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CENTRAL FINANCING

The financing of our Group is managed centrally. The parent company ThyssenKrupp AG assumes responsibility for maintaining the liquidity of the Group companies. This is achieved in particular by the making available of funds within the Group financing system, by negotiating and guaranteeing loans or by means of financing support in the form of letters of comfort.

In order to cover the financial requirements of the Group companies, ThyssenKrupp AG and its financing companies make selective use of local credit and capital markets.

The fact that financing is centralized strengthens the Group's negotiating position vis-à-vis credit institutions and other market participants. Centralization is thus the basis for achieving cost-effective capital procurement and investment opportunities. Interest rate risk management and foreign currency management are likewise performed on a centralized basis. For more details, please turn to Note 30.

Our intercompany cash management system reduces external financing requirements and optimizes the Group's financial and capital investments. The cash management system takes advantage of the surplus funds of individual Group companies to cover the financial requirements of other Group companies. Because intercompany sales are settled via intercompany financial accounts, bank account transactions are substantially reduced.

Maintenance of liquidity

Alongside a financial planning system with a planning horizon of several years, ThyssenKrupp operates a liquidity planning system on a rolling monthly basis with a planning period of five months. Both planning systems comprise all consolidated Group companies.

The financial and liquidity planning systems in conjunction with available committed credit facilities assure that ThyssenKrupp AG always has adequate liquidity reserves. In addition to bilateral bank loans and syndicated credit facilities, financing is accomplished through money market and equity market instruments as well as other selected off-balance financing instruments such as factoring programs and operating leases. Information on the available credit facilities is provided in Note 25.

Rating

Issuer ratings facilitate access to international capital markets. ThyssenKrupp has been rated by Moody's and Standard & Poor's (S&P) since 2001 and by Fitch since 2003. ThyssenKrupp is currently rated by the agencies as follows:

			Long-term rating		Short-term rating		Outlook
Standard & Poor's			BBB-		A3		stable
Moody's			Baa2		Prime-2		stable
Fitch			BBB+		F2		"watch negative"

ANALYSIS OF STATEMENTS OF CASH FLOWS

The amounts taken into consideration in the statements of cash flows correspond to the balance sheet item "Cash and cash equivalents".

Operating activities provided €3.5 billion during fiscal year 2005/2006 compared with €2.4 billion in the previous year. The increase in operating cash flows by €1.1 billion mainly resulted from the significant improvement in net income before depreciation, amortization and impairment of non-current assets, before deferred tax expenses and before gains on disposals of assets.

During fiscal year 2004/2005, operating cash flows of discontinued operations came to €(1) million.

Cash flows from investing activities decreased by €2.6 billion to €(1.7) billion due to a decrease in proceeds from disposals by €2.1 billion to €0.4 billion as a result of the disposal of the Residential Real Estate business during fiscal year 2004/2005. Cash outflows for the purchase of investments accounted for using the equity method and other financial assets increased by €0.2 billion. Moreover, due to the acquisition of Howaldtswerke-Deutsche Werft (HDW) in fiscal year 2004/2005, acquired cash and cash equivalents decreased by €0.3 billion in 2005/2006.

During the previous year cash flows from investing activities of discontinued operations came to €31 million.

The free cash flow, i.e. the sum of operating cash flows and cash flows from investing activities, decreased by €1.5 billion to €1.8 billion during fiscal year 2005/2006. This decrease is especially due to the €2.1 billion decline in proceeds from the sale of businesses. During fiscal year 2005/2006 the free cash flow was used for dividend payments (€0.4 billion), further reduction of net financial debt (€0.9 billion) and in an amount of €0.4 billion for payments to repurchase shares (€(0.7) billion), offset by cash inflows from the sale of treasury shares issued (€0.3 billion).

Change in cash and cash equivalents in million €

During fiscal year 2004/2005 cash flows from financing activities of discontinued operations came to €(11) million.

ANALYSIS OF BALANCE SHEET STRUCTURE

The following balance sheet presentation includes assets and liabilities held for sale which are reported separately in the Group's consolidated balance sheets.

The balance sheet total increased by €429 million to €35,730 million.

Significant balance sheet line items, particularly inventories, trade accounts receivable and payable and total equity, increased compared with September 30, 2005. This is mainly the result of further price increases for raw materials, especially for nonferrous metals, and the cyclical business expansion. Property, plant and equipment and financial liabilities declined due to measures taken to reduce capital employed and disposals. Shifts in exchange rate relations, primarily the relation of the US dollar to the euro, which increased from 1.205 €/US dollar as of September 30, 2005 to 1.267 €/US dollar as of September 30, 2006, led to a decrease in the balance sheet total by €219 million. Deferred tax assets decreased whereas current income tax liabilities increased slightly and deferred tax liabilities increased significantly.

The increase in intangible assets by €110 million resulted primarily from additions to goodwill due to business combinations mainly within the Services segment and from the capitalization of development costs.

The initiated disposal of the North American body and chassis operations as well as the poor economic situation in parts of the Body business unit of the Automotive segment led to impairments of property, plant and equipment. Additionally, the fire damage in the Stainless segment reduced property, plant and equipment.

The increase in investments in companies accounted for using the equity method mainly resulted from the acquisition of Atlas Elektronik in the amount of €93 million.

Inventories climbed by €401 million to €7,410 million. This increase resulted primarily from the further rise in raw material prices, especially for nickel, as well as from increased quantities in the Services segment caused by sales expansion.

Trade accounts receivable as of September 30, 2006 were up by €334 million compared with September 30, 2005. The amount of sold trade accounts receivable as of September 30, 2006 increased only slightly (€44 million) compared with the previous year. The increase was attributable to sales expansion in terms of volume and price in all segments apart from Automotive and Technologies. Technologies posted a decrease in trade accounts receivable due to disposals of activities amounting to €207 million.

Cash outflows for acquisitions, stock repurchases, dividends and the repayment of financial liabilities exceeded cash inflows from operating activities, resulting in a decrease in cash and cash equivalents by €268 million to €4,447 million.

Deferred tax assets declined by €82 million due to the use of tax loss carryforwards in Germany. The increase in deferred tax liabilities by €410 million resulted primarily from different inventory costing under IFRS and for tax purposes.

Total equity increased by €983 million to €8,927 million. The major reason for this rise was the net income achieved during fiscal year 2005/2006. In addition, actuarial gains associated with accrued pensions and similar obligations recognized directly in the statement of recognized income and expense raised equity by €385 million before taxes. Moreover, equity decreased due to the repurchase of own shares (€697 million), the dividend payment for fiscal 2004/2005 (€439 million) and currency translation adjustments (€90 million).

Accrued pensions and similar obligations in the reporting period decreased by €883 million to €8,111 million. This drop resulted mainly from an increase in the discount rate in most of the relevant currency areas. The higher market value of plan assets related to funded pension plans reinforced this effect by €130 million.

Other current and non-current provisions increased slightly compared with the previous year.

Current and non-current gross financial liabilities declined in total by €1,196 million. This resulted primarily from the redemption of two bonds in the Corporate segment amounting to €806 million in total.

Trade accounts payable increased by €681 million. This line item was also impacted by the previously described business expansion and price increases. In the Technologies segment trade accounts payable were reduced due to disposals.

Other liabilities also declined due to the business expansion, particularly in the Technologies and Elevator segments.

Net financial liabilities in million €

ASSETS NOT RECOGNIZED AND OFF-BALANCE FINANCING INSTRUMENTS

In addition to the assets posted in the consolidated balance sheet, the Group uses assets which cannot be recognized in the balance sheet. These mainly concern specific leased or rented assets (operating leases). More details on this are presented under Note 16.

Of the assets not recognized, the ThyssenKrupp brand is a major intangible asset. It was further developed in the reporting year. In February 2006 we launched a new image campaign comprising an image film, TV commercials, press advertisements and outdoor advertising to further strengthen the brand. We regard the expenses for this as an investment in the future, because they give the brand an international profile, generate a presence on the markets and create transparency with regard to our products. Market studies confirm that the ThyssenKrupp brand enjoys a high recognition rating and is well liked by our customers.

The main off-balance financing instruments used by the Group are factoring programs. More details can be found under Note 19.