FMS

Business Context and Reporting Period

Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and nine months ended September 30, 2008
Business Overview: The Company is the world's largest kidney dialysis company, providing dialysis care services and manufacturing/distributing products for end-stage renal disease (ESRD). Operations are segmented into North America and International (aggregating International and Asia Pacific). The Company operates 2,349 clinics globally as of September 30, 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 12% (9% at constant exchange rates) for the quarter and 10% (7% at constant exchange rates) for the nine months compared to 2007. Growth was driven by increased treatment volumes (7% quarterly, 5% nine-month) and higher revenue per treatment.
• Profitability: Net income rose 14% for the quarter and 16% for the nine months. However, operating margins declined slightly (15.6% vs. 16.4% for the quarter) due to reduced gross margins and increased R&D costs.
• Cost Pressures: Gross margins were impacted by higher personnel costs, increased material costs, and significantly higher costs for the anticoagulant drug heparin following a supply shortage. International margins were also affected by unfavorable foreign currency transaction effects.
• Cash Flow: Cash from operating activities decreased approximately 20% year-over-year for the nine-month period, primarily due to an increase in Days Sales Outstanding (DSO) and working capital requirements.

Guidance, Outlook, and Risks

Outlook and Guidance

• 2008 Full Year: Revenue expected to exceed $10.4 billion; Net income projected between $805 million and $825 million.
• Capital Allocation: Capital expenditures expected to be $650-$750 million; Acquisitions expected to be $150-$250 million.
• Debt Metrics: Debt/EBITDA ratio projected to decrease to below 2.8 by year-end 2008.
• 2010 Outlook: Revenue expected to exceed $11.5 billion with earnings growth in the low- to mid-teens annually.

Key Risks and Contingencies

• Reimbursement Changes: The Medicare Improvements for Patients and Providers Act of 2008 mandates a transition to a bundled payment system by 2011, which could impact revenue structures. Approximately 35% of consolidated revenues are from U.S. federal programs.
• Supply Chain: The Company faces risks related to the supply and cost of heparin. While an affiliate acquired the primary U.S. supplier (APP Inc.) in September 2008, the purchase price for heparin has increased.
• Legal Proceedings:
  • Baxter Litigation: Ongoing patent infringement disputes regarding hemodialysis machines. A court ordered a royalty payment and an injunction on specific machines effective Jan 1, 2009, though the Company is appealing and has modified designs.
  • W.R. Grace Settlement: A $115 million payment obligation related to the W.R. Grace bankruptcy settlement is pending final plan confirmation.
  • Tax Audits: Ongoing audits in the U.S. and Germany with potential for additional tax payments, though management does not anticipate a material impact from most pending matters.

Investor Verification Checklist

• Heparin Supply Stability: Verify the long-term impact of the APP Inc. acquisition on heparin pricing and supply continuity.
• Medicare Bundled Payment Impact: Assess the financial modeling for the transition to the 2011 bundled ESRD payment system.
• Legal Exposure: Monitor the outcome of the Baxter patent appeal and the finalization of the W.R. Grace bankruptcy plan.
• Working Capital Trends: Track the Days Sales Outstanding (DSO) metric, which increased to 77 days, to ensure cash flow generation remains sufficient.
• Debt Covenants: Confirm continued compliance with the 2006 Senior Credit Agreement covenants, specifically the fixed charge and leverage ratios.