Annual Report Rheinmetall AG

Transcription

1 Annual Report 2001 Rheinmetall AG

2 Rheinmetall in figures Rheinmetall Group HGB * HGB * HGB * IAS IAS Net sales mill. 3,354 4,129 4,514 4,570 4,603 Order intake mill. 3,670 4,004 4,740 4,563 5,033 Order backlog (Dec. 31) mill. 3,352 3,233 4,147 3,732 4,113 Capital expenditures mill Amortization/depreciation/ write-down 1 mill Accounting equity mill Total assets mill. 2,496 2,730 3,474 4,477 4,218 EBIT (earnings before interest and taxes) mill Cash-flow 2 mill Employees (Dec. 31) 28,512 30,241 33,050 29,876 27,828 EBIT margin % ROCE % Earnings per share (EpS) (DVFA/SG) (0.25) Earnings per common share (IAS) (1.33) 0.56 Earnings per preferred share (IAS) (1.27) 0.62 Total dividend distributed mill Dividend per common share Bonus dividend per common share Dividend per preferred share Bonus dividend per preferred share * German Commercial Code 1 Excl. goodwill amortization 2 Net income/(net loss) plus amortization/depreciation/write-down and changes in accruals for pensions and similar obligations 3 Determined according to the DVFA/SG formula of 1996

3 The Rheinmetall Group Rheinmetall AG (listed) Sales: e4.6 billion Employees: 27,828 The enactment of the Clear Directions strategy is giving birth to new structures within a group whose future is bright: nowadays, Rheinmetall is concentrating on its three core areas of Automotive, Electronics, and Defence. These strong areas of competence give the Group an outstanding position amid international competition. Rheinmetall AG Automotive Kolbenschmidt Pierburg AG Electronics Aditron AG Defence Rheinmetall DeTec AG Systems and modules for every aspect of the engine Automotive electronics, control and security systems Leading European supplier of systems for the land forces Sales: e1.8 billion Employees: 11,700 Sales: e0.8 billion Employees: 5,000 Sales: e1.6 billion Employees: 9,000 As of May 2002

4 Annual Report 2001 Rheinmetall AG

5

6 Contents Report of the Supervisory Board Letter to the stockholders Rheinmetall stock Management report on the Rheinmetall Group Business trend Employees Research and development Dependency report Prospects The sectors Financial investees and service companies Rheinmetall AG Risk management Annual financial statements 2001* Consolidated financial statements Balance sheet Income statement Consolidated balance sheet Consolidated income statement Consolidated statement of cash flows Statement of changes in equity Notes to the consolidated financial statements Auditor s report and opinion Major Group companies Supervisory Board Executive Board Glossary Agenda Addresses * The full separate annual accounts of Rheinmetall AG including the notes (in German language) may be downloaded from our homepage at or can be obtained by contacting Rheinmetall AG, Rheinmetall Allee 1, Düsseldorf, Germany.

7 Rheinmetall AG Report of the Supervisory Board The Supervisory Board regularly monitored, and provided advice on, the Executive Board s work in fiscal Klaus Greinert Supervisory Board Chairman The Supervisory Board met five times with the Executive Board to review the Company s business policy, corporate plans (including financial, investment and human resources planning), general business trends, and major individual transactions, in particular the divestment of shareholdings. The Executive Board also briefed in detail the Supervisory Board on plans at the sector parents, viz. Rheinmetall DeTec AG, Aditron AG, Kolbenschmidt Pierburg AG, and at the financial investee Jagenberg AG, as well as on the ongoing structural changes in the corporate sectors, and business developments in the Rheinmetall Group. The Supervisory Board was additionally kept regularly informed by the Executive Board about business developments and the position of the Group through monthly written reports. This Board performed the tasks incumbent on it under law and the memorandum & articles of association and, moreover, provided advice on material individual issues. Inter alia, the Supervisory Board dealt with the proposed sale and transfer of major companies of Jagenberg AG s Paper Technology division to Voith Paper Holding GmbH & Co. KG, and the sale and transfer of Automotive s MotorEngineering division to AVL Holding GmbH, Graz, Austria. The Supervisory Board s Finance Committee met once in 2001 to discuss the 2000 annual accounts of the Company and the Group, as well as background details of the placement of the corporate bond issue. The Personnel Committee members met four times in In connection with the succession to Dr. Dieter Seipler, of whose resignation as of October 31, 2001, this Board took approving note, the Supervisory Board consented at its September 20, 2001 meeting to Gerd Kleinert being transferred from the post of Aditron AG s CEO to become Executive Board Chairman of Kolbenschmidt Pierburg AG and Pierburg AG with effect as of November 1, With effect as of January 14, 2002, Werner Engelhardt stepped down from the Supervisory Board, both as member and chairman. Following his appointment as Supervisory Board member by the Local Court of Düsseldorf on January 22, 2002, the Supervisory Board elected Klaus Greinert its Chairman at the extraordinary meeting of February 4, Furthermore, lawyer Dr. Martin Hirsch resigned as Supervisory Board member as of January 14, 2002, while Karl Fuchs left this Board when major companies of Jagenberg AG s Paper 4

8 Technology division were sold as of December 31, By order of January 22, 2002, the Local Court of Düsseldorf appointed Johannes Freiherr von Salmuth as a stockholder representative and, on January 14, 2002, Felix Bader as an employee representative, on the Supervisory Board. In accordance with Art. 317 German Commercial Code ( HGB ) and Art. 313 German Stock Corporation Act ( AktG ) and as resolved by the annual stockholders meeting, the Supervisory Board engaged Düsseldorf-based PwC Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft as the statutory auditors to examine the Company s separate and consolidated financial statements and the Executive Board s dependency report for the fiscal year The annual accounts as of December 31, 2001, were prepared unchanged in accordance with HGB regulations. These separate financial statements and the management report for fiscal 2001 (including the accounting) were all examined by PwC Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Düsseldorf, which issued its unqualified opinion thereon. The Supervisory Board concurs with the audit results. Moreover, the annual accounts, the management report and proposed profit appropriation have been examined by the Supervisory Board. At the April 15, 2002 meeting of the Supervisory Board s Finance Committee, the separate and consolidated financial statements of Rheinmetall AG as of December 31, 2001, were discussed on the basis of the audit reports and findings. No objections were raised. At its meeting of April 30, 2002, the Supervisory Board approved Rheinmetall AG s separate financial statements for the fiscal year 2001 as submitted by the Executive Board, which are thus adopted. The Supervisory Board agrees with the Executive Board s proposal for the appropriation of net earnings. The consolidated financial statements (for the first time based on IAS) and Group management report of Rheinmetall AG for fiscal 2001 were also audited by PwC Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Düsseldorf, as statutory auditors that issued their unqualified opinion thereon, too. The Supervisory Board concurs with the audit results. In addition, it reviewed the consolidated financial statements and Group management report. No objections were raised. The Executive Board submitted to the Supervisory Board the report concerning affiliations for fiscal 2001 according to Art. 312 AktG and the pertinent report of the statutory auditors. The Supervisory Board examined the report of the Executive Board and concurs with it, as with the results of the examination by the auditors, who issued the following opinion on the dependency report of the Executive Board concerning affiliations: Based on our examination, which we performed with due professional care, and on our evaluation we certify that (1) the facts stated in the report are valid; (2) the Company s consideration for the legal transactions referred to in the report was not unreasonably high. After reviewing the final results of its own examination, the Supervisory Board found no reasons for objections to the Executive Board s concluding statement in the report on affiliations for fiscal Düsseldorf, April 30, 2002 The Supervisory Board Klaus Greinert Chairman 5

9 Rheinmetall AG Letter to the stockholders Dear Stockholders: Klaus Eberhardt Executive Board Chairman On my assumption of office as Rheinmetall AG s CEO in January 2000, we promised you that not visions, but hard facts would serve as criteria for our actions. Predictability and plausibility would again be a solid basis for your decision to invest in Rheinmetall. With this in mind we have since 2000 successfully sold marginal businesses with a sales volume of around e800 million. The implemented restructuring programs show a sustained impact on cost structures and have improved performance. The success of our efforts, as guided by the Clear Directions strategy, shows that we have kept our promises. Liquidity and profitability once again take precedence over sheer size. Cost consciousness determines our efforts to lastingly streamline our group s structures and focus our activities on core competencies in the Automotive, Electronics, and Defence sectors. Focus and profitability as the core elements of our Clear Directions strategy will in future continue to determine our action. For the first time, the present consolidated financial statements for fiscal 2001 have been prepared according to the International Accounting Standards (IAS). We hence improve transparency and comparability with international competitors. As an MDAX company we will also update you in good time with quarterly reports about our business trend. 6

10 Our review of 2001 and our preview of the current fiscal year may be summed up in four statements: The Clear Directions strategy is proving successful. Rheinmetall is again manifesting muscle. Earnings in core areas have been improved. Restructuring will be completed by Rheinmetall is moving in the right direction; its targets are ambitious. To achieve these targets and as an Executive Board initiative we have for this year additionally launched a Shareholder Value program designed to accelerate our efforts toward focus and profitability. As in the past year, I ask you for your confidence and support along the path we are taking. Sincerely, Klaus Eberhardt March 28,

11 Rheinmetall on the capital market Rheinmetall stock Stocks under shock Caught up in the worldwide recession, the international stock markets came in some instances under massive pressure. The year started with the MDAX (the relevant benchmark for Rheinmetall stock) moving sideways. From the 4,709 points recorded at the beginning of the period, the MDAX maneuvered within a relatively narrow bandwidth between 4,250 and 4,865 during the first eight months. Then, following the terrorist attacks of September 11, 2001, the MDAX, too, began heading downward, sagging to as low as 3,570 points, almost 30 percent less than at the start of the period. A strong rally in the course of the 4th quarter caused the index to rebound to 4,326 points, the outcome being an overall loss of around 8 percent for the year as a whole. Other leading indexes also closed the year well down: the DAX 30 by 20 percent; the Dow Jones 6 percent; the Nikkei 24 percent, and the EuroStoxx50 by 19 percent. Rheinmetall stock compared to MDAX January 2001 to March % MDAX Preferred Common Very good year for Rheinmetall stock During the period Rheinmetall AG common and preferred stock easily outperformed the MDAX and other share indexes. The impact of the September 11, 2001 events was below average. Back in the first quarter of 2001, Rheinmetall AG common stock had outpaced the MDAX on account of the healthy figures for 2000, then gaining additional momentum when the US investor Guy Wyser-Pratte in the first quarter acquired over 5 percent of the common and over 1 percent of the preferred stock, reselling this in November 2001 to Rheinmetall majority stockholder Röchling Industrie Verwaltung GmbH. Rising to over e22 in November, the common stock largely bucked the index trend as the year proceeded. Priced at e20.90 at year-end, it had grown to around 110 percent in the course of the year. The preferred stock, too, had advanced appreciably ahead of the MDAX since the first quarter of 2001, albeit more severely hurt than the common as a result of September 11, Nonetheless, at a closing price of e11.20, the preferred stock had increased 56 percent, well above the MDAX. 8

12 Ownership structure 2001 Common and preferred stock in % 27.3 Röchling Industrie Verwaltung Free float 10.5 Total: 18 million shares each 72.7 of common and preferred stock As of November 27, 2001 Common stock Preferred stock 89.5 Investor relations stepped up Investor relations were stepped up through altogether 10 road shows and analyst conferences for institutional investors and around 50 oneon-one talks with financial analysts and fund managers. The strong interest displayed in Rheinmetall by the financial community was reflected in 35 studies and recommendations by 12 institutes all of which gave the stock positive ratings. Geographically, investor relations focused on Germany, Britain, and France. Stock price trend Number of shares common stock 18,000,000 18,000,000 18,000,000 preferred stock 18,000,000 18,000,000 18,000,000 Common share (ISIN: DE ) annual closing price annual high annual low average daily turnover at all German exchanges shares 12,218 14,973 11,136 Preferred share (ISIN: DE ) annual closing price annual high annual low average daily turnover at all German exchanges shares 58,682 48,602 47,953 9

13 Rheinmetall on the capital market Rheinmetall stock Improved transparency in 2002 Other measures for stepping up investor relations during the current fiscal year are enhanced transparency through the changeover in 2001 to the International Accounting Standards, the introduction of quarterly reporting (for the first time for the first quarter of 2002), and increased focus on Anglosaxon funds and analysts, too. Strengthening the position of Rheinmetall stock within the MDAX is again a declared target for Membership in this index, important to Rheinmetall, hinges on market capitalization and trading volumes over the past 12 months. Right now, the preferred stock is sure of a position because, according to the aforementioned criteria, as of February 2002 it ranked 75 and 76 in the DAX 100, respectively. What s more, Deutsche Börse AG, the German stock exchange corporation, has projected in a forecast the future ranks according to the new index computation methods and taking into account the free float. Here, too, the preferred stock at 82 (trading volume) and 89 (market capitalization) is well below the ceiling of 100. In 2001, the number of common shares traded daily averaged around 11,000 and the preferred shares some 48,000. Shareholder value: the focus of corporate strategy Shareholder value indicators improved in Cash flow per share climbed from e6.71 to e8.71, EpS (before goodwill amortization) rose by e2.06 to e1.03 (common stock) and to e1.09 (preferred stock). At 8.9 percent, ROCE was well above the year-earlier 4.3 percent. Last year s results again document Rheinmetall s commitment to further enhancing shareholder value. The medium-term ROCE target is 15 percent. Shareholder value key figures Cash flow per share from operating activities Earnings per common share (before goodwill amortization) (1.03) 1.03 Earnings per common share (after goodwill amortization) (1.33) 0.56 Earnings per preferred share (before goodwill amortization) (0.97) 1.09 Earnings per preferred share (before goodwill amortization) (1.27) 0.62 ROCE % according to cash flow statement, p

14 Dividend continuity In continuance of the stockholderfriendly dividend policy, a cash dividend of e0.44 for common stock and e0.50 for preferred stock will be proposed at the annual stockholders meeting. Dividend trend Total distribution million Common stock cash dividend per share bonus dividend per share Preferred stock cash dividend per share bonus dividend per share Corporate governance The Executive Board has been closely following the work of the Corporate Governance government commission headed by Prof. Dr. Baums, as well as the related activities of the German Corporate Governance Code Committee, a government commission chaired by Dr. Cromme. The Corporate Governance Code published on February 26, 2002, is welcomed by the Executive Board as a right step toward improving transparency and information disclosure by corporate Germany. Unless anyway long observed within the Rheinmetall Group, the recommendations and proposals listed in the Code will be scrutinized for incorporation in the Rheinmetall Group s Corporate Governance Principles presently being formulated. Once these principles have been approved by all the stockholders, they will be available to all stockholders when published on the websites of all the Group s listed companies. In this way, the Executive Board is demonstrating its commitment not only to shareholder value enhancement but also transparent reporting in the interests of all stockholders. 11

15 The Executive Board has launched a program aimed at enhancing the value of the Company and reviewing strategic options regarding its future development.

16 Rheinmetall on the bond market Rheinmetall places debut bond In May 2001, Rheinmetall AG made the most of a favorable market environment to place a 5-year corporate bond issue to the value of e350 million. The transaction had originally been planned for a volume of e300 million but was then topped up with a green shoe due to the clearly evident oversubscription. The fixed-income security carries interest at percent annually and was floated at The yield of percent for investors at the issuance date was 125 basis points above the interbank midswap spread for the corresponding term. The bond issue was rated by the two major international agencies at Baa2 (Moody s) and BBB (Standard & Poor s), hence investment grade. The proceeds were used to repay short-term bank loans and broaden the existing financing platform. The placement succeeded in attracting new national and international investors to the Rheinmetall Group. About one-third of the bond issue was placed outside of Germany. 13

17 Rheinmetall AG Management report on the Rheinmetall Group Business trend Rheinmetall Group indicators Change e million e million e million % Net sales 4,570 4, Order intake 4,563 5, Order backlog 3,732 4, Employees (Dec. 31) 29,876 27,828 2,048 7 EBIT EBIT margin (in %) ROCE (in %) Consolidated financial statements for the first time according to IAS With the growing globalization of the capital markets, international standards of accounting have gained substantially in significance. Rheinmetall AG is complying with the insistence by the capital markets on greater transparency and international comparability and, for the first time in fiscal 2001, has prepared its consolidated financial statements according to the International Accounting Standards (IAS). The year-earlier figures have also been restated to conform to IAS, enabling direct comparability. Figures for previous years, not based on IAS, have been indicated as such. In order to feed investors with more information, starting from fiscal 2002 quarterly reports will be issued in accordance with IAS. The ultimate aim is to make Rheinmetall stock more attractive for international investors, too. Pruning the business portfolio Strategic portfolio policy means not only broadening activities, but also shedding unprofitable or marginal operations. In the wake of concentration on the core fields of Automotive, Electronics, and Defence, the consolidation group of the Rheinmetall Group changed further in the past fiscal year. Automotive is now allied with AVL- List GmbH, Graz, Austria, in the field of measuring technology. For this purpose, AVL Michigan Holding Inc., Plymouth, USA, took over Pierburg Instruments Inc., Auburn Hills, USA, as of January 1, Moreover, AVL Holding GmbH, Graz, Austria, acquired as of the turn of 2001/02, a majority stake in Pierburg Instruments GmbH, Neuss and Fürth, also taking over corporate control. Pierburg Instruments GmbH is included at equity in the consolidation group as a minority investee as of December 31, In January 2001, Electronics sold RMV Rheinmetall Machine Vision (industrial image processing). The multimedia communication network unit of the Hirschmann division was transferred to Harris Corporation, Melbourne, USA, in June As of December 31, 2001, the financial investee Jagenberg AG, Neuss, sold its main Paper Technology companies to Voith Paper Holding GmbH & Co. KG, Heidenheim. Accordingly, Voith took over Jagenberg Papiertechnik GmbH and Jagenberg Maschinenbau GmbH & Co. KG, both in Neuss, plus Krieger GmbH & Co. KG, Mönchengladbach, and the subsidiaries Jagenberg Inc., Enfield, USA, and 14

18 Basagoitia S.A., Tolosa, Spain, as well as other foreign sales/distribution companies of the Jagenberg Group. Goldbach Innenausbau GmbH, until now carried as a financial investee, was sold as of January 1, Following the transfer of Mauser Waldeck AG in 2000, Rheinmetall s commitment in the field of office systems has thus been completely terminated. EMG EuroMarine Electronics GmbH, Hamburg, a joint venture carried at equity, signed a memorandum of understanding to sell its subsidiaries SRH Marine B.V., Rotterdam, Netherlands, and SRH Marine N.V., Deurne, Belgium, as of December 31, The divestment is taking the form of a management buyout. The contractual closing is subject to the respective antitrust authorities approval and will probably be consummated in the first half of Sales through organic growth In fiscal 2001, Rheinmetall generated Group sales of e4,603 million. Adjusted for changes in the consolidation group, this is 3 percent over the previous year. All sectors helped to raise the business volume. Whereas Automotive and Defence showed only moderate gains, sales at Electronics were around 8 percent above the comparable year-earlier level. The drop in the international share from 60 percent in 2000 to 58 in the year under review is especially attributable to weaker business in North America by the Automotive sector. In all, activities outside the home market are still at a high level and emphasize the Rheinmetall Group s international focus. Sales by region Germany 5.1 Other Europe ,933 mill. North America in % ,717 Asia 37.3 Total sales by the Rheinmetall Group: e4,603 million Other regions 15

19 Rheinmetall AG Management report on the Rheinmetall Group The distribution of sales among the sectors reflects the Group s excellent diversification. In fiscal 2001, too, Automotive at 40 percent and Defence at 35 percent accounted for the largest shares. Electronics accounted for 17 percent. The financial investee Jagenberg inputted most of the rest. Sales by sector in % 8.8 Automotive Kolbenschmidt Pierburg AG 8.4 Total net sales by the Rheinmetall Group: e4,603 million Electronics 2000 Aditron AG Defence Rheinmetall DeTec AG 16.4 Others Order situation In 2001, the order situation within the Rheinmetall Group made very good progress, order intake soaring to a new high of e5,033 million. Taking into account changes within the consolidation group, this was an increase by 13 percent over the previous year. Order intake was a remarkable e430 million or 9 percent above sales, hence fueling further organic growth. Orders on hand were also at a very high level. As of December 31, 2001, order backlog within the Rheinmetall Group amounted to e4,113 million. Despite the no longer consolidated backlog of the Paper Technology operations, the prior year s e3,732 million was surpassed by around 10 percent. Sales and orders within the Rheinmetall Group in e million, percentage change (+/ ) over prior year HGB HGB HGB IAS IAS Net sales 3,354 4,129 4,514 4,570 4, Order intake 3,670 4,004 4,740 4,563 5, Order backlog 3,352 3,233 4,147 3,732 4, Earnings in 2001 EBIT by sectors million Among the targets the Rheinmetall Group set itself with its Clear Directions strategy at the start of 2000 is first and foremost a sustained improvement in earnings and liquidity. The implemented divestments of Automotive Electronics Defence Other (12) 3 Rheinmetall Group marginal areas and the comprehensive restructuring programs Rheinmetall has introduced in all sectors in recent years, are showing effect. Especially worth mentioning in 2001 were the sale of major Paper Technology companies to Voith as well as Rheinmetall Landsysteme s successful about-face. With sales almost unchanged over the previous year, EBIT was raised from e103 million to e197 million. All sectors contributed to this improvement. 16

20 Security first and foremost most certainly after the events of September 11, The latest x-ray inspection systems from Heimann Systems unerringly identify lethal objects concealed in luggage and freight.

21 Lightweight and strong: variable intake manifold in magnesium from Kolbenschmidt Pierburg as used on the Audi A8 W12 developing 430 HP DIN, so far the most powerful 12-cylinder engine in a standardproduction limousine.

22 Employees With a workforce of 27,828 at the end of fiscal 2001, the Rheinmetall Group employed worldwide 2,048 people fewer than in the prior year. The reduction of 2,048 is chiefly due to the disposal of the Jagenberg Group s Paper Technology business and Automotive s transfer of MotorEngineering. Like-for-like, the decline was around 3 percent, due to capacity downscaling in the Automotive Sector as well as restructuring projects in Electronics and Defence. Once again, the number of people employed outside of Germany was 38 percent, thus reflecting the Group s international focus. Sectorwise, the pie is sliced as follows: Employees by sector in % 8 Automotive Electronics Defence Rheinmetall Group (Dec. 31) 27,828 employees 18 Others Training for tomorrow Skilled and talented employees are essential to the success of a business. This is why Rheinmetall is preparing for the pending scarcity of skilled workers by offering attractive apprenticeships for young people. The domestic enterprises employed altogether 800 apprentices, equivalent to 5 percent of the workforce. Rheinmetall tempting jobs for technical and commercial employees From the vantage point of jobseekers, the Rheinmetall Group has a lot to offer. Those wanting to shoulder operational responsibility in a smallish company are soon at home working for one of our self-empowered, manageably sized units just as much as others of a more conceptual or strategic bent, preferring the ambience of a large corporation. It s also the variety of technologies in which the Rheinmetall companies are engaged that makes the Group so tempting for technicians and engineers. For university graduates in engineering and commercial subjects, Rheinmetall s junior management training scheme offers participants working for various companies in Germany and abroad the opportunity to share in project development programs in which they may mature their own personalities and skills through seminars and training courses. Those looking for instant job immersion, others with more experience wanting to switch lanes, trainees having completed their courses, all of them find wide-ranging career opportunities at Rheinmetall. 19

23 Rheinmetall AG Employees Shareholder value, the key criterion for modern remuneration policies A sizeable chunk of the pay pocketed by Rheinmetall executives hinges on the degree to which the individuals have achieved set goals within their respective areas of responsibility and corporate performance as such. This latter is reflected in both an improvement in performance and an increase in shareholder value. The variable remuneration system creates an incentive to surpass set goals as much as possible, besides allowing executives to share in the risks and rewards of their business. With a view to promoting this shareholder value mentality and just as in previous years, 2001 saw the launch of another worldwide SAR plan for Group executives which motivates our managers into focusing their activities on stock market prices. Moreover, the scheme ties talented staff to the Group in an effort to shore long-term strategies with the commensurate human resources. Pension plans now partly pegged to shareholder value increases The Executive Board and the Group Works Council have agreed to remix the pension plans of the various companies into a groupwide scheme comprising three stages: an employer-funded basic, an intermediate, and an employee-funded supplementary plan. The entire system is extremely flexible, the intermediate stage being hinged to corporate performance, defined as an increase in enterprise value (EV). As the system is multitiered to various options, each employee has the possibility of additionally saving for retirement according to their individual needs and requirements. In all, the new arrangements ensure, on the one hand, that pension expenses are kept under control and, on the other, that the actual benefits are improved. TOP20: a program for top managers of potential Amid an environment of global markets, dramatic innovative pressure and aggressive competition, the challenges facing management have risen sharply. TOP20 is a program designed to groom high-potential individuals for challenging management positions at home and abroad. A detailed assessment of potential is used to compile demanding qualification modules for each participant including strategic company management, coping with multicultural diversity, improving negotiating skills, self-development and, last but not least, change management. The ultimate aim is to impart general management skills specifically within international environments. The first TOP20 group was launched in 1999 and continued last year. The career turns taken by the first participants are indicative of both the success and necessity of such programs. 20

24 Fashions fade as fast as they form. Flexible POS data systems from Preh cover the widest-ranging requirements as here in the fashion trade.

25 Dangerous bend ahead! Vacuum pumps from Kolbenschmidt Pierburg ensure safe braking and steering as well as power assistance even in critical situations.

26 Employees Academic and hands-on Altogether 500 specialist and managerial employees from the Rheinmetall companies attended courses in 2001 organized by the Rheinmetall Academy, the Group s own management school. The curriculum is mainly tailored to addressing future business challenges facing the Group enterprises. The principles of the training in the fields of strategy, leadership, management techniques, globalization and specialty skills are based around the participants own business situations and the rapid transfer of knowledge and skills into everyday practice. Classroom instruction is supplemented by tutoring sessions for small groups of participants. Corporate suggestion scheme The Rheinmetall Group s corporate suggestion scheme serves as an efficient tool in promoting workforce commitment. Sound ideas submitted by the employees once again helped to advance products and work flows. Out of the 5,200 proposals, 83 percent were rewarded. Personnel expenses per capita in e1, Personnel expenses per capita inched up to around e51,400. This 4-percent rise is mainly attributable to collectively negotiated pay rises. Sales per capita in e1, In 2001, sales per capita showed an encouraging increase to approx. e156,600 with almost unchanged sales over This upturn is ascribable to the Group s raised productivity. Value added per capita in e1, In fiscal 2001, value added per capita reached a new high at around e59,600, showing a productivity gain of 10 percent over the previous year due to a decrease in average headcount and an increase in value added. Our thanks to our employees and their representatives The success of the Group in fiscal 2001 is primarily due to the knowledge and skills, the dedication and creativity of our employees. We thank them all for their contribution. The Executive Board also thanks the works councils and the members of the managerial staff committees for their constructive cooperation throughout the sectors. 23

27 Rheinmetall AG Research and development In fiscal 2001, Rheinmetall spent e197 million or over 4 percent of sales in order to secure and extend its technological leadership on all major markets. Altogether, 3,400 people were employed year-end 2001 in R&D. Spending was spread out sectorwise as follows: R&D expenditure within the Rheinmetall Group e million % share of sales Automotive (Kolbenschmidt Pierburg AG) Electronics (Aditron AG) Defence (Rheinmetall DeTec AG ) Others Rheinmetall Group Automotive sector Whereas the consolidation process among the automotive manufacturers has almost come to a standstill, the relationship between manufacturers and their vendors is still undergoing change. Broader platform-based model ranges together with the necessity to differentiate among vehicle types, the extension of product ranges but with ever shorter model lifetimes, as well as a concentration on core competencies all lead to the outsourcing of tasks previously performed by the assemblers themselves. Even now, Kolbenschmidt Pierburg with its products for every aspect of the engine is a longstanding and successful partner of the international carmakers in the advancement of functional, economic, low-emission and cost-optimized engine components. In order to maintain this reputation and widen it within the product sectors, where Kolbenschmidt Pierburg is represented with the individual components but still lacks sufficient firsttier systems competence, expenses for research and development in fiscal 2001 were once more raised to exceed an already high year-earlier level. Air Supply & Pumps technical competence was proven with numerous innovative projects, such as electric coolant pumps for the main cooling circuit, regulated oil pumps, motorized exhaust gas recirculating valves for direct-injection gasoline and diesel engines as well as complete predelivery units for diesel applications. All these projects are being readied for series production by interdisciplinary teams. Furthermore, work started on the gestation of sensors and valves for fuel-cell propulsion systems. The worldwide first steplessly variable intake manifold module from thin-walled magnesium for boosting performance and torque went into series production and proved successful. Various electronically controlled throttle bodies (drive-by-wire) and exhaust gas recirculating valves for gasoline and diesel engines on the European and North American market plus value-optimized oil and water pumps likewise came on stream. 24

28 In the Pistons division, the emphasis was on solutions for high-duty diesel pistons in passenger car engines. For various European customers, pistons are currently being developed with specific kw/liter ratings partly clearly above today s. In the market for direct-injection gasoline engines, Kolbenschmidt Pierburg is well prepared for a partial substitution of conventional gasoline engines thanks to a new casting technology matured in the course of last year. In recent years, articulated pistons for commercial vehicles have been developed for various customers and are now being or about to be seriesproduced. Steel pistons, also for diesel engine commercial vehicles, are progressing according to plan. The mounting wave of engineering projects and the growing complexity of the projects themselves place high demands on an organization s capabilities, its processes, process stages and structures. In order to dig deeper into the market and secure technological leadership, the KS OPUS project (Optimized Processes up to Series Production) was accelerated. In 2001, the focus of R&D activities in the Plain Bearings division was again the materials used. In the case of steel/aluminum composites, activities focused on their deployment in direct-injection diesels as well as steel/aluminum connecting rod bearings for direct-injection engines. Efforts in the area of steel/plastic composites for the maintenance-free and low-maintenance Permaglide bearings product group were intended at further enhancing temperature resistance through material refinements and, at the same time, dispensing with lead. Aluminum Technology s efforts concentrated on process refinements, further and new developments in cylinder sleeve concepts, material developments, and added downstream machining (vertical integration). The commencement of new projects, mainly in the low-pressure casting sector, was a focal point of product and process development. Basic research in 2001 again explored innovative ideas for engineering the cylinder sleeve. Electronics sector The divisions themselves are responsible for research and development and their R&D engineers worked on broadening technologies and hence sharpening competitiveness. This is a prerequisite for the Aditron Group to continue to hold leading positions in its respective markets. systems. As an alternative to the classical coaxial cables used in the terrestrial and satellite frequency ranges, the multimedia communications unit developed a TV transmission system facilitating access to the new TV signal distribution technology. In the Hirschmann division, the focus in mobile telecommunication technology was on the development of hardware and software used in integrated antenna systems for radio, cellular phone, navigation and telematics services, television, and emergency calls. In 2001, significant development orders from European carmakers were acquired. At the same time, in the past year, concentration was on improving the techniques for attaching integrated antennas on glass surfaces, as well as on stationary, three-dimensional measuring technology for satellite-supported systems. In collaboration with system partners of the automotive industry, the automotive connectors unit focused on new types of brake systems, brake lining wear sensors, electronic valve trains as well as 42-volt board In its R&D operations and mainstream technologies, the Preh division centers on innovative solutions for manufacturing complex control and sensor systems for customers in the automotive and general industry sectors. In the automobile electronics area, new custom-tailored driver operating systems on the basis of electronically controlled kinematics and new concepts for optical rotary regulators were developed. A further project was a humidity sensor regulated to prevent car windows from fogging. The focal point of R&D at Heimann Systems was selective improvements to the software functions of standard x-ray units as well as the origination of new systems for automatic explosives detection, freight inspection, as well as biometric systems. After 25

29 Innovation for security: the SKYSHIELD air defence system from Oerlikon Contraves has been developed to protect critical military and civilian targets such as airports, power plants or dams from sudden attack.

30 Research and development several years of development work, EDtS (Explosives Detection tomography System) will set a new standard in automatic explosives detection for luggage checked in at airports. Apart from the integration possibility in luggage conveyor systems, EDtS features clearly improved detection performance, achieved by a new type of x-ray beam geometry in connection with a new generation of evaluation and analysis software. Supplementing the concept for automatic explosives detection, the company has come up with an x-ray inspection system for analyzing very complex and hard-to-penetrate objects, using a new technique to generate a threedimensional x-ray image of the test object. The freight inspection unit developed two new systems for inspecting loaded trucks as well as air and sea containers. The first system has the advantage of taking up less space, whereas the second can be integrated into a standard container for transportability. Both concepts save costs and are thus of economic interest to the customer. For registering finger and palm prints, the biometrics unit created a portable system for site-to-site applications. Apart from innovative product developments, the PAT division concentrated on cutting its product gestation periods. The construction machinery unit finalized work on a load moment limiter as well as on a new generation of mobile controllers. The dynamic axle load weighing system of the traffic telematics unit was advanced as part of an EU research project. Work in the field of video-based vehicle registration was also completed. Defence sector With their sophisticated high-tech products, the companies of Defence occupy leading positions within the market. Innovations and further developments of existing product lines therefore form the basis for further growth and economic reward. Expenses of e52.5 million for the sector s own R&D efforts were supplemented by projects ordered and paid for by customers. In the year under review, Air Defence Systems/Medium Caliber zoomed in on prototyping an improved version of the SKYGUARD and industrializing the new 35-mm SKYSHIELD air defence systems. Moreover, the networking of fire units for improved air space air monitoring and weapon deployment coordination was a major development project involving several Defence companies. Further R&D efforts concentrated on a 3-D radar system, specifically tailored to the requirements of its own air defence systems, the application of the AHEAD technology on infantry fighting vehicle cannons and on automatic grenade throwers, a helicopter weapon system with zero-recoil automatic cannon and caseless ammunition, as well as the new MK 2000 automatic cannon. Weapons & Ammunitions aimed its activities mainly at the development of a 120-mm HE cartridge for export plus an alternative version with programmable igniter, the ADW area defence weapon for Great Britain, as well as mobile and lightweight weapon systems required by the armed forces for such vehicles. Another focal point was the new 155-mm fog ammunition. Work on the MASKE smoke projectile for tank protection was successfully completed, a launching unit and ammunition for simulated naval targets MASS was advanced to the testing stage, and activities started together with other Defence companies on a new infrared protection system for aircraft. At Systems & Equipment, the main task was further refining the FUCHS transport tank. FUCHS 2 is clearly superior to its predecessor in terms of humanitarian and peace-keeping missions abroad on behalf of the federal armed forces, since the load capacity is now almost twice as high and a more powerful engine has been installed. Moreover, the retrofitting of various items of equipment is possible in order to deploy FUCHS 2 as an NBC detector, a reconnaissance or transport vehicle. Finally, for 27

31 Rheinmetall AG Overloaded vehicles can cause severe damage to roads and bridges. PAT s weighing stations and mobile wheel and axle load weighers make sure that vehicles are not overweight.

32 Research and development the MARDER 1 infantry fighting vehicle, presently operating with the troops in the Balkans, the division has created an antimine system offering the forces the best possible protection against the threat of landmines. In Naval Systems, STN ATLAS Elektronik continued with the basic development of a new sonar generation for surface vessels, and the command and weapon deployment system for F124 frigates. Another area of emphasis was the COSYS command and deployment system for the coastal patrol boats commissioned by the Malaysian navy. Also underway is the development of DeepC, a self-sufficient submarine, capable of operating over several days at depths of up to 4,000 meters. In Land & Airborne Systems, a new generation of heat imaging units was successfully further developed and the tactical command systems for vehicles and operating centers was advanced into a new product family. In simulation systems, work started on generating a new breed of duel simulators, which will lead to further improvements, especially with regard to precision training. Dependency report Röchling Industrie Verwaltung GmbH, Mannheim, Germany, owns the voting majority of Rheinmetall AG s stock, this having been disclosed as per Art. 20(4) AktG. The dependency report on affiliations in the fiscal year 2001 includes the following representation: Under the circumstances which were known to us at the time legal transactions were entered into and actions taken or omitted, our company has in all cases received an equitable consideration. In the year under review, no actions were taken or omitted at the instigation or in the interests of either Röchling Industrie Verwaltung or any of its group companies. 29

33 Rheinmetall AG Prospects The Rheinmetall Group continued its successful course at the start of At e1,012 million, sales in the first three months of the current fiscal year were 6 percent above the year-earlier figure after taking into account changes in the consolidation group. Order intake, too, topped the comparable year-earlier level. The order backlog showed especially high growth rates. At an 11-percent increase over the like-for-like 2001 volume, order backlog as of March 31, 2002, was exceptionally high and represents a sound basis for the targeted sales growth. The comprehensive restructuring measures and performance enhancement programs started back in fiscal 2000 are becoming effective mostly from 2002 onward and will further improve earnings. The portfolio program of concentrating on core businesses will be substantially completed this year and will encompass all marginal areas as well as any operations not returning the benchmarked earnings. The economic situation in the auto industry, decisive for the Automotive sector, was characterized at the beginning of 2002 by a slight decline in production and sales. In the USA, the figures were even short of the low year-earlier level, and in Western Europe, too, those for the start of the current period were not reachieved. The further course of 2002 is still very uncertain. So far, the markets have not collapsed as feared. In all, we expect production figures in 2002 to decline worldwide, most steeply probably in the United States, whereas Europe and, especially, Germany will only suffer slight losses. As to the remaining markets important to Kolbenschmidt Pierburg like Brazil and China, we forecast 2002 to show growth. On the basis of orders and products already placed or scheduled by our customers for the months ahead, we expect sales for the first half of 2002 to approximate the magnitude of the previous year. For the year as a whole, we foresee, contrary to market trends, a slight uptrend versus the 2001 level thanks to gains through soon-to-belaunched products. Once again, Kolbenschmidt Pierburg will achieve this sales growth in 2002 through extensive investments in R&D and additions to tangible assets. Nevertheless and in view of stalling business, special attention will be paid to the cost efficiency of such capital expenditures in Our top priority in 2002 is to maintain and enhance our own organic profitability. And this is why restructuring programs, substantial productivity enhancements and process improvements, will have to largely compensate for increasing costs and heavier price pressure. For 2002 and assuming only slight increases in sales, the Kolbenschmidt Pierburg Group is targeting earnings of the magnitude of the previous period. e million Sales Order intake Order backlog Employees (March 31) 4, ,012 1, ,839 29,771 27,995 Q1/2001 Q1/

34 Process automation in automotive engineering: components from Hirschmann Electronics allow the entire I/O data registration to be installed direct into the system in a very compact space and requiring a single installation concept.

35 Rheinmetall AG Prospects Electronics anticipates a clear widening of business volume in the current year, which, however, will differ by division. With transmitter business shed, Hirschmann plans to boost its like-for-like sales volume by a budgeted 12 percent. Major growth sources will be the automation and network systems units as well as the automotive products. The forecast for Preh is based on ongoing stable sales at the high prior-year level. Heimann Systems will continue its growth course from a strong position and plans a double-digit sales advance propelled by a record order backlog of e145.2 million. It is expected that the globally stricter safety and security standards will contribute toward higher sales in standard x-ray systems also short term. A conceivable rapid US approval of EDtS technology in the area of automatic explosives detection, anticipated for 2003, may spark additional sales momentum. The formation of a subsidiary in Great Britain, an important market in Europe, offers new growth opportunities for Heimann Systems due to the attractive market volume. Analogously to the economic trend, PAT is looking to a revival of the construction machinery electronics business in the second half of 2002, but which will probably lead to only moderate 12-month sales gains in the OEM and after-sales service areas. In traffic telematics, constant sales figures are expected after the realignment toward the components and systems vendor business, since any shrinkage in project business cannot be outweighed. Having invested in the reformatting of loss-making or lowprofit operations, Electronics counts on further increased earnings. The economic environment for Defence is mainly determined by the defence budgets in Germany and Europe. Despite the scaled-up individual budgets for financing antiterror measures, so far no departure from defence spending austerity is evident. For 2002, the defence budget in Germany amounts to e23.6 billion, to be supplemented by antiterror funds of e767 million. At e5.2 billion or 22.1 percent, defence budget expenditures are again well below the target of 30 percent. Matériel spending will account for e3.5 billion, around e0.3 billion below the year before. For research, development and tryout, only e851 million has been budgeted, almost e270 million less than in In all, this corporate sector the Rheinmetall DeTec Group expects sales to increase over the prior year to around e1.8 billion in its divisions. The direction taken for further productivity enhancements and more contracts from abroad will be continued. In connection with restructuring and process optimization measures, the planned sales boost is intended to strengthen profitability. An additional improvement of the cash flow from operating activities is set to be achieved with well-aimed measures for reducing the working capital. The anticipated upturn in business and earnings is based on the relevant favorable forecasts for the four divisions. For 2002, Air Defence Systems/Medium Caliber expects to extend its business to a sales volume of around e480 million. Apart from the supply of SKY- GUARD systems for short-distance air defence and the renewal of the maintenance contract for the air defence antitank system ADATS, the SKY- SHIELD air defence/fire unit expects another important order from one NATO state. In the Medium Caliber unit, the series production of the weapon system for the Eurofighter as well as on-board cannons for the Swedish Gripen fighter aircraft are pending. Moreover, 30-mm cannons for the Austrian infantry fighting vehicle Ulan will be shipped out. Weapons & Ammunition plans a sales gain to around e430 million. On the one hand, the division benefits from orders for large-caliber weapon systems and ammunition booked the previous year. Furthermore, the follow-up order from the German armed forces for supplying modular propellant systems and the alliance with Royal Ordnance in Great Britain for polybasic powders will lead to rising sales. On the other hand, initial series-production revenues will be generated from the still pending projects for MASKE self-protective ammunition for land forces and the MASS self-protective naval system. After a successfully completed definition phase, 2002 is believed to yield a policy decision for intelligent area defence weapons destined for Great Britain. For Systems & Equipment, a sales volume of around e250 million is budgeted for fiscal After the successful conclusion of a contract for the tank howitzer 2000, the division expects orders from further NATO states. Moreover, the market leadership in NBC reconnaissance systems is to be further widened through the development of a biological reconnaissance vehicle and the marketing of the launched Fuchs NBC detector in the Near East. The division also expects to be able to start development work in the current fiscal 32

36 year on the SPz3 infantry tank as a national megaproject for armored vehicles. Encouraged by a high order backlog, STN ATLAS Elektronik hopes to expand its sales volume to more than e600 million, the main sales contributors still being the integrated sensor and weapon deployment systems for conventional submarines. After completion of a standard production contract for the KZO drone system (small aircraft target tracker) for the German armed forces, an important foundation is laid for maintaining competencies in the field of unmanned aircraft. Given the profound changes in the defence policy of the USA in response to the nine-eleven events, ATK (Alliant Techsystems), Minneapolis, USA, and Rheinmetall DeTec AG, Ratingen, decided to cancel their original plans for an equity partnership in the field of large- and medium-caliber weapons and ammunition. The Rheinmetall Group had a promising start into For the current fiscal year, Rheinmetall therefore aims at again raising sales and earnings, the main assumption being that the automotive industry obeys our budget. By 2004, the Group is targeting an EBIT margin of 7 percent and an ROCE of 15 percent. 33

37 Kolbenschmidt Pierburg AG The sectors: Automotive As a major supplier to the automotive industry, Kolbenschmidt Pierburg is working on the future of the automobile. In close liaison with customers and partners, this sectors develops, manufactures and delivers just in time components, modules, and systems for every aspect of the engine. New focal points of gaining importance are aluminum and magnesium technology. Automotive indicators Kolbenschmidt Pierburg AG Change e million e million e million % Net sales 1,776 1, Order intake 1,812 1, Order backlog Employees as of Dec ,164 11, EBIT EBIT margin (in %) ROCE (in %) Kolbenschmidt Pierburg found itself in 2001 confronted with a market environment clouded by weaker demand in important regions. Worldwide production of passenger cars and light commercial vehicles (LCV) dropped by 3.1 percent to 53.6 million units in Particularly hard hit were the NAFTA countries and Japan. In contrast, production of automobiles and LCVs rose slightly in South America and Western Europe by 1.9 and 1.4 percent, respectively. As of April 1, 2001, the Kolbenschmidt Pierburg Group together with SAIC, one of the biggest automotive companies in China, founded the joint venture Kolbenschmidt Pierburg Shanghai Nonferrous Components Co. Ltd. (KPSNC). The Shanghaibased venture is included at equity in Air Supply & Pumps. MotorEngineering is a division that operates in the market for exhaust gas, flowmeter and workshop measuring equipment for developing and servicing I.C. engines. Accounting for only around 2 percent of the Group s annual sales, it is not a part of the core business of the Kolbenschmidt Pierburg Group. Effective at the turn of 2001/2002, AVL Holding GmbH, Graz, Austria, has taken over a majority stake in the division s parent company Pierburg Instruments GmbH, in which it is also exercising industrial management. While this company s income statement is reflected in Kolbenschmidt Pierburg AG s consolidated financial statements, its balance sheet as of December 31, 2001, is not. As from December 31, 2001, this company has been included at equity. Additionally, the 100-percent stake held in Pierburg Instruments Inc., Auburn Hills, Michigan, USA, a company serving the American market with the development, manufacture, and marketing of flowmeter and exhaust gas measuring equipment, was sold as of January 1, 2001, to AVL Michigan Holding Inc., Plymouth, Michigan, USA. Moreover, Vehicle Spares Ltd., Dublin, Ireland, belonging to the Motor Service division, was sold as of January 1, Despite the harsher economic climate, the Kolbenschmidt Pierburg group companies successfully upheld their position in the markets, the consequence being that group sales gained by 2.8 percent to e1,825.5 million. Five of the six divisions played their part in improving sales revenues over the previous year. The growth regions in 2001 were Western Europe and South America, whereas the Group s activities in North America suffered from reduced customer call-offs and project postponements. Kolbenschmidt Pierburg s business continues to be highly international. Unchanged from 2000, Group sales of customers outside of Germany exceeded 66 percent. In fact, this would have been higher, but for the dents inflicted by the North American automotive market. Whereas sales to customers in Western Europe (excluding Germany) gained one percentage point to 44 percent, the proportion of sales in the other regions remained unchanged. This also applied to sales on the home turf, which again accounted for 34 percent of the total. EBIT in 2001 came to e90.3 million, well above the yearearlier e54.5 million. 34

38 Kolbenschmidt Pierburg AG Sales: e1,826 million Headcount: 11,662

39 Kolbenschmidt Pierburg AG Automotive In fiscal 2001 and at e819.8 million, sales by Air Supply & Pumps were e49.4 million above the previous year s level of e770.4 million, the main reason for the sales increase being the mounting wave of diesel vehicles in a high-volume, yet stalling Western European car market. The division s profitability likewise improved, EBIT gaining e8.0 million to reach e24.8 million. In the past fiscal year, total sales by the Piston division amounted to e571.5 million, equivalent to a 5.8 percent decline in revenues. The division s performance was highly influenced by the North American automotive economy, not only affecting the indigenous operations but also infecting the Brazilian subsidiary. The German company KS Kolbenschmidt AG lifted its sales by 3.2 percent. Whereas the US companies Karl Schmidt Unisia Inc., and KUS Zollner Division Inc. had to face a sharp drop in earnings, all the European and South American operations generated profits. This applies in particular to the Brazilian KS Pistões, which generated a rising profit thanks to changed parities and productivity improvements. Despite declining sales, the Pistons division closed the year with an EBIT of e40.1 million, surpassing the year-earlier figure of e32.8 million. Sales by the Plain Bearings division in the past fiscal year were stepped up from the already high 2000 level by 3.2 percent to e153.2 million. On account of the full start-up of customer projects in the engine bearings sector, incremental sales were achieved. With the division s highduty plain bearings (sputter technology), further shares were acquired in the market for direct-injection diesel engines. The Permaglide product group contributed to the sales increase through new automotive applications as well as higher market shares. The division s EBIT in 2001 advanced from e6.8 million to e17.7 million, the EBIT margin reached 11.6 percent. Aluminum Technology pushed up its sales by e19.6 million to e135.8 million. The rise in series production business was ascribable to extra units sold customers in the largedisplacement engine sector, the start-up of new engine generations, and additional market shares. The again rising development and tooling sales over the high prior-year level reflect the division s intense activities in preparing new products. Aluminum Technology s EBIT for 2001 amounted to e0.7 million (up from a negative e1.7 million). Earnings were again burdened by high start-up costs for new products in the lowpressure casting sector. Idle capacities at the new foundry as well as a product cancellation depressed EBT, customer compensation failing to completely recoup the costs. From added tooling sales, no commensurately higher profits were earned, since tooling products incorporate little added value. In fiscal 2001, sales by MotorEngineering were revved up by around 24 percent to e37.8 million. The gain resulted from rising sales of workshop measuring equipment to a leading German carmaker and the successfully overcome start-up problems with the new AMA 4000 exhaust gas measuring unit. The division s EBIT totaled e8.4 million (up from a negative e1.2 million). Included in this amount is the book gain from the disposal of Pierburg Instruments Inc. Motor Service generated sales of e151.3 million in fiscal 2001 (up from e149.0 million). The declining sales at the subsidiaries were outcompensated by rising sales at the parent company MSI Motor Service International GmbH. Despite the loss of Irish business, sales were elevated by e2.3 million. The EBIT of e16.8 million easily exceeded the yearearlier e13.4 million. During fiscal 2001, the Kolbenschmidt Pierburg Group spent altogether e174.6 million (up from e171.1 million) on tangible and intangible assets. All the divisions invested in expanding their capacities. Spending at the US piston companies was aimed at restructuring and expanding production facilities in order to further enhance productivity. At 62 percent, the domestic production locations accounted for the larger share of capital expenditures in fiscal Capital outlays in North America were lower. At e145.6 million, amortization and depreciation in 2001 approximated the year-earlier level. 36

40 State of the smart: the piston and exhaust gas recirculating systems on the Smart give this avant-garde city runabout the necessary power while minimizing diesel engine emissions.

41 Aditron AG The sectors: Electronics Automotive electronics, control and security systems: these are the essential growth markets of tomorrow and at the same time the divisions of Aditron AG. A variety of capabilities converge into a comprehensive product lineup: from the development of complex systems for relaying voice, data and image information down to the supply of innovative navigation and information systems. Electronics indicators: Aditron AG Change e million e million e million % Net sales Order intake Order backlog Employees as of Dec. 31 5,526 4, EBIT EBIT margin (in %) ROCE (in %) The Aditron Group subsumes the Hirschmann, Preh, Heimann Systems, and PAT divisions. The Aditron companies supply the markets of automotive electronics, safety and security technology, process automation, and communications technology. In some instances, the divisions occupy leadership positions in their respective markets and are remarkable for their high technological know-how and innovation potential. In fiscal 2001, the market for security technology developed very favorably. Especially the security and inspection equipment for flight luggage and freight as well as biometric systems attracted keen interest. In the automotive industry, worldwide demand was generally less when compared to the prior year, however the increasing share of communications and electronic products in vehicles as well as sound sales by the European luxury vehicle manufacturers benefited the automotive vendor business at Preh and Hirschmann. In contrast, consumer-related and industrial process automation and communication electronics as well as construction machinery electronics all suffered from the weak economy. In fiscal 2001, the Aditron Group pressed ahead with its efforts, first started in 1999, at pruning its portfolio. Negotiations on selling Preh s image processing activities (RMV Rheinmetall Machine Vision) were successfully completed in January The sale of the multimedia communication network unit (transmitters) of the Hirschmann division to Harris Corporation, Melbourne, USA, was finalized in June The same month and within the framework of an outsourcing project, the logistics unit of Hirschmann in Neckartenzlingen was sold to a company controlled by Microlog AG. Aditron AG s extraordinary stockholders meeting in December 2001 approved a P&L transfer agreement between Aditron AG and its wholly owned subsidiary Heimann Systems GmbH, Wiesbaden. In a difficult economic climate, the Aditron Group generated a sales gain of e20.4 million to e771.2 million over fiscal Adjusted for changes in the consolidation group, sales revenues rose 8.4 percent. The foreign share, slightly up to 59.8 percent (from 59.1 percent), reflects the increasing internationalization of business. Due to Heimann Systems great success in the recessionbattered USA market in 2001, the second most important sales region following the European Union, the North American share of the Aditron Group s total sales moved up from 12.4 percent to 13.3 percent. Aditron s results of operations improved further. EBIT was raised from the previous year s e26.4 million to e39.5 million. In fiscal 2001, Hirschmann s sales of e329.2 million were 5.3 percent above the previous year s level (likefor-like consolidation group). Due to series production start-ups at various European carmakers, the mobile communications and automotive connector units achieved 8.3-percent sales gains over the prior year. Rising by 6.1 percent, sales of automation and network systems were likewise strong. Despite weak consumer demand, sales of multimedia communication equipment remained at the year-earlier level, whereas revenues from multimedia communications networks were only included 38

42 Aditron AG Sales: e771 million Headcount: 4,985

43 Aditron AG Electronics until June 30, 2001, because of the transfer of transmitter business to Harris Corporation. EBIT in the Hirschmann division reached e6.5 million, following e4.9 million the year before. Preh s business is mainly automotive electronics, industrial electronics, and industrial equipment. The past fiscal year saw an unchanged sales volume of e221.6 million. Automotive electronics, the largest unit and concentrating on the production of driver operating and sensor systems, boosted business by 7.7 percent over the year In the past fiscal year, industrial electronics achieved the prior year s figure adjusted for RMV sales. Apart from economy-related sales difficulties for point-of-sale systems, the chief factor was the pruning of the previous product range. Due to orders delayed into 2002 and sales fluctuations because of invoice timing, the figure for the industrial equipment unit was around e5 million below the year before. In all, Preh managed to improve EBIT over the previous year s e4.6 million to e12.6 million. The implemented restructuring measures mainly contributed toward this earnings improvement. Heimann Systems managed to achieve a record high of e167.0 million sales in fiscal 2001 through the marketing of its x-ray inspection systems. When compared to the year before, this is equivalent to added sales of around 35 percent. The large international share of sales of 83 percent proves the worldwide acceptance enjoyed by the highperformance products of Heimann Systems. Megaorders awarded to Heimann Systems for equipping the Düsseldorf, Munich and Brussels airports with multistage systems for automated inspection of checked-in luggage emphasize the strong market position in the segment of explosives detection systems. The conventional x-ray and cargo inspection systems units were just as successful, the latter receiving two follow-up megaorders from the British customs authority for installing mobile x-ray systems for container inspection. The biometric systems unit also showed an upward trend, its units for digitally registering finger- and palmprints being marketed internationally with great success. The previous year s earnings of e13.5 million were once again clearly improved. At Heimann Systems, the market performance led to an EBIT of e21.8 million. At e59.6 million, PAT, an international player, missed its prior year s sales by 4.3 percent due to belowbudget capacity utilization and the steep recession on the important North American market, this especially hurting the construction machinery electronics unit whose sales sagged 19.4 percent. The poor construction machinery electronics business additionally burdened earnings. Due to increased marketing efforts in Europe and Asia, after-sales service revenues gained 15 percent over the previous year. Despite a difficult market environment, the traffic telematics unit was well on the inside lane, generating a sales rise of 6.6 percent, attributable to the invoicing of major traffic system projects in Germany and the Netherlands. EBIT at PAT dropped by e2.1 million to e0.9 million. Onerous contracting caused losses for this PAT unit. In fiscal 2001, the Aditron Group invested e40.7 million in intangible and tangible assets, following e35.5 million one year before. The international share of capital expenditures rose from 36 to 40 percent in Depreciation of tangible assets amounted to e23.9 million. As in the previous years, all divisions invested, mainly in new machinery and plant for improving the efficiency of production, in technical equipment for the R&D departments as well as in replacing existing plant. Most of Hirschmann s spending went into the automotive product business. As part of their improved vertical integration programs, Preh and Heimann Systems acquired real estate adjacent to their present H.O. locations. 40

44 Many directions but not all the best. Preh s operating control and display systems show the way. They combine radio, phone, board computer, navigation and A/C functions ergonomically and functionally within minimum space.

45 Rheinmetall DeTec AG The sectors: Defence Rheinmetall DeTec is Europe s foremost supplier of systems for the land forces. Its bundled expertise in land forces technology, flight and air defence, naval and simulation systems has made Rheinmetall DeTec a powerful and reliable partner of the German and NATO armed forces. In fact, Rheinmetall DeTec nowadays enjoys a position of technological supremacy in a wide variety of fields worldwide. To consolidate and expand this competitive position is a prime objective. Defence indicators: Rheinmetall DeTec AG Change e million e million e million % Net sales 1,642 1, Order intake 1,535 1, Order backlog 3,061 3, Employees as of Dec. 31 9,176 9, EBIT EBIT margin (in %) ROCE (in %) The economic climate for Defence is mainly determined by the defence budget in Germany. In 2001, this amounted to e24.0 billion, following e24.2 billion a year before, disregarding efficiency gains and revenues from sales, however including additional funds for the Kosovo mission. Spending on military procurements stagnated at e3.5 billion. In 2001, e829 million was spent on military R&D, following e901 million in Despite the difficult market environment, the Defence sector had a generally satisfactory year, generating sales of e1,614.1 million, slightly below that of the year before. Although the formerly fully consolidated Nico Group was included only at equity in 2001, the sector surpassed the comparable previous year s sales by 2 percent. At 36 percent, STN ATLAS Elektronik again contributed the largest share to sales in Down from 48 percent a year earlier, the foreign share of sales amounted to 44 percent. In 2001, order intake by Defence at e1,998.6 million clearly surpassed the 2000 level by e463.5 million. All divisions contributed to this additional business. The sector s order backlog amounted to e3,461.5 million at year-end. At e63.9 million, the year-earlier EBIT of e33.6 million was easily exceeded. Air Defence Systems/Medium Caliber and STN ATLAS Elektronik contributed especially high profits. Apart from the absence of special burdens from restructuring and integration measures at Rheinmetall Landsysteme and STN ATLAS Elektronik, it was the structure and process improvements in all the units that led to the rise in earnings. Following the previous year s e362.5 million, Air Defence Systems/Medium Caliber achieved a sales volume of e367.3 million in fiscal 2001, the lion s share being generated with air defence systems. For the first time, the new SKYSHIELD system contributed to sales. At e396.7 million, the year-earlier order intake was topped by e143.0 million. In fiscal 2001, Oerlikon Contraves successfully acquired a major contract for the SKYGUARD air defence system as well as two additional SKYSHIELD orders from NATO countries. At Air Defence Systems/Medium Caliber, EBIT was bettered over the prior year by e15.9 million to e29.2 million. After e483.8 million one year before, Weapons & Ammunition generated sales of e411.6 million. Taking into account the no longer consolidated sales of the Nico Group, the volume climbed 2 percent. The main sales contributors in fiscal 2001 were deliveries of SMArt artillery ammunition and the weapon system for the tank howitzer 2000 to the German armed forces as well as the LKE II tank ammunition. At e471.6 million, order intake by Weapons & Ammunition was 8 percent over that of Significant contracts included the development of 120-mm HE tank ammunition on behalf of the German armed forces, SMArt sensor fuzed rounds for Switzerland and the follow-up order from the German government for the shipment of 42

46 Rheinmetall DeTec AG Sales: e1,614 million Headcount: 9,019

47 Rheinmetall DeTec AG Defence 255,000 units of the MTLS modular propellant charge system. In 2001, the division s EBIT tumbled to e11.7 million (from e24.8 million) caused by a net loss at Buck Neue Technologien and the lower earnings in the defence business of the Dutch subsidiary Eurometaal Holding N.V. Systems & Equipment, specializing in light armored combat and support vehicles as well as in conversion and maintenance contracts, gained 2 percent in sales to e282.7 million in fiscal The main sources were chassis and integration services for the tank howitzer 2000, the valueenhancement program for the turrets of the Leopard 2 main battle tank as well as the delivery of the Wiesel 2 for the light air defence system of the German armed forces. Compared to one year earlier, the division s order intake rose by 52 percent to e293.8 million. The Swiss army placed a contract for 25 Büffel armored recovery vehicles. Sweden also ordered four such systems. Greece awarded the division a contract for 25 tank howitzers Germany placed an order for 20 Wiesel 2 armored transport vehicles. The restructuring and integration of MaK Systemgesellschaft mbh, KUKA Wehrtechnik GmbH, and Henschel Wehrtechnik GmbH into Rheinmetall Landsysteme GmbH, having heavily burdened previous year s earnings, was successfully concluded with a turnaround in EBIT at Systems & Equipment amounted to e5.7 million (up from a negative e26.6 million). With its three units Naval Systems, Land & Airborne Systems, and Simulation Systems, STN ATLAS Elektronik completed fiscal 2001 with sales of e587.0 million, equivalent to an increase by 9 percent. In Naval Systems, large shares of business were generated through conversion projects for the German navy s minehunting vessels and the ISUS Integrated Sensor Underwater Systems for submarines operated by the Italian and Greek navies. A mainstay of sales at Land & Airborne Systems was the LeFlaSys light air defence system and the invoicing of orders for the development and industrialization preparation of national programs for unmanned aircraft (drones). STN ATLAS Elektronik s order intake rose around 30 percent to e852.2 million in the year under review. Naval Systems managed to acquire a megaorder for modernizing ten Dutch and six Belgian minehunters worth a total of over e140 million. Following the division s extensive development input, Germany placed an order with Land & Airborne Systems for the series production of small targettracking drones. The division is also heavily involved in the delivery and integration of inspection and reconnaissance sensors in the Dutch-German contract for Fennek reconnaissance vehicles. Over the prior year, STN ATLAS Elektronik showed an EBIT improvement by e2.5 million to e30.2 million. In 2001, Defence invested e49.8 million in tangible and intangible assets. At Air Defence Systems/ Medium Caliber, spending concentrated on the testing facilities as well as manufacturing and assembly plant for the new Skyshield firing unit. Weapons & Ammunition commissioned the world s most advanced plant for producing monobasic propellant charge powders at Wimmis, Switzerland. At the Unterlüss location, new machinery and plant concepts for efficiency enhancements within production materialized. Capital outlays by Systems & Equipment mainly served the implementation of Rheinmetall Landsysteme GmbH s integration concept linked to extensive production relocations and the replacement and standardization of the CAD system. As one year before, STN ATLAS Elektronik s capital expenditures focused on computers and software, specifically testing facilities as well as optimizing network structures and the existing computer-aided warehousing system. 44

48 At home where trouble is brewing, the FUCHS NBC detector and reconnaissance vehicle from Rheinmetall DeTec, is able to identify quickly over wide spaces nuclear, biological and chemical substances contained in the air and on the ground.

49 Rheinmetall AG Financial investees and service companies Jagenberg Group Jagenberg AG has sold most of its Paper Technology division to Voith Paper Holding GmbH & Co. KG, Heidenheim. An agreement was signed on October, 24, 2001, according to which Voith took over as of December 31, 2001, Jagenberg Papiertechnik GmbH and Jagenberg Maschinenbau GmbH & Co. KG, both in Neuss; Krieger GmbH & Co. KG, Mönchengladbach; and the subsidiaries Jagenberg Inc., Enfield, USA, and Basagoitia S.A., Tolosa, Spain; as well as the three foreign sales/distribution companies of the Jagenberg Group. In 2001, the companies transferred to Voith generated sales of e276 million (before consolidation) and had a workforce of 866 at the end of the past fiscal year. In Jagenberg AG s 2001 consolidated financial statements, the income statement data of the sold operations was fully consolidated for the last time, but not the balance sheet data. Left over in Jagenberg AG s consolidation group following the abovementioned transfer are: Jagenberg Diana, Woschnik+Partner Maschinenbau, and Jagenberg Slovensko, Nové Mesto, Slovakia (all in the folding carton business of Paper Technology), plus the Film/Foil Technology companies Kampf, Dohrer Maschinenbau, Lemo, Renova and the Swiss Bachofen+Meier AG. The sheeter operations not taken over by Voith have been merged into the newly founded Jagenberg Querschneider GmbH, Neuss, and Jagenberg Converting Inc., Enfield, USA. Efforts are being undertaken to sell the remaining paper, packaging, and film/foil technology operations. After a good first six months and then declining growth rates in the second half of the year, the mechanical engineering sector in Germany saw 12-month sales rise by 1.8 percent in real terms over the prior year. Order intake by those sectors of relevance to Jagenberg fell short of the industry average, however. Orders booked in the field of papermaking, converting as well as paper finishing machines dropped by 9 percent from the preceding period s level. Plastics and rubber processing machine business lost 20 percent over In fiscal 2001, the Jagenberg Group s sales amounted to e404.4 million, after the prior year s e402.4 million. Order intake reached e382.3 million. Excluding the sold companies, the Jagenberg Group s order backlog at year-end was e72.6 million. EBIT was again negative, this time totaling e12.4 million. EuroMarine Group Effective as of December 31, 2001, the SAIT Radio Holland Group (SRH), a globally acting distribution and services network for marine electronics, specifically concentrating on navigation and communications, was sold as part of a management buyout deal. The contractual closing is subject to approval by the antitrust authorities, due to be given in the first half of In 2001 and with 691 employees, the SRH Group achieved sales of e132.0 million. STN ATLAS Marine Electronics GmbH (SAM), Hamburg, including its subsidiaries, plus EuroCom Industries A/S, Ballerup, Denmark, remain with EuroMarine Electronics GmbH (EMG). Despite a slight decline in the number of ships built worldwide in 2001, EMG had a generally positive period. Including SRH and with a workforce of 2,000, EMG generated 4 percent higher sales at e407.5 million in fiscal Whereas the SAM Group clearly surpassed the previous year s level, SRH and EuroCom Industries each missed the year-earlier figure by 5 percent. The restructuring program started at the beginning of 2001, was consistently and successfully implemented. With an EBIT of e2.4 million, EMG achieved a steep increase over the previous year. The earnings improvement from restructuring measures will continue in 2002 to have a favorable initial impact on the entire fiscal year. 46

50 Rheinmetall Service GmbH In line with Rheinmetall AG s blueprint of a lean holding company exercising strategy functions, a number of activities formerly performed by Rheinmetall AG have been downloaded into a central services unit, Rheinmetall Service GmbH (RSG). In addition to property management, its duties include such corporate functions as advice and assistance in patent and industrial property right matters, the organization of training programs, and travel and accommodation reservations. These services are provided by Rheinmetall Service GmbH on the basis of an agreement concluded with the parent and financial investee companies. Additionally, RSG is the shareholder of Rheinmetall Versicherungsdienst GmbH, which renders insurance brokerage services to the Rheinmetall Group companies and other outside companies, too. Rheinmetall AG has concluded P&L transfer agreements with RSG and Rheinmetall Versicherungsdienst GmbH. Propertywise, the main duty of RSG is real-estate and project development of the former production site in Düsseldorf-Derendorf, which is owned by Rheinmetall Immobilien GmbH (RIG). Of the original 180,000 square meters, some 125,000 m 2 has already been sold. By previously securing the necessary planning and construction rights for these projects, it has been possible to achieve a substantial increase in property value. During the period, RIG showed notable book gains from the sale of property. Rheinmetall Informationssysteme GmbH Rheinmetall Informationssysteme GmbH (RIS) provides IT (including telecom) services within the Rheinmetall Group. In connection with computer and technical systems as well as those of a project-related nature, such services are mainly rendered to Rheinmetall Group companies plus some outsiders. In 2001, RIS with a staff of 376 (up from 337) working at 18 locations within Germany, generated sales revenues of e74.4 million (up from e67.9 million) and an EBIT of e3.7 million (down from e3.8 million). The year under review saw no further integration of IT units of Group companies. The gain in revenues is a reflection of organic growth resulting from additional projects and new services. Projectwise, the emphasis was on introducing and expanding SAP R/3 and broadening such e-business services as electronic archiving with IXOS, online trading, and company portals. A number of additional outside clients were also acquired. The RIS product range and its implications were successfully demonstrated at a customer presentation pitched at the corporate headquarters. The SAP Customer Competence Center was reapproved and the IXOS Customer Competence Center for the first time received an award from the producer. Both these approvals will deliver Rheinmetall software and maintenance discounts. Alongside e-business, HR administration and archiving systems, it is three extensive SAP 3/R projects that will generate further growth in Business outside the Rheinmetall Group is again being broadened. 47

51 The legend rolls on: Kolbenschmidt Pierburg produces around half a million pistons annually for the Harley-Davidson Company in Milwaukee, USA.

52 Management holding company Rheinmetall AG Rheinmetall AG s role is that of a strategic holding company subsuming the corporate departments Legal Affairs, Controlling, Finance, Human Resources, and Communications. As of December 31, 2001, its staff totaled 79 (down from 164). This shrinkage is mainly due to the transfer of service functions to Rheinmetall Service GmbH as well as staff retrenchment. Through intermediate holding companies, Rheinmetall AG is affiliated with the subgroup parents of Automotive, Electronics and Defence, as well as with the financial investee Jagenberg. Unlike the consolidated financial statements, Rheinmetall AG s separate financial statements continue to be prepared in accordance with HGB regulations. In the fiscal year 2001, Rheinmetall AG collected a lower investment income from its intermediate holding companies. In addition, the Company earned income from newly concluded P&L transfer agreements with the service companies. Especially the gains from the conveyance of real estate contributed to Rheinmetall AG s earnings. In contrast, the expenses from the waiver or remission of receivables and the write-down of a financial asset burdened net income. This write-down was required by the impairment of investments in the Jagenberg Group whose overall economic situation was unsatisfactory. On balance, net investment income totaled e17.1 million (down from e29.1 million). Net interest expense zoomed from e3.1 million to e10.6 million. A lower other operating income, higher other operating expenses, pared personnel expenses and slimmed amortization/depreciation combined to produce an EBT that is e21.4 below the prior year s. The other operating income mainly includes rental income from properties leased to Rheinmetall DeTec AG, as well as income from intercompany allocations. Together with income tax expenses of e1.8 million (comparing with a tax credit of e1.0 million in 2000) this yielded a net income of approx. e22,000 (down from e24.3 million). After transferring e16.9 million from the reserves retained from earnings, Rheinmetall AG s net earnings came to the same amount. In May 2001, the Company floated a bond issue. Since July 2001 Rheinmetall AG has been providing those financial services to the Group which had previously been rendered by Rheinmetall Finanz GmbH. Rheinmetall AG s results of operations are directly related to the business trend of its corporate sectors and its service companies. 49

53 Rheinmetall AG Risk management Risk management systems and existing risks As an international player, the Rheinmetall Group is exposed to manifold risks inseparable from business activities as such. In order to identify early on and to adequately counteract such risks, risk management is an integral component of any decision and business processes within the Rheinmetall Group. Rheinmetall AG s early-warning system for material and potentially ruinous risks applies to Rheinmetall AG as well as to the sector parents and service companies. The risk management system is a logical enhancement of the inherited budgeting, management and control instruments and hence firmly anchored within the Group s architecture on the basis of clearly defined accountabilities. The system consists of various modules that dovetail into the entire structure and organization. They include the standardized budgeting and controlling processes, reporting procedures, guidelines, organizational policies and certifications, as well as the monthly performance reviews conducted at the Group s various hierarchical tiers. All these modules are summarized in the risk management handbook of Rheinmetall AG and have been appropriately adapted by the sector parents and service companies. The core constituents of Rheinmetall AG s risk management system are: Appointment of a risk manager; Systematic risk detection and evaluation including an estimate of the possible loss and probability of occurrence, as well as the definition of early-warning indicators and countermeasures (risk inventory); Definition of materiality thresholds as a factor of the loss and probability of occurrence for the purpose of risk reporting; Monthly risk reporting by the operational units to the Group s top management, depending on the potential loss and probability of occurrence; Insistence on immediate reporting in the event of risks with substantial repercussions; Annual update of piled-up risks as part of the budgeting process; Sensitizing members of staff and creating risk awareness. Derivative financial instruments are used to hedge against financial risks. Such instruments are exclusively used to cover underlying transactions or hedge against interest and/or exchange rate risks. No speculative open positions exist. The financial transactions are contracted solely with banks of prime standing and within predetermined limits. Sufficient accruals provide for losses on long-term contracts or from supply and purchase contracts or agreements. The Group s business does not hinge on any specific customers and/or (crisis-prone) regions whose adverse repercussions might jeopardize the survival of the Rheinmetall Group. Other risks (defaulting debtors, bad debts, warranties) are adequately provided for in the annual accounts while environmental hazards are limited since the use of contaminated substances is confined. Environmental protection officers ensure that local production facilities comply with local regulations. The Group s diversification policy (the largely independent core sectors of Automotive, Electronics, and Defence) helps to balance out transitory weaknesses in individual industries by peaks enjoyed by other sectors. The Automotive sector and its business are largely dependent on how the automotive climate develops worldwide. In 2001, this industry was battered by a recession unforeseeable to such an extent a year ago, and by the terrorist attacks on the World Trade Center in New York, and on the Pentagon, Washington, on September 11, The reverberations will in all likelihood be felt until far into the current fiscal year According to forecasts, 2002 will generally see declining production and shipments in the three most important automotive markets of North America, Japan, and Western Europe. Particularly lackluster are the prospects in the USA. Some of our US customers are having to contend with financial problems and the same applies to major rival suppliers to the auto industry. Although the Kolbenschmidt Pierburg Group may in some instances benefit from competitor weakness, itself it is exposed to risk through the ailments of some customers. This is reflected in reduced calloffs and fewer orders placed with the Kolbenschmidt Pierburg AG subsidiaries. The impact of individual markets on the economic situation of Kolbenschmidt Pierburg is abated by the Group s globalization. Additionally, downsizing measures already launched the year before in the United States, are being hastened. At the start of the new fiscal year, Kolbenschmidt Pierburg AG s Executive Board decided to shut down a part of the Ft. Wayne, Indiana, plant at the turn of 2002/2003, in order to accelerate the return to profitability of the division s US subsidiaries. A consequence is that this plant at Ft. Wayne will only be used for mass production, the idled machines being largely employed elsewhere by other Group companies. In the wake of the 50

54 International crisis and conflict management. WIESEL 2 from Rheinmetall DeTec is a modern armored vehicle able to rescue the wounded even across tough terrain.

55 Rheinmetall AG Swerving without spluttering: in-tank module with swirl pot and dual-stage fuel pump from Kolbenschmidt Pierburg ensures smooth fuel delivery even under extreme driving and environmental conditions.

56 Risk management industry s woes, customers have stepped up their pressure to obtain further price reductions. This risk is contained by the creation of product and process innovations, the implementation of continuous improvement processes and enforcement of strict cost management. In the 2001 annual accounts, the accrual for impending losses on uncompleted contracts adequately provides for any losses related to individual products. The current collective agreements between the employer federations and the German Metalworkers Union expired February 28, At the end of January, the Metalworkers Union was demanding pay increases of 6.5 percent, which met with wide criticism. Consensus will prove difficult and industrial action at some of the Group s German locations cannot be ruled out. A certain tax risk emanates from unexercised option rights under the warrant bond issue floated by Kolbenschmidt AG in However, Kolbenschmidt Pierburg AG assumes, supported by the prevailing view of tax law pundits and in jurisprudence publications, that the bond redemption is unlikely to entail any tax burden; however, the final judgment in a comparable case has not yet been passed. Moreover, certain risks exist from proceedings pending before the court of competent jurisdiction which have been instituted by 10 stockholders for review of the share exchange ratio under the merger of Kolbenschmidt Pierburg (Rheinmetall shareholdings), as well as for additional cash compensation. Kolbenschmidt Pierburg continues to believe in the underlying share exchange ratio fairly reflecting corporate value relations and that therefore the proceedings as yet underway represent only a slight risk. An additional provision in 1999 still allows for the fees and charges associated with such court proceedings. Within the Electronics sector, the auto industry vendors Hirschmann and Preh are closely dependent on the sales situation at their key accounts, DaimlerChrysler, BMW, and Audi, as well as on the worldwide automotive market. The business climate is clouded by the ongoing pressure exercised by OEMs in order to obtain price reductions. The risks associated with accumulating price pressure may arise, in particular, through fiercer competition among the auto manufacturers. The causes for this may be cyclic declines in demand, improved price transparency resulting from the introduction of the euro, and the planned amendment to the EU car trade and distribution regulations. Dependence on individual markets is being counteracted by the group s progressive globalization. Additionally, product and process innovations are opening up additional price-cost latitude. Sales opportunities exist through the proliferation of electronics in all automobiles as well as the trend to even more sophisticated heating/air conditioning, drive assistance and communication systems. In security technology, in which Heimann Systems operates with its x-ray inspection and biometric systems, there is again considerable indirect economic dependence since both systems are mainly procured by the airlines and public agencies. The results of airline operations and the tax revenues are, in turn, largely determined by the economy as such. The terrorist attacks of September 11, 2001, uncovered worldwide security shortcomings which have caused politicians and public authorities to purchase more of, and more quickly, the already budgeted security equipment such as explosives detectors. This is expected to generate sales opportunities despite the generally tight budgets. Given this situation, if the necessary capacity build-up were delayed or even nonexistent, this might well lead to a loss of our own market shares. Despite this, we cannot be entirely certain that the presently evident growth in demand will last to any extent, albeit in the long term it is expected to easily exceed the present level. The exact volume of such demand is unpredictable right now. In view of these factors, there is the risk of overextending present capacities, thus entailing idle capacity at some later date. Accordingly, Heimann Systems is adopting a measured approach in broadening its production capacities to meet rising demand, thus addressing specifically medium- and long-term market movements. The nine-eleven events have drawn the attention of very many large companies and investors to this sector of industry and there is therefore the possibility that in the medium term new, financially strong and technically competent contenders will enter the market of Heimann Systems. Nonetheless, with its existing product lineup and available production capacities, this company sees itself as having a solid market position in no way jeopardized by any of the aforementioned threats. Moreover, certain risks exist from proceedings pending before the court of competent jurisdiction which have been instituted by six stockholders for review of the share exchange ratio under the merger of KIH AG into Aditron AG, as well as for additional cash compensation. Aditron AG s Executive Board continues to believe in the underlying share exchange ratio correctly reflecting corporate value relations and that therefore the proceedings still underway represent only a slight risk. 53

57 Rheinmetall AG Risk management The Defence sector companies rely heavily on the defence budgets of the various countries. Domestic business (56 percent during the period), in particular, is proving difficult in view of shrinking defence spending in the areas of matériel procurement and R&D, testing. Moreover, the political situation has a large influence on whether exports can be expanded. Such risk exposure is suitably abated by a broad, interlocking range of products (weapon systems, ammunition, simulation training) embracing both established products (such as the FUCHS NBC armored reconnaissance vehicle, the WIESEL 2 family of vehicles) as well as innovative newcomers (such as the BK27 board cannon for the Eurofighter and the American Joint Strike Fighter or the KZO reconnaissance drone). International alliances are also being pursued with greater emphasis for an improved position on the international market. Concurrently, we are paying special attention to the reshuffling of the German and European land forces industry. Alongside the normal product liability risks, which are abated through the many quality checks at the approved locations, one essential aspect in the case of business foreign is the ability to accede to the request by the public authorities abroad for barter deals. The companies within this sector succeed in this respect through an all-embracing offset management system integrating also the Rheinmetall Group s nonmilitary sectors. This system pools the Group s procurement requirements in the respective arms-buying countries. Additionally, ongoing cost reduction and product innovation efforts are designed to shore and secure the market position of the Defence companies. The Jagenberg Group operates in fiercely competitive markets whose economic situation largely determines the economic success of the various companies. In order to outpace competition through engineering advantages, the group s products are continuously being improved or newly developed. Moreover, in order to minimize the risk of inadequate customer acceptance, developments are often carried out in tandem with the customers concerned. Insurance has been taken out to cover or limit the financial consequences of possible claims or liability risks. The extent of such cover is regularly reviewed and, where necessary, updated. Our strategy of shedding additional Jagenberg Group companies might inpinge on earnings in that the cash inflow falls short of the existing book values. In all, it may be stated that neither for Rheinmetall AG as parent company of the Rheinmetall Group nor for the Rheinmetall Group in its entirety have any risks been identified that in themselves or in interaction with others might have a jeopardizing effect on the continued existence as a going concern. From today s vantage point neither do there exist any significant risks with material impact on the net assets, financial position, or results of operations. The risk management system deployed by Rheinmetall AG and the sector parents was covered by the statutory annual audit and fully satisfies the standards set on such a system. In particular, the system meets the requirements of the German Act on Corporate Control & Transparency ( KonTraG ), which has amended parts of the Commercial Code and Stock Corporation Act. Rheinmetall AG Executive Board Eberhardt Dr. Kleinert Dr. Krämer Dr. Müller Düsseldorf, April 25,

58 Irrefutable: live scanners from Heimann Biometric Systems that record finger and palm prints are used for civil and forensic purposes, enabling individuals to be identified in virtually real time.