SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

 

PURSUANT TO RULE 13a-16 OR 15d-16 OF THE

SECURITIES EXCHANGE ACT OF 1934

For the month of August 2011

 

 

FRESENIUS MEDICAL CARE AG & Co. KGaA
(Translation of registrant’s name into English)

 

Else-Kröner Strasse 1

61346 Bad Homburg

Germany

(Address of principal executive offices)

 

 

     Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F þ            Form 40-F o

 

     Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ­ ­

 

     Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ­ ­

 

     Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

     Yes  o                  No þ

 

     If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82 –            .

 

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

Interim Report of Financial Condition and Results of Operations
for the three and six months ended June 30, 2011 and 2010

 

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 Annual Report on Form 20-F for the year ended December 31, 2010, as amended. 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.

 

Forward-looking Statements

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report, the words “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 and be more negative than 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 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 that could cause actual results to differ from our projected results include, among others, the following:

 

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

 

Important factors that could contribute to such differences are noted in this section below and in Note 13 of the Notes to Consolidated Financial Statements (Unaudited), “Commitments and Contingencies” and in our Annual Report on Form 20-F for the year ended December 31, 2010 under “Risk Factors” and elsewhere in that report.

 

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, and 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 below under “Results of Operations”. For a discussion of our critical accounting policies, see Item 5, “Operating and Financial Review and Prospects – Critical Accounting Policies” in our Annual Report on Form 20-F for the year ended December 31, 2010.

 

Overview

 

We are engaged primarily in providing dialysis services and manufacturing and distributing products and equipment for the treatment of end-stage renal disease (“ESRD”). In the U.S., we also perform clinical laboratory testing and vascular access services. We estimate that providing dialysis services and distributing dialysis products and equipment represents an over $69 billion worldwide market with expected annual worldwide market growth of around 4%. Patient growth results from factors such as the aging population and increased life expectancies; shortage of donor organs for kidney transplants; increasing incidence and better treatment of and survival of patients with diabetes and hypertension, which frequently precede the onset of ESRD; improvements in treatment quality, which prolong patient life; and improving standards of living in developing countries, which make life-saving dialysis treatment available to more patients. Key to continued growth in revenue is our ability to attract new patients in order to increase the number of treatments performed each year. For that reason, we believe the number of treatments performed each year is a strong indicator of continued revenue growth and success. In addition, the reimbursement and ancillary services utilization environment significantly influences our business. In the past we experienced, and after the implementation of the new case-mix adjusted bundled prospective payment system (“ESRD PPS”) in the U.S. also expect in the future to experience, generally stable reimbursements for dialysis services. This includes the balancing of unfavorable reimbursement changes in certain countries with favorable changes in other countries. The majority of treatments are paid for by governmental institutions such as Medicare in the United States. As a consequence of the pressure to decrease healthcare costs, reimbursement rate increases have historically been limited. We are seeing a growing trend by government’s to bundle dialysis services currently reimbursed separately. Our ability to influence the pricing of our services is limited.

 

A majority of our U.S. dialysis services is paid for by the Medicare program. Medicare payments for dialysis services provided before January 1, 2011 were based on a composite rate, which included a drug add-on adjustment, case-mix adjustments, and a regional wage index adjustment. The drug add-on adjustment was established under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) to account for differences in Medicare reimbursement for separately billable pharmaceuticals pre-MMA and the average sales price reimbursement system established by the MMA.

 

Until January 1, 2011 certain other items and services that we furnish at our dialysis centers were not included in the composite rate and were eligible for separate Medicare reimbursement. The most significant of these items are drugs or biologicals, such as erythropoietin-stimulating agents (“ESAs”), vitamin D analogs, and iron, which were reimbursed at 106% of the average sales price as reported to the Centers for Medicare and Medicaid Services (“CMS”) by the manufacturer. Products and support services furnished to ESRD patients receiving dialysis treatment at home were also reimbursed separately under a reimbursement structure comparable to the in-center composite rate.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

With the enactment of the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”) in 2008, Congress mandated the development of an expanded ESRD bundled payment system for services furnished on or after January 1, 2011. On July 26, 2010, CMS issued a final rule implementing the ESRD PPS for ESRD dialysis facilities in accordance with MIPPA. Under the ESRD PPS, CMS reimburses dialysis facilities with a single payment for each dialysis treatment, inclusive of (i) all items and services included in the composite rate, (ii) oral vitamin D analogues, oral levocarnitine (an amino acid derivative) and all ESAs and other pharmaceuticals (other than vaccines) furnished to ESRD patients that were previously reimbursed separately under Part B of the Medicare program, (iii) most diagnostic laboratory tests and (iv) other items and services furnished to individuals for the treatment of ESRD. ESRD-related drugs with only an oral form will be reimbursed under the ESRD PPS starting in January 2014 with an adjusted payment amount to be determined by the Secretary of Health and Human Services to reflect the additional cost to dialysis facilities of providing these medications. The 2011 ESRD PPS base reimbursement rate is $229.63 per dialysis treatment (representing 98% of the estimated 2011 Medicare program costs of dialysis care as calculated under the former reimbursement system). The base ESRD PPS payment is subject to case mix adjustments that take into account individual patient characteristics (e.g., age, body surface area, body mass, time on dialysis) and certain co-morbidities. The base payment is also adjusted for (i) certain high cost patient outliers due to unusual variations in medically necessary care, (ii) disparately high costs incurred by low volume facilities relative to other facilities, (iii) provision of home dialysis training, (iv) wage-related costs in the geographic area in which the provider is located and (v) transition adjustments to ensure a budget-neutral transition to the new reimbursement system (the “Transition Adjusters”). For 2011, CMS initially implemented a negative 3.1% adjustment to the base payment to ensure a budget-neutral transition, based on CMS’s assumption that only 43% of dialysis facilities would fully opt into the ESRD PPS in 2011. This adjustment was subsequently eliminated effective April 1, 2011 for the remainder of 2011. No other Transition Adjusters are scheduled for 2011. On July 1, 2011, CMS issued a proposed rule to increase the base ESRD PPS payment for 2012 by 1.8% to $233.76 per treatment. CMS also proposed to add in 2012 a wage index budget neutrality adjustment factor of 1.001126 to the base PPS rate, yielding an adjusted 2012 ESRD PPS base rate of $234.02.

 

The ESRD PPS’s pay-for-performance standards, also known as the quality improvement program or QIP, focusing in the first year on anemia management within a hemoglobin range of 10 – 12 g/dL and dialysis adequacy, will be fully implemented effective January 1, 2012. Dialysis facilities that fail to achieve the established quality standards will have 2012 payments reduced by up to 2%, based on performance in 2010 as an initial performance period. CMS’s July 1, 2011 proposed rule would also amend certain provisions of the QIP. The proposal would (i) eliminate, starting in 2013, the payment reduction for patient hemoglobin results that fall below the 10 g/dL measure and (ii) expand, starting in 2014, the QIP to include quality measures associated with the use of arteriovenous (AV) fistulas for patients’ vascular access, rates of vascular access infections, ratios of hospitalization rates among patients, reporting of dialysis-related infections, administration of patient experience of care surveys, and monthly monitoring of patient phosphorous and calcium levels.

 

The ESRD PPS will be phased in over four years with full implementation for all dialysis facilities on January 1, 2014. However, providers could elect in November 2010 to become fully subject to the new system starting in January 2011. Nearly all of our U.S. dialysis facilities have elected to be fully subject to the ESRD PPS effective January 1, 2011.

 

The ESRD PPS has resulted in lower reimbursement rates on average. Our plans to mitigate the impact of the ESRD PPS included three broad measures. First, we worked with other providers, CMS and the U.S. Congress toward favorably revising the calculation of the Transition Adjuster for 2011. Effective April 1, 2011 CMS eliminated the Transition Adjuster for the remainder of the year. Second, we are working with medical directors and treating physicians to make protocol changes used in treating patients and are negotiating pharmaceutical acquisition cost savings. Finally, we are seeking to achieve greater efficiencies and better patient outcomes by introducing new initiatives to improve patient care upon initiation of dialysis, increase the percentage of patients using home therapies and achieve additional cost reductions in our clinics.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

The Patient Protection and Affordable Care Act was enacted in the United States on March 23, 2010 and subsequently amended by the Health Care and Educational Affordability Reconciliation Act (as amended, “ACA”). ACA will implement broad healthcare system reforms, including (i) provisions to facilitate access to affordable health insurance for all Americans, (ii) expansion of the Medicaid program, (iii) an industry fee on pharmaceutical companies starting in 2011 based on sales of brand name pharmaceuticals to government healthcare programs, (iv) a 2.3% excise tax on manufacturers’ medical device sales starting in 2013, (v) increases in Medicaid prescription drug rebates effective January 1, 2010, (vi) commercial insurance market reforms that protect consumers, such as bans on lifetime and annual limits, coverage of pre-existing conditions, limits on administrative costs, and limits on waiting periods, (vii) provisions encouraging integrated care, efficiency and coordination among providers and (viii) provisions for reduction of healthcare program waste and fraud. ACA’s medical device excise tax, Medicaid drug rebate increases and annual pharmaceutical industry fees will adversely impact our product business earnings and cash flows. We expect modest favorable impact from ACA’s integrated care and commercial insurance consumer protection provisions.

 

Effective February 15, 2011, the department of Veterans Affairs (“VA”) adopted payment rules which reduce its payment rates for non-contracted dialysis services to coincide with those of the Medicare program. As a result of the enactment of these new rules, we expect to experience variability in our aggregated VA reimbursement rates for contracted and non-contracted services. In addition, we may also experience reductions in the volume of VA patients treated in our facilities.

 

In June 2011, the U.S. Food and Drug Administration (FDA) approved modified prescribing information for the use of Epogen in ESRD patients. The modified Epogen label advises physicians to initiate ESA therapy when the patient’s hemoglobin level is less than 10 g/dL and reduce or interrupt the dose when the hemoglobin approaches or exceeds 11 g/dL. This guidance replaces the previous label language specifying a hemoglobin target range of 10-12 g/dL. In addition, the label has been modified to advise that the use of ESAs to target a hemoglobin level of greater than 11 g/dL increases the risk of serious adverse cardiovascular reactions. Our medical advisory board is in the process of modifying our recommended anemia management dosing algorithms to comport with this new guidance.

 

We have identified three operating segments, North America, International, and Asia-Pacific. For reporting purposes, we have aggregated the International and Asia-Pacific segments as “International.” We aggregated these segments due to their similar economic characteristics. These characteristics include same services provided and same products sold, same type patient population, similar methods of distribution of products and services and similar economic environments. Our general partner’s Management Board member responsible for the profitability and cash flow of each segment’s various businesses supervises the management of each operating segment. The accounting policies of the operating segments are the same as those we apply in preparing our consolidated financial statements under accounting principles generally accepted in the United States (“U.S. GAAP”). Our management evaluates each segment using a measure that reflects all of the segment’s controllable revenues and expenses.

 

With respect to the performance of our business operations, our management believes the most appropriate measure in this regard is operating income which measures our source of earnings. Financing is a corporate function which segments do not control. Therefore, we do not include interest expense relating to financing as a segment measurement. We also regard income taxes to be outside the segments’ control. Similarly, we do not allocate “corporate costs,” which relate primarily to certain headquarters overhead charges, including accounting and finance, professional services, etc. because we believe that these costs are also not within the control of the individual segments. As of January 1, 2011, production of products, production asset management, quality management and procurement are centrally managed in corporate by Global Manufacturing Operations. In addition, certain acquisitions and intangible assets are not allocated to a segment but are 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.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

 

 

Treatments increased by 8% for the second quarter of 2011 as compared to the same period in 2010. Growth from acquisitions contributed 5% and same market treatment growth contributed 4%, partially offset by the effect of closed or sold clinics of 1%.

 

At June 30, 2011, we owned, operated or managed (excluding those managed but not consolidated in the U.S.) 2,838 clinics compared to 2,586 clinics at June 30, 2010. During the second quarter of 2011, we acquired 68 clinics, opened 7 clinics and combined or closed 6 clinics. The number of patients treated in clinics that we own, operate or manage (excluding patients of clinics managed but not consolidated in the U.S.) increased by 12% to 225,909 at June 30, 2011 from 202,414 at June 30, 2010. Including 23 clinics managed but not consolidated in the U.S., the total number of patients was 227,423.

 

Net revenue increased by 8% (5% at constant exchange rates) for the second quarter of 2011 over the comparable period in 2010, due to growth in both dialysis care and dialysis products revenues.

 

Dialysis care revenue increased by 6% (4% at constant exchange rates) to $2,362 million for the second quarter of 2011 from $2,224 million in the same period of 2010, mainly due to growth in same market treatments (4%), contributions from acquisitions (3%) and a positive effect from exchange rate fluctuations (2%), partially offset by decreases in revenue per treatment (2%) and the effect of closed or sold clinics (1%).

 

Dialysis product revenue increased by 15% (7% at constant exchange rates) to $832 million from $722 million in the same period of 2010, driven by increased sales of peritoneal dialysis, mainly as a result of the acquisition of the Gambro peritoneal dialysis business, and hemodialysis products, especially of dialyzers, products for acute care treatments and machines as well as solutions and concentrates. This was partially offset by lower sales of renal pharmaceuticals.

 

The increase in gross profit margin reflects an increase in gross profit margin in North America. The increase in North America was due to cost savings in pharmaceuticals mainly driven by lower EPO usage in the second quarter of 2011 as compared to the same period in 2010, partially offset by the effect of a lower revenue rate attributable to the new ESRD PPS and higher personnel expenses.

 

Selling, general and administrative (“SG&A”) expenses increased to $594 million in the second quarter of 2011 from $526 million in the same period of 2010. SG&A expenses as a percentage of sales increased to 18.6% for the second quarter of 2011 in comparison with 17.8% during the same period of 2010 as a result of increases in both

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

North America and in the International segment. The increase in North America was a result of a lower revenue rate due to the ESRD PPS, higher freight and distribution expenses as a result of increased fuel costs and freight volume as well as higher personnel expenses. The increase in the International segment was mainly due to lower foreign exchange gains and higher foreign exchange losses as well as growth in businesses with lower margins. Bad debt expense for the second quarter of 2011 was $57 million as compared to $55 million for the same period of 2010, representing 1.8% and 1.9% of sales for the second quarters of 2011 and 2010, respectively.

 

R&D expenses increased to $27 million in the second quarter of 2011 as compared to $21 million in the same period in 2010 as a result of the effects of the first time consolidation of a second quarter 2010 acquisition.

 

Income from equity method investees increased to $9 million for the second quarter of 2011 from $2 million for the same period of 2010 due to the income from the Vifor-Fresenius Medical Care Renal Pharma Ltd. (“Vifor”), our renal pharmaceuticals joint venture.

 

Operating income increased to $510 million in the second quarter of 2011 from $467 million for the same period in 2010. Operating income margin increased to 16.0% for the second quarter of 2011 from 15.8% for the same period in 2010 as a result of the increase in gross profit margin as noted above and the increase in income from equity method investees as a percentage of revenue, partially offset by the increased SG&A expenses as a percentage of revenue as noted above.

 

Interest expense increased by 18% to $91 million for the second quarter of 2011 from $76 million for the same period in 2010 mainly as a result of increased debt. Interest income increased to $16 million for the second quarter of 2011 from $8 million for the same period in 2010 as a result of interest on subordinated notes issued to us by a third party in the first quarter of 2011, see Note 5, “Other Assets/Notes Receivable” in our Consolidated Financial Statements included in this Report.

 

Income tax expense increased to $149 million for the second quarter of 2011 from $129 million for the same period in 2010. The effective tax rate increased to 34.2% from 32.4% for the same period of 2010 as a result of the positive effect in the second quarter of 2010 of the release of a $10 million valuation allowance on deferred taxes for net operating losses due to changes in activities of the respective entities. This was partially offset by higher tax free income from equity method investments in the second quarter of 2011.

 

Net income attributable to FMC-AG & Co. KGaA for the second quarter of 2011 increased to $261 million from $248 million for the same period in 2010 as a result of the combined effects of the items discussed above.

 

We employed 77,081 people (full-time equivalents) as of June 30, 2011 compared to 70,096 as of June 30, 2010, an increase of 10.0%, primarily due to overall growth in our business and acquisitions.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

The following discussions pertain to our business segments and the measures we use to manage these segments.

 

 

Revenue

 

Treatments increased by 4% for the second quarter of 2011 as compared to the same period in 2010 mostly due to same market growth (3%) and contributions from acquisitions (1%). At June 30, 2011, 139,906 patients (a 4% increase over the same period in the prior year) were being treated in the 1,826 clinics that we own or operate in the North America segment, compared to 135,088 patients treated in 1,782 clinics at June 30, 2010. Average North America revenue per treatment was $340 for the second quarter of 2011 and $349 for the same period in 2010. In the U.S., the average revenue per treatment was $348 for the second quarter of 2011 in comparison to $356 for the same period in 2010. The decrease was mainly attributable to the effect of the implementation of the ESRD PPS.

 

Net revenue for the North America segment for the second quarter of 2011 remained constant in comparison to the same period of 2010 as a result of an increase in dialysis care revenue of 1% to $1,828 million from $1,817 million in the same period of 2010 completely offset by a decrease in dialysis product revenue of 5% to $199 million from $210 million in the second quarter of 2010.

 

The dialysis care revenue increase was driven by same market treatment growth (3%) and contributions from acquisitions (1%), partially offset by decreased revenue per treatment (2%) and the effect of closed or sold clinics (1%).

 

The dialysis product revenue decrease was driven by lower sales of renal pharmaceuticals, principally as a result of a lower average selling price for Venofer ^® , partially offset by increased sales of hemodialysis and peritoneal dialysis products.

 

Operating Income

 

Operating income increased to $348 million for the second quarter of 2011 from $332 million for the same period in 2010. Operating income margin increased to 17.2% for the second quarter of 2011 from 16.4% for the same period in 2010, primarily due to a decrease in cost per treatment in the U.S. to $283 for the second quarter of 2011 from $292 in the same period of 2010 and higher income from equity method investees due to income from the Vifor joint venture. This was partially offset by the effects of the ESRD PPS, higher personnel expenses and higher freight and distribution expenses as a result of increases in fuel costs and freight volume. Cost per treatment for North America decreased to $277 for the second quarter of 2011 from $287 in the same period of 2010.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

 

Revenue

 

Treatments increased by 17% in the second quarter of 2011 over the same period in 2010 mainly due to contributions from acquisitions (13%) and same market growth (5%), partially offset by the effect of closed or sold clinics (1%). As of June 30, 2011, 86,003 patients (a 28% increase over the same period of the prior year) were being treated at 1,012 clinics that we own, operate or manage in the International segment compared to 67,326 patients treated at 804 clinics at June 30, 2010. Average revenue per treatment for the second quarter of 2011 increased to $178 in comparison with $159 for the same period of 2010 due to increased reimbursement rates and changes in country mix ($3) as well as the strengthening of local currencies against the U.S. dollar ($16).

 

Net revenues for the International segment for the second quarter of 2011 increased by 26% (15% increase at constant exchange rates) as compared to the same period in 2010 as a result of increases in both dialysis care and dialysis product revenues. Organic growth during the period was 8%, acquisitions during the period contributed 7%, and the positive effect of exchange rate fluctuations contributed 11%.

 

Including the effects of acquisitions, European region revenue increased 24% (11% increase at constant exchange rates), Latin America region revenue increased 24% (17% increase at constant exchange rates), and Asia-Pacific region revenue increased 38% (27% increase at constant exchange rates).

 

Total dialysis care revenue for the International segment increased during the second quarter of 2011 by 31% (20% increase at constant exchange rates) to $534 million from $407 million in the same period of 2010. This increase is a result of contributions from acquisitions (12%) and same market treatment growth (5%), as well as increases in revenue per treatment (3%). The positive effect of exchange rate fluctuations was 11%.

 

Total dialysis product revenue for the second quarter of 2011 increased by 23% (11% increase at constant exchange rates) to $629 million from $512 million in the same period of 2010. The increase in product revenue was driven by increased sales of peritoneal dialysis, mainly as a result of the acquisition of the Gambro peritoneal dialysis business, and hemodialysis products, especially of dialyzers, products for acute care treatments and machines as well as solutions and concentrates and renal pharmaceuticals. Exchange rate fluctuations contributed 12%.

 

Operating Income

 

Operating income increased by 17% to $203 million for the second quarter of 2011 from $173 million for the same period in 2010. Operating income margin decreased to 17.5% for the second quarter of 2011 from 18.8% for the same period in 2010 due to unfavorable foreign exchange effects and growth in business with the lower margins.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

The discussion of the results of operations of our International segment for the quarter ended June 30, 2011, does not include any effects of the Euromedic acquisition, which we completed effective June 30, 2011.

 

Six months ended June 30, 2011 compared to six months ended June 30, 2010

 

Consolidated Financials

 

 

Treatments increased by 9% for the six months ended June 30, 2011 as compared to the same period in 2010. Growth from acquisitions contributed 5% and same market treatment growth contributed 4%.

 

Net revenue increased by 7% (5% at constant exchange rates) for the six months ended June 30, 2011 over the comparable period in 2010 due to growth in both dialysis care and dialysis products revenues.

 

Dialysis care revenue increased by 6% to $4,647 million (5% at constant exchange rates) in the six-month period ended June 30, 2011 from $4,395 million in the same period of 2010, mainly due to growth in same market treatments (4%), contributions from acquisitions (3%) and the positive effect from exchange rate fluctuations (1%), partially offset by decreases in revenue per treatment (2%).

 

Dialysis product revenue increased by 10% to $1,584 million (increased by 6% at constant exchange rates) from $1,433 million in the same period of 2010, driven by increased sales of peritoneal dialysis, mainly as a result of the acquisition of the Gambro peritoneal dialysis business, and hemodialysis products, especially of dialyzers, products for acute care treatments and solutions and concentrates as well as bloodlines, partially offset by lower sales of renal pharmaceuticals.

 

The increase in gross profit margin mostly reflects an increase in gross profit margin in North America. The increase in North America was due to the cost savings in pharmaceuticals mainly driven by lower EPO usage in the first six months of 2011 as compared to the same period in 2010, partially offset by the effect of a lower revenue rate attributable to the new ESRD PPS and higher personnel expenses.

 

SG&A expenses increased to $1,166 million in the six-month period ended June 30, 2011 from $1,043 million in the same period of 2010. SG&A expenses as a percentage of sales increased to 18.7% in the first six months of 2011 from 17.9% in the same period of 2010 as a result of an increase in both North America and in the International segment as well as higher Corporate costs. The increase in North America was a result of a lower revenue rate due to the ESRD PPS, higher freight and distribution expenses as a result of increased fuel costs and freight volume, partially offset by lower provisions for doubtful accounts. The increase in the International segment was mainly due to foreign exchange effects and higher acquisition related costs partially offset by the one-time revaluation in the first quarter of 2010 of the balance sheet of our operations in Venezuela as a result of the devaluation of the

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

Venezuelan bolivar driven by hyperinflation. Bad debt expense for the six-month period ended June 30, 2011 was $110 million as compared to $116 million for the same period of 2010, representing 1.8% and 2.0% of sales for the six-month periods ended June 30, 2011 and 2010.

 

Research and development (“R&D”) expenses increased to $53 million in the six-month period ended June 30, 2011 as compared to $44 million in the same period in 2010.

 

Income from equity method investees increased to $16 million for the six months ended June 30, 2011 from $4 million for the same period of 2010 due to the income from the Vifor renal pharmaceuticals joint venture.

 

Operating income increased to $955 million in the six-month period ended June 30, 2011 from $892 million for the same period in 2010. Operating income margin remained constant at 15.3% for the six-month period ended June 30, 2011 as compared to the same period in 2010 as a result of the increase in gross profit margin as noted above and the increase in income from equity method investees as a percentage of revenue offset by the increased SG&A expenses as a percentage of revenue as noted above.

 

Interest expense increased by 15% to $172 million for the six months ended June 30, 2011 from $149 million for the same period in 2010 mainly as a result of increased debt. Interest income increased to $26 million for the six months ended June 30, 2011 from $14 million for the same period in 2010 as a result of interest on subordinated notes issued to us by a third party in the first quarter of 2011, see Note 5, “Other Assets/Notes Receivable” in our Consolidated Financial Statements included in this Report.

 

Income tax expense increased to $273 million for the six-month period ended June 30, 2011 from $257 million for the same period in 2010. The effective tax rate decreased to 33.8% from 33.9% for the same period of 2010, as a result of higher tax free income from equity method investments and an increase in net income attributable to non-taxable noncontrolling interests in North America. In addition, the first quarter of 2010 included the effect of non deductible losses in Venezuela as a result of inflationary accounting. This was partially offset by the release in the second quarter of 2010 of a $10 million valuation allowance on deferred taxes for net operating losses due to changes in activities of the respective entities.

 

Net income attributable to FMC-AG & Co. KGaA for the six months ended June 30, 2011 increased to $481 million from $459 million for the same period in 2010 as a result of the combined effects of the items discussed above.

 

The following discussions pertain to our business segments and the measures we use to manage these segments.

 

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

Revenue

 

Treatments increased by 4% for the six months ended June 30, 2011 as compared to the same period in 2010 mostly due to same market growth (3%) and contributions from acquisitions (1%). Average North America revenue per treatment was $340 for the six months ended June 30, 2011 and $348 in the same period in 2010. In the U.S., the average revenue per treatment was $348 for the six months ended June 30, 2011 and $356 for the same period in 2010. The decrease was mainly attributable to the effect of the implementation of the ESRD PPS.

 

Net revenue for the North America segment for the first six months of 2011 increased as a result of an increase in dialysis care revenue by 1% to $3,610 million from $3,578 million in the same period of 2010 partially offset by a decrease in dialysis product revenue by 3% to $395 million from $408 million in the first six months of 2010.

 

The dialysis care revenue increase was driven by same market treatment growth (3%) and contributions from acquisitions (1%), partially offset by decreased revenue per treatment (2%) and the effect of closed or sold clinics (1%).

 

The dialysis product revenue decrease was driven by lower sales of renal pharmaceuticals, principally as a result of a lower average selling price for Venofer ^® , partially offset by increased sales of hemodialysis and peritoneal dialysis products.

 

Operating Income

 

Operating income increased to $661 million for the six-month period ended June 30, 2011 from $640 million for the same period in 2010. Operating income margin increased to 16.5% for the six months ended June 30, 2011 from 16.1% for the same period in 2010, primarily due to a decrease in cost per treatment in the U.S. to $285 for the first six months of 2011 from $294 in the same period of 2010 as a result of lower costs for renal pharmaceuticals, higher income from equity method investees due to income from the Vifor joint venture and lower bad debt expense. This was mostly offset by the effects of the ESRD PPS, higher personnel expenses and higher freight and distribution costs as a result of increases in fuel costs and freight volume. Cost per treatment for North America decreased to $279 for the first six months of 2011 from $288 in the same period of 2010.

 

 

Revenue

 

Treatments increased by 18% in the six months ended June 30, 2011 over the same period in 2010 mainly due to contributions from acquisitions (13%) and same market growth (5%). Average revenue per treatment for the six months ended June 30, 2011 increased to $175 in comparison with $162 for the same period of 2010 due to the

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

increased reimbursement rates and changes in the country mix ($4) as well as the strengthening of local currencies against the U.S. dollar ($9).

 

Net revenues for the International segment for the six-month period ended June 30, 2011 increased by 20% (14% increase at constant exchange rates) as compared to the same period in 2010 as a result of increases in both dialysis care and dialysis product revenues. Organic growth during the period was 7%, acquisitions during the period contributed 7%, and the positive effect of exchange rate fluctuations contributed 6%.

 

Including the effects of acquisitions, European region revenue increased 16% (10% increase at constant exchange rates), Latin America region revenue increased 19% (14% increase at constant exchange rates), and Asia-Pacific region revenue increased 37% (28% increase at constant exchange rates).

 

Total dialysis care revenue for the International segment increased during the first six months of 2011 by 27% (20% increase at constant exchange rates) to $1,037 million from $817 million in the same period of 2010. This increase is a result of contributions from acquisitions (11%) and same market treatment growth (5%), as well as increases in revenue per treatment (4%) and the positive effect of exchange rate fluctuations (7%).

 

Total dialysis product revenue for the six-month period ended June 30, 2011 increased by 15% (9% increase at constant exchange rates) to $1,181 million from $1,025 million in the same period of 2010. The increase in product revenue was driven by increased sales of peritoneal dialysis, mainly as a result of the acquisition of the Gambro peritoneal dialysis business, and hemodialysis products, especially of dialyzers, products for acute care treatments and solutions and concentrates as well as bloodlines and machines. Exchange rate fluctuations contributed 6%.

 

Operating Income

 

Operating income increased by 15% to $374 million for the six-month period ended June 30, 2011 from $324 million for the same period in 2010. Operating income margin decreased to 16.9% for the six-month period ended June 30, 2011 from 17.6% for the same period in 2010 due to unfavorable foreign exchange effects and acquisition-related costs, partially offset by the negative impact in the first quarter of 2010 of the devaluation of the Venezuelan bolivar.

 

The discussion of the results of operations of our International segment for the six-month period ended June 30, 2011, does not include any effects of the Euromedic acquisition, which we completed effective June 30, 2011.

 

Liquidity and Capital Resources

 

Six months ended June 30, 2011 compared to six months ended June 30, 2010

 

Liquidity

 

Our primary sources of liquidity have historically been cash from operations, cash from borrowings from third parties and related parties, as well as cash from issuance of equity and debt securities. We require this capital primarily to finance working capital needs, to fund acquisitions and joint ventures, to develop free-standing renal dialysis centers, to purchase equipment for existing or new renal dialysis centers and production sites, to repay debt and to pay dividends.

 

At June 30, 2011, we had cash and cash equivalents of $449 million. For information regarding utilization and availability under our Amended 2006 Senior Credit Agreement, see Note 7, “Long-term Debt and Capital Lease Obligations” in our Consolidated Financial Statements included in this Report.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

Operations

 

In the first six months of 2011 and 2010, we generated net cash from operations of $487 million and $643 million, respectively. Cash from operations is impacted by the profitability of our business, the development of our working capital, principally receivables, and cash outflows that occur due to a number of singular specific items (especially payments in relation to disallowed tax deductions and legal proceedings). The decrease in the first six months of 2011 versus 2010 was mainly a result of unfavorable days sales outstanding (“DSO”) development in 2011 as compared to 2010 for the reasons discussed below, an increase in days of inventory on hand and a cash outflow from hedging related to intercompany financing.

 

The profitability of our business depends significantly on reimbursement rates. Approximately 75% of our revenues are generated by providing dialysis services, a major portion of which is reimbursed by either public health care organizations or private insurers. For the period ended June 30, 2011, approximately 31% of our consolidated revenues were 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. In the past we experienced and, after the implementation of the new ESRD PPS in the U.S., also expect in the future generally stable reimbursements for our dialysis services. This includes the balancing of unfavorable reimbursement changes in certain countries with favorable changes in other countries. See “Overview” above for a discussion of recent Medicare reimbursement rate changes including provisions for implementation of the ESRD PPS for dialysis services provided after January 1, 2011. See the discussion of the operations of our North America segment under “Results of Operations,” above, for information regarding the effects of the new ESRD PPS on our average revenue per treatment in the U.S.

 

Our working capital was $2,204 million at June 30, 2011 which increased from $1,363 million at December 31, 2010, mainly as a result of the repayment of the Trust Preferred Securities on June 15, 2011 (see Note 11) and increases in accounts receivable, prepaid expenses and inventories as well as currency translation effects, partially offset by increases in short-term borrowings from related parties, accrued expenses, short-term borrowings and accounts payable as well as a decrease in cash. Our ratio of current assets to current liabilities was 1.6 at June 30, 2011.

 

We intend to continue to address our current cash and financing requirements by the generation of cash from operations, our existing and future credit agreements, and the issue of debt securities. We have sufficient financial resources, consisting of only partly drawn credit facilities and our accounts receivable facility to meet our needs for the foreseeable future. In addition, when funds are required for acquisitions, such as those described below under “Subsequent Events – Acquisitions”, or to meet other needs, we expect to successfully complete long-term financing arrangements, such as the issuance of $1,062 million in senior notes on February 3, 2011, see “Financing” below. We aim to preserve financial resources with a minimum of $300 to $500 million of committed and unutilized credit facilities.

 

Cash from operations depends on the collection of accounts receivable. 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 at June 30, 2011 and June 30, 2010, net of valuation allowances, represented DSO of approximately 82 and 76, respectively.

 

 

DSO increased in the North America segment between December 31, 2010 and June 30, 2011 as a result of delays in the processing of bills related to adapting our billing systems to the new ESRD PPS and due to delays in the coordination of insurance coverage between the U.S. federal and state governments. DSO for the International segment increased between December 31, 2010 and June 30, 2011, reflecting slight payment delays, particularly in countries with budget deficits. 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, albeit slightly more slowly in the International segment in the immediate future.

 

There are a number of tax and other items we have identified that will or could impact our cash flows from operations in the future as follows:

 

We filed claims for refunds contesting the Internal Revenue Service’s (“IRS”) disallowance of civil settlement payment deductions taken by Fresenius Medical Care Holdings, Inc. (“FMCH”) in prior year tax returns. As a result of a settlement agreement with the IRS, we received a partial refund in September 2008 of $37 million, inclusive of interest and preserved our right to pursue claims in the United States courts for refunds of all other disallowed deductions. On December 22, 2008, we filed a complaint for complete refund in the United States District Court for the District of Massachusetts, styled as Fresenius Medical Care Holdings, Inc. v. United States. On June 24, 2010, the court denied FMCH’s motion for summary judgment and the litigation is proceeding towards trial.

 

The IRS tax audits of FMCH for the years 2002 through 2006 have been completed. The IRS has disallowed all deductions taken during these audit periods related to intercompany mandatorily redeemable preferred shares. We have protested the disallowed deductions and will avail ourselves of all remedies. An adverse determination with respect to the disallowed deductions related to intercompany mandatorily redeemable preferred shares could have a material adverse effect on our results of operations and liquidity. In addition, the IRS proposed other adjustments which have been recognized in our financial statements.

 

For the tax year 1997, we recognized an impairment of one of our subsidiaries which the German tax authorities disallowed in 2003 at the conclusion of their audit for the years 1996 and 1997. We have filed a complaint with the appropriate German court to challenge the tax authorities’ decision. In January 2011, we reached an agreement with the tax authorities, estimated to be slightly more favorable than the tax benefit recognized previously. The additional benefit is expected to be recognized in the second half of 2011.

 

We are subject to ongoing and future tax audits in the U.S., Germany and other jurisdictions. We have received notices of unfavorable adjustments and disallowances in connection with certain of the audits, including those described above. We are contesting, including appealing, certain of these unfavorable determinations. If our objections and any final audit appeals are unsuccessful, we could be required to make additional tax payments, including payments to state tax authorities reflecting the adjustments made in our federal tax returns in the U.S. With respect to other potential adjustments and disallowances of tax matters currently under review, we do not anticipate that an unfavorable ruling could have a material impact on our results of operations. We are not currently able to determine the timing of these potential additional tax payments.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

W.R. Grace & Co. and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Grace Chapter 11 Proceedings”) on April 2, 2001. The settlement agreement with the asbestos creditors committees on behalf of the W.R. Grace & Co. bankruptcy estate (see Note 13 of the Notes to Consolidated Financial Statements, “Commitments and Contingencies – Legal Proceedings – Commercial Litigation”) provides for payment by the Company of $115 million upon approval of the settlement agreement by the U.S. District Court, which has occurred, and confirmation of a W.R. Grace & Co. bankruptcy reorganization plan that includes the settlement. In January and February 2011, the U.S. Bankruptcy Court entered orders confirming the joint plan of reorganization. These confirmation orders are pending before the U.S. District Court. The $115 million obligation was included in the special charge we recorded in 2001 to address 1996 merger-related legal matters. See Note 13 “Commitments and Contingencies – Legal Proceedings – Accrued Special Charge for Litigation” in our Consolidated Financial Statements included in this Report. The payment obligation is not interest-bearing.

 

If the potential additional tax payments discussed above and the Grace Chapter 11 Proceedings settlement payment were to occur contemporaneously, there could be a material adverse impact on our operating cash flow in the relevant reporting period. Nonetheless, we anticipate that cash from operations and, if required, our senior credit agreement and other sources of liquidity will be sufficient to satisfy all such obligations if and when they come due.

 

Investing

 

We used net cash of $1,353 million and $501 million in investing activities in the six-month periods ended June 30, 2011 and 2010, respectively.

 

Capital expenditures for property, plant and equipment, net of disposals were $231 million and $218 million in the first six months of 2011 and 2010, respectively. In the first six months of 2011, capital expenditures were $104 million in the North America segment, $72 million for the International segment and $55 million at Corporate. Capital expenditures in the first six months of 2010 were $94 million in the North America segment, $69 million for the International segment and $55 million at Corporate. The majority of our capital expenditures was used for maintaining existing clinics, equipping new clinics, maintenance and expansion of production facilities primarily in North America and Germany and capitalization of machines provided to our customers, primarily in the International segment. Capital expenditures were approximately 4% and 4% of total revenue in the first six months of 2011 and 2010, respectively.

 

We invested approximately $1,122 million cash in the first six months of 2011, primarily through the acquisition of International Dialysis Centers, the dialysis service business of Euromedic International (see Note 2, “Acquisitions”), loans provided to Renal Advantage Partners LLC, the parent company of Renal Advantage, Inc., a provider of dialysis services, (see Note 5, “Other Assets/Notes Receivable” in our Consolidated Financial Statements included in this Report) and investments in majority owned joint ventures ($358 million in the North America segment, $759 million in the International segment and $5 million at Corporate), as compared to $158 million cash in the same period of 2010 ($50 million in the North America segment, $102 million in the International segment and $6 million at Corporate). In addition, we invested $133 million (€100 million) in short-term investments with banks during the first six months of 2010. There were no divestitures in the first six months of 2011. We received $8 million in conjunction with divestitures in the first six months of 2010.

 

We anticipate capital expenditures of 5% of revenues and expect to make acquisitions of approximately $1.9 billion in 2011, including all acquisitions to date, see the Notes to Consolidated Financial Statements included in the report. See “Outlook” below.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

Financing

 

Net cash provided by financing was $742 million in the first six months of 2011 compared to net cash provided by financing of $170 million in the first six months of 2010, respectively.

 

In the six-month period ended June 30, 2011, cash was provided by the issuance of $1,062 million in senior notes in February 2011, drawings under our revolving credit facility, short-term borrowings and short-term borrowings from related parties and drawings under the accounts receivable facility, partially offset by the repayment of the Trust Preferred Securities, repayment of long-term debt and the payment of dividends. For further information on the issuance of $1,062 million of senior notes in 2011, see below. In the first six months of 2010, cash was mainly provided by borrowings under the revolving credit facility, our issuance of the €250 million of 5.50% Senior Notes in January 2010 and drawings under the accounts receivable facility.

 

On May 13, 2011, we paid a dividend with respect to 2010 of €0.65 per ordinary share (for 2009 paid in 2010: €0.61) and €0.67 per preference share (for 2009 paid in 2010: €0.63). The total dividend payment was €197 million ($281 million) compared to €183 million ($232 million) in 2011 with respect to 2010.

 

On February 3, 2011, our wholly owned subsidiaries, Fresenius Medical Care US Finance, Inc. and FMC Finance VII S.A., issued $650 million and €300 million (approximately $412 million at the date of issuance) of 5.75% Senior Notes and 5.25% Senior Notes, respectively. The 5.75% Senior Notes had an issue price of 99.060% and a yield to maturity of 5.875%. The 5.25% Senior Notes were issued at par. Both the 5.75% Senior Notes and the 5.25% Senior Notes are due February 15, 2021. Net proceeds were used to repay indebtedness outstanding under our accounts receivable facility and the revolving credit facility of the Amended 2006 Senior Credit Agreement, for acquisitions, including payments under our recent acquisition of International Dialysis Centers, and for general corporate purposes to support our renal dialysis products and services business. Both the 5.75% and the 5.25% Senior Notes are guaranteed on a senior basis jointly and severally by us, FMCH and Fresenius Medical Care Deutschland GmbH (“D-GmbH”).

 

Subsequent Events – Acquisitions

 

Liberty Dialysis

 

On August 2, 2011, we announced our plans to acquire 100% of Liberty Dialysis Holdings, Inc, the owner of all of the business of Liberty Dialysis and owner of a 51% stake in Renal Advantage, Inc.. Fresenius Medical Care currently owns a 49% stake in Renal Advantage. The total investment for Fresenius Medical Care including the assumption of incremental debt will be approximately $1.7 billion. The transaction remains subject to clearance under the Hart – Scott – Rodino Antitrust Improvements Act and is expected to close in early 2012. On completion, the acquired operations would add approximately 260 dialysis outpatient dialysis clinics to Fresenius Medical Care’s network in the U.S and approximately $1 billion in annual revenue before the anticipated divestiture of some centers as a condition of the transaction. The transaction will be financed from cash flow from operations and debt and is expected to be accretive to earnings in the first year after closing of the transaction.

 

American Access Care

 

On August 2, 2011, we announced our plans to acquire the U.S. based company American Access Care Holdings, LLC (AAC) for $385 million. AAC operates 28 freestanding out-patient interventional radiology centers throughout 12 states in the U.S. primarily dedicated to the vascular access needs of dialysis patients. The transaction remains subject to clearance under the Hart – Scott – Rodino Antitrust Improvements Act and is expected to close in the fourth quarter of 2011. On completion, the acquired operations will add approximately $175 million in annual revenue and are expected to be accretive to earnings in the first year after closing of the transaction. The transaction will be financed from cash flow from operations and available borrowing capacity.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

Debt covenant disclosure – EBITDA

 

EBITDA (earnings before interest, tax, depreciation and amortization expenses) was approximately $1,227 million, 19.7% of revenues for the six-month period ended June 30, 2011, and $1,137 million, 19.5% of revenues for the same period of 2010. EBITDA is the basis for determining compliance with certain covenants contained in our Amended 2006 Senior Credit Agreement, Euro Notes, EIB agreements, and the indentures relating to our Senior Notes. You should not consider EBITDA to be an alternative to net earnings determined in accordance with U.S. GAAP or to cash flow from operations, investing activities or financing activities. In addition, not all funds depicted by EBITDA are available for management’s discretionary use. For example, a substantial portion of such funds are subject to contractual restrictions and functional requirements for debt service, to fund necessary capital expenditures and to meet other commitments from time to time as described in more detail elsewhere in this report. EBITDA, as calculated, may not be comparable to similarly titled measures reported by other companies. A reconciliation of EBITDA to cash flow provided by operating activities, which we believe to be the most directly comparable U.S. GAAP financial measure, is calculated as follows:

 

Reconciliation of measures for consolidated totals

 

 

Total assets as of June 30, 2011 increased to $19.1 billion compared to $17.1 billion at December 31, 2010. Current assets as a percent of total assets increased to 31% at June 30, 2011 from 30% at December 31, 2010. The equity ratio, the ratio of our equity divided by total liabilities and shareholders’ equity, decreased to 42% at June 30, 2011 from 44% at December 31, 2010.

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

Outlook

 

We have increased our debt to EBITDA ratio for 2011 from less than or equal to 2.8 times to less than 3.0 times and our expected acquisitions for the year from approximately $1.2 billion to approximately $1.9 billion. Otherwise, we confirm our outlook for the full year 2011 as depicted in the table below:

 

 

Recently Issued Accounting Standards

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-04 (“ASU 2011-04”), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs . ASU 2011-04 is an update of Accounting Standards Codification Topic 820, Fair Value Measurement. The amendments in ASU 2011-04 result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. These amendments include clarifications of the application of highest and best use and valuation premise concepts, the measurement of the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and disclosures about fair value measurements. ASU 2011-04 also changes the measurement and disclosure requirements related to measuring the fair value of financial instruments that are managed within a portfolio, the application of premiums and discounts in a fair value measurement, and additional disclosure about fair value measurements.

 

The disclosures required under ASU 2011-04 are effective for interim and annual reporting periods beginning on or after December 15, 2011. Early application by public entities is not permitted. We will apply the guidance under ASU 2011-04 beginning January 1, 2012.

 

In June 2011, the FASB issued Accounting Standards Update 2011-05 (“ASU 2011-05”), Comprehensive Income (Topic 220): Presentation of Comprehensive Income . The amendments in ASU 2011-05 require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but continuous statements. In the two statement approach, the first statement should present total net income and its components followed consecutively by a second statement presenting total other comprehensive income, the components of other comprehensive income and total of comprehensive income.

 

The disclosures required under ASU 2011-05 are retrospective and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. As we currently present two separate but continuous statements of net income and comprehensive income, we are already in compliance with the amended guidance issued in ASU 2011-05.

 

In July 2011, the FASB issued Accounting Standards Update 2011-06 (“ASU 2011-06”), Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers . The amendments in ASU 2011-06 address how health insurers should recognize and classify their income statement fees mandated by the Health Care and Educational Affordability Reconciliation Act. The amendments require that the liability for the fee be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line allocation method

 

FRESENIUS MEDICAL CARE AG & Co. KGaA

 

Interim Report of Financial Condition and Results of Operations

for the three and six months ended June 30, 2011 and 2010

 

unless a another method better allocates the fee over the entire calendar year for which it is payable. In addition, the amendments state that this fee does not meet the definition of an acquisition cost.

 

The disclosures required under ASU 2011-06 are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. We will apply the guidance under ASU 2011-06 beginning January 1, 2014.

 

In July 2011, the FASB issued Accounting Standards Update 2011-07 (“ASU 2011-07”), Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities in order to provide financial statement users with greater transparency about a health care entity’s net patient service revenue and the related allowance for doubtful accounts. The amendments require health care entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient’s ability to pay to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations. The provision for bad debts must be reclassified from an operating expense to a deduction from patient service revenue. Additionally, these health care entities are required to provide enhanced disclosures about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts.

 

For public entities, the disclosures required under ASU 2011-07 are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. The amendments to the presentation of the provision for bad debts related to patient service revenue in the statement of operations should be applied retrospectively to all prior periods presented. We are currently evaluating the impact of ASU 2011-07 on our operations.

 

See accompanying notes to unaudited consolidated financial statements.

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

See accompanying notes to unaudited consolidated financial statements.

FRESENIUS MEDICAL CARE AG & Co. KGaA

Notes to Consolidated Financial Statements
(unaudited)
(in thousands, except share and per share data)

 

 

The Company

 

Fresenius Medical Care AG & Co. KGaA (“FMC-AG & Co. KGaA” or the “Company”), a German partnership limited by shares (Kommanditgesellschaft auf Aktien), is the world’s largest kidney dialysis company, operating in both the field of dialysis services and the field of dialysis products for the treatment of end-stage renal disease (“ESRD”). The Company’s dialysis business is vertically integrated, providing dialysis treatment at dialysis clinics it owns or operates and supplying these clinics with a broad range of products. In addition, the Company sells dialysis products to other dialysis service providers. In the United States, the Company also performs clinical laboratory testing and provides inpatient dialysis services and other services under contract to hospitals.

 

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.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

The consolidated financial statements at June 30, 2011 and for the three- and six-month periods ended June 30, 2011 and 2010 contained in this report are unaudited and should be read in conjunction with the consolidated financial statements contained in the Company’s 2010 Annual Report on Form 20-F. The preparation of consolidated financial statements 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 revenues and expenses 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 at and for the year ended December 31, 2010, contained in the Company’s 2010 Annual Report on Form 20-F, unless indicated otherwise.

 

The results of operations for the six-month period ended June 30, 2011 are not necessarily indicative of the results of operations for the year ending December 31, 2011.

 

Certain items in the prior periods’s comparative consolidated financial statements have been reclassified to conform to the current period’s presentation.

 

 

On January 4, 2011, the Company announced the signing of a purchase agreement to acquire International Dialysis Centers (“IDC”), Euromedic International’s (“Euromedic”) dialysis service business for €529,214 (approximately $764,873 as of June 30, 2011). The increase over the original purchase price of €485,000 reflects adjustments for the seller’s final cash and debt positions at closing and the effects of the delay in closing resulting from the regulatory approval process. IDC treats over 8,200 hemodialysis patients predominantly in Central and Eastern Europe and operates a total of 70 clinics in nine countries. With the exception of Portugal, where the review is still ongoing, closing occurred on June 30, 2011 following final regulatory approvals by the relevant anti-trust authorities which includes a mandate for the divestiture of five of the acquired clinics. The Company recorded the acquired assets and liabilities at book value as of June 30, 2011, as it was unable to perform a preliminary review to

FRESENIUS MEDICAL CARE AG & Co. KGaA

Notes to Consolidated Financial Statements – (Continued)
(unaudited)
(in thousands, except share and per share data)

 

determine an initial purchase price allocation due to the late date of the closing. The difference of approximately €455,631 ($658,523 at June 30, 2011) between the purchase price and the seller’s book values of its assets and liabilities has been recorded by the Company as goodwill. The Company expects to complete the purchase price allocation by the end of 2011.

 

 

 

The Company’s parent, Fresenius SE & Co. KGaA, is a German partnership limited by shares resulting from the change of legal form effective January 28, 2011, of Fresenius SE, a European Company (Societas Europaea), and which, prior to July 13, 2007, was called Fresenius AG, a German stock corporation. In these Consolidated Financial Statements, Fresenius SE refers to that company as a partnership limited by shares, effective on and after January 28, 2011, as well as both before and after the conversion of Fresenius AG from a stock corporation into a European Company. Fresenius SE owns 100% of the share capital of Fresenius Medical Care Management AG, the Company’s general partner (“General Partner”) and is the Company’s largest shareholder owning approximately 35.7% of the Company’s voting shares as of June 30, 2011. In August 2008, a subsidiary of Fresenius SE issued Mandatory Exchangeable Bonds in the aggregate principal amount of €554,400. These are due on August 14, 2011 when they will be mandatorily exchangeable into ordinary shares of the Company. Upon maturity, the issuer must deliver a certain number of the Company’s ordinary shares to the bond holders. As a result, Fresenius SE’s holding of the Company’s ordinary shares may decrease to approximately 30-31%.

 

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. During the six-month periods ended June 30, 2011 and 2010, amounts charged by Fresenius SE to the Company under the terms of these agreements were $34,251 and $32,099, respectively. The Company also provides certain services to the Fresenius SE Companies, including research and development, central purchasing and warehousing. The Company charged $3,144 and $3,269 for services rendered to the Fresenius SE Companies during the first six months of 2011 and 2010 respectively.

 

Under real estate operating lease agreements entered into with the Fresenius SE Companies, which are leases for the corporate headquarters in Bad Homburg, Germany and production sites in Schweinfurt and St. Wendel, Germany, the Company paid the Fresenius SE Companies $12,910 and $9,689 during the six-month periods ended June 30, 2011 and 2010, respectively. The majority of the leases expire in 2016 and contain renewal options.

 

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 General Partner’s management board. The aggregate amount reimbursed to the General Partner was $6,108 and $4,983, respectively, for its management services during the six-month periods ended June 30, 2011 and 2010.

 

 

For the first six months of 2011 and 2010, the Company sold products to the Fresenius SE Companies for $9,812 and $7,184 respectively. During the same periods, the Company made purchases from the Fresenius SE Companies in the amount of $25,989 and $22,553, respectively.

 

Also, the Company has entered into agreements to provide renal products and pharmaceutical supplies to equity method investees. Under these agreements, the Company sold $3,332 of products to equity method investees during the first six months of 2011.

FRESENIUS MEDICAL CARE AG & Co. KGaA

Notes to Consolidated Financial Statements – (Continued)
(unaudited)
(in thousands, except share and per share data)

 

In addition to the purchases noted above, the Company currently purchases heparin supplied by APP Pharmaceuticals Inc. (“APP Inc.”), through an independent group purchasing organization (“GPO”). APP Inc. is wholly-owned by Fresenius Kabi AG, a wholly-owned subsidiary of Fresenius SE. The Company has no direct supply agreement with APP Inc. and does not submit purchase orders directly to APP Inc. During the six-month periods ended June 30, 2011 and 2010, Fresenius Medical Care Holdings, Inc. (“FMCH”) acquired approximately $12,869 and $15,591, respectively, of heparin from APP Inc. through the GPO contract, which was negotiated by the GPO at arm’s length on behalf of all members of the GPO.

 

 

On June 30, 2011, the Company borrowed €104,400 ($150,889 at June 30, 2011) from Fresenius SE at 2.45% with repayment due July 31, 2011. On July 31, 2011, the amount was increased to €109,300 ($155,682 at July 31, 2011) and the note extended to August 31, 2011 at an interest rate of 2.558%.

 

In January 2011, the Company reached a court settlement with the German tax authorities on a disallowed impairment charge recognized in 1997. As the Company was party to a German trade tax group with Fresenius SE and certain of Fresenius SE’s other affiliates for fiscal years 1997 - 2001, the Company and Fresenius SE had entered into an agreement on how to allocate potential tax effects of the disallowed impairment charge, including interest on prepayments, upon resolution between the Company and the German tax authorities. As a result, the Company recognized €2,560 ($3,592 as of June 30, 2011) as a tax expense for interest payable to Fresenius SE in 2011.

 

Throughout 2010, the Company, under its cash pooling agreement, made cash advances to Fresenius SE. The balance outstanding at December 31, 2010 of €24,600 ($35,554 as of December 31, 2010) was fully repaid on January 3, 2011 at an interest rate of 1.942%.

 

On August 19, 2009, the Company borrowed €1,500 ($2,168 as of June 30, 2011) from the General Partner at 1.335%. The loan repayment, originally due on August 19, 2010, was extended until August 19, 2011.

 

During 2009, the Company reclassified an account payable to Fresenius SE in the amount of €77,745 to short-term borrowings from related parties. The amount represents taxes payable by the Company arising from the period 1997-2001 during which German trade taxes were paid by Fresenius SE on behalf of the Company. Of this amount, €5,747 ($8,306 at June 30, 2011) was outstanding at June 30, 2011 at an interest rate of 6% and will be repaid in 2011.

 

 

As of June 30, 2011 and December 31, 2010, inventories consisted of the following:

 

 

The Company has a contingent liability of up to $70,771, subject to renegotiation of certain supply contracts.

FRESENIUS MEDICAL CARE AG & Co. KGaA

Notes to Consolidated Financial Statements – (Continued)
(unaudited)
(in thousands, except share and per share data)

 

 

During the first quarter of 2011, the Company loaned $294,000 to Renal Advantage Partners LLC, the parent company of Renal Advantage, Inc., a provider of dialysis services, which included a $60,000 conversion right for a 49% minority equity interest in Renal Advantage Partners LLC. The conversion right was exercised and became effective May 1, 2011. The remaining loan is classified within “Other assets and Notes Receivables” in the balance sheet and the participation received resulting from the exercise of the conversion right is classified within “Investment in equity method investees.” Additionally, the Company has entered into agreements to provide renal products and pharmaceutical supplies as well as other services to Renal Advantage Partners LLC and Liberty Dialysis, Inc. On August 2, 2011, the Company announced its plans to acquire 100% of Liberty Dialysis Holdings, Inc, the owner of all of the business of Liberty Dialysis and owner of the remaining 51% stake in Renal Advantage, Inc. See Note 17, “Subsequent Events.”

 

 

As of June 30, 2011 and December 31, 2010, short-term borrowings, other financial liabilities and short-term borrowings from related parties consisted of the following: