Single entity financial statements and management report of Drägerwerk AG & Co. KGaA. as of December 31, 2011

Transcription

1 Single entity financial statements and management report of Drägerwerk AG & Co. KGaA as of December 31, 2011

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3 CONTENT Management report of Drägerwerk AG & Co. KGaA Forward-looking statements 2 43 Single entity financial statements of Drägerwerk AG & Co. KGaA 45 Income statement of Drägerwerk AG & Co. KGaA from January 1 to December 31, Balance sheet of Drägerwerk AG & Co. KGaA as of December 31, Analysis of non-current assets of Drägerwerk AG & Co. KGaA 48 Notes to Drägerwerk AG & Co. KGaA single entity financial statements 50 The Company s Boards 72 Major direct and indirect shareholdings of Drägerwerk AG & Co. KGaA 76 Management compliance statement 81 Possible rounding differences in the financial report may lead to slight discrepancies. 1

4 2 Important changes in fiscal year 2011 Control system Management report of Drägerwerk AG & Co. KGaA Important changes in fiscal year 2011 ties. As soon as the Dräger Group achieves this equity ratio, it plans to distribute around 30 percent of Group net profit (less earnings attributable to non-controlling interests) as a dividend again. Until this equity ratio has been reached, the Executive Board of the general partner intends to distribute 15 percent of Group net profit (less earnings attributable to non-controlling interests). DIVIDENDS The calculation of the dividend to be distributed to preferred and common shareholders is based on certain factors: particularly profitability, financial position, capital requirements, business outlook, the Company s general economic environment and the share of net profit to be issued to participation certificate holders (including minimum dividend). As participation certificates are entitled to receive ten times as much as the dividend paid to preferred shareholders, it must be remembered when determining the dividend for preferred and common shares that an increase of the latter would always result in an increase of the dividend for participation certificates. In the case of an increase, a little less than half of the total amount paid to participation certificate holders and shareholders in the past generally pertained to participation certificates. Subject to the above-mentioned determinant factors and the Company having generated sufficient net earnings, the Executive Board of the general partner, together with the Supervisory Board of Drägerwerk AG & Co. KGaA, Lübeck, plan to propose to the annual shareholders meeting on May 4, 2012 a dividend of EUR 0.19 for preferred shares and a dividend per common share of EUR 0.13 for fiscal year 2011 for the purpose of financing the current improvements to the capital structure. Drägerwerk AG & Co. KGaA also aims to increase its equity base to 40 percent of consolidated total assets in the medium term to improve its strategic leeway to account for the continuing macroeconomic uncertain- The Executive Board of the general partner, together with the Supervisory Board, aim to provide shareholders with higher interest on capital employed in the long term, on the basis of the improved future capital structure. CHANGE IN THE EXECUTIVE BOARD OF DRÄGERWERK VERWALTUNGS AG Dr. Carla Kriwet, Executive Board member since January 1, 2011 and responsible for Marketing and Sales, left the Company on December 31, 2011 by mutual agreement. Both parties agreed to maintain secrecy about the reasons for her resignation. BUSINESS ACTIVITIES Drägerwerk AG & Co. KGaA, Lübeck holds all shares in Dräger Medical GmbH and Dräger Safety AG & Co. KGaA and therefore the parent companies of the medical and safety divisions. Apart from the investments in Dräger Medical GmbH and Dräger Safety AG & Co. KGaA, Drägerwerk AG & Co. KGaA also holds a few equity investments which do not form part of the two divisions operations (see pages 80 et seq. in the notes). All the shareholdings which form part of the global operations of the two divisions are either directly or indirectly owned by the respective parent. Apart from fulfilling the core tasks of the Company, Drägerwerk AG & Co. KGaA provides central services to the divisions and monitors their risk management. These services are provided for the functions HR, Legal, Compliance, Customs and Export Control, Tax, Audit, Insurance,

5 MANAGEMENT REPORT FINANCIAL STATEMENTS NOTES Accounting, Controlling, Treasury, Capital Market Communication, IT and Corporate Communications as well as Strategic Purchasing, Marketing Communications and Basic Research. also take over the management of Dräger Medical GmbH and Dräger Safety AG & Co. KGaA. All three companies Supervisory Boards will be manned by the same members on the capital side. The services to the divisions are closely coordinated with them and invoiced in accordance with arm s length principles, as between unrelated parties. On a local level, Dräger already appointed one Regional Sales and Service Manager each in 2012 who carries the responsibility for the previously divided medical and safety divisions. At a national level, the Group aims to strengthen the Sales and Service function, in particular, and focus even more on different customers in various segments and niches. The other functions will also be linked on a transnational basis. As from 2012, one Country Manager per country will be tasked with coordinating the various functions within one country; in countries with more than 50 employees, this person will be chosen by the Executive Board member responsible for the region. The Executive Board members will assume this role in addition to their other tasks. This ensures that Dräger employs its resources more efficiently by, for instance, jointly using infrastructures and central service functions. At the same time, this new structure explicitly and concisely allocates tasks and responsibilities. A clearly defined escalation path will help to deal with difficult situations more quickly. The Company will also improve its system of checks and balances and reduce potential risks. Joint targets and performance-related remuneration ensure that no-one loses focus of the major goals. Control system NEW MANAGEMENT MODEL In 2007, Dräger first started implementing a functional, cross-departmental management model, beginning with the Executive Board. Functional responsibility has been established since 2006 in the safety division and since 2008 in the medical division. The objective is to reduce unnecessary double structures and to use synergy effects. In 2011, Strategic Purchasing, Logistics, IT, HR, Accounting, Marketing Communications and Group Real Estate already received a cross-departmental structure. Dräger will introduce cross-departmental functions in Sales and Controlling in The Group internally introduced its management model in November It supports this functional structure and the One Dräger concept. Each Executive Board member will take on one regional responsibility so as to gain more knowledge about crossdepartmental activities. This ensures that the Executive Board has an understanding of the effects of its decisions on an operational level, maintains customer contact and makes the connection between global thinking and local requirements. To achieve this, the Executive Board members will assume regional responsibilities in addition to their functional tasks: Gert-Hartwig Lescow will head the Americas region, Dr. Herbert Fehrecke all of Europe and Anton Schrofner the Middle East, Africa and Asia/Pacific. As part of Dräger s functional orientation, the members of the Executive Board of Drägerwerk AG & Co. KGaA will VALUE-DRIVEN MANAGEMENT DRÄGER VALUE ADDED In order to achieve long-term success, Dräger has to generate steady growth as well as stable and sustainable economic performance. The Group uses a value-driven management system to increase the Company value in the long term. 3

6 4 Control system Main accounting features of the internal control and risk management system This system is based on the financial key figure Dräger Value Added (DVA). The main DVA targets are: Profitable growth, Increasing operating efficiency and Increasing capital efficiency. DVA is the central key management figure by which the Company measures its added value and that of its various units. DVA makes it possible to combine the various targets within the Group and all relevant key figures. This way, business decisions can be adjusted so as to assist in increasing Company value. The major proportion of annual variable remuneration of Executive Board members is measured by DVA performance for this reason. The DVA key figure also has been integrated in internal reporting and the managers have been given specific training regarding this topic. BUSINESS DISTRIBUTION PLAN Stefan Dräger CEO Dr. Herbert Fehrecke CTO Vice CEO Gert-Hartwig Lescow CFO Anton Schrofner COO Functional responsibilities Real estate Purchasing Controlling IT HR Research and Development Capital Market Communications Logistics Legal Marketing Medical Division (temporary) Accounting Tax Marketing Safety Division (temporary) Treasury Production Audit Company Development Corporate Communications Patents Quality Sales Insurance Customs and Export Control Regional responsibilities Europe Regional responsibilities Regional responsibilities North America Middle East Central and South America Africa Asia / Pacific

7 MANAGEMENT REPORT FINANCIAL STATEMENTS NOTES ness, efficiency and correctness of the financial reporting system and ensuring compliance with all relevant legal requirements. DVA is the difference between Group earnings before interest and taxes (EBIT) and cost of capital, which was calculated on the basis of historical costs for equity and debt. The weighted average cost of capital (WACC) used for calculating the cost of capital was the current rate of 9.0 percent ( percent) before taxes. The internal control system comprises controls as well as a monitoring system. The Executive Board of Drägerwerk Verwaltungs AG, in its role as management of Drägerwerk AG & Co. KGaA, appointed the Group Controlling and Group Accounting functions of Drägerwerk AG & Co. KGaA with the responsibility for the internal control system. In fiscal year 2011, Dräger generated DVA of EUR million (2010: EUR million), corresponding to a rise of 17.6 percent year-on-year. While cost of capital remained largely unchanged, this increase was achieved by improving EBIT. The average capital invested rose by 1.1 percent to EUR million constituting below average growth compared to net sales (+3.6 percent). This primarily comprises both process-integrated and process-independent measures. Manual process controls, such as a system of checks and balances and automated IT process controls are both essential parts of the processintegrated measures. Bodies like the Compliance Committee and specific Group functions like the central tax and Group legal departments ensure process-integrated monitoring. Main accounting features of the internal control and risk management system as it relates to the financial reporting process The Supervisory Board of Drägerwerk AG & Co. KGaA, particularly its Audit Committee, and Internal Audit implement audit activities as part of the internal monitoring system. Internal Audit carries out regular audits at DEFINITIONS AND ELEMENTS OF THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEM The internal control system includes all principles, processes and measures for guaranteeing the effectivedevelopment OF DRÄGER VALUE ADDED (DVA) Dräger medical division Dräger safety division Dräger Group DVA million EBIT million Cost of capital million WACC 1 million million Net current assets 2 million Other capital employed 2 million Capital employed WACC = Weighted Average Cost of Capital Average over the past 12 months 5

8 6 Main accounting features of the internal control and risk management system Overall economic environment foreign Group companies. The auditor of the financial statements implements process-independent audit activities. The risk management system is aimed at avoiding incorrect entries during the accounting process and the external reporting process, among other things. It comprises operational risk management and a systematic early-warning system for detecting business risks. USE OF IT SYSTEMS Data relevant to financial reporting is recorded during the accounting process using the SAP standard software. Dräger Group uses a uniform accounts structure throughout the Group, which also stipulates the reconciliation methods for items in the financial statements. Dräger assesses the IT environment, identifies potential risks, regularly records them and reports them at least twice a year to the Executive Board within the scope of the risk management system. In addition, the auditor of the group financial statements carries out an independent audit of the entire IT control system, change management, IT operations, access to programs and data and system development once a year. Since 2007, the Company has been carrying out selected tasks in-house or outsourcing them to specialized service providers. As a result, the central Corporate IT function also developed its own capacities in selected areas and will continue to do so in the future. External partners will continue operating technical systems at their computer centers. with commercial and tax laws. Pursuant to these regulations, Dräger carries out inventories, measures assets and liabilities and recognizes them in the financial statements. Amounts reported in the income statement are checked to ensure they were recognized in the correct period. The Company ensures that reliable and traceable information regarding the business transaction is included in the records. It is ensured that accounting transactions are promptly and completely recorded by clearly allocating responsibilities and control mechanisms, by providing transparent accounting and reporting guidelines, and by using highly reliable IT accounting systems. In addition, monthly financial statements are checked by Controlling and reconciled with the plans and the latest forecast. Separating administrative, executive and authorization functions by issuing different access profiles in the accounting systems reduces the potential for fraudulent acts against the Company. Overall economic environment The macroeconomic environment in 2011 was shaped by the weak momentum of the global economy and the at times serious turbulences in the capital market caused by the worsening debt crisis in the eurozone. GLOBAL ECONOMY: UP 3.8 PERCENT ESSENTIAL REGULATORY MEASURES AND CONTROLS FOR ENSURING COMPLIANCE AND RELIABILITY OF THE FINANCIAL REPORTING SYSTEM Dräger has an internal control system to ensure the compliance and reliability of the financial reporting system and also to ensure that business transactions are recorded completely and promptly and in accordance The global economy grew strongly in 2011, albeit less strongly than in the previous year, as global growth started to increasingly slow down in the second half of the year. The 2011 gross domestic product (GDP) rose by 3.8 percent, compared to 5.2 percent in In the emerging markets like China, India and Brazil, restrictive fiscal and particularly monetary policies slowed down

9 MANAGEMENT REPORT economic momentum: their GDP grew by 6.2 percent compared to 7.3 percent in the previous year. The relatively low growth momentum of international trade as well as the reduction of government stimulus packages contributed to cutting the growth rate by half to 1.6 percent in the industrialized nations. As a result, governments demand for goods and services, which stimulates the economy, declined. Although each quarter, the Japanese economy recovered considerably from the effects of the natural and nuclear disaster in spring 2011, the country s GDP shrunk slightly by 0.9 percent year-on-year (previous year: +4.4 percent). Dropping global demand, interruptions to deliveries caused by the floods in Thailand and the strong appreciation of the yen prevented stronger growth in Japan. Although at 1.8 percent the US economy grew significantly less strongly than in the previous year (+3.0 percent), it gained momentum through increased consumer spending and capital investments in the last two quarter of EUROZONE: UP 1.6 PERCENT The economic development in the eurozone lost more and more momentum during the course of the year, and the GDP growth rate fell from 1.9 percent to 1.6 percent as a result. Declining global demand and the debt crisis, which worsened in the second half of 2011, as well as the resulting trust crisis among companies and consumers in the eurozone all contributed to this development. The continuing turbulences in the capital market in the eurozone and the necessary budget cuts increasingly subdued domestic demand in the second half of Despite the great amount of uncertainty in the eurozone about the duration and also the solvability of the debt crisis in some of the member states, the German economy continued to catch up in the second year after the economic crisis. Especially consumer spending, whose main driver was the positive development in the labor market, FINANCIAL STATEMENTS NOTES provided impulses that helped push up the German GDP by 3.0 percent (previous year: percent): The private consumption growth rate was the highest in five years. INFLATION: UP 2.3 PERCENT IN GERMANY: The very strong global economic recovery at the beginning of 2011 significantly increased demand for raw materials in the beginning. Political instability in oil-producing countries in the Middle East and North Africa sent the oil price up even further to over USD 126 per barrel at times. The announcement by the International Energy Agency (IEA) in the summer that it was placing 60 billion barrels of oil in the market and the flattening out of the global economy and consequently demand for crude oil then pushed prices down again. Crude oil was traded at an annual average price of USD 110 per barrel significantly up on the prior-year price USD 80 per barrel. The increased prices for energy and other raw materials were the main reason for the rising rates of inflation past the 2.0 mark in the eurozone, up to which the European Central Bank (ECB) believes that prices will remain stable. In September 2011, the inflation rate went past 3.0 percent for the first time in the year. It only fell below the 3.0 percent mark again to 2.7 percent in December. Consumer prices in Germany rose by an annual average of 3.4 percent 2.3 percent up year-onyear (+1.1 percent) primarily on account of the rise in energy prices. The European Central Bank raised the 2011 key interest rates by 25 basis points respectively in June and July to 1.50 percent to account for inflationary developments in the eurozone. The ECB responded to the economic slowdown and the continuing trust crisis in the financial sector in the eurozone by lowering its key interest rates again in two steps by 0.25 percentage points respectively in November and December to 1.00 percent. In the US, the Federal Reserve did not impose restrictive monetary 7

10 8 Overall economic environment Business trend and results of operations policies on account of economic developments. It had announced in the summer that it would keep the key interest rate at practically 0.00 percent until at least mid In order to dampen the overheating of the Chinese economy, the Chinese central bank raised the key interest rate for the third and last time in 2011 up to 6.56 percent in July. CURRENCY: EURO LOSES COMPARED TO KEY CURRENCIES IN 2011 The uncertainties about the solvability of the sovereign debt crisis and the stability of the European Economic and Monetary Union led to strong fluctuations of the European currency. The euro initially gained significantly compared to other central currencies. Then the worsening debt crisis started triggering losses, some of them serious: The annual average nominal effective exchange rate of the euro (measured by the currencies of the 20 most important trading partners in the eurozone) in 2011 remained almost stable year-on-year, In the final quarter of 2011, however, it depreciated among continuing volatility and in December 2011 was 0.9 percentage points lower than in the fourth quarter of The drop in value in the fourth quarter of 2011 was considerable: In January 11, the due date of the January 2012 ECB report, the nominal effective exchange rate of the euro was 4.1 percent down on the figure at the end of September 2011 and 5.0 percent lower than its average value in the past year. Since the end of September 2011 until January 11, 2012, the common currency depreciated by 5.8 percent compared to Dräger s most important foreign currency, the US dollar, and by as much as 8.6 percent compared to the annual average in The average 2011 euro-us dollar exchange rate of USD 1.39 was nevertheless around 5 percent up on the average prior-year rate of USD On the first trading day of 2011, the euro closed at USD 1.34 and at USD 1.30 on the last trading day of the year. The common currency reached its high of USD 1.48 on April 28, 2011 and its low at USD 1.29 on June 7, EFFECTS OF THE ECONOMIC ENVIRONMENT ON THE DRÄGER GROUP As in fiscal year 2010, Dräger just like the economic momentum profited again from large demand in the emerging markets such as China, India and Brazil. Willingness to invest was unusually great in Russia compared to economic growth both in the industrial and public sectors. Demand in Central Europe, North Europe and Asia, however, also outperformed economic developments. In these regions, Dräger profited from great willingness to invest in the industrial as well as public sectors. The above-average rise is most likely the result of customers catching up on their investments. In North America, especially in the US, demand for medical technology dropped sharply primarily on account of budget spending cuts. In the fourth quarter of 2011, on the other hand, the safety technology market made up for its decline in the first nine months mainly thanks to larger capital investments. The reserved government spending policies had also taken its effect in this market. In South Europe, the restrictive government investment policies, caused by the region s debt problems, had an even worse effect than in the previous year. Demand from customer groups such as hospitals, fire fighting services and the police force dropped, while industrial demand for safety technology remained stable in these countries. In 2011, low interest rates again created stimuli for demand as they provided customers with favorable financing terms. Despite the general weakness of the euro compared to the currencies of Germany s 20 most important trading partners, the changes in exchange rates reduced Dräger s net sales compared to the previous year. Net of currency effects, net sales would have risen by 4.4 percent instead of 3.6 percent and order intake by as much as 7.6 percent instead of 6.9 percent. Purchasing conditions were improved as part of the turnaround program and were able to partly make up for higher commodity prices again in fiscal year 2011.

11 MANAGEMENT REPORT Industry performance MEDICAL DIVISION 2011 saw a constant stream of global demand with slight regional fluctuations. In Germany, for instance, demand for sophisticated medical technology remained high. In the rest of Europe however, the debt crisis in individual countries had an increasingly negative impact. Government austerity programs led to a decline in investment volumes in South Europe that also applied to investments in the hospital sector. Russia, on the other hand, showed a positive performance, driven by political events such as the presidential elections. In the Americas particularly in the US demand for medical technology was still strong in the first half of the year, then dropped significantly in the second half on account of the US budget deficit. With China s and India s help, which both continued to invest in their infrastructures, and due to an overall increase in demand for high-quality medical technology, Asia remained the global growth driver. The impact of the natural and nuclear disaster in Japan and political developments in North Africa on global demand was minimal. Overall, Dräger profited from growing demand for sophisticated medical technology for the optimization of clinical work processes. SAFETY DIVISION Demand for safety technology products developed very positively overall in 2011 in line with global economic developments, even though demand in Germany declined slightly in the second half of the year compared to the first half. In the rest of Europe, demand was sometimes subdued due to factors such as the financial and economic crisis. Both public and industry order volumes were rather low in South Europe. The Americas also developed very differently: In the US, on the one hand, public and industrial demand for safety technology was very weak, just like the economy. Various South American industrial sectors, on the other hand, recorded robust growth. In FINANCIAL STATEMENTS NOTES Asia, excluding Japan, growth remained strong as a whole. The other countries region also developed positively on account of the continuing industrialization and further infrastructure investments in various countries. Overall, Dräger s safety division, with its clearly positioned product portfolio, also profited from the positive market performance. Business trend and results of operations at Drägerwerk AG & Co. KGaA In 2011, Drägerwerk AG & Co. KGaA s business trend and net profit of EUR million (2010: EUR 19.5 million) have essentially been influenced by improved result from operating activities high results of group companies positive interest result development IMPROVED RESULT FROM OPERATING ACTIVITIES In fiscal year 2011, Drägerwerk AG & Co. KGaA increased its result from the operating activities excluding earnings from profit and loss transfer agreements, interest result and taxes by EUR 24.8 million year on year. The following one-off effects influenced the result in the previous year: Extraordinary result of EUR 14.5 million from the change in accordance with the German Accounting Law Modernization Act, transaction costs totaling EUR 6.4 million in connection with the capital increase, the measurement of the option component (EUR 20.3 million) as well as the cash settlement of EUR 7.8 million to be paid to holders of series A, K and D participation certificates. Although these one-off effects were not incurred in 2011, the expenses did not fall as expected in This was countered by the rise in personnel expenses as against 2010 as a result of the increase in headcount resulting from the hiring of new employees as well as the transfer of employees to implement shared services. 9

12 10 Business trend and results of operations Investments Net assets and financial position Borrowing / financing measures Research and development Higher consultancy costs and an increase of other external services including the higher bonus and severance payment to the members of the Executive Board of Drägerwerk Verwaltungs AG also impacted the result of Drägerwerk AG & Co. KGaA. Since the change to the Company s legal form, the Executive Board of Drägerwerk Verwaltungs AG receives its remuneration from the general partner while their pension obligations are handled by Drägerwerk AG & Co. KGaA. At the same time, other operating income increased due to the year-on-year rise in the allocation of other operating expenses to subsidiaries, which included the income from the debt reduction of tranche III of the vendor note from Siemens to the amount of EUR 8.5 million. HIGH RESULTS OF GROUP COMPANIES Earnings from profit and loss transfer agreements (including intragroup tax allocations) came to EUR million in fiscal year 2011 (2010: EUR million). While the profit transferred by Dräger Medical GmbH in fiscal year 2011 was up some EUR 61.2 million, the profit transferred to Drägerwerk AG & Co. KGaA from Dräger Safety AG & Co. KGaA was up approximately EUR 8.1 million on the previous year. In fiscal year 2010, this item includes the distribution of EUR 70.4 million by Dräger Medical AG & Co. KG to Dräger Medical Holding GmbH for fiscal year 2009 resulting from a profit and loss transfer agreement as well as profit of around EUR 19.0 million transferred from Dräger Medical GmbH, less approximately EUR 86 million in expenses incurred by the integration. POSITIVE INTEREST RESULT DEVELOPMENT The positive development of the interest result up EUR 12.9 million in 2011 against 2010 is mainly as a result of one-off effects in In 2010, Dräger not only paid costs incurred for issuing loans in the total amount of EUR 8.2 million for unused loans but also interest on the Siemens vendor note of EUR 1.9 million. The proposed distribution for participation certificates is also down a total of EUR 4.2 million on fiscal year Investments In fiscal year 2011, the Company invested EUR 6.8 million (2010: EUR 3.2 million) in software and prepayments made. Investments in property, plant and equipment came to EUR 6.1 million (2010: EUR 1.3 million). They focused on building conversions and investments in notebooks and IT hardware. The later if mainly related to replacement. Net assets and financial position As a result of its function within the Dräger Group, Drägerwerk AG & Co. KGaA s balance sheet is characterized by high financial assets and liabilities from group financing as well as intercompany receivables and liabilities. After deducting cash and cash equivalents, net financial liabilities to banks as of December 31, 2011 amounted to EUR million (2010: EUR million); group financing of group companies came to EUR 72.0 million (2010: EUR million). Drägerwerk AG & Co. KGaA s equity amounted to EUR million and increased by EUR 82.5 million year on year as a result of the positive result for fiscal year Drägerwerk AG & Co. KGaA s equity ratio as of the reporting date therefore came to 48.1 percent (2010: 40.5 percent).

13 MANAGEMENT REPORT FINANCIAL STATEMENTS NOTES Borrowing / financing measures Research and development Our short-term operating requirements are funded via bilateral credit lines with selected banks. The Company also maintains internal cash pools in several currencies that are used for offsetting liquidity within the Group. On December 31, 2011, short-term loans amounted to around EUR 84.5 million (2010: EUR 54.9 million). As of December 31, 2011, the research and development (R&D) department at Drägerwerk AG & Co. KGaA employs 49 people (December 31, 2010: 48 people). Drägerwerk AG & Co. KGaA spent EUR 4.7 million (2010: EUR 3.3 million) on research and development in fiscal year The Company has arranged for bilateral credit lines with renowned banks to the amount of EUR 240 million due on December 31, 2015 to secure its working capital. Dräger only utilized these credit lines in form of sureties in Germany and abroad in the reporting year. Dräger uses note loans in addition to bilateral credit lines for its medium and long-term financing. This financing instrument has a low minimum volume and is highly flexible. The costs for issuing note loans are usually lower than those for issuing bonds. A note loan is rather more suited to smaller refinancing volumes than a bond, for which a credit rating has to be obtained as well. On December 19, 2011, the Group issued note loans to the amount of EUR 57.5 million at an annual interest rate of 3.21 percent and a term of five years and to the amount of EUR 38.5 million at an annual interest rate of 3.88 percent and a term of seven years. In the reporting year, Dräger repaid due note loans totaling EUR 54.5 million. Of this sum, EUR 30 million carried variable interest at the six-month Euribor plus 0.67 percentage points. A further tranche of EUR 24.5 million carried fixed interest of 4.75 percent p.a. Total note loans amounted to EUR million on December 31, 2011 (December 31, 2010: EUR million). At present, Dräger does not have a rating from agencies such as Standard & Poor s, Moody s or Fitch. The basic research department s main task is to investigate new technologies and develop technical solutions for potential applications. These technologies are transferred to product development only once they have reached a sufficiently high level of maturity. In fiscal year 2011, Basic Research systematically monitored over 20 technology sectors, including electrochemical and micro-electromechanical sensor technology, software and signal processing technology. This measure aims to identify significant risks and opportunities for the Company s technological competitiveness at an early stage. Findings with particularly large potential and also employees ideas were scrutinized in more detail within the scope of almost 30 small research activities. They included patent applications, identifying customer benefits and suggestions for technology projects. In addition, Basic Research worked on almost 50 technology projects that will flow into specific product development projects once they are completed. In the medium term, Dräger expects important contributions to product development from topics such as secure networking and interoperability, interface human-machine and nano-materials. The Company cooperates with around 50 external partners worldwide for this purpose, including university laboratories, clinics, research institutions as well as small, innovative companies. Some projects are also part of government-subsidized undertakings. In fiscal year 2011, patent and trademark offices around the world issued 118 new patents to Dräger (2010: 110). 11

14 12 Research and development Purchasing Marketing Corporate IT Dräger also applied for another 87 patents at international patent and trademark offices (2010: 62). Dräger takes determined action against any breaches of its patent rights to secure its patent-protected competitive advantages. Purchasing COMMODITY PRICES CHALLENGES IN FISCAL YEAR 2011 The high prices for commodities such as copper, aluminum, platinum and rare soils as well as the increasing shortage of materials like plastics throughout 2011 proved the greatest challenge for Dräger s purchasing function. Conventional purchasing methods are often no longer sufficient to ensure supply capability at still reasonable prices. Dräger s purchasers are focusing their efforts on commodities purchasing concepts with the aim of increasing volumes so as to strengthen the Company s market position. The same was applied to Dräger s suppliers, which were intensively included in mastering these challenges and which the Group methodically supported by offering possible solutions. A positive trend showed for the first time in the fourth quarter, but it was unable to fully compensate for the extremely high price hikes in the first nine months. Purchasing as well as Research and Development intensified their cooperation by carrying out joint value analysis projects (design to cost) to be even better prepared for future price fluctuations. Purchasing achieved positive results again for the purchase of non-production materials and IT in 2011, generating excellent savings for the purchase of goods and services. SUPPLIER QUALITY A BASIC REQUIREMENT FOR DRÄGER QUALITY The objective of the supplier quality improvement program, launched at the end of 2010, is to optimize all aspects of Dräger s suppliers with regard to the functions Research and Development, Production and Quality. In fiscal year 2011, this improvement program started to show its first successes in Lübeck. The Company managed, for instance, to lower one electronics supplier s rate of internal production errors by a two-digit percentage figure. This was a great success for both Dräger and the supplier. The Group also uses the experiences gained from the quality improvement program to directly improve its basic cooperation with suppliers. An efficient initial sampling process and an optimized complaints procedure are just two examples of long-term improvements of a partnership. Dräger is now also using the quality improvement program at production sites in the US and Great Britain. The next step will be to launch the program in China in SUPPLIERS KEY TO SUCCESSFUL PURCHASING In addition to highly qualified purchasers, reliable, innovative and high-quality suppliers form an important basis for excellent purchasing performance. Dräger will hold its first cross-departmental supplier day in 2012 to appropriately acknowledge the importance of its suppliers. At this event, the best suppliers will be awarded the Dräger Supplier Award in the categories quality, innovation, logistics, competitiveness and services and one supplier will be declared the overall winner in all categories. Marketing VARIETY OF SALES CHANNELS Dräger regularly analyzes and evaluates the importance of the variety of global sales channels as part of its sales and marketing strategy. The Group is represented by subsidiaries in the majority of key markets. In addition, the Company reaches out to customers via established regional specialist retailers wherever this serves its purpose. The proportion in the growth regions Asia / Pacific, the Middle East and

15 MANAGEMENT REPORT Africa as well as South America is disproportionately large. The retailers in these regions often provide the momentum for Dräger s growth. In some established markets like Canada, the US, Australia and some European markets, the Group works closely together with specialist retailers to gain even better access to its target groups in the various customer segments. SUSTAINABLE CUSTOMER RELATIONSHIP MANAGEMENT By introducing a global comprehensive customer relationship management (CRM), Dräger continues to invest in the long-term success of the Company. It regards a synchronized customer focus of employees, organization, processes and IT as a key success factor for expanding long term and developing new customer relationships. The CRM program, which has been running since 2009, is now being used in 13 countries, which together contribute almost 50 percent of total net sales of the Dräger Group. For the future, Dräger plans to launch this program in all sales companies to generate new opportunities in customer relationship management, both locally and strategically for the whole Group. Dräger also maintains personal customer relationships at its headquarters in Lübeck, where visitors can experience hands-on medical technology system solutions at the new Dräger Design Center. Since September 2011, Dräger has been exhibiting its complete portfolio of products and solutions across the entire acute care patient process chain on roughly 700 m2 of floor space. In addition, visitors can attend workshops to develop virtual floor plans for clinical workstations or whole departments and document them with a 3D tool. Corporate IT FINANCIAL STATEMENTS NOTES adjustments of IT systems to suit requirements, a high technological standard and the constant striving for simplifying the use of IT as much as possible for employees. In the past year, the Company launched a new pilot platform for supporting cooperation between its employees and business partners. Based on the Microsoft Sharepoint application, virtual team rooms will be available to provide more effective teamwork between several locations. Additional functions will be added to this platform in the coming years and in the future it will also be used for the Intranet and Internet. Old applications from various producers can be replaced by the new Sharepoint system in the coming years. In 2011, the Group transferred the operation of numerous applications in the computer center to a new service provider as part of the Strategic Hosting project. At the same time, the applications were updated to the latest versions, new mechanisms were implemented for increasing operating security and uptimes and operating costs were reduced. In the coming years, Dräger will transfer the majority of remaining applications to this model and reduce the number of outsourcing service providers. The Group will focus its IT investments on the global consolidation of numerous enterprise resource planning (ERP) systems from various developers into one central SAP system over the next years. Dräger will carry on using the Microsoft Dynamics CRM application for supporting its customer relationship management and continue with its implementation, which started last year. In 2012, the number of employees using this system around the world will be in excess of 2,000. IT HEADCOUNT IT STRATEGY Dräger s fundamental goal is to support its business processes with IT. This primarily pertains to the ongoing As already announced in the Annual Report 2010, headcount was significantly increased by 17 employees to 58 employees in ERP and CRM Project and Application 13

16 14 Corporate IT Environmental protection Management in the reporting period. An additional 19 employees completed the project management team outside the stated core applications in the fields of system integration as well as support for other applications. This area now has a total headcount of 65. At the same time, we reduced the extent of external services in these areas in the medium term, thereby accumulating strategically important know-how and improved internal IT management processes. The Company plans to continue expanding its workforce in the coming year. The progressive internationalization of the IT organization will make it possible to integrate the subsidiaries IT resources even more effectively. Environmental protection Comprehensive environmental protection as well as occupational health and safety have always been a priority for the Dräger Group. The Company continued to increase the number of environmental certifications for its global subsidiaries in A total of 31 Dräger companies now have certified environmental management systems in compliance with DIN EN ISO (2010: 28 companies). This represents coverage of approximately 64 percent. 22 of the safety division s 42 foreign subsidiaries (52 percent) are certified in accordance with OHSAS (2010: 40 percent). The two US production sites of Dräger Medical Systems Inc. in Andover, Massachusetts, and Telford, Pennsylvania, as well as the sales and service company Dräger Medical Inc., Telford, were included for the first time last year in the medical division. Four of the medical division s key subsidiaries are therefore also certified in accordance with this standard (2010: two). At the same time, Dräger also had the occupational health and safety management systems of its two US production sites certified. The systematic documentation and assessment of energy and resources consumption was expanded further in Dräger companies around the world (2009: 65 companies) participated in the Carbon Disclosure Project reporting system in fiscal year The employees working there represent 96.2 percent of all Dräger employees. The companies involved record their direct and indirect carbon dioxide emissions from the use of electricity, heating, vehicles and air travel and asses corresponding savings potential. For the first time, the logistics data of the subsidiary Dräger Interservices GmbH was also reported. Almost 120,000 tons of direct and indirect carbon dioxide emissions were recorded, of which 50 percent was created in Germany (see illustration Direct and indirect CO2 emissions 2010 ): While the data for direct CO2 emissions remained relatively stable, the first-time inclusion of the logistics data resulted in a rise of around 25 percent in total CO2 emissions. Unlike in the case of indirect CO2 emissions from local energy consumption, there are very few possibilities of reducing the emissions of customerspecific logistics processes as these are largely pre-determined by the volume and regularity of goods transports. ENERGY MANAGEMENT AAt headquarters in Lübeck, the main environmental aspects were electricity, water, natural gas and heating oil consumption as well as waste volumes. In 2011, Dräger managed to further reduce its relative energy consumption in all segments. Primary energy consumption at the Lübeck site in 2011 went down by 12.7 percent year-on-year to 50.3 million kwh (2010: 57.6 million kwh). Environmentally-friendly natural gas consumption amounts to 97.6 percent and heating oil consumption to only 2.4 percent, resulting in direct CO2 emissions of approximately 10,200 tons. This corresponds to a drop of 12.8 percent compared to the

17 MANAGEMENT REPORT FINANCIAL STATEMENTS NOTES tion, use a relatively large amount of energy and some require special climatized rooms to ensure the safety of products and processes. By certifying the energy management in accordance with DIN EN ISO 50001:2011, Dräger aims to further increase the efficiency of its energy consumption in Similar to the previous year, electricity amounted to a mere 35.2 percent of the total volume of externally purchased energy. previous year (2010: 11,700 tons). As over 75 percent of externally purchased primary energy is used for heating, the mild weather in 2011 helped to considerably reduce both gas and oil consumption. Taking into account all different types of weather conditions, the theoretical heating energy consumption decreased slightly by 0.3 percent. The local gas-fuelled cogeneration plant produced a steady 6.2 million kwh/a of environmentally-friendly electricity. The effectiveness of the cogeneration plant, in other words the ratio between fed-in energy and produced heat and electricity, rose slightly from 86 percent to 88 percent. Changed operating times and the resulting fluctuations in annual electricity production are due to the weather, as the generated byproduct heat cannot always be utilized. Electricity consumption at the Lübeck site declined slightly by 3.3 percent to 32.7 million kwh in percent of electricity was produced at the local cogeneration plant, a similar amount to that in the previous year. In relation to the Dräger companies only, which consumed 23.5 million kwh in electricity, the share of selfproduced electricity was as much as 24.6 percent. At around 13 million kwh, the safety division continues to consume the largest amount of electricity of all Dräger companies headquartered in Lübeck. Its important production process, like the soda lime and filter produc- In 2010, water consumption had gone up significantly on account of certain production processes. This figure dropped to 81,000 m3, the lowest level since consumption has been systematically recorded. Filter production in the safety division remains the main user at approximately 20,000 m3 or 25 percent of total consumption. We aim to further reduce water consumption in this area in 2012 by constructing an energy and water-saving filter fleece plant. WASTE MANAGEMENT The waste volume recorded by Dräger Abfallwirtschaftsverbandes w.v., Lübeck, increased slightly by 0.7 percent to 3,980 tons year-on-year (2010: 3,950 tons), but developed below average in relation to production volume. The quantities of individual types of waste shifted slightly in the overall waste mix. Although soda lime production increased on account of a fourth production line being started-up, the volume of waste lime resulting from these processes remained stable. The waste from activated DIRECT AND INDIRECT CO2 EMISSIONS 2010 (COMPANIES RECORDED: 89) Cause Measured CO2 emissions Share in total CO2 emissions (excluding distribution logistics) Electricity Heating Vehicles Air travel Total emissions (excluding distribution logistics) Distribution logistics 29,200 t 16,300 t 31,400 t 15,700 t 92,600 t 30, t 31% 18% 34% 17% 15

18 16 Environmental protection Remuneration report carbon production decreased by around 20 percent contrary to paper and cardboard waste, which increased; a sign of improved waste separation. The waste recycling ratio of Dräger Abfallwirtschaftsverbandes w.v. was 98 percent last year; only around 80 tons had to be disposed. Product returns went up slightly by 5 percent to 222 tons. By disposing of and recycling materials in a legal manner, especially those used in devices and products containing critical chemicals and substances, the Company makes an important contribution to protecting the environment and supports the recycling system. used by the Company in small quantities for the purpose of calibrating anesthesia equipment. A recycling process reduces these emissions by approximately 60 percent. PRODUCT-RELATED ENVIRONMENTAL PROTECTION The Company does not release any hazardous, reportable air emissions pursuant to the European hazardous emission registry EPER. In 2011, product-related environmental protection focused on implementing statutory requirements resulting from the new RoHS II guideline (2011/65/EU) and the REACH EC Regulation. In order to comply with the new RoHS requirements within the specified period, the Company started a project group that will coordinate and implement all necessary measures by Project work will focus on managing internal processes so as to document and if necessary substitute critical substances. The project team also maintains close contact with the Company s suppliers to bring all relevant aspects of RoHS compliance and the particularly critical SVHC substances in line with the new requirements. EMISSIONS OF HAZARDOUS SUBSTANCES AND TOXIC MATERIALS Installation and service work most commonly carried out in the production departments does not release any hazardous emissions into the air. For process security and product safety reasons, cleaning agents, adhesives and coatings that contain solvents continue to be used in certain areas of some production departments at the Lübeck site only. In 2011, the associated emissions again totaled less than 2.7 tons per year and were therefore below the reporting thresholds established by the regulatory authorities. This also applied to the anesthetic gases Powerful extraction systems in the respective production departments ensure that safe work conditions are maintained for the employees working there. This is underscored by the results of exposure measurements which fall far below the legal workplace concentration limits. Regular examinations by a Company doctor and systematic occupational safety training are also provided. Remuneration report EXECUTIVE BOARD REMUNERATION Dräger places great value on providing detailed information on the remuneration of the Executive Board as this forms part of exemplary governance and also creates transparency for our shareholders. This report provides an overview of the amount and structure of Executive Board remuneration at Dräger and outlines the joint remuneration systems for the Executive Board members and top managers in the Group (Top Management Incentive TMI). The main focus is on illustrating how Dräger implements the requirements of the Act on the Appropriateness of Executive Board Remuneration (VorstAG) and the German Corporate Governance Code (GCGC): The remuneration structure is designed to support sustainable business performance; The variable remuneration component is based on a long-term measurement period over several years;