FMS

Business Context and Reporting Period

Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter and Nine Months ended September 30, 2006
Key Context: The Company is the world's largest provider of dialysis products and services. Results for the third quarter and nine months include the consolidation of Renal Care Group (RCG) effective April 1, 2006. The filing includes an Investor News release detailing GAAP and non-GAAP financial measures.

Key Financial Metrics

Third Quarter 2006 (vs. Q3 2005)

• Net Revenue: $2,234 million (+30% reported; +29% constant currency).
• Operating Income (EBIT): $349 million (+47%). Adjusted EBIT (excluding SFAS 123(R) and one-time items) was $358 million.
• Net Income: $139 million (+20%). Adjusted Net Income was $145 million (+21%).
• Earnings Per Share (EPS): $1.42 per ordinary share (+19%).
• Operating Margin: 15.6% (GAAP); 16.0% (Adjusted).
• Cash Flow from Operations: $153 million (GAAP). Underlying cash flow was $261 million, impacted by a $99 million U.S. tax payment and $9 million RCG restructuring costs.
• Free Cash Flow (before acquisitions): $40 million (GAAP); $148 million (underlying).
• Capital Expenditures: $113 million (net of disposals).

Nine Months Ended September 30, 2006 (vs. 9M 2005)

• Net Revenue: $6,147 million (+23%).
• Operating Income (EBIT): $964 million (+39%). Adjusted EBIT was $946 million (+35%).
• Net Income: $385 million (+13%). Adjusted Net Income was $412 million (+20%).
• Earnings Per Share (EPS): $3.93 per ordinary share (+12%).
• Operating Margin: 15.7% (GAAP); 15.4% (Adjusted).
• Cash Flow from Operations: $465 million. Underlying cash flow was $663 million.
• Free Cash Flow (before acquisitions): $192 million (GAAP); $390 million (underlying).
• Capital Expenditures: $273 million (net of disposals).

Balance Sheet and Liquidity (as of Sept 30, 2006)

• Total Assets: $12,667 million.
• Total Debt: $5,672 million (up from $2,191 million at year-end 2005, primarily due to RCG financing).
• Debt/EBITDA Ratio: 3.4x (vs. 1.9x in Q3 2005).
• Cash and Equivalents: $128 million.
• Equity/Assets Ratio: 37%.

Material Changes vs. Prior Period

• Revenue Growth: Driven significantly by the RCG acquisition. North America revenue grew 38% (Q3) and 29% (9M), while International revenue grew 13% (Q3) and 10% (9M). Organic revenue growth worldwide was 10% in Q3.
• Profitability: Operating margins expanded in both segments. North America margin increased 200 basis points to 16.3% (adjusted); International margin increased 230 basis points to 18.2% (adjusted).
• Interest Expense: Net interest expense surged to $100 million in Q3 (from $42 million) and $255 million for the nine months (from $127 million), entirely attributable to debt financing for the RCG acquisition and write-offs of deferred financing costs.
• Tax Rate: Effective tax rates increased to 42.3% (Q3) and 44.3% (9M) due to a German tax audit and U.S. tax payments for prior years. Excluding these impacts, the rate was approximately 39-40%.
• Operational Volume: Total patients treated increased 24% to 161,433. Total treatments increased 19% to 17.43 million. Employee count rose to 56,154 (from 47,521 at end of 2005) due to RCG.

Guidance, Outlook, and Risks

Upgraded 2006 Guidance

• Net Revenue: Upgraded from ~$8.3 billion to ~$8.4 billion.
• Net Income: Upgraded from at least $542 million to at least $557 million (representing at least 18% growth over 2005).
• Exclusions: Guidance excludes expected one-time items and SFAS 123(R) impacts, estimated at $44 million after-tax for the full year.
• Capital Spending: Confirmed guidance of approximately $550 million for capital expenditures and acquisitions in 2006.

Management Commentary and Strategic Moves

• PhosLo Acquisition: Announced acquisition of the worldwide phosphate binder business (PhosLo) from Nabi Biopharmaceuticals for $65 million cash plus milestones.
• Amgen Agreement: Entered a new sourcing and supply agreement with Amgen for erythropoiesis stimulating proteins in the U.S. and Puerto Rico through 2011.
• CEO Statement: Ben Lipps cited excellent results exceeding expectations, strong growth in products and services, and successful RCG integration as drivers for the guidance upgrade.

Risks and Contingencies

• Tax Audits: Ongoing tax audit in Germany impacting effective tax rates.
• Debt Load: Significant increase in leverage due to RCG financing.
• Forward-Looking Statements: Subject to risks including regulatory reforms, foreign exchange fluctuations, and litigation uncertainties.

Investor Verification Checklist

• RCG Integration: Verify the sustainability of margin improvements and operational synergies from the Renal Care Group consolidation.
• Tax Exposure: Assess the final outcome of the German tax audit and the impact of the $99 million U.S. tax payment on future cash flows.
• Debt Servicing: Monitor the impact of the increased debt load ($5.67 billion) on interest coverage and liquidity, given the rise in net interest expense.
• Organic Growth: Distinguish between acquisition-driven growth (RCG) and organic growth (10% in Q3) to evaluate underlying business health.
• PhosLo Closing: Confirm the closing of the PhosLo acquisition and the timing of milestone payments.