«Fresenius Medical Care AG & Co. KGaA Hof an der Saale Germany FRESENIUS MEDICAL CARE AG & Co. KGaA Page FINANCIAL INFORMATION Management’s ...»
Beginning in 2015, we increased our operating segments from three to four segments to align with the way in which we currently manage our company. Our operating segments are the North America Segment, the EMEA Segment, the Asia-Pacific Segment and the Latin America Segment. Accordingly, the two reporting segments disclosed in prior years (the North America Segment and the International Segment, which was comprised of EMEA, Asia-Pacific and Latin America) have now been reclassified into four reporting segments during 2015. 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 U.S. GAAP 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 headquarter overhead charges, including accounting and finance, Corporate, 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 are centrally managed at Corporate.
FRESENIUS MEDICAL CARE AG & Co. KGaAat cost; therefore no internal profit is generated. The associated internal revenues for the product transfers and their elimination are recorded as Corporate activities (See Note 14) “Segment and Corporate Information” found elsewhere in 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 our consolidated results of operations.
Delivered EBIT As a result of the increase 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 FMCAG & Co. KGaA. Below is a table showing the reconciliation of Delivered EBIT to Operating Income for
each of our reporting segments:
Care Coordination 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, only the sub-capitation and other shared savings programs are included within the Member Months and Medical Cost Under Management calculations below. In the future we expect the various other programs will be included in the following metrics as information on reimbursements becomes available, specifically for MA-CSNPs, BPCI and ESCO programs. These metrics may be developed further in future periods.
Member Months Under Medical Cost Management
Member months under medical cost management is calculated by multiplying the number of members who are included in value and risk-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-CSNPs, 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
Medical cost under management represents the management of medical costs associated with our patient membership in value and risk-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
Care Coordination patient encounters represents the total patient encounters and procedures conducted by certain of our Care Coordination activities. Specifically, Care Coordination patient encounters is the sum of all encounters and procedures completed during the period by Sound, MedSpring Urgent Care (“MedSpring”), Fresenius Vascular Care, and National Cardiovascular Partners (“NCP”) as well as patients in our Fresenius Medical Care Rx Bone Mineral Metabolism program (“BMM program”).
The following tables summarize our financial performance and certain operating results by reporting segment and Corporate for the periods indicated. Inter-segment revenues primarily reflect sales of medical equipment and supplies. We prepared the information using a management approach, consistent with the basis and manner in which we internally disaggregate financial information to assist in making internal operating decisions and evaluating management performance.
See the table below:
(1) For further information on Constant Exchange Rates, see "Non-U.S. GAAP Measures for Presentation - Constant Currency" below.
Total Revenue increased by 11% (17% increase at Constant Exchange Rates) to $3,960 million for the three months ended March 31, 2015 from $3,564 million in the same period of 2014 due to increases in Net Health Care revenue.
Net Health Care revenue increased by 14% to $3,182 million (18% increase at Constant Exchange Rates) for the three months ended March 31, 2015 from $2,782 million in the same period of 2014, mainly due to contributions from acquisitions (12%), growth in same market treatments (4%) and increases in organic revenue per treatment (3%), partially offset by the negative impact of exchange rate fluctuations (4%) and the effect of closed or sold clinics (1%).
Dialysis treatments increased by 7% for the three months ended March 31, 2015 as compared to the same period in 2014. The increase is due to same market treatment growth (4%) and acquisitions (4%), partially offset by the effect of closed or sold clinics (1%).
At March 31, 2015, we owned, operated or managed (excluding those managed but not consolidated in the U.S.) 3,396 dialysis clinics compared to 3,263 dialysis clinics at March 31, 2014.
During the three months ended March 31, 2015, we acquired 9 dialysis clinics, opened 42 dialysis clinics and combined or closed 16 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 286,768 at March 31, 2015 from 270,570 at March 31, 2014.
Dialysis product revenue decreased slightly (11% increase at Constant Exchange Rates) to $778 million as compared to $782 million in the same period of 2014. The increase at Constant Exchange Rates was driven by increased sales of dialyzers, machines, hemodialysis solutions and concentrates, peritoneal dialysis products, products for acute care treatments, renal pharmaceuticals and bloodlines.
FRESENIUS MEDICAL CARE AG & Co. KGaAThe decrease in gross profit margin to 29.9% from 30.4% primarily reflects the unfavorable impact of varying margins across our four reporting segments. The decrease in the North America Segment was mainly due to generally lower gross profit margins in Care Coordination and stronger growth in Care Coordination compared to our dialysis business at lower than average margins, partially offset by favorable foreign exchange effects impacting our manufacturing operations and lower costs for pharmaceuticals. The decrease in the Latin America Segment was driven by unfavorable foreign exchange effects. The increase in the Asia-Pacific Segment was largely due to favorable business growth in China. The increase in the EMEA Segment was mainly due to favorable foreign exchange effects.
Selling, general and administrative (“SG&A”) expenses increased to $655 million in the three months ended March 31, 2015 from $620 million in the same period of 2014. SG&A expenses as a percentage of sales decreased to 16.5% for the first three months of 2015 in comparison with 17.4% in the same period of 2014 due to decreases in the EMEA Segment and the Asia-Pacific Segment, partially offset by increases in the North America Segment and at Corporate. The decrease in the EMEA Segment was largely due to favorable foreign exchange effects and lower provisions related to compliance investigations we are conducting (see Note 11). The decrease in the Asia-Pacific Segment was driven by favorable foreign exchange effects, a favorable impact from acquisitions and business growth in China. The increase in the North America Segment was mainly due to higher consulting and legal expenses, higher personnel expense, growth in Care Coordination services at lower than average margins as well as our laboratory services entering into a new agreement at lower rates with a commercial payor. The increase at Corporate was largely driven by higher legal and consulting expenses.
Income from equity method investees decreased to $6 million for the three months ended March 31, 2015 from $13 million for the same period of 2014 due to decreased income from the Vifor Fresenius Medical Care Renal Pharma Ltd. (“VFMCRP”) renal pharmaceuticals joint venture.
Operating income increased to $504 million for the three months ended March 31, 2015 from $445 million for the same period in 2014. Operating income margin increased to 12.7% for the three months ended March 31, 2015 as compared to 12.5% for the same period in 2014 as a result of decreased SG&A as a percentage of revenue, partially offset by the decrease in gross profit margin.
Delivered EBIT increased by 12% to $450 million for the three months ended March 31, 2015 from $403 million for the same period in 2014 as a result of the operating income impacts noted above, Care Coordination acquisitions in 2014 and by increased noncontrolling interests associated with the creation of new joint ventures.
Interest expense increased by 45% to $162 million for the three months ended March 31, 2015 from $112 million for the same period in 2014 due to the valuation of the embedded derivative related to the convertible debt issued in September 2014 and an increase in the average debt level during the quarter, partially offset by a favorable impact from the translation of interest expense on the convertible bond. Interest income increased to $60 million for the three months ended March 31, 2015 from $16 million for the same period in 2014 mainly as a result of the valuation of the call option on our shares related to the issuance of the convertible bond, which fully offsets the increase in the interest expense due to the valuation of the embedded derivative noted above.
Income tax expense increased to $138 million for the three months ended March 31, 2015 from $102 million for the same period in 2014. The effective tax rate increased to 34.3% from 29.1% for the same period of 2014 mainly driven by a favorable impact in 2014 related to an ongoing tax audit.
Net income attributable to noncontrolling interests for the three months ended March 31, 2015 increased to $54 million from $42 million for the same period of 2014 primarily driven by Care Coordination acquisitions in 2014 and by the creation of new joint ventures in the North America Segment.