MAKING MODERN LIVING POSSIBLE

Transcription

1 MAKING MODERN LIVING POSSIBLE Annual Report

2 F i n a n c i a l i n f o r m at i o n Financial highlights Financial highlights Financial highlights (DKK) mill DKKmill DKK mill DKK AND LOSS ACCOUNT PROFIT PROFIT AND LOSS ACCOUNT Net salesnet sales 15,434 15,43416,345 16,34516,416 16,41619,428 19,42822,196 22,196 Operating profitdepreciations, added depreciations, amortisations and impairments Operating profit added amortisations and impairments (EBITDA)(EBITDA) 1,994 1,9941,746 1,7461,699 1,6992,425 2,4252,576 2,576 excl. other income, etc. EBIT excl.ebit other income, etc ,411 1,4111,634 1, Operating profit (EBIT) Operating profit (EBIT) 9471,601 1,6011,616 1,616 1,109 1,1091,072 1, from associates joint ventures Income Income from associates and jointand ventures after taxafter tax items, net FinancialFinancial items, net Profittax before tax Profit before 9311,007 1,0071,402 1,4021,378 1,378 1,023 1, Net profit Net profit ,038 1,0381,063 1, Annual Report I BALANCE BALANCE SHEET SHEET Total non-current Total non-current assets assets Total assets Total assets Equity Equity Net interest-bearing Net interest-bearing debt debt Net assets Net assets Capital expenditure Capital expenditure 5,962 5,9626,497 6,4977,665 7,66510,132 10,13211,054 11,054 13,081 13,08113,101 13,10114,562 14,56218,534 18,53419,857 19,857 7,218 7,2187,653 7,6538,485 8,4859,035 9,0359,744 9, ,866 2,8663,737 3, ,713 6,7137,003 7,0038,373 8,37310,736 10,73612,227 12,227 1,972 1,9721,507 1,5071,867 1,8673,401 3,4011,931 1,931 CASHSTATEMENT FLOW STATEMENT CASH FLOW Cash flow from operating Cash flow from operating activitiesactivities Cash flow from investing Cash flow from investing activitiesactivities herof acquisition of intangible and tangible fixed assets herof acquisition of intangible and tangible fixed assets hereof acquisition o f subsidiaries and activities hereof acquisition o f subsidiaries and activities Free cash flowm&a before M&A Free cash flow before Free cash flow Free cash flow Cash flow from financing Cash flow from financing activitiesactivities 1,284 1,2841,232 1,2321,192 1,1921,321 1,3211,016 1,016-1,172-1, ,626-1,626-3,020-3,020-1,593-1, ,289-1,289-1,028-1, ,399-1, ,936-1, ,699-1, ,877 1, NUMBER OF EMPLOYEES NUMBER OF EMPLOYEES of employees (headcount) NumberNumber of employees (headcount) 17,449 17,44917,543 17,54318,168 18,16820,612 20,61222,323 22,323 KEY FIGURES KEY FIGURES EBIT excl. margin excl. other income, etc. EBIT margin other income, etc. EBIT margin EBIT margin EBIT margin AdjustedAdjusted EBIT margin EBITDA margin EBITDA margin RONA RONA Return on equity Return on equity Equity ratio Equity ratio LeverageLeverage ratio ratio DividendDividend ratio ratio 5.0% 7.2% 7.5% 12.9% 17.0% 10.8% 55.2% 5.2% 12.5% 5.0% 5.6% 7.2% 6.6% 7.5% 6.9% 12.9%10.7% 17.0%15.6% 10.8% 9.4% 55.2%58.4% 5.2% 2.2% 12.5%15.0% 5.6% 5.6% 6.6% 5.8% 6.9% 5.8% 10.7%10.4% 15.6%12.3% 9.4% 9.2% 58.4%58.2% 2.2% 9.7% 15.0%18.0% 5.6% 7.3% 5.8% 8.2% 5.8% 8.4% 10.4%12.5% 12.3%16.8% 9.2%11.9% 58.2%48.6% 9.7%31.8% 18.0%20.0% 7.3% 7.4% 8.2% 7.3% 8.4% 7.6% 12.5%11.6% 16.8%14.1% 11.9%11.4% 48.6%49.0% 31.8%38.4% 20.0%25.0% 7.4% 7.3% 7.6% 11.6% 14.1% 11.4% 49.0% 38.4% 25.0% In the case where the Danish Association of Financial Analyst defines the above ratios, the ratios are computed according to these d efinitions. In the casethe where theassociation Danish Association of Financial Analyst the defines theratios, abovethe ratios, the are computed according these definitions. In the case where Danish of Financial Analyst defines above ratios areratios computed according to theseto definitions. DEFINITIONS RONA (Return On Net Assets) Operating Profit (EBIT) 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. Adjusted EBIT margin Operating Profit added cost, Deprications, Amortisations and Impairment related to the Purchase Price Allocation in connection with Business Combinations as percentage of 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 ratio Net interest-bearing debt as percentage of Shareholders Equity end of year.

3 F i n a n c i a l i n f o r m at i o n Financial highlights Financial highlights Financial highlights (EUR) ANDACCOUNT LOSS ACCOUNT PROFITPROFIT AND LOSS Net sales Net sales Operating profit depreciations, added depreciations, amortisations and impairments Operating profit added amortisations and impairments (EBITDA)(EBITDA) EBIT excl.income, other income, etc. EBIT excl. other etc. Operating profit (EBIT) Operating profit (EBIT) from associates and joint ventures IncomeIncome from associates and joint ventures after taxafter tax Financial items, net Financial items, net Profit tax before tax Profit before Net profit Net profit 2,077 2,077 2,197 2,197 2,203 2,203 2,605 2,605 2,979 2, BALANCE BALANCE SHEET SHEET Total non-current Total non-current assets assets Total assets Total assets Equity Equity Net interest-bearing Net interest-bearing debt debt Net assets Net assets expenditure Capital Capital expenditure ,027 1,027 1,359 1,757 1,757 1,761 1,761 1,952 1,952 2, ,029 1,029 1,137 1,137 1, ,122 1,122 1, CASH STATEMENT FLOW STATEMENT CASH FLOW Cash flow from operating activities Cash flow from operating activities Cash flow from investing activities Cash flow from investing activities herof acquisition of intangible and tangible fixed assets herof acquisition of intangible and tangible fixed assets hereof acquisition o f subsidiaries and activities hereof acquisition o f subsidiaries and activities Free cash flow M&A before M&A Free cash flow before Free cash flow Free cash flow Cash flow from financing activities Cash flow from financing activities NUMBER OF EMPLOYEES NUMBER OF EMPLOYEES of employees (headcount) NumberNumber of employees (headcount) ,359 1,482 2,486 2,663 1,212 1, ,440 1, ,482 2,663 1, , ,449 17,44917,543 17,54318,168 18,16820,612 20,61222,323 22,323 CONVERSION FACTOR BETWEEN DKK AND EUR CONVERSION FACTOR BETWEEN DKK AND EUR Profit loss account and cash flow statement exchange 100 EUR) Profit and lossand account and cash flow statement (average(average exchange rate 100rate EUR) sheet (exchange rate at 31 December, 100 EUR) BalanceBalance sheet (exchange rate at 31 December, 100 EUR) KEY FIGURES KEY FIGURES EBIT margin excl.income, other income, etc. EBIT margin excl. other etc. EBIT margin EBIT margin Adjusted EBIT margin Adjusted EBIT margin EBITDA EBITDA margin margin RONA RONA Return on equity Return on equity Equity ratio Equity ratio Leverage Leverage ratio ratio Dividend Dividend ratio ratio 5.0% 7.2% 7.5% 12.9% 17.0% 10.8% 55.2% 5.2% 12.5% 5.0% 5.6% 7.2% 6.6% 7.5% 6.9% 12.9%10.7% 17.0%15.6% 10.8% 9.4% 55.2%58.4% 5.2% 2.2% 12.5%15.0% 5.6% 5.6% 6.6% 5.8% 6.9% 5.8% 10.7%10.4% 15.6%12.3% 9.4% 9.2% 58.4%58.2% 2.2% 9.7% 15.0%18.0% 5.6% 7.3% 5.8% 8.2% 5.8% 8.4% 10.4%12.5% 12.3%16.8% 9.2%11.9% 58.2%48.6% 9.7%31.8% 18.0%20.0% 7.3% 7.4% 8.2% 7.3% 8.4% 7.6% 12.5%11.6% 16.8%14.1% 11.9%11.4% 48.6%49.0% 31.8%38.4% 20.0%25.0% In the casethe where the Danish Association of Financial theratios, abovethe ratios, theare ratios are computed according these definitions. In the case where Danish Association of Financial Analyst Analyst defines defines the above ratios computed according to thesetodefinitions. In the case where the Danish Association of Financial Analyst defines the above ratios, the ratios are computed according to these d efinitions. 7.4% 7.3% 7.6% 11.6% 14.1% 11.4% 49.0% 38.4% 25.0% II Annual Report mill EUR mill EURmill EUR

4 f i n a n c i a l i n f o r m at i o n Danfoss is one of Denmark s largest industrial companies. Danfoss is a global Group which plays a leading role within research, development, production, sales and service of mech anical and electronic components and solutions for a large range of sectors. Danfoss activities are divided into three main business areas: Danfoss Refrigeration & Air Conditioning Division: The Division supplies products and services worldwide within refrigeration and air conditioning. Danfoss Heating Division: The Division is a worldwide supplier of a range of components and services within heating and water. Danfoss Motion Controls Division: The Division supplies products and services within frequency converters, gearmotor and power electronics for industries globally. Sauer-Danfoss Inc.: Danfoss owns 37,9% of shares in Sauer-Danfoss Inc., one of the world s leading producers and suppliers of mobile hydraulics and electronic components and inte grated s olutions for off-road vehicles in the following segments: agriculture, construction, material handling, road building and s pecialty applications. Annual Report Organisation III Executive Committee Jørgen M. Clausen President & CEO Niels B. Christiansen Vice CEO Kim Fausing Executive Vice President & COO Corporate Functions Frederik Lotz Executive Vice President & CFO Danfoss Ventures Danfoss Refrigeration & Air Conditioning Division Kjeld Stærk President Danfoss Heating Division Nis Storgaard President Danfoss Motion Controls Division Sven Ruder President Danfoss Automatic Controls Danfoss Comfort Controls Danfoss Drives Danfoss Compressors Danfoss District Heating Danfoss Gearmotors Danfoss Electronic Controls & Sensors Danfoss Burner Components Danfoss Silicon Power Danfoss Floor Heating Danfoss Solar Inverters Owner share 37.9% Danfoss Heat Pumps Danfoss Water Controls Danfoss Services Division Roland Fritsch, Senior Vice President Danfoss Global Business Services The Divisions Business Units can have one or more product lines. Danfoss Industri Service Danfoss IT

5 F i n a n c i a l i n f o r m at i o n Contents Danfoss A/S DK-6430 Nordborg CVR No.: Tel: Fax: danfoss@danfoss.com Financial information Financial highlights (DKK) I Financial highlights (EUR) II Management Report for the Danfoss Group Relationship with Shareholders Events after the end of the accounting year Expectations for Danfoss Divisions Group projects Danfoss Services Sauer-Danfoss Inc Management report for Danfoss A/S Management statement Audit report Accounts Accounts Notes, table of contents Danfoss Group Companies Danfoss Group Companies Supplementary reports Introduction to Corporate Citizenship People and Values Corporate Social Responsibility (CSR) Environment Annual Report IV

6

7 B u s i n ess c o n c e p t a n d f i n a n c i a l ta r ge t s Danfoss strives to reach its goals with the minimum consumption of raw materials and energy, the least possible impact on the environment and an efficient use of resources. Danfoss has a long-standing tradition of social responsibility towards employees and the external environment. in brief Vision/strategy Danfoss strategy is based on the Danfoss Vision which was formulated in 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. Highlights Net sales increased by 14% to 22.2bn DKK from 19.4bn DKK last year. Calculated at last year s exchange rate and adjusted for acquisitions and divestments, growth amounted to 12%, compared with 14% in. Operating profit excl. other income and expenses rose by 16% from 1,411m DKK to 1,634m DKK. The EBIT margin excluding other income etc. was 7.4% compared with 7.3% in. Operating profit (EBIT) was 1,616m DKK compared with 1,601m DKK the previous year. Profit before tax was 1,378m DKK compared with 1,402m DKK in Profit for the year was 1,063m DKK compared with 1,038m DKK in. Equity increased by 7.8% to 9,744m DKK. The EBIT margin was 7.3% compared with 8.2% in. RONA fell to 14.1% from 16.8% in. The number of employees increased to 22,323 from 20,612 at the end of. It has been proposed that the dividend rate be increased to 25%, compared to 20% last year, with the dividends being paid immediately after the Annual General Meeting, which will be held on April 25, Expectations for 2008 Net sales are expected to be between 23.5 and 24.5bn DKK. This equals growth of between 6% and 10% compared to. Operating profit (EBIT) is expected to be between 1.9 and 2.2bn DKK. The EBIT margin excluding other income etc., as well as the EBIT margin itself, is expected to be between 8% and 9%. The expectations for 2008 do not include the acquisition of the shares in Sauer-Danfoss Inc., which make Danfoss the majority shareholder. Perspective plan until 2011 Net sales, including acquisitions, will grow by an average of 10% per annum. An EBIT margin of more than an average of 10%. RONA around 20%. Annual Report 1

8 F i n a n c i a l I n f o r m at i o n Danfoss experienced strong growth in. The Group s net sales rose by 14% to 22.2bn DKK. When adjusted for acquisitions and divestments and calculated at last year s exchange rate, growth was 12%. Earnings did not therefore fully live up to expectations. Operating profit (EBIT) was 1,616m DKK. Profit before tax was 1,378m DKK and profit for the year was 1,063m DKK. The combination of strong demand and pressure on earnings meant that Danfoss was not able to achieve its target EBIT margin, which at 7.3% fell short of the expected 8%. Danfoss also expects earnings to be under pressure on several fronts in 2008 and the Group does not expect to be able to fully achieve the target earnings specified in the perspective plan for 2008 Annual Report Management Report for the Danfoss Group 2 Net sales increased by 14% to 22,196m DKK from 19,428m DKK in. Calculated at last year s exchange rate and adjusted for acquisitions and divestments, growth amounted to 12%, compared with 14% in. The financial year did not fully live up to the expectations that the group had at the half-year point. Sales exceeded expectations, but the group s profitability only partially achieved the desired levels. The year was characterised by a generally high level of demand for the group s products and there was strong growth on the markets in the first six months in particular. These high growth rates prompted the group to report at the half-year mark that it expected net sales to be at the high and of the range of 21-22bn DKK. The high level of demand in the first six months meant that production could not keep up with demand at many of the group s locations. It was therefore decided to bring forward investments in additional production capacity. Although most of the group s markets saw improvement in, the second half of the year was marked by a slowdown and uncertainty in many places, mainly as a result of the financial unrest on the American market. Caution was particularly noticeable in terms of new building projects, where many of the group s products are used. Earnings in were generally under pressure. The high cost of raw materials meant that production costs rose by more than expected. In order to partially compensate for this higher cost level, the group was forced to increase prices on a number of products. Non-recurring costs in the form of provisions for product faults and the costs of restructuring activities within the group also had a negative impact on earnings. On publishing its third quarterly report, the group therefore had to concede that earnings would not reach expected levels. Expectations for operating profit, EBIT, were revised to the lower end of the range bn DKK and the EBIT margin was adjusted downwards from 8% to between 7.5% and 8%. The pressure on profitability continued into the fourth quarter, so the group did not fully meet the expectations announced for. All three divisions enjoyed double-digit growth rates in net sales and this contributed to the positive growth in net sales. The European markets, in particular Germany, France and the UK, along with Russia, Latin

9 Group result Group sales Distributed by divisions mill DKK 2,000 mill DKK , Danfoss Refrigeration & Air Conditioning Division Danfoss Heating Division ,000 Operating profit (EBIT) Operating profit excl. other income and expenses 500 Danfoss Motion Controls Division Profit before tax Other activities The Danfoss Executive Committee: Jørgen M. Clausen, Niels B. Christiansen, Kim Fausing and Frederik Lotz

10 EBIT margin/rona Net interest-bearing debt % 20 mill DKK 4,000 3, ,000 2,500 2, ,500 5 EBIT margin, excl. other operating income RONA 03 Annual Report America, the USA and not least China, were the markets that saw the strongest growth. China is now Danfoss fourth largest market, after Germany, the USA and France, whereas in it was only the eighth largest market. Profitability in all three divisions was under pressure in. Rising raw material costs and non-recurring costs put pressure on earnings in the Danfoss Refrigeration & Air Conditioning Division while in the Danfoss Heating Division it was the heat pump market, among others, that failed to live up to expectations. In the Danfoss Motion Controls Division, major investment in the recently acquired Danfoss Solar Inverters was one of the factors affecting earnings. Profit before other operating income and operating expenses rose from 1,411m DKK in to 1,634m DKK, which was an increase of 16%. The improved results were due to growth in sales, the increased capital utilisation, and the various improvement programs of the Danfoss Business System for production, purchasing and sales which are continuously improving all parts of the value chain in the divisions. Operating profit (EBIT) was 1,616m DKK compared with 1,601m DKK for the previous year. Profit therefore met the reported expectations. Taking into account the developments that took place during the year, this profit can generally be considered satisfactory. This profit should also be evaluated in light of the fact that EBIT in was positively affected by profits 1, relating to the de-merger of biotech activities into a new company, Danfoss Bionics A/S. The combination of strong demand and pressure on earnings meant that the group was not quite able to achieve its target EBIT margin, which at 7.3% fell short of the 8% originally expected. The adjusted EBIT margin, measured as EBIT before costs and depreciation, which reflects the revaluation of assets and liabilities in connection with business acquisitions, was 7.6% compared with 8.4% in the previous year. Profit from associates/joint ventures was 210m DKK compared with 91m DKK last year. This item also includes 186m DKK that represents some of the profit from the sale of Damcos A/S, as well as a share of the profit of Sauer-Danfoss Inc., in the amount of 83m DKK, which compares with 129m DKK in the previous year. Profit before tax fell by 1.7% from 1,402m DKK to 1,378m DKK. Net profit was 1,063m DKK compared with 1,038m DKK in the year before. This is considered a satisfactory result. The group s return on net assets, RONA, fell from 16.8% to 14.1%. The acquisitions made in recent years, which are now included on both the opening and the closing balance sheets, as well as the large sums tied up in working capital as a result of growth, have increased net assets. Equity was 9,744m DKK at the end of, compared with 9,035m DKK the year before. The increase in equity is mainly due to the

11 Cash flows mill DKK 1, ,500 Cash flows from operating activities 2,500 Free cash flow Cash flows from investing activities result for the year after deducting the dividend payments for the year. Intangible fixed assets rose to 4,159m DKK from 3,874m DKK. Due to fewer acquisitions compared to, the item only increased by 7%. Financial resources Net interest-bearing debt amounted to 3,737m DKK at the end compared with 2,866m DKK in. This increase in debt can primarily be attributed to loans used to finance acquisitions during the year. For the same reason, the group s leverage (net interest-bearing debts as a percentage of shareholders equity) rose to 38% from 32% in the previous year. Danfoss policy is to maintain considerable long-term financial resources. At 31 December, the group had unused long-term binding credit facilities of 3.9bn DKK (: 2.7bn DKK). Cash flows from operating activities amounted to 1,016m DKK, which was a decrease of 305m DKK. The cash flow was affected by increased amounts tied up in working capital. Cash flows from investment activities amounted to -1,593m DKK, which was a decrease in investment of 1,427m DKK. This was mainly due to the fact that fewer companies were acquired in than in the previous year. In, six acquisitions were made, which together resulted in a negative influence on cash flows of 384m DKK. By comparison, in 1,995m DKK was used for acquisitions. Cash flows in were also negatively affected by advanced investments in the expansion and new construction of production capacity. In total, a total of approx. 300m DKK was spent on new construction. In total, the group will bring 100,000m2 of production facilities, warehousing and offices into operation in This expansion will also have a negative effect on cash flows in ,500 5 Annual Report 0 The free cash flow, which is a combination of cash flows from operating activities of 1,016m DKK and cash flows from investment activities of 1,593m DKK, was 577m DKK, representing an improvement of 1,122m DKK compared to. The free cash flow before M&A amounted to 423m DKK compared with 396m DKK in. The increased level of activity has contributed to a higher level of binding liquidity in working capital, which is partly offset by decreased acquisition activity compared with the same period last year. Accounting policies The annual report is prepared in accordance with the International Financial Reporting Standards (IFRS) and additional Danish information regulations for annual reports for accounting class D. The accounts have been prepared according to the same accounting principles as in. Manufacturer Mads Clausen launched the first valves on the market in The company was initially called Dansk Køleautomatik- og Apparat-Fabrik

12 Thermia headquartered in Arvika in Sweden opened Europe s leading heat pumps research centre. Employees who particularly embody Danfoss values were honoured and 13 teams from nine countries took part in Danfoss Ventures fourth Man on the Moon competition. Annual Report 6 Research and development An essential requirement to meeting its future goals is for Danfoss to constantly renew itself, be innovative and create products to ensure future growth. In, Danfoss spent 4.0% (: 3.8%) of net sales for research and development, including venture activities, equivalent to 889m DKK. This is an increase of 20%. 115 DKK (64m DKK) of this amount was capitalised for strategic development projects. Rising energy prices and the general increase in global demand for energy-saving products has prompted the group to increase the level of its research and development activities. The focus of activities in the Danfoss Refrigeration & Air Conditioning Division has been on achieving energy efficiency, reducing the amount of refrigerant used and using natural refrigerants in applications where possible, as well as developing electronic expansion valves. In, the Danfoss Heating Division opened a 3,000m2 research centre for heat pumps in Sweden, designed to create hi-tech, environmentally friendly, effective energy solutions. The Danfoss Motion Controls Division has been concentrating on developing a new range of frequency converters with additional functions to provide energy savings of up to 30%. The division has also developed products such as active filters that use energy more efficiently. For more information about product development activities, please refer to the divisions individual reports. Another important part of research and development activities is to get the results patented and to ensure that existing Danfoss patents are not infringed, causing damage to the business. Each year, the group generates around 350 inventions, of which around 25% gain patent approval. In, 67 new patent applications were filed compared with 73 the previous year, and the group obtained approvals for a total of 119 patents, compared with 141 in. The total number of active patents at the end of was 982 (: 997). Patents also play an important role in the acquisition of companies. Danfoss Ventures In, Danfoss Ventures consolidated its position as a significant developer of new business concepts. The build up of projects and investments continued and network and marketing activities were further strengthened. In, Danfoss spent 74m DKK for venture activities compared to 86m DKK in. Six new investments were made in, bringing

13 Corporate Citizenship In order to enjoy a good reputation in the current global climate, a company not only needs to make money, but also needs to meet its environmental and social responsibilities. A good reputation is vital for business development. Danfoss success depends on the rest of society trusting Danfoss and on us living our values. Knowledge In order for Danfoss to achieve its long-term goals, it has developed a strategy which will help the group s drive toward its goals. A major element of this strategy is the development of both managers and employees, as it is the people who implement the strategies who achieve the results. Building employees competencies through on-the-job training and other courses and education is crucial in the sharpened global competition. Danfoss views it as a life-long process and commits major resources to supplementary training for employees. Training also improves employees adaptability and employability. In, Danfoss invested 100 million DKK in external supplementary training, which is about 25% less than the year before. At the same time, there was significantly increased focus on a wide range of internal training and supplementary training activities. Many of Danfoss sites are of great importance to the local community and the group could be considered a member of society, with around 22,000 employees and companies in 56 countries. Danfoss overall goal for Corporate Citizenship is keeping our own house in order. This applies to employees, so that they have an attractive workplace and a healthy working environment. It applies to the environment, where Danfoss products contribute to energy savings, and the environmental impact of their manufacture is constantly being reduced. It applies to social and ethical responsibility in a wider sense. These efforts are expected to have a positive effect on Danfoss results through increased employee satisfaction, reduced consumption of resources and a good reputation. In 2002, Danfoss signed up to the ten principles for good business ethics in the UN s Global Compact initiative. The principles include respect for human rights, employee rights and the environment as well as an obligation to work against corruption. Since then, the company has implemented a wide range of initiatives to ensure that the principles are upheld and that there continues to be satisfactory progress in the group s work on environmental and social responsibility. Danfoss wants to ensure that things are done properly across the entire organisation and it therefore carries out a comprehensive survey of the work on social responsibility every autumn. The survey is sent to all the group s factories and sales companies throughout the world and it provides a detailed picture of the individual companies handling of topics such as discrimination, child labour, labour rights, business ethics, corruption and bribery, working environment and their relationship with the local community. Some of the questions in the Danfoss CSR survey concern internal procedures and good business practice, while others relate to the UN s Global Compact initiative and GRI (Global Reporting Initiative) indicators. In, Danfoss produced an Ethics Handbook, which will be sent to all the group s employees in The Ethics Handbook 7 Annual Report the current total to 19. During the course of the year, Danfoss Ventures has increased its focus on the areas of water and sustainable energy. A total of 13 teams from China, India, France, Germany, the USA, Mexico, Brazil, Poland and Denmark took part in Danfoss Ventures fourth Man on the Moon competition. Prizes were awarded to the two teams with the best ideas and it is expected that at least two of the business ideas presented will be realised. To further strengthen the internal network at Danfoss Ventures, a network of Danfoss Ventures ambassadors has been established at each of Danfoss 42 largest locations. The ambassador is the local contact for ideas that do not come under current core activities. The first product was a thermostatic expansion valve. Danfoss modern refrigeration valves can trace their roots back to this valve

14 Employees by region 12,000 10,000 8,000 6,000 4,000 2,000 Annual Report 8 Other regions Asia/ Pacific Northamerica Denmark Europe excl Denmark provides ethical guidelines for all employees and is divided into the following main areas: employee relationships, relationships with customers/suppliers and relationship with the community. As well as covering the Global Compact principles, the Ethics Handbook also includes previously unwritten rules, which have long been implicit in Danfoss values. One of Danfoss core values is passion for technology. Danfoss aims to be at the leading edge of technological development and to ensure that its products and processes are optimised so as to have the smallest possible impact on the surrounding environment. The group continually works to streamline production processes so that products are manufactured with the lowest possible consumption of resources and environmental impact. Danfoss aims to contribute to the reduction of global CO2 emissions through the energysaving properties of its products and by reducing CO2 emissions from the company s own activities. Danfoss has therefore started to set ambitious targets for development in energy consumption and the emission of greenhouse gases, both from its own sources and from purchased energy. In recent years, Danfoss has acquired a number of businesses, which has resulted in an increase in the group s energy consumption. The factories are continuously working to reduce their energy consumption. In the next few years, Danfoss will make a targeted effort to separate energy consumption from increases in production by implementing energy-saving initiatives and making greater use of renewable energy sources. In, all Danfoss production companies were asked to calculate their energy consumption from fossil fuels and renewable energy sources and most factories were able to obtain this information from their suppliers. This has enabled Danfoss to calculate the CO2 emissions for each individual factory for the first time. The basis for the calculations was the same data from the World Resources Institute that the UN s climate panel (IPCC) uses. Ambitious targets for reducing the CO2 emissions of the Danfoss Group will be set in the next few years. Measures will include reducing Danfoss energy consumption, increasing the proportion of renewable energy used and ensuring that Danfoss own products and solutions are used wherever possible from a business and environmental perspective. The Corporate Citizenship section contains additional information on the group s work in relation to social responsibility and the environment. Employee situation At the end of, the Danfoss Group had 22,323 employees, an increase of 1,711 on. During the course of, the number of employees increased by 678 as the result of new acquisitions. The group s employees are distributed as follows: 10,334 in Europe, excl. Denmark (: 9,453), 2,626 in North America, including

15 Acquisition of companies and activities Company Country Profit and Holding Turnover loss account acquired per year consolidated from mill. DKK *) No. of Consideemplo- ration yees paid mill. DKK PowerLynx A/S Denmark March 100% 76 Normann Etek AS Norway July 100% Jupiter Heizsysteme GmgH Germany July 100% 88 **) KH nordtherm A/S Denmark August 70% **) Danfoss Chatleff, LLC USA October 100% ZAO Ridan Russia December 100% *) Unaudited sales in or the latest financial year before the acquisition **) According to a nondisclosure obligation the purchase price is not stated core business areas, the group acquired six businesses in for a combined total cost of 483m DKK. The acquired companies are entered into the accounts with 145m DKK in net sales and 60m DKK in EBIT. Mexico, (2,533), 2,609 in the Asia-Pacific region, including China (2,173) and 289 in other regions (329). At the end of, there were 6,465 employees in Denmark, compared with 6,124 the year before. 9 Acquisition of companies, business expansion and establishments in In order to support Danfoss strategy of being the number one or two within all strategic Sale of companies and activities in In, Danfoss sold its 25% share in Damcos A/S. The profit from the sale is 236 mil. DKK. Intangible assets A company s intangible assets are difficult to value and therefore are not fully included in the company s accounts. In relation to the acquisition of companies, for example, the intangible assets make up the part of the purchase price that cannot be directly assigned to physical assets. This value is made up of factors including the brand, employees knowledge and customers. As, in accordance with IFRS, goodwill is not amortised and because Danfoss has acquired a number of companies in recent years, the entry for goodwill has grown significantly. Since 2005, the goodwill entry on the balance sheet has grown from 1.4bn DKK to 2.9bn DKK in, while the entry for patents, licences, etc., has increased from 0.4bn DKK to 1.2bn DKK. At the same time, Danfoss has built up considerable value over the years that cannot be seen on the balance sheet. Know-how, customer loyalty, patents and reputation/brand all represent huge value for the group. Strength of reputation should therefore play a larger role in assessing a company s true value. Annual Report The Executive Committee and Board At the Danfoss Annual General Meeting on April 20,, Henrik E. Nyegaard was re-elected as Chairman of the Board, while Hans Michael Jebsen was elected Vice-Chairman. Bill Hoover was elected as a new member of the Board, replacing Daniel Meiland. Frederik Lotz succeeded Ole Steen Andersen, who retired at the Annual General Meeting, as Executive Vice President and Chief Financial Officer on May 1. Executive Vice President and Chief Development Officer Hans Kirk stepped down from the Executive Board on December 31,, in preparation for his retirement from the company. Kim Fausing was appointed new Executive Vice President and Chief Operations Officer. He comes from his position as Divisional President for Danfoss Refrigeration & Air Conditioning Division. Board Member Niels Christian Jørgensen died in February 2008, following a long illness. He will be replaced by his deputy, Svend Aage Hansen. The first production was set up in the orchard of Mads Clausen s family farm but soon there was not enough space. The first solution was to split the wooden building in sections and hoist the sections while new walls of brick were made. The wooden building was then placed on top, forming a second storey

16 Annual Report 10 Danfoss reputation/brand is important and is of great value to the group, as it is an indication of the trust that has been built up with customers, employees, suppliers and other Danfoss stakeholders. Trust is therefore a very important factor for Danfoss in terms of achieving the stated future growth target. Danfoss reputation/brand has been strong for many years. This was confirmed in The Global RepTrak survey, prepared by consultancy firm Reputation Institute, in which Danfoss came 12th out of the 1,000 companies from 25 different countries that were included in the survey. In order to emphasise the importance of reputation, in its new perspective plan Danfoss has focused on further strengthening its reputation over the next few years. The major focus on this area was further underlined by the appointment of Communications and Chief of Staff Ole Daugbjerg as Chief Reputation Officer on January 1, One of the most important assets at Danfoss is its employees and every year large amounts of resources are used for training and extending its employees expertise. Many employees have worked for Danfoss for several years and through their jobs they have gained great knowledge and experience of their work tasks. The employees know-how is not valued in the accounts, but it is of great value to Danfoss. Through long-term relationships we have succeeded in achieving a customer base where relationships are not just about customer-supplier affairs but where in many cases there has been joint development and product adaptation in cooperation with the customers. The value of Danfoss customer portfolio and a wide range of complementary products within the individual business areas cannot therefore be seen in the accounts. There are also a number of patents which help to safeguard the value of the product portfolio. ENTERPRISE RISK MANAGEMENT All business involves risks, some of which could transform into opportunities, if the risks are managed. The aim of risk management is not, therefore, a desire to eliminate all risks, but to actively determine which risks can be accepted and managed, and which should be avoided. Good risk management can strengthen competitiveness as the business can keep active control of its risk picture. The aims of Danfoss Enterprise Risk Management (ERM) include: collecting and consolidating risk-related information establishing true reporting of the most significant risks, thereby contributing to the management of these risks ensuring that risk management within the group complies with the applicable group policies encouraging an open business culture with good risk knowledge and a proactive attitude to the management of such risks. Organisation and foundation Risk management is partly about involving employees. It is also about establishing a culture in which relevant risks are discussed openly and across areas of responsibility. Those who know most about actual risks and their management are generally the risk owners themselves. Responsibility for enterprise risk management lies with Corporate Risk Management, which is responsible for consolidation and reporting as well as the development of procedures and tools. As there should naturally be a strong link to the divisions, a Division Risk Manager has been appointed for each division to support the process. Responsibility for risk management lies with the respective business and functions. Risk management Risk management is an integral part of general business management and is developed as new requirements and opportunities come to light. For example, Danfoss Business System programs help to establish effective systematic processes, which in turn improve the management of major risks. Other risks can be insured against, which provides protection against increased financial loss. As well as the insurance required by law, the group also insures areas where management-related or administrative

17 Risk Mapping As part of its risk management strategy, Danfoss is currently implementing risk mapping throughout the Group. As well as identifying and evaluating risks, the process provides a complete evaluation of the most significant risks: a risk profile of the most significant risks, grouped in relation to likelihood and consequence a risk management profile, which evaluates the effect of the actual risk management an improved decision-making basis for determining which risks can be accepted and which must be reduced or eliminated entirely as well as ensuring that this information is clearly communicated. The need for cross-functional risk analyses and initiatives within the field of strategic risk management will increase in proportion to the group s increased involvement in more complex markets and cooperative relationships. Furthermore, the development in Danfoss envi- Strategic/operational risks Political/social risks Political risks can create problems but also opportunities. For example, political intervention in the field of energy conservation can present new revenue opportunities or strengthen existing sales. On the other hand, political or social unrest is a real threat in many of the countries and regions in which Danfoss operates. The group s extensive program for stationing employees in and outside Denmark helps to increase awareness of the cultural and historic differences between employees, just as Danfoss CSR policy supports the idea of doing business while caring for the local community. The current risk scenario seems well-balanced in relation to geography and value creation. Danfoss Captive Reinsurance A/S As an extension and consolidation of the group s Enterprise Risk Management (ERM) processes, Danfoss established its own insurance company as of January 1, The insurance company s main purpose is to reinsure selected risks that the group faces. Initially, the company will reinsure the risks relating to the three existing master insurances: Commercial and product liability, All-Risk insurance and Transport insurance. Despite establishing its own insurance company, the group will only self-insure to a limited extent. ronment demands optimum risk management where this requires increased sensitivity. 11 Annual Report advantages can be achieved. Danfoss has established a global master programme in which all subsidiaries are obliged to participate. This master programme covers areas including all risks insurance (machinery, inventory, stock and operating loss), transport insurance, commercial liability and product liability insurance as well as executive and board liability insurance. In addition to this, each company arranges its own insurance cover, including insurance for occupational injuries. Supplier management The broad composition of the product range and the resulting broad composition of the supplier portfolio mean that the risk for the group in general is limited. The management systems used and the group s standards enable the individual business units to continuously monitor their main suppliers. This safeguards areas such as quality assurance and delivery reliability as well as ethical and environmental aspects. As a result of recent acquisitions, there will be increased focus on risk management in relation to purchasing during the course of Contract management With sales offices in 57 countries and procurement on three continents, there is a great need for contract management in order to limit the risk of serious losses. This management takes place on the basis of legal contract manuals and procedures, which are designed to limit risk to an acceptable level. Even though no particular risks have been identified that could threaten the group s existence, there will be Industry meets agriculture. Elsmark, where Danfoss was established and grew, was originally a farming district

18 a greater emphasis on contract management in Annual Report 12 Company acquisition and integration The group implements a well-proven and comprehensive due diligence process when investigating acquisition candidates. This process covers the acquiring business unit and a fixed number of corporate functions as well as often including external consultants. Against this background and taking other factors into account, an integration plan is prepared for each individual company acquisition. The aim of the plan is to ensure that integration takes place in accordance with business plans and that the group takes care of business-related opportunities and risks as well as the human aspects. Development on core markets Historically the European markets have been the main contributors to earnings. Danfoss increased globalisation of both production and sales has resulted in a more balanced distribution. In recent years, sales on the American, Chinese and Russian markets have increased significantly and have now grown to a size where they are of greater importance. These three markets continue to show strong growth and any recession on these markets would have major consequences for the group s overall result. Pirate copying of Danfoss products Danfoss products are renowned for their high quality, user safety and environmental responsibility. In order to maintain this reputation and to continue to be able to supply new products and solutions to customers, Danfoss invests time and money in product development and quality assurance. In recent years there has been an increase in the number of cases where Danfoss brand or products have been illegally copied. Pirated products are most often characterised by poorer quality and the manufacturer typically has little interest in environmental and working environment conditions. Danfoss department for the protection of intellectual property rights (IPR) has offices in Denmark and China, from which staff investigate each case of suspected pirated copying in conjunction with lawyers and public authorities. This is done to protect customers and Danfoss own rights as well as to eliminate illegal production. Pension obligations Danfoss has pension obligations in the form of Defined Benefit schemes (pledge schemes) in subsidiaries in a number of countries where there is a tradition of such forms of pension. Such obligations are sensitive to a number of parameters including interest rates, longevity and earning of pension rights. Danfoss is actively working to reduce this risk by such measures as closing existing schemes to new members and not setting up any new schemes. Defined Benefit obligations are equivalent to savings in some countries. In these cases, Danfoss attempts to minimise risk by practising an investment policy where invested funds are spread across several classes of securities. Product and commercial liability The majority of Danfoss products do not themselves constitute any danger when used, but they can form parts of finished products which could be a risk to the environment. This risk is monitored and controlled through quality and environmental management systems that cover suppliers, production and product development. This ensures uniform high quality as well as limiting the effects on the environment and working environment of the production, use and disposal of Danfoss products. Financial and treasury risk management Danfoss international business profile is one reason why the company s profitability and cash flows are exposed to financial risks, including currency, interest rate, raw materials, liquidity and financial counterpart risks. Risk management activities are centrally coordinated by Corporate Treasury and focus on risk coverage and minimisation, with a particular emphasis on reducing fluctuations in the company s cash flows and profitability in local currency within a month horizon.

19 1. Transaction risk Major consolidated risks and 12 months expected cash flows in foreign currency (excluding EUR) are covered on an ongoing basis. 2. Translation risk (conversion risk) Danfoss does not generally cover translation risks, as these do not directly affect the underlying cash flows. Danfoss does, however, try to reduce translation risks through loan financing in local currencies as much as possible. 3. Economic/structural (strategic risk) Economic/structural currency exposure cannot be covered effectively using financial instruments and is therefore not part of Danfoss financial risk management strategy, although it is managed at a strategic level as much as possible. Interest rate risk The group s interest rate risk comes primarily from interest-bearing debt and cash funds. The group makes use of both fixed-rate and variable loans, as well as derived interest products. Danfoss policy is that the interest rate risk must not exceed 2% of the expected EBIT for the next 12 months (on a rolling basis): for example, with an EBIT of 1.6bn DKK, the interest rate risk must be no more than 32m DKK. At the end of, the interest rate risk was 16m DKK. Raw materials risk Developments in the global price of raw materials can have an effect on the group s earnings. As well as having fixed price agreements with suppliers, Danfoss uses financial instruments to cover risks relating to its purchase of certain metals and electricity. Danfoss overriding policy is to ensure that significant raw materials risks are reduced Liquidity risk Danfoss policy is to ensure at all times that the group has the liquidity necessary to meet its obligations and to finance its planned strategic action. The group minimises its liquidity risk through a combination of effective liquidity management and planning, by establishing irredeemable loan facilities and by ensuring that cash funds are liquid and accessible. Currency exposure consists of three elements: through a combination of risk coverage and active price adjustment. Raw materials consumption is covered for at least six months and at most 18 months in advance, where they are deemed significant. At present, only copper is covered by the central risk management strategy. 13 It is Danfoss policy to: have a qualified investment grade credit rating have a significant liquidity reserve in the form of unused irredeemable credit facilities and cash assets make sure that a maximum of 25% of loan facilities are due within 12 months make sure that the average due date for the loan portfolio is at least two years At the end of, Danfoss financial resources were 5.9bn DKK. Annual Report Currency exposure Danfoss Group Credit Facilities (DKK mill) Credit Lines Utilized Available Committed credit facilities Danfoss A/S 7,082 3,187 3,895 Working Capital lines 2,480 1,195 1,285 Cash balances Financial resources 719 5,921 Counterpart risk It is Danfoss policy to minimise the risk of one or more of its financial partners being unable to meet their obligations. Danfoss tries to avoid such situations by, where possible, only using financial partners who have at least an A credit From 1943: a finished goods stock and packing department

20 Annual Report 14 rating in Standard & Poor s credit rating terminology. publication must be carried out in a reliable and adequate manner. Corporate Governance With a few exceptions, Danfoss Corporate Governance policy complies with the recommendations of the Copenhagen Stock Exchange Committee for Corporate Governance. Danfoss is a family and foundation-owned company and is therefore not subject to the same duties of information as a listed company. However, Danfoss has chosen to largely follow the regulations that apply to listed companies. The exceptions are stated below. Corporate Governance is based on key words such as responsibility and integrity, while openness about the group s activities plays an important role. It is therefore important that individual managers know how to conduct themselves in this respect and that they act within their own powers and the framework of the law. Danfoss has a two-tier management system consisting of a Board and an Executive Committee. The Articles of Association of the company, its values and regulations as well as a large number of procedures for management and control are also included in Danfoss Corporate Governance. Danfoss is a family- and foundation-owned company and, therefore, it does not have the same duty to inform shareholders and the financial markets as a listed company. However, the Group has chosen to provide information of all material matters and events which have an impact on the fulfilment of the Group s business targets, results and strategies in the same way as a listed company. Danfoss deviations from the recommendations of the Copenhagen Stock Exchange Committee on Corporate Governance Recommendation no. III.1 It is recommended that the Board adopts an information and communication policy. Furthermore, it is recommended that the company develops procedures which ensure that the company immediately publishes all essential information of importance about how the shareholders and the financial markets evaluate the company and its activities, as well as its business goals, strategies and results, unless publication can be omitted according to the legal rules of the stock exchange. The Recommendation no. III.2 It is recommended that the Board ensures that the continuous dialogue between the company and the company s shareholders and potential shareholders is flexible. As a family- and foundation-owned company, there is no need for daily, close communication with shareholders, unlike a listed company. Danfoss is in close contact with the Bitten and Mads Clausen Foundation and the Clausen family and has also chosen to be in regular contact with the other shareholders, thereby acting in many regards as a listed company. Recommendation no. V It is essential that the Board is composed in such a manner that it is capable of handling its managerial tasks, including the strategic tasks of the company, in an efficient and forwardlooking way, and that, at the same time, it acts as a constructive and qualified sparring partner for the management. It is also essential that the directors always act independently of special interests. The Board must continuously ensure that its composition and its procedures reflect the demands posed by the company s current situation and circumstances. An inevitable consequence of the type of owners Danfoss has is the fact that some of the Board members have special interests. However, the Board is aware of this. It is also important that its members have the required competencies. Thus, the current Board has a broad base and a global