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: Nine months ended September 30, 2007 (Unaudited)
Business Overview: The world's largest kidney dialysis company, operating in dialysis services and manufacturing/distributing dialysis products. The company is vertically integrated, owning clinics and supplying them with products. Operations are segmented into North America and International (aggregated International and Asia Pacific).

Key Financial Metrics (Nine Months Ended Sept 30, 2007)

Note: Debt figures include long-term debt, capital lease obligations, and current portions. Working capital decreased primarily due to the reclassification of $665 million of Trust Preferred Securities to short-term liabilities.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 16% (14% at constant exchange rates). Growth was driven by the Renal Care Group (RCG) acquisition (net of divestitures), organic same-market treatment growth (4%), and increased revenue per treatment.
• Profitability: Operating income rose 19% to $1.152 billion. Operating margin improved to 16.1% from 15.7%, aided by higher gross margins and lower SG&A as a percentage of sales, partially offset by a $40 million gain on clinic divestitures in 2006.
• Net Income: Increased 35% to $520 million. The 2006 period was negatively impacted by one-time charges related to RCG integration and tax assessments.
• Cash Flow: Operating cash flow surged 91% to $890 million, driven by higher earnings and improved working capital management (days sales outstanding decreased from 76 to 74 days).
• Debt Structure: In July 2007, the company issued $500 million in Senior Notes due 2017. Proceeds were used to pay down $300 million of term loans and $184 million of the accounts receivable facility.

Guidance, Outlook, and Risks

Outlook (2007 Full Year)

• Revenue: Greater than $9.5 billion (at least 12% growth).
• Net Income: $685 million to $705 million (28-31% growth).
• Adjusted Net Income Growth: 19-23%.
• Capital Expenditures & Acquisitions: Approximately $650 million.
• Effective Tax Rate: Approximately 38-39%.
• Debt/EBITDA: Under 3.0.

Management Commentary & Risks

• Reimbursement Environment: The company faces pressure from government reimbursement rates (Medicare). Changes in the drug add-on adjustment and wage index updates are expected to have a neutral to slightly positive impact in 2007. CMS monitoring policies on EPO/Aranesp utilization continue to impact revenue.
• Legal Proceedings:
  • Baxter Litigation: A jury found the company liable for $14.3 million in damages regarding patent infringement in a retrial. The company intends to appeal.
  • Government Investigations: Ongoing DOJ investigations regarding anemia management programs, PTH testing, and stock option practices. The company is cooperating and defending vigorously.
  • W.R. Grace Settlement: A $115 million payment obligation remains pending confirmation of a bankruptcy reorganization plan.
• Tax Matters: Ongoing audits in Germany and the U.S. A German tax rate reduction (25% to 15%) effective Jan 1, 2008, resulted in a $3.1 million deferred tax benefit in Q3 2007.

Investor Verification Checklist

• Reimbursement Rates: Verify the impact of CMS drug add-on adjustments and wage index changes on future margins.
• Legal Exposure: Monitor the outcome of the Baxter patent appeal and the status of DOJ investigations regarding anemia management and billing practices.
• Debt Covenants: Confirm continued compliance with the 2006 Senior Credit Agreement covenants (Fixed Charge Ratio and Leverage Ratio), especially with $665 million of Trust Preferred Securities maturing in Feb 2008.
• Acquisition Integration: Assess the ongoing integration costs and synergies from the RCG acquisition and recent Asia-Pacific acquisitions.
• Tax Liabilities: Review potential additional tax payments resulting from ongoing audits in Germany and the U.S.