Besides optimizing our financial costs, financial flexibility takes top priority in Fresenius Medical Care’s financing strategy. We ensure this flexibility by using a wide range of financial instruments as well as securing a high level of diversification with regard to our investors and banks. Our financing profile is also characterized by a wide spread of maturities, ranging from our short-term accounts receivable facility, which is extended annually, to senior notes which mature in 2021. In addition, financial leverage can be extended in the form of differently structured credit lines, if required. In addition to this combination of short, medium, and long-term financial instruments, financing needs are essentially covered by operating cash flow.

Our main financing instrument is the syndicated credit agreement with two long-term loans (Term Loan A, Term Loan B). On September 29, 2010, we amended and extended the 2006 credit agreement for two years.

In addition, we use several other mid and long-term financing instruments, including:

• subordinated bonds (trust preferred securities), which will expire mid-2011;
• on a small scale, senior, unsecured euro notes with fixed-rate and floating-rate tranches; and
• senior, unsecured notes in euros and U.S. dollars.

Our financing activities are focused on reducing subordinated financing instruments and replacing them by senior notes, wherever possible. We have sufficient financial resources consisting of only partly drawn credit facilities and our accounts receivable facility, which was renewed and increased from $650 M to $700 M in September 2010. Our target for committed and unutilized credit facilities is between $300 M and $500 M. Our short-term refinancing requirements are limited to paying €485 M for our acquisition of International Dialysis Centers, paying dividends to the amount of approximately €197 M in May 2011, repaying the trust preferred securities of $225 M and €300 M in June 2011, and extending the accounts receivable facility in October 2011. We intend to refinance in accordance with our described financing strategy.

As a guideline for our long-term financial planning, we primarily use the debt/EBITDA ratioDebt/EBITDA ratioImportant indicator in corporate management. It compares a company’s debt to earnings before interest, tax, depreciation and amortization and other noncash charges.. This compares financial liabilities (debt) with earnings before interest, taxes, depreciation and amortization (EBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)Corresponds to operative cash flow before taxes.) and other non-cash items. Fresenius Medical Care holds a strong position in the growing dialysisDialysisForm of renal replacement therapy where a semipermeable membrane – in peritoneal dialysis the peritoneum of the patient, in hemodialysis the membrane of the dialyzer – is used to clean a patient’s blood. sector, which is considered non-cyclical. The industry is characterized by relatively stable cash flows and our market position is further bolstered by the high creditworthiness of most of our customers. This allows us to have a more consistent and higher level of borrowing than may be the case for companies in other industries. At the end of 2010, the debt/EBITDA ratio was 2.38 compared to 2.46 in the previous year. Further information on this can be found in the “Strategy, objectives, and corporate management” section. For detailed information on financing, please see the financial report section  “Liquidity and capital resources”, note 8 and note 9 of the financial report, and the “Outlook” section.

Over the course of the past year, the ratingRatingThe rating is a classification of the creditworthiness of a company accepted on the international capital market. It is published by independent rating agencies such as Standard & Poor’s, Moody’s or Fitch based on a company analysis. agencies Standard & Poor’s (in the second quarter of 2010) and Fitch (in the third quarter of 2010) upgraded Fresenius Medical Care’s outlook from “stable” to “positive”. All ratings were confirmed in the year under review. Moody’s rating remained at “Ba1” (stable outlook), while Fitch and Standard & Poor’s gave Fresenius Medical Care a “BB” rating.

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.

Our main sources of liquidity are our operative cash flow and credits granted by third parties, as well as other financing instruments as required. We need these resources primarily to finance working capital, to fund acquisitions, to build, expand and equip our own dialysis centers and production facilities, and to repay debt and pay out dividends. For detailed information on liquidity, please see the “Liquidity and capital resources” section of the financial report.

Fresenius Medical Care will propose the 14th consecutive dividendDividendPortion of a company’s profits. The profit to be distributed divided by the number of outstanding shares shows the dividend per share. The dividend is paid to shareholders usually once a year in the form of cash, stock or tangible assets. increase at the Annual General Meeting. The recommended dividend for 2010 will be €0.65 per ordinary share (2009: €0.61) and €0.67 per preference share (2009: €0.63). This represents an increase on the previous year of 7 and 6%, respectively. The total dividend payout is expected to be approximately €197 M (2009: €183 M). For further information on dividends, please refer to the “Dividend” section.

Important areas in terms of capital expenditures are maintaining existing clinics and supplying equipment to new clinics. We also invested in the upkeep and expansion of production sites in the past year. Additionally, the capitalization of dialysis machines, which were mainly delivered to customers of the International segment, also contributed to capital expenditures. These investments are financed using operating cash flow or existing or new loans.

In 2010, Fresenius Medical Care spent $1,446 M on capital expenditures, acquisitions and purchasing intangible assets. Of that amount, $1,288 M were cash items in 2010. $524 M of this was allocated to the North America segment, $608 M to the International segment and $156 M to corporate costs.

Total net investment in property, plant and equipment was $507 M, down from $562 M the year before. A large portion of capital expenditures – $306 M – went towards maintaining existing clinics and equipping new ones. In addition, $124 M was invested in the maintenance and expansion of production capacity, primarily in Germany and North America. $93 M was spent on capitalizing dialysis machines provided to customers by our distribution companies, mainly in the International segment. A relatively small amount of $16 M accrued through divestments. Capital expenditures in property, plant and equipment amounted to some 4% of overall revenue, slightly under the previous year’s figure of 5%.

About 44% of net investments were used for expansion activities, while 56% were spent on maintaining existing production sites and dialysis clinics.

Approximately 56% of our net investments were made in North America, followed by Europe with 31%, Asia-Pacific with 8% and Latin America with 5%. 2010 2009 Change North America

In 2010, around $632 M was spent on acquisitions, primarily for purchasing dialysis clinics and the international peritoneal dialysisPeritoneal Dialysis (PD)Dialysis treatment method using the patient’s peritoneum, i.e. the tissue that covers the inner surface of the abdominal cavity and the abdominal organs, as the dialyzing membrane for blood purification. A sterile dialysis solution is introduced and removed through a catheter that has been surgically implanted into the patient’s abdominal cavity. The solution absorbs toxins and excess water. Most treatments are supported by a machine, the cycler, and are administered by the patients in their home or workplace several times a day or during the night.
business of Gambro, but also for founding the new renal pharmaceutical company with Galenica and purchasing licenses. $237 M of this sum went to the North America segment, $373 M to the International segment and $22 M to corporate costs.

All in all, $1,125 M was spent on capital expenditures and acquisitions in 2010, taking into account divestments. This represents an increase of $427 M compared to the previous year ($698 M).

Our operating cash flow in 2010 was $1.37 BN, up over the previous year ($1.34 BN). This rise of about 2% is primarily attributable to improved working capital, including the reduction of stocks, as well as an improved income, partially offset by higher income tax payments. The cash inflow was used for investments (property, plant and equipment as well as acquisitions). A detailed description of additional factors is presented in the financial report in the  “Liquidity and capital resources” section.

In 2010, we observed some regional differences in the payment patterns of our customers worldwide. The days sales outstandingDays Sales Outstanding (DSO)Indicates the average number of days it takes for a receivable to be paid. A shorter DSO results in less interest for the creditor and a lower risk of default., in other words the number of days required to settle outstanding invoices, slightly increased in the year under review. The days sales outstanding in the North America segment continued to be on a low level in 2010. The days sales outstanding in the International segment increased as we anticipated. This mainly reflects payment delays by government and private entities, particularly in Europe, due to the worldwide financial crisis. As the majority of our reimbursement comes from public healthcare organizations and private insurers, we expect to recover most of our outstanding accounts receivable. As in the previous year, we anticipate a slight rise in days sales outstanding in the countries affected most severely by the current global financial crisis. Further information can be found in the “Assets and liabilities” section of this chapter.

In 2010, our free cash flow, excluding acquisitions and dividends, was $861 M compared to $777 M in 2009. Taking account of payments for acquisitions (less disposals) of $618 M (2009: $136 M) and dividends of $263 M (2009: $232 M), we achieved a free cash flow of $11 M compared to $409 M in the previous year. For further information, please  see the “Capital expenditures and acquisitions” section.