A N N U A L R E P O R T D A N F O S S A / S

A N N U A L R E P O R T D A N F O S S A / S

C O N T E N T S Structure of the Annual Report This year s edition of the Danfoss Annual Report has been amended from previous years, when the report has been in three parts: Annual Report, People and Values, and Environmental Report. For 2003, it is in two parts. The first section covers items such as the management report, a review of the core business area activities in 2003, the statement of accounts, the balance sheet and selected notes. The second section covers Danfoss efforts within Corporate Citizenship. Corporate Citizenship is based on the Group s value system or core values, and describes how Danfoss tries to live up to its duties as a responsible member of the community. As a new feature, all notes to the accounts and supplementary information concerning environmental and social matters are attached in a CD-ROM instead of in the printed annual report to allow more space for detailed information. Auditing of social and environmental issues Danfoss is working towards a framework for auditing and verifying the social and environmental issues, which are included in the report. The aim is for the Group to be able to report on these areas in the same way as is currently done on financial matters. The framework is being prepared at the present time, so the overall social and environmental issues in this report are not covered by the auditors report. However, as in preceding years, an external audit has been carried out on the environmental accounts. The framework is expected to be defined during 2004, after which a decision will be taken on future reporting and verification. To our stakeholders............................... 1 Report and Accounts Management report.............................. 5 Shareholders.................................... 11 Refrigeration & Air Conditioning................. 12 Heating & Water................................. 16 Motion Controls................................. 20 Danfoss Services................................ 24 Sauer-Danfoss Inc................................ 25 Financial and operations risk management....... 26 Management and audit report................... 28 Accounting practices employed................. 30 Profit and loss accounts......................... 31 Balance sheet................................... 32 Statement of cash flows......................... 34 Capital and reserves............................. 35 Segment reporting.............................. 36 Corporate Citizenship Preface.......................................... 37 People and Values............................... 38 Global Compact................................. 42 Danfoss Group Companies...................... 54 Executive Committee and Board..................58 The official Danfoss A/S Annual Report can be obtained from Danfoss A/S or from the Danish Commerce and Companies Agency, CVR no.: 20 1657 15. The Annual Report is also available on the enclosed CD-ROM. Executive Committee (from the left) Ole Steen Andersen, CFO, Jørgen M. Clausen, President & CEO, Hans Kirk, COO

F I N A N C I A L H I G H L I G H T S 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 mill DKK mill EUR PROFIT AND LOSS ACCOUNT Net Sales Operating Profit added Depreciations, Amortisations and Impairments Operating Profit Income from Joint Ventures and Associates Financial Items Profit before Tax Net Profit 14,710 1,432 518 0 115 402 257 14,797 1,596 717 98 73 742 501 14,384 1,439 605 68 193 480 332 14,923 1,571 721 107 78 750 513 15,434 1,994 1,109 58 138 1,029 744 1,978 193 70 0 15 54 35 1,985 214 96 13 10 100 67 1,930 193 81 9 26 64 45 2,008 211 97 14 10 101 69 2,077 268 149 8 19 138 100 BALANCE SHEET Total Assets Net Investments (not including goodwill) Net Investments in Goodwill Shareholders Equity Interest-bearing Debt Net Interest-bearing Debt 11,136 1,295 5 5,890 2,039 1,429 11,727 335 123 6,351 2,039 891 11,945 1,151 30 6,636 2,070 1,122 12,272 720 43 6,842 2,022 329 13,081 879 735 7,267 1,766 377 1,496 174 1 791 274 192 1,571 45 16 851 819 273 1,606 155 4 892 278 151 1,653 97 6 922 272 44 1,757 118 99 976 237 51 CASH FLOW STATEMENT Cash Flows from Operating Activities Cash Flows from Investing Activities Free Cash Flows Cash Flows from Financing Activities Cash and Cash Equivalents (end of year) Number of Employees (end of year) 1,008 1,464 456 234 610 18,860 998 1,088 90 642 1,148 16,905 912 947 35 165 948 16,544 1,462 559 903 158 1,693 16,972 1,254 1,142 112 416 1,389 17,449 136 197 61 31 82 134 146 12 86 154 122 127 5 22 127 197 75 122 21 228 169 154 15 57 187 CONVERSION FACTOR BETWEEN DKK AND EUR Profit and Loss Account and Cash Flow Statement (average exchange rate 100 EUR) Balance Sheet (exchange rate at 31 December 2002, 100 EUR) 743.56 744.31 745.37 746.31 745.24 743.57 743.05 742.43 743.07 744.46 KEY FIGURES RONA EBIT-margin EBITDA-margin Net Investment Ratio Return on Sales Return on Equity Equity Ratio Leverage 7.3% 3.5% 9.7% 8.8% 2.7% 4.5% 52.9% 24.3% 10.3% 4.8% 10.8% 2.3% 5.0% 8.2% 54.2% 14.0% 8.9% 4.2% 10.0% 8.0% 3.3% 5.1% 55.6% 16.9% 10.7% 4.8% 10.5% 4.8% 5.0% 7.6% 55.8% 4.8% 16.7% 7.2% 12.9% 10.5% 6.7% 10.5% 55.5% 5.2% In the case, the Danish Association of Financial Analyst defines the above ratios, the ratios are computed according to these definitions. RONA (Return On Net Assets) Operating Profit as percentage of average Net Assets. Net Assets is Total Assets deducted Investments in joint ventures and associates, Cash and cash equivalents, Provisions and Non-interest bearing debt EBIT-margin Operating Profit as percentage of Net Sales EBITDA-margin Operating Profit added Depreciations, Amortisations and Impairments as percentage of Net Sales Net Investment Ratio Net Investments as percentage of N Net Investments is total acquisition tangible and intangible assets (inclu disposals related to business combi

T H E O R G A N I S A T I O N Ejerandel 38,5% Investment Ratio Net Investments as percentage of Net Sales. Net Investments is total acquisitions and disposals of tangible and intangible assets (including acquisitions and disposals related to business combinations), except goodwill Return on Sales Profit before Tax as percentage of Net Sales Return on Equity Net Profit as percentage of average Shareholders Equity Equity Ratio Shareholders Equity as percentage of Total Liabilities and Shareholders Equity end of year Leverage Net interest-bearing debt as percentage of Shareholders Equity end of year

T O O U R S T A K E H O L D E R S Danfoss aims for a relationship with our stakeholders characterised by trust. We realise of course, that trust cannot be demanded or taken for granted. We must always earn trust by our actions. In order for us to develop trust, it is fundamental that we create value for our stakeholders. There are, of course, different perceptions and experiences of what value is. For our customers, it means safe, reliable products and services that make life easier and bring customers closer to their own goals. For our employees, value is associated with our ability to create a good working environment and the greatest possible job security, while at the same time offering tasks that challenge and develop the individual. For shareholders and financial partners, value is associated with our ability to create growth and profit, generating a return on the capital we are responsible for. For suppliers and other partners, value is associated with our ability to fulfil agreements and ensure joint, future-proof growth. For the community and, in particular, the local societies where we are active, it is a matter of consideration for the environment, infrastructure and continued development. Danfoss recognises and respects that we must create a balance between these different perceptions of value if we are to win the trust of all our stakeholders. We therefore work intensively and with a long-term view to develop a company, which is capable of meeting the justified requirements for growth and earnings, while at the same time living up to our responsibilities to our employees and community in a sustainable manner. We fully believe that a balanced company is the best we can offer to customers, and thereby can optimally service them, who when all is said and done are the basis of Danfoss continued existence and success. Our holistic perception of value is reflected in the Annual Report for 2003, which covers three dimensions of the total value, which Danfoss creates by its work. This includes both the economic and financial results, and the environmental and social consequences of our activities. On behalf of the Danfoss Group, I invite you to read on the following pages how Danfoss engaged in earning our stakeholders trust in 2003. On behalf of the Executive Committee Jørgen M. Clausen President and CEO

R E P O R T & A C C O U N T S

M A N A G E M E N T R E P O R T In 2003, Danfoss net sales rose to DKK 15.4bn from DKK 14.9bn in 2002. Operating profit (EBIT) rose to DKK 1,109m from DKK 721m. Profit before tax was DKK 1,029m. The results are considered particularly satisfactory in the light of the difficult market conditions and the low US dollar exchange rate that characterised 2003. The exchange rate effect in 2003 was 5% of net sales. The positive tendency is underlined by the fact that operating profit before other operating income and expenses rose 19% to DKK 768m in 2003 from DKK 647m in 2002. For 2004, Danfoss expects net sales to reach DKK 15.75-16.25bn and operating profit (EBIT) of about DKK 825-925m. Profit and Loss Account Net sales rose to DKK 15,434m from 14,923m, corresponding to a growth of 3% compared with 2002. Adjusted for acquisitions, divestments and foreign currency translation, this equates to growth of 5%. The Group s net sales are highly affected by exchange rate fluctuations, since the exchange rate effect was 5% (lower net sales in DKK, translating from the currencies Danfoss deals in). Furthermore, the US dollar exchange rate was advantageous for some competitors, resulting in enhanced competition in several markets. The market situation improved marginally during the fourth quarter, with demand rising. Sales in Eastern Europe, Russia, Asia and particularly China, where the markets have reached a significant size for Danfoss, have been positive, with double-digit growth rates, while other markets have had low growth. Towards year-end, signs of incipient improvement could, however, be seen on the European markets. This has contributed to growth for Danfoss over the year as a whole. Operating profit before other operating income and expenses rose 19% to DKK 768m from 647m. Operating profit (EBIT) rose 54% to DKK 1,109m from DKK 721m. 4

A continued effort to improve the efficiency of logistics, sales and administrative functions, and improvements in productivity contributed to improved operating profit. The activities will continue in 2004, when the Danfoss Productivity Program will be implemented. Over the next three years, this program will extend Lean Manufacturing principles to all the Group s production sites. The net contribution from other operating income and operating expenses rose to DKK 341m from DKK 74m in 2002, a rise of 361%. Included in this figure are non-recurrent income from sale of activities, including the sale of the Group s flow meter business to Siemens, and impairments. In addition to the above, the acquisition of DEVI A/S, LPM Group, Redan A/S and Desbordes all contributed to improved results, and created renewed growth in the Group s heating and water business. There are, however, still conditions that prevent Danfoss reaching its full earnings potential. The Gearmotor Division is still recording losses, in spite of significant improvements. The restructuring plan that was set in motion in 2001 is progressing as planned, and is expected to be complete in 2004. After this, the Division is expected to make a positive contribution to the Group s results. Despite the positive trend in the Group s sales of household compressors in 2003, it was still not possible to create a profitable business in the production unit in Monterrey, Mexico. An adjustment of production capacity to market conditions has been implemented, and a reduction of surplus output capacity has been commenced and is expected to be complete in 2004. The share of income from Sauer-Danfoss was DKK 58m, compared with DKK 107m in the corresponding period the year before. The result of the year was affected by significant restructuring costs for the impairments of plant and buildings, as well as warranty liabilities, which in total have reduced the effects of an improved competitive situation for the company. Financial income and expenses reached DKK 138m net, an increase of DKK 60m. The change in financial items can mostly be traced to the negative trend in the Group s main currencies, and adjustments as a result of IAS 39 (hedge accounting). 5

Profit before tax rose to DKK 1,029m from DKK 750m, corresponding to an increase of 37% compared with 2002. The net profit after tax was DKK 744m compared with 513m in 2002, an increase of 45%. The net profit is regarded as particularly satisfactory, taking into account the issues mentioned above and the conditions that affected the Group s main markets in 2003. The Group s target for RONA (Return on Net Assets) in the short term is 14%. In 2003, RONA reached 16.7% compared with 10.7% in 2002. Statement of cash flows Free Cash Flow The free cash flow, which is a combination of cash flows from operations of DKK 1,254m and cash flows from investments of DKK 1,142m, totalled DKK 112m for 2003 compared with 903m in 2002. The fall in free cash flow can primarily be attributed to an increased number of activities regarding the acquisition/sale of companies and other assets as well as an increase of paid taxes, totalling DKK 727m. The development in free cash flow is regarded as satisfactory. Cash flows from operations totalled DKK 1,254m, a decrease of DKK 208m compared with 2002, corresponding to 14%. In spite of significantly improved operating profit, increased tax payments among other things reduced the overall cash flow from operations. Cash flows from investments amounted to DKK 1,142m, corresponding to an increase of DKK 583m. Compared with the year before, this is an increase of 104%. The rise is mainly due to the Group s acquisitions of new companies. The total cash flow as a result of acquisitions and sales of companies amounted to DKK 382m, significantly above last year s level of DKK 39m. Research and development Research and development activities in the Danfoss Group are primarily conducted within the individual business areas. At Group level, approximately half a billion DKK was used for research and development in 2003. This level has remained steady over the last three years. 6

EBIT = RONA = Operating profit as percentage of net sales Operating profit as percentage of average net sales Group organisation The Danfoss Group is organised in three core business areas: Refrigeration & Air Conditioning, Heating & Water and Motion Controls. The three business areas each contain a number of units, which undertake development and production within different product groups, and a regional sales organisation. The business areas are supported by a number of shared functions, including European Interservices and the Danfoss Central Distribution Center. The Group also consists of Corporate Functions and Corporate Ventures. Acquisition of companies and establishments in 2003 To strengthen the Group s activities within floor heating, Danfoss acquired the share capital in DEVI A/S, based in Vejle, Denmark, with effect from 1 January. The company, with its 425 employees, is a global provider of electric floor heating systems and is now an independent part of Heating & Water. On 1 February, Danfoss set up a new sales company in Istanbul, Turkey. The company has four employees. The Water Controls Division bought the French company Desbordes, with 76 employees, on 1 April. Desbordes range of pressure reducing valves and the Water Controls Division s range of backflow preventers and check valves complement each other and broaden the range of products within applications for the water industry. Danfoss acquired 51% of the Estonian software company AS Proekspert in Tallinn, with 20 employees, as of 29 April. AS Proekspert will assist Motion Controls with the development of software. In September, Danfoss decided to integrate production activities within district heating at Danfoss Regler GmbH in Germany with production at Danfoss Trata d.o.o in Slovenia. The decision was made to ensure long-term competitiveness and to support the Group s position in the market. The move will be carried out in several phases and is expected to be completed during the summer of 2004. Also in September, Danfoss decided to establish an international purchasing office in the Group s factory in Wuquing, China to support the divisions purchasing activities in China. Offices will also be set up in 7

Shanghai and Guangzhou. The office initiated activities at the beginning of 2004. On 1 October, Danfoss acquired the Finnish company LPM, a manufacturer of compact stations for district heating systems and heat exchangers, and its 260 employees. The Group also acquired the Danish company Redan A/S, with 100 employees, on 10 October. The company specialises in the production and sale of district heating stations, heat exchangers and components for the district heating industry. The takeover of LPM and Redan will support Danfoss strategic goal of developing its activities in the global district heating market. On 18 November, Danfoss increased its ownership share in the Chinese ANSHAN Controls Company Ltd. to 75%. The company employs 50 people. The ownership share was increased to establish a strong Chinese production to serve the Chinese and other Asian markets. Sale of companies in 2003 Danfoss sold its flow meter business with 450 employees to Siemens on 1 September. The sale was a result of the Group s wish to concentrate on its core business areas. Events after year-end It was with deep sadness that Danfoss was informed of Birger Riisager s death on 2 March 2004. Birger Riisager was a member of the Danfoss A/S Board for 14 years and he was Chairman of the Board from 1994 until his sudden death. Employee conditions At the end of 2003, the Danfoss Group employed 17,449 people, which was an increase of 477 employees compared with 2002, corresponding to a growth of 3%. Due to the acquisition of companies, 873 people joined the Group, while 434 employees left Danfoss as a result of the sale of activities. The joint venture company Sauer-Danfoss, of which Danfoss owns 38.5%, had 7,200 employees at the end of the year. The many changes and efficiency programs that characterised Danfoss also in 2003 are implemented in positive cooperation with employees. 8

Environment For many years, the Group has paid conscious attention to the environment. The work is based on Danfoss environmental policy, updated in 2003. The Group s factories have implemented environmental management systems, which either are or are about to be certified in accordance with the international standard ISO 14001. Companies within the Group must comply with local environmental legislation, and the environment is central to the development of new products. The Group s factories do not face major investments as a result of new environmental requirements, but three EU directives can have financial implications for Danfoss. One deals with environmentally-friendly development of energy-consuming products, the second with re-use of electronics products and the third prohibits a number of substances in electronics. The section on Corporate Citizenship contains a range of further information on the Group s environmental matters. Expectations for 2004 The Danfoss Group expects net sales in 2004 to reach DKK 15.75 to 16.25bn. The operating profit (EBIT) is expected to be DKK 825 to 925m. It is anticipated that the EBIT margin will be between 5.2% and 5.7%. As a large part of sales outside Europe is based in dollars, the current low dollar exchange rate will also contribute to restricted growth in net sales. It is expected that conditions will improve in the middle of 2004, and that growth will especially get under way in the second half of the year. In 2003, Danfoss carried out an analysis of, and alterations to, its practices and reporting systems with the aim of preparing for a stock exchange listing. The Group is therefore ready to take such a step should there be a need for capital, making such a move attractive. This is not expected to be the case in 2004. Perspectives for 2004-2008 During 2003, Danfoss prepared a perspective plan for the period 2004-2008. The perspective plan sketches out the activities and focus areas which, over that period, will bring the Group closer to its overall strategic 9

aim of being the global number one or two within all its strategic core business areas. Profitability and growth At the end of the perspective period, Danfoss will have net sales of DKK 24bn. This corresponds to an average annual growth of approximately 9%. The growth targets include both organic growth and growth through acquisitions to an extent that matches the last five years average (2-3% p.a.). Profitability of the Group must similarly be reinforced, and the aim is to achieve a RONA (Return on Net Assets) in the short term of at least 14%, and the target at the end of the perspective period is for a RONA of no less than 20%. A significant element of the efforts to achieve these targets is the implementation of the Danfoss Productivity Program. The need for productivity improvements differs from factory to factory, but the focus is to ensure better use of factories, a more efficient flow of goods, and elimination of bottlenecks in production. Overall, better use of capacity is expected to be able to improve earnings and reduce investments. Optimisation of the business portfolio Acquisition is an important element of Danfoss efforts to become global leaders within all its strategic core business areas. Acquisitions will therefore be made throughout the perspective period to strengthen global business development. The company portfolio will be continuously reviewed during the perspective period to establish whether Danfoss is still the best owner, or whether individual activities could develop better with new owners and divestment could be an option. 10

S H A R E H O L D E R S Danfoss has about 6,000 employee shareholders, of whom approx. 25% work for the company outside Denmark. Employee shareholders and senior management own about 1% of the share capital and about 0.20% of the voting rights. All employee shares are B shares, and each B share is entitled to one vote per DKK 100. The Bitten and Mads Clausen Foundation and the Clausen family own all the A shares and together have 99.8% of the voting rights. A shares are entitled to ten votes per DKK 100, and A shareholders have pre-emptive rights to A shares in the event of any increases in share capital. No other shares have special rights. Shareholders with more than 5% of the share capital: The Bitten and Mads Clausen Foundation, Nordborg, Denmark Clausen Controls A/S, Sønderborg, Denmark Henrik Mads Clausen, Lake Forrest, USA Bente Skibsted, Lutry, Switzerland Limitations exist as to the liquidity of the shares. The Bitten and Mads Clausen Foundation has the option on shares to be sold to individuals who are not descendents of Bitten and Mads Clausen. Should the Foundation not exercise this pre-emption right, transfers can only take place with the consent of the Board. New employee shares At the annual shareholders meeting, the Board will set out proposals for a new employee share offering in 2005 at a favourable rate. The new employee share scheme will be established in connection with the 100th anniversary of the birth of the founder, Mads Clausen. Share scheme for the Board and senior managers A similar proposal for the Board, the Executive Committee and senior management will be put forward at the annual shareholders meeting. They will be offered a new share scheme over a three-year period from 2004-2006. The proposal takes the form of warrants for the Executive Committee and senior management and options for the Board. The total maximum number of warrants and options that can be allocated is 225,000, of which one third will be offered in the first year. Dividends and annual shareholders meeting The Board proposes that the dividend for accounting year 2003 be fixed at 12.5%, corresponding to approx. DKK 127m. The dividend percentage is increased compared to 2002, when it was 10%. The dividend will be paid in Danish kroner and 28% Danish dividend tax will be deducted. The annual shareholders meeting is held in Nordborg, Denmark on 16 April, 2004. 11

R E F R I G E R A T I O N & A I R C O N D I T I O N I N G The net sales for the Refrigeration & Air Conditioning Segment fell from DKK 8,361m to 8,133m in 2003, a decrease of 3%. Operating profit (EBIT) fell from DKK 586m to DKK 393m. The result for the year is regarded as acceptable, given the difficult conditions in 2003, including the non-recurrent expenses in connection with restructuring and the negative trend in exchange rates. Sales in the markets of Asia-Pacific and North America showed double-digit growth rates in local currency, while sales in European markets showed low growth. Net sales decreased from DKK 8,361m to 8,133m, a reduction of 3%. The steep drop in exchange rates of USD and other main currencies in 2003 had a major effect on net sales, as a significant part of the segment s customers are outside Western Europe. The real growth in the segment s sales was almost 4% in 2003, when this is taken into account. In addition, several of the segment s markets showed low activity during the first half of the year, leading to low growth in local currency of 2%. Conditions improved significantly, however, in the second half of the year, resulting in growth in local currency of 5%. Operating profit fell from DKK 586m to 393m, a decrease of 33%. A significant part of the segment s production activities are still located in Europe, meaning that the result was negatively affected by the falling exchange rate. In addition, impairments of fixed assets negatively affected the results. The return on net assets (RONA) dropped from 16.3% to 11.7% in 2003. A reduction in net assets in 2003 smoothed a part of the downturn of the result, however, RONA showed a 4.6 percentage point fall. Cash flows from operations of DKK 932m were reduced by 11% compared with 2002 due to the lower operating profit. Cash flows from investments were DKK 448m compared with DKK 408m in 2002, an increase of 10%. The rise is due to a number of major projects, not least the establishment of a new factory in China. 12

FINANCIAL HIGHLIGHTS FOR REFRIGERATION & AIR CONDITIONING mill DKK 2002 2003 Net sales Operating profit (EBIT) Intangible assets Fixed assets Total assets Non-interest bearing debt Net assets Net investments (excl. goodwill) Net investments in goodwill Depreciations, amortisations and impairments Cash flows from operating activities (excl. paid tax and financial items) Cash flows from investing activities Employees EBIT margin RONA 8,361 586 177 1,461 4,775 1,323 3,453 352 17 422 1,050 408 8,989 7,0% 16.3% 8,133 393 148 1,348 4,794 1,488 3,307 411 10 480 932 448 9,021 4.8% 11.7% The Refrigeration & Air Conditioning Segment operates globally as a leading supplier of compressor and automated solutions to the refrigeration and air conditioning industry. The product range is one of the most extensive in the world and is used in a number of well-defined business areas, ranging from domestic, commercial, retail and industrial refrigeration, to air conditioning and products for the wholesale refrigeration market, to automation in specific industrial sectors. The segment s product solutions are developed and produced globally by approx. 7,300 employees at 27 factories in 16 different countries. A regionalised global sales organisation with approx. 1,700 employees ensures effective marketing, sales, distribution, technical assistance and consultancy for an extensive global customer base. The key principle of all the segment s activities is proximity to and collaboration with the customers. Sales development for Refrigeration & Air Conditioning Sales to customers in Western Europe fell by 3% overall in 2003. This was especially due to negative growth rates in Germany, France, England and several Scandinavian markets. The markets in Italy, Belgium and Denmark, on the other hand, showed positive growth rates. On the Eastern European markets, business developed positively in 2003, with a total growth of 8%. Russia, Slovenia and Poland are now among the strongest markets for Danfoss Refrigeration & Air Conditioning after a number of years of high growth rates. Trends in the American markets showed both very positive and very negative tendencies. General sales in the USA developed positively, with growth of more than 10%, while sales of compressors in both the USA and Mexico were negatively affected by the decision to adjust production activities in Mexico. General sales in the Latin American markets were negatively affected by economic trends in the area, especially in the first half of the year. Finally, changes in the USD exchange rate had a strong negative impact on sales. Overall, net sales in the Latin and North American markets measured in DKK fell by 21% in 2003. The Asia-Pacific markets experienced very positive trends in 2003, with a growth of above 20% measured in local currency. Converted to DKK, however, due to the falling exchange rate, this only became a growth of 7%. Growth in Asia was powered by the Chinese market to a high degree which, measured in DKK, grew by 22%. The Chinese market has over recent years grown very strongly. The general economic growth in the country and the internationally very competitive Chinese industry created a rising demand for components for the refrigeration and air conditioning industries. Danfoss established production in China in the middle of the 1990s, and this is now one of the most profitable and fast-growing production locations in the segment. A new factory has been set up in Wuquing to meet the need for more production. The factory will among other things produce Scroll compressors for air conditioning. An additional seven product areas will start production during 2004 and 2005, resulting in a 13

wide selection of the segment s product range being produced in China. Two product areas grew particularly quickly in 2003. Scroll compressors sales, mainly for air conditioning, grew by more than 13%, led by especially high activity in Asia, while sales of industrial controls grew by 10%, mainly on the European markets. Products and R&D Danfoss developed an efficient and economical cooling system using carbon dioxide (CO₂ ) as a refrigerant instead of HFC and HC gases. CO₂ is a natural and cheaply available gas, which is incombustible and has largely no undesirable consequences for the environment compared with traditional refrigerants. Danfoss has, on an experimental basis, developed a compressor with associated control and regulating components that is capable of functioning with CO₂ as a refrigerant. Provisional tests show that Danfoss can achieve lower energy consumption with this compared with the use of R134a (an HFC refrigerant). The results indicate that Danfoss will be able to provide reliable and efficient compressors and components for use in large commercial cooling systems such as bottle coolers, drinks dispensers and heat pumps. Even though there is great interest from politicians and environmentalists in technologies that can replace the use of greenhouse gases in cooling systems, Danfoss warns against seeing this breakthrough as the solution to all problems. CO₂ only works as a refrigerant under very high pressure, and Danfoss has found solutions to this for some applications, but CO₂ cannot be used in all cases. Danfoss will start pilot production of the new compressors and components in 2004. Production will be limited at first, but will give Danfoss the opportunity to establish collaboration with customers who wish to test the new technology. With this new compressor, Danfoss won the American HVAC and Refrigeration Expo Innovation Award for the year s most innovative new product in the USA. Perspective plan 2004-2008 A new strategy was established for Refrigeration & Air Conditioning in 2003, based on dividing the customers into eight business areas. Each business area consists 14

of a group of customers dealing with a particular part of the refrigeration and air conditioning market, for example domestic cooling systems. As part of a result of thorough analysis, many customers were interviewed about their needs, and what trends they expect in the market. The analysis provided the segment with knowledge of a number of interesting possibilities for renewed growth and earnings. Trends in the markets in China, Russia, East Europe and India offer good possibilities for expansion, and the segment has already set up production in several of the markets. In addition, by using the customers overall needs as a starting point, a number of new possibilities have been discovered for supplementary products already produced and sold today. The customers today demand not only components, but increasingly more complete solutions. This tendency is already widespread, for example in the automotive industry. REFRIGERATION AND AIR CONDITIONING CONTROLS COMMERCIAL COMPRESSORS Continuing development of the organisation After 39 years work for Danfoss, the President of the Refrigeration & Air Conditioning Segment, Finn Fastrup, decided to retire. Vagn Helberg, who was until recently President of one of the segment s divisions, replaces him. On 1 January 2004, the structure of the segment was changed, and a number of new younger managers were appointed. HOUSEHOLD COMPRESSORS APPLIANCE CONTROLS INDUSTRIAL CONTROLS

H E A T I N G & W A T E R The net sales of Heating & Water rose to DKK 3,672m in 2003 from DKK 2,831m in 2002, a growth of 30%. The operating profit increased to DKK 472m from DKK 360m. The increase in net sales was due to both positive market growth in Eastern Europe and China and the acquisition of DEVI A/S, Redan A/S and the LPM Group and an increased ownership share in ANSHAN Controls Company Ltd. The four acquisitions form an important part of Heating s growth plans and support its overall strategy. Following the purchase of DEVI A/S, a new business area, Floor Heating, was established. Large growth in the Asian and Eastern European markets and the purchase of Desbordes in 2003 resulted in double-digit growth for Water. Net sales grew from DKK 2,831m to 3,672m, a growth of 30%. The segment met its expectations of turning the previous years stagnation into growth. The individual regions and business areas have, however, developed in very different ways. The markets in Eastern Europe and China showed particularly satisfactory growth, while the Western European markets are still growing slowly. The businesses acquired during the year also made a positive contribution to the growth in net sales. The operating profit increased from DKK 360m to DKK 472m, corresponding to a growth of 31%. The segment has continued the optimisation and adjustment of production initiated in 2002 which, together with the efficiency projects also initiated, have contributed to improved earnings. RONA (Return on Net Assets) rose from 29.3% in 2002 to 30.8% in 2003. Cash flows from operations of DKK 656m, showed an increase of 29%, especially due to the acquisition of new companies. Cash flows from investments were DKK 871m compared with DKK 174m in 2002, corresponding to a rise of 401%. The increase is mainly due to investments in new companies. The positive development in the markets in Eastern Europe and China and improved conditions in many other markets mean that the overall results for the segment are considered satisfactory. In 2004, the segment will continue the process of focusing more closely on the customers and the entire sales 16

FINANCIAL HIGHLIGHTS FOR HEATING & WATER mill DKK 2002 2003 Net sales Operating profit (EBIT) Intangible assets Fixed assets Total assets Non-interest bearing debt Net assets Net investments (excl. goodwill) Net investments in goodwill Depreciations, amortisations and impairments Cash flows from operating activities (excl. paid tax and financial items) Cash flows from investing activities Employees EBIT margin RONA 2,831 360 35 644 1,583 384 1,199 177 1 124 510 174 2,915 12.7% 29.3% 3,672 472 732 706 2,710 804 1,906 237 722 174 656 871 3,864 12.8% 30.8% The Heating & Water Segment is divided into two units, which pursue their own strategies and plans: Heating operates within the heating sector and includes four business areas; District Heating Controls, Residential & Commercial Comfort Controls, Burner Components and Floor Heating, with a common global sales organisation. Water includes the Water Controls Division. Heating produces and supplies components and automatic solutions for the entire heating supply chain from the production and distribution of heating, to the use of climate and comfort solutions in buildings and houses. Heating comprises the following areas: Self-acting and electronic components including controls for district and central heating; electrical actuators and valves for heating and ventilation; components for oil burners; compact stations for district heating systems; and heat exchangers and electric floor heating systems Water produces and supplies components for the water industry in the form of valves and related products. process. The positive development of the majority of the markets is expected to continue, and all business areas within Heating & Water expect continued positive growth in 2004. Market development in Heating The markets in Eastern Europe and China grew unusually well in 2003, and the business areas District Heating Controls, Burner Components and Residential & Commercial Comfort Controls experienced notable growth in these markets. For District Heating Controls, growth rates were above 30% in Eastern Europe and China. This business sector also experienced a growth of approx. 6% compared with 2002 in the global market for district heating controls. Residential & Commercial Comfort Controls continued the previous years offensive strategies with good results. On the Western European markets, growth in net sales was satisfactory, and growth in the UK market for thermostatic radiator valves was positive. Burner Components rising net sales in 2003 reflected both an improvement in the oil-fired boiler market segment and an improved market position. While the rest of Europe experienced weak growth, the traditional main market in Germany was stable. In early 2003, Danfoss acquired the Danish company DEVI A/S. The company s main product is electric floor heating systems, which are produced in factories in Denmark and France. With the takeover of DEVI A/S, Heating established an additional business area, Floor Heating. During the first half of 2002, growth in the newly established business area was restricted due to stagnating demand in France and Germany. During the year, a range of new activities within marketing were initiated, leading to an improvement in the second half of the year. Overall, a growth of 6% was achieved in 2003 compared with 2002. In addition to DEVI A/S, Heating acquired the LPM Group and Redan A/S in 2003, and increased its ownership share in ANSHAN Controls Company Ltd. in China to 75%. The four new businesses form an important element of Heating s growth initiatives and will open up new possibilities for Heating s overall strategy. 17

Products and R&D A number of new products and measures, including establishing regional skill centers in Russia and China, have been implemented to retain the leading position in the global market for district heating controls. District Heating Controls decided to enter the global market for district heating stations during 2003. With the takeover of LPM and Redan, Danfoss has ensured a leading position in the market for district heating stations, and this position is expected to be strengthened over the coming years. Residential & Commercial Comfort Controls introduced new products, amounting to a major renewal of the product range for thermostatic radiator valves and balancing valves. Among the new products are an innovative range of valves for the UK market, a new version of Danfoss RA 2000 thermostatic radiator valves and a new range of thermostats and valves for the growing market for designer radiators for bathrooms. A new range of services was also launched in 2003. The product makes it possible to upgrade an existing heating system where an older Danfoss thermostatic radiator valve is installed. The potential for this application is more than 100 million radiators. The advantage for the customer is higher energy savings and greater comfort, and in a number of countries this will result in heating systems in accordance with the latest energy saving regulations. The new products are expected to further strengthen the market position of the business area. The business sector for electrical floor heating is expected to grow by over 10% in 2004. Expectations are supported by new product launches and specific plans to expand into new markets. DEVI A/S launched two new thermostats, Devireg 130 and Devireg 850, in 2003. The latter is aimed at the market for outdoor applications, which has great growth potential. In 2003, Burner Components introduced oil pumps for large boilers for domestic heating, and will continue to focus on increasing its presence in the industrial market. This business area s customers are looking for continual reduction of costs and fewer suppliers. The customers also want increased product integration to save installation time. This means that the market for pre-heaters and nozzle holders with ready-mounted nozzles has experienced large growth. 18

WATER CONTROLS Water Market development was positive through the year. The purchase of Desbordes along with growth rates of above 50% in Asia and 30% in Eastern Europe contributed to Water s double-digit growth. Even though the market conditions in Europe were generally unfavourable, the division managed to beat the trend. In product terms, butterfly valves and backflow preventers were the main growth products. The launch of a new series of butterfly valves for the water industry helped strengthen the division s market position. The introduction of the new high-performance butterfly valves at the beginning of 2004 is expected to support the positive market developments. Production was increased in 2003 to meet the heavy demand for butterfly valves. During the year, Water increased its focus on optimising the processes within, for example, logistics, customer services, sales and production which has contributed to improved earnings. In April, Danfoss bought the French company Desbordes, which produces pressure-reducing valves. RESIDENTIAL & COMMERCIAL COMFORT CONTROLS DISTRICT HEATING CONTROLS Perspective plan 2004-2008 During the perspective plan period, Heating will continue its strategy and focus on selected components and solutions within heating and drinking water applications for domestic and industrial buildings. The segment will strengthen its position as market leader by market development, product development and consolidation of the industries. Heating will continue working to reduce costs and improve usage of production in order to increase profitability. In the perspective plan period, Water will focus on market opportunities in Eastern Europe and Asia, including increasing production of valves in China. Further acquisitions to support the business are similarly part of the plan. BURNER COMPONENTS FLOOR HEATING

M O T I O N C O N T R O L S In 2003 Motion Controls had net sales of DKK 3,372m compared with DKK 3,549m in 2002, a decrease of 5%. Operating profit rose from DKK 85m to DKK 193m. Movements in the US dollar exchange rate negatively affected net sales, while efficiency programs are running according to plan and beginning to make a positive contribution to earnings. The results for the Drives and Marine Systems divisions are satisfactory, and restructuring of the Gearmotor Division is proceeding as planned. Sales growth was concentrated in Asia, where several markets achieved double-digit growth rates. Growth in Europe, North and South America is still moderate. Growth rates are expected to continue at the same level in 2004. Net sales fell from DKK 3,549m to 3,372m, a decrease of 5%, primarily due to the divestment of the flow meter business. In addition, demand for the segment s products on the traditional large markets in Europe and USA was marked by stagnation within the industrial sector. This was, however, the general situation in the market, and the estimate is that the segment managed to gain market share in spite of difficult conditions. The segment increased its market share by doubledigit growth rates in South East Asia, especially South Korea, Taiwan and India had very high growth rates. As a result of sales to large new OEM customers (Original Equipment Manufacturers) net sales in China doubled. Operating profit rose from DKK 85m to 193m, corresponding to an increase of 127%. The restructuring of the Gearmotor Division and the efficiency measures taken have contributed to the positive development. The income from the sale of the flow meter business to Siemens is not included in the segment s figures as it is included at Group level. RONA (Return on Net Assets) continued its positive development, and RONA improved from 6.4% to 17.3% in 2003. Cash flows from operations rose by 16% to DKK 441m, due in particular to the improved results of the Gearmotor Division. Cash flows from investments were DKK 95m compared with DKK 128m in 2002, corresponding to a fall of 25%. The fall was mainly due to lower acquisition activities compared with 2002. 20

FINANCIAL HIGHLIGHTS FOR MOTION CONTROLS mill DKK 2002 2003 Net sales Operating profit (EBIT) Intangible assets Fixed assets Total assets Non-interest bearing debt Net assets Net investments (excl. goodwill) Net investments in goodwill Depreciations, amortisations and impairments Cash flows from operating activities (excl. paid tax and financial items) Cash flows from investing activities Employees EBIT margin RONA 3,549 85 73 930 2,051 825 1,226 177 29 149 380 128 3,419 2.4% 6.4% 3,372 193 77 883 1,855 814 1,041 131 3 143 441 95 3,071 5.7% 17.1% The Motion Controls segment includes the Drives, Gearmotor and Marine Systems divisions. The Drives Division produces and markets frequency converters for the speed control of motors, and is a global business selling via Danfoss sales companies. The division has production facilities in Denmark, USA and China. The major sales region is Europe, where the division is the market leader. The Drives Division is a global leader within the food, beverage, HVAC and water industries, and is active in the automobile, chemical, petrochemical, textile, steel and mining industries in selected markets. The Gearmotor Division supplies gear motors for industrial applications and occupies a strong position within the automobile, materials handling and steel industries. The division s sales are concentrated in Europe, with Germany as the biggest market. Production is located in Germany and Slovakia, where the division moved a part of its component production in 2002. In addition, there are assembly operations in several countries in Europe and in the USA. The Gearmotor and Drives divisions jointly supply solutions to the automobile, beverage and materials handling industries. Marine Systems supplies systems for remote control of valves and tank management systems for use in ships. The business is global, with its main markets in Europe, Japan, Korea and China. The division has its own sales channels to shipyards and shipowners via sales offices and agents located in the large shipbuilding markets. There are production facilities in Denmark and Korea. The segment expects increased earnings in 2004 as a result of the restructuring of the Gearmotor Division and improved market prospects. Market developments for Drives and Gearmotor Drives The Drives Division s sales on the markets in Europe, Eastern Europe, the Middle East and Africa did not live up to expectations, but are still considered satisfactory given the conditions. On the Western European market, the expected improvement did not take place, and sales were slightly below the level of 2002. Sales to HVAC (Heating, Ventilation, Air Conditioning) and the industrial sectors in North America remained at the level of the previous year, while sales to the water sector grew moderately. In spite of lack of growth in sales, the Drives Division retained its market position, but the development unfortunately led to the need to adjust the organisation at the end of the year. The continuing difficult economic conditions in Latin America meant that sales remained at the same level as 2002. The leading position in HVAC and the brewery sector was retained. With a growth of 50% in local currency, the Drives Division increased its market share notably in the Asia-Pacific region. In South Korea, Taiwan and India, there were very high growth rates, and in China net sales doubled, partly as a result of new OEM customers. Danfoss is now the market leader within several market segments in the region. Distributed over customer groups, it was the industrial sector for food and beverage in particular which experienced growth in sales in 2003. As a result of increased focus on the automotive industry, the Drives Division set up a new business unit Danfoss Automotive Solutions to supply complete solutions to the automotive sector. Sale of services is intended long-term to provide 15% of total net sales, and the service concept Drive Pro initially aimed at the HVAC sector, has also now been extended to the industrial and water sectors. For 2004, Drives Division is expected to strengthen its position on the European market for frequency converters, although the market is only expected to grow moderately. The most significant activity in 2004 21

will be the introduction of the new VLT Automation Drive. On the North American market, there has been a positive trend in both tenders and sales towards the end of 2003, increasing the expectations for new growth during 2004. In Asia-Pacific, an aggressive growth strategy has been formulated on the basis of expectations of strong market growth in several countries in the region in 2004. Gearmotor The Gearmotor Division consolidated its position with an unchanged market share in a weak European market. Increased focus on the automotive industry increased sales to this sector, and at the same time there was a growth in sales to OEMs in the printing sector. Trends in the North American gear motor market followed the industrial segment, and sales showed a corresponding downturn. Activities in the Asia-Pacific region are focused on China, where growth continued in 2003. The greatest future potential is considered to be in the rapidly growing automotive industry. Generally, low growth is expected in the gear motor market in the first half of 2004, after which a weak recovery is expected in the second half. Products and R&D The main product development effort in 2003 concentrated on completion of the new VLT Automation Drive product range. The product range contains new functionality, making it possible to reach new market segments, and at the same time making the use of the equipment easier for current customers. Replacement of the existing product range commences at the beginning of 2004. Increased focus on the OEM market involved significant development activities for specific customers. The factories in Denmark and USA were ISO certified in accordance with BVQI ISO9001:2000 during 2003. Marine Systems The division experienced a small rise in net sales during 2003, and the results are on a level with 2002. The division s sales and results during the year were negatively affected by the development of the 22

US dollar and related currencies, as up to 50% of the division s sales are in USD or KRW. Marine Systems supplies to the global shipbuilding industry showed higher activity than ever in 2003, and the division s position as one of the leading suppliers was further strengthened. The takeover of the previously 50% owned joint venture in South Korea in particular resulted in winning a greater market share in this important market. Continued growth in sales is expected in 2004, in part as a result of very high contracting activity for ships worldwide that occurred during 2003. DRIVES Perspective plan 2004-2008 The Drives Division will continue efforts on the new VLT Automation Drive concept during the perspective plan period, expand and secure its market share in North America and China, and focus on increased sales of solutions to selected customer groups. After its turnaround, the Gearmotor Division will prepare a new growth and globalisation strategy. Marine Systems will focus on implementing lean manufacturing and extend its position in South East Asia. GEARMOTOR MARINE SYSTEMS 23

D A N F O S S S E R V I C E S 24 Distribution Service Danfoss Distribution Service in Rødekro, Denmark is the home of the Group s North European distribution center and will, once the center is fully implemented, deliver to all customers in Germany, the Netherlands and Belgium, Sweden, Norway, Finland and Denmark, and most customers in the rest of Europe. The purpose of the center is to improve delivery service to customers, to reduce stores of finished goods and to reduce annual operating costs. Customers in Belgium and the Netherlands went over to direct supply from the center in the first half of 2003, while deliveries from the center to German customers started in the second half of the year. The local warehouses in the Netherlands and Germany were closed as the changes took place. During 2004, the center is expected to deliver to customers in Denmark, Sweden, Finland and Norway. At the same time, local warehouses will be phased out. Central Service Central Service delivers a number of services, which support the rest of the organisation within areas such as purchasing, training, cleaning, and personnel, among others. Central Service commenced refurbishment of the main headquarters building in Nordborg, Denmark, in 2003. The refurbishment is expected to be complete in 2004. Distribution Service and Central Service are separate profit centers included in the accounting segment Danfoss Services, while European Interservices and APAC Interservices are integrated in the three main business areas. European Interservices European Interservices is responsible for administration and service functions for the Group sales companies in Europe, and is split into five regions. European Interservices started to install a joint IT structure for the European sales companies in 2003, based on a common SAP platform. Companies in Belgium, the Netherlands, Italy and Germany were connected in 2003, and the other countries will follow in 2004. Introduction of the common SAP platform combined with Danfoss Distribution Service is expected to lead to improved logistics and the ability to reduce costs. APAC Interservices APAC Interservices was set up in spring 2003. The area will deliver the same functions in the Asia-Pacific region as European Interservices does in Europe.

Sauer-Danfoss was established in 2000 after a merger of the mobile hydraulics activities in Danfoss A/S and Sauer-Sundstrand Inc. Sauer-Danfoss Inc. is a global and leading manufacturer and supplier of hydraulic components and electronics to manufacturers of mobile machines, within agriculture and the construction industry, for example. Sauer-Danfoss is listed on the New York Stock Exchange as well as the stock exchange in Frankfurt. Danfoss owns 38.5% of Sauer-Danfoss and the market value of Danfoss share at the end of 2003 was approx. DKK 1.76bn (2002: 1.02bn). Sauer-Danfoss employed about 7,200 employees at the end of 2003. The three members of the Danfoss A/S Executive Committee represent Danfoss on the Sauer-Danfoss Inc. Board of Directors. Sauer-Danfoss Inc. is considered a joint venture as two shareholders hold the majority of shares through the company Danfoss-Murmann Holding A/S, the Murmann family and Danfoss A/S. S A U E R - D A N F O S S I N C. In 2003 Sauer-Danfoss net sales rose from USD 952m to USD 1,127m, an increase of 18.3%. The operating profit before financial items (EBIT) was USD 46.9m, compared with USD 52.2m in 2002, while the profit after tax was USD 11.2m compared with USD 13.7m in 2002. Net profit for the year is not regarded as satisfactory, even when allowing that Sauer-Danfoss was affected by large impairments of production facilities and buildings as well as restructuring costs and guarantee obligations in 2003, which have reduced the effects of the company s improved competitive situation. Cash flows from operations in 2003 were USD 95.6m, thus maintaining the relatively high level of USD 98.2m in 2002. Cash flows from investments fell from USD 66.3m in 2002 to USD 64.9m in 2003. Earnings per share (EPS) in 2003 were USD 0.24 compared with USD 0.29 in 2002. Adjusted for acquisitions and exchange rate fluctuations, net sales rose by 6% in 2003. This increase indicates that the Group still managed to increase its market share in a poorly performing market. Growth in net sales in 2003 was achieved within all business segments, with control hydraulics and electronics showing the greatest growth. The total order book at the end of 2003 was USD 408.6 m, an increase of 7% compared with 2002. The fourth quarter of 2003 saw an increase of 11% in orders compared with the previous year, reflecting positive market trends at the beginning of 2004. The fall of USD 5.3m in the operating profit to 46.9m in 2003 was affected by non-recurrent expenses including those for closing the factory in West Branch, Iowa, USA, currency effects of the weaker USD, and costs associated with customer guarantee claims. Expectations for 2004 Sauer-Danfoss expects a growth in net sales of 5-7% in 2004. The Group still expects weak economic growth in Europe, but sees initial signs of strong economic growth in North and South America. Market growth in the Asia-Pacific region is expected to remain at a high level. The restructuring carried out in 2003 is expected to lead to savings in 2004 of approx. USD 4.0m, or USD 0.05 per share. Earnings per share in 2004 are expected to be between USD 0.55 and 0.70. 25

F I N A N C I A L R I S K M A N A G E M E N T A N D I N S U R A N C E Due to the Danfoss Group s global activities, the exchange rate and interest development of a number of currencies affect the Group s profit, cash flow and equity. In addition, our global presence requires that the risks related to the activities are hedged. The Group s central financial department (Corporate Finance & Treasury), in cooperation with the Group s business units handle overall monitoring and control. The control of operational risks is handled by the Finance Department s Risk Management Function, which evaluates and optimises insurance cover and participates in the Group s ongoing efforts to remove or minimise risks. Policies have been prepared in cooperation with the Board and the Executive Committee. Financial risks Currency exposure Today, the Danfoss Group operates, as a consequence of its global activities, with approximately 40 currencies. That means that an increase or a decline of the exchange rates of these 40 currencies against DKK can affect the Group either negatively or positively as regards net sales, profit and equity. In order to ensure stable financial Group profits, it is necessary to limit fluctuations in the result caused by changes in the rates of exchange. Danfoss accounts for the currency exposure of each company allocated on commercial cash flows in foreign currency and financial positions in foreign currency. They are consolidated on Group level and, together with expectations of the development of the currencies, used to limit and control Group exposure to the desired extent. The most significant cash flow positions of individual companies in foreign currencies within the Danfoss Group are, in descending order, EUR, USD, GBP, SEK and CHF. Apart from the cover that exists in form of selecting in which currency to borrow and buy, Group currency risk is covered through forward contracts and options. Interest rate risk The interest rate risk of the Group is primarily ascribable to the interest bearing debt and the cash funds. The Group makes use of both fixed-rate loans and loans with floating interest rate. The choice between floating and fixed-rate interest is based on an evaluation of the expected future interest development. 26

Cash flow risk The finance department continuously calculates the Group s cash flow and financing requirements in the light of accounts, forecasts, and strategy plans, among other things. The Group aims to control the cash flow and financing of the individual companies to reduce the corporate net finance expenses as much as possible. In that connection cash pools are presently in place in DKK, GBP, SEK, NOK respectively, and for some of the Group s companies, also in EUR and USD. In order to be able to ensure satisfactory cash flows at any time in proportion to Group activities, the Group has established long-term binding credit undertakings from banks. Credit risk The Group s credit risks primarily apply to trade receivables and bank deposits. Trade receivables are allocated on a number of customers and geographical areas. A systematic credit rating is carried out on all customers. Any depreciation carried out to meet a loss on trade receivables from customers is made on basis of the mentioned credit rating. This rating also serves as the basis for the terms of payment offered to the customers. The credit risk is insured when considered necessary. Historically, the Group has only to a limited extent had bad debts. Group deposits and agreements to cover currency exposure are placed with banks of high credit rating. The banks mentioned are primarily the Group s main banking connections. Operational risk It is the Group s policy to primarily use insurance as a hedge towards large financial losses. In addition to all compulsory insurances, areas are also insured where control and administrative benefits are gained. As regards the major insurance risks, worldwide master programs have been established. Participation is obligatory for all subsidiaries. The master programs include, for example, All Risks Insurance (machines, equipment, stocks, loss on operations, transport) and Commercial and Product Liability Insurance (personal injury and property damage). For these risks Danfoss has a uniform insurance cover, regardless of where the damage occurs. Apart from insurance covered by the master programs the subsidiaries establish locally appropriate insurance cover. This is recorded so that the Group s overall insurance structure is optimised on an ongoing basis. In order to maintain the optimisation the Risk Management function is informed of all considerable risk changes and also participates in the acquisition of new companies. Other hedging Danfoss also uses hedging in connection with the Group s purchasing and sale of metals and electricity. 27

M A N A G E M E N T S T A T E M E N T & A U D I T R E P O R T Management statement The Board and Executive Committee have today considered and adopted the Danfoss A/S Annual Report including Group and annual accounts and accompanying reports. The annual report has been presented in accordance with the IAS/IFRS (International Accounting Standards) and the Danish Financial Statements Act. In our opinion, the accounting policies selected are appropriate and the annual report gives a true and fair view of the Group s and the Parent Company s assets, liabilities, financial position and the result. We recommend that the annual shareholders meeting adopt the annual report and ancillary proposals for the employment of the profit. Nordborg, 12 March 2004 Executive Committee Jørgen M. Clausen Ole Steen Andersen Hans Kirk Board of Directors Henrik E. Nyegaard Jørgen M. Clausen Peter J. M. Clausen Niels Christian Jørgensen Tom Kähler Chairman, interim Arno Knöpfli Bente Skibsted Henning Wendelboe Auditors Report *) To the Shareholders of Danfoss A/S We have audited the annual report of Danfoss A/S for the financial year 1 January-31 December 2003, pp. 1-36. The audit did not include the supplementary report on Corporate Citizenship on pp. 37-53. The company management has the responsibility of the annual report. Our responsibility is to express an opinion on the annual report based on our audit, pp. 1-36. Basis of Opinion We conducted our audit in accordance with international auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual report is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the annual report. An audit also includes assessing the accounting policies used and significant estimates made by the Board of Directors and Executive Committee, as well as evaluating the overall annual report presentation. We believe that our audit provides a reasonable basis for our opinion. Our audit has not resulted in any qualification. Opinion In our opinion, the annual report gives a true and fair view of the Group s and the Parent Company s assets, liabilities and financial position at 31 December 2003 and of the results of the Group s and the Parent Company s operations and consolidated cash flows for the financial year 1 January-31 December 2003 in accordance with the Danish Financial Statements Act and International Reporting Standards (IFRS). Sønderborg, 12 March 2004 KPMG C.Jespersen Statsautoriseret Revisionsinteressentskab Finn L. Meyer State Authorised Public Accountant Helge Kallesøe State Authorised Public Accountant 28 *) The official Annual Report of Danfoss A/S was adopted at the Board Meeting on 12 March 2004. The Annual Report is included on the enclosed CD-ROM and can be obtained, upon the approval at the Annual General Meeting on 16 April 2004, from Danfoss A/S or the Danish Commerce and Companies Agency, CVR no.: 20 16 57 15. The above audit report is attached to the official Annual Report. In this present extract of the official Annual Report the above-mentioned page reference, pp. 1-36, are the same as pp. 1-57.

S I G N I F I C A N T A C C O U N T I N G P O L I C I E S Below are extracts and an abridged version of significant accounting policies from the Danfoss A/S 2003 Report & Accounts. The Report & Accounts 2003 for Danfoss A/S have been prepared in accordance with International Financial Reporting Standards (IFRS/IAS) and the Danish Accounting Act (Accounting Class: C). International Financial Reporting Standards are issued by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC/SIC). In order to make the report and financial statements more understandable and readable, certain parts of the information required by IFRS/IAS has been included in the reports, instead of directly in the notes to the financial statements. Changes compared to last year Compared to the Report & Accounts 2002, the following significant changes have been made: External sale of services, primarily from the Danfoss Services units Central Service and Danfoss Distribution A/S, is isolated in a separate item in the profit and loss account, called Sale of services etc.. Comparative figures are likewise changed. Group accounts The Group accounts include Danfoss A/S and subsidiaries of which Danfoss A/S directly or indirectly has controlling interest. Companies where the Group exercises a considerable, but not controlling interest, are considered associated companies or jointly controlled entities (joint ventures), where the joint venture conditions of IAS 31 are complied with. Group internal income and expenses, shareholdings, inter-company balances and dividends, realised and unrealised internal gains and losses are eliminated. Goodwill representing the excess of cost of the acquisition over fair value of net identifiable assets is capitalised and stated as intangible assets. Goodwill is systematically amortised by the straight-line method over the estimated useful life of the asset, however not exceeding 20 years. The IFRS/IAS transition rule requires that goodwill from January 1, 1995 and forward are capitalised and recorded in the Balance Sheet. Goodwill acquired before 1995 is set off directly in equity. In the Group accounts subsidiaries are fully consolidated. Minority interests share of the subsidiaries net profit and equity is stated separately. Profit and Loss account statement Net Sales of goods for resale and finished goods as well as related services are recognised in the Profit and Loss account statement, providing delivery took place before the end of year. Costs and depreciations are classified according to functions and are therefore generally divided into Production, Distribution and Administration Costs. Other Operating Income and Expenses comprise financial items of a secondary nature compared with the principal aim of the companies. Included are gain/losses on disposal of fixed assets and companies. Income from Subsidiaries, Associates and joint ventures is recorded in the Parent Company s accounts and Group accounts by the equity method. Financial income and expenses comprise interest income and expenses as well as realised and unrealised currency gains and losses on securities, debt and foreign exchange transactions. Also included are the finance charges related to finance leases, and gains and losses on derivatives that are not classified as hedging transactions. Balance Sheet Intangible assets The accounting treatment of goodwill is described in the section Group accounts. Development projects for products and processes, including software with the intent to produce, market and use the product or processes within a few years, must be capitalised, if for example a clear connection between expenses and future income can be demonstrated. Software is amortised over four years. Other intangible assets are recognised at cost less accumulated amortisations and impairments. Patents are amortised on a straight-line basis over the remaining patent period, and licenses are amortised over the agreement period, however not exceeding 20 years. Fixed assets Land and buildings, plant and machinery and equipment are recorded at cost less accumulated depreciations and impairment losses. Depreciations are calculated by the straight-line method over the estimated useful life. The estimated useful life for fixed assets is as follows: Useful lives Buildings Plant and machinery Equipment 15-30 years 4-10 years 2-6 years Assets that are finance leases are stated at inception of the lease in the Balance Sheet at an amount equal to the lower of its fair value or the present value of the future minimum lease payments. 29

30 Impairment The carrying amount of intangible and tangible and financial assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If such indication exists, the asset s recoverable amount is estimated. An impairment loss is recognised when the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of an asset s net selling price and its value in use. If the recoverable amount cannot be estimated of the individual asset, the recoverable amount of the cash-generating-unit, to which the asset belongs, is instead estimated. Financial assets Investments in subsidiaries, associates and joint ventures are stated in accordance with the equity method. If possible, investments in other companies are included in financial assets at fair value (estimated, if necessary). If it is not possible to estimate a fair value these investments are stated at cost. Currency adjustments are recorded in the Profit and Loss statement under financial items. Inventories Inventories are stated at the lower of cost and net realisable value and based on the weighted average/fifo method. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling. Cost is stated on basis of the weighted average/fifo methods. Accounts receivable Receivables are stated at cost/amortised cost less impairment losses. Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event in the financial year or previous years, and it is probable that a settlement of the obligation will lead to a consumption of the company s financial resources which can be fairly stated at the balance sheet date. Obligations in respect to defined benefit plans are calculated and discounted to determine the present value. The estimated obligations are deducted the fair value of any plan assets and recognised in the balance sheet according to the 10% corridor rule. Liabilities in the form of debt and finance leases Debt are initially recognised at cost. Subsequent measurement is at cost/amortised cost. Any capitalised outstanding lease obligation for finance lease obligations are stated in the balance sheet as a liability. The part of the lease payments that relate to the interest charge is charged in the profit and loss account statement under financial items. Tax Current tax comprises income taxes from all the companies in the Group. Danfoss A/S has joint taxation with several fully owned Danish and foreign subsidiaries. Current tax for Danish companies is only recorded in the Parent Company account. Current and deferred taxes of the year are recognised in the Profit and Loss statement, except tax that is related to adjustments recognised directly to equity. Tax payable and receivable are included in the balance sheet based on the taxable income for the year and regulated for prepaid taxes. Deferred tax and deferred tax assets are recorded in the balance of all temporary differences between the carrying amounts of assets and liabilities and the amounts used for taxation purposes. Excepted is the tax regarding any sale of shares in subsidiaries and tax regarding goodwill not deductible for tax purposes. Foreign currency Transactions in foreign currencies are translated initially at the foreign exchange rate recognition into Danish kroner after the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to the foreign exchange rate at the balance sheet date. Currency gains and losses arising on translation are recognised in the profit and loss account statement under financial items. Non-monetary assets and liabilities denominated in foreign currencies are translated at foreign exchange rates ruling on the transaction date. The profit and loss account statements of the Parent Company s foreign subsidiaries, associates and joint ventures are translated into Danish kroner at average foreign exchange rates, while the balance sheet items are translated in accordance with the exchange rates ruling at the balance sheet date. Foreign exchange differences arising on translation are recognised directly in equity. Currency adjustments of long-term liabilities with foreign subsidiaries and associates, which are considered additions to or deductions from the subsidiary s equity, are also recognised directly in equity. Derivatives Derivative financial instruments, such as foreign exchange contracts or options and raw material contracts, are recognised initially at cost in the balance sheet and subsequent at fair value in the profit and loss account statement. If the restrictive criteria for documentation etc. are fulfilled, the instruments are accounted for as hedging transactions (hedge accounting). If the criteria for hedge accounting are not fulfilled, changes in market value are recognised directly in the profit and loss account statement under financial items. Cash flow statement The Group Cash Flow Statement presents cash flows from operating, investing and financing activities for the year and the Group s cash and cash equivalent in the beginning and end of the year.

P R O F I T A N D L O S S A C C O U N T S 1 January to 31 December mill DKK Parent Company Group 2002 2003 2002 2003 Net sales 3,940 3,998 14,923 15,434 Sale of services etc. 510 542 280 325 Cost of sales 3,506 3,704 10,475 11,051 Gross profit 944 836 4,728 4,708 Distribution expenses 424 425 3,483 3,353 Administrative expenses 415 419 598 587 Operating profit excl. other income and expenses 105 8 647 768 Other operating income 18 259 133 494 Other operating expenses 5 3 59 153 Operating profit 118 248 721 1,109 Income from subsidiaries 340 653 Income from joint ventures and associates 106 57 107 58 Financial income 240 118 59 30 Financial expenses 57 60 137 168 Profit before tax 747 1,016 750 1,029 Corporate tax expenses 234 272 234 272 Profit after tax 513 744 516 757 Minority interest 3 13 Net profit 513 744 513 744 Net profit is split as follows: Transferred to reserve according to the equity method 241 490 Transferred to the proposed dividends reserve 101 127 Transferred to other reserves 171 127 513 744 The annual report incl. notes can be found on the enclosed CD-ROM 31

B A L A N C E S H E E T 31 December mill DKK Parent Company Group ASSETS 2002 2003 2002 2003 Non-current assets Intangible assets Goodwill 203 875 Other intangible assets 73 110 126 163 73 110 329 1,038 Fixed assets Land and buildings 246 279 1,567 1,473 Machinery 362 382 1,454 1,310 Equipment 248 233 429 400 Buildings and machinery under construction 77 99 222 371 933 993 3,672 3,554 Non-current financial assets Investments in subsidiaries 2,407 3,648 Receivables from subsidiaries 297 330 Investments in associates and joint ventures 711 709 731 750 Other investments 1 5 43 84 Defined benefit plans, net assets 14 Deferred tax assets 453 522 3,416 4,692 1,227 1,370 Total non-current assets 4,422 5,795 5,228 5,962 Current assets Inventories Raw materials and consumables 118 106 703 719 Work in progress 84 81 312 329 Finished goods and goods for resale 236 279 1,270 1,231 438 466 2,285 2,279 Accounts receivable Trade receivables 178 167 2,631 2,812 Receivables from subsidiaries 2,769 2,694 Receivables from associates and joint ventures 61 33 79 50 Other receivables 88 178 355 589 3,096 3,072 3,065 3,451 Cash and cash equivalents 1,049 748 1,693 1,389 Total current assets 4,583 4,286 7,044 7,119 TOTAL ASSETS 9,005 10,081 12,272 13,081 The annual report incl. notes can be found on the enclosed CD-ROM 32

mill DKK Parent Company Group LIABILITIES AND SHAREHOLDERS EQUITY 2002 2003 2002 2003 Equity Share capital 1,012 1,012 1,012 1,012 Share premium 26 26 26 26 Reserves according to the equity method 805 755 48 36 Proposed dividends 101 127 101 127 Other reserves 4,898 5,347 5,655 6,066 Total shareholders equity 6,842 7,267 6,842 7,267 Minority interest 17 28 Provisions Provisions for warranty and other provisions 64 36 425 492 Deferred tax liabilities 288 330 318 415 Defined benefit plans 13 13 330 420 Total provisions 365 379 1,073 1,327 Debt Non-current debt Bank loans, unsecured 914 265 1,189 439 Bank loans, secured 100 59 300 914 365 1,248 739 Current debt Bank loans, secured 5 6 59 Bank loans, unsecured 31 516 768 968 Trade creditors 143 225 1,105 1,248 Debt to subsidiaries 396 980 Debt to associates and joint ventures 2 8 10 Corporation taxes 26 137 101 Other debt 288 342 1,068 1,334 884 2,070 3,092 3,720 Total debt 1,798 2,435 4,340 4,459 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 9,005 10,081 12,272 13,081 The annual report incl. notes can be found on the enclosed CD-ROM 33

S T A T E M E N T O F C A S H F L O W S mill DKK Group 2002 2003 Operating profit 721 1,109 Adjustments for non-cash transactions 788 489 Changes in working capital 169 143 Cash flows generated from operations before interest 1,678 1,741 Net financial items 78 138 Cash flows from operations before tax 1,600 1603 Paid tax 138 349 Cash flows from operating activities 1,462 1,254 Acquisition of intangible assets 30 94 Acquisition of land and buildings, machinery and equipment 772 863 Proceeds from sale of land and buildings, machinery and equipment 267 236 Acquisition of subsidiaries etc. 108 776 Proceeds from disposal of subsidiaries etc. 69 395 Acquisition ( ) and sale of other investments 23 70 Dividends received 38 30 Cash flows from investing activities 559 1,142 Free cash flow 903 112 Financing by non-shareholders: Repayment of ( )/proceeds from interest bearing debt 64 315 Financing by shareholders: Issuing of shares 6 Repurchase/sale of own share 1 Dividends paid 101 101 Cash flows from financing activities 158 416 Net change in cash and cash equivalents 745 304 Cash and cash equivalents at 1 January 948 1,693 Cash and cash equivalents at 31 December 1,693 1,389 The Cash Flow statement cannot be derived on the basis of the Annual financial statements alone. As part of the Group s cash resources, an unused line of a long-term and binding credit of about DKK 3bn exists. The annual report incl. notes can be found on the enclosed CD-ROM 34

C A P I T A L A N D R E S E R V E S Group mill DKK Share capital Share premium Reserve according to the equity method Proposed dividend Reserve for hedge accounting Translation reserve Reserve own shares Other reserves Total Balance at 1 January 2001 1,011 20 71 101 2 12 5,443 6,636 Net profit 77 101 335 513 Dividends to shareholders 1 38 101 38 101 Shares issued 5 6 Own shares acquired 1 1 Currency translation adjustments 62 144 7 213 Balance at 31 December 2002 1,012 26 48 101 142 12 5,809 6,842 Net profit 53 127 564 744 Dividends to shareholders 101 101 Dividend received 30 30 Other 69 43 26 Currency translation adjustments 35 209 244 Balance at 31 December 2003 1,012 26 36 127 69 351 12 6,360 7,267 Parent Company Balance at 1 January 2001 1,011 20 1163 101 12 4,353 6,636 Net profit 241 101 171 513 Dividends to shareholders 101 101 Shares issued 1 5 6 Own shares acquired 1 1 Dividend received 393 393 Currency translation adjustments 206 7 213 Balance at 31 December 2002 1,012 26 805 101 12 4,910 6,842 Net profit 490 127 127 744 Dividends to shareholders 101 101 Other 18 69 25 26 Dividend received 278 278 Currency translation adjustments 244 244 Balance at 31 December 2003 1,012 26 755 127 69 12 5,290 7,267 Total recognised gains for the Group amount to DKK 527 mill (2002: 300 mill), which comprises net profit, DKK 744 mill (2002: 513 mill), and currency translation adjustments, DKK 218 mill (2002: 213 mill). Share capital and other shareholder information is described in the report Shareholder information. 35

S E G M E N T R E P O R T I N G Main business segments (primary segments) Refrigeration & Air Conditioning Heating & Water Motion Controls Corporate Ventures Danfoss Services Corporate/ Not allocated/ eliminations Group mill DKK 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 Net sales, external 8,310 8,072 2,800 3,637 3,499 3,368 30 46 284 312 14,923 15,434 Net sales, internal 51 61 31 35 50 5 1 38 133 139 Net sales, total 8,361 8,133 2,831 3,672 3,549 3,372 31 84 151 173 14,923 15,434 Sales Danfoss Services 120 55 77 913 781 633 707 280 325 Operating profit 586 393 360 472 85 193 137 129 15 12 188 167 721 1,109 Income from associates and joint ventures 107 58 Financial income 59 30 Financial expenses 137 168 Profit before tax 750 1,029 Tax expenses 234 272 Profit after tax 516 757 Minority interest 3 13 Net profit 513 744 OTHER INFORMATION Income from associates and joint ventures 3 1 1 2 2 108 59 107 58 Investment in associates and joint ventures 7 41 12 25 4 2 6 716 680 731 750 Intangible assets 177 148 35 732 73 77 10 2 39 79 5 329 1,038 Land & Buildings, machinery and equipm. 1,461 1,348 644 706 930 883 47 39 528 586 62 9 3,672 3,554 Total assets 4,775 4,794 1,583 2,710 2,051 1,855 98 108 699 745 3,065 2,869 12,272 13,081 Non-interest bearing debt 1,323 1,488 384 804 825 814 33 36 120 132 706 747 3,391 4,021 Net investments (not including goodwill) 352 411 177 237 177 131 1 4 7 194 22 98 720 879 Net investments in goodwill 17 10 1 722 29 3 4 1 43 735 Depreciations/amortisations/impairments 422 480 124 174 149 143 81 25 72 55 2 8 850 886 Number of employees, end of year 8,989 9,021 2,915 3,864 3,419 3,071 141 181 1,277 1,037 231 275 16,972 17,449 See definitions in Financial highlights. The three main segments, Refrigeration & Air Conditioning, Heating & Water and Motion Controls, and Danfoss Services are further described in separate reports. As described in Significant accounting policies the assets Cash and Cash equivalents, interest-bearing debt and tax, assets and liabilities are not allocated to the segments. Instead they are recorded in the column Corporate/Not allocated/eliminations. In 2003 the entity Danfoss Analytical was moved from the Motion Controls segment to Corporate Ventures. Comparative information has not been adjusted. See also Motion Controls. Also the IT activities have been moved from Danfoss Services to the business segments in 2003. Comparative information has not been adjusted. In the column Corporate/Not allocated/eliminations expenses for Corporate Functions are included. These amounted to DKK 211 mill (2002: 189 mill). Geographic segments (secondary segments) mill DKK *) Deferred assets are not included. 2002 2003 Latin North Latin North Europe America America Africa Asia Pacific Total Europe America America Africa Asia Pacific Total Net sales 10,757 397 1,419 377 1,672 301 14,923 11,398 327 1,153 385 1,843 328 15,434 Total assets *) 9,568 132 1,100 162 721 137 11,819 10,346 127 963 183 780 162 12,561 Net investments (not including goodwill) 609 3 73 2 32 1 720 771 3 11 7 85 2 879 Net sales are based on customer location, while Total assets are based on the location of the production, service and sales facilities. 36

C O R P O R A T E C I T I Z E N S H I P

... improves quality of life...... a highly respected company... The Danfoss Vision Danfoss will be a global leader within our core businesses, as a highly respected company, which improves quality of life by mastering advanced technologies in customer applications while creating value for all stakeholders. A global leader...... within out core businesses...... mastering advanced techologies...... in customer applications... The Danfoss Mission We will produce and deliver products to the total satisfaction of our customers in global markets with a high degree of environmental consciousness We are a committed group of people with meaningful working lives We will globally promote the Danfoss culture while supporting and respecting local values We will seek to strengthen the societies in which we play an active role Danfoss Core Values Our business is trust A very safe and reliable choice Passionate about technology Global culture, local representation Environmentally and socially responsible

C O R P O R A T E C I T I Z E N S H I P Preface As a Group, Danfoss has many stakeholders and therefore the Group influences the lives of many people through its activities. As a consequence, Danfoss has systematised its activities within Corporate Citizenship. The Group interprets Corporate Citizenship to be the way Danfoss administers its social and environmental responsibility, both internally and externally. In 2002, Danfoss decided to take an active role by joining UN s Global Compact Initiative, which encourages businesses to contribute to the creation of global sustainable development. Global Compact comprises nine principles covering labour rights, human rights and the environment. This section of the Annual Report deals with how Danfoss has handled its social and environmental obligations in 2003, how employee conditions have developed and what activities have been implemented to live up to the Global Compact principles. The Danfoss Group knows that reputation, through which all stakeholders evaluate us, is created through actions and behaviour. The Danfoss Vision clearly signals the direction the Group wants to head in. The Danfoss Mission sets out our beliefs, while the Danfoss Core Values illustrate how our stakeholders can expect us to act. Danfoss is committed to the following Global Compact nine principles: 1. We will support and respect the internationally declared human rights within our spheres of influence 2. We will ensure we are not accomplices to human rights abuses 3. We aim to maintain employees rights to unionise and recognise employees right to collective bargaining 4. We aim at actively fighting child labour 5. We aim to actively fight all kinds of forced labour 6. We aim at abolishing discrimination in the workplace 7. We will support a precautionary approach to environmental challenges 8. We will undertake initiatives to promote greater environmental responsibility 9. We will encourage the development and diffusion of environmentally-friendly technologies In order to improve the implementation and follow up on the principles, Danfoss developed a Corporate Social Responsibility Policy. The policy sets out how the Group, as a minimum, will deal with its social responsibility relating to human rights and labour market issues. The environment has always been important to the Group. Danfoss has joined the business Charter for Sustainable Development issued by the International Chamber of Commerce (ICC) and has implemented the 16 items of the Charter in the Group s Environmental Policy. As a consequence of the acceptance of Global Compact, the Group Environmental Policy was revised in 2002 to also include the Global Compact principles. 37

P E O P L E A N D V A L U E S Employees at Danfoss are a vital and essential factor in our ability to service our customers and live up to our promises. Therefore, working with employee and management development is a focus area in the Group s efforts to ensure its continued existence. In particular, managers play a central role in efforts to live up to our core values. The managers ability to live and communicate the Danfoss Core Values is necessary to ensure that the values are reflected in our behaviour and that the Group lives up to stakeholder expectations. Managers at Danfoss must create the trust that enables the Group s employees to meet their full potential, which in turn shows customers and other stakeholders that Danfoss is a safe and reliable choice. At the same time, managers must support the passion for technology that enables Danfoss to develop, produce and supply innovative and value-creating services to the Group s costumers. The ability to understand and work in a global community is a prerequisite for a manager at Danfoss, and it is critical that he or she is also capable of working in local cultures and respecting local practices. This applies both to employees, customers and local societies. Environmental and social responsibility should be a focal point for all leaders at Danfoss, in order to obtain the level of highly respected as stated in the Group Vision. The leadership competencies also play a central role in our systematised work to identify and develop future leaders: Danfoss Management Capital. This initiative was implemented in 2002, and was further developed in 2003. Management training is carried out on an ongoing basis, which to a large extent takes place at the Danfoss Management Institute. Another important aspect of the Group s strategy is the development of the employee competencies required to match future challenges. Focus is therefore on the training of employees, which to a large extent takes place at Danfoss Academy. In 2003, the two internal training units had a total of 8,200 days of training. A prerequisite for achieving appropriate competencies is the right educational basis. 77% of employees have more than ten years of schooling, which applies to 66% of the production employees 38

and 91% of the salaried employees. Almost 20% of employees have higher education, for example as engineers, economists and the like. In 2003, the Danfoss Group spent about DKK 230 mill. on employee training, in addition to job training activities. The development of competencies contributes positively to the Group s result, and for the individual employee improved skills equals increased flexibility, something which helps ensure greater employment security. In Poland, for example, an extensive training program has been initiated and half of the about 600 employees attend English courses. Danfoss also focuses on future employees and has therefore launched activities to increase the number of internships in Denmark. The overall efforts in 2003 were rewarded with the Confederation of Danish Industries Award of Education and Training. In addition, special efforts were made to support more vulnerable employee groups in Denmark. In cooperation with the local authorities, an integration project has been established for example, as well as jobs to re-integrate people with disabilities or long-term illness back into the workforce. The many initiatives to strengthen the competencies of employees are intended to both strengthen the Group s competitiveness as well as contribute to an improved working environment. In combination with employee perception studies and exit interviews, this is intended to reduce the number of employees who leave the Group. In 2003, about 6% of the almost 17,500 employees chose to find other employment, and it is very costly to fill the positions and train new employees. In recent years, Danfoss has made great efforts to reduce the absentee rate through improvements in the work environment, and the trend continued in 2003. The absentee rate has fallen from 5.9% in 2000 to 4.9% in 2003 over the past three years (see graph). The average absentee rate from the Confederation of Danish Industries was 5.5% in 2002, which is the most recent official number. During 2003, the Drives Division launched the Well-being and Attendance project, which over the next few years will focus on the well-being and health of employees to reduce the workplace absentee rate. Welfare interviews have been implemented for employees who are ill for more than five days within a three-month period. The purpose of the interviews is 39

to establish the reason for illness and to be able to offer assistance and support at an early stage, or change the work conditions that may be the reason for the absence. Another welfare project is at the Industrial Controls Division, where the employees, based on welfare workshops, try to put into words what they regard as well-being. The project will be evaluated in 2004. The efforts to improve work, welfare and health issues must be adjusted to local cultures and local issues. In South Africa the spreading of HIV/AIDS is a large problem because of lack of information. Danfoss in South Africa has therefore implemented an information campaign, offering employees training and information on HIV/AIDS within working time. The employees are also offered a free and anonymous HIV test to be done at a clinic outside the workplace. The employees with the lowest pay at the company are also paid a health insurance grant so that they receive necessary support in connection with illnesses. Accidents Danfoss is highly concerned with preventing accidents at work. It can be difficult to avoid altogether, however, in a Group with a large number of manufacturing facilities. For reporting purposes, all mishaps entailing at least one day of absence from the workplace are considered accidents. Most crucial is that the accidents are not of a serious nature. 62% of accidents in 2003 were less serious, with absences of 1-10 days. 38% of accidents led to an absence of more than ten days, and special focus is on reducing the number of severe accidents. The most common type of accidents resulting in more than ten days of absence was hand and finger injuries. A survey carried through in 2001 revealed that 75% of accidents were caused by human error, while 25% were caused by technical errors. It is therefore important to carry through a change of attitudes and provide information on accidents that almost happened. The accident rate for 2003 follows the positive trend of the recent years, decreasing from 28.3 in 1999 to 20.5 in 2003. That equals a 28% decrease in the number of accidents. The total number of accidents in 2003 was 317, against 378 in 1999. In the same period the number of working hours in production rose by 16%. A decision has been made to certify all Danfoss factories in Denmark according to the work 40

environment standard OHSAS 18001 before the end of 2004. This is intended to put more focus on the work environment. The Fabrikant Mads Clausen Foundation In 2003, The Fabrikant Mads Clausen Foundation donated DKK 7.0 mill. to charitable purposes. In Denmark, the foundation for example supported research and education, various institutions and a great number of clubs and associations in the Danfoss localities. Outside Denmark, support was granted to, for example, several social projects to benefit children and support was also given to fight SARS in China. In connection with the 90th birthday of Bitten Clausen (wife of founder Mads Clausen) in 2002, a birthday bank account was opened. The money deposited was intended for charitable purposes. A total of DKK 375,000 was deposited, which The Fabrikant Mads Clausen Foundation then offered addition funds to reach a total of DKK 500,000. In 2003, the money was allocated to 19 projects to primarily support the poor, homeless and children, in cooperation with Danfoss subsidiaries in Eastern Europe, Asia, South America and South Africa. Danfoss Employee Foundation The Danfoss Employee Foundation is a social foundation that provides assistance in the form of consultancy and financial assistance to employees at Danfoss and Sauer-Danfoss in Denmark. The foundation attended about 240 cases in 2003 (2002: 275) and about 75 consulting interviews. The cases primarily dealt with problems in connection with divorce, illness, death and psychological and financial problems. The lawyers of the Employee Foundation dealt with about 500 inquiries, primarily regarding inheritance and testaments, divorce, debt rescheduling and insurance matters. In 2003, the Employee Foundation gave financial support worth a total of about DKK 2.8 mill. In 2004, the foundation has decided to make an extraordinary pre-emptive effort to encourage as many employees as possible to make a will. 41

G L O B A L C O M P A C T When Danfoss joined UN s Global Compact Initiative, the Group undertook an obligation to live up to the nine principles regarding human rights, labour rights and the environment. Global Compact is one of the tools that Danfoss uses to set our framework for activities relating to sustainable development. One of the most important initiatives in 2003 was the implementation of a project to train selected purchasers in the principles of Global Compact. The training consists of six role-plays within the fields of human rights, labour rights and environment and is e-learning based. The training forms the basis for the purchasers to begin an evaluation of the first suppliers during 2004. The target is an evaluation of all of Danfoss major suppliers within a three-year period. Another initiative was the Group s cooperation with the Danish Human Rights Center. The cooperation was started to increase the knowledge of human rights and labour rights in selected countries. This has primarily resulted in the preparation of risk analyses of the countries in which the Group has manufacturing facilities. The analyses deal with the human rights and labour rights situation in the individual countries and describe issues that the Group should be aware of. In order to examine whether the Group s companies live up to the principles, a questionnaire on the handling of human rights and labour rights was distributed globally throughout the Group in 2003. The questionnaire dealt with the first six principles from Global Compact, since they had not previously been clarified. The environmental principles are clarified in the existing environmental reporting. The section below describes how far Danfoss has come to living up to the nine principles. Human rights Principle 1. We will support and respect the internationally declared human rights within our spheres of influence The principle is not only about respecting human rights at Danfoss factories and companies, but also where the Group has influence. It applies among other things to Danfoss employees, local authorities and suppliers. Principle 2. We will ensure we are not accomplices to human rights abuses For Danfoss, this principle means that the Group s companies and employees must not, through their 42

work, increase the abuse of human rights. This is ensured for example via the Group s Corporate Social Responsibility Policy, which specifies that the Group will incorporate human rights aspects into business decisions when considered of relevance. Cooperation with the Danish Human Rights Center has revealed where the Group may be faced with issues. The next step in the process is the preparation of guidelines for local management on how to approach the issues. Labour rights Principle 3. We aim to maintain employees rights to unionise and recognise employees right to collective bargaining The Danfoss employees have the right to unionise and also the right to collective bargaining. More than 90% of the Group s companies are located in countries where the employees have the right to be members of trade unions of their own choice. In countries where this is not possible, the Group has established forums at several sites for employees to discuss working conditions with the local management. Principle 4. We aim at actively fighting child labour At a global company with activities in many markets there are several sets of rules regarding when young people are considered part of the work force. In some countries, young people are considered part of the work force from age 15. Danfoss complies with ILO s rules (International Labour Organization), specifying that young people under the age of 18 are not part of the work force, but require special protection when and if employed. Even though it is the Group s policy not to employ minors, Danfoss does have employees under the age of 18. The majority of the employees under the age of 18 are apprentices, pupils or trainees under the protection of special rules. The Global Compact questionnaire survey revealed that three employees aged 17 worked at the Group s manufacturing plant in Monterrey, Mexico. They worked in production on equal terms with the other employees. According to Mexican law, this was not a problem, but management today complies with the rules of ILO, which means that the young people will have more breaks, are not allowed to work at night and must not have hazardous work. 43

Principle 5. We aim to actively fight all kinds of forced labour One of the elements in the Danfoss Vision is that the Group creates a framework for improving quality of life for people all over the world. Fundamentally, all Danfoss employees must have an employment contract or be subject to agreements that specify their terms of employment and their terms of termination, so that the voluntary aspect is clear. Principle 6. We aim at abolishing discrimination in the workplace On basis of internal rules, Danfoss aims to avoid all kinds of discrimination in the workplace. In addition to the Group s CSR policy, many companies have established local rules to prevent discrimination in the workplace. A number of countries have also established very tight regulations relating to discrimination, which the companies live up to. Principle 7. We will support a precautionary approach to environmental challenges For many years, it was part of Danfoss environmental policy that the Group aims to be among the most environmentally conscious companies within its branch of industries. Among other things, this means using only sparingly the substances and processes which may pose risk to humans and the environment. Danfoss defines environment as external environment, working environment and safety. ISO 14001 (Environmental Management Systems) Industrial production cannot take place without having an impact on the environment. The challenge is therefore to limit the environmental impact as much as possible. Danfoss requires that all factories in the Group implement environmental management according to the environmental standard ISO14001. The factories are thus required to ensure that the environmental impact from the production is continually reduced. Danfoss is a growing company, and on average three or four new factories have been acquired every year over the past few years. When a new factory has been established or acquired, a plan for ISO 14001 certification is prepared. 76% of Danfoss 52 factories are certified, 12% are in the process of being certified and another 8% will be certified during 2004. The last 4% are assembly 44

factories that are too small to initiate environmental management. Prior to the acquisition of new companies, environmental due diligence is carried out, which means that all environmental aspects are investigated to find potential risks. Cleaner technology The cornerstone of Danfoss environmental efforts is the use of cleaner technology, involving as few raw materials and environmentally harmful materials as possible, fewer emissions of substances in the air and water and reduced amounts of waste. Cleaner technology prevents environmental problems by intervening at the source, in contrast to post-treatment in terms of cleaning measurements. Some of the results of Danfoss environmental work appear in the graphs on pp. 48-51 on energy and water consumption, waste amounts and emissions to the environment. Principle 8. We will undertake initiatives to promote greater environmental responsibility It is vital for successful and effective environmental work that cooperation takes place across cultural and geographical boundaries, and that best practice is communicated internally to avoid double work and to inspire each other with practical experience. Danfoss strengthens this process through environmental coordinators networks and training in environmental data reporting. It has a positive effect on the local societies when employees are educated and trained in environmental work according to the requirements of the environmental management system. In addition to environmental training, environment is also on the daily agenda for all employees, for instance at department meetings, internal audits, or feature meetings. Suppliers Promoting environmental responsibility also means introducing changes in the product chain in which Danfoss can exert an influence. The Group wishes to see its suppliers behave as environmentally responsible companies themselves, both for the sake of the environment and because they indirectly represent Danfoss. Consequently, the Group s suppliers, whether they deliver materials, products or services, face the 45

same environmental requirements as internally at Danfoss. Principle 9. We will encourage the development and diffusion of environmentally-friendly technology The use of cleaner technology in production is important, but Danfoss also considers the development and production of more environmentally-friendly products to be one if its most important means of encouraging the development and diffusion of environmentally-friendly technologies. It is characteristic that most Danfoss products save energy when installed at the customers premises. Energy consumption is an important parameter in the determination of a product s environmental impact from cradle to grave, and therefore many Danfoss products have an environmentally positive impact. Eco-design The essential principle within eco-design is that the highest possible volume of the product must be reused. The focus on reuse of products often contributes to the development of alternative designs, which are cheaper to produce than conventional designs. Moreover, a product, which is designed for reuse, will have a value when disposed of. Taking into account the EU directive on Waste Electrical and Electronic Equipment, WEE, this will be important for returned goods such as electronic products, because the directive requires the producers of these products to contribute to reuse. Research and development Reducing environmental impact is an important parameter within Group research and development. Over the past ten years, Danfoss has developed a new cooling technology based on the environmentfriendly CO₂ coolant as a replacement for synthetic coolants. The test results from this new technology have proven that lower energy consumption can be obtained than for corresponding systems using other coolants. Danfoss Trata in Slovenia has developed a new controlling unit for a combined heat and water system. This new controlling unit has a material consumption of only 50% compared to the previous unit, and 80% of it can be recycled. 46

Cast iron produces large volumes of waste thus resulting in negative impact on the environment. Danfoss Esco in Norway has now replaced the use of cast iron with ductile iron, resulting in a lower resource consumption when producing water valves. EU directives The electronics area will be regulated by three EU directives, which influence Danfoss. The first directive (EUP) covers environmentally-friendly development of energy-consuming products, the second (WEEE) covers the reuse of electronic products, and the third (RoHS) prohibits a number of substances within electronics. The WEEE directive will be highly important to Danfoss, as the directive introduces and imposes an obligation on the producer to finance the return and recycle of waste from electrical and electronic products. This means that a number of Danfoss electrical products must carry a special label. Some doubt exists as to the precise scope of the directive. At the moment, the five European electronics factories within the Group are working on finding solutions to meet the directives, which come into force in 2005 and 2006. The RoHS directive presents a challenge to some of Danfoss electronics as it prohibits the use of a number of substances, for instance chromium and lead. Today, Danfoss uses many of these substances directly or indirectly through purchased raw materials or components. Both Danfoss and our suppliers view it as a technological challenge to find and/or develop replacements for these substances. In particular, the prohibition of the use of lead will be a major challenge for Danfoss, as it is both used in products and processes. Danfoss uses soldering processes extensively and no sustainable alternatives exist at present for soldering at high temperatures. For many years, Danfoss Silicon Power in Schleswig, Germany, has used unleaded soldering when producing power modules. However, for technical reasons, it is not possible to use the same process in manufacturing at other factories. DEVI A/S, which produces electrical floor heating, starts outphasing lead from cables in 2004. Expectations are that all products can be adapted to the requirements within the time limit, and the customers will be ensured reliable, highquality products in future, too. 47

48 In our efforts to follow the developments as closely as possible and to influence the implementation of the WEEE directive in particular, Danfoss participates in the standardisation work on these directives, both nationally and in the EU. Environmental impact from production Danfoss many manufacturing facilities have an environmental impact, either in terms of resource consumption or emissions to the environment (see the graph of possible environmental impacts). A company that grows in balance with the environment must prove that environmental impact is currently relatively smaller, meaning that even though the production increases the impact does not rise correspondingly. This part of the Statement includes an environmental impact index (EII) to express the relative environmental impact. EII reflects how efficiently resources are used and the Group s ability to reduce the discharges relative to the volume of production. A decreasing EII indicates a lower relative environmental impact. The activity index of the Group (used for calculating the EII) is calculated on basis of the raw material consumption level. In general, the Group s activity level has increased by 11% since 2002, expressed in raw material consumption. The graphs illustrating energy and water consumption, potentially harmful substances and flue gases show that almost every item has a decreasing environmental impact. Only selected graphs are shown in the Statement, but all graphs can be seen on the enclosed CD-ROM, which also includes the environmental policy in full. Environmental objectives Each factory has its own environmental management system containing the environmental objectives, which are most important in the company s production. Many areas show concurrences, and typically factories objectives include reducing the relative consumption of energy, water, potentially harmful substances and waste. Raw materials Objective: to optimise the use of raw materials At Danfoss the consumption of raw materials is reduced by using smaller amounts in the products without compromising their quality or performance characteristics. At the same time, attention is paid to selecting materials with a minimal impact on the environment.

Raw materials include all components that are processed or used directly in the finished product. Typical examples are metals, plastics and electronics, as well as packaging. The largest volumes consumed are CONSUMPTION OF MOST SIGNIFICANT RAW MATERIALS [tonnes] Iron 185,996 Highly alloyed stainless steel 2,058 Brass and copper/copper alloys 23,513 Aluminium incl. alloys 6,816 PVC 518 Formaldehyde plastics 190 Other plastics types 3,995 Printed circuit boards 312 Tin solder 32 Electronic and electro-mechanic components 7,941 Packaging (cardboard and plastics) 4,304 Wood pallets 7,229 Other raw materials 5,427 metals, which are, at the same time, the raw materials most extensively recycled. Energy Objective: to reduce the relative energy consumption The relative energy consumption in the Group has fallen by 8% since 2002. The reason for the reduction is that many factories have carried out energy saving projects. The refrigeration thermostat factory in Turin, Italy, has for instance reduced its consumption of natural gas by almost 40% since 2002, mainly by implementing improvements to the heat and air conditioning systems of the factory. Water Objective: to reduce the relative water consumption Danfoss relative water consumption has fallen by 18% since 2002. This is caused by a number of water saving initiatives at the factories and the increase in production. A typical project to obtain savings within the field of water is the re-circulation of cooling water. 49

Potentially harmful materials Objective: to reduce the relative consumption Potentially harmful materials is a collective designation for substances or materials that can be harmful to humans or the external environment. Danfoss uses potentially harmful materials in the production of components, and these materials cannot easily be avoided. Thus, the challenge lies in replacing them, using them as efficiently as possible and in providing optimum protection for the employees and the environment. The following section shows the relative development in consumption for six materials, the refrigerants HCFC, HFC, CFC, organic solvents, toxic materials and CRAN materials. In general, the potentially harmful materials graphs illustrate only the relative consumption development due to the very large differences in the consumption of the individual materials groups. HCFC, CFC and HFC The relative consumption of refrigerants has fallen since 2002, whereas the consumption of HFC has risen. Since HFC to an increasing extent is used as a replacement of other refrigerants, this is a logical consequence. CRAN materials CRAN is the collective designation for materials, which are undesirable in the working environment, either because they are carcinogenic (C), may be harmful to the ability to reproduce healthy children (R), may cause allergies (A) or harm the central nervous system (N). Taking into consideration the working environment of our employees, the reduction of consumption of CRAN materials has been made a focal point at Danfoss. The consumption of CRAN materials has fallen steadily since 1999. Since 2002, consumption has fallen by 148 tonnes, corresponding to a relative reduction of 31%. In connection with the conversion of its IT system, the Danfoss Plastic and Pressworks factories in Nordborg discovered incomplete reporting of some plastics types marked CRAN. This has roughly resulted in a doubling of the Group level consumption of CRAN substances during the accounting period. To correct the mistake and avoid similar incidents in the future, an in-depth review of the data was implemented and an 50

improved classification of the data requested has been ensured. This entails that the data is now easier to track. Organic solvents Over many years, Danfoss has been dedicated to reducing the consumption of solvents, either because they are harmful to the working environment or to the external environment. The relative consumption level of solvents has fallen only a little since 2002. Absolute figures reflect a minor increase in consumption. CO₂ emission Danfoss reports the emission of three flue gases: CO₂, NO x and SO₂. Energy generated by fossil fuels always leads to the emission of flue gases. CO₂ contributes to global warming. The graph shows that the relative emission of CO₂ has decreased significantly since 2002, which is due to a decrease in relative energy consumption. Heavy metals in wastewater Objective: to reduce relative discharges The calculation of the heavy metals Danfoss releases to the environment only includes the factories required to measure the heavy-metal content in their wastewater. Generally speaking, the factories have their own purification plants, which incorporate the precipitation of heavy metals in the wastewater. This results in sludge, which must then be disposed of. The factories in Nordborg and Flensburg send this sludge for recycling. The Group s total emission of heavy metals in wastewater has been reduced to 66 kilos since 2002. The reduction amounting to 19%, compared with the level of 2002, is primarily due to a reduced emission of wastewater from the factories in Nordborg. Waste Objective: to reduce the relative volume of waste The total volume of waste has grown due to increasing production. For many years Danfoss has worked to sort waste and recycles the majority. It is worth noting that the waste volume for recycling in particular is increasing. A total of 83% of the total volume of waste is recycled, and this is, for the most part, metal. The relative amount of waste has increased slightly at Group level since 1999. The increase coincides with the relocation of production. When production 51

is relocated, it takes a certain amount of time until operations run smoothly and efficiently at the new site. This may result in an increase in the number of defective items, which are then either changed or scrapped. In addition, relocation of production generally leads to increased waste volumes as a consequence of clearing and making the production areas ready. Many factories have achieved good results in the reduction of the amount of waste. At Danfoss Commercial Compressors in Anse and Trevoux Cedex, France, the amount of waste per produced unit has been reduced by 21% since 2001. The concrete initiatives have included re-circulation of coolant lubricants in the factory and reuse of metal-containing sludge from the wastewater treatment instead of sending it to landfill. Other environmental issues Ground water Since the 1980 s, voluntary pollution examinations have been carried out on the Danfoss site in Nordborg, due to the demonstration of pollution resulting from organic solvents. In agreement with the County of Southern Jutland, Danfoss carries out an intensive monitoring program and treats polluted ground water from the upper ground water to prevent spreading of pollution. The risk still exists that an underlying pollution will have an impact on the water supply in the long run. Activities have therefore been implemented to uncover the risk and to establish any preventive initiatives. Compliance with environmental requirements It is important for Danfoss to be open about environmental issues because openness and trust creates the best conditions for cooperation with authorities and neighbours. The individual factories have a number of permissions and agreements with the environmental authorities with which they must comply. With few exceptions, compliance with these permissions and agreements are observed, but during 2003 there were six factories that were in non-compliance with mainly waste water and air emission requirements. Most (37) of the 45 violations 52

were related to waste water emissions of which 26 took place in Nordborg, where there was a problem controlling the emission of nickel from a waste oil treatment plant. An action plan has been prepared and the problem is expected to be solved in 2004. Seven violations regarding waste water emissions took place at Danfoss Compressors d.o.o. in Crnomelj, Slovenia, and the factory is in the process of reconstructing its water treatment plant. Two of the remaining four violations were recorded at DEVI A/S, Vejle, Denmark, where the cooling water from a compressor contained oil. An oil separator will be established to avoid the reoccurrence of the problem. The final two violations took place at Danfoss C.A. de CV in Apodaca, Mexico, and Danfoss Trata d.o.o. in Lubjljana, Slovenia. The violations were isolated incidents and consisted of the emission of too much organic substance and copper, respectively. In addition, four violations of air emission requirements took place in 2003. Three occurred at the factory in Nordborg, of which two were violations of the mineral oil emission requirement of a single machine and one spot check showed violation of the limit for nickel emissions to the air. Both plants will meet the requirements at the beginning of 2004. The final violation of the air emission requirements took place at Danfoss Compressors in Crnomelj, Slovenia, where too much CO₂ was emitted from an oven. Finally, there were four construction issues at Danfoss Bauer GmbH in Esslingen, Germany, regarding protection against pollution of the soil. Implementation of solutions to these issues are planned during 2004, since it is the policy of Danfoss to have an orderly environmental structure and, so, also to have good relations with the authorities. 53

D A N F O S S G R O U P C O M P A N I E S 31 December, 2003 The companies are owned 100 percent by Danfoss unless otherwise stated after the company address EUROPE Austria Danfoss Ges.m.b.H, Guntramsdorf DEVI Austria GmbH, Salzburg Belgium Danfoss Socla Benelux S.P.R.L., Brussels N.V. Danfoss S.A., Brussels S. A. Danfoss Bauer N.V., Brussels Bulgaria Danfoss EOOD, Sofia DEVI EOOD, Sofia Croatia Danfoss d.o.o., Zagreb Danfoss Bionics A/S, Nordborg Danfoss Compressor Holding A/S Danfoss Distribution Services A/S, Rødekro Danfoss Drives A/S, Graasten Danfoss Industrial Refrigeration A/S, Hasselager Danfoss Innovation A/S, Nordborg Danfoss International A/S, Nordborg Danfoss Issab Holding ApS, Nordborg Danfoss Marine Systems A/S, Næstved Danfoss Murmann Holding A/S, Nordborg Danfoss Solutions A/S, Kolding DEVI A/S, Vejle Elsmark Holding A/S, Nordborg Redan A/S, Århus Estonia Danfoss AS, Tallinn DEVI Eesti AS, Tallinn LPM Balti AS, Tallinn Proekspert AS, Tallinn 54 Czech Republic Danfoss s.r.o., Prague DEVI s.r.o., Breclav 51% Denmark Danfoss A/S, Nordborg (Parent Company) Als Motor A/S, Sønderborg Convec, Karlslunde 39% (joint venture) Danfoss Analytical A/S, Sønderborg Danfoss Bauer Holding A/S, Nordborg Finland Danfoss Bauer Oy, Vantaa DEVI Sähkölämpö OY, Nummela LPM Group Ltd., Leppävirta Oy Danfoss Ab, Espoo France Danfoss Commercial Compressors S.A., Trevoux Danfoss Desbordes, Villeurbanne Danfoss S.a.r.l., Trappes

Danfoss Socla S.A.S., Virey Le Grand OREG S.A., Saint Alban Leysse SCI Deléage Immo, Saint-Malo Germany Danfoss Bauer GmbH, Esslingen Danfoss Compressors GmbH, Flensburg Danfoss GmbH, Offenbach/Main Danfoss Industrieautomatik GmbH, Korntal-Münchingen Danfoss Regler GmbH, Stutensee Danfoss Silicon Power GmbH, Schleswig Danfoss Socla GmbH, Rheinbach Danfoss Werk Offenbach GmbH, Offenbach/Main DEVI Deutschland GmbH, Flensburg Ossacur A.G., Oberstenfeld Great Britain Danfoss Bauer Ltd., Denham Danfoss Holding UK Limited, Denham Danfoss Limited, Denham Danfoss Randall Limited, Bedford Dean & Wood Limited, Leatherhead DEVI Electroheat Ltd., Bury St. Edmunds Viking FC Motors Ltd, Huddersfield 50% (joint venture) Woodley Electronics Group limited, Wantage Greece Danfoss E.P.E., Moschato Hungary Danfoss Kft., Budapest Equinoxe, Budapest 49% (associated company) Iceland Danfoss hf., Reykjavik Ireland Danfoss Ireland Ltd., Dublin Dean & Wood Ireland, Portlaoise DEVI Heat Ltd., Dublin Italy Danfoss Socla Italia S.r.l., Milan Danfoss S.r.l., Turin Latvia SIA Danfoss, Riga DEVI SIA, Riga DEVI Latvia SIA, Riga Lithuania Danfoss UAB, Vilnius UAB DEVI Comfort Heat, Vilnius Netherlands Coolmark B.V., Ridderkerk Danfoss B.V., Schiedam Danfoss Holding B.V., Schiedam Norway Danfoss AS, Skui, Oslo Danfoss Esco AS, Kongsberg DEVI Elektrovarme A/S, Oslo Poland Danfoss Sp. z o.o., Grodzisk Mazowiecki Danfoss Saginomiya Sp. z o.o., Grodzisk Mazowiecki 50% (joint venture) DEVI Polska Sp. z o.o., Warsaw Elektronika S.A., Gdynia 50% (joint venture) LPM Poland Ltd. Sp. z o.o., Chwaszczyno Portugal Danfoss (Portugal), Lda., Carnaxide Romania Danfoss s.r.l., Bucharest Russia O.o.o. Danfoss Istra, Istra O.o.o. Gruppa LPM, St. Petersburg LPM Teplo, Moscow 39% (associated company) ZAO Danfoss, Moscow 75% Slovak Republic Danfoss Compressors spol. s.r.o., Zlaté Moravce Danfoss spol. s.r.o., Zlaté Moravce DEVI s.r.o., Kúty 51% Slovenia Biterm d.o.o., Bistrica ob Sotli 25% (associated company) Danfoss Compressors d.o.o., Crnomelj Danfoss d.o.o., Ljubljana Danfoss Trata d.o.o., Ljubljana Spain Danfoss S.A., Madrid Danfoss Socla Iberica S.A., Madrid 55

Sweden Danfoss AB, Mjölby LPM Heat AB, Gothenburg DEVI AB, Vällingby Singeln Invest KB, Vinsta Switzerland Danfoss AG, Frenkendorf Danfoss Holding und Finanz AG, Fribourg Werner Kuster AG, Frenkendorf Turkey Danfoss Otomasyon ve Urunleri Tic Ltd., Istanbul Ukraine Danfoss T.o.v., Kiev DE-VI TOV, Kiev Yugoslavia Danfoss d.o.o., Belgrade NORTH AMERICA Canada Danfoss Inc., Mississauga, Ontario Mexico Danfoss S.A. de C.V., Monterrey USA Danfoss Inc., Baltimore, Maryland Danfoss Maneurop Ltd., Lawrenceville, Georgia Flomatic Corporation, Glenn Falls, New York Sauer-Danfoss Inc., Ames 38.5% (Companies in the Sauer-Danfoss Group) SOUTH AMERICA Argentina Danfoss S.A., Buenos Aires Brazil Danfoss do Brasil Indústria e Comércio Ltda., São Paulo Chile Danfoss Industrias Ltda., Santiago Colombia Danfoss S.A., Santiago de Cali Peru Danfoss S.R.L., Lima Uruguay Danfoss S.A., Montevideo Venezuela Danfoss S.A., Valencia 56

AFRICA Namibia Reco Namibia (Pty) Ltd, Windhoek South Africa Danfoss (Pty) Ltd., Rivonia, Johannesburg Refrigeration Investment Company (Pty.) Limited, Johannesburg ASIA China Anshan Danish-China Controls Co. Ltd., Anshan 75% Danfoss (Shanghai) Automatic Controls Co, Ltd., Shanghai Danfoss (Tianjin) Limited, Tianjin 80% Danfoss Industries Limited, Hong Kong India Danfoss Industries Pvt. Limited, Chennai Japan Danfoss K.K., Gotemba Kazakhstan Danfoss LLP, Almaty Philippines Danfoss Inc., Manila Singapore Danfoss Industries Pte. Ltd., Singapore South Korea Danfoss Ltd., Seoul Danfoss Marine Systems Ltd., Pusan Taiwan Danfoss Co. Ltd., Tapei Thailand Danfoss (Thailand) Co. Ltd., Bangkok 49% United Arab Emirates Danfoss FZCO, Dubai 60% AUSTRALIA Australia Danfoss (Australia) Pty. Ltd., Melbourne New Zealand Danfoss (New Zealand) Ltd., Auckland Malaysia Danfoss Industries Sdn Bhd, Selangor 57

Danfoss A/S Board of Directors Back row from the left: Tom Kähler, Jørgen M. Clausen, Henrik E. Nyegaard, Niels Christian Jørgensen, Arno Knöpfli, Henning Wendelboe. In front from the left: Bitten Clausen (honorary member), Peter M. Clausen, Bente Skibsted. Henrik E. Nyegaard, Chairman, Interim Companies with major board activities Chairman of Gyldendal A/S Contex Holding A/S Proactive A/S Vice Chairman of Rockwool A/S Velux A/S VKR Holding A/S Board member of The Bitten and Mads Clausen Foundation MAN B&W A/S Spæncom A/S Jørgen M. Clausen, President Companies with major board activities Chairman of Forskningscenter RISØ Junior Achievement Young Enterprise (Europe) Vice Chairman of Sauer-Danfoss Inc. Board member of The Bitten and Mads Clausen Foundation Member of the Advisory Board of Danske Bank Peter J.M. Clausen, General Manager Companies with major board activities Chairman of The Bitten and Mads Clausen Foundation The Fabrikant Mads Clausen Foundation Als Motor A/S Danfoss Educational Scholarship Board member of The Mads Clausen s Institute Niels Christian Jørgensen, Employee Board Member Shop steward in Metal Deputy Senior Shop Steward Board member of The Bitten and Mads Clausen Foundation Sønderborg Lufthavn A.m.b.a. Tom Kähler, Group Chief Executive of Rockwool International A/S Companies with major board activities Chairman of A/S Saltbækvig Rockwool Fonden Vice Chairman of The Bitten and Mads Clausen Foundation Board member of Rockwool International A/S The A.P. Møller and Chastine Mc-Kinney Møller Foundation Member of the Advisory Board of Danske Bank Arno Knöpfli, Employee Board Member, Senior Engineer Chairman of The Danfoss European Information and Consultation Forum EICF Board member of The Bitten and Mads Clausen Foundation Bente Skibsted Board member of The Bitten and Mads Clausen Foundation Henning Wendelboe, Employee Board Member Chairman of Danfoss A/S Medarbejderfond Board member of The Bitten and Mads Clausen Foundation 58

Danfoss A/S Annual Report 2003 The enclosed CD-ROM contains further information on the following issues: Accounts and notes to accounts Human Resource data Danfoss documents Environmental data Environmental Policy Vision Danfoss Group companies Policy for Social Responsibility (CSR) Core values Danfoss A/S Annual Reports 1999-2003 Global Compact Business areas Corporate film