A n n u a l R e p o r t

Transcription

1 K n o r r - B r e m s e G r o u p A n n u a l R e p o r t AT A GLANCE KNORR-BREMSE GROUP Sales EUR mill. 2,118 2,206 2,423 2,743 3,121 Knorr-Bremse Group A n n u a l R e p o r t Income before taxation EUR mill Net income EUR mill Employees (as per Dec. 31) 10,959 10,763 11,143 12,119 13,035 Personnel costs EUR mill Balance-sheet total EUR mill. 1,378 1,291 1,438 1,607 1,646 Capital expenditure (not including investments in financial assets) EUR mill Depreciation (not including investments in financial assets) EUR mill Incoming orders EUR mill. 2,377 2,265 2,447 2,849 3,541 Research and development EUR mill

2 Knorr-Bremse Group MAIN MAJORITY-OWNED SUBSIDIARIES Knorr-Bremse AG The Americas Europe Middle East Africa Asia Australia Contact: Knorr-Bremse AG Knorr Brake Holding Corporation Watertown, NY (USA)* Indústria Freios Knorr Ltda. São Paulo (BR) Knorr-Bremse Systeme für Schienenfahrzeuge GmbH Munich (D) Knorr-Bremse Systeme für Nutzfahrzeuge GmbH Munich (D)** Knorr-Bremse Asia Pacific (Holding) Ltd. Hongkong (CHN) Bendix Commercial Vehicle Systems LLC (USA) Knorr-Bremse Sistemas para Veículos Comerciais Brasil Ltda. (BR) Freinrail Systèmes Ferroviaires S.A. (F) Bost Ibérica S.L. (E) Hasse & Wrede CVS Dalian China Ltd. (CHN)* Frensistemi S.r.I. (I) Hasse & Wrede GmbH (D) Knorr-Bremse Ges. m. b. H. (A) Knorr-Bremse Benelux B.V.B.A. (B) IFE-VICTALL Railway Vehicle Door Systems (Qingdao) Co., Ltd. (CHN)* Di-Pro Inc. (USA) Knorr-Bremse Nordic Rail Services AB (S)* Knorr-Bremse Fékrendszerek Kft. (H) Knorr-Bremse Australia Pty. Ltd. (AUS) Hasse & Wrede North America Inc. (USA) Knorr-Bremse Systemy dla Kolejowych Srodków Lokomocji PL Sp. z o.o. (PL) Knorr-Bremse Polska SfN Sp. z o.o. (PL) Knorr-Bremse Brake Equipment (Shanghai) Co., Ltd. (CHN) Bendix Spicer Foundation Brake LLC (USA)* Knorr-Bremse Sistemas para Veículos Ferroviários Ltda. (BR) Knorr Brake Corporation (USA) Knorr-Bremse Rail Systems (UK) Ltd. Knorr-Bremse Sistemi per Autoveicoli Commerciali S.p.A. (I) Knorr Brake Ltd. (CDN) Knorr-Bremse S.A. (Pty.) Ltd. (RSA) New York Air Brake Corporation (USA) Knorr-Bremse Vasúti Jármű Rendszerek Hungária Kft. (H) Merak Sistemas Integrados de Climatización, S. A. (E)* Knorr-Bremse Systèmes pour Véhicules Utilitaires France S.A. (F) Knorr-Bremse CARS LD Vehicle Brake Disc Manufacturing (Beijing) Co., Ltd. (CHN)* Knorr-Bremse Commercial Vehicle Systems Japan Ltd. (J)** Knorr-Bremse System för Tunga Fordon AB (S) Knorr-Bremse India Pvt. Ltd. (IND) Knorr-Bremse Systems for Commercial Vehicles Ltd. (UK) Knorr-Bremse/Nankou Air Supply Unit (Beijing) Co., Ltd. (CHN)* Knorr-Bremse Systémy pro užitková vozidla, ČR, s.r.o. (CZ) Knorr-Bremse Rail Systems Japan Ltd. (J)* Microelettrica Scientifica S.p.A. (I)* Oerlikon-Knorr Eisenbahntechnik AG (CH) Knorr-Bremse Rail Systems Korea Ltd. (ROK)* Sociedad Española de Frenos, Calefacción y Señales, S.A. (E)* Knorr-Bremse Braking Systems for Commercial Vehicles (Dalian) Co., Ltd. (CHN) Dr. techn. Josef Zelisko Ges. m. b. H. (A) Knorr-Bremse Systems for Commercial Vehicles India Pvt. Ltd. (IND)* Knorr-Bremse Systems for Rail Vehicles (Suzhou) Co., Ltd. (CHN) Westinghouse Platform Screen Doors (Guangzhou) Ltd. (CHN)* * Minority holding in subsidiary by non-group companies ** 20 % stake held by Robert Bosch GmbH, Stuttgart (D) As at December 31, 2006 Moosacher Straße Munich Germany Corporate Communications Tel: Fax: public.relations@knorr-bremse.com Additional information about Knorr-Bremse:

3 C o n t e n t s Contents 04 The Executive Board and Supervisory Board of Knorr-Bremse AG 06 Report of the Supervisory Board 08 The State and Development of Knorr-Bremse AG and the Knorr-Bremse Group 28 Further Information on Business Trends 82 Human Resources Consolidated Financial Statements of Knorr-Bremse AG 88 Notes to the Consolidated Financial Statements 104 Consolidated Cash Flow Statement 105 Segment Reporting 106 Statement of Changes in Group Equity 107 Independent Auditor s Report 108 Consolidated Balance Sheet 109 Consolidated Statement of Income

4 T h e E x e c u t i v e B o a r d a n d S u p e r v i s o r y B o a r d THE Executive BOARD AND SUPERVISORY BOARD OF Knorr-Bremse AG Executive Board Supervisory Board Heinz Hermann Thiele Chairman Dr. Raimund Klinkner (since Jan. 1, 2007) Jan Peter Nonnenkamp Dr. Dieter Wilhelm Jens Theuerkorn Dr. Hans-Peter Binder Berg Chairman Retd. Member of the Board of Management of Deutsche Bank AG, Munich Branch Dr. Eduard Gerum* Rosenheim 1st Deputy Chairman (since Nov. 10, 2006) Vice President R&D Brake Systems Dr.-Ing. E. h. Wilfried Lochte Groß Schwülper 2nd Deputy Chairman Retd. Chairman of MAN Nutzfahrzeuge AG and retd. Member of the Board of Management of MAN AG. Daniela Fischer* Bruckmühl (since Nov. 10, 2006) Head of the Legal Office of the IG Metall Trade Union, Munich Office

5 T h e E x e c u t i v e B o a r d a n d S u p e r v i s o r y B o a r d The term of office of the following members expired on Nov. 10, 2006: Klaus Gegenfurtner* Aidenbach Toolmaker Heinz Hausner* Salzweg (since Nov. 10, 2006) Elfriede Hilger* Munich (since Nov. 10, 2006) Chairperson of the General Works Council of Knorr-Bremse Systeme für Schienenfahrzeuge GmbH Werner Ratzisberger* Aldersbach (since Nov. 10, 2006) Chairperson of the Works Council of Knorr-Bremse Systeme für Nutzfahrzeuge GmbH, Aldersbach Plant Arno Hager* Berlin Representative of the IG Metall Trade Union, Berlin Office Horst Lischka** Haar Assistant Representative of the IG Metall Trade Union, Munich Office Peter Ratschnig* Freising Prof. Dr.-Ing. Gunther Reinhart Hebertshausen Head of the Institute of Machine Tools and Production Sciences at Munich Technical University Karl Schenk* Windorf Former Chairperson of the Works Council of Knorr-Bremse Systeme für Nutzfahrzeuge GmbH, Aldersbach Plant Assistant Representative of the IG Metall Trade Union, Passau Office Chairperson of the Works Council of Knorr-Bremse AG, Knorr-Bremse Systeme für Schienenfahrzeuge GmbH, Munich Plant, and KB Media GmbH Dr. Kurt Kiethe Munich Attorney at law Dr. h. c. Horst Zimmer Lampertheim-Hofheim Retd. Member of the Board of Management of Mercedes-Benz AG 1st Deputy Chairman Former Chairperson of the General and Group Works Councils of Knorr-Bremse Systeme für Schienenfahrzeuge GmbH Former Chairperson of the General Works Council of Knorr-Bremse Systeme für Nutzfahrzeuge GmbH * elected by the employees ** court-appointed

6 R e p o r t o f t h e S u p e r v i s o r y B o a r d Report of the Supervisory Board

7 R e p o r t o f t h e S u p e r v i s o r y B o a r d In the course of fiscal 2006, the Supervisory Board concerned itself in detail with the state and development of the Knorr-Bremse Group and its subsidiaries. Along with important individual transactions and human resources decisions, this also included consideration of fundamental aspects of strategic direction and corporate planning. In addition, the Supervisory Board received regular reports from the Executive Board either in the course of its meetings or in written form. The Supervisory Board examined important individual transactions, as well as deciding on items of business that required its approval either by law or in line with company statutes. In 2006, the Knorr-Bremse Group maintained the positive developments recorded in previous years. For the first time, sales surpassed EUR 3 billion, with both divisions contributing to this growth. At the same time, internal processes and structures were enhanced, leading to improvements in productivity that will keep the Group competitive in the marketplace in the future. One focus of attention over the past year was the activities of the Rail Vehicle Systems division in China. The numerous and extensive orders being placed in this high-growth market continue to demand major efforts. As the plant in Suzhou, where production only began in 2005, is already unable to cope with the enormous increase in demand for capacity, building work commenced in 2006 on a new production plant that is scheduled for occupancy in the spring of In addition, the Rail Vehicle Systems division has entered into joint ventures with various partners in China, in each case assuming lead management, in order to further enhance its strong market position in the rail sector. Despite these immense challenges, in the interests of the customer, quality assurance and efficient logistics must remain the top priority. The Commercial Vehicle Systems division benefited from positive market trends in Europe and North America. However, in the course of 2006, internal preparations had to be made for the anticipated market downturn and the resultant drop in unit sales in the USA in The 2006 Financial Statements and the Management Report on Knorr-Bremse AG, as well as the 2006 Consolidated Financial Statements and the Management Report on the Knorr-Bremse Group drawn up by the Executive Board and the company s accounts were examined by the auditors elected by the Annual Shareholders Meeting, KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Munich, and endorsed with their unqualified opinion. The Supervisory Board also examined the Financial Statements for fiscal 2006, the Management Report, the proposed allocation of unappropriated retained earnings, and the Consolidated Financial Statements and Management Report of the Knorr-Bremse Group, and approved these at its meeting on March 16, 2007, making them legally binding. No objections to the above documents were raised. The Supervisory Board concurs with the Executive Board s proposal for the allocation of unappropriated retained earnings. The auditors attended the preparatory meeting of the financial statements committee on March 2, 2007 as well as the financial statements meeting of the Supervisory Board, reported on their key findings and answered outstanding questions. KPMG Deutsche Treuhand-Gesellschaft AG Wirtschaftsprüfungsgesellschaft, Munich, also examined the Executive Board s report on relations with affiliated companies, drawn up in line with 312 German Corporation Law (AktG). The auditors endorsed this report with the following opinion: Having audited and assessed this report in accordance with professional standards, we confirm that: 1. The factual contents of the report are correct. 2. The consideration furnished by the Company in the legal transactions set out in the report was not unreasonably high. The Supervisory Board has also examined the Executive Board s report on relations with affiliated companies and has no objections to the concluding statement by the Executive Board or to the auditors findings. The term of office of the former Supervisory Board expired in At the extraordinary shareholders meeting on November 9, 2006, the shareholders representatives were all re-elected to the Supervisory Board of Knorr-Bremse AG, with the exception of Prof. Gunther Reinhart, who, for personal reasons, did not stand for re-election. The employees representatives elected to the Supervisory Board are Ms. Daniela Fischer, Klaus Gegenfurtner, Dr. Eduard Gerum, Heinz Hausner, Ms. Elfriede Hilger and Werner Ratzisberger. On behalf of Knorr-Bremse AG, the Supervisory Board wishes to thank all its former members for their contributions to the work of the board. On January 1, 2007, Dr. Raimund Klinkner was appointed a Member of the Executive Board of Knorr-Bremse AG and has assumed worldwide responsibility for the Commercial Vehicle Systems division. Munich, March 16, 2007 The Supervisory Board Dr. Hans-Peter Binder Chairman

8 M a n a g e m e n t R e p o r t The State and Development of Knorr-Bremse AG and the Knorr-Bremse Group

9 M a n a g e m e n t R e p o r t THE KNORR-BREMSE GROUP: AN OVERVIEW The Knorr-Bremse Technology Center in Munich. The Knorr-Bremse Group is the world s leading manufacturer of braking systems for rail vehicles and commercial vehicles. Knorr-Bremse has also established a leading international market position in the rail vehicle on-board systems segment, particularly in the fields of automatic door systems, air conditioning, and power supply. Another field of activity in the rail vehicle sector is the platform screen doors segment. In the commercial vehicle sector, apart from braking systems, the product portfolio includes vibration dampers for internal combustion engines, and these too are destined for worldwide applications. The structure of the Knorr-Bremse Group is based on three regions Europe, North and South America, and Asia/Australia and the development of the Group is geared to meeting the requirements of the respective markets and customers. This regional organizational structure is designed to offer globally active customers uniform technical platforms worldwide, while at the same time taking specific local needs into account. It also ensures that customers who operate on a regional basis are supplied with globally tried-and-tested systems and components.

10 10 M a n a g e m e n t R e p o r t GeneRAL economic DeveLoPmentS The worldwide economic climate was positive in 2006, with global economic growth averaging out at approximately 5%, although growth rates differed from one region to the next. The main drivers of growth were once again the Asian countries, led by China, where gross domestic product (GDP) grew by over 10.5%, and India, where GDP was up by more than 9%. The Japanese economy returned a sound performance with growth of over 2%. The pace of growth picked up slightly in South America, averaging over 4.5%. The economy in Brazil, the most important market for Knorr- Bremse in the region, grew by around 3%. In Western Europe, the Euro Zone returned growth of approximately 2.7%, not least on the back of a positive development in Germany, where GDP growth increased from 0.9% in 2005 to 2.7% in In Eastern Europe, the new EU member states showed sustained growth, as did Russia, where economic growth totaled approximately 6.5%. The price of steel was highly volatile in The prices of individual metals also rose sharply, with aluminum, for example, costing almost 40% more on average. As the year drew to a close, the price of crude oil returned to the level at which it started the year, following interim increases of over 30%. The U.S. dollar, which lines up alongside the euro as the most important currency for the Knorr-Bremse Group, weakened against the euro by more than 11% in the course of the year under review, falling to just over USD 1.32 for one euro. The drop was at its sharpest in the last two months of As an annual average, the euro was worth USD ,743 3,121 2,118 2,206 2,423 Sales 1,494 1, Net income Key indicators for the Knorr-Bremse Group in EUR millions

11 M a n a g e m e n t R e p o r t 11 DEVELOPMENT OF THE KNORR-BREMSE GROUP IN 2006 In 2006, the Knorr-Bremse Group was able to sustain the positive growth pattern of previous years and for the first time sales revenues surpassed EUR 3 billion. Sales rose 13.8% year-on-year, to a total of EUR 3,120.6 million, with all regions except South America posting double-digit growth. Both the Commercial Vehicle Systems and Rail Vehicle Systems divisions were able to contribute to this positive development. In North America, the relevant markets for both divisions were exceptionally buoyant. The same applies to the rail vehicle market in the Asia/ Australia region, which continued to show very dynamic growth in particular in China. Europe presented a more diversified picture: While the commercial vehicle sector remained robust, the rail vehicle market was more subdued. In South America, following extraordinary growth rates in the previous year, the rail vehicle market returned to a normal level of activity. The negative impact of higher material prices worldwide made itself felt even more clearly in At the same time, the pace of competition once again increased. Acquisitions, additions and joint ventures In January 2006, Knorr-Bremse AG acquired from BLB-Beteiligungsgesellschaft mbh (BLB) the latter s 20% stake in Knorr-Bremse Systeme für Nutzfahrzeuge GmbH (SfN GmbH) as well as BLB s 35% holding in Knorr-Bremse Sistemas para Veículos Comerciais Brasil Ltda. (KB Truck Brazil). As a result, Knorr-Bremse AG now holds 80% of the shares in SfN and, together with its subsidiary Indústria Freios Knorr Ltda., São Paulo, 100% of the shares in KB Truck Brazil. In North America, Bendix Spicer Foundation Brake LLC, Elyria, Ohio, (Bendix-Spicer) the joint venture managed by Bendix Commercial Vehicle Systems LLC, Elyria, Ohio, (Bendix) acquired Di-Pro Inc. Fresno, California (Dipro). Dipro s brake cylinder business complements the Bendix-Spicer product portfolio in the wheelend segment. In Romania, the Rail Vehicle Systems division set up the joint venture company Knorr-Bremse S.R.L., Bucharest, in conjunction with Mecanoexportimport S.A., Bucharest. Knorr-Bremse Ges. mbh, Mödling, Austria, (KB Austria) holds a 70% majority stake in the new company, whose aim is to drive forward sales of Knorr- Bremse products in Romania.

12 12 M a n a g e m e n t R e p o r t In Poland, a new sales company by the name of Knorr-Bremse Polska SfN Sp. z.o.o., Warsaw, (KB Polska SfN) was set up in response to the growing volume of business in the commercial vehicle sector in Poland. In Spain, SfN GmbH proceeded with the scheduled acquisition of the remaining 49.98% stake in Bost Ibérica S.L. in Madrid. Bost Ibérica serves the needs of customers in the aftermarket and trailer sectors in Spain and Portugal. In the year under review, the former Knorr- Bremse Far East Ltd., Hong Kong, was renamed Knorr-Bremse Asia Pacific (Holding) Ltd., Hong Kong (Knorr-Bremse Asia Pacific). The expansion of the Rail Vehicle Systems division s activities in China called for special efforts. The sharp increase in demand meant that the production plant in Suzhou (100 km west of Shanghai), which only became operational in 2005, had reached the limits of its capacity by As a result, planning and construction work began on a new plant, also in Suzhou, which will commence operations in April The Rail Vehicle Systems division set up four new joint ventures in China in Westinghouse Platform Screen Doors (Guangzhou) Ltd., Guangzhou, (JV Westinghouse Guangzhou) is to focus on the key Chinese market for platform screen doors and expand the business to the entire Asian market. Knorr-Bremse Asia Pacific holds a 65% stake in this joint venture, with the remaining 35% held by its partner Guangzhou Guangri Group Company Ltd., Guangzhou (GGGC). Knorr-Bremse/Nankou Air Supply Unit (Beijing) Co. Ltd., Nankou, (JV Nankou) is a joint venture between CNR Beijing Nankou Air Supply Locomotive & Rolling Stock Machinery Works, Nankou, which holds 45%, and Knorr-Bremse Asia Pacific, which holds the remaining 55%. The purpose of the joint venture is to manufacture compressors and air dryers for the Chinese mainline market. Also targeting the Chinese mainline market, from 2007 onwards the new joint venture Knorr- Bremse CARS LD Vehicle Brake Disc Manufacturing (Beijing) Co. Ltd., Daxing, (JV CARS) is to manufacture brake discs. Knorr-Bremse Asia Pacific holds a 50% stake in the new company, with the remaining 50% being held by the China Academy of Railway Sciences (CARS). The fourth joint venture founded in China in 2006 is to produce and market door systems for high-speed trains. IFE-VICTALL Railway Vehicle Door Systems (Qingdao) Co. Ltd., Qingdao, (JV IFE-VICTALL) is a 50:50 joint venture between Knorr-Bremse Asia Pacific and Qingdao Victall Decoration Materials Manufacturing Company Ltd., Qingdao. Major projects The Commercial Vehicle Systems division has opened a new plant in Sakado (Greater Tokyo), Japan, with highly efficient logistics and full implementation of the Knorr-Bremse Truck Production System, in order to offer Japanese commercial vehicle builders maximum customer benefits. The new facility also serves as head office for the activities of the Rail Vehicle Systems division, targeting the development of additional business in the rail sector in Japan. Within the scope of the PROGRESS project, business processes in the Commercial Vehicle Systems division are being harmonized and optimized worldwide. In the year under review, the necessary ERP software from SAP was jointly defined and exhaustively tested during the realization phase by staff from the Europe and North America regions. Following final product approval and the necessary employee training measures, the optimized processes and software will initially be rolled out in Germany and the USA in In addition, the Commercial Vehicle Systems division also launched the gps (Global Project Management System) project for the definition and implementation of a common worldwide project management standard. The structures and processes of the Knorr- Bremse Group are subject to continuous and systematic optimization, in order to make procedures as efficient as possible and exploit the potential for cost savings. The FOKUS project (focusing on core competencies and strengths) was again consistently implemented in both divisions in the year under review. In the Commercial Vehicle Systems division, the STRONG FOCUS program introduced in 2005 was successfully continued. STRONG FOCUS provides a framework for the control and monitoring of all productivity projects as well as all growth-oriented projects worldwide.

13 M a n a g e m e n t R e p o r t 13 QUALIT Y There was further external confirmation of the efficiency and harmonization of processes at Knorr-Bremse in 2006, when the entire Knorr-Bremse Group organization in Europe, comprising Knorr-Bremse AG and all its European subsidiaries, successfully took part in the European Excellence Award (EEA) organized by the European Foundation for Quality Management (EFQM). Awards of Finalist and Prize Winner status for pronounced resultsorientation confirmed the excellence of the company s process management. In addition, a number of different quality programs were expanded and continued in order to systematically improve both process and product quality. Both divisions pursue a zero defect philosophy. In the Commercial Vehicle Systems division the TRUQ - Truck and Quality program was further enhanced. TRUQ helps identify, implement and monitor numerous measures designed to improve or maintain quality standards. Six Sigma activities and the number of employees with Six Sigma certification also increased in the year under review. In the Rail Vehicle Systems division, activities within the scope of the Quality First program were further intensified. This program comprises several different methods of systematically monitoring and improving product and process quality. In September 2006, the Munich plant passed its first certification audit in line with the European rail industry s new International Railway Industry Standard (IRIS) with flying colors. Implementation of the standard has already begun at all other plants across the division.

14 14 M a n a g e m e n t R e p o r t ASSETS, FINANCIAL STATUS, AND PROFITABILITY The Knorr-Bremse Group s business showed positive overall development in Consolidated sales moved ahead 13.8% in the year under review to EUR 3,120.6 million (2005: EUR 2,743.3 million), although one third of the increase was due to initial consolidation of subsidiaries Merak Sistemas Integrados de Climatización S.A., Pinto, (Merak) and Microelettrica Scientifica S.p.A., Rozzano, (Microelettrica) in the on-board sector, both acquired in Sales were up across all regions. In Europe, consolidated sales rose to EUR 1,975.6 million (2005: EUR 1,702.1 million), which equates to 63.3% of the consolidated total (2005: 62.1%). The Americas contributed EUR million (2005: EUR million) or 30.2% (2005: 31.5%). In the Asian region, sales amounted to EUR million (2005: EUR million), representing 6.5% (2005: 6.4%) of the total. Incoming orders were valued at EUR 3,541.1 million (2005: EUR 2,849.4 million), again well ahead of annual sales. Orders on the books at the Knorr-Bremse Group moved ahead 26.9% to EUR 2,175.8 million (2005: EUR 1,715.1 million). Net income for the Knorr-Bremse Group rose in the year under review to EUR million (2005: EUR million). Net return on sales reached 5.9% (2005: 5.6%). The European region contributed EUR million to net income, corresponding to a net return on sales of 6.9%. Net income from the Americas totaled EUR 49.6 million, with a net return on sales of 5.3%. The Asia/Australia region posted a net loss of EUR 1.2 million, which equates to a net return on sales of -0.6%. The consolidated balance sheet total rose 2.5% in 2006 to EUR 1,646.4 million (2005: EUR 1,606.5 million). At year-end 2006, total assets represented 52.8% of sales. As a proportion of the balance sheet total, intangibles, fixed assets, and investments remained at the prior-year level of 44.4% (2005: 44.4%). Working capital, defined as the sum of inventories and accounts receivable, minus accounts payable trade, totaled EUR million at year-end (2005: EUR million) or 41.8 days sales (2005: 44.1 days). The equity ratio rose from 29.1% to 30.0%. Of the Group s total assets, 56.2% are in the European region, 36.3% in the Americas, and 7.5% in the Asia/Australia region. The net indebtedness of the Knorr-Bremse Group rose from EUR million at year-end 2005 to EUR million at the end of the year under review. The increase was due in particular to the scheduled acquisition of the BLB shares, as well as to the acquisition of Dipro in the commercial vehicle sector, which together slightly outweighed the otherwise positive cashflow generation. As a result, the ratio of net debt to shareholders equity stands at 25.7% (2005: 23.9%). Ever since 2000, the Knorr-Bremse Group has been rated by the external rating agencies Standard & Poor s and Moody s. Both rating agencies raised their rating in the year under review (Standard & Poor s from BBB to BBB+, and Moody s from Baa2 to Baa1). Knorr-Bremse thus retains its investment grade status.

15 M a n a g e m e n t R e p o r t 15 Overall assessment of the economic position of the Group Within the general economic environment described above, the Knorr-Bremse Group has further strengthened its overall position with regard to assets, financial status, and profitability. The Group s profitability was again enhanced by rigorous cost management, rising output volumes, and above all by internal process optimization. With an equity ratio of 30.0% and a gearing of 25.7%, the structure of the Group s assets is very stable, so that it can readily meet its financial obligations. companies, which are centrally administered within the framework of the cash-pooling process managed by Knorr-Bremse AG. It also shows the main component of the Group s external borrowings in the shape of the EUR 175 million bond issued by the Group. As a result of the acquisition of the holdings of BLB described above, the proportion of the balance sheet total accounted for by intangibles, fixed assets and investments rose to 48% (2005: 37%). Overall, the balance sheet total increased 4.4% to EUR million. The equity ratio remained virtually unchanged at 32%. The Corporate Excellence project initiated back in 2003 and continued successfully ever since, has analyzed, documented, and optimized all business processes within the parent company. Knorr-Bremse AG s participation in the European Excellence Award 2006 provided external confirmation of the efficient integration of these business processes into the process management systems of the Rail Vehicle Systems and Commercial Vehicle Systems divisions. Knorr-Bremse AG As the parent company, Knorr-Bremse AG performs the role of a holding company as well as a strategic management function on the operational side. The earnings situation of Knorr-Bremse AG is largely determined by the dividends paid by its subsidiaries and by the provision and charging of central Group services. A profit/loss transfer agreement was concluded in 2005 between Knorr-Bremse AG and SfS GmbH. Owing to a scheduled decrease in income from investments in associated and related companies, income before taxation fell from EUR million in 2005 to EUR 84.8 million in the year under review. However, on account of the retained earnings brought forward from the previous year, the unappropriated retained earnings of Knorr- Bremse AG rose to EUR million (2005: EUR million). Along with interests in affiliated companies, the balance sheet of Knorr-Bremse AG largely reflects receivables from and payables to Group Assets Liabilities Balance sheet total 1, , , ,606.5 Balance sheet total in EUR millions in EUR millions Fixed assets/intangibles % 43 % 30 % 29 % Shareholders equity Investments % 1 % 12 % 13 % Pension accruals Current assets/rap 51 % 52 % 46 % 46 % Short-term debt Liquid assets 5 % 4 % 12 % 12 % Borrowings Structure of assets, liabilities, and finances

16 16 M a n a g e m e n t R e p o r t REGIONAL DEVELOPMENTS BY DIVISION The Commercial Vehicle Systems division contributed EUR 1,967.8 million (2005: EUR 1,773.5 million) to consolidated Group sales, the Rail Vehicle Systems division EUR 1,173.6 million (2005: EUR million). collaboration here is initially to enhance and adapt components and software for Adaptive Cruise Control systems (ACC) from Bosch, so that these can be used in commercial vehicles and marketed worldwide. Europe, Middle East, Africa 63 % Consolidated sales by region The Americas 30 % Asia, Australia 7 % EuropE Commercial Vehicle Systems Production of commercial vehicles and buses with air brakes in Western Europe outpaced the previous year s high level in 2006 to reach approximately 493,000 units, an increase of more than 6%. At the same time, demand in Eastern Europe also rose, particularly in the trailer and aftermarket segments. On account of its strong market position, the Commercial Vehicle Systems division was able to benefit from this robust economic backdrop. Incoming orders were more than 20% up on the previous year. In January 2006, the Aldersbach plant in Bavaria turned out the ten-millionth disc brake, providing impressive proof of this product s success in the marketplace. In all, 2.3 million disc brakes were manufactured in the year under review, making this business unit the largest contributor to sales in the European region. In addition to increased sales of original equipment to vehicle manufacturers, sales in the trailer market and aftermarket also showed an upturn owing to more intensive marketing efforts in these segments. The aftermarket also benefited from the growing proportion of vehicles that are fitted with Knorr-Bremse products as original equipment. A joint venture agreement in the field of driver assistance systems was concluded with Robert Bosch GmbH, Stuttgart (Bosch). The aim of At Hasse & Wrede GmbH, Berlin, sales of torsional vibration dampers remained stable in the year under review. Rail Vehicle Systems After the recession of the previous year and the associated drop in incoming orders, the situation in the European railway industry showed a modest improvement in the year under review. In France, Italy and Spain in particular, substantial orders were obtained for projects in the mass transit and mainline sectors. In Spain, for example, Knorr-Bremse equipped the Velaro high-speed trains with advanced braking systems. While in the mass transit sector, metro units in Rome, Barcelona and Madrid were fitted with braking and on-board systems from Knorr- Bremse. Along with braking and on-board systems as original equipment, Knorr-Bremse also provides aftermarket services under the heading of railservices. Here, too, there was further growth, thanks not least to a good record of schedule effectiveness and short turnaround times, and a clear operational focus on customer requirements. The automatic door systems business, branded as IFE Automatic Door Systems, was also further expanded. Along with organic growth, sales were given a significant boost by the initial consolidation of the two subsidiaries in the on-board sector acquired in 2005: Microelettrica (in the power

17 M a n a g e m e n t R e p o r t 17 generation and distribution segment) and Merak (in the air conditioning segment). THE AMERICAS North America Commercial Vehicle Systems In North America, production of commercial vehicles including buses attained a new record level of 512,000 units. In the process, many manufacturers reached the limits of their capacity. The main reason for this development was an emissions regulation that will apply from 2007 onwards, the requirements of which will make commercial vehicles more expensive. To avoid these additional costs in the short term, many fleet operators brought forward their planned purchases into Consequently, most market players are expecting to see a slump in the original equipment market of around 40% in 2007, and Knorr-Bremse has already adapted its planning accordingly. The Group s Bendix subsidiary successfully built on its strong market position and benefited from the robust economy in the year under review. In the electronics sector in particular, sales moved ahead strongly, above all as a result of the market success of the new anti-lock brakes product family (ABS6) with integrated stability program. The Bendix-Spicer joint venture in the wheelend segment, which is managed by Bendix, met expectations and attained its objectives in the year under review. In addition, the joint venture acquired the US company Dipro. Dipro s brake cylinder business will complement the Bendix-Spicer portfolio and further strengthen the joint venture s position, particularly in the North American aftermarket. Rail Vehicle Systems The North American passenger transportation market remained stable in 2006, as did the Knorr-Bremse Group s business in this sector. The door systems business of the IFE division, under the regional management responsibility of Knorr Brake Corporation, developed well. Knorr Brake Corporation also took over the North American activities of Merak, with the aim of driving forward the rail vehicle air conditioning systems business as a separate division under its current name. In 2006, supplies of complete braking and air conditioning systems for 1,266 cars for the Long Island Railroad M-7 project were completed. The freight car market progressed well in the year under review. The number of freight cars sold in North America rose 9% to approximately 75,000 units, outpacing the high market volume of the previous year. In addition, over 1,000 locomotives were sold in the domestic market alone. Along with the buoyant economy in the original equipment and aftermarket sectors, the successful launch of new products, such as the driver assistance system LEADER, also contributed to rising sales. Growth was also supported by direct exports to China and South Africa, as well as by domestic market orders from vehicle manufacturers, whose end-users are based in China. South America Commercial Vehicle Systems In 2006, Brazil remained the largest and thus most important commercial vehicle market in this region. Commercial vehicle output, including buses, fell by around 6% in the year under review to 137,000 units. The number of buses built showed a slight increase, while truck production fell-off sharply. At Knorr-Bremse, all locally required OE products and all components destined for the local aftermarket are manufactured in Brazil. The introduction of innovative products such as the new handbrake valve product family enabled the company to increase its market share. Rail Vehicle Systems In South America, following a surge in growth in 2005, the number of freight cars manufactured fell by 3,400 units to 4,300 in the year under review. For Knorr-Bremse, this meant a sharp drop in sales in local currency terms. The mass transit market remained stable at the previous year s level. In the year under review, two new CCB26 brake systems for locomotives were supplied to customers for the first time, with technology designed for retrofitting to locomotives already in service. In future, additional sales potential will be realized through newly concluded service and maintenance agreements.

18 18 M a n a g e m e n t R e p o r t ASIA/AUSTRALIA Commercial Vehicle Systems In the Asia/Australia region, 2006 witnessed an overall rise in the output volumes in the major commercial vehicle markets. As a result of intensified business activities, in particular in India, the Commercial Vehicle Systems division of Knorr-Bremse was able to post an increase in sales of more than 6% in euro terms. In Japan, production of trucks and buses with air brakes fell 4% in the year under review to 185,000 units, a downturn that also impacted on business development for the local subsidiaries. To ensure that customers in this key market continue to benefit from efficient service, a new production facility complete with advanced logistics was opened in Sakado. In India, commercial vehicle production moved ahead by around 30% to 277,000 units. The Pune plant, which was opened in 2005 and belongs to the joint venture Knorr-Bremse Systems for Commercial Vehicles India Pvt. Ltd., Pune, has shown a positive development and has steadily increased local production output. The main customer is the Indian commercial vehicle manufacturer Tata Motors Ltd. A stake in this joint venture is held by Tata AutoComp. Systems Ltd. (TACO), a member of the Tata Group. art production systems enable the manufacture of high quality compressors tailored to specific customer requirements. In the torsional vibration damper sector, the Hasse & Wrede Dalian joint venture, which also operates a plant in Dalian, was able, among other things, to acquire an order for original equipment from Dalian Diesel, thus achieving a significant increase in production output and sales compared to Also in the year under review, the new head office for commercial vehicle activities in China was opened in Shanghai. Rail Vehicle Systems The rail vehicle market in the Asia/Australia region continued its very positive development in the year under review. The main driver was once again the high-growth Chinese railway market. In addition to the dynamic development of the mass transit sector, the market for locomotives and high-speed trains also moved into higher gear in 2006 and looks set to maintain this pace over the next few years. The expansion of the Rail Vehicle Systems division s activities in China called for special efforts in the year under review. The increase in demand was so strong that the production plant in Suzhou, which had only become operational in 2005, quickly reached the limits of its capacity. As a result, planning and construction work began on a new plant, also in Suzhou. In addition, four joint ventures were founded in China in the rail vehicle sector. JV Westinghouse Guangzhou is to focus on the extensive Chinese market for platform screen doors and expand the In China, production of commercial vehicles and buses reached approximately 600,000 units and was thus well above the prior-year level. In addition to existing sales activities, Knorr- Bremse also opened its own production plant in Dalian in the year under review. State-of-thebusiness to the entire Asian market. Starting in 2007, JV Nankou is to manufacture compressors and air dryers for the Chinese mainline market, providing a local manufacturing base that will underpin the existing strong market position. From 2007 onwards, a new joint venture with CARS will also target the mainline market, manufacturing brake discs for local customers. The fourth joint venture founded in 2006, JV IFE-VICTALL, is to undertake local production and marketing of door systems for high-speed trains. In the mass transit sector, metro lines were equipped in Guangzhou, Shanghai, Beijing, Tianjin and Nanjing in There was also strong growth in incoming orders for locomotives and high-speed trains for the mainline sector. Apart from business in China, projects with Japanese vehicle manufacturers and in other Asian countries also contributed to growth, including, for example, the equipment of metro cars for the capital of the Philippines, Manila.

19 0 M a n a g e m e n t R e p o r t 19 CAPITAL EXPENDITURE/ DEPRECIATION In the year under review, the Knorr-Bremse Group invested EUR million in fixed and intangible assets, which was less than in the previous year (2005: EUR million). At EUR 68.3 million, 63.8% of the company s capital expenditure was invested in Europe. EUR 30.0 million (28.0%) was invested in the Americas and EUR 8.7 million (8.2%) in Asia/Australia. Allocation of capital expenditure was such that the Commercial Vehicle Systems division benefited to the amount of EUR 69.5 million (2005: EUR 62.4 million) and the Rail Vehicle Systems division to the amount of EUR 36.8 million (2005: EUR 50.4 million). The breakdown of depreciation shows that EUR 55.8 million (2005: EUR 52.8 million) was accounted Investitionen Abschreibungen for by Commercial Vehicle Systems and EUR 39.6 million (2005: EUR 44.3 million) by Rail Vehicle Systems. Investment activity focused primarily on the expansion of production capacities and replacement investments, as well as on IT projects and the structural expansion of the Rail Vehicle Systems division in China. Depreciation, including regular amortization of goodwill from acquisitions, increased from EUR 96.8 million in 2005 to EUR million in the year under review. With EUR 63.0 million, Europe accounted for the majority of depreciation, followed by the Americas with EUR 32.0 million, and Asia/Australia with EUR 8.7 million Capital Investitionen Expenditure Abschreibungen Depreciation Consolidated capital expenditure and depreciation in EUR millions

20 20 M a n a g e m e n t R e p o r t RESEARCH AND DEVELOPMENT The development of sophisticated and ever more complex modules and systems, as well as the increasingly early integration of suppliers into the development process call for a large number of qualified employees. In the year under review, expenditure on research and development and project planning increased to EUR million (2005: EUR million) or 4.5% of consolidated sales. As the technology leader in the fields of braking systems for rail and commercial vehicles, as well as on-board systems for rail vehicles and torsional vibration dampers, Knorr-Bremse develops innovative products distinguished by their safety, high quality, and reliability. For some years now, the predominant trend among European rail and commercial vehicle manufacturers has been towards innovative modular and system solutions, with a preference for mechatronic systems. The direct combination of electronic, pneumatic, and mechanical systems within an integrated and largely autonomous unit will form a crucial part of all future development efforts. Today, Knorr-Bremse has already made all the necessary preparations in order to continue supplying the market with such modules in the future. This is the challenge to which, per December 2006, 1,567 (2005: 1,468) highly trained staff in the research, development and project planning functions across the Knorr-Bremse Group dedicate their working hours. A significant proportion of them now work on electronic systems. In order to optimize cost structures without compromising performance quality in the development sector, Knorr-Bremse is actively promoting the integration of development activities across its various sites. By promoting the exchange of staff between different production sites and using state-of-the-art communications, the company has boosted the efficiency of its development activities and enabled work on carefully coordinated projects to proceed simultaneously at different locations. This leads to innovative, customer-oriented solutions being developed for local markets and then constantly enhanced to the benefit of the customer Consolidated research and development expenditure in EUR millions

21 M a n a g e m e n t R e p o r t 21 HUMAN RESOURCES At year-end 2006, the Knorr-Bremse Group employed a total of 13,035 persons or 7.6% more than at the end of With the exception of South America, all of the regions contributed to this increase as a result of the respective growth in volumes of business. In the Europe/Africa region, there were 8,282 employees on the payroll at year-end (2005: 7,981). At 63.6%, the proportion of employees in Europe continued to fall (2005: 65.9%). The workforce in Germany totaled 3,100 employees (2005: 3,083), which equates to 23.8% of the total Group payroll. 3,511 people were employed at the Group s plants in North and South America (2005: 3,370), or 26.9% of the total payroll, down from 27.8% in In Asia/Australia the size of the workforce increased from 768 to 1,242. This represents 9.5% of the total number of employees, up from 6.3% in the previous year. Knorr-Bremse competes worldwide with a large number of other major technology companies and remains on course for further growth. Special efforts are therefore required to recruit highly qualified managers and other employees and to retain them within the Group in the long-term. To this end, a number of measures have proved useful: maintaining contacts with universities, providing generous support for vocational training and continuing professional development programs, offering performancerelated income incentives, and providing for global staff exchanges. Owing to the current expansion of the activities of both divisions in Asia and the more intensive collaboration among all Group companies worldwide, the respective human resource departments must in particular support temporary foreign assignments for qualified expert staff from the Group s established locations. In the Commercial Vehicle Systems division, the number of employees at year-end 2006 had risen to 6,588 (2005: 6,289). In the Rail Vehicle Systems division, the size of the workforce increased to 6,329 employees (2005: 5,715). The Americas 27 % 14,000 12,000 10,959 10,000 10,763 11,143 12,119 13,035 8,000 6,000 4,000 2, Europe, Middle East, Africa 64 % Asia, Australia 9 % Knorr-Bremse Group workforce (Dec. 31) Knorr-Bremse Group workforce by region (Dec. 31)

22 22 M a n a g e m e n t R e p o r t SOCIAL RESPONSIBILITY As a company with a keen sense of social responsibility, Knorr-Bremse has decided to continue its financial support of the non-profit association Knorr-Bremse Global Care e. V. set up in response to the tsunami catastrophe of December 26, The association supports people in need around the world by helping them to help themselves. At the end of December 2006, more than 80% of the association s budget for tsunami projects in the amount of EUR 2 million had been paid out. In all, 15 projects have been successfully implemented to date in Thailand, Sri Lanka and Indonesia. The association continues to benefit from funding of EUR 1 million per annum from the Knorr-Bremse Group, and in 2007 will be focusing on Africa. Knorr-Bremse Global Care has issued its own separate report. Almost all national Knorr-Bremse companies also demonstrate social responsibility at local level by making donations, and by employees making an active commitment on behalf of Knorr-Bremse to help people in need.

23 M a n a g e m e n t R e p o r t 23 APPROPRIATION OF RETAINED EARNINGS RELATIONS WITH AFFILIATED COMPANIES Knorr-Bremse AG posted unappropriated retained earnings of EUR million in 2006 (2005: EUR million). The Annual Shareholders Meeting will be asked to approve the proposal that an amount of EUR 91.0 million be used to pay a dividend of EUR per dividend-bearing share with a par value of EUR 26.00, with the balance to be carried forward to new account. KB Holding GmbH, Munich, directly holds more than half the share capital of Knorr-Bremse AG. Pursuant to 312 German Corporation Law (AktG), a report on relations with affiliated companies has been drawn up which includes the following statement: In the legal transactions listed in the Report on Relations with Affiliated Companies, in accordance with the circumstances known to us at the time at which the said transactions took place, our company received appropriate counterperformance in each case. The report was audited by the Auditors and received their unqualified opinion.

24 24 M a n a g e m e n t R e p o r t FOLLOW-UP REPORT On January 1, 2007, Dr. Raimund Klinkner was appointed to the Executive Board of Knorr-Bremse AG and has assumed worldwide responsibility for the Commercial Vehicle Systems division. At the end of January 2007, at the Strategic IT Management Meeting hosted by the financial newspaper Handelsblatt, the Knorr-Bremse Group was presented with the IT Strategy Award This accolade honors Knorr-Bremse s globally oriented IT management system as a transparent and efficient system that is closely aligned with corporate strategy. No other events of special importance and with a material influence upon the assets, financial or earnings position of the Group at the balancesheet date took place after the conclusion of fiscal 2006.