Related party transactions

3 Months Ended

Mar. 31, 2019

4. Related party transactions

Fresenius SE is the Company’s largest shareholder and owns 30,92% of the Company’s outstanding shares, excluding treasury shares held by the Company, at March 31, 2019. The Company has entered into certain arrangements for services 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 arrangements for leases with Fresenius SE or its subsidiaries are described in item b) 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 and the Company believes that these arrangements reflect fair market terms. The Company utilizes various methods to verify the commercial reasonableness of its related party arrangements. Financing arrangements as described in item c) 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 d) below. Our related party transactions are settled through Fresenius SE’s cash management system where appropriate.

a) Service agreements and products

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 to 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 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.

The Company entered into a ten year agreement with a Fresenius SE Company for the manufacturing of infusion bags. In order to establish the new production line, the Company purchased machinery from the Fresenius SE company in the amount of €250 during the three months ended March 31, 2019.

In December 2010, the Company and Galenica Ltd. (now known as Vifor Pharma Ltd.) formed the renal pharmaceutical company 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.

Service agreements and products with related parties
in € THOUS
		For the three months endedMarch 31, 2019				For the three months endedMarch 31, 2018				March 31, 2019				December 31, 2018
		Sales of goods and services		Purchases of goods and services		Sales of goods and services		Purchases of goods and services		Accounts receivable		Accounts payable		Accounts receivable		Accounts payable

Service agreements⁽¹⁾
	Fresenius SE		32		5.182		70		5.724		1.064		3.149		378		4.019
	Fresenius SE affiliates		940		24.652		876		24.455		849		7.946		681		8.470
	Equity method investees		730		-		5.060		-		78		-		2.449		-
	Total		1.702		29.834		6.006		30.179		1.991		11.095		3.508		12.489

Products
	Fresenius SE affiliates		9.862		8.290		7.907		9.075		11.062		3.699		8.750		3.658
	Equity method investees		-		151.645		-		121.021		-		112.907		-		57.975
	Total		9.862		159.935		7.907		130.096		11.062		116.606		8.750		61.633

	(1) In addition to the above shown accounts payable, accrued expenses for service agreements with related parties amounted to €6,687 and €9,376 at March 31, 2019 and December 31, 2018, respectively.

b) Lease agreements

In addition to the above-mentioned product and service agreements, the Company is a party to real estate 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 at the end of 2026.

Below is a summary resulting from the above described lease agreements with related parties. For information on the implementation of IFRS 16, see note 1.

Lease agreements with related parties
in € THOUS
		For the three months endedMarch 31, 2019				For the three months endedMarch 31, 2018		March 31, 2019
		Depreciation		Interest expense	Lease expense⁽¹⁾	Lease income	Lease expense	Right-of-use asset		Lease liability


	Fresenius SE		1.214	137	854	-	2.069		35.219	35.286
	Fresenius SE affiliates		3.089	353	161	-	3.692		97.966	98.116
	Total		4.303	490	1.015	-	5.761		133.185	133.402

	(1) Short-term leases and expenses relating to variable lease payments are exempted from balance sheet recognition.

c) Financing

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, 2019 and December 31, 2018, the Company had accounts receivable from Fresenius SE related to short-term financing in the amount of €80.388 and €80.228, respectively. As of March 31, 2019 and December 31, 2018, the Company had accounts payable to Fresenius SE related to short-term financing in the amount of €76.784 and €32.454, 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, with a floor of zero, 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, 2019 with an interest rate of 0,825%. On November 28, 2013, the Company borrowed an additional €1.500 with an interest rate of 1,875% from the General Partner. The loan repayment has been extended periodically and is currently due on November 23, 2019 with an interest rate of 0,825%.

At March 31, 2019 and December 31, 2018, a subsidiary of Fresenius SE held unsecured bonds issued by the Company in the amount of €5.000 and €6.000, respectively. The bonds 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, 2019 and December 31, 2018, the Company borrowed from Fresenius SE in the amount of €104.400 on an unsecured basis at an interest rate of 0,825% and €185.900 on an unsecured basis at an interest rate of 0,825%, respectively. For further information on this loan agreement, see note 8.

d) Key management personnel

Due to the Company’s 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 €8.028 and €4.016, respectively, for its management services during the three months ended March 31, 2019 and 2018. As of March 31, 2019 and December 31, 2018, the Company had accounts receivable from the General Partner in the amount of €1.840 and €176, respectively. As of March 31, 2019 and December 31, 2018, the Company had accounts payable to the General Partner in the amount of €5.899 and €47.205, respectively.