Semiannual Report 1999

Transcription

1 s Semiannual Report 1999

2 2 THIS IS SIEMENS Corporate structure Energy Power Generation (KWU) Power Transmission and Distribution (EV) Industry Automation and Drives (A&D) Industrial Projects and Technical Services (ATD) Production and Logistics Systems (PL) Siemens Building Technologies AG (SBT) Information and Communications Information and Communication Networks (ICN) Information and Communication Products (ICP) Siemens Business Services (SBS) Transportation Transportation Systems (VT) Automotive Systems (AT) Health Care Medical Engineering (Med) Components Semiconductors (HL) Passive Components and Electron Tubes (PR) Electromechanical Components (EC) Lighting Osram GmbH Selected financial data First half First half (in billions of DM) ) ) New orders Net sales Net income (before extraordinary items) Investments /31 9/30 Employees 438, ,000 3/31 9/30 Shareholders equity Stock price range 3) 10/1/98 3/31/99 10/1/97 9/30/98 High Low /31 9/30 Period-end Number of shares (in millions) Market capitalization 3/31 9/30 (in millions of euros) 36,817 28,068 1) 10/1/1998 3/31/1999 2) 10/1/1997 3/31/1998 3) in euros, XETRA or IBIS closing price, Frankfurt Market and share performance (indexed) Financial Services 100 Siemens Financial Services (SFS) Siemens Real Estate Management (SIM) 90 10/1/98 3/31/99 Siemens Dow Jones STOXX DAX

3 Letter to our shareholders 3 Siemens has set ambitious goals for performance and the implementation of strategic measures in fiscal At midyear, we are right on track. A STRONG HALF YEAR The Company s key figures for the first half have met our expectations. The 17% surge in sales, partly attributable to the billing of major projects, will normalize during the year, yet remain in the double-digit range. After moderate growth in the first quarter, new orders jumped sharply to yield a half-year increase of 10%. Global demand for our innovative products, systems and solutions continues to grow. Earnings are also gratifying, with net income climbing 17% to just under DM1.4 billion. We are making solid progress. We are issuing this first Semiannual Report in preparation for conversion to the U.S. GAAP standard and a subsequent listing on a U.S. stock exchange early in The Report contains detailed information on each of our business segments and has been reviewed by our auditors. Its publication is part of our policy of providing complete transparency to the groups we are addressing both within and outside the Company: our customers, investors and employees. IMPLEMENTING THE TEN-POINT PROGRAM I presented our Ten-Point Program designed to ensure sustainable growth in the Company s profitability in our 1998 Annual Report and at the Annual Shareholders Meeting on February 18, 1999.The Program focuses on optimizing our business portfolio, strengthening fields that are strategically important for the future, orienting all decisions toward raising Company value, and preparing to list Siemens on an American stock exchange. We are rigorously implementing the Program quickly but carefully. What have we accomplished so far?

4 4 Letter to our shareholders COMPONENTS SPUN OFF To further optimize our portfolio, we are spinning off the three Groups in the Components segment step-bystep and divesting two divisions in Information and Communication Products (ICP). Preparations for these moves have largely been completed. After concluding agreements with employee representatives regarding future working conditions, we converted Semiconductors (HL) into a separate legal entity, Infineon Technologies AG, on April 1, We plan to list this company on stock exchanges in Germany as well as the U.S. On April 1, 1999, we also transformed Electromechanical Components (EC) into a separate legal entity called Electromechanical Components GmbH & Co. KG, Munich. Talks have begun with prospective buyers. A large share of the business at Passive Components and Electron Tubes (PR) is conducted by the legally independent joint venture Siemens Matsushita Components GmbH (S+M), in which Siemens and Matsushita each hold a 50 percent stake. We have now reached an agreement with our partner to publicly list this Group as well. Siemens and Matsushita will jointly hold a 25 percent stake in the new company. Details regarding this listing will be finalized in the coming weeks. STRENGTHENING KEY FIELDS In our drive to strengthen strategically important fields, we acquired the industrial activities of Switzerland s Elektrowatt and Westinghouse s conventional power generation business last year. Elektrowatt forms the core of Siemens Building Technologies AG (SBT), launched on October 1, SBT is making a solid contribution to our sales and earnings growth. Thanks to this acquisition, we now hold a commanding market position in the field of building technologies. Westinghouse is proving to be the ideal complement to Power Generation (KWU). While Siemens is a technology and market leader in the 50-hertz field, Westinghouse is strongest in the 60-hertz field, particularly in the Americas and parts of Asia. Together we are profiting from the booming American market for power plants. We initiated the second phase of the KWU-Westinghouse integration plan in March 1999, and expect the significant rationalization effects and cost-reducing synergies resulting from this move to reduce Power Generation s costs by more than US$600 million in the near future. The pace of technological progress is particularly breathtaking in the Information and Communications segment. Within Information and Communication Networks (ICN), developments are especially dynamic at the Information & Broadband Division. To bolster our position in Internet technologies, we founded Unisphere Solutions, Inc., in Burlington, Massachusetts, two months ago.the company consolidates all Siemens Internet businesses, a stake in Accelerated Networks, and our recent acquisitions of Argon Networks, Castle Networks and Redstone Communications. We have sharpened our focus in this exciting business by acquiring these highly innovative specialists and by entering into key strategic partnerships, such as with 3Com and Newbridge. In another promising move, we signed an agreement with Japan s NEC Corporation in March 1999 to set up a joint venture for developing network technologies for the third generation of mobile phones which will operate on the UMTS standard. The new company will secure our leading position in GSM-based network technologies over the long term.

5 Letter to our shareholders 5 In early April, during the realignment of Italy s telecommunications sector, we reached an agreement with Telecom Italia to divide up the joint venture Italtel, which had been formed in When this move is approved by government authorities, we will take over 100 percent of Italtel s radio relay and transmission systems business, its mobile communications networks segment, and its call center, IT and terminal devices subsidiaries. Our two strategic objectives in founding Italtel gaining access to the Italian market and utilizing combined technical know-how, particularly in the sectors of mobile communications and transmission systems have been completely achieved. At the Annual Shareholders Meeting on February 18, 1999, I explained that we have tied the compensation of our senior management to the EVA performance yardstick. In addition, our shareholders approved the creation of a stock-option plan for top managers and the conditional capital measure necessary for implementing the plan. Major changes will follow from the conversion of our bearer stock into registered stock and the exercise of our stock-buyback option. A majority of shareholders also approved the proposal to eliminate preferred stock with multiple voting rights. We have just reorganized the Computer Systems Division at Information and Communication Products (ICP) by dividing it into two business units: one for volume products (personal computers and Intel-based servers), and the other for enterprise computers (mainframes and Unixbased servers). This change will enable us to compete more efficiently, improve our customer focus and optimize our use of resources. The stock market has rewarded our decisive implementation of the Ten-Point Program and our improved earnings. The Siemens share has significantly outperformed the Dow Jones STOXX and Germany s DAX index since the beginning of fiscal We look to the future with confidence. WE ARE INCREASING COMPANY VALUE At the beginning of this fiscal year we introduced EVA (economic value added) Company-wide as the yardstick of success for each of our activities. In focusing on creating Company value, a business is considered successful only if it at least recoups its capital costs. We now conduct thorough quarterly reviews of each unit s performance and take immediate corrective measures if necessary. Our initial experiences with this system have been highly positive, and this approach is helping shape a more responsive and performance-oriented corporate culture. Dr. Heinrich v. Pierer President and Chief Executive Officer Siemens AG

6 6 MANAGEMENT S DISCUSSION AND ANALYSIS The publication of this Semiannual Report marks a first for Siemens: never before has the Company issued a comprehensive discussion and analysis of its interim business results with detailed segment information. In its presentation of business trends, statement of income, balance sheet, and statement of cash flows, the Report reflects the structure of the Company-wide, EVA-based management system introduced on October 1, Under this structure, Company activities are broken down into three categories: operations; financing and real estate business; and pension funds. Due to this change in reporting, comparable figures for the corresponding period last year are available only for key data such as new orders, sales, net income and investments. The separate disclosure of these three categories reflects the essential value components of Siemens business. Various industry-specific controlling tools have been defined for quantifying these components. A HALF-YEAR REVIEW Key half-year information: Earnings after income taxes increased 17% to DM1.389 billion, compared with income of DM1.188 billion before extraordinary items a year earlier. The elimination of last year s burdens and the first positive effects from restructuring measures contributed to this performance. The higher tax rate also indicates the effects of the German tax reform passed in March Nearly all operating units contributed to the positive earnings trend. Positive developments at Medical Engineering (Med), Power Generation (KWU), Transportation Systems (VT) and Semiconductors (HL) were especially notable. The results at Passive Components and Electron Tubes (PR) and Electromechanical Components (EC) were adversely affected by a slower economy. New orders rose 10% and sales climbed 17%, compared with year-earlier figures. These figures were substantially boosted by consolidation effects and negatively affected to a slight degree by currency translation factors. The balance of net cash provided by operating activities and net cash used in investing activities was DM2.8 billion for the half year. Expenditures for property, plant and equipment, and investments totaled DM3.5 billion, of which approximately DM500 million was spent on acquisitions of investments. SOLID IMPROVEMENT IN EARNINGS Income from continuing operations before income taxes was DM2.064 billion for the first half of fiscal 1999, compared with DM3.438 billion for the full 1998 fiscal year. Half-year gross profit on sales totaled DM17.3 billion. Gross profit on sales expressed as a percentage of net sales increased from 27.1% for the full 1998 fiscal year to 28.2% for the period under review. This improvement is largely attributable to the absence of special charges arising from project risks in the Energy and Transportation segments, and to price stability in the semiconductors sector. As a percentage of sales, research and development costs as well as marketing and selling expenses were slightly below their fiscal 1998 level. In contrast, general administrative expenses increased as a result of differences in the way administrative costs are defined in newly consolidated companies. The share of financial results to income from continuing operations declined to 47% from 54% in fiscal Net income from investment in other companies was DM236 million; this reflects both the absence of income provided by the Company s 40% stake in GPT Holdings Ltd. (GPT), London, which was sold in fiscal 1998, and the negative results of Italtel S.p.A, Milan. As in the previous year, other financial gains of DM1.311 billion includes income from the regular sale of marketable securities as well as gains achieved by reapportioning specialized investment funds in the Company s domestic pension fund. As a result, the interest income from these special-

7 Management s discussion and analysis 7 ized funds declined. Together with lower interest income from reduced liquidity and higher interest expenses due to slightly increased debt, this led to a net interest expense of DM574 million. GRATIFYING BUSINESS GROWTH New orders in the first half of fiscal 1999 rose 10% to DM65.3 (1998: DM59.5) billion. Changes in the consolidated group in particular the acquisition of the industrial activities of Elektrowatt AG (Elektrowatt), Zurich, and the power plant business of CBS Corporation (Westinghouse), New York, contributed nine percentage points to this growth. Currency translation effects reduced the growth in orders by three percentage points. Bolstered by major projects as well as growth at Semiconductors (HL), domestic orders rose 13% to DM19.7 billion. International orders grew 8% to DM45.6 billion, reflecting the effects of regional crises in Asia, Eastern Europe and South America. The level of orders in the Asia-Pacific region, however, stabilized in the second quarter. Sales climbed 17% to DM61.2 (1998: DM52.1) billion. Approximately 7% of this growth is attributable to changes in the consolidated group. As with new orders, currency translation factors had a negative 3% effect on sales. Domestic sales increased 5% to DM17.8 billion. The relatively low growth is attributable in part to moderated demand in the Industry segment. International sales, profiting from consolidations as well as project billing, jumped 23% to DM43.4 billion. Regional development varied: sales climbed 20% in Europe, 29% in Asia-Pacific, and 35% in the Americas. Siemens employed 438,000 people worldwide at March 31, 1999, compared with 416,000 at September 30, The increase of 22,000 employees affected only the international workforce, which grew to 244,000 at March 31, 1999 from 222,000 at the close of fiscal 1998.The consolidation of Elektrowatt s building technology business accounted for 19,400 of the additional international employees.the number of domestic employees 194,000 remained unchanged from September 30, GROWTH REQUIRES AN INCREASE IN ASSETS EMPLOYED The balance of net cash provided by operating activities and net cash used in investing activities resulted in net cash outlays of DM2.8 billion in the first half year. These cash outlays were primarily due to the buildup in working capital. The higher level of assets employed is chiefly the result of a DM2.8 billion increase in trade accounts receivable, which reflects business growth and changes in customer financing requirements for Company products and services. These receivables have a financing dimension because of their lengthy terms of contract. However, they are included in net cash provided by operating activities under their respective businesses insofar as financing is not provided by Siemens Financial Services (SFS). The inventory increase of DM2.8 billion was more than offset by an increase in progress payments to DM2.9 billion. Net cash used in investing activities, totaling DM4.5 billion, is considerably lower than the corresponding amount in fiscal 1998, which was affected by the Elektrowatt and Westinghouse acquisitions. Of the acquisitions made by Information and Communication Networks, the purchase of Argon Networks, Inc. (Argon), Littleton, had an impact on liquidity as of March 31, By contrast, receivables from financing services rose by DM2.6 billion as a result of expanding financing and real estate activities. The balance of net cash provided by operating activities and net cash used in investing activities was financed in large part by the DM2.7 billion reduction in the liquidity of the Company. Of the increased debt disclosed in the balance sheet, only DM0.8 billion affected the cash flow of the Company, resulting in a debt-equity ratio of 0.5:1. As part of the move to centralize financing, the operating units have substituted in-house financing for part of their external debt.

8 8 Management s discussion and analysis EBIT AND NET CAPITAL EMPLOYED USED AS NEW INDICATORS FOR OPERATIONS By introducing economic value added (EVA) as a basic performance measure and incentive, the Company has further refined the income statement and balance sheet presentation of its operations. Contrary to the former practice of disclosing earnings before taxes (EBT), the Company now presents earnings before interest and taxes (EBIT), conforming to international practice. The difference between EBIT and EBT lies chiefly in the interest cost incurred by debt. In the EVA approach, this interest cost is covered by the capital cost concept. In addition, overhead cost allocations from corporate departments to the operating units have been eliminated as of the beginning of the current fiscal year. As a result, the figures of the operating units include only cross-charges relating to services provided by corporate departments at market terms. Last year s figures have been made comparable. Net capital employed is presented as an EBIT-related indicator that consists of noncurrent assets and net working capital, with advances received from customers and other non-interest-bearing liabilities being recognized as asset-reducing items. Thus net capital employed essentially represents the interest-bearing capital of operations from an investor s view and are the basis for determining capital cost when calculating economic value added (EVA). INDUSTRY-SPECIFIC KEY INDICATORS FOR FINANCING AND REAL ESTATE ACTIVITIES In contrast to the system used for operations, return on bank-specific and business-specific shareholders equity is decisive for Siemens Financial Services (SFS) and Siemens Real Estate Management (SIM) because net interest income is a prime performance driver of both units. The amount of the shareholders equity is determined by the assets and the composition of the respective business assets. Risks from off-balance-sheet items, such as derivative financial instruments, are also included in assessing risk-adjusted capital. Pension funds relates to domestic pension assets and domestic pension accruals which are administered like an external pension fund. The pension plan assets are managed predominantly by Siemens Kapitalanlagegesellschaft mbh, Munich. Earnings reflect the balance of the interest cost on benefit obligations as well as the return on the domestic plan assets. Allocations to pension accruals for benefits earned during the fiscal year (service costs) are borne by the respective units as part of their functional costs.

9 Management s discussion and analysis 9 TRENDS IN THE OPERATING UNITS ENERGY Thanks to the billing of major projects in Asia and the Americas, Power Generation (KWU) posted an EBIT of DM98 million. Overall, new orders showed a favorable trend, with growth especially strong in the conventional power generation business in the U.S. However, the number of major projects in Asia and South America declined. Assets employed grew due to a stronger U.S. dollar and the high number of sales reported at the end of the period under review, with the corresponding increase in receivables. KWU launched a comprehensive program to integrate the Westinghouse fossil-fuel power plant business; the program focuses on optimizing the Group s worldwide manufacturing organization, expanding its service sector and leveraging purchasing synergies to improve market and cost positions. Power Transmission and Distribution (EV) reported an EBIT of DM95 million, a result well above seasonal expectations. Savings generated by restructuring measures and process improvements together with increased earnings from innovative products drove performance at EV. The billing of a number of major projects boosted sales. On the other hand, the sale of the power cable business, effective October 1, 1998, impacted sales. The sale of this capital-intensive business, combined with strict asset management, significantly reduced assets employed. INDUSTRY Automation and Drives (A&D) recorded a half-year EBIT of DM659 million. The Group sustained its positive earnings trend despite continuing subdued demand for capital goods. New orders and sales remained at last year s high level. Extensively implemented benchmarking efforts and productivity-enhancement programs, particularly in the industrial automation and motion control sectors, helped boost earnings. Assets employed increased slightly more than sales. Industrial Projects and Technical Services (ATD) generated an EBIT of DM95 million, exceeding expectations for the period. Strong demand in Germany and the U.S. boosted overall orders and sales, while business in Asia, the C.I.S. and Latin America softened somewhat.the level of assets employed held steady. Effective October 1, 1998, the Group s Building Technologies Division was transferred to newly founded Siemens Building Technologies AG (SBT) and the Group took over the worldwide industrial service activities of Westinghouse. The integration of this service business will be a focus of activity in this fiscal year. The EBIT of DM37 million at Production and Logistics Systems (PL) was burdened by two factors. In the serial production of placement and production systems, upfront expenditures were made to strengthen marketing efforts and expand the product spectrum; in the project business, slower sales were due to seasonal fluctuations in business volume. A cutback in receivables reduced the overall level of assets employed. Business trends at Siemens Building Technologies AG (SBT) met expectations for the period, as did the EBIT of DM134 million. Difficult business trends in Europe were offset by continuing strong growth in the Americas. The integration of Elektrowatt s industrial activities and Siemens Building Technologies Division is on track and already showing positive results. The level of assets employed held steady.

10 10 Management s discussion and analysis INFORMATION AND COMMUNICATIONS Information and Communication Networks (ICN) achieved an EBIT of DM414 million. Earnings were influenced by the absence of the income from the stake in GPT, which was divested in fiscal 1998, and the loss from the Italtel stake. The Group did particularly well in Germany, while business volume in the crisis regions of Latin America and Russia declined.the Information & Broadband Division concentrated its activities in Unisphere Solutions, Inc., Burlington, U.S., and strengthened them with acquisitions. The new company is tapping into dynamic developments in the data networking and Internet sector. Argon and a 20% stake in Accelerated Networks, Inc., Moorpark, were acquired in the period under review. The takeovers of Castle Networks, Inc., Westford, and Redstone Communications, Inc., Westford, will be completed in the third quarter. Assets employed increased as a result of acquisitions, a decline in advances received from customers, and a sales peak in March. Information and Communication Products (ICP) posted an EBIT of DM186 million. While the successful market positioning of the C25 cell phone fueled a clear upturn, this effect was felt only at the end of the reporting period and thus did not have an appreciable positive influence on the Group s EBIT. Price competition in the PC sector also burdened the earnings trend. Business was impacted by sales downturns in the crisis regions of Asia, Russia and Latin America. In the banking and point-of-sales systems businesses, the Group further improved its European market position. The level of assets employed changed only slightly. The implementation of productivity-enhancement and portfolio-adjustment measures enabled Siemens Business Services (SBS) to make considerable progress in cutting losses. SBS posted a half-year loss of DM35 million. Sales trends were boosted by orders connected with the Year 2000 transition and euro-related projects. SBS also won major contracts from international customers in the outsourcing business. Successful asset management reduced assets employed despite an increase in business volume. TRANSPORTATION Transportation Systems (VT) improved its EBIT to a negative DM59 million, after a substantial charge for risk provisions burdened last year s results. The billing of domestic orders in particular for operation control systems for mass transit and main-line systems contributed to this improved performance. International business is generating the bulk of new orders. In addition to major orders for locomotives from Austria and China, the Light Rail Division has been highly successful with its innovative Combino low-floor light rail system. In a move to focus on its specialty, the manufacture of diesel-electric locomotives, Transportation Systems divested its diesel-hydraulic locomotive production by selling Schienenfahrzeugtechnik (SFT), Kiel, to Vossloh AG, Werdohl, in October Higher progress payments and the sale of SFT reduced the level of assets employed. Automotive Systems (AT) reported an EBIT of DM156 million for the first half year, although burdened by substantial upfront expenditures for new products and systems such as customized navigation and diesel injection systems. Buoyed by ongoing strong demand in the automotive industry, the Group was able to further improve its market position. Sales of automotive electronics (airbags and vehicle immobilization systems) in NAFTA countries accounted for the highest growth rates. Consequent asset management kept assets employed nearly at last year s level despite volume growth.

11 Management s discussion and analysis 11 HEALTH CARE Medical Engineering (Med) achieved an EBIT of DM248 million. Innovative products continued to make the largest contribution to improved performance in all business fields particularly in magnetic resonance tomography and hearing instruments. Information and communications systems for networking doctors offices and hospitals are important growth areas. Medical Engineering is expanding its competence as a solutions provider to exploit new business opportunities. Assets employed increased only marginally. COMPONENTS Siemens Semiconductors (HL) had a negative EBIT of DM104 million, marking a major improvement in performance. Closure of the North Tyneside chip plant, rigorous implementation of cost-cutting programs, and price stability in memory chips (DRAMs) pushed down the level of losses. Despite sales growth, assets employed remained nearly unchanged. The conversion of production from 16- megabit to 64-megabit chips is virtually completed. Business surged in the smart card sector. In preparation for a public listing, Infineon Technologies AG (Infineon), Munich, was formed on April 1, 1999; this separate legal entity will conduct the semiconductor business of Siemens AG. Plans call for a parallel listing in the U.S. and in Germany on the basis of a financial statement complying with U.S. GAAP. The figures for HL published in this Report are based on the German Commercial Code (HGB). Passive Components and Electron Tubes (PR) reported an EBIT of DM95 million. Group earnings were primarily burdened by one-time start-up costs for new production capacities in Portugal, Singapore, Malaysia and Hanau, Germany. The strongest growth drivers were the mobile telecommunications and automotive electronics sectors. While international orders, especially in Scandinavia, were brisk, domestic demand declined due to a general slowdown in the German economy. The increase in assets employed is the result of large investments in fixed assets and a rise in inventories. There are also plans for listing Passive Components and Electron Tubes in the U.S. and in Germany on the basis of a financial statement complying with U.S. GAAP. The figures for PR published in this Report, however, are still based on the German Commercial Code (HGB). Business figures for Electromechanical Components (EC) reflect the difficult economic environment in some regions and special burdens in preparation for divestment. The Group s EBIT was DM5 million. Assets employed exceeded last year s level due to higher inventories. This increase in inventories is attributable to the planned merger of locations in the U.S. In preparation for the Group s sale, Siemens Electromechanical Components GmbH & Co. KG, Munich, was established on April 1, 1999.

12 12 Management s discussion and analysis LIGHTING Osram slightly improved its solid level of earnings with an EBIT of DM330 million. In Europe in particular, profitability improved as a result of productivity gains and optimized purchasing management. Earnings in the U.S. were satisfactory in view of moderate sales growth. As part of their strategy to outpace the market by exploiting innovative technologies, Osram and Siemens Semiconductors (now Infineon) formed a joint venture in the field of opto-semiconductors on January 1, The partners plan to tap new markets for semiconductor light sources by pooling their competencies under Osram management. The increase in assets employed was primarily attributable to the first-time consolidation of Opto Semiconductors GmbH & Co. OHG, Regensburg, and to the stronger U.S. dollar. TRENDS IN FINANCE AND REAL ESTATE MANAGEMENT Siemens Financial Services (SFS) continued its positive development. Earnings before taxes of DM123 million were affected by one-time gains from ongoing business expansion. At March 31, 1999, SFS had total assets of DM20.5 billion. Equipment leasing, project and export financing, and participation in infrastructure projects account for most of its assets. Assets of DM7.6 billion are derived from internal Company transactions in particular, from the corporate financing activities also carried out by SFS. With earnings before taxes of DM69 million, Siemens Real Estate Management (SIM) made further progress in implementing its professional and profit-generating real estate management strategy. As owner of Siemens domestic real estate, SIM ensures the cost-effective allocation of space required for Company operations and maximizes returns on property not needed for operations. SIM s responsibility is increasingly being extended to include marketable Company real estate in other countries as well. SIM currently manages real estate assets with a book value of DM4.5 billion, comprising 9 million square meters of floor space and 17.3 million square meters of land. PENSION FUND With only a DM3 million deficit, the pension fund has been almost completely balanced.the first-time use of the new mortality tables on a time-proportion basis was nearly compensated by higher earnings from pension assets. The book value of the domestic pension plan assets declined slightly and is now DM0.4 billion less than the corresponding pension commitments. In the wake of the capital markets recovery from the slump precipitated by the Russian crisis in the fourth quarter of fiscal 1998, the market value of the pension plan assets managed by Siemens Kapitalanlagegesellschaft mbh, Munich, again

13 Management s discussion and analysis 13 increased notably to DM21.8 (1998: DM20.4) billion. As a result, the market value of the plan assets as of March 31, 1999, covers the pension obligations determined under the projected unit credit method required by U.S. GAAP. THREE-WAY BREAKDOWN OF EQUITY ALLOCATIONS Siemens shareholders equity grew to DM (1998: DM30.292) billion, slightly outpacing total assets. This increase is primarily attributable to the decline in the negative translation adjustment due to the relative strength of the U.S. dollar, and to a rise in retained earnings for the half year. The equity ratio (shareholders equity divided by total assets) was 27%. No equity is allocated to pension plan assets and accruals for domestic pension plans, which are presented by the Company like external pension funds. This is in line with generally accepted practice for pension funds which have been separated from the consolidated group. The entire remaining shareholders equity of DM (1998: DM26.742) billion, is allocated to operations, which include assets of the operating units, corporate-controlled investments in other companies (such as BSH Bosch und Siemens Hausgeräte GmbH, Munich), and other corporate assets (including eliminations). This corresponds to an equity ratio of 37% (1998: 36%). DM3.550 billion in shareholders equity was allotted to the financing and real estate business. This equity allocation is oriented on business-specific parameters and corresponds to the current business structures of SFS and SIM. Allocated equity is for the time being more or less evenly distributed between SFS and SIM. The equity allocation of SFS corresponds to a debt-equity ratio of 6:1. In the period under review, the decline in required shareholders equity resulting from the sale of equity investments was offset by the increasing need for equity due to expanded business volume. Equity allocation will develop in accordance with changes in the business profile. Assets and the risk profile of SIM remained virtually unchanged in the period under review. SIM s equity requirements will change primarily as a result of reductions in property not needed for operations. Equity allocation takes into account SIM s leasing payment obligations under rental and leasing agreements that are not carried as assets on the balance sheet (Operating Leases).

14 14 Management s discussion and analysis INTRODUCTION OF THE EURO As of January 1, 1999, Siemens is able to conduct all of its transactions with business partners on a euro basis. Effective October 1, 1999 the beginning of the first fiscal year following the introduction of the common currency the euro will become the Company s functional currency. Individual agreements have been made with all business partners to ensure a smooth transition. Over 60,000 business partners have already designated a date for converting their transactions to the euro. The Company is on schedule in adapting its processes and preparing its computer systems for conversion to the euro on October 1, Year 2000 transition is closely linked to the efforts of many partners with various degrees of commitment to ensuring a smooth Y2K transition. Siemens and its main product and service suppliers, as well as all those who are indispensable for maintaining the Company s business processes, are regularly keeping one other updated on the status of Year 2000 preparations for products, services and supply capacities. Siemens is aware that the Year 2000 issue can be mastered only with the cooperation of all participants in the process chain.the Company has accordingly intensified its contacts to customers and suppliers to set up and coordinate joint programs for meeting the challenges posed by the Year 2000 transition. YEAR 2000 TRANSITION Siemens has undertaken comprehensive measures throughout the Company to ensure Year 2000 compliance according to BSI (British Standards Institute) DISC PD standards applying to products, systems, services and projects, as well as internal procedures and networking with partners. The Company aims at achieving the necessary compliance by mid Groups, Regional Units and Corporate Departments are all on track for achieving internal Y2K readiness. Following a Company-wide review of business processes and infrastructures, many specific applications have been replaced with standard products. Siemens AG will have spent several hundred million marks on achieving Year 2000 compliance by the beginning of fiscal Exact expenditures fory2k readiness cannot be determined, since they are inextricably intertwined with the regularly incurred costs of continually upgrading the Company s IT and systems environments. The current status of Year 2000 compliance for Siemens product offerings can be checked on the Internet or will be provided by the Company upon request. Siemens is tackling the Year 2000 issue in close cooperation with its business partners, customers and suppliers. Achieving Year 2000 readiness for all products, systems and plants already installed is a formidable challenge: the Company depends on the cooperation of its customers. Due to the extent and complexity of Siemens global business network, the success of the Company s

15 Management s discussion and analysis 15 OUTLOOK The spin-offs and planned sales of parts of the Company will not affect consolidated figures in the current fiscal year. Infineon Technologies AG, Munich, the Passive Components and Electron Tubes Group (PR), and Electromechanical Components GmbH & Co. KG, Munich, as well as Siemens Nixdorf Retail and Banking Systems GmbH, Paderborn, will continue to be included in the consolidated financial statements as of September 30, A weakening economic environment is expected to have a dampening effect on Siemens business volume in the second half of the current year. The Company anticipates that the exceptionally high 17% half-year growth in sales, boosted by project billing, will normalize.the growth in new orders should stabilize at the present level. Sales growth will remain in the two-digit range. In view of current worldwide economic conditions, the Company continues to expect that growth of net income will slightly outpace sales for fiscal 1999.

16 16 Consolidated financial statements (condensed version) STATEMENT OF INCOME for the six months ended March 31, 1999 (in millions of DM) Siemens worldwide First half Fiscal year Net sales 61, ,696 Cost of sales (43,909) (85,780) Gross profit on sales 17,283 31,916 Research and development expenses (4,639) (9,122) Marketing and selling expenses (9,136) (17,672) General administration expenses (2,326) (3,616) Other operating income Other operating expenses (501) (883) 1,091 1,574 Net income from investment in other companies Net interest income (expense) (574) (61) Other financial gains (losses) 1,311 1, ,864 Income from continuing operations before income taxes 2,064 3,438 Taxes on income from continuing operations (675) (780) Income before extraordinary items 1,389 2,658 Extraordinary items (after taxes) (1,741) Net income 1, COMMENTS ON THE CONSOLIDATED FINANCIAL STATEMENTS The worldwide consolidated financial statements for the six months ended March 31, 1999, have been prepared in accordance with the German Commercial Code (HGB) and the German Corporation Act (AktG) as an abridged version without accompanying notes. The principles of accounting, valuation and consolidation applied to the last reporting period and published in the Annual Report 1998 of Siemens AG were used without change. The restructuring charges formerly disclosed separately in the statement of income have been allocated to functional costs, and the prior year s figures have been restated to conform to the current period s presentation. The consolidated financial statements as of March 31, 1999, include the accounts of Siemens AG and 770 subsidiaries, 112 companies more than at year-end Siemens Building Technologies AG, Zurich, whose assets and liabilities were included in the consolidated balance sheet at September 30, 1998, is now also fully reflected in the consolidated statements of income and cash flows. Siemens Westinghouse Power Corporation, Orlando, Florida, whose income statement was included in the 1998 consolidated financial statements for a period of only two months, is now fully consolidated. These consolidations and the changes in the number of consolidated companies contributed DM4.0 billion to the first six months net sales and DM178 million to income from continuing operations before income taxes. Their impact on total assets was insignificant. The figures relating to financing and real estate activities and pension fund include items resulting from intercompany transactions (stand-alone view). The effects of intercompany transactions and corporate items have been allocated to operations. For segment reporting purposes, the effects of these items on income and assets are disclosed in a separate line captioned Other, eliminations. Income before taxes relating to the pension fund includes the interest cost on domestic benefit obligations and the additional contributions to pension accruals to provide for future increases in benefits, net of the return on domestic plan assets. Since one-

17 Consolidated financial statements (condensed version) 17 Operations Financing Pension Fund and Real Estate First half Fiscal year First half Fiscal year First half Fiscal year , ,266 1,326 2,430 (42,616) (83,406) (1,293) (2,374) 17,250 31, (4,639) (9,122) (9,120) (17,660) (16) (12) (2,221) (3,484) (105) (132) (137) (526) (31) (137) (333) (220) 1,500 1,941 (76) (147) (333) (220) (332) (290) (377) (325) , ,875 3, (3) (9) (613) (688) (63) (94) 1 2 1,262 2, (2) (7) third of the benefit expense resulting from the adoption of the new mortality tables will be recognized in fiscal year 1999, this effect is reflected in the consolidated financial statements as of March 31, 1999, on a time proportion basis.the expense for benefits earned during the fiscal year is borne by operations and is therefore included in the functional costs of operations. The interest cost on benefit obligations and the return on plan assets are included in net interest income (expense) and in other financial gains, respectively, while the additional contributions to pension accruals and the benefit expense resulting from the revised mortality assumptions are recognized in other operating expenses. The change in accounts receivable of the financing activities of SFS, formerly included in net cash provided by operating activities, is included in net cash used in investing activities of financing and real estate services. This is due to the investment-like nature of this item. In addition, the change in financing of real estate and project companies to the extent that these items are related to financing and real estate activities previously disclosed in financing activities, is now included in investment activities.the remainder of these items is included in net cash provided by operating activities in accordance with their respective organizational responsibility. The increase in pension assets formerly included in net cash provided by financing activities has been assigned to the pension fund and is disclosed under net cash used in investing activities. The prior year s figures for the statement of cash flows have been restated to conform to the current period s presentation. The consolidated balance sheet of Siemens AG at March 31, 1999, as well as the consolidated statement of income and the consolidated statement of cash flows for the six-month period ended March 31, 1999, have been reviewed by KPMG Deutsche Treuhand-Gesellschaft.

18 18 Consolidated financial statements (condensed version) B ALANCE SHEET at March 31, 1999 (in millions of DM) Siemens worldwide Assets 3/31/1999 9/30/1998 Intangible assets 5,937 5,418 Property, plant and equipment 25,212 24,794 Investments 21,454 21,777 Noncurrent assets 52,603 51,989 Inventories 36,446 32,695 Less advances received from customers (22,370) (19,110) 14,076 13,585 Trade accounts receivable 29,844 25,773 Other accounts receivable and miscellaneous assets 15,381 14,801 45,225 40,574 Liquid assets 2,936 5,615 Current assets 62,237 59,774 Prepaid expenses Total assets 115, ,024 Shareholders equity and liabilities 3/31/1999 9/30/1998 Capital stock (total number of votes 594,780,140) 2,974 2,974 Additional paid-in capital 10,963 10,963 Retained earnings 16,342 15,819 Minority interest 1,615 1,709 Translation adjustment (399) (1,173) Shareholders equity 31,495 30,292 Pension plans and similar commitments 20,369 19,801 Other accrued liabilities 23,723 23,550 Accrued liabilities 44,092 43,351 Debt 15,763 14,484 Trade accounts payable 13,309 12,085 Additional liabilities 9,686 10,658 Other liabilities 22,995 22,743 Deferred income 1,176 1,154 Total shareholders equity and liabilities 115, ,024 1) This item results from gross receivables of DM32,317 million and consolidation effects of DM(4,165) million. 2) This item results from gross receivables of DM30,082 million and consolidation effects of DM(3,820) million. 3) This item results from gross payables of DM20,948 million and consolidation effects of DM(6,034) million. 4) This item results from gross payables of DM20,883 million and consolidation effects of DM(7,136) million.

19 Consolidated financial statements (condensed version) 19 Operations Financing Pension Fund and Real Estate 3/31/1999 9/30/1998 3/31/1999 9/30/1998 3/31/1999 9/30/1998 5,937 5,418 20,013 19,989 5,199 4,805 4,443 4, ,553 16,614 30,393 30,284 5,657 5,091 16,553 16,614 36,122 32, (22,367) (19,110) (3) 13,755 13, ,152 1) 26,262 2) 16,711 14, ,840 3, ,204 44,747 43,156 17,128 16, ,786 73,697 22,820 21,713 16,915 16,614 3/31/1999 9/30/1998 3/31/1999 9/30/1998 3/31/1999 9/30/ ,945 26,742 3,550 3,550 3,449 3, ,915 16,406 23,033 22, ,482 26, ,915 16,406 5,361 5,707 10,402 8,777 14,914 3) 13,747 4) 8,081 8, ,084 1, ,786 73,697 22,820 21,713 16,915 16,614

20 20 Consolidated financial statements (condensed version) S TATEMENT OF CASH for the six months ended March 31, 1999 (in millions of DM) Siemens worldwide First half Fiscal year Income before extraordinary items 1,389 2,658 Extraordinary restructuring charges (3,327) Depreciation and amortization 2,921 7,588 Increase in accrued liabilities 375 2,983 Gain on disposal of noncurrent assets (253) (342) Equity in losses (income) of companies consolidated under the equity method, net of distributions Other noncash charges (credits) 1 36 Change in current assets and other liabilities Increase in inventories (2,789) (573) Decrease in advances received from customers 2,899 (2,431) Increase in accounts receivable (2,827) (3,644) Increase in liabilities (89) 1,886 Net cash provided by operating activities 1,681 4,865 Additions to property, plant and equipment (2,958) (7,263) Payments for acquisitions of investments and additions to noncurrent marketable securities (525) (7,597) Increase in accounts receivable of financing activities (2,617) (585) Proceeds from sale of noncurrent assets 1,590 6,181 Net cash used in investing activities (4,510) (9,264) (2,829) (4,399) Stock issued 1,725 Proceeds from issuance of debt 3,274 Repayment of debt (146) (18) Other changes in debt Increase in noncurrent securities (850) Prior year s dividends paid (889) (857) Dividends paid to minority shareholders (222) (191) Effect of changes in number of consolidated companies on liquid assets 546 (56) Intercompany financing Net cash provided by financing activities 99 3,837 Effect of exchange rate and other changes on liquid assets 51 (252) Net decrease in liquid assets (2,679) (814) Liquid assets at March 31, ,936 5,615 1) 1) At September 30, 1998

21 Consolidated financial statements (condensed version) 21 FLOWS Operations Financing Pension Fund and Real Estate First half Fiscal year First half Fiscal year First half Fiscal year ,262 2, (2) (7) (3,327) 2,634 7, (304) 2, (218) (274) (35) (68) (2,744) (544) (45) (29) 2,895 (2,431) 4 (2,762) (3,557) (37) (130) (28) 43 (432) 1, , , (2,549) (6,351) (409) (912) (483) (6,746) (3) (41) (39) (810) (2,617) (585) 1,337 6, (1,695) (7,068) (2,776) (1,386) (39) (810) (1,309) (3,941) (2,004) (319) 484 (139) 1,725 3,274 (146) (18) (515) (120) 1, (850) (889) (857) (222) (191) 146 (56) 400 2,193 4,927 (1,709) (5,066) (484) ,578 (130) (880) (484) (199) 26 (53) (571) 438 (2,108) (1,252) 2,840 3,411 1) 96 2,204 1)

22 22 Consolidated financial statements (condensed version) SEGMENT INFORMATION for the six months ended March 31, 1999 (in millions of DM) Operations New orders External sales Intersegment sales First half Fiscal year First half Fiscal year First half Fiscal year Power Generation (KWU) 6,529 11,945 6,289 10, PowerTransmission and Distribution (EV) 3,039 7,291 2,498 6, Automation and Drives (A&D) 6,976 13,841 5,393 11,368 1,087 2,378 Industrial Projects and Technical Services (ATD) 4,004 9,582 2,607 7,923 1,008 2,405 Production and Logistics Systems (PL) 1,215 2, , Siemens Building Technologies AG (SBT) 4,068 3, Information and Communication Networks (ICN) 11,831 22,467 11,339 23, Information and Communication Products (ICP) 9,603 17,873 7,517 15,179 1,280 2,582 Siemens Business Services (SBS) 3,402 6,730 1,943 3,852 1,230 2,355 Transportation Systems (VT) 2,386 5,053 2,459 5, Automotive Systems (AT) 3,129 5,568 3,124 5, Medical Engineering (Med) 3,699 7,994 3,635 7, Semiconductors (HL) 4,418 7,165 3,139 5, ,058 Passive Components and Electron Tubes (PR) 1,528 2,734 1,100 2, Electromechanical Components (EC) 883 1, , Osram 3,527 6,558 3,432 6, Other 3), eliminations (4,927) (9,576) 1,527 2,643 (1,456) Subtotal 65, ,601 60, ,338 6,265 11,381 Reconciliation to financial statements 4) Earnings before taxes 5), total assets Financing and Real Estate Siemens Financial Services (SFS) Siemens Real Estate Management (SIM) ,968 Total ,090 2,072 Pension Fund New orders External sales Intersegment sales Siemens worldwide 65, ,601 61, ,696 7,355 13,453 1) Intangible assets, property, plant and equipment, equity investments, pension assets. 2) The position includes depreciation of intangible assets, property, plant and equipment, and write-down of investments. 3) Other primarily refers to centrally managed equity investments (e.g. BSH Bosch und Siemens Hausgeräte GmbH, Munich) and corporate items relating to regional companies and Company headquarters.