ON TRACK ANNUAL REPORT

Transcription

1 ON TRACK ANNUAL REPORT

2 ON TRACK. Our Group program FOCUS has substantially enhanced Dürr s earning power. We have achieved our earnings targets and have set the course for further earnings improvement.

3 KEY FIGURES (IFRS) (CONTINUING OPERATIONS) / 2005 Change in % Incoming orders in m 1, , , Orders on hand (Dec. 31) in m Sales revenue in m 1, , , EBIT before non-recurring expenses in m Net income/net loss in m Cash flow from operating activities in m Cash flow from investing activities in m Cash flow from financing activities in m Balance sheet total (Dec. 31) in m 1, , , Equity (with minority interests) (Dec. 31) in m Net financial debt 1 (Dec. 31) in m Net working capital (Dec. 31) in m Employees (Dec. 31) 5,650 5,992 6, Dürr stock ISIN: DE High 2 in Low 2 in Close 2 in Number of shares (weighted average) 15,728,020 14,400,050 14,298,200 Earnings per share (continuing operations) in Earnings per share (Group) in Paint and Assembly Systems Incoming orders in m 1, , Sales revenue in m 1, , , EBIT before non-recurring expenses in m Employees (Dec. 31) 3,786 3,979 4, Measuring and Process Systems Incoming orders in m Sales revenue in m EBIT before non-recurring expenses in m Employees (Dec. 31) 1,821 1,966 1, Without finance leases 2 XETRA Immaterial variances may occur in this report due to roundings in the computation of sums and percentages.

4 DÜRR GROUP THE DÜRR GROUP OPERATES IN THE MARKET THROUGH TWO DIVISIONS WHICH ARE DIVIDED INTO SIX BUSINESS UNITS. DÜRR AG IN STUTTGART OPERATES AS A PURE MANAGEMENT HOLDING COMPANY. PAINT AND ASSEMBLY SYSTEMS DIVISION MEASURING AND PROCESS SYSTEMS DIVISION The Paint and Assembly Systems division is the world s leading supplier of paint shops for automobile manufacturers and their suppliers. We are also a leading partner to the automotive industry as a full-range supplier of vehicle final assembly systems. Exhaust-air purification systems round out our range of products and services. Apart from the automotive industry, our systems are also used in the aviation industry and other non-automotive industries. The Measuring and Process Systems division includes two areas of activity: balancing and diagnostic systems and cleaning, automation, and filtration systems. The power to innovate, global presence, and quality engineering have made us a world market leader in both areas. Our largest customer group by far is the automotive industry, which uses our systems in building engines and transmissions. But our systems are also enhancing productivity in industries like aerospace, machinery, and electrical equipment. PAINT AND ASSEMBLY SYSTEMS BUSINESS UNITS MEASURING AND PROCESS SYSTEMS BUSINESS UNITS Paint Systems: Paint shops for automobile manufacturers and their suppliers Application Technology: Systems for automated paint application Environmental and Energy Systems: Technology for exhaust-air purification and for disposing of liquid residues as well as energy-saving concepts Factory Assembly Systems: Final assembly, testing, filling, and conveyor systems Balancing and Diagnostic Systems: Technology for balancing and diagnostic applications Cleaning and Filtration Systems: Industrial cleaning technology, automation, and filtration systems

5 STRATEGY Dürr is one of the world s leading suppliers of systems, services, and products for automobile manufacturing. We generate around 90% of our sales through business with the automotive industry. The machinery sector and the chemical, pharmaceutical, coating, and aviation industries are also important customer groups. The focus of our activities is on plant engineering, which accounts for around two-thirds of our sales. We offer innovative, energy-saving, environmentally friendly solutions that help our customers achieve lower costs, higher quality, and greater flexibility in production and assembly. Our product range is based on standardized modules that we then tailor to our customers specific needs. Our range of products and services covers important stages of vehicle production. As a systems supplier, we plan and build complete paint shops and final assembly facilities. We also offer cleaning, automation, and balancing systems for the manufacture of engine, transmission, and vehicle components. We are working to increase our profitability for the long term, aiming at rates of return on sales of 4% before taxes and 8 % relative to EBITDA. We have set course for that with our Group-wide FOCUS program. We have boosted the efficiency of our business processes and become even more responsive to our customers needs. The FOCUS strategy also includes expanding our high-margin service business. The basis for that is the widespread use of our products in customers plants around the world. Some 60 % of all automotive paint shops and around 50 % of all assembly plants employ Dürr technology. We are furthermore focusing on our strengths: innovative power, turnkey expertise, global presence, particularly in growth markets, and the experience and expertise of our 5,650 employees. To establish the achievements of FOCUS in the company on a permanent basis, in early 2007 we integrated key elements of the program into a continuous improvement process that will yield further optimization and thus contribute to increasing the company s value. CONTENTS 2 BASIC INFORMATION 2 Letter from the Board of Management 4 Report of the Supervisory Board 8 Dürr on the capital market 11 Corporate governance report 16 FROM THE MARKETS 16 On the right track with FOCUS 18 Dürr Green Paint Shop 20 Highlights from Dürr Consulting 23 GROUP MANAGEMENT REPORT 23 Organizational and legal structure 27 Economic environment 28 Business development 35 Financial development 40 Research and development 43 Purchasing 44 Employees 45 Risks 50 Events subsequent to the reporting date 51 Outlook 56 CONSOLIDATED FINANCIAL STATEMENTS 57 Independent auditor s report 58 Consolidated income statement 59 Consolidated balance sheet 60 Consolidated statement of changes in shareholders equity 60 Statement of recognized income and expense 61 Consolidated cash flow statement 62 Notes to the consolidated financial statements 117 OTHER 117 Statement by the Board of Management 118 Dürr worldwide 120 Glossary Cover 2006 in review

6 2 LETTER FROM THE BOARD OF MANAGEMENT DEAR SHAREHOLDERS, CUSTOMERS, BUSINESS ASSOCIATES, AND STAFF, As previously announced, 2006 was a year of transition in which Dürr reached important milestones. We increased our operating result (EBIT before non-recurring expenses) considerably, from 3.5 million to 39.1 million, despite a weaker than expected US market. Cash flow from operating activities also improved. Following a negative cash flow of million in 2005, cash flow for 2006 was only slightly negative, at 9.8 million. We achieved positive cash flow of 70.0 million in the fourth quarter of New orders were up 20%, which was better than expected. This shows not least the great confidence that we enjoy with our customers again after a difficult year in An order backlog of 7.1 months gives us a good capacity cushion. The improved earnings development reflects the first benefits feeding through from our Group-wide FOCUS program, with which we made significant progress in We adjusted our capacities to account for changes in regional demand by reducing personnel in North America and Western Europe and hiring additional employees in the growth markets of Asia. We systematically expanded our high-margin service business, which now accounts for 26% of Group sales. We also made our order handling more efficient by improving processes. 28 of the 47 FOCUS projects have already been completed. Early in 2007, we integrated the remaining projects into a continuous improvement process. It will securely anchor the tools and processes developed under FOCUS in our daily operations. Standardizing our IT systems is a top priority. We will introduce a Group-wide enterprise resource planning system at all of our sites by October 2008 to establish uniform processes and better connect all parts of the Group and thereby reduce order handling risks. The uniform data structure we are creating is essential to our making further progress toward standardizing and modularizing our products. Another focus of the continuous improvement process is to reduce lead and delivery times, which will have a direct positive impact on net working capital and is crucial to optimizing cash flow in the machinery and industrial equipment industry. We have registered a strong inflow of new orders in the first few weeks of 2007, testimony that this year will provide a challenging, yet promising, environment for our business with the automotive industry. Now more than ever, Asia and Eastern Europe will be a major focus in In particular, important impetus for our new plant business is coming from China, India, and Russia, where the automotive industry is increasingly investing. By contrast, our customers in Western Europe are increasingly seeking plant conversions and modernizations. For the United States, the world s largest automobile market, we are confident that capital investment will pick up again beginning in 2008.

7 2 BASIC INFORMATION 16 FROM THE MARKETS 23 MANAGEMENT REPORT 56 CONSOLIDATED FINANCIAL STATEMENTS 117 OTHER 2 LETTER FROM THE BOARD OF MANAGEMENT 3 RALF W. DIETER (46), CHAIRMAN (left) Paint and Assembly Systems Measuring and Process Systems Quality Research and Development Human Resources (Employee Affairs Director) MARTIN HOLLENHORST (48) Business Administration Investor and Public Relations Legal Affairs/Patents Information Technology Risk Management Internal Auditing On the product side, we have the right technologies to offer our customers forward-looking solutions for their manufacturing operations. One example is FAStplant, our modular final assembly system. Two years after its launch, this unique concept has become well established the most recent proof of which is a large-scale order from a leading carmaker in Mexico. FAStplant is also a prime example of the product strategy with which we intend to boost earnings in our Factory Assembly Systems business unit, where we are increasingly focusing on technologically sophisticated, modular solutions with unique selling points that distinguish us from the competition. The Dürr team achieved a great deal in The strong inflow of new orders kept our daily operations running at full speed. At the same time, our team integrated numerous new processes under FOCUS. The Board of Management thanks all Dürr employees for their great dedication, motivation, and creativity. We know that the improvement of earnings in 2006 was only a first step on a long road. That is why we will continue to gear our business to greater profitability and concentrate fully on implementing the improvements we have introduced. We want to grow under our own steam and take advantage of the opportunities presented by the market. The new year is off to a good start. We are highly motivated and our order books are full. The positive effects of FOCUS and the continuous improvement process will intensify in 2007 and For 2007, we expect a considerable improvement of EBIT and net income. We also intend to generate positive cash flow and improve our financial structure. We are standing by our targets for 2008 a return on sales of 4% before taxes and 8% based on EBITDA. We wish to thank our shareholders, customers, and business associates for the confidence you have placed in Dürr this past year. We will continue to do everything we can to maintain your trust in Sincerely, RALF W. DIETER CHAIRMAN OF THE BOARD OF MANAGEMENT MARTIN HOLLENHORST MEMBER OF THE BOARD OF MANAGEMENT Stuttgart, March 2007

8 4 REPORT OF THE SUPERVISORY BOARD In 2006, the Supervisory Board performed the duties assigned to it by law and the articles of incorporation and worked closely with the Board of Management in an advisory and supervisory capacity. The Supervisory Board was involved in all major decisions and intensively discussed them with the Board of Management before they were reached. These joint discussions often related to critical issues such as the US automotive industry s capital spending restraint, the restructuring of our Cleaning and Filtration Systems business unit, and the effectiveness of various FOCUS measures in the current market environment. Overall, the Supervisory Board has concluded that the process of change initiated under FOCUS is on the right track and will help Dürr make the most of its potential as a market leader. The Board of Management informed the Supervisory Board in a timely and comprehensive manner about the economic situation of the company, about company planning, and about transactions requiring Supervisory Board consent, substantial business transactions, and risk management. The Supervisory Board adopted its resolutions after thorough review on the basis of written decision-making materials. In 2006, the Supervisory Board held five regular meetings and one organizational meeting. The Supervisory Board evaluated its efficiency in the year under review. The Personnel Committee met three times in 2006, the Audit Committee met twice, and the Mediation Committee was not convened. The Chairman of the Supervisory Board maintained close contact with the Board of Management outside the meetings in order to analyze the company s situation. He always reported the results of these discussions to the entire Supervisory Board. Together with the Board of Management, the Chairman of the Supervisory Board represented the company in the acquisition of orders and in maintaining customer relations, particularly in Asia and South America. The Board of Management and the Supervisory Board discussed the Group s orders, sales, and earnings situation and its financial position at all meetings. Detailed reports and presentations by the Board of Management and the heads of the business units served as the basis for these discussions. The Supervisory Board obtained information about the implementation of FOCUS at all meetings. With respect to the FOCUS aim of enhancing the quality of our business processes, the Supervisory Board obtained reports on concepts for personnel development at Dürr on several occasions. In the future, topics such as personnel structure, development, and qualifications will increasingly be discussed with the Board of Management in the context of comprehensive personnel reports. Another focus of discussion was the quality of margins on systems orders. The Supervisory Board discussed with the Board of Management margin expectations on new orders and ways to optimize margins during order processing. At the meeting on December 20, 2006, the Supervisory Board approved the corporate planning for 2007, acknowledged the planning for 2008 and 2009, and was informed about the intended business policy. At the

9 2 BASIC INFORMATION 16 FROM THE MARKETS 23 MANAGEMENT REPORT 56 CONSOLIDATED FINANCIAL STATEMENTS 117 OTHER 4 REPORT OF THE SUPERVISORY BOARD 5 DR.-ING. E. H. HEINZ DÜRR same meeting, the Supervisory Board and the Board of Management discussed the planned relocation of the Stuttgart facility to Bietigheim-Bissingen. The Supervisory Board approved the sale of the site in Stuttgart to Dr.-Ing. h.c. Ferdinand Porsche AG and authorized the Board of Management to purchase land and buildings to expand the Bietigheim-Bissingen site. Also on December 20, the Supervisory Board approved a new schedule of responsibilities for the Board of Management. Since, under the new schedule, responsibility for personnel was transferred from Mr. Hollenhorst to Mr. Dieter, the Supervisory Board appointed Mr. Dieter Employee Affairs Director. Mr. Hollenhorst took over responsibility for information technology from Mr. Dieter. On December 20, the Supervisory Board expanded its rules of procedure to include additional rules for the Audit Committee. On the same day, the Chairmen of the Supervisory Board and Board of Management signed an updated declaration of compliance pursuant to Sec. 161 of the German Stock Corporation Law. Detailed information on corporate governance and compliance with the recommendations of the Government Commission of the German Corporate Governance Code can be found on pages 11 to 15 and online at The Board of Management reported regularly and in a timely manner to the Supervisory Board about existing risks. The Supervisory Board advised the Board of Management regarding the expansion of the risk control and monitoring system. German legislation implementing the EU Takeover Directive came into force on July 14, 2006, and places additional disclosure requirements on the management report. These requirements were considered in preparing the Group management report. The relevant information can be found on pages 24 to 26. In this respect, the Supervisory Board issues the following explanatory notes pursuant to Sec. 171 (2), Sentence 2 of the German Stock Corporation Law: The shareholders Heinz Dürr GmbH, Heinz und Heide Dürr-Stiftung GmbH, Süd-Kapitalbeteiligungs-Gesellschaft mbh, and BWK GmbH Unternehmensbeteiligungsgesellschaft, which held a combined stake of 58.1% of the shares of Dürr AG as of December 31, 2006, have entered into a pool arrangement that grants the remaining partners a right of first refusal when one or more of the partners sells Dürr AG shares. This ensures that shares from the pool cannot simply be sold to third parties. The partners under the arrangement view their alliance as a strategic partnership aimed at securing consistent industrial leadership and increasing the value of the company. The relevant provisions of the law are the only provisions governing the appointment and recall of members of the Board of Management and changes to the articles of incorporation. There are no additional provisions, for example, in the articles of incorporation. The authorizations given by the annual shareholders meeting (on capital increases, warrant bonds, convertible bonds, profit-sharing rights, participating bonds, or any combination of these instruments) are global authorizations that give Dürr greater flexibility in financing as needed.

10 6 The rules regarding a possible change in control as set forth in the terms and conditions of the corporate bond we issued in July 2004 are customary and are included in comparable form in other issuers bond terms and conditions. They safeguard the bondholders interests. CHANGES IN THE BOARD OF MANAGEMENT AND SUPERVISORY BOARD ELECTIONS Ralf Dieter took over as Chairman of the Board of Management of Dürr AG as of January 1, He succeeded Stephan Rojahn, who had resigned his post as of December 31, The Supervisory Board thanks Mr. Rojahn for his active service to Dürr since October On March 28, 2007, the Supervisory Board appointed Ralph Heuwing a regular member of the Board of Management, effective as of May 14, Mr. Heuwing succeeds Martin Hollenhorst as Chief Financial Officer, who has expressed the wish not to renew his employment contract, which runs until April The contract has therefore been ended early by mutual agreement, and Mr. Hollenhorst will leave the company on May 31, The Supervisory Board thanks him for his successful efforts. In keeping with the election cycle, elections for the Supervisory Board of Dürr AG were held in Elections for employee representatives were held on April 24. Bernhard Ackermann, Erich Horst, and Hayo Raich were elected as new members. Benno Eberl, Harald Lambacher, and Günter Lorenz were appointed for another term. The 17th annual shareholders meeting on May 24, 2006, elected Dr. Dr. Alexandra Dürr and Prof. Dr.-Ing. Holger Hanselka to the Supervisory Board as new shareholder representatives. Dr.-Ing. E. h. Heinz Dürr, Prof. Dr. Norbert Loos, Joachim Schielke, and Dr. Hans Michael Schmidt-Dencker were reelected to the Board. At the Supervisory Board s organizational meeting on May 24, 2006, Dr.-Ing. E. h. Heinz Dürr was elected Chairman and Prof. Dr. Loos and Mr. Raich were elected Deputy Chairmen of the Supervisory Board. The Supervisory Board thanks Lieselotte Dedek-Fried, Prof. Jörg Menno Harms, Dr. Tessen von Heydebreck, Werner Kramp, and Peter Weingart, who left the Board as of the close of the 17th annual shareholders meeting, for their many years of constructive cooperation. AUDIT AND RATIFICATION OF THE ANNUAL FINANCIAL STATEMENTS Ernst & Young AG Wirtschaftsprüfungsgesellschaft examined the annual financial statements, the consolidated financial statements, the management report, and the Group management report for Dürr AG, which were prepared by the Board of Management for the period ended December 31, 2006, and issued an unqualified auditor s report. The annual financial statements, the consolidated financial statements, the management

11 2 BASIC INFORMATION 16 FROM THE MARKETS 23 MANAGEMENT REPORT 56 CONSOLIDATED FINANCIAL STATEMENTS 117 OTHER 4 REPORT OF THE SUPERVISORY BOARD 7 report, the Group management report, and the auditor s reports were submitted to the members of the Supervisory Board in good time. They were discussed in detail with the Board of Management at the Supervisory Board meeting held to approve the financial statements on March 28, The auditors signing the audit report participated in that meeting and in the Audit Committee meeting on March 21, They reported on their audit and were available to provide further explanations. The Supervisory Board examined and accepted the annual financial statements, the consolidated financial statements, the management report, and the Group management report. The Supervisory Board approves the results of the audits of both sets of financial statements and approves the annual financial statements and consolidated financial statements prepared for the period ended December 31, The annual financial statements are thereby ratified. The Supervisory Board has examined the report prepared by the Board of Management pursuant to Sec. 312 of the German Stock Corporation Law concerning relationships with associated enterprises (dependent company report) for The auditor issued the following unqualified report pursuant to Sec. 313 (3) of the German Stock Corporation Law: After examination and assessment in accordance with our professional duties, we confirm that: 1. the factual information given in the report is correct, 2. the consideration paid by the company in connection with the transactions mentioned in the report was not unduly high, and 3. regarding the measures mentioned in the report, no circumstances argue in favor of a materially different judgment than that made by the Board of Management. The Supervisory Board concurs with this result of the review. According to the final results of the examination by the Supervisory Board, there are no objections to be raised against the declaration by the Board of Management at the end of the dependent company report. The Supervisory Board thanks the Board of Management, the employee representatives, and all employees for their dedication in 2006, as well as the shareholders for the confidence they have placed in the company. Stuttgart, March 28, 2007 Chairman of the Supervisory Board DR.-ING. E. H. HEINZ DÜRR

12 8 PRICE TREND OF DÜRR STOCK IN XETRA TRADING FROM JANUARY DECEMBER 2006 COMPARED WITH DEVELOPMENT OF THE DAX, MDAX, AND SDAX (INDEXED VALUES) IN % ISIN DE J F M A M J J A S O N D REUTERS SYMBOL DUEG BLOOMBERG CODE DUE GY FIRST CALL THOMSON FINANCIAL DUE.DE Dürr stock in XETRA trading DAX MDAX SDAX DÜRR ON THE CAPITAL MARKET DÜRR STOCK STABLE IN 2006 After favorable trends in the past years, international stock markets continued to develop well in 2006 despite a renewed rise in raw material prices. Stock prices on the exchanges of emerging markets like Argentina, China, and India rose more than proportionately. In Europe, many stocks benefited from favorable company valuations and relatively low interest rates, although central banks did increase short-term rates sharply. The DAX index registered a plus of 21% in The MDAX and SDAX second-line indexes gained 27% and 30%, respectively. On average, small and mid-cap stocks were valued higher than the big blue chips. The bond markets trended downward during the year. Rising key interest rates hurt bonds with shorter maturities. Longer maturities saw price declines as inflation fears set in. However, price declines slowed somewhat at the end of the year as expectations turned toward a more moderate economic trend and thus moderate inflation for Yields on 10-year government bonds rose from 3.4% to 3.8% at the end of The volume of Dürr shares traded increased significantly in Our stock began the year 2006 with a XETRA quotation of The stock price rose sharply following the release of the 2005 financial statements and figures for the first quarter of During the same period, we also conducted several international roadshows and stepped up our investor relations activities. We were able to gain investors confidence in the realignment of our operations and the turnaround in our earnings trend. Dürr s stock price topped out for the year at in the second quarter. The stock lost ground over the rest of the year, although we maintained and reached the targets we had set for One possible reason for this price trend was emerging skepticism regarding the stocks of automobile component suppliers. In the United States, several suppliers filed for Chapter 11 bankruptcy protection and one US competitor in the paint systems business left the market.

13 2 BASIC INFORMATION 16 FROM THE MARKETS 23 MANAGEMENT REPORT 56 CONSOLIDATED FINANCIAL STATEMENTS 117 OTHER 8 DÜRR ON THE CAPITAL MARKET 9 KEY FIGURES FOR DÜRR STOCK Earnings per share, Group (in ) Earnings per share, continuing operations (in ) Cash flow per share, continuing operations (in ) Dividend per share (in ) 1 High (in ) Low (in ) Close (in ) Average daily trading volume (no. of shares) 19,244 12,726 7,801 Market capitalization at Dec. 31 (in m) Number of shares (weighted average) 15,728,020 14,400,050 14,298,200 1 Dividend proposed to the annual shareholders meeting DÜRR BACK ON THE SDAX Dürr stock is listed in Deutsche Börse s Prime Standard segment and is traded on all German stock exchanges. Since the end of January 2007, we are also once again included in the SDAX, Deutsche Börse s index comprising the 50 largest German small caps. Our return to the SDAX was based on our stock s expanded trading volume and on the increased market capitalization of our free float. Our readmission to the index shows that investors acknowledge the progress we are making in our operations and view Dürr s prospects for the future positively. The following companies regularly published research reports on Dürr: Bayerische Landesbank Berenberg Bank Deutsche Bank Helaba Trust HSBC Trinkaus & Burkhardt Landesbank Baden- Württemberg Merck Finck & Co. Solventis Wertpapierhandelsbank INTENSIVE CAPITAL MARKET COMMUNICATION Our corporate bond placement in July 2004 widened the circle of investors and analysts with whom we communicate. In 2006, the number of analysts covering our stock rose. All analysts rated our stock at either buy or neutral at the end of the year. According to a study by DIRK - Deutscher Investor Relations Verband (German Investor Relations Association), SDAX stocks are actively watched by seven analysts on average. With eight active analysts, we are doing pretty well, especially as we have only been back in the SDAX since the end of January We seek to inform our investors as transparently, promptly, and continually as possible. In 2006, the Dürr Board of Management made presentations at numerous investor conferences and roadshows in Germany and across Europe. Key aims were to present the new corporate concept and to establish a broader investor base. Our analyst conferences and conference calls were very popular. We also maintain contact with individual investors by phone, online, and at individual customer events. Investors can find the latest, comprehensive information at The investor relations section of the website includes the outlook for 2007 and 2008 as well as information about the company and corporate governance. Information on analyst events, press conferences, and the annual shareholders meeting are also added in a timely manner so that individual shareholders can obtain simultaneous information. Analysts and investors can download our data as Excel tables. And those interested in receiving our ad-hoc announcements and press releases directly via can subscribe to our online news service.

14 10 SHAREHOLDER STRUCTURE December 31, % 5.0% 5.1% 6.4% 37.9% 3.8% 10.0% Heinz Dürr GmbH Heinz und Heide Dürr-Stiftung GmbH Süd-Kapitalbeteiligungs-Gesellschaft mbh BWK GmbH Unternehmensbeteiligungsgesellschaft Kreissparkasse Biberach M&G Investment Management Limited Institutional and private investors According to Deutsche Börse s calculations, the free float is 47 %. Our bond ISIN (Reg S): XS ISIN (144a): XS OUR BOND Ourfixed-ratebondmaturesin2011andhasanominalvolumeof 200millionandacoupon of9.75%.thebondissubordinatedtothesyndicatedloanalsoarrangedin2004.thisisa majorreasonwhythebondcarriesahigherinterestratethanabankloan. LiketheDürrshareprice,thepriceofourbondroseinthesecondquarterof2006afterwe released our 2005 figures and reported on the progress of our restructuring efforts. The bond price also declined over the rest of the year, only to recover to the same level at which it had started the year, 108.0%, by the end of December. Our bond thus outperformed comparable German government bonds. Standard & Poor s (S&P) and Moody s did not change our ratings in In March 2007, S&P s company rating for Dürr was B and the bond s rating CCC+ with a stable outlook. Moody s companyratingfordürrwas B2 andthebond srating Caa1 witha negative outlook.the agencies ratings are based almost exclusively on past data and give very little weight to future expectations. The agencies are still particularly skeptical about companies that are in the midst of a turnaround. Although the operating results for 2006 have improved noticeably and the rating agencies recognize this progress, our 2006 earnings are not likely to be enough to prompt an upgrade in the spring 2007 rating review. For 2007 and 2008, we see greatly improvedprospectsasaresultoffocus (see Outlook, p. 51) that are not yet reflected in the currentratings.ouraimistoimproveourratingbyincreasingearningsandcashflow. Ourstock sfreefloat,calculatedusingdeutschebörse smodel,increasedto47%in2006. Itwas36%attheendof2005.HeinzDürrGmbH,HeinzundHeideDürr-StiftungGmbH,and the two companies belonging to Landesbank Baden-Württemberg, Süd-Kapitalbeteiligungs- Gesellschaft mbh and BWK GmbH Unternehmensbeteiligungsgesellschaft, have a pool arrangement under which the other parties to thearrangementhavearightoffirstrefusal when one of the other parties sells Dürr shares. Together, these four shareholders held more than 50% of Dürr stock at the end of In December 2006, M&G Investment Management Limited,London,informedusthatitheld5%ofourcapital.M&GispartofthePrudential Group and is one of the largest investment firms in London. In an effort to improve our financial structure further, the Board of Management and SupervisoryBoardhavedecidedtoproposetotheannualshareholders meetingthatnodividend be paid for 2006 since the result on the balance sheet of Dürr AG is only slightly positive.

15 2 BASIC INFORMATION 16 FROM THE MARKETS 23 MANAGEMENT REPORT 56 CONSOLIDATED FINANCIAL STATEMENTS 117 OTHER 11 CORPORATE GOVERNANCE REPORT 11 CORPORATE GOVERNANCE REPORT GERMAN CORPORATE GOVERNANCE CODE LARGELY IMPLEMENTED We consider the German Corporate Governance Code to be an important contribution toward transparent and responsible corporate management. Thus, we have implemented most of the recommendations because we believe in them. On the other hand, we have also consciously chosen not to implement certain suggestions contained in the Code partly because of our tradition as a medium-sized company and partly because we have carefully weighed how the recommended disclosures could conflict with our competitive interests. It should be noted that our competitors are subject to far less comprehensive reporting requirements than we are, as most either are not publicly traded companies or operate as divisions of larger groups of companies. In the declaration of compliance of December 20, 2006, we are non-compliant with only five of the Code s recommendations. One is the new version of Item 4.2.4, which was released on June 12, The other four recommendations that we have not implemented were not changed in the latest version of the Code, and our position with regard to them likewise remains unchanged. The following excerpt from our current declaration of compliance lists the divergences from the June 12, 2006, version of the Code and our reasons for not conforming. ITEM 3.8, PARAGRAPH 2: If the company takes out a D&O (directors and officers liability insurance) policy for the Management Board and Supervisory Board, a suitable deductible shall be agreed. A D&O insurance policy with no deductibles exists for the members of the Board of Management and the Supervisory Board. This is a group insurance policy for executives at home and abroad, although a differentiation between members of the executive body and employees does not appear appropriate. In addition, a deductible is not usual abroad and would therefore make it difficult to recruit executives from abroad.

16 12 ITEM 4.2.4: The total compensation of each member of the Management Board, subdivided according to performance-neutral, performance-related, and long-term incentive components, shall be disclosed together with the name of the respective person unless decided otherwise by a three-fourths majority at the annual meeting. We report the sum of Board of Management members salaries in the notes to our consolidated financial statements according to fixed and variable components. Severance benefits andpensionprovisionsarealsoreported.inthecorporategovernancereport,wereferto the compensation report contained in the notes to the consolidated financial statements. 1 In our view, individualized reporting provides no additional benefit to the shareholders. In thatspirit,itwasalsodecidedattheannualmeetingonmay24,2006,thatindividualized disclosure of the compensation of Board of Management members is not to be made for aperiodoffiveyears. ITEM 5.4.1, SENTENCE 2: Furthermore, an age limit to be specified for the members of its Supervisory Board shall be taken into account. Dürr sees no necessity for defining an age limit for members of its Supervisory Board. ITEM 5.4.7, PARAGRAPH 3: The compensation of the members of the Supervisory Board shall be reported individually in the Corporate Governance Report, subdivided according to components. Also payments made by the enterprise to the members of the Supervisory Board or advantages extended for services provided individually, in particular, advisory or agency services shall be listed separately in the Corporate Governance Report. We report the sum of compensation of the members of our Supervisory Board in the Notes toourconsolidatedfinancialstatements.inourviewaspecial,individualizeddisclosureby components would not provide any additional benefit for the shareholders. The possibility of obtaining the expertise of individual members of our Supervisory Board for special topics at any time represents a special advantage for Dürr. Cooperation is based on the conditions that are usual in the industry, which are also maintained in comparable transactions with third parties. Hence, we see no necessity for individualized publication. 1 Contrary to what is stated in the declaration of compliance published in December 2006, the compensation report is not included in the notes to the consolidated financial statements, but rather in the corporate governance report, pages 13 and 14.The compensation report constitutes a part of the group management report.

17 2 BASIC INFORMATION 16 FROM THE MARKETS 23 MANAGEMENT REPORT 56 CONSOLIDATED FINANCIAL STATEMENTS 117 OTHER 11 CORPORATE GOVERNANCE REPORT 13 ITEM 7.1.4, SENTENCES 1 AND 3: The company shall publish a list of third party companies in which it has a shareholding that is not of minor importance for the enterprise. The following shall be provided: name and headquarters of the company, the amount of the shareholding, the amount of equity, and the operating result of the past financial year. We publish a list of the significant third party companies, indicating the company s headquarters. We do not make additional information public for reasons relating to competition. MORE ON CORPORATE GOVERNANCE AT DÜRR COMMUNICATION WITH SHAREHOLDERS Quarterlyreports,thefinancialandtechnicalpressreleasespublishedatwww.durr.com,and the extensive Investor Relations section of our website enable our shareholders to keep abreastofthelatestdevelopmentsrelatingtodürr. OurInvestor Relationsdepartmentisalso available for one-on-one and consultations. THE BOARD OF MANAGEMENT AND SUPERVISORY BOARD In accordance with German Stock Corporation Law, the Board of Management of Dürr AG is monitoredbythesupervisoryboard.inaccordancewiththe German Codetermination Act, the Supervisory Board of Dürr AG consists of equal numbers of shareholder and employee representatives. ThereportoftheSupervisoryBoardonpages4to7discussesthecooperation between the Supervisory Board and the Board of Management. COMPENSATION OF THE BOARD OF MANAGEMENT AND THE SUPERVISORY BOARD The current version of the German Corporate Governance Code recommends that companies report on the compensation of members of the Supervisory Board and Board of Management in the corporate governance report. The German Commercial Code requires that information on the compensation of both boards be disclosed in the management report and in the notes to the consolidated financial statements (Secs. 315 and 314 of the German Commercial Code). Thus, in addition to the information provided in the two paragraphs below, we refer readers to the corresponding information in the notes to the consolidated financial statements (Item 35), which shall be deemed part of this corporate governance report. The information provided in the two para-

18 14 graphs below fulfills the disclosure requirements pursuant to Sec. 315 of the German Commercial Code. These disclosures constitute part of the consolidated management report. Total expenses for the compensation paid to the members of the Board of Management of Dürr AG in 2006 were 2,478 thousand (2005: 4,117 thousand). This includes compensation of 700 thousand related to the termination of a contract of employment. Furthermore, 899 thousand was paid to former members of the Board of Management (2005: 820 thousand). The structure of the compensation system for the Board of Management is discussed and reviewed by the Supervisory Board on a regular basis at the suggestion of the Personnel Committee. Compensation for the members of the Board of Management comprises performance-related and non-performance-related components. The non-performance-related components consist of a fixed amount and non-cash compensation, and the performance-related component is a profit share bonus. Criteria for determining the appropriateness of the compensation particularly include but are not limited to the tasks of the respective member of the Board of Management, his personal performance, the performance of the Board of Management, and the economic situation, performance and outlook of the enterprise, taking into account its peer companies. The fixed amount, which is the non-performance-related base pay, is paid out monthly as a salary. This salary is reviewed at regular intervals on the basis of factors including general salary trends within the Group and salary trends at comparable companies. The target profit share bonus amounts to 100% of the relevant board member s annual base salary. The actual amount of the bonus depends heavily on the Dürr Group s achievement of its earnings targets (EBT) and on the board member s achievement of his individual goals or targets. In addition, the members of the Board of Management receive non-cash benefits, primarily the use of a company car. The company pays taxes on these non-cash benefits. No loans or advances were granted to members of the Board of Management during Total compensation paid to the Supervisory Board in 2006 amounted to 374 thousand (2005: 298 thousand). The members of the Supervisory Board receive annual fixed compensation in the amount of 15,000 and an attendance fee of 500 for each meeting attended in addition to reimbursement for their expenses. Furthermore, they receive variable compensation equal to 0.4 of the reported consolidated earnings before taxes (EBT). This variable compensation cannot exceed 25,000. The Chairman receives three times the total compensation paid to a regular member; the Deputy Chairmen of the Supervisory Board receive one and a half times the total compensation paid to a regular member. Compensation of the Supervisory Board is governed by Article 15 of the articles of incorporation, which can be found online at

19 2 BASIC INFORMATION 16 FROM THE MARKETS 23 MANAGEMENT REPORT 56 CONSOLIDATED FINANCIAL STATEMENTS 117 OTHER 11 CORPORATE GOVERNANCE REPORT 15 SIDELINE ACTIVITIES The members of the Board of Management do not carry out sideline activities other than those listed under Item 35 of the notes to the consolidated financial statements. Moreover, they hold no significant stakes in other companies. SECURITIES TRANSACTIONS THAT MUST BE REPORTED (DIRECTORS DEALINGS) Under Sec. 15a of the German Securities Trading Act, members of the Supervisory Board and Board of Management and management-level employees must report transactions in which they buy or sell Dürr AG shares (including any related financial instruments) if the value of the transactions equals or exceeds 5,000 within a calendar year. An overview of the directors dealings that have been reported to us can be found online at In 2006, all of the securities transactions subject to the reporting requirement were carried out by Heinz Dürr GmbH. COMPLIANCE Within the Board of Management, the Chief Financial Officer is responsible for matters relating to corporate governance. In addition, Dürr AG has a compliance officer who ensures compliance with the rules governing capital market behavior. RISK MANAGEMENT Our risk management system is oriented toward the special demands of mechanical and plant engineering business. It provides tools for early detection and assessment of risks and is designed to enable rapid action to counteract risks. Details can be found on pages 45 to 50. AUDITOR The annual shareholders meeting on May 24, 2006, voted to appoint Ernst & Young AG Wirtschaftsprüfungsgesellschaft, Stuttgart, as the independent auditor for fiscal Before the Supervisory Board proposed Ernst & Young for election, Ernst & Young submitted a statement to the Supervisory Board stating that no relationships exist between the auditor, its bodies, and its head auditor, on the one hand, and Dürr or members of Dürr s bodies, on the other hand, which could cast doubt on Ernst & Young s independence. The auditor is required to inform the Supervisory Board if it finds any divergences from the declaration of compliance provided by the Supervisory Board and the Board of Management.

20 16 FROM THE MARKETS ON THE RIGHT TRACK WITH FOCUS At Dürr, the year 2006 was largely shaped by the Groupwide program FOCUS. We launched 47 individual projects aimed at improving profitability, increasing the efficiency of our processes, and establishing a strong position in our business with the automotive industry. Implementation of FOCUS is progressing on schedule. We have successfully completed 28 projects and have been pursuing all the other projects in a continuous improvement process since the start of IT STANDARDIZATION TOPS THE LIST OF PRIORITIES The continuous improvement process is aimed at securely anchoring the processes and tools developed under FOCUS in our daily operations and making further improvements. Three managers are dedicated exclusively to implementing this process. Harmonizing the IT structures at all our sites is a top priority. We have begun to establish a Group-wide ENTERPRISE RESOURCE PLANNING (ERP) system so that all data can be processed in a uniform manner and the same functions are available at every site. The system will cover all operational processes, from design to logistics. It will go into operation in Germany and the United States in 2007, and the IT standardization at all sites should be completed by the end of This effort will improve international collaboration within the Group, make our core process project execution more systematic and secure, and reduce both costs and risk of errors. We are also pushing ahead with other projects in 2007 besides IT standardization. As we expand our service activities, we are focusing particularly on revamp business, which involves plant conversions and modernization. Other major projects in 2007 are aimed at improving our marketing, innovation management, and contract management. FOCUS: LOOKING GOOD With FOCUS, we have already gotten many important improvements off the ground. We achieved the first of our main goals at the end of 2005, when we substantially reduced our financial debt through a capital increase and the sale of non-core businesses. This has placed the Group on a solid financial footing. GLOSSARY: page 120

21 2 BASIC INFORMATION 16 FROM THE MARKETS 23 MANAGEMENT REPORT 56 CONSOLIDATED FINANCIAL STATEMENTS 117 OTHER ON THE RIGHT TRACK WITH FOCUS With FOCUS, we have laid the foundation for increasing the operating earning power of our business units. In the photo, you see the heads of our six business units (from left to right): HARALD RÜBER, Paint Systems DR. HANS SCHUMACHER, Application Technology SATPAL BHATNAGAR, Environmental and Energy Systems GERHARD MOGCK, Factory Assembly Systems DR. FRITZ DORNER, Cleaning and Filtration Systems DR. RALF-MICHAEL FUCHS, Balancing and Diagnostic Systems FOCUS really took off in We have reached major milestones in all areas of the program. The following examples illustrate the potential we are leveraging: Growth in services: With our service growth strategy, we increased the share of sales generated through our service business from less than 20% to 26%. Under this strategy, we established a new service organization and developed new service products such as remote plant diagnostics, software upgrades, and faster access to spare parts. We also expanded our network of service points located on-site at customers plants. These antennas enable us to recognize customers needs and offer corresponding products and services faster. New antennas have been established in Germany, Spain, Great Britain, Malaysia, Turkey, and Slovakia. Process improvements: We improved processes at many sites and reorganized some sites. For example, in Bietigheim-Bissingen, our center of expertise for robotics, we are converting robot assembly over to flow production. This will reduce lead times and costs while improving product quality. In Mexico, we moved to a location that puts us closer to our customers and improves the logistics chain between Mexico and the Plymouth plant in the United States. At our final assembly systems plant in Püttlingen, we shifted the focus of the product mix more heavily toward technologically sophisticated TEST SYS- TEMS and assembly stations. We also merged locations in Germany, France, Italy, and the United States to lower costs and speed processes. Moving capacities to match demand: We reduced capacities in declining markets and expanded in growth markets. We cut 479 jobs mainly in Western Europe and North America in 2006, following 332 cuts in By comparison, we increased staff in China by 28% to 347 employees and in India by 14% to 168 employees in Innovation process and product standardization: We introduced a uniform innovation process that applies throughout the Group and will result in greater efficiency in the development of new products. More information can be found on page 40. By standardizing our products, we are lowering costs and making order processing more reliable. Our aim is to standardize more than 80% of our paint systems products a very good figure for an industrial equipment manufacturer. A high level of standardization means more rationalized order processing and serves as the basis on which we can quickly design different system variants for our customers during the offer stage. GLOSSARY: page 120

22 18 DÜRR GREEN PAINT SHOP Automotive paint systems: Intelligent energy concept lowers costs per unit Painting is the most energy-intensive process in automobile manufacturing. In a single year, a large paint shop uses as much power as a city with 50,000 inhabitants, including its commercial areas. In view of the sharp rise in energy and raw material prices, experts at Dürr Consulting systematically worked on developing more energy-efficient plant concepts in The fruit of their labors is the Dürr Green Paint Shop, a model paint shop designed to make optimal use of energy resources and thus benefit our customers twofold by considerably lowering costs per unit and reducing the impact of their operations on the environment. Real-life operating conditions informed our development of the Green Paint Shop. We examined a typical paint shop based on an inquiry from one of our Asian customers, carefully analyzing the specifications for potential to improve efficiency in every process step from body PRETREATMENT and DIP-PAINTING to the spray booths and drying zones. With this approach, we developed more than 20 measures to improve energy consumption and reduce the environmental impact of automotive painting. Three of these measures are described below. 1. PRETREATMENT AND DIP-PAINTING Instead of conventional power & free or pendulum conveyor systems, we use our proprietary RoDip process, in which the vehicle body is rotated 360 degrees within the tank. RoDip cuts plant lengths by as much as 25%. But it does more than shorten the tanks. It also allows for smaller pump capacities, lowers heat loss and heating energy consumption, and reduces the amount of material used and the volume of waste water generated. As our customers operating data shows, the savings are considerable, with water and energy consumption down as much as 50% and the amount of chemicals used reduced by up to 30%. GLOSSARY: page 120