s
Fiscal 2000 1999 1998 Stock price range*
(half-year 2000 or fiscal 1999, 1998) High 191.51 86.30 70.87 Low 75.98 40.39 46.17 Period-end (March 31 or September 30) 149.99 77.40 47.19 Number of shares
(March 31 or September 30) (in millions) 595 595 595 Market capitalization
(March 31 or September 30) (in millions of €) 89,213 46,037 28,068 * XETRA closing prices, Frankfurt
Stock market information (in €) Stock price development (indexed)
Siemens Dow Jones STOXX®
10/1/1999 3/31/2000 90 170 150 130 110 190 210 230 250 DAX®
after extraordinary items 6,010 710 699
Net cash provided 4,863 659 (371)
Net cash (used in) provided by
investing activities 6,312 (2,071) (1,148) Research and development expenses 2,517 2,372 2,215 Shareholders’ equity (March 31 or September 30) 24,118 17,200 15,488 Employees
technology (IT) services, process automation, medical technology, and automotive electronics. We are employ-ing joint ventures, acquisitions, and realignments to put the best combinations of people and technology together in the world’s most dynamic markets.
For example, we brought our mobile networking and mobile telephone businesses together in a new Group, Information and Communication Mobile (ICM). Similarly, we combined all our information technology (IT) services activities in Siemens Business Services (SBS), and are acquiring Entex Information Services, Inc., a leading information technology services provider, to significantly expand our services business in the U.S. Both Groups now have a clearer focus and enormous market potential.
More exciting opportunities lie ahead, because of the successful bid to acquire Atecs Mannesmann along with Robert Bosch GmbH. This transaction brings us a number of attractive and well-positioned businesses, including VDO, a leading automotive electronics busi-ness. The combination of our Automotive Systems (AT) Group with VDO gives us the scope and scale to become a global force in automotive electronics – one of the most important areas of automobile design and manufacture worldwide. “The Internet in every car” is no longer a vision for the future; it is the path we are taking today.
Also in its early stages is our Medical Engineering (Med) Group’s acquisition of Shared Medical Systems, a top provider of IT services and systems for health care in the U.S. Once again, we are combining industry-leading capabilities with our existing expertise, to increase our competitiveness in a high-growth segment of one of the world’s strongest economies.
Letter to our shareholders –
3
When we launched our Ten-Point Program less than two years ago, we envisioned a streamlined Siemens that could innovate more quickly to seize high-growth opportunities, manage its assets more efficiently, and reward investors with more profitable returns on those assets. In the first half of fiscal 2000, we achieved those results.
Net income before extraordinary items nearly dou-bled, to €1.4 billion for Siemens worldwide. Every one of our operating groups was in the black. And even though we began the year with a significantly reduced revenue base as a result of divestments, we still increased net sales to €35.5 billion for the half-year, 13% higher than the same period in fiscal 1999. On top of these results, we also realized a net gain of €4.6 billion from divest-ments, the successful public offerings of Infineon Tech-nologies AG and Epcos AG, and other non-recurring activities.
The clearest validation of our Ten-Point Program, however, is that for the first time we generated profits exceeding our cost of capital. This calculation, known as economic value added, or EVA, was positive for the first two quarters of the fiscal year, and we expect to achieve the same result for the fiscal year as a whole. One rea-son for our confidence is that the improvement was led by Operations, which increased its EVA by €745 million. Our Information and Communications segment, for example, which is central to our evolution into an IT-driven high-tech company, delivered more than €900 million in earnings before interest and taxes (EBIT).
More than ever, we are able to benefit from eco-nomic growth almost anywhere it occurs. Sales from outside Germany now account for 75% of our total revenue. We continued to expand orders in the U.S. and Europe at healthy double-digit rates, while the Asia/Pacific region rebounded strongly with new order growth of almost 60% compared to the first half of fiscal 1999.
To push E-business forward throughout Siemens, we have set up a “Center of E-Excellence” where we can define objectives, coordinate projects and share best practices. At the top of the agenda are expansion of electronic purchasing – E-Procurement – and electronic distribution – E-Commerce. We will use web-based processes to realize efficiency increases and cost reductions of more than €1 billion. To this end, we will also invest several €100 million to expand our internal network. Here again we are not taking short steps, but long strides.
The world is changing, and Siemens is changing with it. Are we the company we want to be? Not nearly. We still have to complete the Ten-Point Program, and well before that we will have identified new heights to climb. We want to measure ourselves against the best compa-nies in the world – for the benefit of our shareholders, our customers, and our employees.
Sincerely,
Heinrich v. Pierer
5
M A N A G E M E N T ’ S
D I S C U S S I O N A N D A N A LYS I S
In the financial statements and accompanying charts that follow, we present results for Operations separately from those for Financing and Real Estate and for our domestic Pension Fund, because these three components of Siemens are distinctly different in terms of goals and requirements.
The information presented is for the first half of fiscal 2000, beginning October 1, 1999 and ending March 31, 2000. Except where indicated, comparisons are with the first half of fiscal 1999. We converted our financial accounting to Euros as of the first day of the fiscal year, and have restated fiscal 1999 results in Euros for comparison.
H I G H L I G H T S
● Net income before extraordinary items for the first half-year nearly doubled to €1.405 billion. All of our operating groups were profitable.
● EBIT from Operations rose 107%, to €2.157 billion and EBIT-DA grew 59%, to €3.792 billion.
● Economic value added (EVA) before extraordinary items climbed €806 million for the half-year compared to fiscal 1999 as a whole. For the first time since launching our Ten-Point Program, and more than a year ahead of schedule, we passed the break-even point versus our cost of capital.
● Extraordinary items as defined by the German Commercial Code (HGB) contributed an after-tax total of €4.605 billion. This sum includes gains from our successful IPOs of Infineon Technologies AG and Epcos AG, as well as sales of other businesses and related costs. Net income including these items totaled €6.010 billion.
● Net cash provided by Operations jumped to €3.984 billion. Including net cash provided by investment activities, the total is €11.988 billion.
● Sales for the first half of the year climbed 13% to €35.5 bil-lion, compared to €31.3 billion a year earlier, aided by positive currency exchange effects. Taking divestments into account, sales rose even faster on a comparable basis, by 21%.
D I V E S T M E N T S A N D E Q U I T Y O F F E R I N G S In the first half of fiscal 2000, we completed a number of major divestments and equity offerings which we initiated in fiscal 1999:
● We listed the shares of Infineon Technologies AG (formerly our Semiconductors Group) on the Frankfurt and New York stock exchanges on March 13, 2000. Due to our continued ownership of 71% of its shares, Infineon remains fully consolidated in our financial statements.
● We listed the shares of Epcos AG (formerly Passive Compo-nents and Electron Tubes) on the Frankfurt and New York stock exchanges on October 15, 1999. We continue to hold a minority stake in this business.
● We sold Siemens Electromechanical Components GmbH & Co. KG (formerly Electromechanical Components) to Tyco International Ltd.
● We sold Siemens Nixdorf Retail and Banking Systems (formerly part of Information and Communications Products) to a consortium including financial investors Kohlberg Kravis Roberts & Co. LP and GS Capital Partners III, LP, the private equity arm of Goldman Sachs & Co.
● We sold Vacuumschmelze GmbH to Morgan Crucible Company plc. Vacuumschmelze was part of Passive Compo-nents and Electron Tubes, which we converted into Epcos AG and sold in the IPO described above.
● We sold our stake of the cable businesses of Cablecom Holding AG to NTL Inc., of the U.K.
We include the results of the foregoing transactions in the Income Statement as “Extraordinary Items.” In this Half-Year Report, the value shown for extraordinary items includes not only the net gains from the transactions listed above, but also costs arising from other one-time events. These include adjusting our domestic pension accruals to the projected unit credit method, in anticipation of our conversion to U.S. GAAP in fiscal 2001. Extraordinary items also include, among other things, costs associated with wrapping up divestments and provisions for our contribution to the government-sponsored German foundation “Remembrance, Responsibility, and the Future.”
J O I N T V E N T U R E S A N D A C Q U I S I T I O N S The divestments described above are one aspect of our larger program of portfolio optimization under the Ten-Point Program. We are also strengthening our business through joint ventures and acquisitions, with the goal of making Siemens a clear leader in every market it serves.
● We launched our planned joint venture with J.M. Voith AG, of Germany, in the hydroelectric power business, and our planned joint venture with Yaskawa Electric motor, of Japan, in the industrial electric motor business.
● In the automation and drives area, we acquired Moore Products Corp., of the U.S., and Milltronics, Ltd., of Canada, to strengthen our capabilities in process automation systems. We also acquired Vickers Electronics Systems, of the U.S., to expand our presence in industrial automation electronics.
● We acquired the activities of Motorola Lighting Inc., of the U.S., one of North America's leading manufacturers of electronic control gear for lighting.
● We announced a joint venture with our long-time research partner Framatome, of France, to merge our complementary nuclear power businesses. We expect the joint venture to begin international operations later in the calendar year.
● We agreed to acquire the mobile telecommunications opera-tions of Robert Bosch GmbH. The people and technology from this acquisition will be merged into our Information and Communications Mobile (ICM) group.
● We agreed to acquire Entex Information Services, Inc., an information technology services provider in the U.S., to significantly expand our services businesses there and move us closer to our goal of becoming one of the world’s top IT service providers.
Management’s discussion and analysis –
7
For Siemens worldwide, second-quarter income from ordinary activities before taxes doubled year-over-year, to €1.230 billion. Net income before extraordinary items also dou-bled, to €780 million. Extraordinary items rose to €3.631 billion compared to fiscal 1999’s second quarter, primarily due to the Infineon IPO and other divestments. New orders increased 19% and sales increased by 15%. Excluding the effects of divest-ments, new orders and sales rose by 25% and 22%, respec-tively, year-over-year.
Quarterly figures (in millions of Euro) 2000 1999 2000 1999
2ndQuarter 2ndQuarter 1stQuarter 1stQuarter
Operations
New orders 20,036 16,886 18,067 15,828
Sales 18,597 16,189 16,002 14,420
EBIT 1,155 567 1,002 477
Financing and Real Estate
Income from ordinary activities before income taxes 88 64 63 34
Domestic Pension Fund
Income from ordinary activities before income taxes 13 15 7 (17)
Siemens worldwide
New orders 20,479 17,248 18,476 16,144
Sales 19,040 16,551 16,411 14,736
Income from ordinary activities before income taxes 1,230 605 960 450
Net income before extraordinary items 780 383 625 327
Net income 4,411 383 1,599 327
Extraordinary items after taxes 3,631 974
S E C O N D Q U A R T E R
Quarterly earnings from Operations continued to rise sharply year-over-year, more than doubling in the second quarter. Compared to the comparable quarter of fiscal 1999, new orders and sales increased by more than 14%.
E VA P E R F O R M A N C E
With an EVA of €148 million for the first half (on a consolidated basis, excluding extraordinary items), Siemens is now earning its cost of capital and adding demonstrable economic value for shareholders.
● EVA in Operations improved dramatically, to a positive €116 million, driven primarily by earnings growth in almost all our operating Groups. Coupled with the small increase in average net operating assets, this enabled Operations to record its first positive result for EVA.
● EVA in Financing and Real Estate was also positive for the first half of the year, at €19 million. Judicious asset sales produced a surge in earnings that in turn boosted EVA.
● EVA for our domestic Pension Fund remained level, in line with the Fund’s long-term objectives.
EVA calculation (in millions of Euro) Half-year Fiscal
2000 1999
Operations
EBIT 2,157 2,971
Taxes and other (741) (1,035)
Net operating profit after taxes 1,416 1,936
Net capital employed 25,981 27,283
Financial adjustments/average calculation 1,405 (23)
Average net operating assets 27,386 27,260
Capital cost (1,300)* (2,565)
EVA for Operations 116 (629) Financing and Real Estate
Income from ordinary activities
before taxes 151 183
Taxes and other (52) (67)
Net operating profit after taxes 99 116
Equity 1,815 1,815
Capital cost (80)* (161)
EVA for Financing and Real Estate 19 (45) Domestic Pension Fund
Income from ordinary activities
before taxes 20 25
Taxes (7) (9)
Net operating profit after taxes 13 16
EVA for Domestic Pension Fund 13 16 Siemens worldwide
(before extraordinary items) 148 (658)
Extraordinary items after taxes 4,605
Management’s discussion and analysis –
9
O P E R AT I O N S
The following summaries provide highlights of activities in our operating Groups for the first half of fiscal 2000.
E n e r gy
Power Generation (KWU) continued the progress of the first quarter through the first half of the year, increasing EBIT to €62 million. Reduced accounts receivables and higher prepayments from customers significantly reduced net capital employed. A comprehensive quality improvement offensive stabilized a new generation of gas turbine technology. The ongoing power plant boom in the U.S. more than offset weaker demand in other markets, so that half-year new orders increased to €3.9 billion, a 17% rise compared to the first half of fiscal 1999. Total sales, at€3.6 billion, were 11% above last year’s level.
Power Transmission and Distribution (EV) improved its EBIT by 47%, to €72 million, largely through contributions of its High Voltage, Metering, and Transformer Divisions. Overall the Group improved its competitive position with the help of inten-sive benchmarking and innovative new products. Higher cus-tomer prepayment rates, in particular, helped EV keep its net capital employed below the level of year-end 1999. Despite price erosion in some sectors, total sales rose 6% to €1.5 billion and new orders rose 23% to €1.9 billion, primarily as a result of two major international projects in the High Voltage Division: the Three Gorges hydroelectric project in China and expansion of the national power grid in India.
I n d u s t r y
Automation and Drives (A&D) bolstered its business portfolio with strategic acquisitions in North America: Vickers Electronic Systems (U.S.), Moore Products Corp. (U.S.), and Milltronics Ltd. (Canada). The Group also officially launched its joint venture with Yaskawa Electric Corporation of Japan. A&D sustained its positive earnings trend and increased its EBIT by 23% to €413 million for the half-year. Relatively strong growth rates in inter-national business and consolidation of the newly acquired com-panies helped A&D increase new orders by 9%, to €3.9 billion, and total sales by 10%, to €3.7 billion. As a result of its acquisi-tions, A&D’s net capital employed increased considerably.
Industrial Projects and Technical Services (ATD) contin-ued to sharpen its focus by shedding its underground mining technology business and by forming a new IT Plant Solutions Division to strengthen its position in the high-growth market for industrial information technology. Positive earnings trends continued as the Group showed an EBIT of €61 million, up 24% compared to the first half of 1999. Net capital employed in the first half of 2000 increased significantly compared to year-end 1999, due to lower prepayments caused by a reduction in the Group’s order backlog. New orders grew slowly to €2.1 billion, while total sales grew by 5% to €1.9 billion.
Production and Logistics Systems (PL) profited from strong market trends and positive customer acceptance of its new generation of surface mount technology (SMT) placement systems. The Group’s EBIT jumped to €64 million from €19 million for the comparable period a year earlier. New orders rose 36%, to €842 million, and total sales increased by 44%, to €744 million. Despite its business expansion, PL reduced its net capital employed compared to year-end fiscal 1999.
S i e m e n s B u i l d i n g Te ch n o l o g i e s ( S B T )
SBT continued the positive trend of the first quarter, boosting its EBIT to €111 million, a 61% jump compared to the first half of 1999. The Landis & Staefa Division, which provides building control systems, made an especially strong earnings contribu-tion. Effective asset management kept SBT’s net capital employed below the level of year-end fiscal 1999. New orders increased by 16% to €2.4 billion, and total sales rose by 21% to €2.3 billion, fueled by strong demand in Europe, the Americas, and the Asia/Pacific region.
I n fo r m a t i o n a n d C o m m u n i c a t i o n s
presented for this new alignment, while fiscal 1999 information is based on the previous organization. Comparable fiscal 1999 results for total sales, new orders, and EBIT are given in footnote 3 to the Segment Information table on page 24.
Information and Communication Networks (ICN) achieved an EBIT of €313 million, including gains on sales of equity interests in start-up companies. ICN booked new orders of €5.8 billion and total sales of €5.2 billion, benefitting from first-time contributions by recent acquisitions in the U.S. and consolidation of the businesses we took over when we ended our Italtel S.p.A. joint venture with Telecom Italia. To address the continuing expansion in the internet protocol (IP) market, ICN announced the launch of a new corporate structure in the U.S., including the creation of a new company, Optisphere Networks, Inc., for optical networks as well as the formation of an Enter-prise Networks Division to build IP-based corporate networks.
Information and Communication Mobile (ICM) delivered an EBIT totaling €527 million for its first half-year.The Group’s mobile phone business, and the wireless business it took over from ICN, both contributed strong earnings and growth. ICM earnings were restrained by the performance of the Fujitsu Siemens joint venture, which contains our former computer systems business as of the first of the fiscal year. High growth rates in the mobile phone business resulted in new orders of €4.9 billion and total sales of €4.1 billion for the period under review.
Siemens Business Services (SBS) continued its strong turnaround, earning an EBIT of €63 million.The Group’s results, including a rise in total sales to €2.7 billion, benefitted from the addition of the IT services business formerly included in ICP. SBS is significantly strengthening its position in the U.S., where the Group has agreed to acquire Entex Information Services, Inc., a provider of enterprise IT services.
Tr a n s p o r t a t i o n
Transportation Systems (VT) turned a loss in the first half of fiscal 1999 into a positive EBIT of €41 million in the first half of fiscal 2000. Billing of higher-margin projects as well as productiv-ity programs contributed to the turnaround. Higher customer pre-payment rates helped the Group keep its net capital employed negative. New orders climbed 41% to €1.7 billion, especially due to major projects from abroad, while total sales climbed 40% to €1.8 billion, based on high growth rates both in Germany and in international markets. To strengthen its capabilities in civic transport management systems in North America, VT acquired Integrated Local Government Systems from Rockwell Collins, Inc. of the U.S.
Automotive Systems (AT) pushed both total sales and new orders up by 19%, to €1.9 billion, compared to the first half of fiscal 1999. EBIT remained below last year’s level of €80 million, due to increasing costs of funding the development of diesel injection and navigation systems. Despite its increased business volume, AT was able to reduce its net capital employed in the first half of fiscal 2000. A planned combination of AT with the automotive systems business of Atecs Mannesmann, acquired in partnership with Bosch, will significantly increase the Group’s market reach.
H e a l t h C a r e
Management’s discussion and analysis –
11
L i g h t i n g
Osram benefitted from innovative products and productivity improvements, as it increased total sales by 20%, to €2.2 billion, and its EBIT by 23%, to €208 million, compared to the same half-year period of fiscal 1999. The strong U.S. dollar contributed to increases in total sales, profitability and net capital employed. Osram’s business with optoelectronic semiconductors, a joint venture with Infineon, showed especially strong expansion, and both the automotive lighting and photo/optics sectors also achieved healthy growth rates. Osram’s acquisition of the activi-ties of Motorola Lighting Inc., one of North America's leading manufacturers of electronic control gear for lamps, is a strategi-cally important move to strengthen Osram's market position and growth potential in the lighting electronics sector.
I n f i n e o n
After the successful IPO of Infineon Technologies AG in the sec-ond quarter, we now own approximately 71% of Infineon shares and continue to consolidate its results in our financial state-ments. Infineon’s operating performance was strong in the first half of fiscal 2000, with its positive EBIT of €497 million standing in marked contrast to its negative result in the comparable period of fiscal 1999. Both strong demand for Infineon products and stable prices contributed to Infineon’s earnings increase. Further-more, in spite of strong growth in total sales, to €3.1 billion for the half-year, Infineon managed to reduce its net capital employed compared to the end of fiscal 1999. As part of an aggressive program of innovation, Infineon announced technol-ogy development agreements involving such industry leaders as Intel, Hyundai Electronics, Micron Technology, NEC, and Samsung Electronics. Infineon also announced that it would acquire Savan Communications Ltd., a broadband communica-tions IC company based in Israel.
F I N A N C I N G A N D R E A L E S TAT E
Siemens Financial Services (SFS) continued its positive devel-opment in the first half of fiscal 2000, contributing pretax earn-ings of €77 million primarily from continuing operations. At March 31, 2000, SFS showed total assets of €22.9 billion, mainly in equipment leasing, group treasury activities, purchased receiv-ables, and equity stakes in infrastructure projects. Approximately €6.0 billion of this total results from internal transactions, in particular from intercompany financing.
S TAT E M E N T O F I N C O M E
Gross profit on sales from Operations increased 18% for the first half of fiscal 2000, to €10.398 billion. Earnings before inter-est and taxes (EBIT) more than doubled, to €2.157 billion. Every operating group was in the black, and a number of businesses which had posted losses in the first half of fiscal 1999, notably Infineon and our mobile phone business, instead delivered significant profits.
As in fiscal 1999, we maintained research and development expenditures at more than 7% of net sales. Marketing and sell-ing expenses declined one and a half percentage points, from 15.2% of net sales to 13.7%.The significant increase in general administrative expenses was driven in part by reclassification of other costs into administrative expenses, resulting in presenta-tion more consistent with internapresenta-tional standards. Other operat-ing income of €391 million nearly offset other operating expenses of€408 million. Other operating expenses include additional goodwill amortization from acquisitions.
Income from investments in other companies increased sharply, reflecting the improvement in profitability of companies in which we hold equity stakes. The sharp reduction in income from financial assets and marketable securities results from comparison with the first half of fiscal 1999, when as part of our asset management program we disposed of securities and realized substantial gains.
Sales in the first half of fiscal 2000 from Financing and Real Estate grew to€852 million, an increase of 26% compared to the period a year earlier, and came predominantly from real estate property leases at Siemens Real Estate Management (SIM) and operating leases at Siemens Financial Services (SFS). Higher one-time gains on property sales, which we sold as part of our overall asset management program, also boosted earn-ings. At SFS, growth in administrative expenses is in part related to the Group’s higher asset base. Interest rate increases coupled with greater financing requirements at SIM produced the overall change in interest position at Financing and Real Estate.
Income in the Pension Fund rose to €20 million for the first half of fiscal 2000. Our long-term objective for the Pension Fund is always to balance income and expenses. Although conversion to U.S. GAAP results in a sharp increase in domestic pension accruals, in this Report the corresponding expenses are reflected in extraordinary items rather than in the domestic Pension Fund.
For Siemens worldwide, income before income taxes and extraordinary items more than doubled to €2.190 billion in the first half of fiscal 2000. The effective tax rate on income from continuing activities before income taxes and certain extra-ordinary items in the first half of fiscal 2000 was 36%. Non-recurring effects resulted in a comparatively lower tax rate of 33% in fiscal 1999.
New orders totaled €39.0 billion for the first half of the year. Adjusting for divestments, which had a negative effect of about 8%, the comparable growth rate compared to fiscal 1999 was approximately 25%. Currency effects, particularly from the weak Euro, had a positive effect of about 5%. Domestic new orders declined on an absolute basis due to divestment activities. On a comparable basis, growth was actually positive at 6%. New inter-national orders continued to grow at double-digit rates, reaching 33% on a comparable basis for the first half of fiscal 2000. All regions turned in double-digit growth, including 24% in Europe and 34% in America. The pace was faster still in the Asia/Pacific region, where order growth reached 59%.
Total sales Income before taxes
35.5 31.3
26.7
Sales and earnings (in billions of Euro)
Management’s discussion and analysis –
13
Sales in the first half of fiscal 2000 grew to €35.5 billion, an increase of 13% compared to the prior year. On a comparable basis, sales grew 21% year-over-year. The divestment and cur-rency effects described above for new orders apply equally to sales. Geographic trends were also analogous, with international sales growing more rapidly than domestic sales and showing strength across all regions.
S TAT E M E N T O F C A S H F L O W S
In fiscal 1999, we adjusted our statement of cash flows to align with international practice and comply with the standard of the German Accounting Standards Committee (GASC). Liquid assets other than cash and cash equivalents are now included in net cash used in investing activities on the line “Changes in other liquid assets”. We have restated the fiscal 1999 half-year state-ment of cash flows for comparison purposes.
Net cash provided by Operations for the first half of fiscal 2000 reached €3.984 billion, up from a negative €3 million in fiscal 1999. Net cash used in investing activities in fiscal 1999 became €8.0 billion of net cash provided from investing in fiscal 2000, primarily from the proceeds of divestments. Excluding Infineon, net cash provided reached €3.3 billion and net cash provided from investing activities rose to €8.8 billion.
Strong growth in income before extraordinary items to €1.3 billion, in combination with continued emphasis on asset management, enabled us to achieve the substantial gain in net cash provided by Operations. Working capital improved by €3.0 billion, as the increase in liabilities and decrease in accounts receivable more than offset the increase in inventories.
Additions to intangible assets, property, plant and equip-ment, and equipment leased to customers from Operations increased €223 million, to €1.5 billion. Infineon alone accounted for€382 million of the total. Purchase of investments and non-current marketable securities increased strongly by €832 million, including such strategic investments as Moore Products Corp. and Milltronics Ltd. As we anticipated, proceeds from disposals increased by €10.1 billion as we completed divestments and
the public offering of Infineon and Epcos AG. Disposals con-tributed to the €9.8 billion increase in cash and cash equivalents for Siemens worldwide, which are included in Finance and Real Estate due to enterprise-wide cash pooling managed by SFS.
Net cash provided by Financing and Real Estate benefitted mainly from a €430 million decrease in accounts receivable at Siemens Real Estate (SIM). Net cash used in investing activities rose, as SFS expanded its financing receivables and continued to take over customer financing activities previously undertaken by Operations. Typically the customer financing functions that SFS performs in support of Operations and external customers result in cash consumption, which drives net cash used in investing activities. Capital expenditures remained flat for Financing and Real Estate. Purchases of investments and noncurrent
Net cash provided
Net cash (used in) provided by investing activities Net cash provided / net cash used (Operations) (in billions of Euro)
4.0 3.3*
8.8*
Half-year 1999 Half-year 2000
8.0
(0.6) * without Infineon
Additions to intangible assets, property, plant and equipment, and equipment leased to customers
Purchases of investments and noncurrent marketable securities Capital spending (Operations)
(in billions of Euro)
marketable securities does not yet reflect the acquisition of Schroder Leasing by SFS.
Net cash provided by our Pension Fund remained within €100 million of last year’s total. We made no substantial new purchases of investments and noncurrent marketable securities in the Pension Fund.
B A L A N C E S H E E T
Property, plant and equipment assets in Operations declined by €1.3 billion, due primarily to divestments and the transfer of real estate assets from Operations to Financing and Real Estate. This was more than offset by an increase of €1.9 billion in invest-ments, resulting mainly from the transfer of assets into joint ventures and the process by which we divested our stake of the cable businesses of Cablecom Holdings AG.
Despite an increase in gross inventories of €2.3 billion, advances received from customers, primarily by our Power Gen-eration Group (KWU), rose enough to produce a much smaller increase in net inventories. Liquid assets associated with Opera-tions stood 53% higher than at the end of fiscal 1999. This increase in liquidity relates mainly to Infineon, which issued new capital stock at the time of its IPO and retained the proceeds.
The increase in accrued liabilities relates in part to obligations associated with our divestment program, as well as the changed valuation of our pension accruals associated with conversion to U.S. GAAP.
Debt declined 8%, as higher cash flows enabled us to reduce debt financing. This in turn improved our debt-equity ratio, which stood at 0.12 to 1 midway through the fiscal year. Equity as a percent of total assets within Operations rose from 36% at the close of fiscal 1999 to 51% at the end of the second quarter. Excluding Infineon, the debt-equity ratio was 0.14 to 1. These figures reflect the continuing high equity levels within Opera-tions, and indicate the appropriateness of the share repurchase program described on page 15.
Total assets of Financing and Real Estate increased €11.1 billion, driven primarily by an increase in liquid assets from our divestment program and the transfer of real estate from Operations to Siemens Real Estate Management (SIM). These asset transfers also produced the increase in other liabilities. Debt levels remained flat, reflecting long-term considerations with financing and real estate activities. The approximately €1.0 billion increase in accounts receivable at Financing and Real Estate reflects the concentration within SFS of financing activities that were previously included in Operations.
Siemens has substantial financial resources that enable us to meet both short-term and long-term financial obligations. We can quickly generate cash by issuing debt in international
Balance sheet structure (Operations) (in billions of Euro)
43.1 43.1 6% 4% 38% 4% 26% 7% 27% 4% 36% 42% 14% 40% 15% 41%
Fixed assets Shareholders’ equity
Pension accruals Other accrued liabilities
Management’s discussion and analysis –
15
financial markets in order to finance operations, investments, and business expansions. We typically maintain a flexible range of funding options and high-volume backup facilities. For example, we have implemented €1.5 billion and US$1.6 billion commercial paper programs as well as a €3.5 billion medium-term note pro-gram. First-class financial institutions have put two additional committed backup facilities at our disposal: a US$2.0 billion facility and a €1.0 billion facility. At the close of the half-year, the amount outstanding under the commercial paper and note pro-grams totaled €4.0 billion. We did not utilize the backup facilities.
International rating agencies Standard & Poor’s and Moody’s Investors Service rate our long-term debt AA and Aa3, respec-tively. Their ratings for our short-term debt are A-1+ and P1, respectively.
The book value of pension assets in our domestic Pension Fund remained almost unchanged from the end of fiscal 1999. On the other hand, the market value of the Pension Fund assets increased strongly from €10.936 billion at the end of fiscal 1999 to €13.199 billion at the end of the second quarter. Adoption of the U.S. GAAP liability computation for establishing the domestic pension accruals under HGB increases the reported value of our pension accruals more than €1.4 billion, to €10.8 billion.
As part of our conversion to the U.S. GAAP standard for ongoing financial reporting on October 1, 2000, we have created a pension trust to fund our domestic pension obligation. The trust, funded from our existing Pension Fund assets, took effect at the end of March, 2000. The establishment of the Pension Trust has no impact on accounting in accordance with HGB.
Shareholders’ equity for Siemens worldwide was €24.1 billion, up from €17.2 billion at the end of fiscal 1999, driven primarily by the impact of higher income from ordinary activities and extraordinary items after taxes.
S T O C K O P T I O N P R O G R A M & S H A R E R E P U R C H A S E P L A N
At the Annual Meeting in 1999, shareholders authorized Siemens to establish a stock option program. The program makes available 10 million shares, representing approximately 1.7% of the total shares outstanding, for option grants to approximately 500 senior managers. The option grants vest after two years and can be exercised for up to five years. Options can be exercised only if Siemens’ share price is higher than the strike price and also exceeds a reference index (the Dow Jones STOXX®) by a per-centage that escalates annually during the five-year period after the options vest. In fiscal 2000 we made option grants totaling 1,181,000 shares, setting the strike price at €86.60 and the commencement of the vesting period at November 4, 1999.
At the Annual Meeting in 2000, shareholders authorized Siemens to renew the share repurchase program. Repurchased shares may be used to list Siemens shares on foreign stock exchanges where they are not yet traded, to make strategic acquisitions, or to reduce our capital stock. The share repurchase authorization is legally limited to 10% of Siemens capital stock, currently 59,479,094 shares. At its meeting on April 25, the Managing Board of Siemens AG approved an initial share repurchase fund of €1.0 billion.
Balance sheet structure (Financing and Real Estate) (in billions of Euro)
O U T L O O K
In view of continuing favorable business trends, Siemens pro-jects a significant increase in its business volume for fiscal 2000 and even stronger earnings growth. We expect that our high earnings growth rate at midyear will be moderated for the full year, because the base of comparison will include the exception-ally rapid earnings improvement we achieved in the second half of fiscal 1999. We also expect to pass a major milestone by achieving a positive EVA before extraordinary items for the fiscal year as a whole.
As we explained in our 1999 Annual Report, we devote considerable attention to risk management, so that we may take on only those risks associated with creating added economic value. In the second half of fiscal 2000 we foresee no major increase in risk for our business as a whole. Given continued economic growth in major world markets and an associated increase in demand for electrical and electronics components, however, we are monitoring the possibility of component supply delays which could affect the performance of certain of our operating units later in the fiscal year.
After the close of the second quarter, we initiated three material transactions:
● Along with Robert Bosch GmbH, of Germany, we success-fully bid to acquire Atecs Mannesmann AG, of Germany. Each partner will own half of the company, and both will combine various of their existing businesses with certain Atecs Mannesmann operations. In particular, the planned combina-tion of Atecs’ successful VDO unit with our Automotive Systems (AT) Group will create one of the world’s premier automotive electronics concerns.
● We agreed with the board of directors of Shared Medical Systems Corp. (SMS), of the U.S., to make a tender offer to shareholders to acquire the company for total consideration of approximately US$2.1 billion. SMS is one of the world’s top two suppliers of services and IT systems for the healthcare industry, making it an excellent fit with our existing expansion plans in the Health Care segment.
Management’s discussion and analysis –
17
This Half-Year Report contains forward-looking statements based on beliefs of Siemens’ management. We use the words ”anticipate”, ”believe”, ”estimate”, ”expect”, ”intend”, ”plan” and ”project” to identify forward-looking statements. Such state-ments reflect our current views with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results to be materially different, including, among others, changes in general economic and business condi-tions, changes in currency exchange rates and interest rates, introduction of competing products, lack of acceptance of new products or services and changes in business strategy. Actual results may vary materially from those projected here. Siemens does not intend or assume any obligation to update these forward-looking statements.
C O M M E N T S O N T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
The worldwide consolidated financial statements for the six months ended March 31, 2000, have been prepared in accor-dance with the German Commercial Code (HGB) and the German Corporation Act (AktG) as an abridged version without accompanying notes. The principles of accounting, valuation and consolidation applied to the last reporting period and published in the Annual Report 1999 of Siemens were generally used without change, except for pension obligations.
The consolidated financial statements as of March 31, 2000, include the accounts of Siemens AG and 699 subsidiaries, 43 companies fewer than at year-end 1999. The change in the number of consolidated companies reduced the first six months’ net sales by €2.6 billion and income from ordinary activities before income taxes by €132 million.Total assets increased as a result by €2.2 billion.
Within Financing and Real Estate intersegment accounts payable and receivable between Operations and SFS are offset. The prior year amounts were restated to conform to the 2000 presentation.
Beginning with fiscal 2000, we calculated our domestic pension accruals in accordance with the projected unit credit method.
The statements of cash flows were adjusted to align with international practice and comply with the standard of the German Accounting Standards Committee (GASC). Liquid assets other than cash and cash equivalents are now included in net cash used in investing activities under the line “Changes in other liquid assets”. The prior year amounts have been restated to conform to the actual presentation of the statements of cash flows.
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