The ThyssenKrupp Group is managed and controlled on the basis of an Economic Value Added ("EVA") management system. The key goal of this system is to maintain continuous increases in corporate value by focusing on business segments which – with respect to their performance – are among the best worldwide. To achieve this objective, an integrated controlling concept is applied. It allows for goal-driven controlling and coordination of activities of all segments, supports decentralized responsibility and promotes overall transparency.

By taking timely appropriate actions, the integrated controlling concept realizes the increase of corporate value by bridging operating and strategic gaps between the actual and target situation. The prerequisite for this concept is the existence of highquality operational and strategic reporting systems for the accounting of actual and budgeted results as well as internal and external reporting. The values determined under US GAAP for each and every reporting unit form the basis for our reporting system.

In the ThyssenKrupp controlling concept, strategic and operational elements are linked to timely reporting which is accompanied by regular pro-active communication. The concrete elements of this strategy are: economic value added performance measures and active portfolio management.

The central performance measures are return on capital employed (ROCE) and Economic Value Added (EVA). These two ratios reflect the earning power of capital employed in the form of a relative quantity (ROCE) and an absolute value (EVA).

ROCE is calculated as follows:

 

income before income taxes, minority interest and interest

ROCE =

 

capital employed

The numerator is composed of income before income taxes, minority interest, net interest income or expense, and an internally allocated interest expense associated with accrued pension liabilities. Management's performance as well as the Capital Employed included in the denominator of the profitability ratio include the activities of both continuing and discountinued operations. The capital employed denominator can be computed on the basis of either asset or liability items. For the calculation based on asset items, net fixed assets are added to working capital. Deferred taxes are not included in the computation because the standard figures are determined on a pre-tax basis. Capital employed calculated based on the following liability items including discontinued operations and the breakdown of the disposal group as disclosed in Note 3 of the consolidated financial statements:

Group million €
 

 

 

  

Oct. 01, 2003

  

Sept. 30, 2004

  

Oct. 01, 2004

  

Sept. 30, 2005

Total Stockholders' Equity

 

  

7,671

  

8,327

  

8,327

  

8,771

+ Minority interest

 

  

320

  

410

  

410

  

481

+ Pensions and similar obligations

 

  

7,401

  

7,221

  

7,221

  

8,072

+ Financial payables

 

  

4,948

  

4,270

  

4,270

  

4,814

./. Marketable securities/cash and cash equivalents

 

  

713

  

1,437

  

1,437

  

4,823

+ Deferred tax liabilities

 

  

771

  

984

  

984

  

1,527

./. Deferred tax assets

 

  

1,283

  

1,150

  

1,150

  

1,480

Total as of measurement date

 

  

19,115

  

18,625

  

18,625

  

17,362
           
 

 

        

Average

 

  

18,870

  

17,994

The ROCE is compared to the weighted average costs (wacc) of capital employed. The cost of capital is determined on a pre-tax basis, as is the standard result used. On this basis, the weighted interest for the Group from equity (14.0%), financial payables (6.5%) and pension accruals (6.0%) amounts to 9.0%. This weighted cost of capital is maintained at a constant level in the medium term, in order to guarantee a relatively high degree of continuity over the periods. Therefore the interest rate is only adjusted if changes are material.

The segments' cost of capital are derived from the Group's cost of capital for equity, financial payables and pension accruals based on the relevant segments' capital structure. In addition segments' specific business risks were taken into account. Therefore, weighted and risk-adjusted segments' cost of capital amount to: Steel 10.0%, Automotive 9.5%, Technologies 10.0%, Elevator 9.0%, Services 9.0%.

EVA is computed as the difference between ROCE and the cost of capital, multiplied by the capital employed. Additional value is created only if the ROCE exceeds the weighted cost of capital. Accordingly, cost of capital reflects the minimum acceptable rate of return. In addition, individual target profitability is agreed for individual activities, which are based either on the best competitor or on an inter-industry benchmark. This management and controlling system is linked to the bonus system in such a way that the amount of the performance-related remuneration is determined by the achieved EVA.

The following tables illustrate the development of the performance measures in the previous two fiscal years.

Year ending Sept. 2004 *
* unaudited
** Income including discontinued operations before income taxes, minority interest and interest (net interest income or expense incl. interest expense associated with accrued pension liabilities)
 

 

  

Income before interest **
(million €)

  

Capital employed
(million €)

  

ROCE
(%)

  

WACC
(%)

  

Spread
(%-points)

  

EVA
(million €)

Group

 

  

2,271

  

18,870

  

12.,0

  

9.0

  

3.0

  

572

thereof:

 

  

 

  

 

  

 

  

 

  

 

  

 

Steel

 

  

1,095

  

8,685

  

12.6

  

10.0

  

2.6

  

226

Automotive

 

  

399

  

3,146

  

12.7

  

9.5

  

3.2

  

100

Technologies

 

  

84

  

572

  

14.7

  

10.0

  

4.7

  

27

Elevator

 

  

404

  

1,709

  

23.7

  

9.0

  

14.7

  

250

Services

 

  

350

  

2,725

  

12.9

  

9.0

  

3.9

  

105
Year ending Sept. 2005 * Download
* unaudited
** Income including discontinued operations before income taxes, minority interest and interest (net interest income or expense incl. interest expense associated with accrued pension liabilities)

 

 

  

Income before interest **
(million €)

  

Capital employed
(million €)

  

ROCE
(%)

  

WACC
(%)

  

Spread
(%-points)

  

EVA
(million €)

  

Change in EVA
(million €)

Group

 

  

2,706

  

17,994

  

15.0

  

9.0

  

6.0

  

1,087

  

515

thereof:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Steel

 

  

1,406

  

8,804

  

16.0

  

10.0

  

6.0

  

526

  

300

Automotive

 

  

158

  

3,145

  

5.0

  

9.5

  

(4.5)

  

(141)

  

(241)

Technologies

 

  

(94)

  

936

  

(3.7)

  

10.0

  

(13.7)

  

(128)

  

(155)

Elevator

 

  

378

  

1,752

  

21.6

  

9.0

  

12.6

  

220

  

(30)

Services

 

  

391

  

2,677

  

14.6

  

9.0

  

5.6

  

150

  

45

Income before interest of the ThyssenKrupp Group in 2004/2005 increased by €435 million to €2,706 million. In measuring the return on capital, this improvement is slightly increased by the reduction in capital employed. Capital employed fell by €876 million to €17,994 million. ROCE in 2004/2005 was 15.0% compared with 12.0% in the previous year. It thus exceeded the cost of capital for the Group (9.0%) by a greater margin than the year before. EVA increased by €515 to €1,087 million. The improvement in ROCE and EVA for the ThyssenKrupp Group was particularly influenced by the results from the sale of the residential real estate business and other dispoals in connection with the divestment program. On the other hand there was a non-recurring charge for the RAG investment.

In the Steel segment, income before interest increased by €311 million to €1,406 million. Despite a slight increase in capital employed, ROCE increased from 12.6% to 16.0% in 2004/2005. This is therefore once again significantly higher than the cost of capital of 10%. A positive EVA of €526 million was achieved, which represents an improvement of €300 million compared with the previous year.

At Automotive income before interest decreased to €158 million in 2004/2005, which is €241 million lower than the year before. This deterioration mainly reflects disposal losses in connection with the divestment program, restructuring measures and the fact that steel price increases could only partially be passed on to customers. With capital employed virtually unchanged, ROCE decreased from 12.7% to 5.0% and is therefore well below the cost of capital of 9.5%. After a positive EVA in the prior year, EVA in 2004/2005 fell by €241 million to €(141) million.

Technologies' income before interest decreased by €178 million to €(94) million in 2004/2005. This too is mainly the result of disposal losses incurred under the divestment program. This led to an ROCE of (3.7)% compared with 14.7% in the prior year. With a cost of capital of 10.0%, a negative EVA in the amount of €(128) million was achieved. This corresponds to a decline of €155 million compared with the previous period. The realisation of the divestment program reduced the income before taxes and interest, the numerator of ROCE, in the amout of €245 million (loss from disposals). Without the effects of the divestment program Technologies would have realized a significantly higher double-digit EVA.

In the Elevator segment, income before interest in 2004/2005 was only slightly lower than the year before at €378 million. With capital employed slightly higher, this led to a slight drop in ROCE by 2.1% to 21.6%. EVA fell to €220 million in 2004/2005 compared with €250 million in the previous year.

In the Services segment, income before interest in 2004/2005 increased by €41 million to €391 million. This is primarily attributable to improved activity on the international industrial and raw material markets. Despite the expansion of business activities, capital employed in the period was reduced by €48 million to €2,677 million. These two effects led to an increase in ROCE from 12.9% in the previous year to 14.6% in 2004/2005. EVA therefore improved by €45 million to €150 million.

ThyssenKrupp's active portfolio management directly follows the result of the analysis of the performance measures. It involves structural measures which are principally of a strategic nature, including the selection and expansion of business units with which the targeted increases in EVA or value are to be realized, as well as the timely and profitable withdrawal from activities which do not achieve adequate increases in EVA. These measures further aim at creating new operating activities through a favorable entry in evolving markets. For the Group as a whole these measures are of particular importance when it comes to establishing a balance between value generators and cash providers. This is a basic prerequisite for dividend continuity and sustained growth in core activities.