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: Unaudited results for the three and six months ended June 30, 2006.
Key Event: The Company completed the acquisition of Renal Care Group, Inc. ("RCG") on March 31, 2006, for approximately $4.15 billion. RCG operations are included in results from April 1, 2006. The Company also transformed its legal form from a stock corporation to a partnership limited by shares in February 2006.

Key Financial Metrics (Six Months Ended June 30, 2006)

Note: Debt figures include long-term debt, capital lease obligations, and current portions. The significant increase in debt is primarily due to the RCG acquisition.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 19% (20% at constant exchange rates) driven by the RCG acquisition (14% contribution), same-market treatment growth (4%), and higher revenue rates (5%).
• Profitability: Operating income increased 34% to $616 million. Operating margin improved from 14.0% to 15.7%. This was aided by a $39 million gain on the sale of legacy clinics required by the FTC, partially offset by RCG integration costs and higher interest expense.
• Interest Expense: Doubled to $170 million (from $91 million) due to new debt financing for the RCG acquisition and the write-off of $15 million in unamortized fees from the prior credit agreement.
• Tax Rate: The effective tax rate increased to 44.8% (from 39.8%) largely due to a $44 million tax expense on the sale of legacy clinics, despite a $39 million book gain.
• Balance Sheet: Total assets increased from $7.98 billion to $12.64 billion, primarily due to the addition of RCG assets and goodwill of $3.49 billion.

Guidance, Outlook, and Risks

Outlook: Management expects the RCG acquisition to be earnings neutral to slightly accretive in 2006 (excluding transaction costs) and accretive from 2007 onward. The Company projects 2006 net income (excluding one-time costs like transformation, integration, and accounting changes) to be at least 15% higher than the adjusted 2005 net income of $472 million.

Capital Expenditures: Total capital expenditures and acquisitions (excluding RCG) for 2006 are projected to be in the range of $550 million.

Risks and Contingencies:

• Legal Proceedings: The Company is subject to multiple investigations by the U.S. Department of Justice regarding clinical quality, physician relationships, and stock option practices. A settlement with W.R. Grace & Co. bankruptcy estate requires a potential $115 million payment upon plan confirmation.
• Regulatory: The Company faces ongoing scrutiny regarding Medicare reimbursement rates and compliance with the Anti-Kickback Statute and False Claims Act.
• Debt Covenants: The Company is subject to financial covenants under its new $4.6 billion credit facility, including limits on capital expenditures and dividend payments ($240 million limit for 2007).

Investor Verification Checklist

• RCG Integration: Verify the timeline and cost of integrating RCG operations and the realization of projected synergies.
• Debt Servicing: Confirm the Company's ability to meet interest obligations on the significantly increased debt load ($4.6B facility) and compliance with leverage covenants.
• Legal Exposure: Monitor the status of DOJ investigations and the final confirmation of the W.R. Grace bankruptcy plan to assess the $115 million liability.
• Reimbursement Rates: Track changes in Medicare composite rates and CMS policies regarding EPO/Aranesp administration, which impact 23-24% of North America dialysis care revenue.
• Divestiture Impact: Assess the long-term revenue impact of the FTC-mandated divestiture of 105 clinics.