• 04.1
  Critical Accounting Policies
• 04.2
  Financial Condition and Results of Operations
• 04.3
  Results of Operations
• 04.4
  Liquidity and Capital Resources
• 04.5
  Recently Issued Accounting Standards
• 04.6
  Quantitative and Qualitative Disclosures about Market Risk
• 04.7
  Compensation of Management Board and Supervisory Board

04.4

Liquidity and Capital Resources

Our primary sources of liquidity have historically been cash from operations, cash from borrowings from third parties and related parties, as well as cash from issuance of equity and debt securities. We require this capital primarily to finance working capital needs, to fund acquisitions and develop free-standing renal dialysis centers, to purchase equipment for existing or new renal dialysis centers and production sites, to repay debt and to pay dividends.

At December 31, 2008, we had cash and cash equivalents of $222 million and unused credit lines of $820 million available to us which are discussed in more detail below.

OPERATIONS

In the past two years, 2008 and 2007, we have generated cash flows from operations of $ 1,016 million and $ 1,200 million, respectively. Cash from operations is impacted by the profitability of our business, the development of our working capital, principally receivables, and cash outflows that occur due to a number of singular specific items (especially payments in relation to disallowed tax deductions and legal proceedings).

The profitability of our business depends significantly on reimbursement rates. Approximately 73 % of our revenues are generated by providing dialysis treatment, a major portion of which is reimbursed by either public health care organizations or private insurers. For the year ended December 31, 2008, approximately 35 % of our consolidated revenues resulted from U.S. federal health care benefit programs, such as Medicare and Medicaid reimbursement. Legislative changes could affect Medicare reimbursement rates for all the services we provide, as well as the scope of Medicare coverage. A decrease in reimbursement rates or the scope of coverage could have a material adverse effect on our business, financial condition and results of operations and thus on our capacity to generate cash flow. In the past we experienced and also expect in the future generally stable reimbursements for our dialysis services. This includes the balancing of unfavorable reimbursement changes in certain countries with favorable changes in other countries. See “Overview” above for a discussion of recent Medicare reimbursement rate changes including provisions for implementation of a “bundled rate” by January 1, 2011.

Furthermore, cash from operations depends on the collection of accounts receivable. Our working capital was $1,068 million at December 31, 2008 which increased from $833 million at December 31, 2007, mainly as a result of increases in our accounts receivables; our ratio of current assets to current liabilities was 1.34. We could face difficulties in enforcing and collecting accounts receivable under some countries' legal systems. Some customers and governments may have longer payment cycles. A lengthening of this payment cycle could have a material adverse effect on our capacity to generate cash flow. During 2008, we have experienced some delay in payments from our customers worldwide. Accounts receivable balances at December 31, 2008 and December 31, 2007, net of valuation allowances, represented approximately 77 and 73 days of net revenue, respectively, with increased balances in both of our segments. The increase in the North America segment is mainly driven by the launch of Venofer in late 2008 in the Products business, as well as reimbursement delays in the dialysis services business related to National Provider Identification issues and other delays associated with provider numbers for new clinics and acquisitions. The increase for the International segment mainly reflects payment delays by government entities most recently impacted by the worldwide financial crises. Due to the fact that a large portion of our reimbursement is provided by public health care organizations and private insurers, we expect that most of our accounts receivables will be collectable, albeit somewhat more slowly in the immediate future.

The development of days sales outstanding (“DSO”) by operating segment is shown in the table below:

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Interest and income tax payments also have a significant impact on our cash from operations.

There are a number of tax and other items we have identified that will or could impact our cash flows from operations in the immediate future as follows:

During the third quarter 2006, the German tax authorities substantially finalized their tax audit for tax years 1998 – 2001 and issued an audit report in the second quarter 2008. We recognized and recorded the results of the audit in 2006, and thereafter paid all amounts due to the tax authorities. We have filed claims for refunds contesting the IRS’s disallowance of FMCH’s civil settlement payment deductions in prior year tax returns. As a result of a settlement agreement with the IRS to resolve our appeal of the IRS’s disallowance of deductions for the civil settlement payments made to qui tam relators in connection with the resolution of the 2000 investigation, we received a refund in September 2008 of $37 million, inclusive of interest. The settlement agreement preserves our right to continue to pursue claims in the U.S. Federal courts for refund of all other disallowed deductions.

For the tax year 1997, we recognized an impairment of one of our subsidiaries which the German tax authorities have disallowed in the audit for the years 1996 and 1997. We disagree with such conclusion, believe we have valid arguments and have filed a complaint with the appropriate German court to challenge the tax authority’s decision. An adverse determination in this litigation could have a material adverse effect on our results of operations in the relevant reporting period. We have a liability payable to Fresenius SE related to this matter (see Note 3 „Related Party Transactions – Other”).

The IRS tax audit of FMCH for the years 2002 through 2004 has been completed. Except for the disallowance of all deductions taken during the audit period for remuneration related to intercompany mandatorily redeemable preferred shares, the proposed adjustments are routine in nature and have been recognized in the financial statements. The Company has protested the disallowed deductions and some routine adjustments and will avail itself of all remedies. An adverse determination in this litigation could have a material adverse effect on results of operations and liquidity.

We are subject to ongoing tax audits in the U.S., Germany and other jurisdictions. We have received notices of unfavorable adjustments and disallowances in connection with certain of the audits. We are contesting, including appealing, certain of these unfavorable determinations. If our objections and any final audit appeals are unsuccessful, we could be required to make additional tax payments, including payments to state tax authorities reflecting the adjustments made in our federal tax returns in the U.S. With respect to other potential adjustments and disallowances of tax matters currently under review or where tentative agreement has been reached, we do not anticipate that an unfavorable ruling would have a material impact on our results of operations. We are not currently able to determine the timing of these potential additional tax payments.

W.R. Grace & Co. and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Grace Chapter 11 Proceedings”) on April 2, 2001. The settlement agreement with the asbestos creditors committees on behalf of the W.R. Grace & Co. bankruptcy estate (see Note 18 „Legal Proceedings”) provides for payment by the Company of $115 million upon approval of the settlement agreement by the U.S. District Court, which has occurred, and confirmation of a W.R. Grace & Co. bankruptcy reorganization plan that includes the settlement. The $115 million obligation was included in the special charge we recorded in 2001 to address 1996 merger-related legal matters. The payment obligation is not interest- bearing.

If all potential additional tax payments and the Grace Chapter 11 Proceedings settlement payment were to occur contemporaneously, there could be a material adverse impact on our operating cash flow in the relevant reporting period. Nonetheless, we anticipate that cash from operations and, if required, our available liquidity will be sufficient to satisfy all such obligations if and when they come due.

INVESTING

We used net cash of $891 million and $777 million in investing activities in 2008 and 2007, respectively.

Capital expenditures for property, plant and equipment, net of disposals were $673 million in 2008 and $543 million in 2007. In 2008, capital expenditures were $384 million in the North America segment, and $289 million for the International segment. Capital expenditures in 2007 were $314 million in the North America segment, and $229 million for the International segment. The majority of our capital expenditures was used for equipping new clinics, maintaining existing clinics, maintenance and expansion of production facilities primarily in North America and Germany and; in 2008 – Japan and France, in 2007 – Japan. In addition, we incurred higher investment for machines that we provide to our customers mostly under operating leases, primarily in the International segment (2008 and 2007). Capital expenditures were approximately 6 % and 6 % of total revenue for 2008 and 2007, respectively.

Primarily for acquisitions of dialysis clinics and licenses, we invested approximately $227 million cash in 2008 ($113 million in the North America segment, $57 million in the International segment and $57 million in Corporate) and $143 million in 2007 ($63 million in the North America segment and $80 million in the International segment). In addition, in 2007 we paid approximately $120 million in conjunction with the Renal Solutions, Inc. acquisition. We also received $59 million and $29 million in conjunction with divestitures in 2008 and 2007, respectively.

In 2008, we granted a loan of $50 million to Fresenius SE, our parent (see Note 3 „Related Party Transactions”).

We anticipate capital expenditures of approximately $550 to $650 million and expect to make acquisitions of approximately $200 to $300 million in 2009.

FINANCING

Net cash used in financing was $156 million in 2008 compared to $341 million in 2007.

In 2008, cash was mainly used for redemption of trust preferred securities ($678 million), the payment of dividends ($252 million) and the payment in November 2008 of the remaining financial liability relating to the 2007 rsi Acquisition ($56 million); we raised cash from our accounts receivable securitization facility (“A/R Facility”) and other existing long-term credit facilities. In 2007, cash was mainly used to pay down our A/R Facility and other debt and for payment of dividends; we raised net proceeds of $484 million from the issuance of our Senior Notes due 2017 (“Senior Notes”).

For a description of our short-term credit facilities, including our A/R Facility, see Note 8 „Short-Term Borrowings, Other Financial Liabilities and Short-Term Borrowings from Related Parties”. For a description of our long-term sources of liquidity, including our 2006 Senior Credit Agreement, our Senior Notes, our credit facilities with the European Investment Bank ("EIB"), and our trust preferred securities, see Note 9 „Long-Term Debt and Capital Lease Obligations” and see Note 11 „Mandatorily Redeemable Trust Preferred Securities”.

The following table summarizes the Company’s available sources of liquidity at December 31, 2008:

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At December 31, 2008, we have short-term borrowings, excluding the current portion of long-term debt, of $660 million.

The following table summarizes, as of December 31, 2008, our obligations and commitments to make future payments under our long-term debt, trust preferred securities and other long-term obligations, and our commitments and obligations under lines of credit and letters of credit.

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Our obligations under the 2006 Credit Agreement are secured by pledges of capital stock of certain material subsidiaries, including FMCH and D-GmbH, in favor of the lenders. Our 2006 Senior Credit Agreement, EIB agreements, Euro Notes, Senior Notes, and the indentures relating to our trust preferred securities include covenants that require us to maintain certain financial ratios or meet other financial tests. Under our 2006 Senior Credit Agreement, we are obligated to maintain a minimum consolidated fixed charge ratio EBITDAR (sum of EBITDA plus Rent expense under operation leases) to Consolidated Fixed Charges as these terms are defined in the 2006 Senior Credit Agreement) and a maximum consolidated leverage ratio (ratio of consolidated funded debt to consolidated EBITDA as these terms are defined in the 2006 Senior Credit Agreement). Other covenants in one or more of each of these agreements restrict or have the effect of restricting our ability to dispose of assets, incur debt, pay dividends and make other restricted payments, create liens or engage in sale-lease backs.

The breach of any of the covenants in any of the instruments or agreements governing our long-term debt – the 2006 Senior Credit Agreement, the EIB agreements, the Euro Notes, the Senior Notes or the notes underlying our trust preferred securities – could, in turn, create additional defaults under one or more of the other instruments or agreements. In default, the outstanding balance under the Senior Credit Agreement becomes due at the option of the lenders under that agreement, and the “cross default” provisions in our other long-term debt permit the lenders to accelerate the maturity of the debt upon such a default as well. As of December 31, 2008, we are in compliance with all covenants under the 2006 Senior Credit Agreement and our other financing agreements.

Although we are not immune from the world-wide financial crises of 2008, we believe that we are in a solid financial position to continue to grow our business while meeting our financial obligations as they come due. Our business is generally not cyclical. A substantial portion of our accounts receivable are generated by governmental payers. While payment and collection practices vary significantly between countries and even between agencies within one country, government payors usually represent low risks (see “Critical Accounting Policies – Accounts Receivable and Allowance for Doubtful Accounts”, above). Our syndicated credit facility is comprised of 60 lenders for our revolving credit facility none of which contribute more than 4 % of our revolving borrowings under the 2006 Credit Agreement. Even though one of the 60 participating banks in this syndicated facility defaulted on its obligation to provide funds under the terms of the revolving facility during the fourth quarter 2008, we do not anticipate any major issues in having funds available for us when we utilize this credit facility. As we deemed the amount in default immaterial, we took no action to amend our 2006 Credit Agreement to replace the defaulting bank (see Note 9 „Long-Term Debt and Capital Lease Obligations – 2006 Senior Credit Agreement”). However, limited or expensive access to capital could make it more difficult for our customers to do business with us, or to do business generally, which could adversely affect our business. Current conditions in the credit and equity markets, if they continue, could also increase our financing costs and limit our financial flexibility.

Following our earnings-driven dividend policy, our General Partner’s Management Board will propose to the shareholders at the Annual General meeting on May 7, 2009, a dividend with respect to 2008 and payable in 2009, of €0.58 per ordinary share (for 2007 paid in 2008: €0.54) and €0.60 per preference share (for 2007 paid in 2008: €0.56). The total expected dividend payment is approximately €173 million (approximately $240 million based upon the December 31, 2008 spot rate) compared to €160 million ($252 million) in 2008 with respect to 2007. Our 2006 Senior Credit Agreement limits disbursements for dividends and other payments for the acquisition of our equity securities (and rights to acquire them, such as options or warrants) during 2009 to $280 million in total.

Our treasury management services, which Fresenius SE provides under contractual arrangements with us, assists in the management of our liquidity by means of effective cash management as well as an anticipatory evaluation of financing alternatives. We have sufficient financial resources – consisting of only partly drawn credit facilities and our accounts receivable facility – which we intend to preserve in the next years. We aim to keep committed and unutilized credit facilities to a minimum of $500 million.

We will focus our financing activities in the coming years on reducing subordinated debt. In this respect we did not refinance the subordinated trust-preferred securities issued by Fresenius Medical Care Capital Trust II and III which matured in February 2008 by issuing new subordinated debt, but used our existing senior credit facilities instead. Our target for maturing long-term debt is to refinance with senior and unsecured debt instruments only.

Our refinancing needs for the years 2009 and 2010 are limited to refinancing of our Euro Notes totaling $278 million (€200 million) in July 2009 and the annual renewal of our $550 million accounts receivable facility. These refinancing requirements, as well as our dividend payment of approximately $240 million in May 2009 and the anticipated dividend payment in 2010, are expected to be covered by our cash flows and by using existing credit facilities. Our debt covenants provide sufficient flexibility to cover our financing needs. Generally, we believe that we will have sufficient financing to achieve our goals in the future and to continue to promote our growth.

Our financing strategy and our financial performance are reflected in the credit ratings assigned to us by the rating agencies, Standard & Poor’s and Moody’s. The table below shows the ratings as of December 31, 2008.

DEBT COVENANT DISCLOSURE – EBITDA

EBITDA (earnings before interest, taxes, depreciation and amortization) was approximately $2,088 million, 19.7 % of revenues for 2008 and $1,944 million, 20.0 % of revenues for 2007. EBITDA is the basis for determining compliance with certain covenants contained in our 2006 Credit Agreement, Senior Notes, Euro Notes, EIB , and the indentures relating to our outstanding trust preferred securities. You should not consider EBITDA to be an alternative to net earnings determined in accordance with U.S. GAAP or to cash flow from operations, investing activities or financing activities. In addition, not all funds depicted by EBITDA are available for management’s discretionary use. For example, a substantial portion of such funds are subject to contractual restrictions and functional requirements for debt service, as needed for capital expenditures and to meet other commitments as described in more detail elsewhere in this report. EBITDA, as calculated, may not be comparable to similarly titled measures reported by other companies. A reconciliation of cash flow provided by operating activities to EBITDA is calculated as follows:

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