• 02.1
  Operations and Business Environment
• 02.2
  Results of Operations, financial Situation, Assets and Liabilities
• 02.3
  Non-financial Performance Indicators
• 02.4
  Risk Report
• 02.5
  Subsequent Events
• 02.6
  Outlook

02.2

Results of Operations, financial Situation, Assets and Liabilities

RESULTS OF OPERATIONS

2008 was another successful business year, especially considering the generally difficult economic situation worldwide. We achieved and partially exceeded our annual targets, yielding record numbers in revenue and income. Every region and segment contributed to our growth and consequently to our consolidated market position in nearly every business area.

REVENUE

In 2008, Fresenius Medical Care once again achieved a significant gain in revenue of 9 % to $10.61 billion. In constant currency, the gain was 8 %; organic revenue increased by 7 % and acquisitions grew by 1 %.

In 2008, dialysis services, with 73 % (2007: 74 %), accounted for the majority of revenue. Meanwhile, 27 % of our revenue went to dialysis products (2007: 26 %).

We gained 7 % in worldwide revenue for dialysis services ($7.74 billion) in 2008. The revenue increase resulted from organic growth of 6 % and exchange rate effects of 1 %.

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The core of our dialysis services is the provision of high-quality treatments in our dialysis clinics. Therefore, the number of dialysis treatments provided is a key indicator in the revenue development of this business segment. At the end of 2008, we operated about 2,400 dialysis clinics, 7 % more than at the end of 2007. At the same time, Fresenius Medical Care treated more than 184,000 patients, up 6 % from the previous year. The number of treatments in 2008 grew by 5 % to approximately 27.87 million.

Revenue from dialysis products rose by 15 % (11 % in constant currency) to $2.87 billion. The main reasons for the gain were increased sales of hemodialysis machines, dialyzers, blood lines, concentrates, products for peritoneal dialysis as well as higher revenues from the phosphate binding drug PhosLo and revenue from intravenous iron products, which are the subject of the new license agreements. Including sales to our own dialysis clinics, revenue from dialysis products rose by 14 % to $3.73 billion.

As in previous years, the majority of dialysis services by far were provided in North America (89 %). Due to the strong expansion of our clinic network, the focus of the International segment experienced a slight shift to the services business; however, product sales still dominate this segment with 59 % of revenue. The revenue distribution of dialysis services and products in North America differs from that of the International region due to several reasons. One of the main reasons is the different development and structure of local healthcare systems. For example, in major dialysis markets such as Germany and Japan, extensive legal restrictions are imposed on the operation of dialysis clinics by private companies such as Fresenius Medical Care. This limits the expansion of our clinic network in these countries. Furthermore, we accelerated the expansion of our dialysis service business in North America since Fresenius Medical Care was founded in 1996 and the aquisition of National Medical Care (NMC).

Both segments – North America and International – contributed to revenue growth in 2008.

Revenue in North America rose by 5 % to $7.01 billion. Organic revenue growth was also 5 %. North America remains the most important business region for Fresenius Medical Care. In 2008, 66 % of our total revenue was derived from this region; in 2007, it was 69 %.

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Revenue from the dialysis services business in North America increased by 4 % to $6.25 billion. Organic growth was 4 %. The average reimbursement rate per treatment in the U.S. – our main market – rose from $327 to $330 in 2008. The main reason for this rise was an increase in commercial payer revenue.

Sales development of dialysis products was also extremely successful. In the North America segment, this includes products for hemodialysis and peritoneal dialysis, as well as the dialysis drug PhosLo and newly licensed intravenous iron products. Revenue from dialysis products grew by 15 % to $758 million, which was due to strong sales of nearly all products in our product portfolio.

The International segment is comprised of all business regions except North America. In 2008, Fresenius Medical Care generated approximately 34 % of its total revenue in this segment. This represents a significant increase from the previous year (31 %). Revenue grew by 18 % (13 % in constant currency) to $3.61 billion in 2008. Organic revenue growth was 12 % and acquisitions accounted for 1 % of revenue growth.

Dialysis services revenue in the International segment increased by 23 % (18 % in constant currency) to $1.49 billion. Dialysis products sales rose by 15 % to $2.12 billion (10 % in constant currency), due to continued high demand for dialysis machines, dialyzers and peritoneal dialysis products.

The largest business region in the International segment is Europe / Middle East / Africa. Revenue in this region rose by 19 % to $2.51 billion. In constant currency, revenue growth was 12 %. The region accounted for 24 % of total revenue (2007: 22 %). Thanks to our positive business performance in Europe, we have confirmed and expanded our position as the region’s largest provider of dialysis services and products. At the end of the 2008, we provided dialysis services to nearly 30,000 patients in 400 dialysis clinics; an increase of nearly 3,000 patients (+11 %) compared to the previous year. In 2008, our revenue from dialysis services was $948 million, up 25 % from the previous year. Adjusted for exchange rate effects, revenue rose by 18 %. Revenue from dialysis products was $1.56 billion, an increase of 15 % (9 % in constant currency).

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Business performance in Latin America was also positive. Revenue grew by 23 % to $491 million, 19 % in constant currency. Revenue generated in Latin American accounted for 4 % of our total revenue, as in the previous year. Dialysis services revenue rose by 25 % (22 % in constant currency) to $330 million. We generated $161 million from dialysis product sales, an increase of 18 % over 2007 (12 % in constant currency). At the end of 2008, we treated more than 19,000 patients in 177 dialysis clinics in this business region.

The Asia-Pacific region recorded revenue growth of 12 % to $606 million. In constant currency, growth was 11 %. This region accounted for 6 % of Fresenius Medical Care’s total revenue (2007: 5 %). Revenue from dialysis services increased by 13 % (10 % in constant currency) to about $212 million. In 2008, dialysis product revenue in this region increased by 11 % (11 % in constant currency) to $394 million.

Order volume is not a significant indicator for Fresenius Medical Care since nearly 75 % of its business model consists of regularly provided services. In addition, our product business mainly covers single-use products, whereas project-related orders could lead to significant changes in order volumes in the reporting period. As a result, Fresenius Medical Care does not report on the basis of this indicator.

EARNINGS

EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased by 7 % to $2.09 billion in 2008 (2007: $1.94 billion).

OPERATING INCOME. (EBIT, earnings before interest and taxes). Operating income also increased in 2008 by 6 % to $1.67 billion. The operating margin was 15.8 % and lower than the previous year’s figure of 16.3 %. The decline was among others due to higher personnel costs, lower reimbursement rates for EPO, start-up costs for new clinics and unfavorable exchange rate effects. Furthermore, depreciation increased as we expanded our production capacities due to continuous high demand for our products. Due to these additional capacities, we were able to perform our regular maintenance program at our European plants during the summer break of this year. Whereas last year, the program had to be shortened because capacity limits had been reached, and resulted in a positive effect on the operating margin. The strong revenue growth impacted operating margins positively which, was driven by higher reimbursement rates for dialysis services, as well as continued above market growth rates for dialysis product sales.

In the North America segment, operating income rose by 3 % to $1.17 billion in 2008. The operating margin was 16.7 % compared to 17 % in 2007. The moderate decrease is mainly due to increased personnel costs and other operating costs as well as lower reimbursement rates for. This was partially compensated by increased commercial payor revenue.

In the International segment, we increased our operating income by 13 % to $616 million. This mainly resulted from an increase in product sales and treatment volumes as well as higher revenue per treatment. The operating margin was 17.1 %, which was also below previous year’s figure of 17.8 %. This was primarily due to accelerated growth in the dialysis services business with lower margins, start-up costs for new clinics, higher depreciation due to capacity expansion, as well as foreign currency transaction effects.

Corporate costs for our central administration also increased, primarily as the result of the Renal Solutions, Inc. acquisition because such costs are not accounted for in the EBITDA and EBIT of the International and North America business segments. As such costs are not controlled by and are not under the cognizance of the individual business segments, Fresenius Medical Care is of the opinion that these costs are not controlled by the individual business segments. They mainly account for corporate expenses such as for accounting and finance as well as business segment, research and development costs. The total corporate operating costs amounted to $112 million in 2008 compared to $94 million in 2007.

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EARNINGS BEFORE TAXES. Increased to $1.34 billion, up 10 % from the previous year ($1.21 billion).

NET INCOME. In 2008, net income rose by 14 % to $818 million (2007: $717 million).

DEVELOPMENT OF OTHER MAJOR ITEMS IN THE INCOME STATEMENT

GROSS PROFIT. Increased to $3.63 billion in 2008, up 8 % compared to 2007. During the same period, the gross profit margin fell from 34.5 % to 34.2 %. The slightly lower margin was mainly due to higher personnel costs and other increased costs, especially for Heparin, but also due to lower reimbursement rates for EPO and decreased dosage of EPO in North America. Both segments recorded higher depreciation due to expanded production capacities in 2008.

Selling, general and administrative (SG&A) expenses grew by 10 % to $1.88 billion (2007: $1.71 billion). These expenses corresponded to 17.7 % of revenue, a slight increase from the previous year (2007: 17.6 %). The increased revenue had a favorable impact, however, this was partially offset by higher personnel costs and higher Corporate costs.

Depreciation and amortization in 2008 was $416 million, compared to $363 million in the previous year. This increase resulted from higher investment activity, particularly as a result of our worldwide production capacity expansion.

In 2008, research and development expenditure was $80 million (2007: $67 million). This increase was mainly due to additional costs for research and development programs required to develop hemodialysis machines, field testing of new products as well as expenses for home dialysis research projects.

NET INTEREST EXPENSE. Net interest expense in 2008 amounted to $336 million compared to $371 million in 2007. This positive development was primarily due to lower average interest rates in connection with changes in the financing structure, resulting from the repayment of a portion of our trust preferred securities. More information on our financial situation can be found here as well as in note 9 of the financial report.

TAX RATE. Income tax expense in 2008 was $489 million, compared to $466 million in the previous year. This corresponds to an effective tax rate of 36.6 % (2007: 38.5 %). The lower tax rate was mainly due to the German corporate tax reform that became effective on January 1, 2008.

EARNINGS PER SHARE. Earnings per share (EPS) grew by 13 % in 2008 to $2.75 per ordinary share compared to $2.43 in 2007. These figures also apply to our ordinary American Depository Shares (ADS), since the relationship between ordinary share and ordinary ADS has been 1:1 since the share split in 2007. The weighted average number of shares outstanding was approximately 297.03 million in 2008 (2007: 295.67 million). Of this number, 293.23 million were ordinary shares (2007: 291.93 million). The increase in the number of outstanding shares was due to the exercise of stock options. Detailed information on earnings per share is listed here.

VALUE ADDED STATEMENT

The value added statement shows Fresenius Medical Care’s total economic output in 2008. All goods and services purchased as well as depreciation and amortization have been subtracted. Fresenius Medical Care’s value added was $5.2 billion in 2008 (2007: $4.8 billion), an increase of 8 % compared to the previous year. Of this amount, $3.5 billion or 67 % was attributable to our employees, and 9 %, was attributable for the state. About $362 million or 7 % went to lenders, while $283 million (approximately. 6 %) went to shareholders and minority interest holders. The company retained $564 million for reinvestment.

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