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Management's discussion and analysis1. Income / dividendThyssenKrupp generated income from continuing operations before taxes and minority interest and before special items of €1,836 million in fiscal 2004/2005; not included in this is a nonrecurring charge of €474 million in connection with the reassessment of the 20.6% interest in RAG Aktiengesellschaft, as well as a gain of €870 million from the sale of the Residential Real Estate business reported under discontinued operations. This represents another record profit for ThyssenKrupp, €359 million higher than the Company's previous best in the prior year. The main drivers of this success were the excellent results in the Steel segment. In all segments, the successfully implemented programs to increase efficiency and the portfolio adjustments had a positive impact. Increases in starting material and raw material prices and the worsening situation in parts of the auto industry in the USA and the uk had a negative impact on earnings. The divestment program for non-core operations was virtually completed in the course of the fiscal year. eleven material entities were either sold or their disposal was initiated in the course of fiscal 2004/2005. In total, these transactions resulted in a disposal gain of €469 million before taxes; the ordinary income of the sold entities totaled €21 million before taxes and is reported under discontinued operations along with the disposal gains and losses.
SteelSteel recognized income from continuing operations in the amount of €1,302 million, compared with €916 million in the previous year. Edelstahl Witten-Krefeld GmbH from the Special Materials business unit was sold in the reporting period, and the sale of Hoesch Contecna Systembau GmbH from the building construction operating group of the Carbon Steel business unit was initiated in September 2005 and has since been completed. The ordinary income and disposal gains/ losses from these entities are reported separately under discontinued operations. Income at Carbon Steel increased by €394 million to €1,002 million. ThyssenKrupp Stahl made a major contribution to this growth in profit. The main reasons for the rise in earnings were higher average revenues and the consistent continuation of performanceenhancement measures. On the other hand, the drastic cost increases for key raw materials such as ore, coal/coke and scrap as well as for freight rates and energy had a negative impact. The steadying of the market following the demand boom of the previous year also led to a drop in shipment volumes. In a particularly favorable market environment, the medium-wide strip products activity more than doubled profits despite having to absorb nonrecurring expenses from the disposal of the special profiles business. The steel service centers and non-grain-oriented electrical steel activity likewise returned substantially higher income and made a major contribution to the improvement in earnings. In tinmill products and tailored blanks, profits were down from the good prioryear level. The building construction activities generated a small profit in a difficult market environment. The cold room business significantly improved on its prior-year income. Stainless Steel reported income of €282 million, compared with €385 million a year earlier. Demand for cold rolled products in Europe fell sharply in the course of the year. As a result, base prices entered into a steady decline from the second quarter onwards. Added to this were increased costs for energy and freight rates as well as price increases for input materials such as nickel, chromium and scrap. The passing on of cost increases for input materials in the form of alloy surcharges is possible only to a limited extent outside the European and American markets, and even in Europe and America the process entails a time lag. As a result of the continuing implementation of cost-reduction and efficiencyenhancement programs, our German activities achieved outstanding profitability in this environment and almost repeated the income level of the previous year. In Italy profits were down from the year before due to restructurings and capacity cutbacks. Following a recovery, the Chinese market was characterized by a dramatic fall in prices from April, triggered by substantial new capacities forcing their way onto the market. As well as operating losses, this led to inventory write-downs, which were the main reason for the loss reported by the Chinese cold-rolling mill. In a generally stable market, the Mexican cold-rolling activities almost succeeded in repeating the very good earnings of the previous year. The nickelbase alloys activity reported significantly higher operating income. Special Materials returned a profit of €22 million after showing a loss of €80 million in the previous year. The German and French grain-oriented electrical steel activities achieved a strong profit following losses the year before. However, the Italian activity again reported a loss. In the reporting period it includes €17 million in strike costs at the Terni plant and expenses for the now completed closure of electrical steel production. Even without these nonrecurring charges, income in both years would have been negative. AutomotiveThe Automotive segment generated earnings from continuing operations in the amount of €49 million, having returned €260 million in the previous year. The income for the reporting year contains a €28 million impairment loss in the Body & Chassis (North America) unit. The ordinary income and disposal gain/loss from the European truck spring business of the Body & Chassis (Europe/Asia Pacific/Latin America) unit and the aluminum castings business of the Powertrain business unit, which were sold in fiscal 2004/2005, are included under discontinued operations. Also included here are the earnings and anticipated disposal loss from the aluminum foundry ThyssenKrupp Stahl Company, the sale of which was initiated in the reporting year but has not yet been completed. The new business units Body & Chassis (North America) and Body & Chassis (Europe/Asia Pacific/Latin America) were created effective October 01, 2004, organized along regional lines. They incorporate the activities of the former Body and Chassis business units. The prior-year figures have been recalculated on a comparable basis. The Powertrain business unit continued to be the primary contributor to income. Earnings in all three business units were impacted by the hefty steel price increases which could only partly be passed onto customers. Having generated positive income the year before, the Body & Chassis (North America) business unit returned a loss in the reporting period. The main reasons were a continued decline in utilization and low productivity at the Detroit and Shelbyville stamping plants and the Kitchener frame plant. In connection with this situation, an impairment loss was recognized at the Detroit stamping plant. By contrast, the foundries reported a significant rise in profits thanks to a better workload and improvements in passing on scrap price changes. While the Body & Chassis (Europe/Asia Pacific/Latin America) business unit returned a profit, it fell significantly short of the good prior-year result. This was mainly attributable to the stamping plants, the production equipment operations and the suspension business. Redundancies and lost revenues as a result of the insolvency of Rover had a major impact, as did nonrecurring expenses in connection with the withdrawal from Valmet. These developments were countered by the positive performance of the system business and the absence of costs from the sold British foundry activities. The Powertrain business unit again recorded strong profits but fell short of the high prior-year level. The crankshaft and engine component activities were adversely impacted by steel price increases and exchange rate movements. TechnologiesThe Technologies segment recognized income from continuing operations of €172 million in fiscal year 2004/2005; the €84 million rise means income almost doubled. In addition to the inclusion of the HDW group, the improvement was due mainly to the good performance of the general engineering sector, a key customer market. The Mechanical Engineering business unit again made the largest contribution to income. In the course of the fiscal year the structural steelwork operating group was sold. The sale of the MetalCutting business unit and the turbine components operating group was initiated and has since been completed. The ordinary income and disposal gain/loss from these entities are reported under discontinued operations. The Plant Technology business unit again showed a double digit profit, though this did not match the level of the previous year due to high expenses from the fair-value recognition of currency hedges and higher project costs for a major chemical plant order. Marine Systems reported double-digit earnings, which showed a significant improvement on the year before. The absence of restructuring expenses and nonrecurring expenses from the financing of two cruise ship sales, which impacted income in the previous year, had a positive effect. Added to this were the positive income contributions from the HDW group which was consolidated at January 01, 2005. Mechanical Engineering succeeded in boosting profits by more than 40% and made the highest contribution to the segment's earnings. This was mainly attributable to substantial growth in large-diameter anti-friction bearings and construction equipment components. The loss at Transrapid was significantly reduced thanks to the absence of nonrecurring expenses from the billing of the Shanghai order and further cost-reduction measures. ElevatorThe Elevator segment achieved income of €352 million in fiscal 2004/2005, having reported €370 million the year before. All business units recognized a profit, though some were unable to match the very high prior-year level. In addition to negative exchange-rate effects, earnings were impacted by significantly increased pressure on prices and margins, which was further exacerbated – especially in the new installations business – by intensive competition and the worldwide rise in starting material prices. The negative effects were largely offset by process optimizations and associated efficiency gains. In the service business, too, the pressure on prices is increasing; the measures introduced under the "Global Service Strategy" are already achieving initial success. The Central/Eastern/Northern Europe business unit almost matched the very high prior-year income level despite the extremely tight market situation in the United Kingdom. The service business was expanded in particular in France. Although the Americas business unit achieved higher operating earnings, negative exchange-rate effects neutralized the improvement when the result was translated into euros. In addition to a steady performance in North America, the Brazilian activity in particular recorded a positive trend in income as a result of efficiency improvements. The operating earnings of the Southern Europe/Africa/Middle East business unit reached the prior-year level, but the reorganization of the Spanish activities led to additional nonrecurring expenditures. Business was expanded with the acquisition of Ascensores Hidrolex S.I. in Spain and the entry into the Italian market. The Asia/Pacific business unit's income was lower than the year before, due mainly to the rise in starting material prices. In South Korea the new installations business came under severe pressure as a result of the market weakness; in China additional market penetration costs were incurred. Earnings in the Escalators/Passenger Boarding Bridges business unit were likewise down from the previous year. This mainly reflects a negative effect from the fair-value measurement of currency hedging derivatives. At the same time billing deferrals – especially in the escalator business – had a negative impact on sales and thus earnings. The Accessibility business unit achieved another distinct rise in income. In addition to the absence of restructuring expenses in the United Kingdom, which impacted the previous year's results, both the European and American activities further expanded their market position and realized additional income as a result. ServicesThe Services segment achieved the best results in its Group history with a profit of €380 million from continuing operations. Compared with the prior year this represents an increase of €129 million or over 50%. In fiscal 2004/2005, the Services segment completed its portfolio streamlining with the initiation of the sale of the Hommel group and Krupp Druckereibetriebe. The results of these entities are shown under discontinued operations. The greatest contribution to earnings was made by the Materials Services Europe business unit which significantly increased its profit. In the first half of the year, the dynamic materials market continued to have an impact, combined with very high price levels. Price decreases in individual product groups in the second half of the year were partly offset thanks to the broad range of products and services – from rolled steel and stainless steel to tubes, nonferrous metals and plastics. The further expansion of business in Eastern Europe and the successful implementation and continuation of the performance programs initiated in Germany and the Western European countries in the previous year had a positive effect. The profits of Materials Services North America were slightly down from the prior year, which was marked by unusually high price levels for rolled steel. The earnings impact of the significant price decrease was almost completely offset thanks to the unit's specific product range with a very high share of nonferrous metals as well as a straight expansion of sales activities. The Industrial Services business unit more than doubled its profit compared with the prior year and made a significant contribution to segment earnings. Business in the USA, Scandinavia, the Middle East and Asia profited from improved economic conditions in these regions. In Germany, earnings were boosted by an extensive program of measures to improve the organizational and branch structure and enhance new business development and customer service. The Special Products business unit improved significantly again from a very strong prior year. The international rolled steel and tube business expanded above all in the Asian region. New partnerships and purchasing sources further increased earnings in business with alloys, metals, coke and minerals. The plant and equipment business also contributed to the profit increase, especially on the export markets. CorporateCorporate comprises the Group head office inclusive of financing and insurance companies as well as other service providers and the national holding companies. Following the sale of Residential Real Estate, Corporate also includes Corporate Real Estate Management. In the reporting period, Corporate recorded expenditures of €868 million before tax. This result was significantly impacted by a non-recurring charge in connection with the reassessment of the investment in RAG Aktiengesellschaft. The carrying value of the investment at €442 million was written down to zero; further in this context, accrued liabilities for charges resulting from the former mining operations of the ThyssenKrupp Group were increased by €32 million. Details are contained in Note 8 to the consolidated financial statements. Excluding these events, expenditures of Corporate stood at €394 million, level with the prior year. Pension costs were again the largest single item at €183 million and showed a further decrease by €10 million. Corporate administration costs decreased in total by €3 million to €135 million; general material costs were lower while costs for developing and standardizing the Groupwide IT infrastructure were higher. Among others - the lower earnings of Corporate Real Estate Management as a result of consideration of certain risks had a negative impact. Net interest expense improved by €7 million to €(55) million. Income taxesIncome taxes in 2004/2005 amounted to €735 million, compared with €587 million in the previous year. In the reporting year as well as in the previous year these amounts consist only of tax expenses relating to continuing operations. The tax rate is 40%, related to income from continuing operations of €1,836 million, which does not include the non-recurring charge associated with the reassessment of the interest in RAG Aktiengesellschaft. The tax rate including this nonrecurring item is 53.9%. The tax rate of 40% is also due to the fact that more than half the Group's profit in 2004/2005 was generated in Germany. The tax burden in Germany is higher than the average tax burden on profits earned abroad. Discontinued OperationsIncome from discontinued operations net of tax amounted to €442 million, compared with €74 million in the prior year. Included in this are 11 entities which were either sold as part of the divestment program for non-core operations or whose disposal was initiated in fiscal 2004/2005. The disposal results from these entities totaled €442 million and include both realized gains and losses from completed disposals and anticipated losses from initiated disposals. In addition, income from discontinued operations also includes the ordinary income of these entities in the amount of €0 million (prior year €3 million). The two largest disposals in fiscal 2004/2005 were the sale of the Residential Real Estate business comprising around 48,000 dwelling units and the sale of the MetalCutting business unit in the Technologies segment, which was initiated in August 2005 and has since been completed. The disposal of the Residential Real Estate business resulted in a disposal gain of €787 million net of tax; cumulative ordinary income up to the time of disposal amounted to €15 million net of tax. The disposal of the MetalCutting business unit resulted in a loss of €166 million net of tax at September 30, 2005, while ordinary income in fiscal 2004/2005 amounted to €(16) million net of tax. Income from discontinued operations in the reporting period also includes transaction related expenses resulting from disposals completed in prior years. Net income/Earnings per shareAfter the deduction of minority interest in the amount of €46 million (prior year €60 million) and expense of €4 million net of tax (€(6) million before tax) resulting from the change in accounting principle, net income amounts to €1,019 million, compared with €904 million in the prior year. Earnings per share (EPS) is calculated by dividing net income by the number of shares outstanding. In the reporting period the number of shares outstanding was 498,628,610 and in the prior year 498,028,925. The increase is due to the issue of treasury stock in connection with the employee share programs in the 3rd quarter 2004/2005. Based on these figures, EPS amounted to €2.05 per share in 2004/2005, compared with €1.81 per share in the prior year. EPS from continuing operations amounted to €1.17 per share in fiscal 2004/2005 and €1.67 per share in the prior year. DividendThe Management will propose to the Annual General Meeting the payment of a dividend of €0.70 per share. This is an increase of €0.10 from the previous year. On top of this, a special dividend of €0.10 per share is to be paid resulting from the nearly completed divestment program. The legal basis for the dividend payment is unappropriated net income. It comprises the net income of ThyssenKrupp AG under German GAAP in the amount of €920 million (previous year €301 million), less €481 million which has already been transferred to retained earnings by the Management, plus the carryforward from the previous year. Of the €448 million (previous year €309 million) unappropriated net income, a total of €399 million is to be used to pay a dividend on the 499,149,151 shares eligible for dividend payment as of September 30, 2005. A further €37 million is to be transferred to retained earnings and the balance of €12 million is to be carried forward. Should the number of shares eligible for dividend distribution change before the date of the Annual General Meeting, the proposed dividend distribution will be adjusted accordingly. In relation to consolidated net income, the payout ratio – subject to the approval of the Annual General Meeting – will be 39%, compared with 33% in the previous year. In relation to ThyssenKrupp AG's net income, the payout ratio is 43% (previous year 99%).
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