The Steel segment counters the risks arising from cyclic al trends in the steel business byoptimizing costs, adjusting produc tion in a timely manner and conc entrating on exac ting market segments. To counterac t financial risks through increased insurer’s premiums, the Steel segment has integrated proper ty insurance-related economic and technic al risk monitoring into the risk management proc ess. To fur ther optimize preventivefire safety, common minimum standards have been defined for the entire segment.
Quality and deliver y deadline risks are minimized through the optimization of the value chains. The segment counteracts currency risks arising from procurement and sales transac tions through hedging.
The main risks for the Carbon Steel business unit include market risks regarding sales and procurement, risks from loss of produc tion and increased expenditure for repairs following equipment breakdowns, as well as currency exchange rate fluc tuations.
The business unit reduc es the risk of limited core markets through globalization of manufacturing in downstream activities and enhanced internationalization of sales. The business unit counterac ts the high competitive intensity in the market for c arbon flat steel produc ts through its innovation strategy, allowing competitive advantages to be at tained, at least temporarily. The risk of rising raw material pric es (c aused by the growth in demand on the Chinese market (par ticularly for coke, oreand scrap, c an only be counterac ted to a limited extent by alternative procurement sourc es and/or by passing the prices on. Preventive maintenance, modernization and investments work against the risk of an unplanned produc tion standstill.
The Stainless Steel business unit is confronted with risks arising on the one hand from market developments, par ticularly in Europe and China, and on the other hand due to expec ted overc apacity in stainless produc tion, exac erbated by changes in worldwide supply flows through existing or new access barriers to major markets outside Europe. The companies of this business unit cur tail such risks through measures of distribution, c apacity and produc tion control. Rising competitive pressure is countered by the development of new applic ations for stainless steels and nickel-base materials and innovative produc ts from these materials, as well as modern and cost-saving process technologies. Beyond this, all subsidiaries of the business unit are strengthening their customer relationships through customer-c entric ser vic e of ferings, fur ther quality improvements and bet ter deliver yperformance.
The risks arising from the availability and the price development of raw materials, especially for nickel and alloyed scrap, are minimized by means of adequate contrac ts and assuranc e mechanisms.
The Automotive segment is lowering its dependenc e on regional markets byan increasing global presence, in par ticular in growth regions such as Asia and Latin America. Regardless of this, due to the current sales struc ture, fur ther developments in Nor th Americ a are par ticularly impor tant for the segment.
An ambitious segment-wide cost reduction program has been introduc ed to compensate for increasing pric e pressure from automotivemanufac turers. The ef fec ts of these measures will be strengthened by improvements in earnings from restructuring measures introduc ed in the previous years.
Sales and earnings in the past fisc al year were af fec ted by the strengthening of the euro against the us-Dollar and the Brazilian Real.
The struc tural market development was charac terized by conc entration trends on the par t of automobile manufac turers and competitors. ThyssenKrupp Automotive counterac ts such trends through dynamic internal and external, quantitativeand qualitative growth.
Automotive is countering possible risks arising from the
research and development, and, if nec essary, cooperation with par tners or acquisition of investments, as well as the strengthening of its position as a system vendor. Major consideration is given to the increased use of alternative materials and the use of elec tric/ elec tronic systems to replac e mechanic al solutions. At the same time, however, the increasing complexity of produc ts as well as underlying produc tion proc esses in some c ases c arr y the risks of higher star t-up costs and a strained income situation.
The international steel market is currently strongly influenc ed by China’s expanding steel and primary material needs. The major price rises for scrap resulting from this have had a signific ant impac t on earnings for the segment’s Nor th Americ an foundries as pric e increases c an only be passed on to customers with a time delay. A continuation of the development in steel prices also carries significant risks for earnings at the steel-proc essing companies.
While the operating performanceof the Elevator segment’s new installation business is dependent on the situation in the construction sec tor, this is not the c ase with the modernization, ser vic e and repair business, which thereforehas a stabilizing ef fec ton earnings.
In this regard, regional weaknesses in the international construction sec tor are impac ting fur ther segment growth. However, the segment is profiting from the stable growth, particularly in construction activities, which can currently be obser ved in Asia. The fur ther expansion of Elevator’s ser vic e business is relatively independent of the regional variations in the development of new installation business as the expansion of the service portfolio is not based only on new installations.
The operating risks are seen as relatively low due to the strongly dec entralized organization of the segment with over 800 branches worldwide and the associated high level of diversific ation.
Although approx. 45% of business volume is realized in us-Dollar, the currency risks are limited as sales and costs are largely accounted for in the same currency, due to the highly regional nature of activities. The remaining transac tion risks areminimized through consistent hedging.
Par t of Elevator’s strategy for succ essful business expansion is to acquirenew companies. The risks associated with the integration of new acquisitions are minimized through comprehensive business
integration measures and close suppor t of the acquired ac tivities. The Technologies segment has a dif ferentiated risk struc ture due to the vast diversity of produc t ranges. Projec t controlling as a form of early identific ation system based on available instruments and systems is fur ther optimized through monthly summar y repor ting on the status and changes of key major projec ts.
The risk at the Produc tion Systems business unit of over- dependence on only a few large customers is being counteracted by abroadening of the customer base and a reorganization of sales. Risks from changes during project processing will be countered with greater flexibility and fur ther development of produc t ranges.
Plant Technology curbs risks arising from the proc essing of long- term contrac ts through more ef ficient contrac t management and intensiveprojectcontrolling as well as conc entration on mastered technologies.
In the Marine business unit, risks in order proc essing shall be limited by greater projec t management and controlling. Merchant shipbuilding, conc entrating on small and medium-sized container ships (up to 2,700 teu(container storage spac es)), fast ships (ferries) and mega-yachts, contributes to the compensation of c apacity fluc tuations in naval shipbuilding.
At the Mechanical Engineering business unit, leading market positions will be consolidated and expanded through fur ther restruc turing and cost reduc tion measures, range extensions and by developing new sales markets.
Now that the Shanghai route has succ essfully commenc ed commercial operations, worldwide market penetration for the Transrapid will be supported by the government-financed development program. At the same time, the development program is improving the chances of realizing the Munich projec t.
The companies of the Services segment chiefly involved in materials trading are mainly exposed to price and inventory risks and those of uncollectible rec eivables, none of which, however, jeopardize their existence. Further expansion of the centralized warehousing concept as well as constant advanc ement of the logistics control systems reduceinventories, thus buf fering the ef fec ts of shor t-term pric e volatility even fur ther.
In order to fur ther lower the dependency on cyclical pric e developments, the segment has been expanding its service business, which does not depend on the pric e development of materials. The risks from potentially uncollec tible rec eivables are relatively insignific ant. Apar t from the use of hedging instruments, a broad customer por tfolio and worldwide business ac tivities ensure a wide spread in this area of risk. This also applies to the Industrial Services business unit to a great extent. In par t, the considerable competition and price pressure has been countered by capacity adjustments at all levels on the one hand and targeted sales initiatives on the other. Business losses have been largely compensated through the acquisition of new customers.
No risks are disc ernible which could jeopardize the continued existenc eof the Real Estate segment; this applies in par ticular for risks which could arise from struc tural or legal changes or external influences. The risk of vac ancy will be limited for residential proper ty in particular through targeted modernization programs and optimized customer ser vic e. Improved projec t management is facilitating risk limitation for industrial property.Beyond this, an integrated sales and maintenance program, together with optimized inventory management, suppor ts the segment’s ongoing por tfolio optimization.
Summary
The overall evaluation of the risks shows that the Group is af fec ted principally by market risks; this includes economic pric e and volume developments in par ticular, as well as the dependency on the development of major customers and industries. Performanc e proc esses are well controlled in general and, therefore, less subjec t to risks. Overall, it c an be noted that the risks in the ThyssenKrupp Group are contained and manageable and do not pose a threat to the existenc e of the company. Nor are any risks disc ernible that may jeopardize the existenc e of the Company in the future.
The Executive Board of ThyssenKrupp agis responsible for the compilation, completeness and accuracy of the Group annual consolidated financial statements, the description of the economic development and the management’s discussion and analysis as well as the other information presented in the annual repor t. The Group annual consolidated financial statements have been prepared in accordanc e with United States Generally Acc epted Accounting Principles (“usgaap”) and, wherever necessary, objective estimates have been made by Management. The description of the economic development and the management’ s discussion and analysis contain an analysis of the assets, financial and earnings situation of the Group together with fur ther explanations required by the regulations of the German Commercial Code.
Toensurethe reliability of the information used in preparing the Group annual consolidated financial statements, inclusive of the description of the economic development and the management‘s discussion and analysis, and internal repor ting, an ef fec tive internal “steering” and control system exists. It involves group-wide uniform guidelines for accounting and risk management in accordanc ewith the German Ac t regarding the Control and Transparency of Company Divisions (KonTraG) as well as an integrated controlling conc ept as par t of the value-oriented management approach and audits by the Group’sinternal audit department. This system enables the Executive Board to recognize major risks at an early stage and to initiate counter- measures.
Pursuant to the resolution of the annual stockholders‘ meeting, KPMG Deutsche Treuhand-Gesellschaf t Aktiengesellschaf t, Wir t- schaf tsprüfungsgesellschaf t, Berlin and Frankfur t am Main has been appointed by the Supervisory Board after being elected by the stock- holders as independent annual consolidated financial statements auditors for the fisc al year 2003/2004 of ThyssenKrupp ag.They have audited the Group annual consolidated financial statements prepared in accordance with usgaapand they confirm that all of the requirements under Ar t. 292a of the German Commercial Code, which relieve the Company from the obligation of preparing financial statements under German gaap,have been fulfilled. The auditors have issued the following auditors‘ repor t.
The Group annual consolidated financial statements, the description of the economic development and the management´s discussion and analysis, auditors‘ repor t and risk management system havebeen discussed in depth with the auditorsin both the Audit Commit tee of the Super visor y Board, and in the annual consolidated financial statement meeting of the entire Super visor y Board.
Prof. Dr.-Ing. Dr. h.c.
We have audited the consolidated financial statements, comprising the balanc e sheet, the statement of income, the statement of stockholders’ equity and the statement of cash flows as well as the Notes to the financial statements prepared by ThyssenKrupp ag, Duisburg and Essen, for the business year from Oc tober 1, 2003 to September 30, 2004. The preparation and the content of the consolidated financial statements in accordanc e with Accounting Principles Generally Acc epted in the United States of Americ a (usgaap)are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit of the consolidated financial statements in accordanc e with German auditing regulations and German generally accepted standards for the audit of financial statements promulgated by the Institute of Auditors (Institut der Wirtschaftsprüfer - idw). Those standards requirethat weplan and perform the audit such that it can beassessed with reasonable assuranc e whether the consolidated financial statements are free of material misstatements. The evidence supporting the amounts and disclosures in the consolidated financial statements is examined on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and signific ant estimates made by the Company’s management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements give a true and fair view of the net assets, financial position, results of operations and cash flows of the Group for the business year in accordance with Accounting Principles Generally Acc epted in the United States of Americ a.
Our audit, which also extends to the Group management report prepared by the Company’s management for the business year from October 1, 2003 to September 30, 2004, has not led to any reservations. In our opinion on the whole the Group management repor t provides a suitable understanding of the Group´s position and suitably presents the risks of future development.
In addition, we confirm that the consolidated financial statements and the Group management report for the business year from October 1, 2003 to September 30, 2004 satisf y the conditions required for the Group’s exemption from its duty to prepare consolidated financial statements and the Group management repor t in accordanc e with German law.
Düsseldorf, November 15, 2004
KPMG Deutsche Treuhand-Gesellschaf t Aktiengesellschaf t
Wir tschaf tsprüfungsgesellschaf t
Reinke Nunnenkamp
127
Financial Repor t
Consolidated financial statements