FMS

Business Context and Reporting Period

Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and six months ended June 30, 2009
Business Overview: The Company is the world's largest kidney dialysis company, providing dialysis services and manufacturing/distributing products for end-stage renal disease (ESRD). Operations are segmented into North America and International (aggregating International and Asia Pacific). Approximately 75% of revenue is generated from dialysis treatment, with a significant portion reimbursed by government programs like Medicare.

Key Financial Metrics (Six Months Ended June 30, 2009)

Margins (Six Months 2009):
- Gross Margin: 33.7% (vs. 34.4% in 2008)
- Operating Margin: 15.3% (vs. 15.8% in 2008)
- Effective Tax Rate: 32.2% (vs. 36.3% in 2008)

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 3% (9% at constant exchange rates). Growth was driven by a 6% increase in dialysis care revenue, partially offset by a 4% decrease in dialysis product revenue.
• Volume: Total treatments increased 5% to 14.36 million. Same-market treatment growth was 4.4%.
• Profitability: Operating income decreased slightly to $813 million due to lower gross margins and increased SG&A expenses, though net income increased to $419 million primarily due to a lower effective tax rate.
• Segment Performance:
  • North America: Revenue up 8%; Operating income up 1% to $569 million. Growth driven by same-market treatment volume and revenue per treatment.
  • International: Revenue down 7% (up 10% at constant exchange rates) due to significant currency headwinds. Operating income down 3% to $300 million.
• Cost Drivers: Gross margin compression was caused by higher pharmaceutical costs (heparin), personnel costs, and the launch of generic competition for the phosphate binder PhosLo®. International margins were impacted by the appreciation of the Euro and Yen against local currencies.

Guidance, Outlook, and Risks

2009 Full Year Outlook:
- Net Revenues: > $11,100 million
- Net Income: $850 - $890 million
- Debt/EBITDA: < 2.7
- Capital Expenditures: ~$550 - $650 million
- Acquisitions: ~$200 - $300 million

Key Risks and Contingencies:
- Reimbursement Changes: The Medicare Improvements for Patients and Providers Act (MIPPA) mandates a bundled payment system starting January 1, 2011, which will materially affect reimbursement for Epogen® and other services. The full impact cannot be estimated until final regulations are issued. - Legal Proceedings: Ongoing patent litigation with Baxter International regarding hemodialysis machines (royalty exposure estimated at $2-3 million/month if appeals fail) and Gambro in Germany. The Company is also subject to various government investigations and tax audits (IRS and German authorities). - Financial Risks: Exposure to foreign exchange fluctuations and potential delays in government receivables collection due to the global financial crisis.

Investor Verification Checklist

• Reimbursement Policy: Monitor CMS final regulations regarding the 2011 bundled payment system and its impact on pharmaceutical reimbursement.
• Generic Competition: Assess the long-term revenue impact of generic PhosLo® on the North America pharmaceutical segment.
• Currency Exposure: Verify the effectiveness of hedging strategies given the significant negative impact of the strong Euro/Yen on International segment results.
• Legal Liabilities: Track the status of the Baxter patent appeal and the outcome of the German tax court complaint regarding the 1997 impairment deduction.
• Liquidity: Confirm the renewal of the $550 million accounts receivable facility and compliance with debt covenants (Fixed Charge Ratio and Leverage Ratio).