Notes to the consolidated statement of income
04 Net sales
Net sales include revenues resulting from the rendering of services of €10,694 million (2005/2006: €9,343 million).
05 Other operating income
Other operating income includes gains on the disposal of property, plant and equipment and intangible assets in the amount of €75 million (2005/2006: €44 million), gains of €23 million (2005/2006: €0 million) resulting from currency exchange differences recognized in the income statement as well as insurance compensation in the amount of €195 million (2005/2006: €213 million) which mainly results from one bigger fire damage. The corresponding expense due to the property and business interruptions is included in cost of sales. The disposal of real property as part of the concentration of ThyssenKrupp's administrative office locations in Germany resulted in other operating income of €119 million in 2006/2007; in this context ThyssenKrupp incurred transaction expenses in the amount of €4 million in 2006/2007 and of €3 million in previous periods. In addition prior year other operating income includes €153 million resulting from the break fee which had to be paid by Dofasco in accordance with the terms of the Support Agreement.
06 Other operating expenses
Other operating expenses include a fine of approximately €480 million from the EU Commission which was imposed for infringement of competition regulations by ThyssenKrupp in the elevator and escalator business in 2006/2007; in addition other operating expenses comprise of losses on the disposal of property, plant and equipment and intangible assets in the amount of €35 million (2005/2006: €47 million), restructuring charges in the amount of €30 million (2005/2006: €99 million), other provisions (excluding restructuring) in the amount of €11 million (2005/2006: €22 million) and goodwill impairment of €60 million (2005/2006: €34 million). Additional expenses in connection with non-customer related research and development activities are shown here in the amount of €199 million (2005/2006: €188 million).
07 Government grants
In connection with the building of a new steel mill in the USA, the Group received a government grant in the form of land. This is reported at zero cost. The fair value of the land is €19 million. Further government grants for several investment projects of the Group led to a €21 million reduction of cost in fiscal year 2006/2007. In addition, government grants to compensate expenses of the Group are recognized in the amount of €7 million.
Payment of the above-mentioned government grants is subject to certain conditions which currently will be met.
08 Financial income/(expense), net
| Year ended Sept. 30, 2006 |
Year ended Sept. 30, 2007 |
|||
|---|---|---|---|---|
| Income from companies accounted for using the equity method | 28 | 51 | ||
| Interest income from financial receivables | 140 | 139 | ||
| Expected return on plan assets | 144 | 140 | ||
| Interest income | 284 | 279 | ||
| Interest expense from financial liabilities | (264) | (234) | ||
| Interest cost of pensions and health care obligations | (441) | (443) | ||
| Interest expense | (705) | (677) | ||
| Income from investments | 6 | 9 | ||
| Write-down of financial assets | (3) | (6) | ||
| Gain/(loss) from disposals of financial assets | (33) | (29) | ||
| Accretion of other provisions | (5) | (4) | ||
| Miscellaneous, net | 17 | 26 | ||
| Other financial income/(expense), net | (18) | (4) | ||
| Financial income/(expense), net | (411) | (351) |
Borrowing costs in the amount of €42 million (2005/2006: €13 million) were capitalized during the period which reduced the line item "miscellaneous, net" as part of other financial income/(expense), net. If financing is directly allocable to a certain investment, the actual borrowing costs are capitalized. If no direct allocation is possible, the Group's average borrowing interest rate of the current period is taken into account to calculate the borrowing costs.
09 Income taxes
Income tax expense/(benefit) for the year ended September 30, 2007, and the previous year consists of the following:
| Year ended Sept. 30, 2006 | Year ended Sept. 30, 2007 | |||
|---|---|---|---|---|
| Current income tax expense for the reporting period | 601 | 1,039 | ||
| Current income tax benefit for prior periods | (2) | (117) | ||
| Deferred income tax expense for the reporting period | 351 | 176 | ||
| Deferred income tax expense/(benefit) for prior periods | (31) | 42 | ||
| Total | 919 | 1,140 |
The German corporate income tax law applicable for 2006/2007 sets a statutory income tax rate of 25% (2005/2006: 25%) plus a solidarity surcharge of 5.5%. On average, the Group's German companies are subject to a trade tax rate of 13.0% (2005/2006: 13.0%). From 2007/2008, the statutory corporate income tax rate for German companies will be reduced to 15% while the average trade tax rate will increase to 15.1%. Therefore, at year-end September 30, 2007, deferred taxes of German companies are calculated with a combined income tax rate including solidarity charge of 30.9% (2005/2006: 39.4%). In fiscal year 2006/2007, the impact of the decrease in the German tax rate resulted in a deferred tax benefit in the amount of €171 million. The German tax reform also includes various further measures that may partly offset the benefit from the income tax rate reduction in the future. The applicable tax rates employed for companies outside Germany range from 5.7% to 42.3% (2005/2006: 5.7% to 42.3%). In fiscal year 2006/2007, changes in foreign tax rates resulted in deferred tax benefit in the amount of €15 million (2005/2006: €14 million deferred tax expense).
Due to a further tax law amendment also effective in fiscal year 2006/2007, the German companies of the Group became entitled to a payout in ten equal annual installments of remaining corporate tax credits by the fiscal authorities. Therefore, tax refund claims in the amount of €9 million have been recognized as a tax benefit in fiscal year 2006/2007.
The components of income taxes recognized in equity are as follows:
| Year ended Sept. 30, 2006 | Year ended Sept. 30, 2007 | |||
|---|---|---|---|---|
| Income tax expense as presented on the income statement | 919 | 1,140 | ||
| Income tax expense on cumulative income and expense directly recognized in equity | 118 | 111 | ||
| Total | 1,037 | 1,251 |
Deferred tax assets are recognized only to the extent that the realization of such tax benefits is probable. In determining the related valuation allowance, all positive and negative factors, including prospective results, are taken into consideration in estimating whether sufficient taxable income will be generated to realize deferred tax assets. These estimates can change depending on the future course of events. As of September 30, 2007, tax loss carryforwards for which no deferred tax asset is recognized amount to €881 million (2006: €1,045 million). According to tax legislation as of September 30, 2007, an amount of €466 million (2006: €580 million) of these tax losses may be carried forward indefinitely and in unlimited amounts whereas an amount of €415 million (2006: €465 million) of these tax loss carryforwards will expire over the next 20 years if not utilized. In addition, as of September 30, 2007, no deferred tax asset is recognized for deductible temporary differences in the amount of €240 million (2006: €376 million). No deferred tax liabilities were recorded on undistributed profits of foreign subsidiaries, as such profits are to remain invested on a permanent basis.
Significant components of the deferred tax assets and liabilities are as follows:
| Deferred tax assets | Deferred tax liabilities | |||||||
|---|---|---|---|---|---|---|---|---|
| Sept. 30, 2006 | Sept. 30, 2007 | Sept. 30, 2006 | Sept. 30, 2007 | |||||
| Intangible assets | 59 | 55 | 345 | 326 | ||||
| Property, plant and equipment | 209 | 105 | 997 | 796 | ||||
| Financial assets | 13 | 74 | 55 | 41 | ||||
| Inventories | 115 | 209 | 1,154 | 1,011 | ||||
| Other assets | 200 | 168 | 337 | 422 | ||||
| Accrued pension and similar obligations | 1,186 | 656 | 65 | 77 | ||||
| Other provisions | 500 | 176 | 127 | 70 | ||||
| Other liabilities | 848 | 1,002 | 280 | 306 | ||||
| Tax loss carryforwards | 541 | 353 | — | — | ||||
| Gross value | 3,671 | 2,798 | 3,360 | 3,049 | ||||
| Valuation allowance | (422) | (310) | — | — | ||||
| Offset | (2,542) | (2,103) | (2,542) | (2,103) | ||||
| Balance sheet amount* | 707 | 385 | 818 | 946 | ||||
Deferred tax assets and liabilities are offset if they pertain to future tax effects for the same taxable entity towards the same taxation authority.
For fiscal year 2006/2007, the income tax expense of €1,140 million (2005/2006: €919 million) presented in the financial statements is €173 million lower (2005/2006: €115 million lower) than the expected income tax expense of €1,313 million (2005/2006: €1,034 million) which would result if the German combined income tax rate of 39.4% (2005/2006: 39.4%) were applied to the Group's income before income taxes. The following table reconciles the expected income tax expense to the income tax expense presented in the income statement.
| Year ended Sept. 30, 2006 |
in % | Year ended Sept. 30, 2007 |
in % | |||||
|---|---|---|---|---|---|---|---|---|
| Expected income tax expense | 1,034 | 39.4 | 1,313 | 39.4 | ||||
| Foreign tax rate differential | (80) | (3.0) | (95) | (2.9) | ||||
| Changes in tax rates or laws | 14 | 0.5 | (195) | (5.8) | ||||
| Tax consequences of disposal of businesses | (2) | (0.1) | (20) | (0.6) | ||||
| Permanent items (in fiscal year 2006/2007 mainly EU antitrust fine) | (7) | (0.3) | 255 | 7.7 | ||||
| Effects from previously unrecognized tax losses | (5) | (0.2) | (116) | (3.5) | ||||
| Changes in other valuation allowances | 27 | 1.0 | (3) | (0.1) | ||||
| Other, net | (62) | (2.3) | 1 | 0.0 | ||||
| Income tax expense as presented on the income statement | 919 | 35.0 | 1,140 | 34.2 |
10 Earnings per share
Basic earnings per share are computed as follows:
| Year ended Sept. 30, 2006 | Year ended Sept. 30, 2007 | |||||||
|---|---|---|---|---|---|---|---|---|
| Total amount in million € | Earnings per share in € | Total amount in million € | Earnings per share in € | |||||
| Numerator: | ||||||||
| Net income (attributable to ThyssenKrupp AG’s stockholders) | 1,643 | 3.24 | 2,102 | 4.30 | ||||
| Denominator: | ||||||||
| Weighted average shares | 507,731,743 | 488,764,592 | ||||||
Relevant number of common shares for the determination of earnings per share
Earnings per share have been computed by dividing income attributable to common stockholders of ThyssenKrupp AG (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Shares issued during the period and shares reacquired during the period have been weighted for the portion of the period that they were outstanding.
The weighted average number of outstanding shares was reduced by the reacquisition of shares on May 06, 2003, and increased by the sale of those shares in the 2nd quarter ended March 31, 2004, the 3rd quarter ended June 30, 2005, and the 1st quarter ended December 31, 2005. In the 4th quarter ended September 30, 2006, the weighted average number of outstanding shares was reduced again by the reacquisition of shares.
There were no dilutive securities in the periods presented.
11 Additional disclosures to the consolidated statement of income
Personnel expenses included in the consolidated statement of income are comprised of:
| Year ended Sept. 30, 2006 | Year ended Sept. 30, 2007 | |||
|---|---|---|---|---|
| Wages and salaries | 7,261 | 7,306 | ||
| Social security taxes | 1,259 | 1,253 | ||
| Net periodic pension costs - defined benefit* | 154 | 91 | ||
| Net periodic pension costs - defined contribution | 34 | 37 | ||
| Net periodic postretirement benefit cost other than pensions* | 8 | (36) | ||
| Other expenses for pensions and retirements | 125 | 84 | ||
| Related fringe benefits | 464 | 434 | ||
| Total | 9,305 | 9,169 |
The annual average number of employees is as follows:
| Year ended Sept. 30, 2006 | Year ended Sept. 30, 2007 | |||
|---|---|---|---|---|
| Steel | 38,833 | 39,016 | ||
| Stainless | 12,156 | 12,207 | ||
| Technologies | 55,962 | 53,950 | ||
| Elevator | 35,164 | 37,914 | ||
| Services | 37,982 | 42,223 | ||
| Corporate | 6,475 | 2,674 | ||
| Total | 186,572 | 187,984 | ||
| This total breaks down to | ||||
| Wage earners | 119,312 | 118,858 | ||
| Salaried employees | 62,896 | 64,839 | ||
| Trainees | 4,364 | 4,287 |
As of October 01, 2006, the operations of the Automotive segment remaining after the disposals in North America were combined for the most part with the Technologies segment. The retained assets and liabilities of ThyssenKrupp Budd were assigned to Corporate as of October 01, 2006. Furthermore, in the 2nd quarter ended March 31, 2007, Umformtechnik was regrouped from the Technologies to the Steel segment due to strategic reasons. Prior period presentation has been adjusted accordingly.
Auditors' fees and services
For the services performed by the Group auditors KPMG Deutsche Treuhand-Gesellschaft, Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft and the companies of the worldwide KPMG association in fiscal years 2005/2006 and 2006/2007 the following fees were recognized as expenses:
| Year ended Sept. 30, 2006 | Year ended Sept. 30, 2007 | |||||||
|---|---|---|---|---|---|---|---|---|
| Total | thereof Germany |
Total | thereof Germany |
|||||
| Audit fees | 18 | 9 | 20 | 10 | ||||
| Audit-related fees | 3 | 2 | 1 | 1 | ||||
| Tax fees | 1 | 0 | 1 | 0 | ||||
| Fees for other services | 1 | 1 | 1 | 1 | ||||
| Total | 23 | 12 | 23 | 12 | ||||
The audit fees include mainly fees for the year-end audit of the consolidated financial statements, the auditors' review of the interim consolidated financial statements, and the statutory auditing of ThyssenKrupp AG and the subsidiaries included in the consolidated financial statements. The audit-related fees essentially comprise the fees for due diligence services in connection with acquisitions and disposals and auditing of the internal control system. The tax fees include in particular fees for tax consulting services for current and planned transactions, for the preparation of tax returns, for tax due diligence services, for tax advice in connection with projects and Group-internal reorganizations as well as tax advice for employees sent to work abroad. The fees for other services are mainly fees for project-related consulting services.