• 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

FINANCIAL SITUATION

Despite considerable uncertainty on the financial markets, our investment and financing strategy did not change in 2008. As such our business model allows for a stable and high cash flow, thereby enabling us to have a more consistent and higher level of borrowing than other industries. In addition, we optimized our financing structure at an early stage, prior to the start of the financial crisis, by issuing senior notes and by redeeming trust preferred securities. As a result, no significant refinancing will be required before 2011. Our refinancing options remain stable and flexible and we will continue our investment plans for the current business year.

FINANCIAL MANAGEMENT POLICIES AND GOALS

Ensuring our financial flexibility is key to Fresenius Medical Care’s financing strategy. This is achieved through the use of a wide range of financial instruments as well as diversification of investors and banks. Our maturity profile is characterized by diversification of maturities with a high amount of medium-term and long-term financing options.

In selecting financial instruments, we consider market capacity, financing costs, investor diversification, flexibility, qualification requirements and maturities. At the same time, we focus on financing cost optimization.

Fresenius Medical Care manages its financing needs through a combination of operating cash flow as well as short, medium, and long-term debt. In addition to the financing instruments utilized, Fresenius Medical Care has a sufficient financial leverage in the form of syndicated lines of credit, which can be utilized if needed.

Fresenius Medical Care uses the debt / EBITDA ratio (leverage ratio) as a guideline for its long-term financial planning. This ratio compares the Company’s financial liabilities (debt) with earnings before interest, taxes, depreciation and amortization (EBITDA) and other noncash items. Fresenius Medical Care has a strong position in the growing global dialysis markets, which is considered non-cyclical. The dialysis industry can be characterized by stable cash flows, as most clients have high credit worthiness. Therefore, high, stable, and plannable strong cash flows can be achieved. These allow for an appropriate ratio of debt, i.e. a balanced combination of financial debt liabilities. At the end of 2008, the debt / EBITDA ratio was 2.69 compared to 2.84 in the previous year. For further information, please see the „Strategy, Objectives, and Corporate Management” section.

Fresenius Medical Care has sufficient financial resources, due to only partially used lines of credits and the accounts receivable facility, which will be maintained in the years to come. We aim to keep committed and unutilized credit facilities of at least $500 million.

In addition, we are focusing on reducing financing instruments with our financing activities in the coming years. For this reason, the subordinated trust-preferred securities issued by Fresenius Medical Care Capital Trust II and III, which matured in February 2008, were refinanced with existing senior credit facilities instead of issuance of new subordinated securities. Our mediumterm goal is to create a financing portfolio containing only of senior and unsecured debt instruments.

For detailed information on financing, please see the financial report section „Liquidity and Capital Resources”, notes 8 and 9, and in the „Outlook” report.

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RATING

In the second quarter of 2008, the rating agency Moody’s upgraded the corporate rating and credit rating of Fresenius Medical Care. Moody’s ratings are all based on a stable outlook.

At the beginning of the third quarter, Standard & Poor’s downgraded the outlook rating of Fresenius Medical Care from positive to negative in connection with the app acquisition through Fresenius SE. All other ratings were confirmed.

EFFECT OF OFF-BALANCE-SHEET FINANCING INSTRUMENTS ON THE FINANCIAL POSITION AND ASSETS AND LIABILITIES

Fresenius Medical Care is not involved in any off-balance- sheet transactions that could have a significant effect on the company’s financial situation, expenses or earnings, profit and loss position, liquidity, investments, assets or capitalization.

LIQUIDITY ANALYSIS

For detailed information on liquidity, please see the „Liquidity and Capital Resources” section of the financial report.

DIVIDENDS

Fresenius Medical Care will propose the twelfth consecutive dividend increase to the Annual General Meeting. A dividend of €0.58 per ordinary share (2007: €0.54) and €0.60 per preference share (2007: €0.56) will be proposed for the business year 2008. This represents an increase of 7 % in both cases. The total dividend payout is expected to be approximately €173 million (2007: €160 million). For further information on dividends, please see the section „To Our Shareholders”.

INVESTMENTS AND ACQUISITIONS

The majority of the investment expenditure went to maintenance of existing clinics and setup of new clinics. In addition, funds were invested in maintaining and expanding production facilities in North America, Germany, Japan, and France. Capitalization of dialysis machines for customers, primarily in the International segment, also took up a portion of the investment expenditure. These investments are financed through operating cash flow or through existing or new credit facilities.

In 2008, Fresenius Medical Care spent $1,011 million on investments, acquisitions and the purchase of intangible assets; of this amount, $964 million were cash transactions, of which $498 million went to the North America segment, $359 million to the International segment and the Corporate segment accounted for $107 million. This amount includes a loan granted to Fresenius SE in the amount of $50 million.

A total of $673 million in net investment went to fixed assets, compared to $543 million in the previous year. A large portion of the investment expenditure – $398 million – went to maintaining existing clinics and set up of new clinics. Additionally, $195 million in investment expenditure went to maintaining and expanding production capacities, mainly in Germany and North America as well as in Japan and France. Another $94 million was invested in the capitalization of dialysis machines provided to customers by our distribution companies, primarily in the International segment. Investments in fixed assets accounted for about 6 % of total revenue and hence remained unchanged from the previous year.

About 54 % of the net investment amount went to expansion investments, while 46 % was spent on maintaining existing production sites and dialysis clinics.

We invested approx. 57 % in North America, followed by 34 % in Europe, 5 % in the Asia-Pacific region and 4 % in Latin America.

In 2008, $225 million was spent on licenses and acquisitions, primarily in the area of dialysis clinics. Of this amount, $113 million went to North America; $57 million was spent for the International segment and $57 million in the Corporate segment. In addition, a loan of $50 million was granted to Fresenius SE. We also recorded receipts in the amount of $59 million in connection with divestitures.

Overall, approximately $891 million was spent for investment activities and acquisitions in 2008, taking into account disinvestments. An increase of $114 million compared to the previous year.

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CASH FLOW ANALYSIS

Our operating cash in 2008 was $1.02 billion, which was lower by 15 % from 2007 ($1.20 billion). The decline was due to an increase in the days sales outstanding (DSO) as well as other charges to the working capital; however, the decrease was partially offset by increased earnings. The cash inflow was used for investments (property, plant and equipment and acquisitions).

A detailed description of additional factors is listed in the financial report in the „Liquidity and Capital Resources” section.

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In 2008, we already saw some slight delays in the payment patterns of our clients worldwide. At the end of 2008, the days sales outstanding in North America rose by two days to 60 days; outside of North America, it rose by three days to 107 days. Overall, the days sales outstanding increased by four days to 77 days compared to the previous year. The increase in the North America segment was largely due to the launch of the in-licensed iron product Venofer as well as due to delays in reimbursement of dialysis services related to the introduction of new identification numbers for Medicare and Medicaid health care providers. The increase in the International segment mainly reflects delays in payment by state entities, which are affected by the current worldwide financial crisis. Since the majority of our reimbursement comes from public healthcare organizations and private insurers, we expect that most of our outstanding accounts will be collected in the near future, although with a slight delay. Further information is listed in the „Assets and Liabilities” section.

In 2008, our free cash flow, excluding acquisitions and dividends, was $343 million compared to $657 million in 2007. After acquisition expenses of $218 million (less divestitures) and dividends amounted to $252 million, free cash flow was – $127 million, compared to $235 million in the previous year. For further information, please see the section “Investments and Acquisitions” above.

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