| Assets recognized at carrying amount1 | 4,253,524 | 4,253,524 | 3,987,806 | 3,987,806 |
| Assets recognized at fair value | 321,444 | 321,444 | 256,437 | 256,437 |
| Liabilities recognized at carrying amount2 | (10,221,141) | (10,811,599) | (10,254,062) | (10,754,495) |
| Liabilities recognized at fair value | (219,350) | (219,350) | (223,504) | (223,504) |
| Noncontrolling interests subject to put provisions | (1,009,344) | (1,009,344) | (1,007,733) | (1,007,733) |
| Derivative Financial Instruments | ||||
| Derivatives not designated as hedging instruments | (37,072) | (37,072) | 16,209 | 16,209 |
| Derivatives designated as hedging instruments | (882) | (882) | (3,556) | (3,556) |
1 Not included are "Other current and non-current assets" that do not qualify as financial instruments (March 31, 2017: €843,828 and
December 31, 2016: €850,630).
2 Not included are "Current and non-current provisions and other current and non-current liabilities" that do not qualify as financial instruments (March 31, 2017: €1,434,078 and December 31, 2016: €1,429,344).
The significant methods and assumptions used in estimating the fair values of non-derivative financial instruments are as follows:
Cash and cash equivalents are stated at nominal value which equals the fair value.
Short-term financial instruments such as trade accounts receivable, accounts receivable from related parties, accounts payable, accounts payable to related parties and short-term debt as well as certain other financial instruments are valued at their carrying amounts, which are reasonable estimates of the fair value due to the relatively short period to maturity of these instruments.
The fair value of available for sale financial assets quoted in an active market is based on price quotations at the period-end date (Level 1).
Long-term debt is recognized at its carrying amount. The fair values of major long-term debt are calculated on the basis of market information (Level 2). Liabilities for which market quotes are available are
52
N
measured using these quotes. The fair values of the other long-term debt are calculated at the present value of the respective future cash flows. To determine these present values, the prevailing interest rates and credit spreads for the Company as of the balance sheet date are used.
Variable payments outstanding for acquisitions are recognized at their fair value. The estimation of the individual fair values is based on the key inputs of the arrangement that determine the future contingent payment as well as the Company's expectation of these factors (Level 3). The Company assesses the likelihood and timing of achieving the relevant objectives. The underlying assumptions are reviewed regularly.
Noncontrolling interests subject to put provisions are recognized at their fair value. The methodology the Company uses to estimate the fair values assumes the greater of net book value or a multiple of earnings, based on historical earnings, development stage of the underlying business and other factors (Level 3). Additionally, there are put provisions that are valued by an external valuation firm. The external valuation estimates the fair values using a combination of discounted cash flows and a multiple of earnings and/or revenue (Level 3). When applicable, the obligations are discounted at a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability. The estimated fair values of the noncontrolling interests subject to these put provisions can also fluctuate, and the discounted cash flows as well as the implicit multiple of earnings and/or revenue at which these noncontrolling interest obligations may ultimately be settled could vary significantly from the Company's current estimates depending upon market conditions.
Following is a roll forward of noncontrolling interests subject to put provisions at March 31, 2017 and December 31, 2016.
| NONCONTROLLING INTERESTS SUBJECT TO PUT PROVISIONS in € thousands |
||
|---|---|---|
| 2017 | 2016 | |
| BEGINNING BALANCE AT JANUARY 1, | 1,007,733 | 791,075 |
| Contributions to noncontrolling interests | (32,023) | (169,260) |
| Purchase of noncontrolling interests | (8,388) | (1,785) |
| Sale of noncontrolling interests | 6,297 | 53,919 |
| Contributions from noncontrolling interests | 1,088 | 29,144 |
| Expiration of put provisions and other reclassifications | (1,991) | (8,814) |
| Changes in fair value of noncontrolling interests | 5,670 | 115,627 |
| Net income | 44,438 | 164,515 |
| Foreign Currency Translation | (13,480) | 33,312 |
| ENDING BALANCE AS OF MARCH 31, 2017 AND DECEMBER 31, 2016 | 1,009,344 | 1,007,733 |
Credit risk resulting from a decrease in the value of the Company's financing receivables and allowances on credit losses of financing receivables are immaterial.
In order to manage the risk of currency exchange rate and interest rate fluctuations, the Company enters into various hedging transactions by means of derivative instruments with highly rated financial institutions as authorized by the Company's General Partner. On a quarterly basis, the Company performs an assessment of its counterparty credit risk. The Company currently considers this risk to be low. The Company's policy, which has been consistently followed, is that financial derivatives be used only for the purpose of hedging foreign currency and interest rate exposure.
In certain instances, the Company enters into derivative contracts that do not qualify for hedge accounting but are utilized for economic purposes ("economic hedges"). The Company does not use financial instruments for trading purposes. The Company established guidelines for risk assessment procedures and controls for the use of financial instruments. They include a clear segregation of duties with regard to execution on one side and administration, accounting and controlling on the other.
54
To reduce the credit risk arising from derivatives the Company entered into Master Netting Agreements with banks. Through such agreements, positive and negative fair values of the derivative contracts could be offset against one another if a partner becomes insolvent. This offsetting is valid for transactions where the aggregate amount of obligations owed to and receivable from are not equal. If insolvency occurs, the party which owes the larger amount is obliged to pay the other party the difference between the amounts owed in the form of one net payment.
These master netting agreements do not provide a basis for offsetting the fair values of derivative financial instruments in the statement of financial position as the offsetting criteria under IFRS are not satisfied.
At March 31, 2017 and December 31, 2016, the Company had €7,154 and €24,312 of derivative financial assets subject to netting arrangements and €48,709 and €26,751 of derivative financial liabilities subject to netting arrangements. Offsetting these derivative financial instruments would have resulted in net assets of €104 and €13,673 as well as net liabilities of €41,659 and €16,112 at March 31, 2017 and December 31, 2016, respectively.
In connection with the issuance of the Convertible Bonds in September 2014, the Company purchased share options. Any change in the Company's share price above the conversion price would be offset by a corresponding value change in the share options.
The Company conducts business on a global basis in various currencies, though a majority of its operations are in Germany and the United States. For financial reporting purposes in accordance with Section 315a of the German Commercial Code ("HGB") the Company has chosen the euro as its reporting currency. Therefore, changes in the rate of exchange between the euro and the local currencies in which the financial statements of the Company's international operations are maintained, affect its results of operations and financial position as reported in its Consolidated Financial Statements.
Additionally, individual subsidiaries are exposed to transactional risks mainly resulting from intercompany purchases between production sites and other subsidiaries with different functional currencies. This exposes the subsidiaries to fluctuations in the rate of exchange between the invoicing currencies and the currency in which their local operations are conducted. For the purpose of hedging existing and foreseeable foreign exchange transaction exposures the Company enters into foreign exchange forward contracts and, on a small scale, foreign exchange options. At March 31, 2017 and December 31, 2016, the Company had no foreign exchange options.
Changes in the fair value of the effective portion of foreign exchange forward contracts designated and qualifying as cash flow hedges of forecasted product purchases and sales are reported in Accumulated Other Comprehensive Income ("AOCI"). Additionally, in connection with intercompany loans in foreign currency, the Company uses foreign exchange swaps to assure that no foreign exchange risks arise from those loans, which, if they qualify for cash flow hedge accounting, are also reported in AOCI. These amounts recorded in AOCI are subsequently reclassified into earnings as a component of cost of revenue for those contracts that hedge product purchases and sales or as an adjustment of interest income/expense for those contracts that hedge loans, in the same period in which the hedged transaction affects earnings. The notional amounts of foreign exchange contracts in place that are designated and qualify as cash flow hedges totalled €84,658 and €103,358 March 31, 2017 and December 31, 2016, respectively.
The Company also enters into derivative contracts for forecasted product purchases and sales and for intercompany loans in foreign currencies which do not qualify for hedge accounting but are utilized for economic hedges as defined above. In these two cases, the change in value of the economic hedge is recorded in the income statement and usually offsets the change in value recorded in the income statement for the underlying asset or liability. The notional amounts of economic hedges that do not qualify for hedge accounting totalled €1,839,956 and €1,407,611 at March 31, 2017 and December 31, 2016, respectively.
The Company enters into derivatives, particularly interest rate swaps and, to a certain extent, interest rate options to protect against the risk of rising interest rates. These interest rate derivatives are designated as cash flow hedges and have been entered into in order to effectively convert payments based on variable interest rates into payments at a fixed interest rate. The euro-denominated interest rate swaps expire in 2019 and have a weighted average interest rate of 0.32%. Interest payable and receivable under the swap agreements is accrued and recorded as an adjustment to interest expense.
The effective portion of gains and losses of derivatives designated as cash flow hedges is deferred in AOCI; the amount of gains and losses reclassified from AOCI are recorded in interest income and interest expenses.
At March 31, 2017 and December 31, 2016, the notional amount of the euro-denominated interest rate swaps in place was €246,000 and €252,000.
In addition, the Company also enters into interest rate hedges ("pre-hedges") in anticipation of future long-term debt issuance. These pre-hedges are used to hedge interest rate exposures with regard to interest rates which are relevant for the future long-term debt issuance and which could rise until the respective debt is actually issued. These pre-hedges were settled at the issuance date of the corresponding long-term debt with the settlement amount recorded in AOCI amortized to interest expense over the life of the debt. At March 31, 2017 and December 31, 2016, the Company had €31,103 and €35,814, respectively, related to settlements of pre-hedges deferred in AOCI, net of tax.
DERIVATIVE FINANCIAL INSTRUMENT VALUATION
The following table shows the carrying amounts of the Company's derivatives at March 31, 2017 and December 31, 2016.
1 At March 31, 2017 and December 31, 2016, the valuation of the Company's derivatives was determined using Significant Other Observable Inputs (Level 2). 2 Derivative instruments are marked to market each reporting period resulting in carrying amounts being equal to fair values at the reporting date.
TOTAL 88,278 (125,350) 132,406 (116,197)
The carrying amounts for the current portion of derivatives indicated as assets in the table above are included in Other current assets in the Consolidated Balance Sheets while the current portion of those indicated as liabilities are included in Current provisions and other current liabilities. The non-current portions indicated as assets or liabilities are included in the Consolidated Balance Sheets in Other non-current assets or Non-current provisions and other non-current liabilities, respectively.
The significant methods and assumptions used in estimating the fair values of derivative financial instruments are as follows:
The fair value of interest rate swaps is calculated by discounting the future cash flows on the basis of the market interest rates applicable for the remaining term of the contract as of the balance sheet date. To determine the fair value of foreign exchange forward contracts, the contracted forward rate is compared to the current forward rate for the remaining term of the contract as of the balance sheet date. The result is then discounted on the basis of the market interest rates prevailing at the balance sheet date for the applicable currency. The fair value of the embedded derivative of the convertible bonds is calculated using the difference between the market value of the convertible bond and the market value of an adequate straight bond discounted with the market interest rates as of the reporting date.
The Company's own credit risk is incorporated in the fair value estimation of derivatives that are liabilities. Counterparty credit risk adjustments are factored into the valuation of derivatives that are assets. The Company monitors and analyses the credit risk from derivative financial instruments on a regular basis. For the valuation of derivative financial instruments, the credit risk is considered in the fair value of every individual instrument. The default probability is based upon the credit default swap spreads of each counterparty appropriate for the duration. The calculation of the credit risk considered in the valuation is performed by multiplying the default probability appropriate for the duration with the expected discounted cash flows of the derivative financial instrument.
The following table shows the effect of derivatives on the Consolidated Financial Statements:
in € thousands
| Amount of Gain (Loss) recognized in AOCI on Derivatives (Effective Portion) |
Location of (Gain) Loss reclassified from AOCI in Income (Effective Portion) |
Amount of (Gain) Loss reclassified from AOCI in Income (Effective Portion) |
|||
|---|---|---|---|---|---|
| for the three months ended March 31, |
for the three months ended March 31, |
||||
| Derivatives in Cash Flow Hedging Relationships | 2017 | 2016 | 2017 | 2016 | |
| Interest rate contracts | 58 | (3,172) | Interest income/expense | 6,805 | 5,657 |
| Foreign exchange contracts | 1,568 | 2,095 | Costs of Revenue | 938 | (436) |
| TOTAL | 1,626 | (1,077) | 7,743 | 5,221 | |
| Location of (Gain) Loss recognized in Income on Derivatives |
Amount of (Gain) Loss recognized in Income on Derivatives for the three months ended March 31, |
||||
| Derivatives not designated as Hedging Instruments | 2017 | 2016 | |||
| Foreign exchange contracts | Selling, general and administrative expense |
20,717 | 24,229 | ||
| Foreign exchange contracts | Interest income/expense | 1,483 | 642 | ||
| Derivatives embedded in the Convertible Bonds | Interest income/expense | (15,406) | (3,361) | ||
| Share options to secure the Convertible Bonds | Interest income/expense | 15,406 | 3,361 | ||
| TOTAL | 22,200 | 24,871 |
At March 31, 2017, the Company had foreign exchange derivatives with maturities of up to 12 months and interest rate swaps with maturities of up to 31 months.
57
The Company's operating segments are the North America Segment, the EMEA Segment, the Asia-Pacific Segment and the Latin America Segment. The operating segments are determined based upon how the Company manages its businesses with geographical responsibilities. All segments are primarily engaged in providing health care services and the distribution of products and equipment for the treatment of ESRD and other extracorporeal therapies.
Management evaluates each segment using measures that reflect all of the segment's controllable revenues and expenses. With respect to the performance of business operations, management believes that the most appropriate IFRS measures are revenue, operating income and operating income margin. The Company does not include income taxes as it believes this is outside the segments' control. Financing is a corporate function, which the Company's segments do not control. Therefore, the Company does not include interest expense relating to financing as a segment measurement. Similarly, the Company does not allocate certain costs, which relate primarily to certain headquarters' overhead charges, including accounting and finance, because the Company believes that these costs are also not within the control of the individual segments. Production of products, production asset management, quality management and procurement related to production are centrally managed at Corporate. The Company's global research and development is also centrally managed at Corporate. These Corporate activities do not fulfill the definition of a segment according to IFRS 8. Products are transferred to the segments at cost; therefore no internal profit is generated. The associated internal revenue for the product transfers and their elimination are recorded as Corporate activities. Capital expenditures for production are based on the expected demand of the segments and consolidated profitability considerations. In addition, certain revenues, investments and intangible assets, as well as any related expenses, are not allocated to a segment but are accounted for as Corporate.
The key data used by the management board of the Company's General Partner to control the segments are based on IFRS figures. Until December 31, 2016 US-GAAP based figures were used to control the segments. Thus, the segment information was given in accordance with US-GAAP.
Information pertaining to the Company's segment and Corporate activities for the three months ended March 31, 2017 and 2016 is set forth below.
in € thousands
| North America Segment |
EMEA Segment |
Asia- Pacific Segment |
Latin America Segment |
Segment Total |
Corporate | Total | |
|---|---|---|---|---|---|---|---|
| Three months ended March 31, 2017 |
|||||||
| Revenue external customers | 3,374,842 | 613,687 | 377,545 | 177,409 | 4,543,483 | 4,637 | 4,548,120 |
| Inter-segment revenue | 674 | 19 | 57 | 750 | (750) | ||
| $\triangleright$ REVENUE | 3,375,516 | 613,687 | 377,564 | 177,466 | 4,544,233 | 3,887 | 4,548,120 |
| ► OPERATING INCOME | 525,815 | 114,479 | 81,835 | 14,405 | 736,534 | (85, 255) | 651,279 |
| Interest | (92, 728) | ||||||
| Earnings before taxes | 558,551 | ||||||
| Depreciation and amortization | (105,007) | (30, 453) | (11, 655) | (4,508) | (151, 623) | (38, 285) | (189,908) |
| Income (loss) from equity method investees |
14,808 | (846) | 804 | 119 | 14.885 | 14,885 | |
| Total assets | 17,434,931 | 3,656,704 | 1,829,306 | 704,626 | 23,625,567 | 2,154,105 | 25,779,672 |
| thereof investments in equity method investees |
304,409 | 187,658 | 97,321 | 23,851 | 613,239 | 613,239 | |
| Capital expenditures, acquisitions and investments 1,2 |
263,642 | 37,691 | 7,426 | 7,938 | 316,697 | 41,062 | 357,759 |
| Three months ended March 31, 2016 |
|||||||
| Revenue external customers | 2,862,352 | 572,400 | 339,686 | 139,068 | 3,913,506 | 2,875 | 3,916,381 |
| Inter-segment revenue | 926 | 5 | 29 | 960 | (960) | ||
| ► REVENUE | 2,863,278 | 572,400 | 339,691 | 139,097 | 3,914,466 | 1,915 | 3,916,381 |
| ► OPERATING INCOME | 401,808 | 117,969 | 59,386 | 9,779 | 588,942 | (92, 026) | 496,916 |
| Interest | (95, 544) | ||||||
| Earnings before taxes | 401,372 | ||||||
| Depreciation and amortization | (91, 947) | (26, 029) | (10, 427) | (3, 267) | (131, 670) | (33, 656) | (165, 326) |
| Income (loss) from equity method investees |
15,002 | 1,243 | 507 | 100 | 16,852 | 16,852 | |
| Total assets | 15,399,683 | 3,035,763 | 1,570,782 | 577,543 | 20,583,771 | 2,263,076 | 22,846,847 |
| thereof investments in equity method investees |
248,875 | 190,785 | 95,847 | 23,794 | 559,301 | 559,301 | |
| Capital expenditures, acquisitions and investments 3 |
220,935 | 26,355 | 7,778 | 4,347 | 259,415 | 50,237 | 309,652 |
1 North America and EMEA acquisitions exclude €3,814 and – €13,731 respectively of non-cash acquisitions for 2017.
2 Acquisitions of the last twelve months increased consolidated earnings in the amount of €5,637.
3 North America and EMEA acquisitions exclude €7,595 and €10 of non-cash acquisitions for 2016.
59
The following additional information is provided with respect to the Consolidated Statements of Cash Flows:
| SUPPLEMENTARY CASH FLOW INFORMATION in € thousands |
||
|---|---|---|
| For the three months ended March 31, |
||
| 2017 | 2016 | |
| Details for acquisitions: | ||
| Assets acquired | (155,397) | (65,389) |
| Liabilities assumed | 6,137 | – |
| Noncontrolling interest subject to put provisions | 5,700 | 1,634 |
| Noncontrolling interest | 563 | 3,492 |
| Non-cash consideration | (9,917) | 7,605 |
| Cash paid | (152,914) | (52,658) |
| Less cash acquired | 383 | 2,179 |
| NET CASH PAID FOR ACQUISITIONS | (152,531) | (50,479) |
| Cash paid for investments | (3,693) | (29,243) |
| Cash paid for intangible assets | (3,987) | (2,908) |
| TOTAL CASH PAID FOR ACQUISITIONS AND INVESTMENTS, NET OF CASH ACQUIRED, AND PURCHASES OF INTANGIBLE ASSETS |
(160,211) | (82,630) |
On April 28, 2017, the Company successfully closed the acquisition of Cura Day Hospital Group Pty Ltd. ("Cura") in Australia – the first step into Care Coordination outside the North America Segment. Cura generated €87,000 in revenue for their 2016 fiscal year. Consolidation effects are already reflected in the Company's outlook for 2017.
No further significant activities have taken place subsequent to the balance sheet date March 31, 2017 that have a material impact on the key figures and earnings presented. Currently, there are no other significant changes in the Company's structure, management, legal form or personnel.
The personally liable shareholder, represented by the Managing Board of Fresenius Medical Care Management AG, and the Supervisory Board of FMC AG & CO. KGAA have issued a compliance declaration pursuant to 161 of the German Stock Corporation Act (AktG).The Company has made this declaration available to the public on its website: http:/ /www.freseniusmedicalcare.com/en/investors/corporate-governance/declaration-of-compliance/
The Consolidated Financial Statements as of and for the period ended March 31, 2017 and the interim management report for the three months ended March 31, 2017 were not audited nor reviewed.
C
61346 Bad Homburg v.d.H. Germany Tel. + 49 6172 609 0 www.freseniusmedicalcare.com
Corporate Communications Dr. Dominik Heger Head of Investor Relations & Corporate Communications Tel. + 49 6172 609 25 25 Fax + 49 6172 609 23 01 E-Mail: [email protected]
Report on Second Quarter 2017: August 1, 2017
Report on Third Quarter 2017: November 2, 2017
C
62 FRESENIUS MEDICAL CARE
Else-Kröner-Str. 1 61352 Bad Homburg v.d.H., Germany www.freseniusmedicalcare.com
Building tools?
Free accounts include 100 API calls/year for testing.
Have a question? We'll get back to you promptly.