Annual Report 2005 Annual Report 2005 Contents

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Annual Report 2005 annual report 2005 Contents

Financial Information Management Report for the Danfoss Group ...... 4 Danfoss Divisions ...... 20 Danfoss Refrigeration & Air Conditioning Division ...... 22 Danfoss Heating Division (including Danfoss Water Controls) ...... 28 Danfoss Motion Controls Division ...... 34 Group projects ...... 39 Danfoss Services ...... 40 Sauer-Danfoss Inc...... 42 Management report for Danfoss A/S ...... 43 Financial and operational risk management ...... 44 Accounting policies ...... 46 Management statement & audit report ...... 54 Profit and loss account ...... 57 Balance sheet ...... 58 Statement of cash flow ...... 60 Capital and reserves ...... 61 Notes, table of contents ...... 63 Danfoss Group Companies ...... 94 Organisation ...... 98 Financial highlights (DKK) ...... 99 Financial highlights (EUR) ...... 100

Corporate Citizenship Introduction ...... 101 People and Values ...... 102 Social Responsibility (CSR) ...... 112 Environment ...... 118 Accounting principles ...... 132 Audit endorsement ...... 136

Danfoss A/S DK-6430 Nordborg, Denmark CVR No.: 20 16 57 15 Tel.: +45 74 88 22 22 Fax: +45 74 49 09 49 E-mail: [email protected] www.danfoss.com

Annual Report 2005 The Danfoss Group The Danfoss Group 2005 in brief Danfoss is one of Denmark’s largest industrial companies. Danfoss is a global Group which plays a leading role within research, development, production, sales and service of mechanical and electronic components for a large range of sectors.

Danfoss’ activities are divided into three main business areas:

Danfoss Refrigeration & Air Conditioning Division: The division supplies products and services worldwide within refrigeration and air conditioning.

Danfoss Heating Division including Danfoss Water Controls: The division supplies a number of components and services worldwide within heating and water.

Danfoss Motion Controls Division: The division supplies products and services within frequency converters and gearmotors for industries globally.

Danfoss strives to reach its goals with a minimum consumption of raw materials and energy, the least possible impact on the environment and efficient use of resources. Danfoss has a long-standing tradition for social responsibility towards employees and the external environment. Danfoss owns 38.4% of the shares in Sauer-Danfoss, which is one of the world’s leading producers and suppliers of mobile hydraulics and electronic components for agricultural and entrepreneurial vehicles.

Highlights in 2005 • The positive development of the last four months of the year exceeded the Group’s expectations announced at the half-year, fulfilling the original expectations for the entire year. • The Group net sales, amounting to 16.4bn DKK, is approximately the same as in the previous year. The growth in net sales amounted to 5%, when calculated at last year’s exchange rates and adjusted for acquisitions and divestments. • The operating profit excluding other income and expenses was 910m DKK which is at level with the previous year. • The operating profit (EBIT) amounted to 943m DKK, a decrease of 12%, which was primarily due to less non-recurrent income compared to the year before. • The result before taxes amounted to 999m DKK, an increase of 7% compared to the previous year. • The number of employees rose to 18,168 from 17,543, an increase of 4%. • Acquisitions in 2005: AGH Warmte-units b.v., Holland; FWT Wärmetechnik AG, Germany; Thermia Värme AB, Sweden; Holip, China; and Senstronics Ltd., England. • Divestments in 2005: Als Motor A/S, Denmark, Danfoss Analytical A/S, Denmark, and the Spring Factory, Denmark.

Expectations for 2006 • Net sales are expected to reach 17.0 to 17.5bn DKK. This equals a growth of between 4% and 7% compared to 2005. • The operating profit (EBIT) is expected to be 1.0 to 1.1bn DKK. The EBIT margin is expected to be between 6.0% and 6.5%.

Annual Report 2005 The Danfoss Group F i n a n c i a l I n f o r m a t i o n Management Report for the Danfoss Group

The Group’s net sales were 16.4bn DKK, approximately the same as in the previous year. Calculated at last year’s exchange rate level and adjusted for acquisitions and divestments this equals a growth of 5%. Operating profit was 943m DKK. The result before tax was 999m DKK, 7% higher than in 2004. The positive development in the last four months of the year meant that the Group’s expectations at the half-year were exceeded and the original expectations for the whole year were met. It must be noted that even in an extremely competitive and difficult market, Danfoss chose to continue with a high level of investment activity in various projects and activities all of which are aimed to ensure that the Group maintains long-term competitiveness and earning potential. In 2006, Danfoss expects net sales to reach 17.0 to 17.5bn DKK. This equals a growth of between 4% and 7% compared to 2005. The operating profit E( BIT) is expected to be 1.0 to 1.1bn DKK. Any effects of future acquisitions and divestments are not included in the expectations.

Group sales Net sales in 2005 were 16.416bn DKK, which was about the same as in 2004 Distributed by divisions whenDistributed they reached by regions 16,345bn DKK. When calculated at last year’s exchange mill DKK rates and% adjusted for acquisitions and divestments the growth was 5%, which 20,000 is slightly60 lower than in 2004, when the similar growth was 9%. Danfoss50 entered 2005 expecting that the beginning of an upward global 15,000 trend would affect the Group’s markets and therefore maintained a corre- 40 sponding level of activity. However, it was evident that by the end of the half- 10,000 year, that30 assumptions had not been met and despite several markets showing a growth20 in sales, the Danfoss Group did not meet its projected targets in its 5,000 key markets. 10 Lower5 net sales meant a reduction in capacity utilisation, which led to greater production costs. This, combined with the continued high cost of raw 01 02 03 04 05

materials and fierce price competitionAsia had a negative affect on earnings. How- Paci c

Danfoss Refrigeration & Rest of Europe

ever, at the half-year end the Africa & decision was taken to proceed with a series of Air Conditioning Division Denmark EU excl. DK EU excl.

strategic Group projects, whichMiddle East in the long-term will help secure the Group’s

Danfoss Heating Division Latin America North America (including Danfoss Water Controls) competitiveness and earnings. At the same time other projects were also 2001 2002 2003 2004 2005 Danfoss Motion Controls Division brought forward. Other activities Consequently, expectations of net sales and earnings for the whole year Group sales were readjusted accordingly to 15.75-16.25bn DKK and 700-800m DKK. Origi- Distributed by divisions Distributed by regions nal expectations were at 16.25-16.75bn DKK and 900-1,000m DKK. mill DKK % The development in the Group’s largest core business area, Danfoss 20,000 60 Refrigeration & Air Conditioning Division, was the cause of the downward

50 adjustment of the figures. 15,000 In the last four months of the year, several markets again began to show 40 signs of improvement and throughout the whole year some markets, par- 10,000 30 ticularly in North and Latin America, showed decent growth. The main Euro- pean market showed only moderate growth throughout the year but towards 20 5,000 the end of the year there were signs of a rise in customer sales. The impor- 10 tant German market also showed signs of improvement. Central and Eastern 5 Europe, including the Russian market, showed steady double-digit growth. 01 02 03 04 05 Asian markets, including China, were not quite able to live up to last year’s Asia Paci c

Danfoss Refrigeration & Rest of Europe growth rate. Africa &

Air Conditioning Division Denmark EU excl. DK EU excl. Middle East

Danfoss Heating Division Latin America North America (including Danfoss Water Controls) 2001 2002 2003 2004 2005 Danfoss Motion Controls Division Other activities Annual Report 2005 The Danfoss Group

Group result The unexpected positive development in the latter four months of the year mill DKK meant that the Group’s expectations were exceeded so that original expecta- 1,200 tions for the whole year were met. 1,000 Operating profit excluding other operating income and expenseswere 800 910m DKK, and at the same level as the previous year. Despite sales remain-

600 ing at the same level as 2004 and the cost level being relatively higher than expected, it was still possible to achieve an acceptable operating result. The 400 effect of a lower capacity utilisation was significant. Earnings were further affected by bringing forward a series of strategic projects, which in the long- 200 term will create the conditions for better earnings. Costs of the Group’s strategic and operational projects reached 109m DKK in 2005 (89m DKK). Research 01 02 03 04 05 and development costs were increased by 36m DKK to 594m DKK in order to build up innovation and support growth in coming years. Operating pro t (EBIT) Danfoss is currently going through a period of reorganisation and restruc- Operating pro t excl. other income and expenses turing which will secure the Group’s future profitability and competitiveness. Pro t before tax The relocation of parts of the compressor production from Germany to Slovakia and of parts of the refrigerator thermostat production from Denmark to Slovakia were elements of the restructuring. The results of these projects Raw material prices, index are expected to appear in the next few years. Some of the already noticeable effects of the projects meant that Danfoss, 250 in a difficult market, was able to show an acceptable operating profit excluding other operating income and expenses. 200 It was also decided in 2005 that Danfoss should increase its sales in Japan through a working partnership with Saginomiya Seisakusho Inc. The local 150 Danfoss sales organisation was therefore shut down. This incurred one-off payments and provisions of 42m DKK. Moreover, the result is negatively affected 100 by a loss of 23m DKK from the sale of a plane.

50 Operating profit (EBIT) ended at 943m DKK compared to 1,072m DKK which equals a decrease of 12%. The decrease is primarily due to less non-recurrent Jan 04 Jun 04 Dec 04 Jun 05 Dec 05 income than in 2004. Operating profit was therefore better than the Group Mar 04 Sep 04 Mar 05 Sep 05 expected following the downward adjustment at the half-year end and the Copper Brass Group’s expectations at the start of 2005 were therefore met. In this light the Oil Steel result is considered satisfactory. The share of income from Sauer-Danfoss reached 114m DKK which is an increase of 13% in comparison to the same period of the previous year. In 2005 Sauer-Danfoss showed a growth in both net sales and earnings. EBIT margin/RONA % Financial income and expenses were –22m DKK net which is an improve- 18 ment of 213m DKK. The positive development in the financial items can pri- 16 marily be ascribed to considerable exchange rate adjustments/gains in 2005 14 as a result of increasing rates in USD and USD related currencies. In accordance 12 with IFRS 2 (Share-based Payment), financial items have also been affected by 10 an addition of 32m DKK to the Group’s share remuneration programme, com- 8 pared to 114m DKK in 2004. The result before tax rose to 999m DKK from 931m DKK which equals a 6 growth of 7% compared to 2004. 4 The result for the year was 733m DKK compared to 699m DKK in 2004. This 2 represents an increase of 5%. This is considered a satisfactory result when taking into account the increasing price of raw materials and falling growth rates 01 02 03 04 05 which were particularly present in the first half of 2005. EBIT margin RONA measures the Group’s ability to carry the interest of its net assets. RONA In 2005 RONA was 12.1% compared to 15.5% in 2004. The decrease can be

Annual Report 2005 The Danfoss Group Cash ows ascribed to a combination of lower results and an increased balance following mill DKK goodwill in connection with the acquisition of companies and activities. 1,500 Equity increased to 8,693m DKK from 7,787m DKK which meant a growth of 1,000 12% while the equity ratio was at 59.4% (59.1%).

500 Statement of cash flows – free cash flow 0 The free cash flow, which is a combination of cash flows from operations of – 500 1,192m DKK and cash flows from investments of –1,626m DKK totalled, –434m

– 1,000 DKK compared to 281m DKK the previous year. The change compared to the previous year can mainly be ascribed to the acquisition of companies and – 1,500 fewer investments in fixed assets. – 2,000 01 02 03 04 05 Cash flows from operating activities totalled 1,192m DKK, a decrease of 40m DKK compared to 2004. Cash flows are affected by lower interest rates Cash ow from operating activities and less fluctuation in the working capital. Cash ow from investing activities Free cash ow Cash flows from investing activities amounted to –1,626m DKK, an increase of 675m DKK or 71%. In 2005 a series of acquisitions affected the level of investment. This meant that the collective cash flows following purchase and Net interest-bearing debt sale of companies totalled –504m DKK compared to 355m DKK in 2004 when mill DKK there were major one off earnings from sales of activities. 1,200

1,000 Financial resources Net interest-bearing debt rose to 825m DKK in 2005 from 167m DKK the previ- 800 ous year which represents an increase of 658m DKK, primarily due to loans in connection with acquisitions. This meant that the Group’s leverage (net inter- 600 est-bearing debt as percentage of Shareholders’ Equity) rose to 9.5% com- 400 pared with 2.1% in 2004. Danfoss’ policy is to maintain considerable long-term financial resources. 200 The Group had on December 31, 2005 unused long-term binding credit facilities of about 3.3bn DKK (3.4bn DKK).

01 02 03 04 05 Changes to accounting policies Comparable figures for results and net capital for the Group have been subject to changes to accounting policies and appear differently to the 2004 Annual report. The most important change concerns calculation of warrants and options (the 2001 program) in the profit and loss and balance sheet. For 2005, impact of the change on the profit and loss (under financial expenses) is –32m DKK before tax. Accordingly, the comparable figures for 2004 have been affected by –114m DKK before taxes. There have also been several reclassifications. The most important concerns tax in associated companies and joint ventures. The share of profit from these companies is now calculated after tax in the profit and loss account, whereas previously, it was recognised before tax. The Group’s result for the year has not been affected by this change. Please refer to Accounting Policies for further details.

Research and development Research and development are essential criteria for the Group’s future growth and such activities are primarily conducted within the individual business areas. At Group level 3.9% (3.5%) of net sales was used for research and development in 2005 excluding venture activities. This equals 646m DKK including capitalised development costs. This is a growth of 14% compared to the

Annual Report 2005 The Danfoss Group previous year. The increase reflects Danfoss’ wish to strengthen its activities in research and development. Within the refrigeration field, Danfoss received in 2005 the prestigious American innovation prize AHR Innovation Award for its new Plug & Cool™ cooling system which has been designed in such a way that it can be integrated in, for example, soft drink vending machines. The flexibility of the concept enables new cooling technologies to be introduced to customers step by step, without having to replace the entire vending machine. A new development centre for turbo compressor technology is being set up in Nordborg, Denmark. The centre will be researching new ways to apply the technology. The new American environmental requirements for energy use in private air conditioning units have meant that the TR6 valve, which enables better management of air conditioning units, has been adapted accordingly and a high level of automation has made it profitable to set up a new product line in Nordborg, Denmark. As for the heating market, 2005 not only saw the launch of a new generation of wireless controls together with a complete range of components for installing water based floor heating, but also a design series of radiator thermostats. Danfoss Motions Controls Division presented several new features to the industrial market for the new frequency converter VLT®AutomationDrive FC301 together with new hardware for the VLT® 5000 series. In April the “High Power” frequency converter was presented to the global market at the Hanover Trade Fair in Germany. For further information on product development and market introductions, please refer to the Divisions’ individual reports. The Group files a number of patent applications each year for new inven- tions in order to safeguard research results. In 2005, 83 (71) new applications were filed and the Group obtained approvals of a total of 138 (222) patents. The total number of active patents at the end of 2005 was 962.

Danfoss Ventures In 2004, a new strategy was launched for venture activities and in 2005 Danfoss Ventures has concentrated on being the focal point for both internal and external business ideas as well as on putting the parameters in place for venture activities. The Group’s target is to spend between 100-150m DKK yearly on venture activities. This will be used to further the development of new business ideas which lie outside the core business areas but which have the potential to either strengthen or expand them. In 2005, as a result of a higher level of activity a total of 149m DKK was spent on venture activities compared with 127m DKK the previous year. Every venture has its own management team led by a senior Danfoss manager. All ventures follow business plans and must meet certain milestones to make financing available for further development. An important element in the implementation of the venture strategy is to have the right people involved in venture activities. Danfoss has therefore put into place a series of activities to attract employees who have an interest in business development and in expanding their skills in this field. More than 100 people are involved in the network “Man on the Moon”. The aim of the network is to educate members through seminars, workshops and, via competi- tions, to bring out and develop the best business ideas. The establishment of

Annual Report 2005 The Danfoss Group proper training courses in intrapreneurship has also begun (i.e. how to behave as an entrepreneur within the company).

Knowledge and the environment To ensure Danfoss is able to handle global competition in the future, it is important that employees have the necessary skills and competences. One of the most essential areas is therefore continued professional and personal employee development. Skills development does takes place through traditional course attendance but is also increasingly forming part of the day-to-day work schedule and via internal courses which aim to improve and optimise the daily processes within Danfoss. The shift from the more traditional courses to a more personal and direct job related training and strengthening of skill sets is supported by an increased use of e-learning. In 2005, an e-learning function was established across the Group with the aim of progressing and developing those activities which, for many years, have been used within, for example, product knowledge. In 2005, Danfoss spent approximately 112m DKK on employee training, which is in line with the previous year. All of the Group’s factories must implement environmental management systems according to the international environmental management standard ISO 14001. The environmental management systems ensure that the environmental impact is reduced at source and that the environmental work is embedded in the entire organisation. The Group’s preventive environmental work means that new environmental requirements are not expected to require major investments in any of the production plants. The introduction of two EU-Directives concerning the use of electronic products and the prohibition of certain substances within electronic products will only affect earnings slightly in the years to come. The directives are expected to incur additional costs of less than 10m DKK per annum. The directive concerning environmentally-friendly development of energy-consuming products, EuP, is expected to come into force in 2008 or 2009 and will only slightly affect costs for product development. In 2005, a pilot project was launched to introduce the certified working environment management system (OHSAS 18001) in the factories outside Denmark. The pilot project is expected to start in the spring of 2006 in 4-6 of the factories. Evaluation of the pilot project will determine whether working environment management should be implemented throughout the whole Group, as has already happened in Denmark. The section on Corporate Citizenship includes further information about employees and environmental matters.

Employee Conditions At the end of 2005, Danfoss had a total of 18,168 employees which represents an increase of 625 employees compared with 2004. The number of employees has been reduced throughout 2005 with 221 as a result of the divestment of activities. The purchase of new businesses has meant an addition of 515 employees. Thus, the real growth in the number of employees is 2%. Employees are divided between regions with 14,460 in Europe (14,245), 1,536 in North America including Mexico (1,527), 1,688 in Asia Pacific including China (1,213) and 484 in other regions (558). At the end of 2005 Denmark

Annual Report 2005 The Danfoss Group had 5,810 employees compared to 6,048 the previous year. The reduction in employees is mainly due to the sale of companies.

The Executive Committee and Board At the Danfoss Annual General Meeting on April 15, 2005, Hans Michael Jebsen was elected as a new member of the Board, because Jørgen M. Clausen did not offer himself for re-election. The Board then elected Henrik E. Nyegaard as Chairman and Tom Kähler as Vice-Chairman. In May there was a reallocation of work tasks within the Executive Commit- tee and this change resulted in the Executive Committee being composed as follows: • Jørgen M. Clausen, President and Chief Executive Officer (CEO). • Ole Steen Andersen, Executive Vice President and Chief Financial Officer (CFO). • Niels B. Christiansen, Executive Vice President and Chief Operations Officer (COO). • Hans Kirk, Executive Vice President and Chief Development Officer (CDO). In December there was an election of employee representatives to the Board. Niels Christian Jørgensen and Arno Knöpfli were re-elected and Jens Peter Nielsen was elected as a new employee representative replacing Henning Wendelboe, who chose not to run for re-election. Jens Peter Nielsen will become a member of the Board at the Danfoss A/S Annual General Meeting on April 4, 2006.

The Group’s organisation The Group is organised in three core business areas: Danfoss Refrigeration & Air Conditioning Division, Danfoss Heating Division (including Danfoss Water Controls) and Danfoss Motion Controls Division. Sales happen mainly via regional sales organisations within the individual divisions. The divisions also each include a number of Business Units, maintaining development and production within different product groups. The Group’s venture activities are organisationally placed at Danfoss Ventures. Danfoss consists of a further series of shared corporate and service functions. In order to make personnel and HR conditions more uniform, the decentralised HR and personnel functions were reorganised in 2005 and assembled in a new Global HR organisation.

Acquisition and sale of companies

Acquisition of companies, business expansion and establishments in 2005 With effect from January 1, 2005, Danfoss took over the sales and development company AGH Warmte-units b.v in Nieuwegein (Uttrecht), Holland. The company’s net sales for 2004 were approximately 37m DKK and it has three employees. In April, Danfoss acquired FWT Wärmetechnik AG in Hamburg, Germany. This company sells and develops small and large substations for district heating, hot water systems for houses, anti-legionella systems and heat exchangers. The company’s net sales for 2004 were approximately 75m DKK and it has 28 employees. The acquisition of AGH Warmte-units b.v and FWT Wärmetechnik AG should be viewed as part of the Group’s strategy to become the leading sup-

Annual Report 2005 10 The Danfoss Group plier to the district heating industry. AGH Warmte-units b.v is included in the accounts as of January 1, 2005 and FWT Wärmetechnik AG is included as of April 1, 2005. In June, Danfoss took over the heat pump manufacturer Thermia Värme AB in Arvika, Sweden. In 2004 the company had net sales of approximately 330m DKK and it has 230 employees. The company is included in the accounts as from July 1, 2005. In June, the construction of the 15,000m2 new factory in Wuqing, China, was completed. At the same time, the first sod was turned for a further exten- sion of 10,000m2. The construction budgeted at 39m DKK is expected to be completed during spring 2006. When the construction is complete, the Danfoss factories, administration offices and warehouse in Wuqing will measure a total of 50,000m2. On August 23, Danfoss entered into an agreement for the acquisition of the products and Intellectual Property Rights from the German company Eucon. Eucon supplies system solutions, consultancy and project management for heating, light, ventilation, climate and energy-surveillance of supermarkets in Germany. In November, Danfoss acquired the Chinese producer of frequency converters Holip (Zhejiang Haili Electronic Technology Co. Ltd) with 200 employees and net sales of approximately 65m DKK. The company is included in the accounts from November 1, 2005. In December, Danfoss, together with Launchchange Ltd, a subsidiary of the Danaher Group, took over the English company Senstronics Ltd in a 50/50 joint venture. Senstronics, which is a producer of pressure transmitters, had a turnover of 30m DKK in 2004 and 69 employees. The company will be included in accounts as of December 31, 2005.

Sale of companies, relocations and outsourcing in 2005 In May, the competition authorities approved the agreement on the sale of Danfoss Analytical A/S to the Danaher Group, entered into in December 2004. As a consequence of the fierce price competition within the refrigerator/ freezer market, Danfoss moved the production of refrigerator/freezer thermostats from Nordborg in Denmark to the Danfoss factory in Slovakia. The move was carried out at the end of the year and affected 77 employees in Nordborg, Denmark. It has been possible to secure employment for almost all the affected employees. In June, Danfoss sold 51% of its shares in Als Motor A/S Sønderborg, to Als Motor Holding A/S. The company had net sales of approximately 235m DKK in 2004 and has 93 employees. The company is included in the accounts until May 1, 2005. In 2006, Danfoss sold its remaining shares to Als Motor Holding A/S. In July, Danfoss entered an initial agreement with Capgemini about outsourcing part of the Group’s finance and book-keeping transactions to Capgemini in Krakow, Poland. The agreement is expected to affect approximately 110 employees in Europe and South Africa. In August, Danfoss sold its Spring factory in Tinglev, Denmark, with 46 employees, to the Swedish spring manufacturer Lesjöfors AB. The company was included in accounts until September 30, 2005. In September, Danfoss entered into an agreement with the Japanese Group Saginomiya Seisakusho Inc. whereby, from January 1, 2006, the company will take over sales and service of Danfoss products on the Japanese market. The agreement meant that Danfoss’ Japanese subsidiary was closed on Decem-

Annual Report 2005 11 The Danfoss Group ber 31, 2005. 20 out of the company’s 67 employees were offered jobs with Saginomiya.

Risk factors Every business-related activity carries with it a risk which can affect future results. Danfoss is focusing on identifying the most important risks and is actively looking at how they can be managed. As part of ongoing risk management, Danfoss aims continuously at identifying the risks areas that could have a negative impact on the Group’s activities, financial results or future growth. The identified, monitored risk areas include financial and operational areas, risks related to customers and market conditions as well as those related to the company’s environmental and social responsibility. This list of risks is not exhaustive but covers those areas most likely to affect the Group in the future.

Financial and operational risk management Danfoss’ central finance department deals with the financial and operational risk management in cooperation with the Group’s business units. For further information, please refer to the section Financial and Operational Risks.

Lawsuits Danfoss is a party to a few lawsuits. It is the view of the management that the outcome of the lawsuits will not have a considerable impact on the Group’s financial position.

Losses on customers The risk of losses on customers is primarily connected with customers’ non- payment for products already supplied. The Group supplies many different products to customers worldwide and none of the customers are large enough to be a risk of critical business losses.

Product Risk Even though the majority of Danfoss’ products do not incur any risk during use, they can be sub-components in end products that are possibly hazardous to the surroundings. Danfoss therefore invests time and money to ensure that the products are environmentally-friendly and safe for customers.

Environment Danfoss’ environmental work is based on a number of internal rules and stan dards that are defined in the Group’s Environmental Policy. In addition to these rules, all of the Group’s factories must, of course, comply with the requirements set by the local authorities in the countries where the factories are located. In 2005, Danfoss acquired a range of companies. Prior to any acquisition, due diligence is carried out which includes environment, working environment and security relations. Examination of the company’s registra- tions together with an inspection of the company itself and interviews with employees ensures that financial and environmental risks together with relations which can damage Danfoss’ reputation are all covered. Information on environmental relations is collected together with other information on the company prior to any acquisition negotiations.

Annual Report 2005 12 The Danfoss Group The section on Corporate Citizenship contains further information on the Group’s environmental matters.

UN Global Compact In 2002, Danfoss joined UN’s Global Compact which encourages businesses to contribute to the creation of sustainable development in the world. Global Compact was chosen as the framework for how Danfoss manages its social and environmental responsibility, both internally and externally. For further information about Danfoss’ management of the social and environmental responsibility, refer to the section on Corporate Citizenship.

Events following the close of the financial year.

Organisational change in the Danfoss Refrigeration & Air Conditioning Division As part of the process to make the Danfoss Refrigeration & Air Conditioning Division more customer and market orientated the Division was restructured. This took place on January 1, 2006. The Division will now have three business units: Danfoss Automatic Controls, Danfoss Compressors and Danfoss Electronic Controls & Sensors. The three business units will be supported by a global sales and marketing organisation. For further information regarding the new organisation please refer to the section on Danfoss Refrigeration & Air Conditioning Division.

As of January 6, 2006, the New Zealand company Heatcraft NZ LTD has taken over the sales and support of Danfoss’ cooling and air-conditioning products on the New Zealand market. The 20 employees in the local Danfoss company will all be offered jobs with Heatcraft NZ LTD.

Significant events that would affect the Group’s financial position have not been recorded after the Balance Sheet date.

Expectations for 2006 The Danfoss Group expects the following for 2006: • Net sales are expected to reach 17.0 to 17.5bn DKK. This equals a growth of between 4% and 7% compared to 2005. • The operating profit (EBIT) is expected to be 1.0 to 1.1 bn DKK . • The EBIT margin is expected to be between 6.0% and 6.5%. Any impact from future acquisitions and divestments is not included in the expectations.

Prerequisites In 2006, growth is primarily expected to come from the North and Latin American markets, Eastern and Central Europe and from the Chinese market, which again is expected to add to the collective growth. Markets in the rest of Asia and Europe are expected to show a moderate growth. A large part of Danfoss’ sales outside Europe are settled in dollars. A low dollar exchange rate could therefore mean a restricted growth in net sales when exchanged to Danish kroner. The expectations are based on a dollar exchange rate of 6.05 DKK/USD. The price of raw materials is expected to remain high for 2006. Develop- ment of copper, brass and aluminium is particularly uncertain and there is like- wise a risk of increasing energy prices. Danfoss will try to hedge selected raw

Annual Report 2005 13 The Danfoss Group materials and thereby try to even out some of the major fluctuations in raw material prices. If prices continue to rise at the same rate as in 2005, it will have a negative impact on results for 2006. The Group’s projects, which have already been started and brought forward, will also have a negative impact on results for 2006, but the projects are important to secure the Group’s long-term competitiveness. There are no immediate plans to start any new and larger Group projects.

Strategy Danfoss’ strategy is based on the Danfoss Vision. The Vision was drawn up in 2001 and guides the organisation to reach future targets that are defined in the 2004-2008 perspective plan.

Danfoss will be a global leader within our core businesses, as a highly respected company, which improves quality of life by mastering advanced technologies in customer applications while creating value for all stakeholders.

2004-2008 perspective plan The perspective plan describes targets of the Group, including the projects and activities which will allow Danfoss to get closer to its strategic goal of being number one or two within all of the strategic core businesses by the end of the perspective period in 2008. In 2008 the target for net sales is 24bn DKK, which corresponds to an ave rage yearly growth of 9% in the period 2004 to 2008. The increase in net sales is to be achieved through a combination of organic growth and acquisitions. Growth is primarily expected to come from the North and Latin American markets, Eastern Europe and Asia. Profitability will also be strengthened, in that earnings capacity measured in terms of an EBIT margin is to be 10%. In 2005 the EBIT margin stood at 5.7%. The goal for RONA (Return on Net Assets) in the perspective period is 20% at the end of 2008. In 2005, RONA was 12.1%. In particular, the Group has high expectations from the Chinese market and a new strategy was prepared in 2004 for this market, which will help to secure the Group’s annual sales growth of 40% during the perspective period. In order to reach the targets of the Chinese market, it will be necessary to recruit a considerable number of employees in China. In 2005, approximately 1,230 (747) were employed in China which corresponds to a growth of 65% compared to 2004. Acquisitions are an important part of Danfoss’ efforts to become global leader within its strategic core business areas. Ongoing acquisitions will be made during the perspective period. Based on the Group’s strategic core business areas, Danfoss evaluates potential acquisition candidates on an ongoing basis. Despite the business being focused on the Divisions’ core competencies, the company portfolio will be under an ongoing evaluation as to whether Danfoss continues to be the right owner or whether individual activities will be able to develop more successfully under new ownership. Danfoss Business System is an essential project to ensure the targets of the perspective plan are reached. For further information please refer to Danfoss Business System.

Annual Report 2005 14 The Danfoss Group Geographic distribution of shareholders RelationshipsFluctuation in marketwith shareholders price of Danfoss’Danfoss share shares capital is 1,022.98m DKK and is divided into two share classes: A andDKK/aktie B. A-shares are 425.0m DKK and B-shares are 597.98m DKK. 1,500 Others A-shares entitle ten votes for every 100 DKK share (nominal value) while Asia/Paci c B‑shares entitle one vote for every 100 DKK share (nominal value). Owners of North & Latin America 1,200 A-shares also have pre-emptive rights to B-shares in the event of any increases Rest of Europe England in share900 capital. Slovenia The Bitten and Mads Clausen Foundation and the Clausen family jointly France own600 all A-shares and a number of B-shares equalling 99.4% of the votes. Germany Danfoss has about 7,200 employee shareholders of whom about 25% are employed300 at companies outside Denmark. The employee shareholders and Denmark senior management together own about 3% of share capital and hold about 0.6% of the votes. All employee shares are B-shares. Geographic distribution of shareholders Fluctuation in market price of 01 02 03 04 05 Danfoss shares Shareholders with more than 5% share capital: DKK/aktie 1,500 • Bitten and Mads Clausen Foundation, Nordborg Others • Clausen Controls A/S, Sønderborg, Denmark Asia/Paci c North & Latin America 1,200 • Henrik Mads Clausen, Lake Forrest, USA Rest of Europe • Bente Skibsted, Lutry, Switzerland England 900 Slovenia The Danfoss shares are not freely negotiable. The Bitten and Mads Clausen France 600 Foundation has the pre-emptive right to shares sold to individuals who are Germany not descendants of Bitten and Mads Clausen. However, employee shares are 300 excepted. Should the Foundation not exercise this pre-emption right, trans- Denmark fers can only take place with the consent of the Board of the Bitten and Mads Clausen Foundation. 01 02 03 04 05 Employee shares In 2004, employees were offered the annual opportunity to buy or sell shares in a limited period only and in continuation of the Annual General Meeting at the fixed market price (2005:1,438 DKK). 51 employees took advantage of this offer and acquired a total of 1,146 shares. These shares will only be sellable following the Annual General Meeting in 2006.

Fluctutations in market price for Danfoss shares Danske Bank fixes the market price of the Danfoss shares once a year before the Annual General Meeting in April. The first employee shares were issued in 2001 and this was also the first time the market price of the shares was fixed. In 2001 the market price was fixed at 749. The calculation of the market price is based upon Danfoss’ economic development, the Group’s expectations for coming years, the ability to meet the stated expectations, the economic development for other similar companies and their future expectations together with the general development on the stock market. The 2005 price was 1,438.

Dividends and Annual General Meeting The Board proposes that the dividend for the accounting year of 2005 is fixed at 18%, corresponding to 184m DKK (152m DKK). The dividend percentage was increased compared to 15% in 2004. The dividend will be paid in Danish kroner and 28% Danish dividend tax will be deducted from Danish shareholders. For shareholders outside Denmark, dividend tax will be deducted according to the joint taxation agreements that Denmark and the countries in question have entered into.

Annual Report 2005 15 The Danfoss Group The Board The ordinary Annual General Meeting will take place in Nordborg, Denmark,

Henrik E. Nyegaard Companies with major on April 4, 2006. Chairman board activities: (born 1940) Chairman of: Financial Calendar • Gyldendal A/S Financial reports in 2006 will be published on the following dates: Vice Chairman of: May 15, 2006...... First quarterly report 2006 • Rockwool A/S September 4, 2006 ...... Interim report 2006 • VELUX A/S • VKR Holding A/S November 13, 2006 ...... Third quarterly report 2006

Board member of: • The Bitten and Mads Corporate Governance Clausen Foundation • Lousiana Museum The Danfoss Board is following the public debate surrounding Corporate • MAN B&W A/S Governance and will be considering if new proposals and advice should be integrated into the Group’s Corporate Governance policy. Tom Kähler Companies with major board Vice-chairman activities: Danfoss has a two-tier management system consisting of a Board and an (born 1943) Executive Committee. The Board has the overall responsibility for the com- Chairman of: • Rockwool International A/S pany activities while the Executive Committee is responsible for day-to-day • A/S Saltbækvig operations. • Rockwool Fonden Good corporate governance is based on key words such as responsibility, Vice Chairman of: integrity and openness regarding the Group’s activities. It is important that • The Bitten and Mads Clausen Foundation the individual leader knows how to act within his or her own powers and the

Board member of: framework of the law. • A.P. Møller og Hustru The Articles of Association of the company and a large number of pro- Chastine Mc-Kinney Møllers Fond til almene cedures for internal management and control are also included in Danfoss’ Formaal Corporate Governance. Member of the Advisory Board of: Annual General Meeting • Danske Bank The Annual General Meeting has the ultimate authority in all company mat- Hans Michael Companies with major ters. The ordinary Annual General Meeting is held before the end of the Jebsen board activities: (born 1956) fourth month after the end of the accounting year. All shareholders, who Chairman of: have requested an admission card, are allowed access to the Annual General • Jebsen & Co Ltd Meeting and can ask questions of the Board and the Executive Committee. Board member of: Shareholders can send proposals for the meeting’s agenda, which must arrive • A.P. Jessen Fonden • Hysan Development at the Board no later than March 1 in order to be discussed at the Annual Co Ltd General Meeting. • Wharf (Holdings) Ltd Danfoss has Class A and Class B shares, of which the A-shares are entitled to ten votes per share and the B-shares are entitled to one vote per share. Decisions are made by an ordinary majority at the Annual General Meeting, Peter J. M. Clausen Companies with major Vice President board activities: unless otherwise stated by law or by Danfoss Articles of Association. (born 1949) Chairman of: • The Bitten and Mads The Board Clausen Foundation • Fabrikant Mads Clausens The Board is elected at the Annual General Meeting and has the overall Fond responsibility for company activities. • Als Motor A/S • Danfoss Educational The Board determines, among other things, the overall strategies and Scholarship objectives and also defines the Executive Committee’s guidelines for daily Board member of: operations of the Group. The order of business contains a description of the • The Mads Clausen’s allocation of tasks between the Board and the Executive Committee. Institute Current issues are decided through simple majority at Board meetings and Sven Murmann Companies with major Managing Director board activities: in case of equality of votes the Chairman holds the deciding vote. At least five (born 1967) Board meetings are held each year and one Board meeting is held in connec- Chairman of • Bibus Hydraulik AG, tion with a visit to one of the Group’s locations. Each year, the strategy, target Schweiz and perspective plan, among other items, are evaluated and updated. • Schleswig-Holstein Musik Festival Foundation During 2006, the Board will decide as to how Danfoss will be ready to live Board up to the EU’s 8th Directive concerning the setting up of an audit committee. Vice Chairman of: • Sauer-Danfoss Inc., USA

Annual Report 2005 16 The Danfoss Group Bente Skibsted Companies with major The Danfoss Board consists of nine members: six elected at the Annual (born 1942) board activities: General Meeting, three employee-elected representatives and Bitten Clausen, Board member of: who is a honorary member appointed by the Board. The members elected at • The Bitten and Mads Clausen Foundation the Annual General Meeting are elected for one year at a time so that all members elected at the Annual General Meeting are up for election at the ordinary Annual General Meeting. The employee-elected Board members are, according to Danish law, up for election every four years. In 2005 Niels Christian Jørgensen, Arno Knöpfli and Jens Peter Nielsen were elected. The next election will be held in 2009. Jens Peter Nielsen joins the Board in connection with Niels Christian Companies with major Jørgensen board activities the ordinary Annual General Meeting on April 4, 2006. Employee Board Member Board member of: (born 1950) • The Bitten and Mads On December 31, 2005, the Board consisted of: Shop steward in Clausen Foundation Elected at the Annual General Meeting: Henrik E. Nyegaard (Chairman), Tom Metal • Sønderborg Lufthavn Deputy Senior Shop A.m.b.a. Kähler (Vice-Chairman), Hans Michael Jebsen, Peter M. Clausen, Sven Murmann Steward and Bente Skibsted. Member of: • Nordborg Byråd Employee-elected: Niels Christian Jørgensen, Arno Knöpfli and Henning Wendelboe.

Honorary Member: Bitten Clausen

Arno Knöpfli Companies with major The Board members are not required to be shareholders of Danfoss and the Employee Board board activities: age limit of elected members is 70 years. Member, Senior Engineer (born Chairman of: 1959) • The Danfoss European Vice President of Corporate Communications & Reputation Management Information and Consultation Forum, EICF Ole M. Daugbjerg takes the minutes of Board Meetings.

Board member of: • The Bitten and Mads Executive Committee Clausen Foundation The Executive Committee, which can consist of between two and six members, holds the day-to-day responsibility for the Group’s operation and is employed by the Board. The current age limit for members of the Executive Committee is 65 years. Henning Companies with major At the end of 2005, the Executive Committee consisted of four members: Wendelboe board activities: Employee Board CEO and President Jørgen M. Clausen and Executive Vice Presidents Ole Steen Member Chairman of Andersen, Niels B. Christiansen and Hans Kirk. The Executive Committee holds (born 1945) • Danfoss Employee Foundation weekly meetings.

Board member of: According to the order of business, the Executive Committee must see to it • The Bitten and Mads that the following issues, among others, are discussed at least once a year at a Clausen Foundation Board meeting: • Assessment of internal control functions, including IT security. • Securing of capital resources, book-keeping and property management. Bitten Clausen • Establishment of risk management systems, including insurance issues and Honorary Member currency management. • Review and updating of the order of business, the Corporate Governance policy and internal sets of rules. • Preparation of budget, three year plans and perspectives.

Audit The audit safeguards the interests of shareholders and the public. At the ordinary Annual General Meeting, an independant auditor is elected to deal with the audit tasks until the next Annual General Meeting.

Annual Report 2005 17 The Danfoss Group Executive Committee In 2003, an agreement was entered into with KPMG C.Jespersen to attend

Jørgen M. Clausen Companies with major to all of Danfoss’ subsidiaries in Denmark and abroad, in addition to being the President CEO board activities: Group’s corporate auditor. The agreement is renegotiated annually. (born 1948) Chairman of: At the last Annual General Meeting, the auditing firm KPMG C.Jespersen • Sauer-Danfoss Inc. was appointed as Group auditor until the next ordinary Annual General • Forskningscenter RISØ • Højteknologifonden Meeting. • Junior Achievement, Young Enterprise (Europe) Reporting All of the Group’s companies report figures to the monthly, quarterly and Board member of: • The Bitten and Mads annual reports in one and the same reporting environment, securing com- Clausen Foundation plete transparency across all of the Group’s units. The reporting is prepared Member of the Advisory according to the International Financial Reporting Standards (IFRS). The Board of: • Danske Bank Group’s Corporate Citizenship reporting takes place within the framework of UN’s Global Compact. Ole Steen Andersen Companies with major In order to minimise the Group’s risks, the individual companies’ reporting Corporate board activities: Vice President CFO is reviewed by centrally located accounting controllers. At least once a year the (born 1946) Chairman of: Board approaches the internal audit environment. • Cowi A/S Vice President Corporate Communications & Reputation Management Board member of Ole M. Daugbjerg and Vice President of Corporate Finance Per Have are • Danske Trælast • Auriga A/S responsible for the Danfoss Group’s entire reporting. • Sauer-Danfoss Inc. Risk Management See the section on Risk Factors.

Niels Bjørn Companies with major Remuneration of the Executive Committee and Board Christiansen board activities: Corporate Vice The Board members receive an annual fee set at the Annual General Meeting. President COO Board member of (born 1966) • Axcel In addition to the above mentioned fee, payment can be conferred on Board members who have performed special tasks. Additional payments have not been transferred in 2005. The total Board fee for 2005 was 3m DKK (2m DKK). Included in the fee, the Board was granted share options. The members of the Executive Committee have individual remuneration packages that are adjusted once a year by the Board. In addition to the regular remuneration, a bonus scheme is linked to financial development of Danfoss A/S. Apart from that warrants are also included, as described in detail in the Hans Kirk Companies with major section Warrants and Options. Corporate board activities: The Executive Committee receives gross pay, which includes a pension Vice President CDO (born 1943) Chairman of: contribution paid by the company. Each member of the Executive Committee • NIRAS Gruppen • Teknologisk Institut can choose to retire at the age of 63 and will then continue to be paid a sum that equals their gross pay until the age of 65. Board member of: • The Bitten and Mads The members of the Executive Committee have a notice period of Clausen Foundation between one to three years, depending on the time they have been on the • Sauer-Danfoss Inc. Executive Committee. The Executive Committee members are entitled to sev- erance pay equalling 36 months’ remuneration, if the employment ends for other reasons than own resignation. All members of the Executive Committee are entitled to a redundancy scheme if Danfoss is taken over by another company and can, in such a case, also resign at short notice. Such an event does not mean that granted options can be used since obligations in connection with warrant agreements would be taken over by any other purchaser of the Group. The total Executive Committee fee for 2005 was 27m DKK (29m DKK). Included in the fee, the Executive Committee was also granted share options.

Annual Report 2005 18 The Danfoss Group Warrants and Options Danfoss has introduced a range of incentive programmes based on shares for senior employees, the Executive Committee and the Board. Since 2001, the senior employees and the Executive Committee have been granted warrants in several turns and at the end of 2005, 81 senior employees and the four members of the Executive Committee had been granted a total of 333,261 warrants. The Board has also been granted options in several turns since 2001. As of December 31, 2005, the Board members have been granted a total of 18,000 options. At the 2004 Annual General Meeting a new option scheme for the Board and a new subscription scheme to the Executive Committee and senior employees was decided upon. The schemes allow the participants to be granted options and warrants from 2005 to 2008. The maximum number of warrants to be granted totals 9,600 and 242,064, respectively, of which about one third were granted in 2005. The conditions of being granted warrants or options are based on an annually fixed target for RONA. The participation in the incentive scheme is also conditional on the fact that the senior employees and the Executive Committee buy a number of shares at full market price (2005: 1,438 DKK each).

Annual Report 2005 19 The Danfoss Group f inancial in f o r m a t i o n Danfoss Divisions

Division profiles Financial highlights FINANCIALFINANCIAL HIGHLIGHTS HIGHLIGHTS FOR DANFOSS FOR DANFOSS REFRIGERATION REFRIGERATION & AIR CONDITIONING & AIR CONDITIONING DIVISION DIVISION The Danfoss Refrigeration & Air Conditioning Divisionmill DKK Danfossmill DKK Refrigeration & Air Conditioning Division consists of three business units and four sales units. The mill DKK 2004 20052004 2005 Dev. Dev. Dev.% Dev. % three business units, Danfoss Automatic Controls, Danfoss Compressors and Danfoss Electronics & Sensors are, within Net sales Net sales 8,583 8,3518,583 8,351 -232 -2.7%-232 -2.7% their product areas, responsible for product development, Operating profitOperating profit 615 449615 449 -166 -27.0%-166 -27.0% production and key customers. The products are manufacIntangible- fixedIntangible assets fixed assets 151 228151 228 77 51.0%77 51.0% tured at 27 factories in 16 countries. Tangible fixedTangible assets fixed assets 1,702 1,9671,702 1,967 265 15.6%265 15.6% The Division sells products on the global market throughTotal assets Total assets 5,189 5,6695,189 5,669 480 9.3%480 9.3% its own sales organisation which is dedicated towards cus-Non-interest-bearingNon-interest-bearing debt debt 1,678 1,6051,678 1,605 -73 -4.4%-73 -4.4% tomer groups within Air Conditioning Key Accounts, FoodNet assets Net assets 3,449 4,0053,449 4,005 556 16.1%556 16.1% Retail and Industrial Automation. A fourth sales unit is dediNet- investmentsNet (excl.investments goodwill) (excl. goodwill) 647 621647 621 -26 -4.0%-26 -4.0% cated to the major markets of Commercial Refrigeration, Net investmentsNet ininvestments goodwill in goodwill 15 015 0 -15 -100.0%-15 -100.0% Industrial Refrigeration and, not least, the significant marketDepreciation Depreciation / amortisation / amortisation 356 364356 364 8 2.2% 8 2.2% on which sales takes place via the refrigeration wholesalers.ImpairmentsImpairments -96 2-96 2 98 -102.1%98 -102.1% Cash flow fromCash operating flow from activities operating (excl. activities paid tax (excl. paid tax and financial anditems) financial items) 807 853807 853 46 5.7%46 5.7% Cash flow fromCash investing flow from activities investing activities -452 -655-452 -655 -203 44.9%-203 44.9%

Number of employeesNumber of employees 9,006 9,0939,006 9,093 87 1.0%87 1.0% EBIT margin EBIT margin 7.2% 5.4%7.2% 5.4% RONA RONA 18.3% 12.0%18.3% 12.0% FINANCIALFINANCIAL HIGHLIGHTS HIGHLIGHTS FOR DANFOSS FOR DANFOSS HEATING HEATING DIVISION DIVISION Division(INCL.DanfossDivision (INCL.DANFOSSsales distributed DANFOSSHeating sales WATER Divisiondistributed WATER by CONTROLS) regions CONTROLS) by regions(%) (%) Danfoss Heating Division offers a number of compo- mill DKK (includingmill DKK Danfoss Water Controls) nents and solutions for the generation, supply and control mill DKK 20042004 2005 2005 Dev. Dev.Dev. % Dev. % of heating to optimise comfort and save energy in private 2001 20022001 2003 2002 2004 2003 2005 2004 2005 households and small commercial buildings. The Division is EU excl.Net sales DK EUNet excl. sales DK 4,19257%4,192 4,640 56%57% 4,640 57% 56% 53%448 57% 10.7%448 49% 53% 10.7% 49% a leading company within the global industry with produc- DenmarkOperatingDenmarkOperating profit profit 4495%449 505 5%5% 505 5% 5% 5%56 5% 12.5%56 4% 5% 12.5% 4% tion facilities in more that 10 countries, and sales companies RestIntangible of EuropeRestIntangible fixed of assets Europe fixed assets 7966% 1,351796 9%6% 1,351 9% 9% 10%555 9% 69.7%555 8% 10% 69.7% 8% and agents on all heating markets worldwide. The constant LatinTangible America fixedLatinTangible assetsAmerica fixed assets 7655%765 858 4%5% 858 3% 4% 4%93 3% 12.2%93 5% 4% 12.2% 5% improvement of products and services has enabled Danfoss NorthTotal America assetsNorthTotal assets America 2,88410%2,884 3,821 10%10% 3,821 8% 10%937 8% 8% 32.5%937 10% 8% 32.5% 10% Heating Division to build strong relationships with customersNon-interest-bearing Non-interest-bearing debt debt 776776 807 807 31 4.0%31 4.0% Africa & MiddleAfrica East & Middle East 6% 6%6% 6% 6% 8% 6% 9% 8% 9% and business partners throughout the value chain. Net assetsNet assets 2,1092,109 3,014 3,014 905 42.9%905 42.9% Asia Asia 8% 9%8% 10% 9% 11% 10% 12% 11% 12% Net investmentsNet investments (excl. goodwill) (excl. goodwill) 197197 381 381 184 93.4%184 93.4% Pacific Pacific 2% 2%2% 2% 2% 2% 2% 2% 2% 2% Danfoss Water Controls produces and offers components Net investmentsNet investments in goodwill in goodwill 95 42095 420 325 342.1%325 342.1% for the water industry in the form of valves and related prod-DepreciationDepreciation / amortisation / amortisation 189189 170 170 -19 -10.1%-19 -10.1% ucts. The business unit’s sales and service network covers all Cash flowCash from flow operating from operating activities (excl.activities paid (excl. tax paid tax markets, which means that Danfoss can offer assistance to and financialand items) financial items) 644644 548 548 -96 -14.9%-96 -14.9% both global and local customers. Regional companies main- Cash flowCash from flow investing from investingactivities activities -364-364 -820 -820 -456 125.3%-456 125.3% tain marketing, sales and customer service with highly qualified staff close to the customers. Number ofNumber employees of employees 4,1434,143 4,437 4,437 294 7.1%294 7.1% EBIT marginEBIT margin 10.7%10.7% 10.9% 10.9% RONA RONA 22.5%22.5% 19.7% 19.7%

DivisionDivision sales distributed sales distributed by regions by regions (%) (%)

20012001 2002 2002 2003 2003 2004 2004 2005 2005 EU excl. DKEU excl. DK 70%70% 68% 68% 70% 70% 70% 70% 69% 69% Denmark Denmark 9%9% 8% 8% 8% 8% 8% 8% 8% 8% Rest of EuropeRest of Europe 13%13% 15% 15% 15% 15% 13% 13% 16% 16% Annual Report 2005 Latin20 AmericaLatinThe America Danfoss Group 0%0% 0% 0% 0% 0% 0% 0% 0% 0% North AmericaNorth America 5%5% 4% 4% 3% 3% 3% 3% 3% 3% Africa & MiddleAfrica East& Middle East 1%1% 1% 1% 0% 0% 0% 0% 1% 1% Asia Asia 3%3% 3% 3% 3% 3% 5% 5% 4% 4% Pacific Pacific 0%0% 0% 0% 0% 0% 0% 0% 0% 0% FINANCIALFINANCIAL HIGHLIGHTS HIGHLIGHTS FOR DANFOSS FOR DANFOSS MOTION MOTION CONTROLS CONTROLS DIVISION DIVISION Danfoss Motion Controls Division is comprised of two mill DKK Danfossmill DKK Motion Controls Division business units: Danfoss Drives and Danfoss Gearmotors with 20042004 2005 2005 Dev. Dev.Dev. % Dev. % factories in Denmark, China, Slovakia, Germany and the USA. mill DKK Danfoss Drives and Danfoss Gearmotors operate as independ- Net sales Net sales 3,2083,208 3,211 3,211 3 0.1%3 0.1% ent business areas, which cooperate to offer package solu- OperatingOperating profit profit 354354 252 252 -102 -28.8%-102 -28.8% tions to the customers. The division has a global network of IntangibleIntangible fixed assets fixed assets 52 18152 181 129 248.1%129 248.1% sales offices offering professional service to the customers. Tangible fixedTangible assets fixed assets 796796 807 807 11 1.4%11 1.4% Danfoss Drives is the global market leader in the food, bevTotal- assetsTotal assets 1,5721,572 1,852 1,852 280 17.8%280 17.8% erage, HVAC and water industries and has activities within theNon-interest-bearing Non-interest-bearing debt debt 703703 842 842 139 19.8%139 19.8% automobile, chemical, petrochemical, textile, steel and miningNet assetsNet assets 871871 991 991 120 13.8%120 13.8% industries in selected markets. Danfoss Gearmotors deliv- Net investmentsNet investments (excl. goodwill) (excl. goodwill) 74 21174 211 137 185.1%137 185.1% ers gearmotors for industrial applications and holds a strong Net investmentsNet investments in goodwill in goodwill -32-32 48 48 80 -250.0%80 -250.0% position within the automobile, material handling and steel DepreciationDepreciation / amortisation / amortisation 131131 139 139 8 6.1%8 6.1% industry. Cash flowCash from flow operating from operating activities (excl.activities paid (excl. tax paid tax and financialand items)financial items) 367367 411 411 44 12.0%44 12.0% Cash flowCash from flow investing from investingactivities activities -150-150 -228 -228 -78 52.0%-78 52.0%

Number ofNumber employees of employees 2,8162,816 3,176 3,176 360 12.8%360 12.8% EBIT marginEBIT margin 11.0%11.0% 7.9% 7.9% RONA RONA 37.0%37.0% 27.1% 27.1%

DivisionDivision sales distributedsales distributed by regions by regions (%) (%)

20012001 2002 2002 2003 2003 2004 2004 2005 2005 EU excl. DKEU excl. DK 59%59% 57% 57% 57% 57% 55% 55% 57% 57% DenmarkDenmark 5%5% 5% 5% 4% 4% 4% 4% 3% 3% Rest of EuropeRest of Europe 6%6% 6% 6% 6% 6% 6% 6% 6% 6% Latin AmericaLatin America 3%3% 3% 3% 2% 2% 2% 2% 3% 3% North AmericaNorth America 13%13% 14% 14% 11% 11% 13% 13% 14% 14% Africa & MiddleAfrica &East Middle East 2%2% 2% 2% 2% 2% 2% 2% 2% 2% Asia Asia 9% 11%9% 11% 15% 15% 15% 15% 11% 11% Pacific Pacific 3%3% 3% 3% 3% 3% 3% 3% 4% 4%

Annual Report 2005 21 The Danfoss Group f inancial in f o r m a t i o n Danfoss Refrigeration & Air Conditioning Division

The Danfoss Refrigeration & Air Conditioning Division achieved net sales in 2005 of 8,351m DKK compared to 8,583m DKK in 2004, a decrease of 3%. The operating profit was 449m DKK, which is a decrease of 27% compared to the year before. The result is not considered satisfactory.

Refer to the division’s profile and financial highlights on page 27

The net sales decreased to 8,351m DKK from 8,583m DKK, a decrease of 3%, primarily due to the divestment of the Elsmark Group in the autumn of 2004. The growth in net sales was 4% in 2005, when converted at last year’s exchange rates and adjusted for acquisitions and divestments. The result is acceptable in the light of the very weak demand on the Division’s main markets in the first half of the year. The first half year was characterised by considerable costs incurred through adjusting production levels to the poor demand which in turn resulted in a reduced capacity utilisation. At the end of the year, demand and capacity once again balanced which improved the profitability of the business. The difficult market conditions also meant that the increasing material prices could not fully be covered by increases in prices. Because of the result at the half year, strategic projects were initiated and brought forward to secure the Division’s long-term competitiveness. The decision lead to a restructuring of selected parts of the divisional activities in Japan and Denmark, among other things, which resulted in non-recurrent expenses totalling 42m DKK. The operating profit was 449m DKK compared to 615m DKK the year before. This is a decrease of 27%, which is considered unsatisfactory. The return on the Divisions’ net assets (RONA) was 12%, compared to 18.3% the year before. The decline in the result and a 556m DKK increase in the net assets had an effect on RONA. The increase in the net assets was primarily due to the high activity level at the end of the year which increased the funds tied up in the form of increased amounts owed by the customers. In addition to this, the relocation of production to sites such as the one in Slovakia has had an impact on the net assets. The cash flow from operating activities amounted to 853m DKK, equalling an increase of 46m DKK. In spite of the decrease in operating profits, cash flows were not reduced correspondingly which was primarily due to a significant reduction of the working capital. The cash flow from investing activities amounted to –655m DKK, an increase of 203m DKK compared to 2004. However, income from the sale of the Elsmark Group was set off, affecting the cash flow amount in 2004. The relocation of the household compressor production from Danfoss’ factory in Flensburg, Germany, to the factory in Slovakia was initiated in 2005. The first compressor line was relocated in the autumn of 2005 and approximately 170 employees left at the end of the year. The relocation will ensure that the Group continues to be competitive in the field of household compressors. The

Annual Report 2005 22 The Danfoss Group factory in Flensburg, Germany, will remain a competence centre for the entire compressor production. The production of small-sized commercial compressors will continue to take place in Flensburg. The Division anticipates net sales and profit to increase in 2006, as a result of the implemented restructuring and the increasing growth in the Division’s markets, among other things.

Market development for the Danfoss Refrigeration & Air Conditioning Division The growth in the markets in North and Latin America continued, showing very satisfactory double-digit growth rates. All markets and business areas of the region improved significantly, especially sales to the major air conditioning OEMs (Original Equipment Manufacturers) had a major breakthrough in 2005. Because some of the large European customers adjusted their stocks, demand in the first half year was less than anticipated. The total sales to customers in the EU countries were, however, largely unchanged compared to 2004, as a result of a good fourth quarter. The year was characterised by a generally low financial activity level in many countries, including Italy that in previous years showed high growth rates. In spite of the generally difficult situation, the Division managed to realise decent growth rates on the markets in Germany, France and Sweden. Sales in the Asia-Pacific markets did not show the same growth rates as in previous years. One of the reasons was that sales stagnated on the mature markets in Australia, New Zealand and Japan. A decline in the number of publicly financed construction projects in China meant that the substantial increase in demand shown in previous years could not be maintained, because a large part of Danfoss’ sale to China is to air conditioning OEMs. Consequently, sales in China only grew moderately in 2005. On the markets in Korea, India and Taiwan double-digit growth rates were achieved. To support the Division’s sale of integrated solutions for refrigeration control in supermarkets, an agreement was made in 2005 for the takeover of products and know-how from the German company Eucon. Danfoss entered a joint venture with a company of the Danaher group to take over the English company Senstronic Ltd. The purpose of the takeover was to strengthen the current pressure transmitter product range. As a result of the restructuring, the New Zealand company Heatcraft NZ LTD took over the sale and support of Danfoss’ refrigeration and air conditioning products on the market in New Zealand, after the end of the accounting year.

Products and R&D The Plug & Cool™ refrigeration system was awarded the prestigious American innovation prize “AHR Innovation Award” for being the most innovative, new product in 2005 within its category. The system is a complete refrigeration system designed to be easily integrated in, for example, soft drink vending machines. In comparison with conventional systems, it is easier to replace and maintain the Plug & Cool™ system. In this way, significant savings can be obtained throughout the entire life span of the vending machine. Additionally, the concept makes it possible for customers to gradually introduce new refrigeration technologies, which are more energy-efficient or which are based on natural refrigerants such as CO2, without having to replace the entire vending machine.

Annual Report 2005 24 The Danfoss Group In order to meet the increasing demand for oil-free turbo compressors for commercial air conditioning the Danfoss Turbocor Compressors Inc.’s head- quarters and production will be moved from Montreal, Canada, to Tallahassee, Florida in 2006. A new development centre for turbo compressor technology is being established in Nordborg, Denmark. The purpose of the centre will be to research new opportunities to utilise the technology. As a consequence of new environmental requirements in the USA, (SEER13), concerning energy consumption of private air conditioning systems, the TR6 valve was made to comply with the new American requirements. The valve facilitates more accurate control of air conditioning systems. To comply with the demand, the Division decided to expand the existing valve production in Mexico. In addition, a new production line for TR6 valves was established in Nordborg, Denmark, in 2005. The project is a fine example of the fact that it is possible to establish new production in Denmark, when the potential for a high degree of automation exists.

Organisational changes In order to sharpen focus on customers and markets and begin a gradual gen- erational change, the organisational structure of the Danfoss Refrigeration & Air Conditioning Division was changed as of January 1, 2006. Three new development and production units were set up, based on three main technologies within refrigeration and air conditioning. At Danfoss Compressors, all of Danfoss’ compressor activities were joined together through a gradual integration of Danfoss Household Compressors, Danfoss Commercial Compressors and Danfoss Appliance Controls. Through the integration of Danfoss Refrigeration and Air Conditioning Controls and Danfoss Industrial Controls, activities relating to mechanical and electro-mechanical components for the control and regulation of refrigeration and air conditioning and other industrial systems will be grouped in Danfoss Automatic Controls. Danfoss Electronic Controls & Sensors will be the centre of activities relating to electronic and mechatronic products for the control and regulation of refrigeration, air conditioning and other industrial systems. Moreover, three new organisations will be established in relation to sale and marketing with focus on customer groups within Air Conditioning Key Accounts, Food Retail and Industrial Automation. A fourth sales organisation will be dedicated to the markets for Commercial Refrigeration, Industrial Refrigeration and refrigeration wholesalers.

Perspective plan 2005-2008 The Division expects to increase net sales in the period, through acquisitions and alliances with companies doing business within the existing activities and in areas that are similar to the current core business, in addition to organic growth. The cooperation with both Danaher Inc. and Saginomiya Seisakusho Inc. are concrete examples of how this strategy is being realised. Through an expanded cooperation with a number of international customers on the development and supply of new products and solutions, Danfoss is expected to strengthen its market position within refrigeration and air conditioning. Danfoss’ range of compressors will be modernised and significantly expanded in the perspective period. The Division’s production flow will be adjusted in connection with the Group’s productivity program, which means that an increasing number of compressors are being produced in countries with a competitive cost level, such as China, Slovakia and Slovenia. The

Annual Report 2005 25 The Danfoss Group expansion of the range will be done partly through own development and the establishment of joint ventures, and partly through acquiring companies which can provide Danfoss with new compressor technologies. Today, the Danfoss Refrigeration & Air Conditioning Division is an important player in China. The target is to retain and expand this position, through, among other things, the expansion of the production capacity, the development of new products for the Chinese market and through the acquisition of companies. The ambition is for the market share in China to be comparable with Danfoss’ large market shares in the European market.

Annual Report 2005 26 The Danfoss Group Division profile Danfoss Refrigeration & Air Conditioning Division consists of three business units and four sales units. The three business units, Danfoss Automatic Controls, Danfoss Compressors and Danfoss Electronics & Sensors are, within their product areas, responsible for product development, production and key customers. The products are manufactured at 27 factories in 16 countries. The Division sells products on the global market through its own sales organisation which is dedicated towards customer groups within Air Conditioning Key Accounts, Food Retail and Industrial Automation. A fourth sales unit is dedicated to the major markets of Commercial Refrigeration, Industrial Refrigeration and, not least, the significant market on which sales takes place via the refrigeration wholesalers.

Financial highlights for Danfoss Refrigeration & Air Conditioning Division FINANCIALFINANCIAL HIGHLIGHTS HIGHLIGHTS FOR DANFOSS FOR DANFOSS REFRIGERATION REFRIGERATION & AIR CONDITIONING & AIR CONDITIONING DIVISION DIVISION mill DKK mill DKK

2004 20052004 2005 Dev.Division Dev. %Dev. sales Dev. % Distributed by regions Net sales Net sales 8,583 8,3518,583 8,351 -232 -2.7%-232 -2.7% % Operating profitOperating profit 615 449 615 449 -166 -27.0%-166 -27.0% 60 Intangible fixedIntangible assets fixed assets 151 228 151 228 77 51.0% 77 51.0% Tangible fixed Tangibleassets fixed assets 1,702 1,9671,702 1,967 26550 15.6% 265 15.6% Total assets Total assets 5,189 5,6695,189 5,669 480 9.3% 480 9.3% Non-interest-bearingNon-interest-bearing debt debt 1,678 1,6051,678 1,605 -7340 -4.4% -73 -4.4% Net assets Net assets 3,449 4,0053,449 4,005 556 16.1% 556 16.1% 30 Net investmentsNet (excl. investments goodwill) (excl. goodwill) 647 621 647 621 -26 -4.0% -26 -4.0% Net investmentsNet in investments goodwill in goodwill 15 0 15 0 -1520 -100.0% -15 -100.0% Depreciation / Depreciationamortisation / amortisation 356 364 356 364 8 2.2% 8 2.2% Impairments Impairments -96 2 -96 2 9810 -102.1% 98 -102.1% 5 Cash flow fromCash operating flow from activities operating (excl. activitiespaid tax (excl. paid tax and financial items)and financial items) 807 853 807 853 46 5.7% 46 5.7%

Cash flow fromCash investing flow from activities investing activities -452 -655-452 -655 -203 44.9%-203 44.9% Asia Paci c Rest of Europe Africa & Denmark

Number of employeesNumber of employees 9,006 9,0939,006 9,093 87 1.0% DK EU excl. 87 1.0% Middle East Latin America

EBIT margin EBIT margin 7.2% 5.4%7.2% 5.4% North America RONA RONA 18.3% 12.0%18.3% 12.0% 2001 2002 2003 2004 2005

Division salesDivision distributed sales distributed by regions by (%) regions (%)

2001 20022001 2003 2002 2004 2003 2005 2004 2005 EU excl. DK EU excl. DK 57% 56%57% 57% 56% 53% 57% 49% 53% 49% Denmark Denmark 5% 5%5% 5% 5% 5% 5% 4% 5% 4% Rest of EuropeRest of Europe 6% 9%6% 9% 9% 10% 9% 8% 10% 8% Latin America Latin America 5% 4%5% 3% 4% 4% 3% 5% 4% 5% North AmericaNorth America 10% 10%10% 8% 10% 8% 8% 10% 8% 10% Africa & MiddleAfrica East & Middle East 6% 6%6% 6% 6% 8% 6% 9% 8% 9% Asia Asia 8% 9%8% 10% 9% 11% 10% 12% 11% 12% Pacific Pacific 2% 2%2% 2% 2% 2% 2% 2% 2% 2%

Annual Report 2005 27 The Danfoss Group f inancial in f o r m a t i o n Danfoss Heating Division (including Danfoss Water Controls)

The net sales of Danfoss Heating Division reached 4,640m DKK in 2005 compared to 4,192m DKK in 2004. This is an increase of 11%. The operating profit increased by 13% to 505m DKK. This result is considered satisfactory. The results from the business unit Danfoss Water Controls are included in the overall figures for Danfoss Heating Division.

Refer to the division’s profile and financial highlights on page 32

Net sales increased to 4,640m DKK in 2005 from 4,192m DKK in 2004, corresponding to a growth of 11%. When calculated at last year’s exchange rates and adjusted for acquisitions and divestments the growth was 4%, which is considered satisfactory when the general market development is taken into consideration. The Division’s various business areas generally displayed satisfactory growth in 2005, continuing the positive development. The markets in Eastern Europe and Russia developed particularly satisfactorily, while several Western European markets only displayed weak growth and in a few cases stagnation. In 2005 the Division participated in the continuous implementation of the cross-Group project directed at production, sales and procurement (Danfoss Business System), and thereby achieved significant process improvements across the value chain. The Group’s improvement projects have, however, tied up significant resources, which have had a negative effect on the result, but it is expected that the improvements will contribute positively to earnings in the future. The operating profit rose to 505m DKK from 449m DKK, a growth of 13%. The result was negatively affected by costs incurred with the integration of acquired companies. The Division’s RONA (Return on Net Assets) reached 19.7% compared to 22.5% in 2004, primarily due to the fact that the division’s net assets increased as a result of company acquisitions. Cash flows from operations amounted to 548m DKK, which is 96m DKK less than in 2004. The cash flows from investing activities amounted to –820m DKK, increased by 456m DKK due to acquisitions. In 2006 the Division will continue to focus on increasing sales by focusing even more on the customers and the sales process, and by keeping an eye on opportunities to develop business in new areas. The positive developments on most of the markets are expected to continue. Therefore, the business areas within Danfoss Heating Division are expected to develop positively in 2006.

Market development in Danfoss Heating Division Constantly increasing energy costs and various political initiatives, e.g. the EU’s directive regarding energy consumption in buildings, have increased interest in the Division’s products.

Annual Report 2005 28 The Danfoss Group

All business areas within Danfoss Heating Division achieved high growth rates in Eastern Europe and Russia, and seen as a whole the Division strengthened its market position in 2005. The Western European market was also characterised by difficult market conditions in 2005, but the launch of a number of sales-stimulating activities started to show results in several countries in the second half of 2005. Sales in China did not reach the same high level as in 2004. Developments in the district heating market followed the same trends as in previous years with limited growth in Scandinavia and Central Europe, while the markets in Eastern Europe, Russia and China continue to grow rapidly. In Western Europe there is a continued tendency towards installing complete district heating units rather than piecing them together from single components as was previously common. Danfoss Comfort Controls maintained its position in the Western Euro- pean markets in 2005 and has strengthened its position in new markets such as Eastern Europe and the Middle East. Sales of radiator thermostats in the Russian market are going well and are expected to rise significantly in the years to come. Danfoss Floor Heating achieved a fine increase in sales that resulted in a generally strengthened market position. This growth will be supported in 2006 by a number of sales supporting activities and continuous expansion into new markets. Danfoss Burner Components experienced a drop in sales in 2005, partly due to the divestment of Danfoss’ Spring factory and a generally low activity level on the market for oil burners. The high oil prices have indirectly contributed to a shift to other forms of heating that are not dependent on oil prices, which affected the sales of oil burners. In spite of the difficult market conditions the business area has succeeded in strengthening its relative market position. In 2005 the Division continued its focus on sales growth and business development, which resulted in the acquisitions of the Swedish producer of oil pumps, Thermia, the Germany-based FWT Wärmetechnik, and the Dutch company AGH Wärmte-units as a continued expansion of the Division’s district heating strategy. Additional focus on the Division’s core businesses resulted in the divestment of the industrial metering business to the German company Metra Energie Messtechnik GmbH and the sale of Danfoss’ Spring factory to the Swedish company Lesjöfors.

Products and R&D During 2005, a number of new products for the district heating business were introduced, including controls, heat exchangers and district heating stations. As a result of acquisitions, the product program has been expanded with con- tainer solutions and stations for water heating, combined district heating and cooling as well as small stations. Danfoss Comfort Controls introduced several new products in 2005 that focus on design in the segment for thermostats for bathroom radiators. This has strengthened the market position in the growing design segment. In 2005 Danfoss Floor Heating introduced a new generation of wireless controls and a complete range of components for the installation of water- based floor heating. WebHome has also been developed further, so that the electric floor heating setup can be controlled via the internet, and also other features such as monitoring of electricity and water consumption.

Annual Report 2005 30 The Danfoss Group Heat Pumps has introduced a new air-water heat pump, which makes operation possible in temperatures down to –20°C. The water-water range was also expanded with a capacity regulating heat pump.

Perspective plan 2006-2008 During the perspective period the Division will focus on growth within selected components and solutions for heating and climate applications for residential and commercial buildings. The underlying condition for the growth strategy is the continued development of the markets in Eastern Europe, Russia, China and selected business areas in North America. In order to secure its leading position Danfoss Heating Division will actively participate in the ongoing consolidation in the market. Innovative product development that focuses on user and installation friendliness will also contribute to strengthening the division’s market position in established markets. Danfoss Heating Division will also focus on developing its business through company acquisitions within the division’s focus areas. In the perspective period the Division will focus on profitability through process improvements across the entire value chain. It is therefore expected that Danfoss Heating Division can retain its current earnings while also focusing on continued growth.

Danfoss Water Controls In 2005 Danfoss Water Controls experienced growth in its main markets, and the markets in Eastern Europe, Asia and North America in particular displayed good growth rates. In spite of difficult conditions in Western Europe the business area succeeded in winning market shares, partly following the introduction of the new series of industrial butterfly valves in 2004. The launches of a new type of large, industrial butterfly valves for the water segment and special industrial applications were well received by the market. At the end of the year a new type of sealed valve (Aquosus) was introduced and it is expected that the valve will win a significant share of the market in the future. In 2005 Danfoss Water Controls participated in the Group’s productivity program, where the factory in Mery achieved improvements of more than 20%.

Annual Report 2005 31 The Danfoss Group Division profile

Danfoss Heating Division offers a number of components and solutions for the generation, supply and control of heating to optimise comfort and save energy in private households and small commercial buildings. The Division is a leading company within the global industry with production facilities in more that 10 countries, and sales companies and agents on all heating markets worldwide. The constant improvement of products and services has enabled Danfoss Heating Division to build strong relationships with customers and business partners throughout the value chain.

Danfoss Water Controls produces and offers components for the water industry in the form of valves and related products. The business unit’s sales and service network covers all markets, which means that Danfoss can offer assistance to both global and local customers. Regional companies maintain marketing, sales and customer service with highly qualified staff close to the customers.

FINANCIAL HIGHLIGHTS FOR DANFOSS HEATING DIVISION FINANCIAL HIGHLIGHTS FOR DANFOSS HEATING DIVISION (INCL. DANFOSSFinancial WATER highlights CONTROLS) for Danfoss Heating & Water Division (including Danfoss Water Controls) mill DKK (INCL. DANFOSS WATER CONTROLS) mill DKK 2004 2005 Dev. Dev. % 2004 2005 DivisionDev. sales Dev. % Net sales 4,192 4,640 448Distributed 10.7% by regions Net sales 4,192 4,640 448 10.7% Operating profit 449 505 56% 12.5% Operating profit 449 505 56 12.5% Intangible fixed assets 796 1,351 55570 69.7% Intangible fixed assets Tangible fixed assets 765 858796 1,351 93 12.2%555 69.7% Tangible fixed assets Total assets 2,884 3,821765 858 93760 32.5% 93 12.2% Total assets 2,884 3,821 937 32.5% Non-interest-bearing debt 776 807 3150 4.0% Non-interest-bearing debt Net assets 2,109 3,014776 807 905 42.9% 31 4.0% Net assets 40 Net investments (excl. goodwill) 197 3812,109 3,014 184 93.4%905 42.9% Net investments (excl. goodwill) 197 381 184 93.4% Net investments in goodwill 95 420 32530 342.1% Net investments in goodwill Depreciation / amortisation 189 170 95 420 -19 -10.1%325 342.1% Depreciation / amortisation 189 170 20 -19 -10.1% Cash flow from operating activities (excl. paid tax and financial items)Cash flow from operating activities (excl. paid tax 644 548 -9610 -14.9% and financial items) 5 Cash flow from investing activities -364 -820644 548 -456 125.3%-96 -14.9% Cash flow from investing activities -364 -820 -456 125.3%

Number of employees 4,143 4,437 294 7.1% Asia Paci c Rest of

Number of employees 4,143 4,437 294 7.1%Europe

EBIT margin 10.7% 10.9% Africa & EBIT margin 10.7% 10.9% Denmark RONA DK EU excl.

22.5% 19.7% Middle East

RONA 22.5% 19.7% Latin America North America Division sales distributed by regions (%) 2001 2002 2003 2004 2005 Division sales distributed by regions (%)

2001 2002 2003 2004 2005 EU excl. DK 70% 68%2001 70% 2002 70% 2003 69% 2004 2005 EU excl. DK 70% 68% 70% 70% 69% Denmark 9% 8% 8% 8% 8% Denmark 9% 8% 8% 8% 8% Rest of Europe 13% 15% 15% 13% 16% Rest of Europe 13% 15% 15% 13% 16% Latin America 0% 0% 0% 0% 0% Latin America 0% 0% 0% 0% 0% North America 5% 4% 3% 3% 3% North America 5% 4% 3% 3% 3% Africa & Middle East 1% 1% 0% 0% 1% Africa & Middle East 1% 1% 0% 0% 1% Asia 3% 3% 3% 5% 4% Asia 3% 3% 3% 5% 4% Pacific 0% 0% 0% 0% 0% Pacific 0% 0% 0% 0% 0%

Annual Report 2005 32 The Danfoss Group f inancial in f o r m a t i o n Danfoss Motion Controls Division

The Danfoss Motion Controls Division had net sales in 2005 of 3,211m DKK which was in line with the previous year. The operating profit amounted to 252m DKK which corresponds to a decrease of 29%. The result is considered to be very satisfactory considering the divestment of Danfoss Marine Systems in 2004.

Refer to the division’s profile and financial highlights on page 38

In 2005, the Danfoss Motion Controls Division obtained net sales of 3,211m DKK, which was in line with the previous year where it amounted to 3,208m DKK. When calculated at last year’s exchange rates and adjusted for acquisitions and divestments the growth was 9%, which is considered satisfactory. Sales on the EU markets developed positively, in particular the important German market. The division experienced double-digit growth rates on the markets in Latin and North America and on the Asian market. This resulted in an increased market share and a stronger market position. Moreover, the development on the Chinese market was satisfactory. The total operating profit of Danfoss Motion Controls Division amounted to 252m DKK in 2005, compared to 354m DKK in 2004, corresponding to a decrease of 29%. The result is considered very satisfactory given the divestment of Danfoss Marine Systems in 2004. When adjusted for non-recurrent items in 2004 the profit increased by 20%. As a result of the reduced earnings, the RONA (Return on Net Assets) of the division was 27.1%, compared to 37.0% in the previous year. The cash flows from operating activities amounted to 411m DKK, which was an increase of 44m DKK compared to 2004. The cash flows from investment activities amounted to –228m DKK, compared to –150m DKK in 2004, which was affected by the earnings in connection with the divestment of Danfoss Marine Systems. The Danfoss Productivity Program continued in 2005. Three projects were launched at Danfoss Drives, two in Gråsten, Denmark, and one in Milwaukee, USA. Danfoss Gearmotors launched a project in Munich, Germany. So far, eight projects have been launched in Motion Controls. The projects resulted in productivity improvements of up to 25%. Danfoss Silicon Power participated in one of the first pilots in the Full Potential Purchasing Program, which is expected to reduce purchasing prices considerably in the next years. In 2006, Danfoss Motion Controls Division will participate in the Danfoss Sales Program. The program aims to support the sales organisation in increasing sales and earnings and by developing a strong culture of ongoing improvements. Danfoss Motion Controls Division expects earnings to increase in 2006, as a consequence of the completed restructuring of activities in Danfoss Gearmo- tors, the Group’s Productivity Program and the improved market prospects.

Annual Report 2005 34 The Danfoss Group

Market development for Danfoss Drives The growth of Danfoss Drives continued in 2005 where sales were 13% higher than last year and considerably higher than the market growth. Danfoss Drives maintained its position as one of the largest worldwide suppliers of frequency converters for motors from 0.25-160 kW. In 2005, Danfoss Silicon Power strengthened its position in the automobile segment by entering into agreements with several car manufacturers on the supply of parts for electronic control of both conventional cars and the more environmentally friendly hybrid cars. In Europe, the three business areas, HVAC (Heating, Ventilation and Air Conditioning), Food & Beverage and Industry, grew considerably. The sale of the new product line, VLT® AutomationDrive, exceeded expectations and Germany in particular experienced soaring sales. North America benefited from double-digit growth rates within the HVAC and Service business areas. In 2005, one of the leading American producers of air compressors chose frequency converters from Danfoss for their new compressors. The first frequency converters will be delivered in 2006. The sales activities in Latin America focused on getting new customers within the HVAC, Food and Beverage, and Water businesses and the efforts resulted in double-digit growth rates. Furthermore, the sales organisation received new orders for energy solutions for the beverage industry. The markets in Asia-Pacific had double-digit growth rates. Focus was on HVAC and Water and an international pump manufacturer, among others, placed a multi-million order for Danfoss’ frequency converters. In Australia, the sales company obtained new orders for the delivery of frequency converters for luggage handling systems. The activity level in India has increased during the year and new orders have, among other things, been received from Indian textile and plastic producers. Despite local, strong price competition, Danfoss managed to increase sales in China and Taiwan by approximately 15%. In order to support Danfoss Drives’ ambitions for growth in China, the Chinese company Holip (Zhejiang Haili Electronic Technology Co.) was acquired in 2005. Holip is one of the leading players on the market for low- price frequency converters in China.

Products and R&D 2005 saw the introduction of several functionalities through the launch of the new generation of frequency converters – VLT®AutomationDrive FC301 – to the industrial market as well as new hardware for the VLT® 5000 line. The VLT®2900 was launched to the big OEM customers in China, and at the Hanover Trade Fair in Germany the new “High Power” frequency converters were presented to the global market. In April, Danfoss Drives signed an agreement with the German company Pilz concerning the joint development of special solutions for VLT®AutomationDrive. The systems are, among other things, used in the Food & Beverage industries. In the beginning of 2005, a new production line for “Medium Power” frequency converters was set up in Denmark. The Danish Society of Engineers (IDA) awarded the ”Elektro Prisen 2005” to Henrik Rosendahl Andersen. ”Elektro Prisen” is presented once a year to a person who has shown high-level specialist skills by way of excellent techni- cal and scientific results. He was awarded the prize for his PhD thesis on the reduction of refrigerators’ power consumption and his work in Danfoss Drives, where he helped develop frequency converters, e.g. for induction engines.

Annual Report 2005 36 The Danfoss Group Market development at Danfoss Gearmotors In 2005, Danfoss Gearmotors reached its target of positive operating results and ended the year better than expected. The sale of gearmotors was well above last year’s level and showed a strong development in almost all regions. In Europe sales increased by 6%. Germany is still Danfoss Gearmotors’ largest market. The sale of gearmotors in North America increased by 9% compared to last year. The Asia-Pacific region is a new and promising market for Danfoss Gearmotors. Sales in China increased by 33% and more salespeople will be engaged in China in 2006 to ensure the positive development. In 2005, Danfoss Gearmotors signed a license agreement on the production of the new BAUER 2000 line in India and in September, the first gear motors were delivered to customers there. Danfoss Gearmotors has high expectations for the Indian market, which showed positive growth rates in 2005.

Products and R&D Within the area of R&D, Danfoss Gearmotors concentrated on launching new products which live up to special serial requirements and completing the product range. The gearmotor product range, which is used in sterile environ- ments in the food industry, among other things, was expanded with a new model as Danfoss Gearmotors aims to enhance its profile within this area.

Perspective plan for 2005-2008 In 2005, Danfoss Motion Controls Division reviewed their strategy to obtain a global market leader position. It was concluded that the Division may bene fit from concentrating on its core businesses and thus utilise the growth and earnings potential as much as possible. Therefore, the sales organisation was restructured and the employees were allocated to either Danfoss Drives or Danfoss Gearmotors to be able to offer better service to their respective customers within the strategic business areas.

Annual Report 2005 37 The Danfoss Group Division profile

Danfoss Motion Controls Division is comprised of two business units: Danfoss Drives and Danfoss Gearmotors with factories in Denmark, China, Slovakia, Germany and the USA. Danfoss Drives and Danfoss Gearmotors operate as independent business areas, which cooperate to offer package solutions to the customers. The division has a global network of sales offices offering professional service to the customers.

Danfoss Drives is the global market leader in the food, beverage, HVAC and water industries and has activities within the automobile, chemical, petrochemical, textile, steel and mining industries in selected markets. Danfoss Gearmotors delivers gearmotors for industrial applications and holds a strong position within the automobile, material handling and steel industry.

Financial highlights for Danfoss Motion Controls Division FINANCIALFINANCIAL HIGHLIGHTS HIGHLIGHTS FOR DANFOSS FOR DANFOSS MOTION MOTIONCONTROLS CONTROLS DIVISION DIVISION mill DKK mill DKK

2004 20052004 2005 Dev.Division Dev. %Dev. sales Dev. % Distributed by regions Net sales Net sales 3,208 3,2113,208 3,211 3 0.1% 3 0.1% % Operating profitOperating profit 354 252 354 252 -102 -28.8%-102 -28.8% 60 Intangible fixedIntangible assets fixed assets 52 181 52 181 129 248.1% 129 248.1% Tangible fixed Tangibleassets fixed assets 796 807 796 807 1150 1.4% 11 1.4% Total assets Total assets 1,572 1,8521,572 1,852 280 17.8% 280 17.8% Non-interest-bearingNon-interest-bearing debt debt 703 842 703 842 13940 19.8% 139 19.8% Net assets Net assets 871 991 871 991 120 13.8% 120 13.8% 30 Net investmentsNet (excl. investments goodwill) (excl. goodwill) 74 211 74 211 137 185.1% 137 185.1% Net investmentsNet in investments goodwill in goodwill -32 48 -32 48 80 -250.0%20 80 -250.0% Depreciation / Depreciationamortisation / amortisation 131 139 131 139 8 6.1% 8 6.1% Cash flow fromCash operating flow from activities operating (excl. activitiespaid tax (excl. paid tax 10 and financial items)and financial items) 367 411 367 411 44 12.0%5 44 12.0% Cash flow fromCash investing flow from activities investing activities -150 -228-150 -228 -78 52.0% -78 52.0% Asia Paci c Rest of Number of employeesNumber of employees Europe

2,816 3,1762,816 3,176 360 12.8% 360 12.8% Africa & Denmark

EBIT margin EBIT margin 11.0% 7.9%11.0% 7.9% DK EU excl. Middle East Latin America

RONA RONA 37.0% 27.1%37.0% 27.1% North America 2001 2002 2003 2004 2005

Division salesDivision distributed sales distributed by regions by (%) regions (%)

2001 20022001 2003 2002 2004 2003 2005 2004 2005 EU excl. DK EU excl. DK 59% 57%59% 57% 57% 55% 57% 57% 55% 57% Denmark Denmark 5% 5%5% 4% 5% 4% 4% 3% 4% 3% Rest of EuropeRest of Europe 6% 6%6% 6% 6% 6% 6% 6% 6% 6% Latin America Latin America 3% 3%3% 2% 3% 2% 2% 3% 2% 3% North AmericaNorth America 13% 14%13% 11% 14% 13% 11% 14% 13% 14% Africa & MiddleAfrica East & Middle East 2% 2%2% 2% 2% 2% 2% 2% 2% 2% Asia Asia 9% 11%9% 15% 11% 15% 15% 11% 15% 11% Pacific Pacific 3% 3%3% 3% 3% 3% 3% 4% 3% 4%

Annual Report 2005 38 The Danfoss Group f inancial in f o r m a t i o n Group projects

Danfoss Business System Danfoss Business System is a Group initiative with the purpose of strengthening focus on the ability for continuous improvements throughout the value chain. This is achieved through a number of cross-Group projects which will be completed during the next few years. So far programmes have run in production, sales and purchasing. Danfoss Productivity Program was launched at the end of 2003 and focuses on optimising the production areas. Using an approach built on Lean thinking all processes are analysed with the goal to increase the utilisation of the entire production system. The results of the production related projects that have been completed so far are satisfactory. Productivity in the areas covered by the project has increased by more than 20%, capacity has grown by 25% and work in progess has been reduced by more than 30%. In 2008 all production units will have completed the program. Delivery service and quality assurance of products are not covered by Danfoss Business System due to the fact that these are monitored in separate quality assurance systems. The Danfoss Sales Program was launched in 2005. This programme primarily aims at increasing sales by introducing “best practise” in all parts of the sales process. When the first test projects are completed, full scale implementation will commence in 2006 and will run until 2008. The programme will start in Europe and from there roll out to the rest of the world. In 2005 Danfoss also kicked off the Full Potential Purchasing Program, which focuses on securing Danfoss the optimal purchasing process in cooperation with the suppliers. The entire process, from component specification until the component is built into a Danfoss product, will be analysed in order to reduce the total costs. The programme is expected to run until the end of 2007.

Annual Report 2005 39 The Danfoss Group f inancial in f o r m a t i o n Danfoss Services

Danfoss Global Business Services Danfoss Global Business Services is an internal service organisation, whose purpose is to optimise the Group’s internal administrative service functions to achieve economy of scale benefits, and thereby contribute to reducing the Group’s total cost level. In 2005 Danfoss Global Business Services entered into an agreement with Capgemini regarding outsourcing parts of the Group’s European finance and accounting transactions to Capgemini in Krakow, Poland. Within logistics the new European distribution structure with direct deliver- ies from Danfoss Distribution Center in Rødekro, Denmark, was almost final- ised. In 2005 Danfoss implemented a shared sales and distribution system in Brazil as the first country in North and Latin America. Implementation will proceed in more countries in the region during 2006. In Asia the system was implemented in Singapore and India, while Malaysia and the Philippines are expected to be ready at the beginning of 2006.

Danfoss Industrial Service Danfoss Industrial Service offers services internally in Danfoss and to companies outside the Group. The business area offers, among other things, services to laboratories, technology consultants, workshops, building administration, advertising, catering and cleaning services. The future focus of Danfoss Industrial Service will be directed at activities that improve competitiveness in addition to continuing to expand externally. Furthermore, in 2005 Danfoss Industrial Service opened the Mads Clausen Entrepreneur Park, which is an entrepreneur park where Danfoss through its competence centres helps entrepreneurs develop their ideas.

Annual Report 2005 40 The Danfoss Group Danfoss IT Danfoss IT is responsible for projects, infrastructure, service, operation and purchasing in connection with the Group’s use of information technology. The function employs approximately 400 IT professionals who support the Group’s business areas and common services through implementation projects, operation of business systems and the underlying IT infrastructure. Significant activities during the period have included the design and implementation of a shared system to support sales and marketing efforts (CRM), the continued global expansion of a shared SAP platform, and the develop ment and pilot testing of the “Work smart” project – the optimal use of Danfoss’ global Microsoft Infrastructure. In order to support the global implementation of SAP systems Danfoss IT has entered into an agreement with a leading consultancy firm with employees on all continents. Danfoss IT uses consultants from these locations to help implement SAP R/3 in Asia and for ongoing system maintenance. Danfoss IT’s services have been the centre of attention in a survey regarding price/quality and user satisfaction compared to other global companies. The result showed that Danfoss IT is ranked among the top 10% of the participating companies in the survey.

Annual Report 2005 41 The Danfoss Group f inancial in f o r m a t i o n Sauer-Danfoss Inc.

Sauer-Danfoss Inc. is one of the world’s leading producers and suppliers of mobile hydraulic and electronic components for vehicles in the agriculture and construction sector. Sauer-Danfoss is listed on the New York Stock Exchange. Sauer-Danfoss was established in 2000 through a merger of the mobile hydraulics activities of Danfoss A/S and Sauer-Sundstrand Inc. Danfoss owns 38.4% of Sauer-Danfoss, and the market value of Danfoss’ ownership was approximately 2,17bn DKK at the end of 2005 (2,18bn DKK). Through the company Danfoss-Murmann Holding A/S, Danfoss A/S owns, jointly with the Murmann family, the majority of shares in Sauer-Danfoss Inc. Three members of the Danfoss A/S Executive Committee (Jørgen M. Clausen, Ole Steen Andersen and Hans Kirk) represent Danfoss on the Board of Sauer‑Danfoss Inc. and in 2004 Jørgen M. Clausen was elected Chairman of the Board. Sauer-Danfoss Inc. is included in the accounts as a joint venture.

Accounts for 2005 Sauer-Danfoss’ net sales in 2005 increased to 1,548m USD from 1,404m USD, equalling an increase of approximately 10%. When calculated at last year’s exchange rates and adjusted for acquisitions and divestments, net sales in 2005 increased by 10%. The operating profit (EBIT) amounted to 80.6m USD compared to 91.9m USD in 2004, while the result for the year after tax was 38.7m USD compared to 33.2m USD in 2004. The growth in net sales in 2005 applied to all business segments. The cash flows from operating activities in 2005 amounted to 116.3m USD compared to 124.8m USD the year before. The cash flows from investing activities rose to –93.3m USD in 2005 from –75.5m USD in 2004. The earnings per share (EPS) amounted to 0.81 USD in 2005 against 0.70 USD the year before. Sauer-Danfoss employed a total of 8.500 people at the end of 2005.

Expectations for 2006 Sauer-Danfoss expects that the U.S. markets will continue to grow, but at a more moderate rate compared to the strong growth experienced in 2005, while the European markets are showing signs of strengthening from 2005 levels. The company also expects the markets in Asia-Pacific to contribute to the growth again, in line with the stronger sales seen in the last two quarters. The earnings per share in 2006 are expected to reach 0.90-1.05 USD.

Annual Report 2005 42 The Danfoss Group f inancial in f o r m a t i o n Management report for Danfoss A/S

Danfoss A/S is the Parent Company of the Danfoss Group. It is made up of a number of production facilities within Danfoss Refrigeration & Air Conditioning Division and Danfoss Heating Division. In addition, the Parent Company includes the major part of the Group’s Corporate Functions, Danfoss IT and Danfoss Industry Services, among other things. As of January 1, 2005, the subsidiary Danfoss Industrial Refrigeration A/S merged with Danfoss A/S while the buildings in Nordborg, Denmark, at the same time were spun off to the Danfoss Ejendomsselskab A/S. More information about the major areas influencing the Parent Company is available in the Danfoss Group Management Report. Net sales rose to 4,554m DKK from 4,437m DKK in 2004, equalling growth of 3%. The operating profit (EBIT) fell by 26m DKK compared to 2004, to a defi- cit of 33m DKK in 2005. The result is affected by increased costs at Danfoss Ser- vices and in the venture business. The net financial income and expenses were 248m DKK, which was an increase of 201m DKK compared to the year before. The change is particularly due to exchange rate adjustments, write-down on loans to subsidiaries, and the fact that the financial items were affected by an allocation to share remuneration programs amounting to 23m DKK against 85m DKK in 2004. The result after tax was 201m DKK compared to 46m DKK. The equity increased to 6,126m DKK from 6,070m DKK, equalling a growth rate of 1%. As a consequence of changed accounting policies, the result and equity of the Parent Company Danfoss A/S are changed compared to the Annual Report 2004. For further details about the implemented changes please refer to the section on Accounting Policies. At the end of 2005, Danfoss A/S employed 4,191 people, which is at the same level as the year before. The 2006 net sales and operating profit are expected to be on a par with 2005.

Events after the end of the year Significant events which would affect the Parent Company’s financial position have not been recorded after the balance sheet date.

Annual Report 2005 43 The Danfoss Group report & account s Financial and operational risk management

The Group’s central financial department, in cooperation with regard, cash pools have been established in EUR, DKK, GBP, the Group’s business units, handle overall monitoring and USD, SEK and NOK. All of the Western European companies control of the Group’s financial and operational risk manage- participate in a EUR cash pool set up at one of the Group’s ment. The control is based on policies established with the main banks. Danfoss Board and Executive Committee. In order to be able to ensure satisfactory cash flows in proportion to Group activities, the Group has established long- Financial risks term binding credit undertakings from different banks, of The Danfoss Group’s international activities mean that which approximately 3.3bn DKK are unused. profit, cash flow and equity are affected by developments in exchange rates and interest in a number of countries. It is Credit risk therefore necessary to quantify and hedge the related risks. The Group’s credit risks primarily apply to trade receivables and bank deposits. Currency exposure Trade receivables are allocated on a number of customers Today, the Danfoss Group operates with approximately 40 and geographic areas. A systematic credit rating is carried out currencies, and variations in these exchange rates against DKK on all customers and any write down carried out to meet a can have an effect on the Group’s net sales, profit and equity. loss on trade receivables is made on the basis of this credit The Group accounts for the currency exposure of each com- rating. The rating also serves as the basis for the terms of pay- pany is allocated on commercial cash flows and financial posi- ment offered to the customers. The credit risk is insured when tions in foreign currency in order to be able to respond to the considered necessary. Historically, the Group has only had lim- development, limiting the movement in net sales, profit and ited losses on bad debts. equity. Furthermore, the risk is accounted for when translating and consolidating the Group’s results. Other hedging In addition, the expectations for the development of the Danfoss’ profit is affected by developments in global raw currencies are used to control the Group’s currency exposure. material prices. Supplementing the fixed-price contracts Danfoss’ most significant currencies are, in descending with suppliers, some business units of the Danfoss Group order, EUR, USD, GBP, SEK and AUD. In addition to the hedge also hedge using financial instruments in relation to the that exists in form of selecting in which currency to borrow Group’s purchase of metals and electricity. Risk hedging using and buy, Group currency risk is covered through forward con- financial instruments always takes place on the basis of an tracts and options. The financial instruments, which Danfoss expected future commercial need. uses for covering currency exposure prepared according to the Group’s policies, are recognised in accordance with the Operational risks »hedge accounting« rules in IAS 39. It is the Group’s policy to primarily use insurance as a hedge towards large financial losses. In addition to all compulsory Interest rate risk insurances, areas are also insured where control and adminis- The interest rate risk of the Group is primarily ascribable to trative benefits are gained. interest-bearing debt and cash funds. The Group makes use of With regards to major insurance risks, worldwide mas- both fixed-rate loans and loans with floating interest rate. The ter programmes/group policies have been established. choice between floating and fixed-rate interest is based on an Participation is obligatory for all subsidiaries. The master pro- evaluation of the expected future interest development. grammes include, for example, All Risks Insurance (machines, equipment, buildings, stocks, loss on operations), Transport Cash flow risk Insurance, Commercial and Product Liability Insurance The Group continuously calculates the Group’s cash flow and and Executive Committee and Board Liability Insurance. financing requirements in the light of accounts, budget, and Furthermore, the subsidiaries establish local insurance covers, strategy plans, among other things. The control of the subsidi- including work-related injury insurance covers. aries’ cash flow and financing is based on the largest possible reduction of the corporate net financing expenses. In that

Annual Report 2005 44 The Danfoss Group Risk Management with a risk manager appointed for each of the three Divisions. In addition to attending to the control of insurable risks, Risk On the basis of reports from the risk managers and a risk Management is responsible for initiating and developing risk report prepared by the corporate functions, the risk manage- management on a corporate level. This includes the development function produces a total consolidated report every six ment of Group tools to supports the entire process, ranging month for the Board and the Executive Committee. from initiation over risk mapping to the handling of the risks. As part of the Group’s risk management system, an overall consolidation and risk mapping is made of all of the Group’s major risks, primarily those that are insurable, strategic, operational and financial. It is the Group’s goal to continuously identify risks that can have a significant impact on the Group’s financial results and growth. To ensure that the consolidation gives a true and fair view of risks, a risk management function was established in 2005

Annual Report 2005 45 The Danfoss Group report & account s Accounting policies

The Report & Accounts 2005 for Danfoss A/S have been pre- Changes in accounting principles pared in accordance with International Financial Reporting As a consequence of new IFRS/IAS accounting standards that Standards (IFRS/IAS), the Danish Accounting Act (Accounting became effective certain changes have taken place both in Class C – Large companies) and EU approved account- respect to Group and the Parent Company. ing standards. International Financial Reporting Standards are issued by the International Accounting Standards Board Comments to changes in accounting principles: (IASB) and interpretations issued by the International Financial 1) Share Based Schemes – “New” (IFRS 2 “Share Based Reporting Interpretations Committee (IFRIC/SIC). In order to Payments” ): make the report and financial statements more understanda- Share schemes established in 2004 and onwards: the value ble and readable, certain parts of the information required by of share-based schemes is allowed for in the profit and IFRS/IAS has been included in the reports, instead of directly loss account through the aggregate vesting period for the in the notes of the financial statement. Only accounting schemes that exist or are established after January 1, 2004. standards that became effective on December 31, 2005 apply. The corresponding entry is in the equity, which on the whole makes the equity unchanged. Comparative figures are changed correspondingly.

The effect on comparative figures is as follows: (mill DKK):

Group January 1, 2004 December 31, 2004 December 31, 2005 Liabili- Net Liabili- Net Liabili- Notes Assets ties Equity profit Assets ties Equity profit Assets ties Equity Accounting principles 13,081 5,814 7,267 775 13,158 5,223 7,935 696 14,520 5,736 8,784 before changes Warrants and share options 1 –11 –22 (new) Warrants and share options 2 116 –116 –114 230 –230 –27 257 –257 (old) Minority interest 3 –28 28 15 –13 13 5 –16 16 Goodwill 4 0 0 0 78 78 78 Tax effect of changes 6 –35 35 34 –69 69 3 -72 72 Total adjustments 0 53 –53 –76 0 148 –148 37 78 169 –91

New accounting principles 13,081 5,867 7,214 699 13,158 5,371 7,787 733 14,598 5,905 8,693

Parent Company January 1, 2004 December 31, 2004 December 31, 2005 Liabili- Net Liabili- Net Liabili- Notes Assets ties Equity profit Assets ties Equity profit Assets ties Equity Accounting principles 10,081 2,814 7,267 775 10,259 2,324 7,935 696 11,565 2,781 8,784 before changes Warrants and share options 1 –7 –14 (new) Warrants and share options 2 32 116 -84 –79 67 230 –163 –23 71 257 -186 (old) Shares in subsidiaries 5 Adjusted shares in –1,069 25 –1,094 –880 –1,733 25 –1,758 –679 –2,498 26 –2,524 subsidiaries Dividend less impairments 213 215 Tax effect of changes 6 –32 33 24 –56 56 6 –52 52 Total adjustments –1,037 109 –1,145 –729 –1,666 199 –1,865 –495 –2,427 231 –2,658

New accounting principles 9,044 2,923 6,122 46 8,593 2,523 6,070 201 9,138 3,012 6,126

Annual Report 2005 46 The Danfoss Group 2) Share Based Schemes (“Old”) – (IFRS 2 “Share Based Changed joint taxation rules for the Parent Company Payments”): As a consequence of new requirements in the changed joint Share schemes established in 2001: The vesting period of taxation rules, Danfoss has changed its accounting method, these schemes ended before 2005, but since these schemes from allocating all Danish taxes to the Parent Company to allo- can be demanded settled in cash, cf. the assumptions stated cating taxes entirely to the Danish companies. in note 23 of the Annual Report, the value of the total cash According to this new method the current Danish corpo- settlement liability is included in the annual accounts. The ration tax is allocated based on the taxable income in the set-off item of the liability as of January 1, 2005, is the equity. different companies. Companies that are utilizing taxable The value of the ”cash settlement liability” will be annu- losses in other companies are paying a fee to the Parent com- ally accounted for, and changes in value will be taken to the pany, which equals the tax value of the losses, while compa- profit and loss account under Financial Items. In the Parent nies which taxable losses are utilised by other companies are Company an additional asset is recorded, which comprises receiving a corresponding fee from the Parent Company. At the expected contribution from subsidiaries in respect of the transition deferred taxes, which previously was recorded the above share based liabilities. This amount adds up to 71 only in the Parent company, were allocated to the different mill DKK at the end of 2005 and is recorded in the line item companies. The impact of this allocation of deferred taxes, “Financial assets”. Comparative figures are changed corre- is recorded as dividend in the Parent company in case a spondingly. deferred tax asset is transferred, and as a reduction in cost price of shares in subsidiaries in case a deferred tax liability 3) Minority interest (IFRS 1 ”Presentation of Financial is transferred. This change in principle has no impact on the Statements”): comparative figures (2004). For 2005 the Parent Company has The minority interests’ share of the Group’s equity will no received 7 mill DKK in dividend, and reduced its shares in sub- longer be a separate item on the liabilities but be a part of sidiaries with 3 mill DKK as a result of the above mentioned the Group’s equity as a separate item. This will also mean that rules. the minority interests’ share of the profit after tax will not be deducted from the profit after tax. Comparative figures are Reclassifications: changed correspondingly. 1) Taxes in joint ventures and associates: According to new practice, income from joint ventures and 4) Goodwill amortisations (IFRS 3 ”Business Combinations”): associates contains the proportionate share of earnings/losses Goodwill amortisations will cease in 2005, and amortisations after tax from joint ventures and associates. This means that will only be made if required by related impairment tests. the proportionate share of their taxes no longer is incorpo- Amortisations of goodwill in 2004 reached approximately rated in the line item “corporation taxes”. 60 mill DKK. According to IFRS 3 comparative figures (2004) are not changed correspondingly. Accumulated amortizations 2) Provisions: January 1, 2005 are deducted in cost price of goodwill, which Deferred taxes, pensions and provisions are no longer pre- after that constitutes the new cost price of goodwill. sented under a separate heading in the balance sheet (Provisions), but are instead divided into non-current and 5) The Parent Company’s recognition of capital shares in current liabilities. subsidiaries, associated companies and joint ventures (IAS 27 ”Consolidated Financial Statements and Accounting for 3) Cash Flow Statement: Investments in Subsidiaries” et al.): Dividends are no longer presented under the heading “Cash In 2005, capital shares in the companies referred to above are flow from investment activities”, but are instead presented no longer recognised in the Parent Company by the equity under the heading “Cash flow from operating activities”. method. Instead, capital shares are recognised at accumulated cost price deducted impairments, if any. Income in the form The above reclassifications did not affect net profit, equity or of dividends is recognised in the profit and loss account at the free cash flow. Comparative figures are changed correspond- time of declaration. Comparative figures are changed corre- ingly. spondingly. Key figures and ratios 6) Deferred taxes caused by adjustments: Comparative figures for 2001-2003 are not restated as a con- Deferred tax is recorded based on the adjustments, primarily, sequence of changes in accounting principles. The impact in relations to Share based payments (“Old”) on these figures are estimated not to be material. However,

Annual Report 2005 47 The Danfoss Group changes made in connection with reclassifications, cf. above, Generating Units are determined by the management and resulted in restatements with regard to the above mentioned financial structures of the Group. years. If uncertainty exists at the time of the takeover as to the measuring of net identifiable assets and obligations, the Accounting judgments and estimates first recognition takes place at preliminary stated fair value. When measuring certain assets and liabilities, estimates on Should it turn out later that the fair value of identifiable assets how future events are affecting the value of these assets and and obligations are different than assumed at the time of liabilities, are required. Estimates that are significant for the the takeover, goodwill is adjusted until 12 months after the accounting process are exercised when evaluating depre- acquisition. After that, goodwill is only adjusted as a result of ciations, impairments, inventories, pensions, provisions and changes in the estimates of conditional acquisition payments. contingent liabilities. The applied estimates are based on The effect is recognised in the equity and comparative figures assumptions, which the management rate as reasonable, even are restated if material. Besides the above, other adjustments though they contain uncertainties. The Group is subject to after the 12 month period, are included in the profit and loss risk and uncertainties, which may cause those actual results, account, except for adjustments in deferred tax assets, which deviate from these estimates. The value of intangible assets will affect the goodwill. may especially be impacted by significant changes in the esti- Gains or losses are stated as the difference between the mates and assumptions that are the basis of such calculations. purchase price or disposal price and the carrying amount of net assets at the time of the sale, including goodwill, and Description of accounting principles expenses for sale or disposal.

Group accounts Profit and loss account The Group accounts include Danfoss A/S and subsidiaries of which Danfoss A/S directly or indirectly has more than 50% Net sales of the voting rights or in another way has the controlling Net sales of goods for resale and finished goods are recog- interest. Companies where the Group has between 20% to nised in the profit and loss account, providing delivery and 50% of the voting rights and exercises a considerable, but not risk transfer to the purchaser took place before the end of controlling interest, are considered associated companies or year, and if the income can be reliably measured and payment jointly controlled entities (joint ventures), where the joint ven- is expected to be received. Net sales are recorded exclusive ture conditions of IAS 31 are complied with. of VAT, duties and discounts in relation to the sale. Related The Group accounts are prepared by merging the Parent service income is recognised in the profit and loss account as Company’s and the individual subsidiaries’ audited annual the services are performed, whereby the recognised sale cor- accounts, which have all been accounted for in accordance responds to the market value of the work performed during with Danfoss A/S’ accounting policies. At consolidation, elimi- the year. The sale of services is recognised in the profit and nation of Group internal income and expenses, holding of loss account, when the aggregate income and expenses of shares, internal balances and dividends and realised and unre- the service contract can be reliably recorded, and it is prob- alised earnings and losses at transactions takes place between able that the Group will receive the financial benefits, includ- the consolidated companies. ing payments.

Business combinations Net sales Danfoss Services etc. Newly acquired or established companies are recognised Net sales Danfoss Services etc. cover the units Danfoss in the Group accounts from the time of the takeover, and Industrial Service, Danfoss Distribution A/S and Danfoss IT’s divested companies are recognised until the time of divest- sale of services etc for joint ventures, associated companies ment. Comparative figures are not adjusted for companies and other external parties. integrated through acquisition or merger or for divested companies. When companies are acquired, identifiable assets Production costs and liabilities, including contingent liabilities, are stated at fair Production costs include costs, including depreciations and value at the time of acquisition. The tax effect of the per- salaries, which are paid in order to achieve the year’s net sales. formed revaluations is taken into consideration. Identifiable Production costs also include research and development intangible assets are recognised, if they can be separated or expenses and amortisation of development costs. stems from a legal contract, and the fair value can be reliably stated. Distribution costs Goodwill, representing the excess of cost of the acquisi- Distribution costs include expenses related to sales staff, tion over fair value of net identifiable assets, is capitalised and advertising and exhibition costs etc., including depreciations. stated under intangible assets. Until the end of 2004, goodwill acquired before April 1, 2004 was systematically amortised by Administration costs the straight-line method over the estimated useful life of the Administration costs include expenses in relation to adminis- asset. Goodwill is no longer amortised, but is only subject to trative staff, the management, offices, office costs etc., includ- impairment evaluations, cf. the section ”Impairment”. ing depreciations. The carrying amount of goodwill is allocated to the Group’s Cash Generating Units at the time of takeover. This allocation is the basis for subsequent impairment tests. Cash

Annual Report 2005 48 The Danfoss Group Other operating income and expenses Profit and loss incurred at the disposal of intangible fixed Other operating income and expenses comprise financial assets are recorded as the difference between the sales price items of a secondary nature compared with the principal less sales expenses and the carrying amount at the time aim of the companies. Included are gain/losses on disposal of the sale. Profit or loss is recognised in the profit and loss of fixed assets and companies, impairments and retirement account under other operating income and expenses. expenses. Tangible fixed assets Income from associates and joint ventures Land and buildings, plant and machinery and equipment are In the Group, a proportionate share of the associates’ and the recorded at cost less accumulated impairments and deprecia- joint ventures’ earnings or losses after tax is taken to the profit tions. The cost price includes expenses for materials, compo- and loss account after elimination of proportionate share of nents, subsuppliers, direct salary expenses and for own manu- internal profit/loss and deduction of impairment of goodwill. factured assets as well as indirect production costs. The cost price is added estimated costs in relation to dis- Financial income and expenses mantling and disposal of the assets and reestablishment if Financial income and expenses comprise interest income and it can be provided for according to IFRS 38. The cost price is expenses as well as realised and unrealised currency gains divided into separate assets if useful life is different for the and losses on securities, debt and foreign exchange transac- individual assets. The assets are then depreciated accordingly. tions. Also included are the finance charges related to finance Interests and other lending expenses are not included in the leases, and gains and losses on derivatives that are not classi- cost price. fied as hedging transactions. Subsequent expenditure, ie. exchange of parts of tangible In the Parent Company dividends from subsidiaries, asso- fixed assets, are included in the carrying amount of the asset, ciates and joint ventures is recognised in the profit and loss when it is probable that it may generate future economic account at the time of declaration. In case declared dividends benefits. Expenditure on repairs and maintenance are recog- from a company is higher than the accumulated earnings nised in the profit and loss account when incurred. after the time of takeover, dividends are not recognised in the Depreciations are calculated by the straight-line method profit and loss account, but are instead recognised as a write over the estimated useful life. The estimated useful life for tan- down of the cost price of the shares. gible fixed assets is as follows:

Balance Sheet useful lives Buildings 15-30 years Intangible fixed assets Machinery 4-10 years Equipment 2-6 years Goodwill Goodwill is included in the balance sheet the first time at cost The depreciable amount of an asset is determined after price, as described under ”Group accounts”. Subsequently, deducting the residual value of the assets and any impair- goodwill is recorded at cost price with deducted accumulated ment charges. The residual value is determined on the impairments. Goodwill is no longer amortized. acquisition date and reassessed annually. If the residual value exceeds the carrying amount of the asset, depreciation will Development projects, software, patents and licenses cease. Changes in useful lives or residual values that are affect- Development projects for new products and processes, ing depreciations are recognised in the current and future including software, with the intent to produce, market and periods. use the developed systems within a few years, must be capi- Profit and loss at the disposal of tangible fixed assets is talised, if for example a clear connection between expenses stated as the difference between the sales price less sales and future income can be demonstrated. expenses and the carrying amount at the time of the sale. Expenses for the purchase and development of projects Profit or loss is stated in the profit and loss account under are recognised at cost price deducted accumulated impair- other operating income and expenses. ments and depreciations. Cost price includes direct and indi- Assets that are finance leases are stated at inception of the rect expenses, including salaries. Development costs, includ- lease in the balance sheet at an amount equal to the lower ing software are generally amortised over 4 to 5 years. of its fair value or the present value of the future minimum Patents and licenses are recognised at cost price deducted lease payments. When calculating the current value, the leas- accumulated amortizations and impairments. Patents are ing agreement’s internal interest rate is used as a discount amortised on a straight-line basis over the remaining patent factor or its approximate value. Assets that are financial leases period, and licenses are amortised over the agreement period, are depreciated and amortised as other tangible fixed assets. unless the useful life is shorter. Leasing assets are systematically taken to the profit and loss Other intangible fixed assets, including those taken over account during the term of the contract. in business combinations, are amortized over useful life. The intangible assets, customer relations and technology, are Impairments amortised over up to 12 and 10 years, respectively. Goodwill and intangible fixed assets with in definitive life are Intangible assets with no definitive useful life are not amor- annually tested for impairments. Development projects in tised, but are tested annually for impairments. progress are tested in the same way. The carrying amount of non-current assets, other than goodwill, intangible assets with

Annual Report 2005 49 The Danfoss Group indefinitive life, development projects in progress, deferred Equity tax assets and financial assets, are annually reviewed in order to determine whether there is any indication of impairment. Share capital If any such indication exists, the assets are tested for impair- Share capital includes the nominal portion of the amounts ment. paid in accordance with the subscription of shares. Share capi- Impairment is tested by estimating the asset’s recover- tal can only be released according to the rules relating to capi- able amount. The recoverable amount is the greater of the tal reduction, after submitting a statutory notice. net selling price and value in use. If the net selling or value in use cannot be decided on individual assets, the recoverable Proposed dividends amount is evaluated on the cash generating unit (CGU) in Dividends are recognised as a liability at the time of the deci- which the asset belongs. sion of the Annual General Meeting. An impairment loss is reversed if the there has been a Proposals for the dividends of the accounting year are change in the estimates used to determine the recoverable included under the equity item proposed dividends. amount. An impairment loss in respect of goodwill is not reversed. An impairment loss is reversed only to the extent Revaluation reserve that the asset’s carrying amount does not exceed the carrying Refer to the section ”Derivatives”. amount that would have been determined, net of depreciations or amortisation, if no impairment loss had been recog- Translation reserve nised. Variations in exchange rates, which have occurred at the translation of foreign subsidiaries’ equity at the beginning of Financial assets the year into the exchange rates of the balance sheet day as The share of total recognised gains and losses in associates well as translation of profit and loss accounts from average and joint ventures are recognised in the consolidated finan- exchange rates into the exchange rates of the balance sheet cial statement on an equity basis. The gains and losses are day, are recorded directly on equity under the item exchange adjusted for group internal unrealized earnings/losses. rate adjustments. The Parent company’s share of subsidiaries, associates and Exchange rate adjustments of long-term accounts with joint ventures are stated at cost price. If the cost price exceeds foreign subsidiaries and associates, which are considered the recoverable amount, the cost price is impaired. The additions or deductions of the subsidiaries’ equity, are also cost price is written down to the extent, received dividend recorded directly on equity. When disposing of capital shares exceeds the accumulated earnings after the date of takeover. of the foreign companies, the accumulated net effect is Shares and bonds, that are part of the Group’s trading recorded at the profit and loss account. holdings, are stated at cost price within current assets and are subsequently stated at fair value. Changes in the fair value are Reserve for own shares recognised in the profit & loss account within financial items. The acquisition price and disposal price of own shares are Shares and bonds, that are not part of the Group’s trading recorded directly on equity under reserves. The same applies holdings (available for sale), are recognised within non-current to dividends of own shares. assets at cost price and subsequently recognised at fair value. If fair value cannot be estimated reliably the assets are stated Reserve for Minority interests at cost prices. Unrealised value adjustments are recognised The minority interest’s proportionate share of the subsidiar- in equity, except for impairment losses and reversals hereof. ies earnings and equities are separately stated in the equity. When the assets are realized the accumulated adjustments Minority interests are recognised, at time of take over, based in equity are transferred to financial items in the profit & loss on the fair values of identifiable assets and liabilities. account. Remuneration based on shares Inventories The Board, Executive Committee and several senior employ- Inventories are stated at the lower of cost and net realisable ees are included in the option and warrant schemes based on value. Net realisable value is the estimated selling price in the the company’s shares. ordinary course of business, less the estimated costs of com- The service benefit of options/warrants granted is based pletion and selling. Cost is stated on basis of the weighted on the fair value op these options/warrants. average/FIFO methods. For Equity based schemes the fair value is measured at The cost price, under manufacturing and manufactured grant date and recognised in the profit and loss account, as finished goods, includes expenses for the cost price of raw personnel costs, over the period during which the employees materials and consumables, conversion costs and other costs, become unconditionally entitled to the options/warrants. The which directly or indirectly can be related to the goods. corresponding entry is an increase in equity. Indirect production costs include maintenance and deprecia- For equity schemes where the employees have the right tion of production facilities and plants as well as administra- to receive cash based payments, the fair value is measured tion and management of factories. Interests and other bor- at grant date and initially recognised in the profit and loss rowing costs are not included in the cost price. account, as personnel costs, over the period during which the employees become unconditionally entitled to the options/ Accounts receivable warrants. The corresponding entry is an increase in liability. Receivables are stated at cost/amortised cost less impairment The liability is measured at the balance sheet date and at set- losses.

Annual Report 2005 50 The Danfoss Group tlement date. Changes in the fair value of the liability are rec- Liabilities in the form of debt and finance leases ognised within financial item in the profit and loss account. Debt is initially recognised at cost. Subsequent measurement At initial recognition of the options and warrants an esti- is at cost/amortised cost. Amortised cost price is the recogni- mate of the expected number of awarded options and war- tion of a constant, gross yield over the term. Amortised cost rants is made. The estimate is subsequently changed when price is recorded as the original cost price less any repayments the exact number of options and warrants awarded are and additions/deductions of the accumulated amortisation known. of the difference between the cost price and the nominal The fair value of the schemes are measured based on the amount. Black & Scholes formula, taking into account the terms and Any capitalised outstanding lease obligation for finance conditions upon which the instruments were granted. lease obligations are stated in the balance sheet as a liability. The part of the lease payments that relate to the interest Subscription of employee shares charge is charged in the profit and loss account statement As from January 1, 2005 the difference between the fair value under financial items. of the shares and the subscription prices, is recognised as an expense in the profit & loss account. The corresponding Grants entry is in equity. Until January 1, 2005, the employee shares Grants, which are compensations for the incurrence of where treated accounting wise as ordinary share subscrip- expenses eligible for grants, are recorded systematically in tions – which means that the profit and loss account was not the profit and loss account concurrently with the taking to affected. the profit and loss account of the expenses, which are compensated by the grants. Grants relating to investments (fixed Provisions assets) are deducted the acquisition price of the fixed assets in A provision is recognised in the balance sheet when the question. Group has a legal or constructive obligation as a result of a past event in the financial year or previous years, and it is Corporation tax and deferred taxes probable that a settlement of the obligation will lead to a Danfoss A/S’ companies are liable to pay tax in the countries consumption of the company’s financial resources which can where they are located. The current tax includes both Danish be fairly stated at the balance sheet date. The management‘s and foreign income tax. As a consequence of new joint taxa- best estimate is considered when the provision is measured. tion rules, Danfoss A/S is from 2005 only taxed jointly with its Restructuring expenses are provided for when the Group Danish subsidiaries. The current Danish corporation tax is now has decided on a detailed and formal plan, and the Group accounting wise fully allocated to the Danish companies. In has started the implementation, or it has published the prin- 2004 Danfoss A/S was taxed jointly with both a number of cipal features of the plan. Provisions for restructuring do not wholly owned, Danish and foreign subsidiaries. In the 2004 include costs for the ongoing operations during the restruc- number (comparative numbers) the current Danish corpo- turing phase. ration tax fully allocated to the parent company. The jointly taxed companies are included in the Tax Prepayment Scheme. Defined benefit plans The Group has established defined benefit plans with some Profit and loss account employees at some of the Group’s foreign companies. The The current and deferred taxes of the year are taken to the plans place the Group under an obligation to pay a certain profit and loss account, except from tax related to readjust- consideration in connection with retirement (e.g. in the form ments, which are recorded in the equity. of a fixed amount at retirement or a share of the employ- Additions, deductions and compensations relating to tax ee’s exit salary). The pension obligations are recorded via a payments are recognised in financial income and expenses. discount of the pension obligations at current value. In order Tax at source relating to dividends from subsidiaries, asso- to calculate the current value, prerequisites of the future ciates and joint ventures is recorded in the profit and loss development of financial elements, such as interest level, account in the year the dividend is declared. inflation, expected time of death and disability probabilities, are determined. The stated obligation less the market value Balance sheet of assets covered by the scheme is recorded in the balance Tax payable and outstanding current tax is recognised in sheet cf. below. Differences between the expected develop- the balance sheet as calculated tax of the year’s tax liable ment of pension assets and liabilities and the realised values income, adjusted for prepaid tax. Deferred tax obligations and are described as actuarial gains and losses. If the accumulated deferred tax assets are recognised in the balance sheet of all actuarial gains and losses exceed the greater of the nomi- temporary differences between carrying amounts and tax nal value of 10% of the pension assets or 10% of the pension amounts of assets and liabilities. Exempted is tax that would liabilities, the excess amount is recorded in the profit and loss be incurred from any sale of shares of subsidiaries and tax account and accrued over the service period of the remain- relating to goodwill, which is not eligible for tax deduction. ing workforce in the company in question. Actuarial gains and Deferred tax assets are recorded at the expected realisable losses that are below the above limits are not recorded in the value, either by an offset in deferred tax obligations or by profit and loss account (”10% corridor rule”). settling with tax from future earnings within the same legal tax unit. Deferred tax is recognised on basis of the tax rules and at the rate of tax, which would be in force through the legislation of the balance sheet day, when the tax obligation

Annual Report 2005 51 The Danfoss Group is expected generated as current tax. In Denmark, the tax rate Assets or disposal groups held for sale are measured at the was 28% in 2005 (30%). lower of carrying amount or fair value less costs to sell. Assets are not depreciated or amortised from the date when they are Foreign currency reclassified as held for sale. For each of the companies in the Group a functional currency Impairment losses on initial recognition as held for sale and is determined. The functional currency is the currency which gains and losses on subsequent remeasurement at the lower is used in the primary economical environment, in which the of carrying amount and fair value less costs to sell are rec- different companies operates. Transactions in other currencies ognised in the income statement in the items to which they than the functional currency are transactions in foreign cur- relate. Gains and losses are disclosed in the noted. rencies. Assets and liabilities are recognised separately in the bal- Transactions in foreign currencies are translated initially at ance sheet and main items are specified in the notes. the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign curren- Cash flow statement cies are translated to the foreign exchange rate at the balance The cash flow statement shows the cash flows from operat- sheet date. Currency gains and losses arising on translation ing, investing and financing activities for the year and cash are recognised in the profit and loss account statement under equivalents at the beginning and end of the year. financial items. Cash generated from the acquisition and sale of compa- Non-monetary assets and liabilities denominated in for- nies is showed separately under cash flows from investing eign currencies are translated at foreign exchange rates ruling activities. In the cash flow statement cash flows are included on the transaction date. relating to acquired companies at the time of the acquisition, The assets and liabilities of foreign operations are trans- and cash flows relating to divested companies are included lated into Danish Kroner at foreign exchange rates ruling at until the time of the sale. the balance sheet date. The revenues and expenses of foreign operations are translated into Danish Kroner at rates approxi- Cash flows from operations mating to the foreign exchange rates ruling at the dates of Cash flows from operations are recognised by the indirect transactions. method on basis of the operating profit and adjusted for non- Foreign exchange differences arising on retranslation are cash operating items, changes in the working capital, paid recognised separately in equity. financial items and paid corporation taxes. Exchange differences arising on an internal loan that in substance forms part of the net investment in a foreign opera- Cash flows from investing activities tion is also recognised in equity accordingly. Cash flows from investing activities include payment in connection with the acquisition and sale of companies and activi- Derivatives ties, intangible and tangible fixed assets as well as securities Derivative financial instruments, such as foreign exchange related to investing activities. contracts or options and raw material contracts, are recognised initially at cost in the balance sheet and subsequent at Cash flows from financing activities fair value in the profit and loss account statement. Cash flows from financing activities include payments Provided that the restrictive conditions relating to docu- diverted by changes in the size or composition of the share mentation etc. are fulfilled, the instruments are reported as capital, paid dividends and raising of and instalment of long- hedge accounting. By hedging future sales and purchase term debt and short-term bank debt. transactions (cash flow), changes in the market value are recorded in the equity, under revaluation reserves, until the Cash and cash equivalents time when the expected sale and purchase, respectively, Cash and cash equivalents include bank account deposits and is realised. At the realisation, the accumulated change is cash balances. recorded in the same item in the profit and loss account as the sale and purchase transaction, respectively. If the crite- Segment information ria for hedge accounting are not fulfilled, changes in market Segment information is given for business segments (pri- value are recognised directly in the profit and loss account mary) and geographical segments (secondary). The segment statement under financial items. information is prepared in accordance with the Group’s internal financial control and reporting. The segment information Assets held for sale and discontinued operations complies with the Group’s accounting policies. The income, Assets held for sale comprises non-current assets and disposal expenses, assets and liabilities of the segment include those, groups held for sale. Disposal groups are defined as a group which can be allocated on a reasonable basis. Deferred tax of assets to be disposed of, by sale or otherwise, together as a (assets and liabilities), outstanding and payable tax, cash and group in a single transaction. Liabilities associated with assets interest-bearing liabilities are not allocated to the segments. held for sale are those liabilities directly associated with the Trading between segments generally takes place at market assets that will be transferred in the transaction. Assets are value. classified as held for sale if the carrying amount will be recov- ered principally through a sale within 12 months in accord- New IFRS standards that are effective from 2006 ance with a formal plan rather than through continuing use. IASB and EU have approved the following standards, which are effective from 2006 and onwards:

Annual Report 2005 52 The Danfoss Group IAS 19 (updated 2004) Post-employment services are effec- IASB and EU have approved the below IFRIC’s. The IFRIC’s tive from 2006. Danfoss A/S has not yet decided if the present have no effect on the financial report for 2005 method of recognizing actuarial losses/gains according to the IFRIC 4 Determining whether an Arrangement contains a 10% corridor rule will be continued or if actuarial losses/gains Lease is effective from 2006. At the moment there are no indi- will be recognised in the “consolidated statement of recog- cations that Danfoss has agreements that will be classified as nised income and expense” immediately. If the new optional leasing arrangement according to IFRIC 4. rule had been applied for 2005 the effect on total equity IFRIC 5 Rights to interests arising from Decommissioning, would have been around –150 to –200 million DKK and the Restoration and Environmental Rehabilitation Funds are effec- net profit would have been improved by 3 mill DKK. tive from 2006. Danfoss are not engaged in activities that are IAS 39 Financial Instruments (update) are effective from comprised by this IFRIC. 2006. Danfoss does not expect to use the option of recogniz- IFRIC 6 Liabilities arising form participation in a Specific ing financial assets and liabilities at fair value. Market – Waste Electrical an Electronic Equipment is effective IFRS 4 Insurance Contracts and IFRS 6 Exploration for and from 2006. At the moment there are no indications that this Evaluation of Mineral Resources and related changes of IFRS 1 IFRIC will have a material impact on the financial statements are effective from 2006. Danfoss are not engaged in activities for 2006. that are comprised by these standards. IFRIC 7 Applying Restatement Approach under IAS 29 IFRS 7 Disclosure of Financial Instruments and changes to Financial Reporting in Hyperinflationary Economies is effec- IAS 1 in regards to equity are effective from 2007. The new tive from 2006. Danfoss has no material foreign operations standard will have no impact on the recognition financial that are placed in hyperinflationary economies (not approved instruments. by EU as per December 31, 2005).

Annual Report 2005 53 The Danfoss Group report & account s Management statement & audit report

Management statement The Board and Executive Committee have today considered and approved the Danfoss A/S Annual Report 2005. The Annual Report has been presented in accordance with the International Financial Reporting Standards (IFRS), which have been approved by the EU, and Danish disclosure requirements regarding presentation of the accounts. In our opinion, the accounting policies and estimates selected are appropriate and the Annual Report gives a true and fair view of the Group’s and the Parent Company’s assets, liabilities and financial position as of December 31, 2005, and of the result of the Group’s and the Parent Company’s activities and cash flows in 2005. The supplementary report on Corporate Citizenship at Danfoss A/S gives a true and fair view within the scope of common, recognised guidelines.

We recommend that the Annual General Meeting adopt the Annual Report.

Nordborg, March 5, 2006

Executive committee

Jørgen M. Clausen Ole Steen Andersen Niels B. Christiansen Hans Kirk

Board of directors

Henrik E. Nyegaard Tom Kähler Peter J. M. Clausen Chairman Vice-chairman

Hans Michael Jebsen Niels Christian Jørgensen Arno Knöpfli

Sven Murmann Bente Skibsted Henning Wendelboe

Annual Report 2005 54 The Danfoss Group Audit report

To the shareholders of Danfoss A/S We have audited the Annual Report of Danfoss A/S for the financial year January 1-December 31, 2005, Financial Infor- mation section. The audit did not include the supplementary report on Corporate Citizenship. The company management has the responsibility for the Annual Report. Our responsibility is, on basis of our audit, to express an opinion on the Annual Report, which is presented according to International Financial Reporting Standards (IFRS), which have been approved by the EU, and the Danish disclosure requirements regarding presentation of the accounts.

Basis of opinion We conduct our audit in accordance with Danish auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance that the Annual Report is free of material misstatement, partly through random sampling of the information supporting the amounts and information stated in the Annual Report. An audit also includes assessing the accounting policies used and significant estimates made by the Board of Directors and Executive Committee, as well as evaluating the overall Annual Report presentation. We believe that our audit provides a reasonable basis for our opinion.

Our audit has not resulted in any qualification.

Opinion In our opinion, the Danfoss A/S Annual Report, the sections Financial Information, gives a true and fair view of the Group’s and the Parent Company’s assets, liabilities and financial position at December 31, 2005, and of the results of the Group’s and the Parent Company’s operations and consolidated cash flows for the financial year January 1- December 31, 2005, in accordance with the International Financial Reporting Standards (IFRS), which have been approved by the EU, and also the Danish disclosure requirements regarding presentation of the accounts.

Sønderborg, March 5, 2006

KPMG C.Jespersen Statsautoriseret Revisionsinteressentskab

Finn L. Meyer Helge Kallesøe State Authorised Public Accountant State Authorised Public Accountant

Annual Report 2005 55 The Danfoss Group f inancial in f o r m a t i o n Profit and loss account

PROFIT AND LOSS ACCOUNT 1 January to 31 December mill DKK Parent Company Group

Note 2004 2005 2004 2005 Net sales ………………………………………………… 1 4,437 4,554 16,345 16,416 Net sales Danfoss Services etc. …………………………… 1 625 785 398 452 Cost of sales ……………………………………………… 2 -4,128 -4,419 -11,643 -11,865 Gross profit 934 920 5,100 5,003

Distribution expenses …………………………………… 2 -492 -527 -3,492 -3,443 Administration expenses ………………………………… 2 -476 -434 -701 -650 Operating profit excl. other income and expenses -34 -41 907 910

Other operating income ………………………………… 2 34 41 365 155 Other operating expenses ………………………………… 2 -7 -33 -200 -122 Operating profit 1 -7 -33 1,072 943

Income from associates and joint ventures after tax ……… 3 94 78 Financial income ………………………………………… 4 286 342 16 120 Financial expenses ………………………………………… 5 -239 -94 -251 -142 Profit before tax 40 215 931 999

Corporate tax expenses …………………………………… 6 6 -14 -232 -266 Net profit 46 201 699 733

Net profit is distributed as follows: Minority interest …………………………………………… 15 5 Transferred to the proposed dividends reserve …………… 152 184 152 184 Transferred to other reserves ……………………………… -106 17 532 544 46 201 699 733

Earnings per share (share of nominel 100 DKK) …………… 24 67.5 71.3 Earnings per share, diluted (share of nominel 100 DKK) … 24 67.5 70.9

Annual Report 2005 57 The Danfoss Group f inancial in f o r m a t i o n Balance sheet

BALANCE SHEET As per 31 December mill DKK Parent Company Group

ASSETS Note 2004 2005 2004 2005

Non-current assets Goodwill ……………………………………………………… 4 10 895 1,364 Other intangible fixed assets ………………………………… 137 233 195 408 Intangible fixed assets 7 141 243 1,090 1,772 Land and buildings …………………………………………… 340 38 1,519 1,695 Machinery ……………………………………………………… 408 390 1,596 1,709 Equipment …………………………………………………… 276 206 422 329 Buildings and machinery under construction ………………… 210 258 483 606 Tangible fixed assets 8 1,234 892 4,020 4,339

Non-current financial assets 3 Investments in subsidiaries …………………………………… 2,108 3,190 Receivables from subsidiaries ………………………………… 248 229 Investments in associates and joint ventures ………………… 1,247 1,226 838 926 Other investments …………………………………………… 7 72 68 118 Defined benefit plans, net asset ……………………………… 14 19 22 Deferred tax assets …………………………………………… 13 518 524 Financial assets 3,610 4,717 1,443 1,590

Total non-current assets 4,985 5,852 6,553 7,701

Current assets Raw materials and consumables ……………………………… 119 133 829 863 Work in progress ……………………………………………… 88 90 336 322 Finished goods and goods for resale ………………………… 317 298 1,246 1,211 Inventories 9 524 521 2,411 2,396

Trade receivables ……………………………………………… 10 172 193 2,716 3,060 Receivables from subsidiaries ………………………………… 10 2,375 2,350 Receivables from associates and joint ventures ……………… 52 38 78 67 Receivable corporation tax …………………………………… 16 39 24 64 76 Other receivables ……………………………………………… 52 106 378 562 Accounts receivable 2,690 2,711 3,236 3,765

Cash and cash equivalents 15 394 54 958 736

Total currrent assets 3,608 3,286 6,605 6,897

Total assets 8,593 9,138 13,158 14,598

Annual Report 2005 58 The Danfoss Group BALANCE SHEET As per 31 December mill DKK Parent Company Group

LIABILITIES AND SHAREHOLDERS’ EQUITY Note 2004 2005 2004 2005

Shareholders' equity Share capital ………………………………………………… 11 1,023 1,023 1,023 1,023 Proposed dividends ………………………………………… 152 184 152 184 Other reserves ……………………………………………… 4,895 4,919 6,599 7,470 Danfoss A/S' share of equity ………………………………… 6,070 6,126 7,774 8,677 Minority interest ……………………………………………… 13 16 Total shareholders’ equity 6,070 6,126 7,787 8,693 Liabilities Provisions for warranty and other provisions ………………… 12 52 87 339 254 Provisions for stock options and warrants …………………… 23 236 264 236 264 Deferred tax liabilities ………………………………………… 13 288 205 367 338 Defined benefit plans ………………………………………… 14 14 14 429 436 Bank loans, unsecured ……………………………………… 15 130 535 242 639 Bank loans, secured ………………………………………… 15 93 1 264 241 Non-current liabilities 813 1,106 1,877 2,172

Bank loans, unsecured ……………………………………… 15 144 126 594 648 Bank loans, secured ………………………………………… 15 7 3 25 33 Trade creditors ……………………………………………… 312 329 1,324 1,358 Debt to subsidiaries ………………………………………… 15 893 1,084 Debt to associates and joint ventures ……………………… 2 2 11 10 Corporation taxes …………………………………………… 16 57 112 Provisions for warranty and other provisions ………………… 12 24 23 272 244 Other debt …………………………………………………… 328 339 1,211 1,328 Current liabilities 1,710 1,906 3,494 3,733

Total liabilities 2,523 3,012 5,371 5,905

Total liabilities and shareholders’ equity 8,593 9,138 13,158 14,598

Contingencies etc. 17 Related parties 21 Government grants 22 Events after the balance sheet date 25

Annual Report 2005 59 The Danfoss Group f inancial in f o r m a t i o n Statement of cash flow

STATEMENT OF CASH FLOW As per 31 December mill DKK Parent Company Group

Note 2004 2005 2004 2005 Operating profit ……………………………………………… -7 -33 1,072 943 Adjustments for non-cash transactions ……………………… 18 170 214 631 691 Changes in working capital ………………………………… 19 -40 -77 -107 -116 Cash flow generated from operations before interest 123 104 1,596 1,518 Net financial items …………………………………………… 13 77 -107 -63 Dividends received …………………………………………… 219 212 32 48 Cash flow from operations before tax 355 393 1,521 1,503 Paid tax ……………………………………………………… 1 -7 -289 -311 Cash flow from operating activities 356 386 1,232 1,192

Acquisition of intangible fixed assets ………………………… -77 -147 -175 -165 Acquisition of tangible fixed assets ………………………… -515 -257 -1,240 -1,043 Proceeds from sale of tangible assets ………………………… 115 31 126 179 Acquisition of subsidiaries etc. ……………………………… 20 -925 -861 -213 -653 Proceeds from disposal of subsidiaries etc. ………………… 20 864 49 568 149 Acquisition(-) and sale of other investments etc. …………… 366 86 -17 -93 Cash flow from investing activities -172 -1,099 -951 -1,626

Free cash flow 184 -713 281 -434

Financing by non-shareholders: Financing by repayment of (-)/proceeds from interest- bearing debt, including finance leases ……………………… -476 519 -612 328 Financing by shareholders: Issuing of shares/sale of own shares ………………………… 64 7 64 7 Addition/disposal of minority interest ……………………… -31 -3 Dividends paid ……………………………………………… -126 -153 -126 -155 Cash flow from financing activities -538 373 -705 177

Net change in cash and cash equivalents -354 -340 -424 -257

Cash and cash equivalents at 1 January ……………………… 748 394 1,389 958 Foreign exchange adj. on cash and cash equivalents ……… -7 35 Cash and cash equivalents at 31 December 394 54 958 736

The cash flow statement cannot be derived on the basis of the annual financial statements alone.

As part of the Group's stand-by liquid funds there are unused long-term binding credit facilities of approximately 3.3 bn DKK (2004: 3.4 bn).

Annual Report 2005 60 The Danfoss Group f inancial in f o r m a t i o n Capital and reserves

CAPITAL AND RESERVES mill DKK

Group Share capital Share premium Share according Reserve method equity to dividends Proposed Revaluation reserve reserve Translation shares own Reserves interest Minority reserves Other Total Balance at 1 January 2004 1,012 26 36 127 69 -351 -12 6,360 7,267 Change in accounting principle -36 28 -45 -53 Balance at 1 January 2004 1,012 26 127 69 -351 -12 28 6,315 7,214 Net profit 152 15 532 699 Other -1 -15 12 -4 Currency translation adjustments -30 1 -29 Total recognised income and expense 151 -15 -30 16 544 666 Dividends to shareholders -126 -126 Shares issued/capital reduction 11 53 -31 33 Balance at 31 December 2004 1,023 79 152 54 -381 -12 13 6,859 7,787

Net profit 184 5 544 733 Other -79 1 71 99 92 Currency translation adjustments 229 229 Total recognised income and expense -79 185 71 229 5 643 1,054 Dividends to shareholders -153 -2 -155 Shares issued/capital reduction 7 7 Balance at 31 December 2005 P 1,023 184 125 -152 -12 16 7,509 8,693

In the line "Other" in the column "Other reserves" 22 mill DKK (2004: 11 mill) is recognised in relation to equity compensation benefits established in 2004, cf. note 23.

Share capital and other shareholder information are described in note 11 and in "Management Report for the Danfoss Group" under shareholder information.

Specification of revaluation reserve 2004 2005 Revaluation reserve 1 January 69 54 Transfered to the profit and loss account*) -86 -90 Additions and disposals 65 186 Tax effect 6 -25 Revaluation reserve 31 December 54 125 *) Income in profit and loss account (-)

Annual Report 2005 61 The Danfoss Group CapitalCAPITAL and AND reserves RESERVES (continued) (continued) mill DKK

Parent Company Share capital Share premium Share according Reserve method equity to dividends Proposed Revaluation reserve reserve Translation shares own Reserves interest Minority reserves Other Total Balance at 1 January 2004 1,012 26 755 127 69 -12 5,290 7,267 Change in accounting principle -755 -390 -1,145 Balance at 1 January 2004 1,012 26 127 69 -12 4,900 6,122 Net profit 152 -106 46 Other -1 -58 23 -36 Total recognised income and expense 151 -58 -83 10 Dividends to shareholders -126 -126 Shares issued 11 53 64 Balance at 31 December 2004 1,023 79 152 11 -12 4,817 6,070

Net profit 184 17 201 Other -79 1 -12 91 1 Total recognised income and expense -79 185 -12 108 202 Dividends to shareholders -153 -153 Shares issued 7 7 Balance at 31 December 2005 P 1,023 184 -1 -12 4,932 6,126

In the line "Other" in the column "Other reserves" 14 mill DKK (2004: 7 mill) is recognised in relation to equity compensation benefits established in 2004, cf. note 23.

Specification of revaluation reserve 2005 Revaluation reserve 1 January 11 Transfered to the profit and loss account*) 7 Additions and disposals -24 Tax effect 5 Revaluation reserve 31 December -1 *) Income in profit and loss account (-)

Annual Report 2005 62 The Danfoss Group f inancial in f o r m a t i o n Notes, table of contents

1. Segment reporting ...... 64 2. Expenses and other operating income ...... 66 3. Non-current financial assets ...... 68 4. Financial income ...... 69 5. Financial expenses ...... 69 6. Corporation tax expenses ...... 69 7. Intangible fixed assets...... 70 8. Tangible fixed assets...... 72 9. Inventories ...... 74 10. Trade receivables and receivables from subsidiaries ...... 74 11. Share capital ...... 75 12. Provisions ...... 76 13. Deferred tax assets and liabilities ...... 77 14. Defined benefit plans ...... 78 15. Financial instruments ...... 79 16. Current corporation tax ...... 83 17. Contingencies etc...... 84 18. Adjustment for non-cash transactions ...... 85 19. Change in working capital ...... 85 20. Acquisition and sale of subsidiaries etc...... 86 21. Related parties ...... 88 22. Government grants ...... 89 23. Equity compensation benefits ...... 90 24. Earnings per share ...... 92 25. Events after the balance sheet date ...... 92

Annual Report 2005 63 The Danfoss Group 1. SegmentSegment reporting reporting mill DKK

Danfoss Danfoss Heating Refrigeration Division Danfoss & Air (incl. Danfoss Motion Corporate/ Conditioning Water Controls Danfoss not allocated/ Main business segments Division Controls) Division Venture eliminations Group 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 Net sales, external 8,527 8,306 4,161 4,618 3,200 3,199 133 104 324 189 16,345 16,416 Net sales, internal 56 45 31 22 8 12 -95 -79 Net sales 8,583 8,351 4,192 4,640 3,208 3,211 133 104 229 110 16,345 16,416 Net sales Danfoss Services etc. 161 188 85 143 98 120 3 9 51 -8 398 452 Operating profit 615 449 449 505 354 252 -127 -80 -219 -183 1,072 943 Income from associates and joint ventures 94 78 Financial income 16 120 Financial expenses -251 -142 Profit before tax 931 999 Tax expenses -232 -266 Net profit 699 733

Other information Income from associates and joint ventures -8 -25 -1 1 3 -2 -15 104 115 94 78 Investment in associates and joint ventures 62 59 -2 16 50 762 817 838 926 Intangible assets 151 228 796 1,351 52 181 91 12 1,090 1,772 Fixed assets 1,702 1,967 765 858 796 807 40 38 717 669 4,020 4,339 Total assets 5,189 5,669 2,884 3,821 1,572 1,852 147 143 3,366 3,113 13,158 14,598 Non-interest-bearing debt 1,678 1,605 776 807 703 842 34 23 1,056 1,066 4,247 4,343 Net investments (excluding goodwill) 647 621 197 381 74 211 22 11 185 -60 1,125 1,164 Net investments in goodwill 15 95 420 -32 48 4 -4 82 464 Depreciation / amortisation 356 364 189 170 131 139 23 14 70 59 769 746 Impairments *) -96 2 1 -96 3 Number of employees 9,006 9,093 4,143 4,437 2,816 3,176 232 170 1,346 1,292 17,543 18,168

*) Income (-)

See definitions in "Financial highlights (DKK)".

The three divisions, "Danfoss Refrigeration & Air Conditioning Division", "Danfoss Heating Division (including Danfoss Water Controls)" and "Danfoss Motion Controls Division" are further described in separate reports. As described in "Accounting policies" for segment information, the assets cash and cash equivalents, interest-bearing debt and deferred taxes are not allocated to the divisions. Instead they are recorded in the line "Total assets" in the column "Corporate/not allocated/eliminations". Information about cash flow is described in the separate division reports.

In the column ''Corporate/not allocated/eliminations'' net costs for Corporate Functions are included and amount to 209 mill DKK. (2004: 206 mill).

Annual Report 2005 64 The Danfoss Group 1. SegmentSegment reporting reporting (continued) (continued)

Geographical segments (secondary segments)

Group mill DKK 2004 Other North Latin Middle EU Europe Asia America Africa Pacific America East Total Net sales 10,401 1,603 1,637 1,194 441 364 391 314 16,345 Total assets *) 9,947 406 827 926 178 162 169 25 12,640 Net investments (excluding goodwill) 931 52 76 52 2 2 10 1,125

Group 2005 Other North Latin Middle EU Europe Asia America Africa Pacific America East Total Net sales 10,032 1,658 1,588 1,402 485 360 553 338 16,416 Total assets *) 10,665 633 1,129 1,024 194 159 240 30 14,074 Net investments (excluding goodwill) 997 53 70 42 1 1 1,164

*) Deferred tax assets are not included.

"Net sales" are based on customer location, while "Total assets" and "Net investments" are based on the location of the production, service and sales facilities.

Annual Report 2005 65 The Danfoss Group 22.. Expenses Expenses and and other other operating operating income income mill DKK Res.opg. A. Personnel expenses Parent Company Group 2004 2005 2004 2005 Remuneration to Board of Directors *) 2 3 2 3 Remuneration to Executive Committee *) 29 27 29 27 Other salaries and wages 1,421 1,486 4,636 4,472 Social security 15 16 426 456 Pension expenses 88 97 243 257 1,555 1,629 5,336 5,215 Average number of employees 4,156 4,297 17,399 18,258 Total number of employees 4,195 4,191 17,543 18,168

*) Including equity compensation benefits of 0.8 mill DKK (2004: 0.4 mill) to the Board of Directors and 6.8 mill DKK (2004: 3.4 mill) to the Executive Committee, cf. further information of equity compensation benefit in note 23.

Expenses for defined benefit plans are described in note 14.

Parent Company Group 2004 2005 2004 2005 Personnel expenses divided into functions: Production 1,212 1,268 3,191 3,247 Distribution 128 137 1,613 1,594 Administration 213 216 362 334 Other operating income and expenses 2 8 170 40 1,555 1,629 5,336 5,215

B. Depreciation/amortisation and impairment losses Parent Company Group 2004 2005 2004 2005 Divided into categories: Amortisation of intangible fixed assets 46 52 131 93 Depreciation of tangible fixed assets 168 159 638 653 Impairment on tangible fixed assets 4 4 3 Reversal of impairment losses on tangible fixed assets -100 218 211 673 749 Divided into functions: Cost of sales 157 173 609 617 Distribution expenses 22 9 113 92 Administration expenses 35 29 47 37 Other operating income -100 Other operating expenses 4 4 3 218 211 673 749

C. Research and development expenses Parent Company Group 2004 2005 2004 2005 Research and development costs 204 219 567 646 Capitalised development costs -15 -10 -55 Amortisation development costs 1 3 204 204 558 594

Research and development expenses are included in "Cost of sales".

D. Other operating income Parent Company Group 2004 2005 2004 2005 Gain on disposal of activities 1 36 205 82 Gain on disposal of tangible fixed assets 12 2 22 50 Reversal of impairment losses on tangible fixed assets 100 Other 21 3 38 23 Res.opg. 34 41 365 155

Reversal of impairments in 2004 is caused by the fact that a decided disposal of a business activity did not take place. Those estimates and assumptions that were present do no longer indicate a need for impairment on this activity.

Annual Report 2005 66 The Danfoss Group 22.. ExpensesExpenses and and other other operating operating income income (continued) (continues) mill DKK

E. Other operating expenses Parent Company Group 2004 2005 2004 2005 Loss on disposal of tangible fixed assets -1 -24 -5 -42 Impairments -4 -4 -3 Other -2 -9 -191 -77 Res.opg. -7 -33 -200 -122

Impairments are based on expected net realisable values. In 2005, restructuring costs of approximately 45 mill DKK are included in the line "Other", which mainly relates to restructuring and close down concerning Global Business Services and the Japanese sales company. In 2004, restructuring costs of approximately 170 mill DKK are included, which mainly relates to restructuring of compressor activities.

F. Fees to the Auditors appointed at the Annual General Meeting Parent Company Group 2004 2005 2004 2005 Audit fee: KPMG 4 5 16 19

Other fees: KPMG 5 5 7 7

Total 9 10 23 26

Annual Report 2005 67 The Danfoss Group 3.3. Non-current Non-current financial financial assets assets mill DKK Parent Company Group 2004 2004 Investments in subsidiaries from Receivables subsidiaries Investments in associates joint and ventures Other investments Investments in associates joint and ventures Other investments Balance at 1 January 2,441 368 1,149 5 716 84 Exchange rate adjustments etc. -4 Acquisitions 925 106 3 49 9 Transfers -1 1 -2 Disposals -906 -120 -8 -29 -4 Balance at 31 December 2,460 248 1,247 7 737 83

Balance at 1 January -299 34 -1 Exchange rate adjustments etc. 1 Transfers 1 Profit before tax and amortisation -53 139 -15 Tax expenses -44 Dividends -31 Disposals 2 Balance at 31 December -352 101 -15

Carrying amount at 31 December Aktiver 2,108 248 1,247 7 838 68

"Other investments" are recorded at fair value, if a reasonable amount can be estimated. If this is not the case they are recorded at cost price deducted any impairments.

Parent Company Group 2005 2005 Investments in subsidiaries from Receivables subsidiaries Investments in associates joint and ventures Other investments Investments in associates joint and ventures Other investments Balance at 1 January 2,460 248 1,247 7 737 83 Exchange rate adjustments etc. 7 6 Acquisitions 1,185 44 66 71 87 Disposals -103 -19 -66 -44 -43 Balance at 31 December 3,542 229 1,225 73 771 133

Balance at 1 January -352 101 -15 Exchange rate adjustments etc. 27 Profit before tax and amortisation s.o 1 -1 112 Tax expenses -35 Dividends -50 Balance at 31 December -352 1 -1 155 -15

Carrying amount at 31 December Aktiver 3,190 229 1,226 72 926 118

"Other investments" are recorded at fair value, if a reasonable amount can be estimated. If this is not the case they are recorded at cost price deducted any impairments.

Further information about subsidiaries and joint ventures are described in the notes 4, 5, 15, and 21.

Annual Report 2005 68 The Danfoss Group 44.. FinancialFinancial income income mill DKK Parent Company Group 2004 2005 2004 2005 Interest from subsidiaries 71 64 Interest from associates and joint ventures 5 5 Interest from banks etc. 2 1 16 20 Foreign exchange gains, net 57 95 Dividend from subsidiaries 188 165 Dividend from associates and joint ventures 25 50 Res.opg. 286 342 16 120

5.5. FinancialFinancial expenses expenses mill DKK Parent Company Group 2004 2005 2004 2005 Interest to subsidiaries -20 -15 Interest to bank etc. -28 -21 -82 -88 Foreign exchange losses, net -12 -40 Fair value adjustment for stock options and warrants *) -85 -23 -114 -32 Impairment/loss on loans -18 -18 Impairment/loss on disposal of shares in subsidiaries and associates -94 -17 Impairment, other investments -15 -4 Res.opg. -239 -94 -251 -142

*) cf. note 23.

6. Corporation Corporation tax tax expenses expenses mill DKK Parent Company Group 2004 2005 2004 2005 Current tax expenses -3 -24 -248 -353 Change in deferred taxes 9 8 14 85 Adjustments concerning previous years 2 2 2 Res.opg. 6 -14 -232 -266

Reconciliation of effective tax rate: Income tax using the domestic corporation tax rate 30.0% 28.0% 30.0% 28.0% Income from associates and joint ventures after tax -3.0% -4.6% Effect of tax rates in foreign jurisdictions 30/28% -0.8% 1.4% Tax exempt income/non-deductible expenses -17.8% 6.0% -5.6% 0.8% Adjustment concerning carry-forward of tax losses/joint taxation 100.0% 8.9% 3.6% 2.0% Net taxable profit in Danish companies included in joint taxation 29.3% Taxfree dividends -159.9% -28.0% Other adjustments *) 2.7% -8.4% 0.7% -1.0% Effective tax rates -15.7% 6.5% 24.9% 26.6%

*) Including reduction in Danish company tax rate from 30% to 28%.

Deferred tax recorded directly in Group's equity and relating to items recorded in equity, amounts to -25 mill DKK (2004: 6 mill). For the Parent Com- pany the equivalent amount is 5 mill DKK in income (2004: -6 mill).

Annual Report 2005 69 The Danfoss Group 77.. IntangibleIntangible fixed fixed assets assets mill DKK Group 2004 Patents, Develop- Others Goodwill Software trademarks etc. ment costs total Balance at 1 January 958 163 153 316 Foreign exchange effect etc. -4 -1 12 11 Acquisitions, business combinations 76 6 6 Transfers 5 -11 5 -6 Acquisitions 64 68 23 10 101 Disposals -79 -3 -13 -16 Balance at 31 December 1,020 227 170 15 412

Balance at 1 January 83 50 103 153 Foreign exchange effect etc. -1 -1 5 4 Transfers 2 -2 -2 Amortisation for the year 60 39 31 1 71 Disposals -19 -2 -7 -9 Balance at 31 December 125 86 130 1 217

Carrying amount at 31 December er 895 141 40 14 195

Group 2005 Patents, Develop- Others Goodwill Software trademarks etc. ment costs total Balance at 1 January *) 895 227 170 15 412 Foreign exchange effect etc. 6 4 -12 -8 Acquisitions, business combinations 463 144 144 Acquisitions 4 86 35 55 176 Disposals -4 8 5 13 Balance at 31 December 1,364 325 342 70 737

Balance at 1 January 86 130 1 217 Foreign exchange effect etc. 4 2 6 Amortisation for the year 55 35 3 93 Impairments for the year -1 -1 Disposals 9 5 14 Balance at 31 December 154 171 4 329

Carrying amount at 31 December er 1,364 171 171 66 408

*) Goodwill including accumulated amortisations end of 2004.

At year end impairment tests of goodwill have been carried out. In this relation the carrying amount of goodwill is allocated to a number of Cash Generating Units (CGU’s). When testing for impairment the present value of estimated net cash flows are compared with the carrying amounts of the net assets from the CGU’s. The estimated cash flows are based on budgets/expectations for the years 2006-2015, approved by the management of the CGU’s. The discount factor used lies within a level of 11-14% (before tax). The most significant variables/parameters are net sales, EBIT, working capital, net investments and taxes.

Below the most significant goodwill allocations and related impairment tests are described:

Electrical Floor Heating (Danfoss Heating Division) 33% of the Group’s goodwill is allocated to Electrical Floor Heating (EFH). The earnings in this CGU have been satisfactory and are also expected to be so in the future. The CGU’s RONA for 2005 is above the Group’s minimum goal of 14%. The weighted average growth rate used to estimate the expected net cash inflow from 2015 and forward, is expected to be 2%. The EBIT margin in the terminal period is expected to be unchanged. The working capital in % of net sales is also expected to be at the same level during the period. Net investments are assumed to be equal to the depreciations and amortisations during the period.

District Heating (Danfoss Heating Division) 20% of the Group’s goodwill is allocated to District Heating (DH). The earnings in this CGU have been satisfactory and are also expected to be so in the future. The CGU’s RONA for 2005 is above the Group’s minimum goal of 14%. The weighted average growth rate used to estimate the expected net cash inflow from 2015 and forward, is expected to be 2%. The EBIT margin in the terminal period is expected to be unchanged. The working capital in % of net sales is also expected to be at the same level during the period. Net investments are assumed to be equal to the depreciations and amortisations during the period.

Annual Report 2005 70 The Danfoss Group 77.. IntangibleIntangible fixed fixed assets assets (continued) (continued)

Heating Pumps (Danfoss Heating Division) 29% of the Group’s goodwill is allocated to Heating Pumps (HP). The earnings in this CGU unit have been satisfactory and with the expected future growth, the earnings will be significantly improved. The CGU’s RONA for 2005 is below the Group’s minimum goal of 14%, but is expected to exceed this goal within a reasonable period of time. The weighted average growth rate used to estimate the expected net cash inflow from 2015 and forward is expected to be 2%. The EBIT margin in the terminal period is expected to be unchanged. The working capital in % of net sales is also expected to be at the same level during the period. Net investments are assumed to be equal to the depreciations and amortisations during the period.

Impairment tests of the remaining goodwill have also been carried out with similar assumptions as mentioned above. None of the above impairment tests indicated basis for impairments.

Software in progress amounts to 22 mill DKK (2004: 30 mill). Development in progress amounts to 55 mill DKK (2004: 5 mill). Software and development in progress is mainly build up internal.

The Group has in 2005 carried out impairment tests of the carrying amount for software and development in progress. The project development process related to the actual expenses and achieved milestones has been estimated according to the approved project and business plans. The recoverable amount is estimated to be above the carrying amount.

mill DKK Parent Company 2004 Patents, Develop- Others Goodwill Software trademarks etc. ment costs total Balance at 1 January 5 88 85 173 Acquisitions 42 41 83 Disposals -13 -13 Balance at 31 December 5 130 113 243

Balance at 1 January 1 17 50 67 Amortisation for the year 24 22 46 Disposals -7 -7 Balance at 31 December 1 41 65 106

Carrying amount at 31 December er 4 89 48 137

Parent Company 2005 Patents, Develop- Others Goodwill Software trademarks etc. ment costs total Balance at 1 January 4 130 113 243 Acquisitions, business combinations 6 21 21 Acquisitions 58 74 15 147 Balance at 31 December 10 188 208 15 411

Balance at 1 January 41 66 107 Acquisitions, business combinations 19 19 Amortisation for the year 35 17 52 Balance at 31 December 76 102 178

Carrying amount at 31 December er 10 112 106 15 233

*) Goodwill including accumulated amortisations end of 2004.

Annual Report 2005 71 The Danfoss Group 8.8. Tangible Tangible fixed fixed assets assets mill DKK Group 2004 Land and Work in buildings Machinery Equipment progress Balance at 1 January 3,047 5,903 1,284 371 Foreign exchange effect -3 -36 -6 -6 Acquisitions, business combinations 19 27 6 Transfers 115 336 203 -656 Acquisitions 79 284 60 784 Disposals -124 -215 -320 -10 Balance at 31 December 3,133 6,299 1,227 483

Balance at 1 January 1,574 4,593 884 Foreign exchange effect -2 -31 -5 Acquisitions, business combinations 4 17 2 Transfers -12 11 Depreciations for the year 97 419 122 Impairments for the year/reversal of impairments (-) -96 Disposals -59 -187 -209 Balance at 31 December 1,614 4,703 805

Carrying amount at 31 December Aktiver 1,519 1,596 422 483

Group 2005 Land and Work in buildings Machinery Equipment progress Balance at 1 January 3,133 6,299 1,227 483 Foreign exchange effect 45 85 28 69 Acquisitions, business combinations 26 7 6 6 Transfers 203 341 51 -593 Acquisitions 126 233 28 643 Disposals -249 -194 -233 -2 Balance at 31 December 3,284 6,771 1,107 606

Balance at 1 January 1,614 4,703 805 Foreign exchange effect 14 76 21 Transfers -1 7 -5 Depreciations for the year 103 434 116 Impairments for the year/reversal of impairments (-) 3 Disposals -144 -158 -159 Balance at 31 December 1,589 5,062 778

Carrying amount at 31 December Aktiver 1,695 1,709 329 606

The Group's carrying amount of financial leasing contracts, mainly equipment, amounts to 64 mill DKK (2004: 71 mill).

Annual Report 2005 72 The Danfoss Group 88.. TangibleTangible fixed fixed assets assets (continued) (continued) mill DKK Parent Company 2004 Land and Work in buildings Machinery Equipment progress Balance at 1 January 1,115 2,014 553 99 Transfers 78 143 178 -399 Acquisitions 510 Disposals -15 -82 -181 Balance at 31 December 1,178 2,075 550 210

Balance at 1 January 836 1,632 320 Depreciations for the year 17 105 46 Impairments for the year 4 Disposals -15 -74 -92 Balance at 31 December 838 1,667 274

Carrying amount at 31 December Aktiver 340 408 276 210

Parent Company 2005 Land and Work in buildings Machinery Equipment progress Balance at 1 January 1,178 2,075 550 210 Acquisitions, business combinations 9 100 5 2 Transfers 2 88 37 -127 Acquisitions 257 Disposals -940 -145 -118 -84 Balance at 31 December 249 2,118 474 258

Balance at 1 January 838 1,667 274 Acquisitions, business combinations 6 74 5 Depreciations for the year 4 106 49 Disposals -637 -119 -60 Balance at 31 December 211 1,728 268

Carrying amount at 31 December Aktiver 38 390 206 258

Publicly assessed market value on the Parent Company's land and buildings as per 31 December amounts to 178 mill DKK (2004: 584 mill).

The Parent Company's carrying amount of financial leasing contracts, mainly equipment, amounts to 2 mill DKK (2004: 6 mill).

Annual Report 2005 73 The Danfoss Group 99.. InventoriesInventories mill DKK Parent Company Group 2004 2005 2004 2005 Inventories before obsolescence 565 568 2,643 2,636 Obsolescence -41 -47 -232 -240 Inventories Aktiver 524 521 2,411 2,396

Carrying amount of inventories written down to net realisable value 26 32 182 186

10. TradeTrade receivables and receivables from subsidiaries mill DKK Parent Company Group 2004 2005 2004 2005 Trade receivables Aktiver 172 193 2,716 3,060

Hereof trade receivables due after 1 year 1 14 16

Trade receivables from subsidiaries 519 630 Short-term borrowings to subsidiaries 1,856 1,720 Receivables from subsidiaries Aktiver 2,375 2,350

Annual Report 2005 74 The Danfoss Group 11. ShareShare capitalcapital

Shareholders holding more than 5% of the shares or 5% of the votes Bitten & Mads Clausen Foundation, Nordborg, Denmark; Henrik M. Clausen, Lake Forrest, USA; Clausen Controls A/S, Sønderborg, Denmark and Bente Skibsted, Lutry, Schweiz.

Distribution of shares

Group Group 2004 2005 A-shares Pcs. Nominel value mill DKK Pcs. Nominel value mill DKK 25 10 mill DKK 250.0 25 10 mill DKK 250.0 139 1 mill DKK 139.0 139 1 mill DKK 139.0 260 100 tDKK 26.0 260 100 tDKK 26.0 180 50 tDKK 9.0 180 50 tDKK 9.0 80 10 tDKK 0.8 80 10 tDKK 0.8 30 5 tDKK 0.2 30 5 tDKK 0.2 50 1 tDKK 0.1 50 1 tDKK 0.1 764 425.0 764 425.0

B-shares Pcs. Nominel value mill DKK Pcs. Nominel value mill DKK 31 10 mill DKK 310.0 31 10 mill DKK 310.0 204 1 mill DKK 204.0 204 1 mill DKK 204.0 16 500 tDKK 8.0 16 500 tDKK 8.0 525 100 tDKK 52.5 525 100 tDKK 52.5 6 50 tDKK 0.3 6 50 tDKK 0.3 18 10 tDKK 0.2 18 10 tDKK 0.2 20 1 tDKK 0.0 20 1 tDKK 0.0 224,525 100 DKK 22.5 229,805 100 DKK 23.0 225,345 597.5 230,625 598.0

Total shares Passiver 226,109 1,022.5 231,389 1,023.0

Issue of shares During the last five years new shares have been issued in 2001, 2002, 2004 and 2005 with amounts of 11 mill DKK, 1 mill DKK, 11 mill DKK and 1 mill DKK, respectively.

Dividend per share (DKK)

2004 2005 Dividend per 100 DKK share 15.0 18.0

The development in the Group's own shares (pcs.) is as follows (B-shares of 100 DKK)

2004 2005 Stock at 1 January 15,509 15,572 Bought in the year by employees 63 Addition in relation to increase in share capital 3,000 Sold in the year to employees/Bitten & Mads Clausen Foundation -3,043 Stock at 31 December 15,572 15,529

The primary purpose of holding own shares is to secure the share option programme for the Board of Directors in Danfoss A/S. Total cost price in 2005 for own shares amounts to 0 mill DKK (2004: 0.1 mill). Total sales price relating to own shares amounts to 4.4 mill DKK in 2005 (2004: 0 mill). Of the Group's share capital own shares make up 0.15% (2004: 0.15%). The value of own shares amounts to 22 mill DKK (2004: 20 mill).

Annual Report 2005 75 The Danfoss Group 12.12. ProvisionsProvisions mill DKK Group 2005 Restruc- Warranty turing Others Total Balance at 1 January 152 244 215 611 Foreign exchange effect etc. 4 5 4 13 Acquisitions, business combinations 10 10 Provisions used -68 -99 -110 -277 Provisions reversed -19 -10 -17 -46 Provisions made 82 41 66 189 Disposals, business combinations -2 -2 Balance at 31 December Passiver 159 181 158 498

Estimated payable: 2004 2005 Within 1 year Passiver 272 244 Between 1 and 5 years rantiLang 281 199 After 5 years 58 55 Passiver 611 498

Parent Company 2005 Restruc- Warranty turing Others Total Balance at 1 January 15 3 58 76 Provisions used -5 -2 -12 -19 Provisions reversed -2 -6 -8 Provisions made 8 4 49 61 Balance at 31 December 16 5 89 110

Estimated payable: 2004 2005 Within 1 year Passiver 24 23 Between 1 and 5 years rantiLang 32 63 After 5 years 20 24 76 110

Provisions for warranty comprise expected costs arising in the warranty period of the Group's products sold. The Group’s provision for restructuring comprises mainly termination benefits. Other provisions comprise cost related to "earn-out agreements" in relation to acquisitions of companies and certain costs related to employees, including jubilee costs.

Annual Report 2005 76 The Danfoss Group 13.13. DeferredDeferred taxtax assetsassets andand liabilitiesliabilities mill DKK

Changes in deferred taxes Parent Company Group 2004 2005 2004 2005 Balance at 1 January, (net) *) -297 -288 107 151 Acquisitions, business combinations -48 Foreign exchange effect -11 23 Changes in the year 9 13 55 60 Disposals, business combinations 70 Balance at 31 December, (net) *) -288 -205 151 186

*) Liability (-)

Deferred tax assets and liabilities attributed to accounting items Parent Company Group 2004 2005 2004 2005 Deferred Deferred Deferred Deferred tax tax tax tax asset asset asset asset Intangible assets 27 3 Fixed assets and non-current financial assets 13 117 127 Current assets 2 5 48 79 Liabilities 92 94 196 243 Gross tax value of loss carry-forwards 511 508 Impairment of tax value -179 -178 107 99 720 782

Set-off of tax -107 -99 -202 -258 Deferred tax assets Aktiver 0 0 518 524

Parent Company Group 2004 2005 2004 2005 Deferred Deferred Deferred Deferred tax tax tax tax liability liability liability liability Intangible assets 55 50 57 89 Fixed assets and non-current financial assets 39 6 148 198 Current assets 45 20 72 63 Liabilities 20 36 38 Deferred tax regarding Danish joint taxation 256 208 256 208 395 304 569 596

Set off of tax -107 -99 -202 -258 Deferred tax liabilities Passiver 288 205 367 338

Of the tax asset, which stems from loss carry-forwards, 330 mill DKK (2004: 332 mill), a large part is related to subsidiaries that have suffered losses in 2004 and 2005. The part of the tax asset relating to carry-forward losses is expected to be utilised primarily by future taxable profits in the different subsidiaries.

The tax value of unrecognised tax assets, which stems from carry-forward tax losses, amounts to 178 mill DKK (2004: 179 mill). The amount is not recognised as an asset, as the carry-forward tax losses are not expected to be utilised.

Of the Parent Company's deferred tax liability of 205 mill DKK (2004: 288 mill), 208 mill DKK (2004: 256 mill) can be attributed to taxes relating to joint taxation with foreign subsidiaries in previous years.

Annual Report 2005 77 The Danfoss Group 114.4. Defined benefit benefit plans plans

The major part of the Group's pension obligations are defined contribution plans. However, a number of foreign subsidiaries have defined benefit plans, which are not funded or only partly funded.

It is the Group’s policy that pension plans within the Group should be arranged as defined contribution plans. However, in countries like, England, Japan, Germany, the Netherlands and Norway there is a tradition of defined benefit plans. Defined benefit plans that are unfunded are mainly located in the German subsidiaries, Danfoss Bauer GmbH and Danfoss Compressors GmbH. In these companies unfunded plans amount to approximately 325 mill DKK (2004: 290 mill). The obligations in these plans are slowly being reduced, as these plans are not offered to new employees.

Funded and partly funded plans are mainly located in England, the Netherlands and Norway. All significant defined benefit plans are calculated by independent actuarial advisors. In 2005 a number of changes in the pension plans for England, the Netherlands and Norway took place. New employees in these countries are now part of defined benefit contribution plans instead of being part of defined benefit plans. Furthermore the defined benefit plans are being changed, so the risk of volatility in the net liabilities are reduced. mill DKK

The Group's defined benefit plan obligations Group 2004 2005 Present value of funded and unfunded obligations 992 1,174 Fair value of plan assets -472 -588 520 586 Unrecognised actuarial losses -110 -172 410 414 Above obligations are recorded as follows: Defined benefit plans, net asset Aktiver 19 22 Defined benefit plans, liabilities Passiver 429 436

Movements in the net liability recognised in the balance sheet Group 2004 2005 Net liability at 1 January 406 409 Foreign exchange effect etc. 1 Additions and disposals 2 -1 Expense in the profit and loss account 51 45 Contributions -49 -40 Net liability at 31 December 410 414

Expenses recognised in the profit and loss account Group 2004 2005 Current service costs 29 28 Interest on obligation 47 51 Expected return on plan assets -32 -38 Actuarial gains and losses, net 4 4 Losses on curtailments and settlements 3 Expense in profit and loss account 51 45

Actual return on plan assets 49 93

Principal actuarial assumptions at the balance sheet date

Group 2004 2005 Discount rates 4-5,5% 4-5,3% Future salary increases 1-4% 2-4% Expected return on plan assets 6-8% 5-8% Future pension increases 1-3% 2-3%

So far, the major part of the plan assets have been invested in quoted equities. However the Group has changed its policy, so that in the future a larger part of the plan assets will be invested in less volatile assets, such as bonds.

Annual Report 2005 78 The Danfoss Group 15. Financial Financial instruments instruments mill DKK

Cash and cash equivalents for the Group The major part of the Group's cash and cash equivalents of 736 mill DKK (2004: 958 mill) is placed on short term deposits, with an interest rate below 3% p.a.

Term, debt repayment, effective interest rate and repricing schedule for the Group

Group 2004 Repricing Repayment Carryingamount effectiveAverage interest rate year 0-1 years 1-5 years 5 over year 0-1 years 1-5 years 5 over Non-current debt, unsecured 835 4.5% 685 51 99 594 61 180 Non-current debt, secured 213 6.0% 13 44 156 12 58 143 Finance leases: Gross payment 91 4.0% 84 7 17 54 20 Reduced with interest part -14 -14 -4 -7 -3 1,125 768 102 255 619 166 340

Group 2005 Repricing Repayment Carryingamount effectiveAverage interest rate year 0-1 years 1-5 years 5 over year 0-1 years 1-5 years 5 over Non-current debt, unsecured 1,287 4.2% 711 69 507 648 50 589 Non-current debt, secured 202 6.1% 12 43 147 18 56 128 Finance leases: Gross payment 86 4.5% 85 1 17 56 13 Reduced with interest part -14 -14 -2 -9 -3 1,561 794 113 654 681 153 727

Group 2004 2005

The above debt is recorded as follows: Current liabilities ver 619 681 Non-current liabilities ver 506 880 Passiver 1,125 1,561

Interest-bearing debt divided into major currencies for the Group

2004 2005 DKK 246 229 EUR 217 651 USD 316 173 Other 346 508 1,125 1,561

The above is not to be seen as a measure of the Group's foreign exchange risk in connection with interest-bearing debt, as the major part of the Group's debt is established in the functional currency of the subsidiaries.

Annual Report 2005 79 The Danfoss Group 15. Financial Financial instruments instruments (continued) (continued) mill DKK

Fair value of financial instruments for the Group Besides the items below, there are no significant differences between the carrying amounts and fair values of the assets and liabilities.

Group Group 2004 2004 2005 2005 Carrying Carrying amount Fair value amount Fair value Investments in associates and joint ventures *) 838 2,257 926 2,298 Interest-bearing debt 1,125 1,145 1,561 1,568

*) The difference between "Carrying amount" and "Fair value" is primarily due to Sauer-Danfoss Inc. where "Fair value" corresponds to the current market value of the shares.

Derivatives as per 31 December for the Group

Group Group 2004 2005 Settlement value when (-) Gain/loss adjusting to value market (-) recorded Gain/loss inprofit accounts loss and Maturity Settlement value (-)when Gain/loss adjusting to value market (-) recorded Gain/loss inprofit accounts loss and Maturity Derivatives, sale (-)/buy: USD sale 199 16 -2 2005 774 -12 -10 2006 USD buy 140 -3 2005 3 2006 CHF sale 59 1 2005 2006 CHF buy 82 2005 2006 GBP sale 4 2005 131 2 2006 GBP buy 9 2005 2006 Other currencies sale 436 -3 -2 2005 487 -4 -3 2006 Other currencies buy 8 2005 72 -1 -1 2006 Foreign exchange contracts 11 -4 -15 -14

Rawmaterial contracts (buy) 255 62 2005-07 313 175 2006-08 Other derivatives 25 -1 -2 2005 46 12 12 2006 61 -2 187 12

Derivatives end of year 72 -6 172 -2

End of year 2005, unrealised gains on derivatives amounted to 174 mill DKK (2004: 78 mill).

In the statement "Capital and reserves", specification of revaluation reserve, the unrealised amount, net of tax, of the Group's cash flow hedge transactions are stated.

Further information regarding management of financial risk is available in the report "Financial and operationel risk management".

Annual Report 2005 80 The Danfoss Group 15. Financial Financial instruments instruments (continued) (continued) mill DKK

Parent Company's non-current receivables from subsidiaries The interest rates concerning the above receivables have typically been at the level of 3.5% p.a. in 2005 (2004: 3%).

Parent Company's cash and cash equivalents The major part of the Parent Company's cash and cash equivalents of 54 mill DKK (2004: 394 mio.) is placed on short term deposits, with an interest rate below 3% p.a.

Term, debt repayment, effective interest rate and repricing schedule for the Parent Company

Parent Company 2004 Repricing Repayment Carryingamount effectiveAverage interest rate 0-1year years 1-5 years 5 over year 0-1 years 1-5 years 5 over Non-current debt, unsecured 1,096 2.9% 1,064 32 967 15 114 Non-current debt, secured 94 6.2% 1 93 3 15 76 Finance leases Gross payment 7 6.5% 7 4 3 1,197 1,064 8 125 974 33 190

Parent Company 2005 Repricing Repayment Carryingamount effectiveAverage interest rate year 0-1 years 1-5 years 5 over year 0-1 years 1-5 years 5 over Non-current debt, unsecured 1,627 2.9% 1,188 439 1,092 15 520 Non-current debt, secured 1 4.0% 1 1 Finance leases: Gross payment 4 7.0% 3 1 3 1 1,632 1,191 2 439 1,096 16 520

Parent Company 2004 2005

The above debt is recorded as follows: Current liabilities 151 129 Non-current liabilities 223 536 Debt to subsidiaries 823 967 Passiver 1,197 1,632

Besides interest-bearing debt of 967 mill DKK (2004: 823 mill) the line ''Debt to subsidiaries'' contains accounts payables etc. of 117 mill DKK (2004: 70 mill). In total 1,084 mill DKK (2004: 893 mill).

Fair value of financial instruments for the Parent Company Besides the items below, there are no significant differences between the carrying amounts and fair values of the assets and liabilities.

Parent Company Parent Company 2004 2004 2005 2005 Carrying Carrying amount Fair value amount Fair value Investments in associates and joint ventures *) 1,247 2,235 1,226 2,282 Interest-bearing debt 1,197 1,215 1,632 1,623

*) The difference between "Carrying amount" and "Fair value" is primarily due to Sauer-Danfoss Inc. where "Fair value" corresponds to the current market value of the shares.

Annual Report 2005 81 The Danfoss Group 15. Financial Financial instruments instruments (continued) (continued) mill DKK

Derivatives as per 31 December for the Parent Company

Parent Company Parent Company 2004 2005 Settlement value (-)when Gain/loss adjusting to value market (-) recorded Gain/loss inprofit accounts loss and Maturity Settlement value (-)when Gain/loss adjusting to value market (-) recorded Gain/loss inprofit accounts loss and Maturity Derivatives, sale/buy: USD sale 187 18 2005 759 -11 -8 2006 USD buy 134 -2 2005 2006 CHF sale 59 1 2005 2006 CHF buy 82 2005 2006 GBP sale 2005 131 2 2006 GBP buy 2005 2006 Other currencies sale 436 -3 -2 2005 487 -4 -3 2006 Other currencies buy 7 2005 73 -1 -1 2006 Foreign exchange contracts 14 -2 -14 -12

Other derivatives 25 -2 -2 2005 46 12 11 2006-07 -2 -2 12 11

Derivatives end of year 12 -4 -2 -1

End of year 2005, unrealised gains on derivatives amounted to -1 mill DKK (2004: 16 mill).

Annual Report 2005 82 The Danfoss Group 16. CurrentCurrent corporationcorporation tax mill DKK Parent Company Group 2004 2005 2004 2005 Corporation tax payable/receivable (–) 1 January -42 -39 43 -7 Foreign exchange effect on corporate tax expenses -1 Acquisitions, business combinations 3 Paid during the year 1 -7 -289 -311 Tax adjustments previous years -1 -2 -2 -2 Disposals, business combinations -6 Current tax expenses 3 24 248 353 Corporation tax payable/receivable (–) 31 December -39 -24 -7 36

The above corporation tax is recorded as follows: Assets Aktiver 39 24 64 76 Liabilities assiver 57 112 -39 -24 -7 36

Annual Report 2005 83 The Danfoss Group 117.7. Contingencies etc. mill DKK

Security Parent Company Group 2004 2005 2004 2005 Carrying amount of land and buildings are subject to a registered debenture to secure bank loans/mortgages with 121 256 567 Leasing assets are subject to a registered debenture to secure bank loans/mortgages with a carrying amount of 6 2 71 60

In connection with disposal of activities, ordinary representations and warranties have been issued.

Contingent liabilities A number of claims have been raised against the Group. The opinion of the management is that the outcome of these will not materially change the financial position of the Group.

No significant asbestos-related claims have been identified. The claims that have been raised at present are not material and assessed to be unfound- ed. The Group does not believe that the cost of resolving current and possible asbestos-related claims will have a material impact on its consolidated financial position, liquidity and results of operations.

Operating leases (lease expenses) Parent Company Group 2004 2005 2004 2005 Operating lease rentals are payable as follows:

Buildings: Less than 1 year 3 96 100 106 Between 1 and 5 years 9 331 329 337 More than 5 years 14 177 394 382

Machinery etc.: Less than 1 year 53 52 93 100 Between 1 and 5 years 92 61 133 126

The Group has expensed 337 mill DKK in operating lease rentals in 2005 (2004: 255 mill). Expensed lease rentals relate mainly to buildings and machinery.

Operating leases (lease income) Parent Company Group 2004 2005 2004 2005 Operating lease rentals are receivable as follows: Less than 1 year 44 48 50 48 Between 1 and 5 years 172 171 184 173 More than 5 years 202 164 201 164

The Group has leasing income of 57 mill DKK in 2005 (2004: 65 mill). The above rentals relate mainly to buildings.

Annual Report 2005 84 The Danfoss Group 118.8. Adjustment for non-cash transactions mill DKK Parent Company Group 2004 2005 2004 2005 Depreciations/amortisations and impairments 218 211 673 749 Gain on disposal of land and buildings, machinery etc. -11 -13 -221 -90 Others, including provisions -37 16 179 32 Pengestrøm 170 214 631 691

19.19. ChangeChange inin workingworking capitalcapital mill DKK Parent Company Group 2004 2005 2004 2005 Change in inventories -59 29 -316 79 Change in receivables -77 -132 -1 -238 Change in payables 96 26 210 43 Pengestrøm -40 -77 -107 -116

Annual Report 2005 85 The Danfoss Group 220.0. AcquisitionAcquisition and sale of subsidiaries etc. mill DKK Group 2004 2005 2004 2005 Acquisitions Acquisitions Disposals Disposals Intangible fixed assets, except goodwill -1 -144 66 Tangible fixed assets -29 -44 105 48 Inventories -30 -60 209 60 Receivables -21 -98 244 27 Cash and cash equivalents -23 -28 79 3 Interest-bearing debts 11 45 -39 -18 Provisions including deferred taxes 2 58 -33 -3 Payables 20 89 -182 -43 -71 -182 449 74

Goodwill(-)/gain on disposal -76 -463 205 81

Consideration paid(–)/received -147 -645 654 155 Cash and cash equivalents 23 28 -79 -3 Net consideration paid(–)/received -124 -617 575 152

Acquisitions Acquisitions Disposals Disposals Net consideration paid(–)/received is paid as follows: Cash and cash equivalents Pengestrøm -213 -653 568 149 Receivable, 31 December -49 Payable, 1 January 89 85 Shares 7 3 -124 -617 575 152

Group In the "Management Report for the Danfoss Group" and the division reports further information about time and type of acquisitions and disposals of companies/activities is provided.

Acquisitions and disposals 2005 Danfoss Heating Division acquired Thermia Värme AB, Sweden and some minor sales activities in Germany and the Netherlands. The acquisition amount was approximately 539 mill DKK. The acquisition amount was paid in cash and as "earn-out agreements". In relation to the acquisitions assets and liabilities are identified and valued to fair values, cf. the table below. After recognition of identifiable assets and liabilities to fair values, goodwill (residual) was stated to approximately 411 mill DKK. Goodwill primarily represents the value of the staff, know-how and not least the expected synergies going forward. The acquisitions have impacted the Group’s net profit with approximately 3 mill DKK. Had the companies been acquired as of Ja- nuary 1, 2005, under the same assumptions, the Group’s net profit would have been impacted by estimated 4 mill DKK and net sales with 495 mill DKK. The information regarding Thermia and the sales activities are aggregated, as from a materiality point of view, it is not necessary to disclose the information per transaction.

Danfoss Motion Controls Division acquired Zheijang Holip Electronic Technology Co. Ltd (Holip) in November 2005. The acquisition amount was paid in cash and as an "earn-out agreement". In relation to the acquisition assets and liabilities are identified and valued to fair values, cf. the table below. After recognition of identifiable assets and liabilities to fair values, goodwill (residual) was stated to approximately 48 mill DKK. Goodwill primarily represents the value of the staff, know-how and not least the expected synergies going forward. Holip has had an impact on the Group’s net profit with 0 mill DKK. Had the company been acquired as of January 1, 2005, under the same assumptions, the Group’s net profit would have been impacted by estimated 7 mill DKK and net sales with 63 mill DKK.

Adjustments in relation to IFRS 3 (mill DKK) Holip Thermia etc. The most significant adjustments are: Technology 16 41 Customer relations/contracts 7 64 Land and buildings 5 Inventories 2 6 Others 14 3 Deferred tax on adjustments -6 -34 Total 33 85

The Group’s divestments in 2005 are Danfoss Analytical, the automobile business Als Motor A/S and the Spring Factory. The Analytical business and Als Motor A/S were disposed in spring. The Spring Factory was disposed in the autumn. The impact on the Group’s net profit in 2005 was insignificant, except for the gains related to the disposals, cf. above.

Annual Report 2005 86 The Danfoss Group 20. Acquisition and sale of subsidiaries etc. (continued) 20. Acquisition and sale of subsidiaries etc. (continued) Acquisitions and disposals 2004 Acquisitions in 2004 are primarily related to Gemina Termix Production A/S. In accordance with the accounting policies fair value adjustments of assets and liabilities have been made in connection with the acquisition. The fair value adjustments however, have not exceeded 5 mill DKK. The remaining amount, goodwill, reflects non-identifiable assets such as know-how etc. The activities in Gemina Termix in 2004 contributed to the Group result with less than 10 mill DKK net after tax.

Disposals in 2004 are primarily related to the sold activities in The Elsmark Group and Danfoss Marine Systems. The disposals took place in the 4th quarter of 2004, and the Group result in 2004 is therefore only affected by the profit related hereto.

Parent company mill DKK Parent Company 2004 2005 2004 2005 Acquisitions Acquisitions Disposals Disposals Intangible fixed assets, except goodwill -8 Tangible fixed assets -31 419 Investments in subsidiaries -925 -1,184 906 100 Inventories -31 5 Receivables -23 Cash and cash equivalents 1 Interest-bearing debts 10 -93 Provisions including deferred taxes -60 Payables 30 -3 -925 -1,237 906 369

Goodwill(-)/gain on disposal -42 18

Consideration paid(–)/received -925 -1,237 864 387 Cash and cash equivalents -1 Net consideration paid(–)/received -925 -1,237 864 386

Acquisitions Acquisitions Disposals Disposals Net consideration paid(–)/received is paid as follows: Cash and cash equivalents Pengestrøm -925 -861 864 49 Receivable, 31 December -39 Investments in subsidiaries -337 337 -925 -1,237 864 386

The Parent Company's issuing of shares/acquisitions of companies and activities of -1,237 mill DKK (2004: 925 mill) are mainly issuing of shares and Group internal transfers.

The Parent Company's divestments of companies and activities of 386 mill DKK are mainly internal disposals. In 2004 the amount was 864 mill DKK which mainly was related to Group internal transfers.

Annual Report 2005 87 The Danfoss Group 21. Related parties 21. Related parties Danfoss A/S’ related parties include the Bitten & Mads Clausen Foundation, other shareholders, subsidiaries, associates, joint ventures, the Board of Directors, the Executive Committee and senior managers. Further related parties include companies, in which, the above-mentioned persons have significant interests.

Bitten & Mads Clausen Foundation and other shareholders Bitten & Mads Clausen Foundation holds 48.9% of the shares in Danfoss A/S and controls 85.5% of the voting power.

In the financial year a limited number of transactions have taken place between the Bitten & Mads Clausen Foundation, its other subsidiaries including Danfoss Universe and certain shareholders of the Clausen Family. The transactions comprise service and financial transactions and they have been made according to the arm's length principle. The total payment does not exceed 15 mill DKK (2004: 10 mill). Around 97% of Danfoss A/S' dividend payments is related to Bitten & Mads Clausen Foundation and shareholders of the Clausen Family.

Board of Directors, Executive Committee and senior managers In the financial year, no transactions took place with the Board of Directors or the Executive Committee, other than transactions as a result of conditions of employment. The only exception is a rental agreement in Italy with CEO Jørgen M. Clausen. The rental agreement runs until 2012. The rent payment amounted to 3 mill DKK in 2005 (2004: 3 mill). The rent is set on basis of arm's length. Besides that companies, in which CEO Jørgen M. Clausen has significant influence, have sold goods and services below 10 mill DKK (2004: 10 mill) to the Danfoss Group.

Joint ventures and associated companies Share of joint ventures: The following items representing the Group’s share of joint ventures (in all materiality according to Danfoss accounting policies): mill DKK Parent Company Group 2004 2005 2004 2005 Share of: Non-current assets 1,283 1,451 1,283 1,452 Current assets 1,154 1,303 1,154 1,308 Total assets 2,437 2,754 2,437 2,760

Non-current liabilities 557 821 557 821 Current liabilities 1,073 1,031 1,073 1,033 Total debt 1,630 1,852 1,630 1,854 Net assets 807 902 807 906

Net sales 3,308 3,690 3,308 3,699 Expenses 3,216 3,602 3,216 3,613 Net profit 92 88 92 86

The major part of the above stems from Sauer-Danfoss Inc. A separate description of Sauer-Danfoss Inc. can be found in "Sauer-Danfoss Inc.". Besides the cooperation with Sauer-Danfoss Inc. Danfoss has joint venture cooperation with different manufacturing companies. For further information on joint ventures refer to the page "Danfoss Group Companies".

Share of associated companies: The following items representing the Group’s share of associated companies (in all materiality according to Danfoss accounting policies): mill DKK Parent Company Group 2004 2005 2004 2005 Share of: Total assets 67 133 93 196 Total debt 9 112 62 176 Net assets 58 21 31 20

Net sales 21 117 38 216 Expenses 19 113 36 224 Net profit 2 4 2 -8

The major part of the above stems from Damcos Holding A/S, where the investment is a financial investment. Besides this, a number of minor investments in venture companies are included in the above numbers. Refer to the page "Danfoss Group Companies" for further information on associated companies.

Annual Report 2005 88 The Danfoss Group 21.21. RelatedRelated partiesparties (continued)(continued)

Transactions with joint ventures and associated companies: mill DKK Parent Company Group 2004 2005 2004 2005 Net sales of goods and related services 38 34 42 37 Net sales Danfoss Services etc. 216 238 299 335 Purchase of goods and services 42 36 74 197

Loans, trade receivables and liabilities in relation to joint ventures and associated companies are stated separately in the balance sheet of the Parent Company and the Group.

Besides the above transactions between the Parent Company and subsidiaries are described in the notes 3, 4, 5 and 15.

Transactions etc. with subsidiaries:

Transactions between the Parent Company and the subsidiaries: mill DKK Parent Company 2004 2005 Net sales of goods and related services 3,242 3,440 Net sales Danfoss Services etc. 328 448 Purchase of goods and services 1,008 1,276 Purchase of intangible and tangible assets 1 60 Disposal of intangible and tangible assets 22 432

Besides the above, transactions between the Parent Company and subsidiaries are described in the notes 3, 4, 5 and 15.

22. Government grants 22. Government grants The Group received government grants amounting to 8 mill DKK in 2005 (2004: 9 mill). The grants are primarily related to research and development projects as well as grants for the establishment of workplaces.

Annual Report 2005 89 The Danfoss Group 23. Equity compensation benefits 23. Equity compensation benefits Equity compensation benefits established in 2001 In 2001 at the annual shareholders’ meeting, members of the Board, executives and senior managers received the right to be awarded shares. The programs are limited to the period 2001 to 2006.

Under existing share plans the total awards of options/warrants are limited to 16,500 and 358,500 (in number), respectively. In order to participate in the program, the executives and senior managers had to buy a number of shares at market value before the annual general assembly in 2002. Approximately 1/3 of the options and warrants were awarded in 2001.

The principal criterion for receiving options/warrants was a RONA for a given year being above a certain minimum target. Based on this, options/ warrants were awarded in 2003 and 2004.

The awarded options and warrants grant the right to buy and subscribe to, respectively, B-shares (of 100 DKK) in the year Danfoss is quoted on the stock exchange, at certain exercise prices, cf. below. If Danfoss is not quoted on the stock exchange, the calculated value of the options and warrants can be cashed in by the holders from April 6, 2006. The value of an option/a warrant will as such be calculated as the share price at the time of utilisation less the exercise price. The options/warrants must be cashed in/utilised no later than the date of annual shareholders’ meeting in 2011.

Awards/disposals etc. of options/warrants in relation to the above program are specified below:

Movements since 2001: The Board Executives Other Exercise (number) (number) (number) price Outstanding 1 January 2001 0 0 0 Awarded in 2001 5,000 33,333 78,055 749 Outstanding 31 December 2001 5,000 33,333 78,055 Awarded in 2001 0 0 0 Outstanding 31 December 2002 5,000 33,333 78,055 Awarded in 2002 5,000 33,333 78,055 752 Outstanding 31 December 2003 10,000 66,666 156,110 Awarded in 2003 5,000 33,333 77,151 752 Disposal in 2004 -6,033 749/752 Outstanding 31 December 2004 15,000 100,000 227,228 Awarded in 2004 0 0 0 Disposal in 2005 0 0 -6,600 749/752 Outstanding 31 December 2005 15,000 100,000 220,628

Holdings 31 December 2004: The Board Executives Other Fair value Fair value (number) (number) (number) (number) (mill DKK) Options/warrants - exercise price at 749 5,000 33,333 76,555 673 77 Options/warrants - exercise price at 752 10,000 66,667 150,673 671 153 15,000 100,000 227,228 230

Holdings 31 December 2005: The Board Executives Other Fair value Fair value (number) (number) (number) (number) (mill DKK) Options/warrants - exercise price at 749 5,000 33,333 74,355 766 86 Options/warrants - exercise price at 752 10,000 66,667 146,273 764 171 15,000 100,000 220,628 257

Disposals in 2004 and 2005 are related to pension retirements. In addition to the above program, a “phantom” share program was established for a few senior managers abroad. This program follows the same principles as the above program. As of 31 December 2005 there are awarded 9,000 pcs. with a fair value of 7 mill DKK (2004: 6 mill).

Annual Report 2005 90 The Danfoss Group 23. Equity compensation benefits (continued) 23. Equity compensation benefits (continued) Equity compensation benefits established in 2004 In 2004 at the annual shareholder’s meeting members of the Board, executives and senior managers received the right to be awarded shares in a new equity compensation program.

This program is limited to the period 2005 to 2007. Under this share plan the total awards of options/warrants are limited to 9,600 and 242,064 (in number), respectively. In order to participate in the program, the executives and senior managers have to buy a total of 7,028 shares at market value - 1307/1438. Approximately 1/3 of these options/warrants were awarded in 2005 (1. tranche). The principal criterion for receiving options/warrants is, like the old program that the RONA for a given year is above a certain minimum target.

The awarded options and warrants grant the right to buy and subscribe to, respectively, B-shares (of 100 DKK) not earlier than 3 years after the options or warrants are granted to certain exercise prices. The exercise prices are determined as the latest published share price less 15%. The latest date for utilisation of the options/warrants awarded in 2005 (1. tranche) is 21 May 2015. Are the options or warrants granted for the last tranche (3. tranche), the latest date for utilisation of this part will be 21 May 2017. The options and warrants can only be exercised in return of Danfoss shares.

Awards/disposals etc. of options/warrants in relation to the above program are specified below:

Movements in 2005: The Board Executives Other Exercise (number) (number) (number) price Outstanding 1 January 2005 0 0 0 Awarded in 2005 (1. tranche) 3,000 26,000 53,539 564 Outstanding 31 December 2005 3,000 26,000 53,539

Holdings 31 December 2005: The Board Executives Other Fair value Fair value (number) (number) (number) (number) (mill DKK) Options/warrants - exercise price 1222 3,000 26,000 53,539 564 47 3,000 26,000 53,539 47

In 2006 it is expected that 84,575 options and warrants are granted, as the adjusted RONA requirements for 2005 were fulfilled. The exercise price and the fair values will be determined at the annual shareholders’ meeting on 4 April 2006. Based on the fair value of 1. tranche, a preliminary fair value can be estimated to 48 mill DKK.

Recognition of equity compensation programs Recognised liabilities in relation to the 2001 program, including “phantom” shares, as per 31 December, are 264 mill DKK (2004: 236 mill). Net profit for 2005 is impacted by -32 mill DKK (2004: -114 mill), which primarily stems from the fair value adjustment of the liability from 1 January 2005. For the Parent Company the liability amounts to, as per 31 December, net 192 mill DKK (2004: -169 mill) and the net profit is impacted by -23 mill DKK (2004: -85 mill).

The Group’s net profit for 2005 is furthermore impacted by -22 mill DKK (2004: -11 mill) which stems from 1. tranche and 2. tranche of the 2004 program. The fair value at grant date of 1. tranche and 2. tranche of 95 mill DKK, is recognised and accrued in the profit and loss account from 1 January 2004 until April 2009. The corresponding entry is the equity. No liability is recognised for this program, as the related options/warrants cannot be ter- minated by cash payments from the Danfoss Group. The Parent Company’s net profit is impacted by -14 mill DKK (2004: 7 mill).

The fair value of the options/warrants as per balance sheet date for the Group is stated in the tables above.

The calculated fair values used for stating the values at the balance sheet dates and when computing the value of the 2004 program on the grant date, are based on the Black & Scholes model.

The assumptions used in the Black & Scholes model are:

2004 2005 Share price 1307 1438 Expected volatility 23.0% 21.0% Expected dividends 1.0% 1.0% Risk-free interest rate 3.9% 3.7% Exercise prices cf. tables above Expected life of options/warrants: 2001 programme 2011 2011 2004 programme 2017 2017

As Danfoss is not quoted on a stock exchange, the foundation for calculating the above values are based on a number of quoted comparable companies in Denmark and abroad.

Annual Report 2005 91 The Danfoss Group 2424.. Earnings per share mill DKK Group 2004 2005 Net profit 699 733 Minority interest -15 -5 The Group's share of net profit 684 728

Nominel value (mill DKK)

Weighted average number of ordinary shares 1,014.4 1,022.8 Average number of own shares -1.6 -1.7 Average number of shares issued 1,012.8 1,021.1 Effect of share options/warrants on issue 6.2 Diluted average number of ordinary shares issued 1,012.8 1,027.3

Earnings per share (share of nominel 100 DKK) Res.opg. 67.5 71.3 Earnings per share, diluted (share of nominel 100 DKK) Res.opg. 67.5 70.9

25. Events after the balance sheet date 25. Events after the balance sheet date No significant changes affecting the 2005 Annual Accounts have occured after the balance sheet date.

Annual Report 2005 92 The Danfoss Group f inancial in f o r m a t i o n Danfoss Group Companies

December 31, 2005

The companies are owned 100 percent by Danfoss unless otherwise stated after the company address. EUROPA Austria Danfoss Gesellschaft m.b.H, Guntramsdorf DEVI Austria GmbH, Salzburg Belgium Danfoss Socla Benelux S.P.R.L., Brussels N.V. Danfoss S.A., Groot-Bijgaarden Bulgaria Danfoss EOOD, Sofia DEVI EOOD, Sofia Croatia Danfoss d.o.o., Zagreb Czech Republic Danfoss s.r.o., Prague DEVI s.r.o., Breclav Denmark Als Motor A/S, Sønderborg – 49 Damcos Holding A/S, Næstved – 25% (associated company) Danfoss A/S, Nordborg (Parent Company) Danfoss Bionics A/S, Nordborg Danfoss Compressor Holding A/S, Nordborg Danfoss Distribution Services A/S, Rødekro Danfoss Drives A/S, Gråsten Danfoss Ejendomsselskab A/S, Nordborg Danfoss Innovation A/S, Nordborg Danfoss International A/S, Nordborg Danfoss Issab Holding ApS, Nordborg Danfoss Murmann Holding A/S, Nordborg Danfoss Redan A/S, Risskov Danfoss Solutions A/S, Kolding DEVI A/S, Vejle Gemina Ejendomsselskab A/S, Sunds Gemina Termix Production A/S, Sunds Piflex GP Company Aps, Løgumkloster – 50% (Joint Venture) Piflex P/S, Løgumkloster – 50% (Joint Venture) Powerlynx A/S, Sønderborg – 2.4% (associated company) Estonia Danfoss AS, Tallinn DEVI Eesti AS, Tallinn LPM Balti AS, Tallinn Proekspert AS, Tallinn – 55% Finland Danfoss Bauer Oy, Vantaa DEVI OY, Nummela Oy Danfoss Ab, Leppävirta

Annual Report 2005 94 The Danfoss Group France Danfoss Commercial Compressors S.A., Trevoux Danfoss Desbordes, Villeurbanne Danfoss S.a.r.l., Trappes Danfoss Socla S.A.S., Virey Le Grand Deléage S.A. Saint-Malo SCI Deléage Immo, Saint-Malo Germany Danfoss Bauer GmbH, Esslingen Danfoss Compressors GmbH, Flensburg Danfoss GmbH, Offenbach/Main Danfoss Silicon Power GmbH, Schleswig Danfoss Socla GmbH, Rheinbach Danfoss Werk Offenbach GmbH, Offenbach/Main DEVI Deutschland GmbH, Flensburg FWT Wärmetechnik AG, Hamburg Nanotron GmbH, Berlin – 30.2% (associated company) Ossacur A.G., Oberstenfeld Great Britain Conduit Ventures Fund, London – 18.1% (associated company) Danfoss Holding UK Limited, Denham Danfoss Limited, Denham Danfoss Randall Limited, Bedford DEVI Electroheat Ltd., Bury St. Edmunds Senstronics Holding Ltd., London – 50% (Joint Venture) Viking FC Motors Ltd, Huddersfield – 50% (Joint Venture) Greece Danfoss E.P.E., Moschato Hungary Danfoss Kft., Budapest Iceland Danfoss hf., Reykjavik Irland Danfoss Ireland Ltd., Dublin DEVI Heat Ltd., Dublin Italy Danfoss Socla Italia S.r.l., Milan Danfoss S.r.l., Turin Latvia DEVI SIA, Riga SIA Danfoss, Riga Lithuania Danfoss UAB, Vilnius Netherlands AGH warmte-units B.V., Utrecht Danfoss B.V., Schiedam Danfoss Holding B.V., Schiedam Norway Danfoss AS, Skui, Oslo

Annual Report 2005 95 The Danfoss Group Danfoss Esco AS, Kongsberg DEVI Elektrovarme A/S, Oslo Poland Danfoss LPM Sp. z o.o., Chwaszczyno Danfoss Saginomiya Sp. z o.o., Grodzisk Mazowiecki – 50% (Joint Venture) Danfoss Sp. z o.o., Grodzisk Mazowiecki Elektronika S.A., Gdynia – 50% (Joint Venture) Portugal Danfoss (Portugal), Lda., Carnaxide Romania Danfoss s.r.l., Bucharest Russia LTM Teplo, Moscow – 39% (associated company) O.o.o. Danfoss Istra, Istra O.o.o. Gruppa LPM, St. Petersburg ZAO Danfoss, Moscow Serbia & Montenegro Danfoss d.o.o., Belgrade Slovak Republic Danfoss Compressors spol. s.r.o., Zlaté Moravce Danfoss spol. s.r.o., Zlaté Moravce DEVI s.r.o., Kúty Slovenia Biterm d.o.o., Bistrica ob Sotli – 25% (associated company) Danfoss Compressors d.o.o., Crnomelj Danfoss d.o.o., Ljubljana Danfoss Trata d.o.o., Ljubljana Spain Danfoss S.A., Madrid Danfoss Socla Iberica S.A., Madrid Sweden Danfoss AB, Linköbing Danfoss District Heating AB, Gothenburg DEVI AB, Vällingby DEVI Sverige AB, Vällingby Singeln Invest KB, Vällingby Thermia Värme AB, Arvika Switzerland Danfoss AG, Frenkendorf Turkey Danfoss Otomasyon ve Urunleri Tic Ltd., Istanbul Ukraine Danfoss T.o.v., Kiev DE-VI TOV, Kiev NORth AMERIcA Canada Danfoss Inc., Mississauga, Ontario Danfoss Turbocor Compressors Inc., Dorval, Québec – 50% (Joint Venture) Mexico Danfoss Industries S.A. de C.V., Apodaca, Monterrey Danfoss S.A. de C.V., Monterrey USA Danfoss Inc., Baltimore, Maryland Danfoss Commercial Compressors Ltd., Lawrenceville, Georgia Danfoss Flomatic Corporation, Glenn Falls, New York Sauer-Danfoss Inc., Lincolnshire, IL – 38.4% (Companies in the Sauer-Danfoss Group)

Annual Report 2005 96 The Danfoss Group South aMERIcA Argentina Danfoss S.A., Buenos Aires Brazil Danfoss do Brasil Indústria e Comércio Ltda., São Paulo Chile Danfoss Industrias Ltda., Santiago Colombia Danfoss S.A., Santiago de Cali Peru Danfoss S.R.L., Lima Venezuela Danfoss S.A., Valencia AFRIcA Namibia Reco Namibia (Pty) Ltd, Windhoek South Africa Danfoss (Pty) Ltd., Rivonia, Johannesburg Refrigeration Equipment Company (Pty.) Limited, Johannesburg Refrigeration Investment Company (Pty.) Limited, Johannesburg ASIa China Anshan Danish-China Controls Co. Ltd., Anshan – 75% Danfoss (Shanghai) Automatic Controls Co, Ltd., Shanghai Danfoss (Tianjin) Limited, Tianjin Danfoss Industries Limited, Hong Kong Zheijang Holip Electronic Technology Co. Ltd., Zheijang India Danfoss Industries Pvt. Limited, Chennai Japan Danfoss K.K., Gotemba Kazakhstan Danfoss LLP, Almaty Malaysia Danfoss Industries Sdn Bhd, Selangor Philippinerne Danfoss Inc., Manila Singapore Danfoss Industries Pte. Ltd., Singapore South Korea Danfoss Ltd., Seoul Taiwan Danfoss Co. Ltd., Tapei Thailand Danfoss (Thailand) Co. Ltd., Bangkok – 49% United Arab Emirats Danfoss FZCO, Dubai – 60% AUSTRALIa Australien Danfoss (Australia) Pty. Ltd., Melbourne New Zealand Danfoss (New Zealand) Ltd., Auckland

Annual Report 2005 97 The Danfoss Group f inancial in f o r m a t i o n Organisation

Executive Committee

Hans Kirk Niels B. Christiansen Jørgen M. Clausen Ole Steen Andersen Executive Vice President & CDO Executive Vice President & COO President & CEO Executive Vice President & CFO

Corporate Danfoss Functions Ventures

Danfoss Refrigeration & Danfoss Heating Division Danfoss Motion Controls Air Conditioning Division Division Vagn Helberg Nis Storgaard Sven Ruder President President President Danfoss Automatic Controls Danfoss Comfort Controls Danfoss Drives U U U Danfoss Compressors Danfoss District Heating Danfoss Gearmotors U U Owner share Danfoss Electronic Danfoss Burner Components 38.4% Controls & Sensors U Danfoss Floor Heating U Danfoss Heat Pumps

Danfoss Water Controls

Danfoss Services

Annual Report 2005 98 The Danfoss Group f inancial in f o r m a t i o n Financial highlights (DKK)

FINANCIAL HIGHLIGHTS mill DKK

2001 2002 2003 2004 2005

PROFIT AND LOSS ACCOUNT Net sales 14,384 14,923 15,434 16,345 16,416 Operating profit added depreciations, amortisations and impairments (EBITDA) 1,439 1,571 1,994 1,746 1,695 Operating profit 605 721 1,109 1,072 943 Income from associates and joint ventures 51 77 52 94 78 Financial items -193 -78 -138 -235 -22 Profit before tax 463 720 1,023 931 999 Net profit 322 516 757 699 733

BALANCE SHEET Total assets 11,945 12,272 13,081 13,158 14,598 Net investments (excl. goodwill) 1,151 720 879 1,125 1,164 Net investments in goodwill 30 43 735 82 464 Equity 6,653 6,859 7,295 7,787 8,693 Interest-bearing debt 2,070 2,022 1,766 1,125 1,561 Net interest-bearing debt 1,122 329 377 167 825

CASH FLOW STATEMENT Cash flow from operating activities 969 1,500 1,284 1,232 1,192 Cash flow from investing activities -1,004 -597 -1,172 -951 -1,626 Free cash flow -35 903 112 281 -434 Cash flow from financing activities -165 -158 -416 -712 177 Cash and cash equivalents at 31 December 948 1,693 1,389 958 736

Number of employees (headcount) 16,544 16,972 17,449 17,543 18,168

KEY FIGURES RONA 8.9% 10.7% 16.7% 15.5% 12.1% EBIT margin 4.2% 4.8% 7.2% 6.6% 5.7% EBITDA margin 10.0% 10.5% 12.9% 10.7% 10.3% Net investment ratio 8.0% 4.8% 10.5% 7.4% 9.9% Return on sales 3.3% 5.0% 6.7% 5.7% 6.1% Return on equity 5.1% 7.6% 10.5% 9.3% 8.9% Equity ratio 55.6% 55.8% 55.5% 59.1% 59.4% Leverage ratio 16.9% 4.8% 5.2% 2.1% 9.5%

In the case where the Danish Association of Financial Analyst defines the above ratios, the ratios are computed according to these definitions.

DEFINITIONS EBITDA margin Return on sales Operating Profit added Depreciations, Profit before Tax as percentage of Net Sales. RONA (Return On Net Assets) Amortisations and Impairments as percentage Operating Profit as percentage of average Net of Net Sales. Return on Equity Assets. Net Profit as percentage of average Net Assets is Total Assets deducted Net investment ratio Shareholders’ Equity. Investments in joint ventures and associates, Net Investments as percentage of Net Sales. Cash and cash equivalents, Provisions and Non- Net Investments is total acquisitions and dis- Equity ratio interest bearing debt. posals of tangible and intangible assets (includ- Shareholders’ Equity as percentage of Total ing acquisitions and disposals related to busi- Liabilities and Shareholders’ Equity end of year. EBIT margin ness combinations), except goodwill. Operating Profit as percentage of Net Sales. Leverage ratio Net interest-bearing debt as percentage of Shareholders’ Equity end of year.

Annual Report 2005 99 The Danfoss Group f inancial in f o r m a t i o n Financial highlights (EUR)

FINANCIAL HIGHLIGHTS mill EUR

2001 2002 2003 2004 2005

PROFIT AND LOSS ACCOUNT Net sales 1,930 2,008 2,077 2,197 2,203 Operating profit added depreciations, amortisations and impairments (EBITDA) 193 211 268 235 227 Operating profit 81 97 149 144 127 Income from associates and joint ventures 7 10 7 13 10 Financial items -26 -10 -19 -32 -3 Profit before tax 62 97 137 125 134 Net profit 43 69 102 94 99

BALANCE SHEET Total assets 1,606 1,653 1,757 1,769 1,957 Net investments (excl. goodwill) 155 97 118 151 156 Net investments in goodwill 4 6 99 11 62 Equity 894 924 980 1,047 1,165 Interest-bearing debt 278 272 237 151 209 Net interest-bearing debt 151 44 51 22 111

CASH FLOW STATEMENT Cash flow from operating activities 130 202 173 166 160 Cash flow from investing activities -135 -80 -158 -128 -218 Free cash flow -5 122 15 38 -58 Cash flow from financing activities -22 -21 -57 -96 24 Cash and cash equivalents at 31 December 127 228 187 129 99

Number of employees (headcount) 16,544 16,972 17,449 17,543 18,168

CONVERSION FACTOR BETWEEN DKK AND EUR Profit and loss account and cash flow statement (average exchange rate 100 EUR) 745.24 743.05 743.07 743.98 745.19 Balance sheet (exchange rate at 31 December, 100 EUR) 743.57 742.43 744.46 743.81 746.05

In the case where the Danish Association of Financial Analyst defines the above ratios, the ratios are computed according to these definitions.

Annual Report 2005 100 The Danfoss Group C o r p o r a t e C i t i z e n sh i p Introduction

Danfoss is aware of the role played by the company in society, and knows that the Group’s reputation is founded on daily actions and behaviour. Globalisa- tion brings with it increasing demands on companies to act responsibly when ethical challenges arise. This especially applies to companies like Danfoss that operate globally, and therefore encounter many diverse ethical questions. As a family-owned company with strong values, the Group always has environmental issues and social responsibility in mind, and we are convinced that a responsible approach to people and the environment creates added value for all stakeholders. The triple bottom line, where finance, the environment and social responsibility form the three pillars of the company’s total results, is a principle that has been adopted by many companies and investors. Since 2003, Danfoss has produced a Corporate Citizenship report as part of the Group annual report, and it describes how the Group has shown responsibility as a member of society – with regard to its employees, the environment and social responsibility in a broader perspective. In several regions of the world, Danfoss is a visible con- stituent in local society and is correspondingly important to the people who live and work in its neighbourhood. Danfoss wishes therefore to make a difference to local communities by acting in harmony with the company’s five Core Values, one of which cover being an environmentally and socially responsible company. As a major Danish company, Danfoss is also responsible for contributing to the development of the concept of company ethics. Consequently, Danfoss has taken an active role in NVIR, a network for business ethics and non- financial reporting, in the discussion of how good company ethics influence the bottom line. Additionally, Danfoss has tested part of the Human Rights Compliance Assessment, during 2005, which was developed by the Danish Institute for Human Rights. Danfoss’ overall goal within environmental and social responsibility is to “keep our own house in order”. This applies with regard to employees, so that they have an attractive workplace. It applies to the environment, where Danfoss products contribute to energy savings, and the environmental impact of their manufacture is constantly being reduced. And it applies to social responsibility in a wider sense (CSR). The result is a positive effect on the bottom line where employee satisfaction is high, consumption of resources is as low as possible, and the company’s ethics and reputation are good.

The Corporate Citizenship report is divided into three sections: People and Values, Social Responsibility (CSR) and Environment.

Annual Report 2005 101 The Danfoss Group C o r p o r a t e C i t i z e n sh i p People and Values

Number of employees world-wide Danfoss has a strong foundation in the company’s core values, which to a large extent come from the employees themselves, and in the mutual trust 20,000 that has been built up through many years between company and employees, customers, suppliers and partners. 15,000 Danfoss knows that satisfied and committed employees who do their utmost to reach the targets that have been laid out are an important factor for 10,000 continued growth and earnings. In order to succeed in the competition to be leaders within the Group’s businesses, Danfoss must to an even greater degree 5,000 have the will to win both on the individual and collective level. The efforts of Human Resources in Danfoss are directed at developing employees, management and the organisation in order to achieve constant 01 02 03 04 05 improvements. This enables managers to create results through their employ- Employees by region Ageees, thusdistribution creating by value region for the business.Age distribution, globally Number of employees % HR activities focus on a variety of common strategic goals that define the 10,000 overall60 focus areas. Each goal is defined by indicators which mark out the sta- tus50 in each of the chosen focus areas and enablesWhite- even better measurementBlue- 8,000 collar collar of the effect of HR initiatives 40 employees employees 6,000 Good30 leadership at Danfoss 4,000 In20 2004, a global employee perception survey showed that the Group had many good managers, but that some managers needed to improve their abil- 2,000 10 Managers ity to communicate and participate actively in theTemporary developmentTrainees of employees. The ability to motivate staff and to set and maintainemployees targets must be strengthened, and six fundamental leadership competences have been specifically EMA EMA China China (incl. MX) (incl. MX) (incl. (excl. DK)(excl. DK)(excl. (excl. CN) (excl. CN) (excl. definedGlobally as the characteristics of good“ leadership at Danfoss”. These leadership Denmark Denmark Asia-Paci c skills are supported by a new incentiveAsia-Paci c structure, in which part of the man- Latin America Latin America North America agers’ bonus and subsequentNorth America career progress depend on an assessment of 2003 2004 2005 16-25 years 26-35 years 36-45 years their qualities as leaders. At the same time participation in development pro- 46-55 years 56-65 years > 66 years grammes such as training or coaching is considered a mandatory element in a Employees by region Age distribution by region Age distribution, globally career as manager at Danfoss. Number of employees % 10,000 60 Besides a continual evaluation of the managers’ general conduct and results, development and evaluation tools are used to assess individual man- 50 White- Blue- 8,000 agerscollar with regard to the collarleadership competences. The assessment is made 40 employeesby their direct reports, colleaguesemployees in management and immediate superiors. 6,000 30 These measures and the individual plans of action that were made out for 4,000 each manager after the latest perception survey are to ensure that the general 20 standard of management in Danfoss is enhanced, so that it is reflected in busi- 2,000 10 ness Managersresults and in the employees’ assessment of the leadership in the Group. Temporary Trainees In 2006employees Danfoss will intensify its efforts to train the Group’s managers. The internal range of management training programmes is being revised, and will EMA EMA

China China be structured to provide both basic competence development and more spe- (incl. MX) (incl. MX) (incl. (excl. DK)(excl. DK)(excl. (excl. CN) (excl. CN) (excl. Globally Denmark Denmark cific business oriented training for individual managers. Attention will be cen- Asia-Paci c Asia-Paci c Latin America Latin America

North America North America tred on ensuring learning, so that a real change in behaviour takes place, and 2003 2004 2005 16-25 years 26-35 years 36-45 years this will later be followed up with measurements of the changes in managers’ 46-55 years 56-65 years > 66 years knowledge, attitudes and conduct.

Annual Report 2005 102 The Danfoss Group

Employees by region Age distribution by region Age distribution, globally Case: Management in Danfoss China Number of employees % The increasing globalisation of Danfoss activities also influences the way in 10,000 60 which the Group practises management. The Danfoss Core Values and the White- Blue- leadership competences form the foundation, but a crucial factor in the suc- 8,000 50 collar collar cess of the business is that the management of the regional Danfoss compa- 40 employees employees 6,000 nies are adapted to local conditions, allowing for different cultures. 30 A specific example is Danfoss in China, which should run as a Danfoss 4,000 20 company in China (and not as a Danish or a Chinese company). Put simply, it is a question of creating a Chinese Danfoss culture based on the best of both 2,000 10 Managers Temporary Trainees cultures. In this regard, it is important to understand that the typical Chinese employees working culture, which is based on a very different cultural heritage than in westernCompleted Europe is Employee at present undergoing considerable changes. Less willing- EMA EMA

China China Educational basis Development Dialogues (EDDs) (incl. MX) (incl. MX) (incl. (excl. DK)(excl. DK)(excl. (excl. CN) (excl. CN) (excl. Globally ness to take risks and greater power distance are strong elements in a conven-

Denmark Denmark Distributed by regions Asia-Paci c Asia-Paci c % tional image% of Chinese working culture, which does not immediately support Latin America Latin America North America North America 50 the ideal100 of individual employees taking initiative or acting independently in 2003 2004 2005 16-25 years 26-35 years 36-45 years the course of their work. Danfoss has seen, however, that the Chinese have a 46-55 years 56-65 years > 66 years 40 great deal80 of self respect and an increasing desire to make progress and create results that acts as a powerful driving force behind activities in China. Precisely 30 60 this wish to take the initiative is indispensable for Danfoss in China with high 20 annual40 growth rates, and where it is important that every employee makes a strong contribution. 10 To 20support the development and the cultural changes in Danfoss in China, specific efforts are being made to reduce the number of employees stationed in China from abroad, and to train the Chinese managers to take charge of EMA EMA daily operations. In addition, responsibilityChina is being delegated to managers and Globally Bachelor (incl. MX) (incl. (excl. DK)(excl. Denmark (excl. CN) (excl. education

employees in key positions and othersAsia-Paci c in order to build up a mature culture (6 to 9 years) (6 to (10-14 years) or equivalent Latin America

around responsibility andNorth America initiative. By means of a simple, but target-oriented (less than 6 years) Master and Ph.D Higher secondary Primary education technique, by which a manager always asks for the employee’s advice, and in Secondary education Managers some cases actually demands advice from the employees, a strong feeling of White-collar employees responsibility has been created among the employees. It is now the general Blue-collar employees rule that employees no longer simply draw attention to a problem when it arises, but also suggest a solution on their own initiative. An essential factor is Completed Employee that many employees have been employed by the company for many years. A Educational basis Development Dialogues (EDDs) large proportion of the present managers have been employed at Danfoss in Distributed by regions % % China since it was first established, and they were able to celebrate their ten- 50 100 year anniversaries in 2005. In the effort to make China a second home market for Danfoss it is vital to 40 80 build a bridge between the Danish and Chinese cultures and create mutual understanding. Danfoss will continue to expand its activities in China in the 30 60 coming years, and the experiences and considerations described here will 20 40 help to ensure that Danfoss in China can maintain its employees’ satisfaction and pride in their work while increasing the financial results of their activities. 10 20 Training and enhancement of competencies Professional and personal development is another of the most important areas EMA EMA China for development, pointed out by the employee perception survey mentioned Globally Bachelor (incl. MX) (incl. (excl. DK)(excl. Denmark (excl. CN) (excl. education

Asia-Paci c earlier. Employees’ development at Danfoss is increasingly aimed at build- (6 to 9 years) (6 to (10-14 years) or equivalent Latin America

North America ing up and securing the necessary skills for individual employees or in teams, (less than 6 years) Master and Ph.D Higher secondary Primary education so that they will subsequently be able to perform their tasks in the immedi-

Secondary education Accomplished EDDs ate future as well as here and now. Competence building may still take place Managers Distributed by categories of employees through participation in conventional courses, but it is gradually becoming White-collar employees White-collar Blue-collar Managers Blue-collar employees employees employees just as frequently acquired through daily work or internal programmes such as 45,2% 73,0% 70,7%

Annual Report 2005 104 The Danfoss Group the Danfoss Business System, which is designed to improve and optimise daily processes at Danfoss.

Case: Danfoss Business System

Occupational satisfaction in connection with improvement programmes Danfoss has achieved considerable production improvements through Danfoss Productivity Program. Until now more than 900 employees have been involved, and on average productivity has increased by 21%. Improvement programs have also been initiated in sales and purchasing. All these programs are part of the Danfoss Business System – a global initiative designed to help to increase growth and profitability in Danfoss, to improve its success on a competitive global market. Achieving these goals calls for hard work, and employees often need to learn new ways of working, while constantly concentrating on doing their work better than before. It can be both frustrating and stressful. Several initiatives have been introduced to help employees through the changes. As of June 2005 employees in Denmark have taken courses in stress prevention before starting on Danfoss Productivity Program projects. The supervisors in production, whose job can be particularly stressful, have been given new job descriptions that clearly specify what they are to spend time on and what tasks they can pass on to others. The project managers who are responsible for implementing the improvement projects undergo training, so that they are better able to identify with the employees’ situation, listen to them and involve them in the process. In order to constantly monitor how the employees feel about their work, perception studies have become a regular element in all projects. These perception studies enable managers to identify danger signals and react to them before the situation becomes serious. The new working methods are defined and improvements created by the area managers and employees – with the support of the Danfoss Business System organisation.

Case: Skills development for production supervisors The Danfoss Business System, which was introduced in 2005, has especially involved employees in production and to some extent those in group sales functions. As a result of implementing the Danfoss Productivity Program and the general development of production management, new areas of responsibility and new tasks appeared for the Danfoss production supervisors. They have a crucial role to play in ensuring that Danfoss achieves the improvements in production and the changes in the working culture with regard to performance and continuous improvements, which are the actual target. The role of the production supervisors is essential in achieving the goals, both during and after the implementation of Danfoss Productivity Program. At the same time the production supervisors are responsible for initiating and completing improvement projects. Experience from Danfoss Productivity Program shows that great pressure can build up around production supervisors and employees, and there have been cases of stress-related sickness and candidates rejecting the offer of positions as production supervisors. As a consequence, a working group drew up a new job description and skills profile for Danfoss production supervisors. In the future, active leadership, development and care for employees are to take up more of the production supervisors’ normal working day. At least 50% of their time at work must therefore be spent among the employees in the

Annual Report 2005 105 The Danfoss Group production. On the basis of the new competence profile, a special course of supplementary training has been designed for production supervisors, concentrating on improving the skills needed if the production supervisors are to meet the demands of their leadership role. This production supervisor course are carried out for the first time at the beginning of 2006, and according to plan it will become an integrated part of the Danfoss Productivity Program activities at Danfoss.

The transition from conventional course activities to a more direct and individual work-related form of training and competence development is increasingly supplemented by e-learning, and a common Group e-learning function was established in 2005. Danfoss wants to take advantage of the possibilities opened up by e-learning, for instance to extend the knowledge of administrative tools that are to be used globally within the Group. E-learning is regarded as a cost-effective supplement to the more conventional ways of building up skills and competences, which can be carried out locally or through training programmes. Another purpose behind the continuing focus on enhancement of competencies for Danfoss employees is to improve their chances of getting a new job either within the Group or externally, if the employment situation at Danfoss changes. This development of skills provides a solid foundation for employees if they lose their jobs due to cutbacks. Danfoss has particularly good experience of how a coordinated, purposeful effort produced positive results when it was necessary to find other work for the employees affected. Again in 2005 there have been examples of business units at Danfoss that have decided to relocate production from Denmark or Germany, because the considerably lower costs of production in other parts of the world have been critical for maintaining or expanding the Group’s position on the market.

Case: Redundancies at Danfoss in Flensborg, Germany Globally, the competitive situation within household compressors is domi- nated by the fact that production is chiefly carried out in countries where the level of costs is low (such as Brazil, Korea, Eastern Europe, Malaysia, and to some extent China). Due to unprofitable production of smaller-sized household compressors in Flensburg, Germany, the employees were informed in 2004 that plans would be made to relocate that type of production. As a result of the specific plans for relocation, production of small household compressors is being relocated to Slovakia in the course of 2005-2007. Subsequently, the plans for relocation were discussed with employee representatives, who have accepted that the move was an economic necessity. The cuts in personnel at the Flensburg factory will result in a reduction of the staff by nearly 700 employees over about two and a half years, and the selection of those to be dismissed is based on social criteria. Redundancy payments have been negotiated between the employee representatives and the management. At the same time a new job-training company (Transfergesellschaft Küste) has been established, which also operates as a job exchange. This company is based on financial support from Danfoss, and develops the employment skills of the employees affected by the dismissal round, and also negotiates new employment contracts. In parallel, the employee representatives and the factory management have also started further activities that aim to create new forms of employment for workers both north and south of the border between Denmark and Germany.

Annual Report 2005 106 The Danfoss Group The purpose of the relocation is to restore cost-effectiveness in production, and at the same time to secure the remaining production of smaller commercial compressors and future work at the Flensburg factory, which will also continue to be the competence centre for the entire compressor production. The restructuring process during 2005 has been characterised by the employees’ acceptance of the need to relocate production.

Case: Partnership for women as entrepreneurs in China Danfoss is committed to developing society and creating workplaces. In China Danfoss, UNDP and the Beijing Women’s Federation have entered into a partnership to train unemployed women as entrepreneurs. The project exploits a combination of Danfoss’ expertise on starting enterprises, UNDP’s expert knowledge of conditions in China, and the Beijing Women’s Federations network to identify suitable candidates, together with the unemployed women’s need to find themselves jobs. The project centres on “self-help”, and the first 66 women completed their training in 2005. In the future the unemployed women who are trained as entrepreneurs will be expected to train new entrepreneurs. This project is being assessed together with other UNDP partner ships as part of a PhD study at the University of Aarhus in Denmark. The project was started because unemployed women are marginalised in China, where there is an unwritten “40-50” rule: jobs are difficult to find for men aged over 50 and for women aged over 40.

Case: Women as managers in China During recent years Danfoss has seen an increase in the number of female managers. In 2004 15% of the managers in the Group were women, while the number of women managers in China was twice as high. A total of 26% of Chinese managers are women. The apparent reason is that gender equality is more widespread in China than in other societies, and that the one-child policy combined with grandparents looking after the children makes it easier for women to have a career.

Talent management at Danfoss One of the most vital areas for HR work at Danfoss is the ability to attract and retain employees with talents at all levels, in various types of work. Danfoss endeavours to strengthen the company’s position as one of the preferred workplaces on a labour market strongly affected by competition. In recent years recruitment activities at Danfoss have taken on an increasingly international dimension with sharpened focus on readiness for change and cultural understanding. This tendency is expected to continue and become stronger in the next few years, and consequently Danfoss extended its resources in recruitment to key positions in 2005. The globalisation of the recruitment function will continue in 2006. In connection with this strengthening of the recruitment function Danfoss has drawn up a strategy for strengthening talent development at middle management level. The new initiatives will be based on experience gathered from the group’s highly successful Postgraduate Rotational Program(see the case below). In addition, a general fostering of talents – processes concerned with identifying, managing and developing talents – will become more systematic at all levels within Danfoss and will be a result of coordinated action and follow-up right across the business areas and companies in the Group.

Annual Report 2005 107 The Danfoss Group International experience Case: Postgraduate Rotational Program Employees who have been stationed More than 30 years ago Danfoss developed a two-year development and rota- outside their countries for 2 years or longer Distributed by region tion program for newly trained engineers and economists. Today this program % – the Postgraduate Rotational Program (PRP) – has spread globally and covers 3.0 all types of Master’s degrees relevant to Danfoss. Many talented people have 2.5 been developed through the program, and today many of them hold key positions at Danfoss. 2.0 In 2005 34 employees went through the program, representing ten differ- 1.5 ent nations: Denmark, China, India, Japan, Indonesia, Malaysia, USA, Poland, 1.0 Germany and France. The participants work both in their own home countries and in Danfoss locations throughout the world. They carry out or contribute to 0.5 value-creating projects, typically taking on four to six tasks of up to six months’ duration in the course of the two-year program. Outside Denmark, focus is sharpest on the Asian growth markets, and the EMA EMA China

Globally target group consists of the best graduates at Master’s degree level from the (incl. MX) (incl. (excl. DK)(excl. Denmark (excl. CN) (excl. Asia-Paci c appropriate universities. In China, Danfoss collaborates with nine universities, Latin America North America and this collaboration will be extended to include fifteen with the best reputa- Length of service tionsAbsence in core areas. As a result, Danfoss hasEmployee received moreturnover than 1,000 written enquiries, and from these six candidates willExcl. be sale chosen of companies to take part in the pro- % gram% in 2006. Danfoss needs far more new% employees in China, and many of 100 5 60 the enquiries about the Postgraduate Rotational Program lead to other forms 80 of 4permanent employment in the company50 in China. It is Danfoss’ ambition to continue to develop40 the program with a view to 60 becoming3 a qualified player in the contest to attract the best talents. 30 40 2 Cross-cultural understanding 20

20 Since1 an increasing number of Danfoss activities10 are carried on outside Denmark or across international borders, there is an increasing need to develop cross-cultural skills and understanding among the company’s

EMA EMA employees. The EMA rotation program described above supports EMA this develop- China China China (incl. MX) (incl. MX) (incl. MX) (incl. (excl. DK)(excl. DK)(excl. DK)(excl. Globally Globally Globally (ekskl. CN) (ekskl. CN) (ekskl. CN) Denmark Denmark ment, and additionally the understanding of culturalDenmark differences is increased Asien-Paci c Asien-Paci c Asien-Paci c

Latin America when employees are exchangedLatin America or stationed to different companiesLatin America in the North America North America North America 0-4 years 5-14 years 15-24 years Danfoss Group. Experience shows that personalManagers experience is necessaryBlue-collar in order to understand other cultures, and real international experienceemployees is only 25-34 years > 35 years White-collar Total (excl.) gained through carrying out long-term assignmentsemployees abroad – preferably last- ing more than six months, and optimally involving actual stationing abroad, with a duration of at least two years. At the end of 2005 a total of 72 Danfoss employees were stationed outside Length of service Absence Employee turnover theirExcl. salerespective of companies countries for at least a year. Since Danfoss started stationing % % employees% abroad in 1991, 915 employees have been stationed abroad for at 100 5 least60 a year of which 229 have spent more than two years abroad.

80 4 50 Employee40 satisfaction 60 3 The global survey of employee satisfaction in 2004 showed a largely satis- factory30 picture of overall satisfaction and motivation among employees. At 40 2 the20 beginning of 2005 individual managers drew up and presented plans of action, defining the measures they would take to improve weak points or 20 1 10 maintain the best in each department. The employees in the various depart- ments have been involved in taking general action, while other measures have been more concerned with personal development for the managers. In both EMA EMA EMA EMA China China China (incl. MX) (incl. MX) (incl. MX) (incl. (excl. DK)(excl. DK)(excl. DK)(excl. Globally Globally Globally (ekskl. CN) (ekskl. CN) (ekskl. CN) Denmark Denmark cases resourcesDenmark have been made available to implement the measures taken.

Asien-Paci c Asien-Paci c At the same time each manager’sAsien-Paci c immediate superior has been responsible for Latin America Latin America Latin America North America North America North America 0-4 years 5-14 years 15-24 years followingManagers up on the progressBlue-collar of the action plans. employees 25-34 years > 35 years White-collar Total (excl.) employees Annual Report 2005 108 The Danfoss Group Length of service Absence Employee turnover Case: Improving employee satisfaction at Danfoss in Turkey Excl. sale of companies The Danfoss sales company in Turkey was one of the units in the organisation % % % 100 5 60 that did not show good results in the employee satisfaction survey in 2004. The assessment of the management and the employees’ general satisfaction 50 80 4 was not acceptable, and a process was started to bring about many different 40 changes that would lead to considerable improvements. 60 3 30 Efforts were concentrated on four problem areas, where employees have 40 2 been involved in drawing up suggestions for improvements: confidence, com- 20 munication, teamwork and time spent together socially. Additionally, training 20 1 10 was provided for the company’s management team. The specific results of the changes made and the action taken at Danfoss Turkey were measured in the middle of 2005. This analysis showed improve- EMA EMA EMA EMA China China China ments in all areas compared with the results from 2004. The employees feel (incl. MX) (incl. MX) (incl. MX) (incl. (excl. DK)(excl. DK)(excl. DK)(excl. Globally Globally Globally (ekskl. CN) (ekskl. CN) (ekskl. CN) Denmark Denmark Denmark twice as motivated as before, and the assessment of the company manage- Asien-Paci c Asien-Paci c Asien-Paci c Latin America Latin America Latin America

North America North America North America ment also shows considerable improvements. 0-4 years 5-14 years 15-24 years Managers Blue-collar employees 25-34 years > 35 years White-collar Total (excl.) Workplace of the Year in Denmark employees At the end of 2005 Danfoss was voted “Workplace of the Year 2005” in Total employee turnover including Denmark by 3F, (United Federation of Danish Workers) and the magazine company divestments was 17%. Without Fagbladet. This is a title awarded on the basis of votes from the Union’s own divestments employee turnover was 16% members. The award committee singled out the Danfoss company culture and the ability to propagate that culture when new companies are established Reasons for leaving roundReasons the world. for leavingIt also mentioned employee influence and the individual’s Distributed by regions experienceDistributed of by being categories able of toemployees make a difference as factors that contributed to % the nomination% of Danfoss as one of the best workplaces in Denmark. 100 60

The human50 factor and company acquisitions 80 In the next few years, part of Danfoss’ growth will come from acquisitions of 40 60 new companies. The Group has gradually accumulated valuable knowledge and experience30 of the financial and business-oriented processes in assess- 40 ing potential companies for acquisition and the subsequent integration. Up 20 to now, however, Danfoss has not focused sharply on exploiting the experi- 20 ence 10of personnel and management factors in connection with the process of acquisition and integration. In 2005, a number of initiatives were implemented centrally to ensure that in the future HR will play an important role in connec- EMA EMA China tion with company acquisitions by Danfoss. (incl. MX) (incl. (excl. DK)(excl. Globally (ekskl. CN) Denmark Managers Blue-collar employees employees

From a human resourceWhite-collar point of view, the acquisition of another company Asien-Paci c Latin America North America Reasons for leaving ReasonsRetirement for and leaving illness can be seenRetirement as a and kind illness of recruitment of new employees where, in addition Distributed by regions DistributedEmployee by actioncategories of employees to gainingEmployee access action to new customers, products and technology, Danfoss also % % Danfoss action acquiresDanfoss new skills,action professional knowledge and experience. The human fac- 100 60 tor, as in the new employees’ and managers’ motivation, is in most cases vitally 50 important to the success of the company takeover. To bring about integra- 80 tion, links must be forged and a “we” attitude built up with the new company. 40 60 Specialists from the HR function must support the management in the proc- 30 esses of adaptation and integration that are necessary in order to achieve the 40 20 expected gains from the acquisition. 20 From the beginning of 2006 Danfoss will be even better equipped to carry 10 out effective integration processes. A checklist has been made out covering the aspects of human resources and management to be investigated when a company is being evaluated for acquisition (“HR due diligence”), and which of EMA EMA China (incl. MX) (incl.

(excl. DK)(excl. these aspects should be given particular attention in the integration process. Globally (ekskl. CN) Denmark Managers Blue-collar employees employees White-collar Asien-Paci c Latin America North America Retirement and illness Retirement and illness Employee action Employee action Danfoss action Danfoss action Annual Report 2005 109 The Danfoss Group Optimising HR processes In order to create continuous improvements in the area of human resources, the entire Group section of the Danfoss HR organisation has been fundamentally restructured during 2005. The central and regional functions have been merged in a single global HR organisation, and initiatives have been implemented that will extend and strengthen the global network of HR staff. The decentralised responsibility for day-to-day personnel work in the company units and local Danfoss companies will be maintained. Nevertheless, greater efforts are being made to create aligned, Group-oriented coordination in HR work at Danfoss globally, with the primary aim of contributing to Danfoss’ ability to achieve satisfactory business results. In relation to this, a web portal has been created with global coverage, to make it easier for Danfoss managers to gain an overview and carry out HR activities more effectively. This web portal will make it possible for individual company units and managers to ensure more alignment in their focus and actions in all units across national borders. The new HR platform provides access to relevant employee data among other things and to the tools to be used by managers in connection with interviews and employee development. Access to the portal and administration of the data comply with local legislation. At the end of 2005, 77% of the managers have access to the portal, and this number will increase during 2006, while new tools are added.

Annual Report 2005 110 The Danfoss Group Danfoss Employee Foundation, Foundations allocation of grants Con rmation 4% Danfoss Employee Foundation Change of Abuse 1% address The Danfoss Employee Foundation is a social foundation that offers advisory Continuation 12% school 1% Psychologist and financial support to employees in Danfoss A/S and associates, including Funeral 27% Sauer-Danfoss ApS. aid 4% Other 4% In 2005, the Foundation attended to about 300 cases. The cases included Health problems in connection with divorce, illness and death as well as psychologi- treatment Divorce, 4% dissolved cal and financial problems. The Foundation made donations totalling about partnerships DKK 3.6m in 2005, which is an increase of 24% compared to 2004. 14% Financial The legal consultancy services of the Employee Foundation dealt with problems Illness, 26% dentist, etc. 3% about 400 inquiries, primarily in relation to inheritances and wills, divorce/ estate divisions, debt relief and insurance issues. The Foundation carried out a campaign promoting estate planning in 2004 to encourage as many employees as possible to make a will. Since the campaign was very successful, it has been made permanent. Donations from the Fabrikant Mads Clausens Foundation The Fabrikant Mads Clausen Foundation The Fabrikant Mads Clausen Foundation was established in 1960 with the aim Outside Denmark Research & of making donations for charitable purposes. The Foundation has granted training 28% 18% considerable funds for many purposes, historically primarily in the local area around the Nordborg plant. As Danfoss expanded and became global, the support has now expanded to include areas around Danfoss locations Art & culture in Denmark and abroad. The Foundation generally supports training and 13% research, the promotion of Danish cultural enterprise in Denmark and abroad,

Spare time & charitable associations or institutions and other charitable purposes judged sports 10% Hospitals, institutions, suitable by the Board. health 31% In 2005, the Fabrikant Mads Clausen Foundation donated 7.3m DKK. The Foundation has once again supported a wide range of associations and institutions in Danfoss’ vicinity in Denmark, including sports clubs, scouts groups, pensioners’ associations and disabled persons’ institutions. To support art and culture, donations have been made for local museums, choirs and orchestras. Within research and training, the Foundation has supported different projects to fight diseases, for instance the research in cancer and resistant bacteria. Several hospitals have received support allowing them to purchase diagnostic and treatment equipment. Among them is Sønderborg hospital which has purchased laser equipment for the treatment of enlarged prostate as well as equipment for the monitoring of ill, newborn and prema- ture babies. In 2005, the Foundation donated approx. 1.3m DKK outside Denmark. During the past year, the world has witnessed a number of major natural disasters, which have had a bearing on the Foundation’s donations. The foundation donated, for example, 1m DKK to the victims of the tsunami in South- east Asia, This initiative began with collections among the Group’s employees globally, who raised 0.5m DKK. The Foundation doubled the amount. Additionally, funds have been donated for relief aid and the reconstruction work following the hurricane Katrina in the southern part of the USA and the earthquake in Pakistan.

Annual Report 2005 111 The Danfoss Group C o r p o r a t e C i t i z e n sh i p Social Responsibility (CSR)

Social responsibility applies to companies, both internally and externally. Inter- nal social responsibility concerns the way the company treats the employees, their opportunities and challenges and how they are supported (refer to People and Values). Externally, it is a matter of company ethics and social responsibility in a wider sense of the word. Danfoss has joined UN’s Global Compact Initiative which comprises ten principles for good company ethics. Global Compact covers human rights, labour rights, environment and corruption. In the interest of the reader, the three environmental principles are dealt with in the latter part of the report, whereas the other principles relating to CSR are described in this section. In the following ten items, the Global Compact principles are reviewed, explaining how Danfoss approaches them and which initiatives the Group has taken in this field in 2005. In order to ensure that the organisation lives up to the expectations for a company like Danfoss, an internal survey of the Group’s social responsibility has been conducted for three consecutive years (CSR questionnaire). The survey focuses on the handling of, for instance, discrimination, children’s work, labour rights, business ethics, corruption and bribery, working environment, relationship with the local community, and the implementation of policies. Some of the questions in Danfoss’ CSR surveys concern internal procedures and good business ethics, while others relate to UN’s Global Compact.

Principle 1. We will support and respect the internationally declared human rights within our spheres of influence A prerequisite of supporting and respecting human rights is that the organisation is familiar with the human rights and local conditions in the countries where the Group has its activities. Consequently, Danfoss has initiated country analyses of all the countries in which the Group has factories. The country analyses are used in connection with the acquisition of companies outside Denmark and when visiting factories, in which cases social responsibility is a parameter. The analyses are also available to all purchasers. Danfoss outlined a Code of Conduct in 2004 for suppliers. It was updated in 2005 which means that the tenth principle in Global Compact on fighting corruption and bribery is now included. More than 100 purchasers worldwide have received training in the tenth principle and in the use of a new database containing information of suppliers’ CSR and environmental conditions. The database was designed on request of the purchasers who were trained in Global Compact in 2004. Danfoss’ Code of Conduct has been incorporated into the Group’s standard contract and is part of the purchasing terms.

Annual Report 2005 112 The Danfoss Group

Principle 2. We will ensure we are not complicit in human rights abuses The principle deals with the respect towards human rights at Danfoss’ companies. A basic prerequisite of not violating the human rights is that these are known by management. Danfoss’ internal CSR questionnaire examines different aspects of human rights and labour rights, and if areas are found not to be satisfactory, this monitoring is used to improve conditions. In some of the 21 countries where Danfoss has production, violations of human rights are not unusual. Therefore, social responsibility has been an inte- gral part of the Basic Management Programme since 2005. The programme involves management training for young managers. The purpose of the programme is to enable the managers to deal with the challenges they come across in different countries and sharpen their awareness on social responsibility. Visits to the factories take place regularly in order to “keep our own house in order”. The visits typically relate to environmental and social responsibility issues. The communication with the factories is based on the analysis of the country in question. Conditions are adjusted to meet the conventions of ILO, International Labour Organisation, if areas are found not to fully comply. Infor- mation is also gathered on how local sites act in different circumstances to use as best practice for the benefit of the rest of the Group.

Cases: China

Expansion of factory in China Danfoss opened a new factory in China in 2005 and plans to expand the factory area with another 10,000 square meters in March 2006. In order to prevent difficulties for the local inhabitants when the need for new land arises, Danfoss has made an agreement with local authorities concerning housing. According to the agreement, all of the affected residents will be offered another home free of charge of the same size as he/she has today in a different location. If the number of square meters of the new home exceeds the size of the previous home, the amount charged for the extra square meters will be equivalent to half the market price. The new apartments are based on ownership, not rental. In addition, the authorities will offer the local residents up to three jobs and training if required. Residents above the age of 55 will receive pension, irrespective of having earned it or not. This settlement has been well received by the local people.

Medical examination in China It is common practice for many countries to use agencies for the recruitment of employees or health examinations for potential employees. Usually, companies should take a cautious approach when examining employees’ health, because this implies a risk of discrimination. Danfoss China employs an agency to examine whether a pulmonary disease has been passed on to the applicants. The examination is partly required by the authorities but also by the employees at Danfoss China who have requested an annual health examination. Applicants will be informed of the result of the examination. If the pulmonary disease has been passed to an employee, he or she will be asked to receive treatment. Danfoss will only be informed if job applicants have been infected with the disease in question.

Annual Report 2005 114 The Danfoss Group Principle 3: We aim to maintain employees’ rights to unionise and recognise employees’ rights to collective bargaining Danfoss respects the employees’ right to unionise and participate in collective bargaining, and the top managements of all the companies state in the survey that the employees have the right to do so. In countries where the employees do not have the right to be members of trade unions of their own choice or where trade unions are banned, the Group has established alternative forums at several locations, giving the employees the opportunity to discuss work conditions with the local management. Examples are China, the USA and the United Arab Emirates.

Principle 4: We aim to actively fight all kinds of forced labour The Danfoss Group does not tolerate forced labour. Danfoss’ social responsibility policy requires that all employees have employment contracts or are subject to agreements, which specify the employment terms, stating the voluntary aspect of the employment. Employees at 92% of the companies included in Danfoss’ survey have written employment contracts. The remaining 8% of companies define the employees’ salary and working conditions on the basis of other agreements. These companies are located in Argentina, the USA, Finland, England and Ice- land.

Principle 5: We aim to actively fight child labour Danfoss respects children’s and young people’s right to development and education. As a global company with activities in many markets there are several sets of rules regarding when young people are considered part of the work force. Danfoss has consulted Save the Children in Denmark and thus the rules governing child labour are made plain in the revised CSR policy from 2005. Danfoss complies with ILO’s rules, specifying that young people between 15 and 18 years of age can be part of the work force, if they are beyond the school age and if they are under special protection. Young people are not allowed to work night shifts or have hazardous work, and they are entitled to more breaks than adults. A total of nine factories employ young people between 15 and 18 years of age: Six Danfoss companies in Denmark, one in Germany, one in Finland and one in England. A total of 40 young people are employed at Danfoss, of which only six are employed full-time. Some are apprentices while others are weary of going to school and do not have the motivation to continue school. They are being offered ad-hoc service work and are trained in being independent and having responsibilities. The purpose is to prepare them for training later or an apprenticeship in business life. A number of the factories employ young people during the summer holi- day, which is the case in Germany and Finland. The remaining number of young people only work four to eight hours a week. The factories comply with local law regarding child labour and the ILO requirements are also complied with, such as offering the young people sufficient breaks. At one factory, DEVI in Vejle, Denmark, six young people under the age of 15 are employed. DEVI has introduced a scheme allowing the children of employees to work a couple of hours a week with ad hoc service work, such as tidying up, shredding paper or assembling a few and small-sized components in their own home. Of the six young people, five do not work in the factory, but are given a small number of components, which one of their parents brings home. The work is organised so that the children are not prevented

Annual Report 2005 115 The Danfoss Group from attending school and every aspect of Danish law relating to children’s labour is complied with (refer to CSR declaration). But the scheme is contrary to Danfoss’ own CSR policy. Consequently, in the future only young people over the age of 15 will be employed under the scheme. The young people pres- ently employed under the scheme will continue to be employed, however, because they will soon be 15.

Principle 6: We aim to eliminate discrimination in the work place The Group aims to promote a work place culture of dignity and respect towards employees, where discrimination is not tolerated. Abolishing discrimination is a point in Danfoss’ social responsibility policy. In addition to the social responsibility policy, 54% of the Group’s companies have local policies or procedures to counteract discrimination, according to Danfoss’ CSR survey. This is an increase of 13 percentage points, compared to the 2004 figure. The policies or procedures often cover equal treatment at the work place (77%). The chart shows the percentage distribution. A long range of the companies which do not have written procedures to counteract discrimination have decided how to handle cases of discrimination, if required.

Distribution of policies Issue (among those companies that have policies) Gender 81 Nationality/ethnicity 69 Religion 71 Age 71 Sexual harassment 71 Bullying 67 Disabilities 62 HIV/AIDS 40

Principle 10: We will work against corruption, including extortion and bribery Corruption and bribery are some of the most substantial obstacles to free trade and is also the biggest obstacle to eliminating poverty in the world. It is therefore important that companies approach the tenth principle on the fighting of corruption and bribery. In the revised CSR policy from 2005, Danfoss has defined its view on corruption and bribery: Taking part in corruption or bribery is incompatible with being employed at Danfoss and employees must be careful not to participate in situations which involve corruption or bribery, for example when entering into agreements with business partners. Corruption and bribery are illegal in a range of countries, but is seldom enforced. They are covert actions, so one of the companies’ most important tools is to introduce transparent business procedures and increase the employees’ awareness on the issue so that they know how to respond. The CSR policy, which applies throughout the Group, establishes that any gifts worth more than a certain amount must be reported to the immediate manager. The manager can decide to set a different lower limit locally.

Other CSR issues at the Danfoss Group Ethics and decent behaviour are important parameters for Danfoss. Inquiries have therefore been made at every Danfoss company to establish whether employees had been dismissed due to unethical behaviour or the violation

Annual Report 2005 116 The Danfoss Group of Danfoss’ guidelines (abuse of company property, theft, violation of security rules or fraud). 92% of all of the Group’s companies have never had reason to dismiss an employee on grounds of unethical behaviour or violation of company guidelines, however 8% of the companies have dismissed employees or have accepted the employee’s resignation. A total of 20 employees have left Danfoss in Denmark, South Africa, China, Ireland, Mexico, France, Vietnam, the Philippines and the USA. The reasons for leaving Danfoss were theft of company property, violation of the law, or disloyal/unethical behaviour towards the colleagues or Danfoss.

Annual Report 2005 117 The Danfoss Group C orporate citizen sh i p Environment

Principle 7: We will support a precautionary approach to environmental challenges Over many years, a principal element in Danfoss’ environment policy has been that the Group aims to be among the most environmentally conscious companies within its branch of industries. Among other things, this means restrict- ing the use of substances and processes, which may pose a risk to humans and the environment. Danfoss uses potentially harmful substances, which cannot directly be dis- pensed with. The challenge is to replace them with other, less harmful substances, to use them as efficiently as possible and to protect employees and the environment in the best possible way. Danfoss strives to prevent the occurrence of environmental problems in all situations. Consequently the Group carries out environmental assessments of all potential acquisitions before a decision is taken on whether the company shall be included in the Group. This environmental due diligence ensures that Danfoss has a deep knowledge of the environmental impact of new companies and that purchase of new companies takes place with environment al considerations. The Danfoss Group has joined ”The Business Charter for Sustainable Devel- opment” issued by the International Chamber of Commerce.

Danfoss’ use of refrigerants Danfoss has successfully phased out the environmentally harmful gasses CFC and HCFC. The switchover to the less harmful HFC gas has been a gain for the environment and it will be of further benefit when it becomes technically viable to use natural alternatives in those applications where HFC is the only technically sustainable option. The refrigerants CFC, HCFC and HFC are chemicals containing Chlorine (C), Fluorine (F), Carbon (C) and Hydrogen (H). CFCs and HCFCs have an ozone- depleting effect because they contain Chlorine. However, HFCs do not contain Chlorine, so they do not have a harmful impact on the ozone layer. All three of them contribute to global warming, but HFCs are depleted faster in the atmosphere, contributing less to global warming than the others. Danfoss sees objective, reasonable reasons for developing alternatives to the HFC gasses. HFCs are contributing to global warming but only if the refrigerants are released into the atmosphere. Danfoss collects the refrigerants to prevent release into the atmosphere. Danfoss has over recent years invested substantially in research and development of these alternatives. The energy consumption in stationary cooling and air conditioning installations is a much larger contributor to global warming than refrigerants. An increase in the energy efficiency of installations has consequently a much higher positive effect on the global climate than the choice of refrigerant. Today the most energy effective cooling and air conditioning installations are based on HFC.

Annual Report 2005 118 The Danfoss Group

Especially within air conditioning, not very many components for alternative refrigerants have been developed yet. Danfoss fundamentally believes that maximum consideration for the environment is part of sustainable development which means that the company will continue to research in and develop alternatives to existing solutions.

Case: Environmentally friendly cooling technology A desire to cool food by means of environmental friendly technology is behind

the installation of the first commercial CO2 cooling system in Great Britain, which is installed in a supermarket in Clapham. The cooling system is the result of a cooperation between a number of suppliers and the supermarket giant Sainsbury’s. Danfoss supplied an ADAP-KOOL® system which consists of electronic control units, frequency converters and expansion valves – all devel-

oped for use in CO2-installations. Danfoss Industrial Refrigeration’s ICM Electronic Motorised Control Valve was awarded the prestigious prize as “This year’s environmental friendly product” at the distribution of Great Britain’s 2005 Cooling Industry Awards held on the 22nd September. The valve is the result of the work over several years at Danfoss Industrial Refrigeration and represents a major leap forward. With the hermetically closed and magnetically actuator, the valve overcomes the problems with poor closing and leakage in connection with traditional industrial cooling valves. In this way, the loss of refrigerant is very much minimised. At the same time the design of the valves makes it possible to use it with all forms of refrigerants including high-pressure carbon dioxide, ammonia, HCFC and HFC. The performance of the valve goes far beyond its limited size. It is a product with a significant future both concerning industry and environment. The award ceremony, which took place for the second time, is an event for the entire industry where the best and most recent methods for more environment friendly cooling is rewarded and celebrated.

Principle 8: We will undertake initiatives to promote greater environmental responsibility. Industrial production cannot take place without an impact on the environment. It is crucial to minimise the impact, which is why environmental responsibility must be high. Danfoss’ most important means towards this end is the implementation of environmental management systems according to the ISO 14001 at the Danfoss factories international environmental management standard ISO 14001 and the introduction of a common global environment target as of 2006. Certi ed environmental management (ISO 14001) in place The environmental management systems ensure that the environmental 84% work pervades the entire organisation and that the environmental impact is reduced at the source. A network has been established between the environmental coordinators of the factories to spread best practice and to avoid double work. Through the anchoring of Danfoss vision and values with all the employees, the ownership of environmental work at all levels in the Group is ensured and the local societies are positively affected. 84% of the 57 factories included in the environment part of the Corporate Environmental Assembly factories Citizenship Report are environmentally certified, and 11% are in the process management which are not yet initiated to be certi ed of becoming certified. The last 5% are assembly plants which are too small to 11% 5% introduce environmental management.

Annual Report 2005 120 The Danfoss Group Environmental management systems in Danfoss Danfoss’ aims to drive continuous environmental improvements through environmental management systems. Local engagement and ownership is the basis for success ensured through focus on planning, operation, monitoring and corrections by using the Plan-Do-Check-Act method as a foundation for the management systems. When a factory introduces environmental management, all environmental conditions are assessed to create an overview of where to take action, both on basis of what are considerable environmental impacts, the environmental policy and the local national legislation and environmental agreements. Danfoss’ environmental policy is implemented and, if necessary, comple- mented by local formulations, and environmental objectives and action plans are agreed upon, initiating environmental improvements projects. Procedures and instructions describe the environmental work, making it a part of the daily operation. Continuous monitoring of the environmental conditions ensures that irregularities or errors are corrected and that preventive action is initiated to prevent recurrence. The executive management monitor the environmental management system by means of internal audits and annual reviews of all system elements to ensure that the environmental management system is functioning properly. All parts of the management system are examined by an external assessor who evaluates whether certification can be upheld.

Organising the environmental work The responsibility for environment, working environment and safety lies to the broadest extent with the factories in the Group. Corporate policies and standards are maintained by “Corporate Environ- ment & CSR” which also maintains a network of environmental coordinators at each factory. The coordinators are local resources within environment and also contribute data for the Corporate Citizenship Report. It is the responsibility of each factory to maintain its own procedures and management systems and to observe local legislation during operation of the facility. All environmental aspects are considered when designing new products or processes. The use of chemical substances, atmospheric emissions, machine safety, waste management and ergonomics are among the topics dealt with when assessing Danfoss’ environmental impact. Ongoing education and training of employees at all factories throughout the Group ensure that they have the required knowledge and skills to enable continuous improvement of safety and environmental impact. The education and training is planned according to local needs and constituted 32,300 hours in 2005.

Environmental conditions of suppliers Danfoss is conscious of the importance of selecting suppliers who meet our stringent requirements. Thus Danfoss launched a global concept for selection and approval of suppliers. The concept is implemented through the global purchasing organisation and includes quality, logistics, production, technology, management, employees, environment as well as the principles of Global Compact. A standardised evaluation tool and scoring system is used, to be able to register and compare the performance of the suppliers.

Annual Report 2005 121 The Danfoss Group Environmental indicators Ethical guidelines (Code of Conduct) for suppliers and Danfoss’ own lists of banned and undesired substances and materials supplement the evaluation Bad Good tool. EII – Energy Danfoss’ “negative list” describes the chemical substances and materials EII – Water which must not be used in products or processes and substances of which the use must be limited as much as possible. The list must be used in connec- EII – Waste tion with all contacts with suppliers and is updated in the end of 2005. The EII – CRAN materials list ensures that purchasers everywhere in the organisation know the require- EII – HCFC Montreal ments of Danfoss to the supplier’s use of chemical substances and that only Protocol substances for which the environmental effects are known and accepted are purchased and used.

Global environmental targets and indicators To further a continued positive development of the Group’s environmental impacts, environmental targets have been set up across all organisational units with effective in 2006. Danfoss finds it important to set measurable targets for the Group’s total consumption of CRAN substances, organic solvents, energy, water and HFC as well as waste and accidents. All factories have been asked to contribute to fulfilling the targets and focus has been set on those with large consumption, which have developed ambitious action plans. The aim is, over a period of three years, to reduce the total relative environmental impact (EII, Environmental Impact Index) of the Group on each of the areas mentioned by at least 5-10% annually. The aim is that the annual increase in CRAN substances, organic solvents, energy, water, HFC and waste does not exceed 20-50% of the annual increase in the Group’s raw material consumption. The number of accidents must decrease by at least 5% annually. The Danfoss Management can monitor the environmental targets through the Danfoss Performance Management System. Danfoss expects that this system will be used by the factories in the future, to monitor their own results.

Environmental reporting All Group factories are required to report environmental data for the Corporate Citizenship report. Every year, the factories must report on 90 different parameters which are processed and subjected to thorough internal audit. Finally an external audit is carried out on the whole environmental section of the Corporate Citizenship report. A week long seminar is held annually for all employees responsible for reporting, to provide training and updated knowledge required for the reporting task. In 2005, 45 of approximately 60 coordinators from 14 countries participated in a seminar in Slovakia. Some factories prepare their own environmental statement or green account depending on whether they are subject to legislation or are registered according to the European EMAS regulation. The factories in Nordborg issue a joint green account whereas the magnet valve factory in Kolding and the compressor factory in Flensborg issue EMAS-statements. Danfoss Drives in Graasten is obliged by Danish legislation to issue a green account.

Case: Visualising environmental performance The radiator thermostat factory in Silkeborg, Denmark, was awarded an environmental diploma for their preparation of a reader friendly environmental statement to all employees. The diploma is awarded by the local environmental network “Miljøforum Østjylland” in recognition of Danfoss’ contribution to the improvement of environmental consciousness in the local society.

Annual Report 2005 122 The Danfoss Group Danfoss Compressors in Slovenia experienced that increasing production resulted in less consideration of clean and organised work places. This situation called for a campaign which would re-create order and tidiness. Posters were set up to supplement a thorough education of employees. Subsequent follow-up each week quickly lead to the desired result. The local chamber of commerce in Slovenia recognised the efforts and awarded the compressor factory for its hard work. The factory received an award as the cleanest and best organised factory in the region. Only one other company in Slovenia has previously received this award. Since mid-2004 Danfoss Industries S.A. de C.V. in Mexico has participated in PROFEPA’s (the Mexican Environmental Protection Agency) ”Clean Industry Certification”. This certification program, supported by Mexico’s environmental minister, led to certification of the company on areas as emissions and handling of waste and environmental risks in September 2005. For customers and the local society the certification means that the factory is recognised as an environmentally responsible company which acts in a sustainable way. The certification also means that the company can use an official ”Clean Industry” mark in the marketing and that inspection from the authorities is suspended as long as the certificate is upheld. The certification is extended with participation in the local state program ”Ecology Award by Recycling”, which focuses on a sustainable development and the exchange of knowledge and experience about recycling with other companies. Danfoss LPM in Finland participated for the fourth year in a row in an event with local industry companies and the university in Kuopio. The aim was to inform adults and children about industry processes and products and how everybody in society can participate to improve the environment. In an amus- ing and inspiring way families learned how LPM’s district heating stations are manufactured and how they contribute to saving energy.

Principle 9: We will encourage the development and diffusion of environmentally friendly technologies. Danfoss defines development and diffusion of environment-friendly technology as developing and producing more environmentally friendly products but also as using cleaner technology in production. Most of Danfoss’ products are characterised by the fact that they contribute to energy savings when used by the customers. Many Danfoss products have a positive environmental impact as the energy consumption is a parameter which weighs heavily in the environmental impact of a product from cra- dle to grave.

Continued focus on the environmental impact of electronics In 2005 Danfoss worked on implementing the requirements from EU’s WEEE directive on recycling of electrical and electronic products and the RoHS directive which prohibits the use of a number of substances in electronics. The WEEE directive is only expected to cover a limited portion of Danfoss’ products by the end of 2005. New interpretations of ”fixed installation” and ”installed by professional” has moved the responsibility for registration and recycling of most products from Danfoss to those customers building our components and products into their products before selling it to the end user. Following this, Danfoss only bears the responsibility for ensuring recycling for a limited number of products. Danfoss labels a number of products with a crossed-over wheeled bin and issues product declarations describing the major material fractions and princi-

Annual Report 2005 123 The Danfoss Group ples for separation and reuse. The declarations are made available to customers and recycling companies. The RoHS directive bans the use of lead, cadmium, hexavalent chromium, mercury and the flame retardants PBB and PBDE and is already implemented in a number of business areas. The directive has a major impact on Danfoss Drives, for example, which is the biggest electronics manufacturer in the Group. Drives is very advanced in introducing alternatives to soldering materials with lead and by the end of 2005 the first products were delivered, which meet the requirements in the RoHS directive. The introduction of lead-free soldering has been an easier task technically than expected and the quality of the new soldering is increased to the advantage of the customers. The RoHS directive has also influenced many other business areas. Hexava- lent chromium, which is used for surface treatment of e.g. screws, is one of the unwanted substances. Danfoss Household Compressors has, through successful co-operation with its suppliers, developed a durable corrosion protection for screws and other metal parts in the compressors. Since mid-2005, House- hold Compressors has been capable of delivering compressors which meet the requirements of the customers. All other products are expected to be mar- keted according to the directives of RoHS by mid 2006.

Case: Development of environmental-friendly products Danfoss Drives in Loves Park, USA, has reduced the size of the largest frequency converters so they weigh less and have fewer parts than the previous generation. In this way the organisation has succeeded in saving 4,333 parts in a 200 kW converter which equals 45% of the parts. At the same time, the weight was reduced by 60% and the size by 38%. Lower weight, smaller size and fewer parts mean lower costs for materials and transportation and is an example of how environmental advantages go hand-in-hand with business advantages. In June 2005 this example was chosen as “This year’s environmental story” at Danfoss at the environmental coordinators’ annual seminar. Bacteria have many hiding places in a brewery that leads to possible damage to the soft drinks tapped into bottles. Danfoss Gearmotors has found a solution by developing a gear motor without the cooling fins and ventilator that normally collects dirt on a motor. The concept is called Aseptic Drive. The need for cleaning-friendly motors has its origin within the brewery industry which needs motors which can be cleaned with strong chemicals and at the same time are sealed to prevent particles from being whirled into the air. It is especially important in modern bacteria free bottling lines. The concept reduces the number of bacteria around the bottling machine before caps are put on. The Gerolsteiner brewery, which is Germany’s largest producer of mineral water in bottles has implemented Danfoss’ concept as their standard system.

Annual Report 2005 124 The Danfoss Group Possible environmental effects Production affects the environment The many Danfoss production sites have an impact on the environment in terms of use of resources, emissions to air, discharges to water and ground, and generation of waste. Danfoss’ aim is to reduce the relative environmental impact so that a rise in production is not followed by a corresponding rise in environmental impact. Noise Emission to air For most parameters, there is a relative decreasing environmental impact CO2, SO2, NOx compared to previous years. In 2005 Danfoss sold the Spring factory in Tinglev, Denmark, and Danfoss Analytical in Sønderborg, Denmark. The sale has no major influence on the environmental accounts as the environmental impact of the two factories Energy makes up less than 1% of the overall effect of the Group. Danfoss still pur- Finished and Raw chases from the Spring Factory and as of 2005 the raw materials will be water products and Waste included in the reporting from each business area. auxiliary water materals and Danfoss acquired Thermia Värme AB in Arvika, Sweden, in 2005. Thermia’s waste Old ground amount of raw materials equals 1% of the total amount of the Group whereas contaminations the amount of HFC is 39%. The EEI graph for HFC has therefore changed accordingly in 2005. In the following, each parameter is explained and evaluated with an overall objective, actual development and cases. The total raw material consumption of the Group decreased almost 10% in 2005 compared to 2004. This will affect the EEI graphs which for many parameters will not decrease as much as expected. Some of the environmental impacts are not fully proportional to the activity level in the factories. For example, the energy used for heating remains almost unchanged even though activities are going down.

Significant environmental impacts

Energy consumption Resource consumption: Energy TJ Objective:Distribution To ofreduce energy consumptionthe relative consumption of energy 2,000 Danfoss wants to reduce the energy consumption per unit produced, so many EII factories implement energy-saving projects, either by optimising production 1,500 100 equipment, or by making other Electricitysaving procedures. 56% 80 Danfoss is a growing company, which involves a rise in the absolute energy 1,000 Natural gas 60 consumption,32.7% all other things equal. The decisive factor is the best possible reduction of consumption, and especially that the relative consumption falls 40 500 every year. The absolute energy consumption has increased 3.7% since 2004, 20 Gas oil 2.1% whereasDistrict the relativeheating consumptionHeavy fuel has increased by 12% due to the lower consumption of raw6.2% materials.2.7% 01 02 03 04 05 Waste oil 0.2% TJ The electricity comsumption in 2005 was 56% of Danfoss’ comsumption of EII energy which is the same as in 2004. The share of natural gas is increasing over Energy consumption time. TJ Distribution of energy consumption 2,000 The most polluting fuels (e.g. gas oil and heavy fuel oil) have at some factories been substituted by natural gas or other environmentally friendlier energy EII 1,500 100 Electricity sources. The consumption of gas oil and heavy fuel oil has decreased by 18%. 56% 80 1,000 Natural gas Case: Energy savings and alternative sources of energy 60 32.7% Refrigeration & Air Conditioning in Nordborg, Denmark, has replaced 448 old 40 500 light sources with 220 new ones controlled by the incoming daylight. The 20 Gas oil 2.1% business area saves 450.000 kWh per year, equivalent to the annual energy District heating Heavy fuel 6.2% 2.7% consumption in more than 100 private homes. It has furthermore been possi- 01 02 03 04 05 Waste oil 0.2% ble to reduce the lighting, which benefits the working environment. TJ EII

Annual Report 2005 125 The Danfoss Group Water consumption Danfoss Gearmotors in Munich, Germany, has installed a geothermal heat- m ing system,Consumption replacing of water adistributed system on that sources used gas oil. The energy costs are higher 700,000 for the new system than by using e.g. natural gas, but since no new installa- 600,000 EII tions are required, this is compensated for. Ground 500,000 100 water 76,3% 400,000 80 Resource consumption: Water 300,000 60 Objective: To reduce the relative consumption of water Danfoss wants to reduce the waterRecycled consumption per unit produced. In the 200,000 40 water past many years, the Group has focused7,4% on reducing the relative water con- 100,000 20 Surface sumption, and since 2001, thewater relative water consumption has been reduced 01 02 03 04 05 by 5%. The consumption has16,3% increased 9% since 2004 and is now little more m than 600,000 m3. In 2004 the groundwater was 76% of the total water con- EII sumption, surface water was 16.3%, and the remaining water consumed was recycled water. The increased comsumption is mainly due to increased activi- Water consumption ties at the factories in China and Nordborg and the acquisition of Thermia AB m Consumption of water distributed on sources 700,000 in Sweden. 600,000 EII Ground Case: Reduction of water used for washing 500,000 100 water 76,3% Danfoss Flomatic in USA has reduced the consumption of water by more than 400,000 80 25% even though sales went up 12%. The factory has replaced a cleaning 300,000 60 Recycled process based on water and a cleaning agent with a process that uses sand 200,000 40 water blasting. Water or natural gas for heating is no longer needed. The water con- 7,4% 100,000 20 Surface sumption has been reduced further by replacement of a 30 year old cooling water tower. 01 02 03 04 05 16,3% m EII Resource consumption: Raw materials Objective: To minimise the consumption of raw materials per produced product Danfoss uses a number of raw materials, primarily metals and plastics, for manufacturing components and products. 2005 2004 Change Consumption of significant raw materials [tonnes] [tonnes] as percentage Iron 171,802 196,687 –12.7 Highly alloyed stainless steel 4,106 4,289 –4.3 Brass and copper/copper alloys 25,553 27,581 –7.4 Aluminium incl. alloys 6,820 6,571 3.8 Other metals 166 22 671 PVC 637 636 0.2 Formaldehyde plastics 241 185 30.7 Other plastics types (incl. rubber) 4,616 4,938 –6.5 Electronic and electro-mechanic components 10,033 9,062 10.7 Printed circuit boards (with and without components) 281 289 –2.5 Solder materials 38 35 9.8 Wood (incl. wood pallets) 9,508 10,149 –6.3 Packaging (cardboard and plastics) 5,214 4,893 6.6 Other raw materials 6,424 7,475 –14.0 (incl. filling medias and chemicals in products) The Group’s total consumption of raw materials 245,431 272,809 –10.0

The aim is to use a minimum of raw materials and other resources in the manufacturing process. The planning takes place in the development phase when the products are being designed. In addition to minimising the use of raw materials per product manufactured, essential aims are an increase in the

Annual Report 2005 126 The Danfoss Group percentage of recyclable materials and reduction of waste from manufacturing processes. The Group’s total consumption of raw materials has decreased 10% from 2004. This is mainly caused by lower consumption of materials in the compressor businesses. The manufacturing of household and commercial compressors uses 70% of the Group’s raw materials, so any change here will have a significant impact on the total consumption. The raw material consumption in the rest of the Group has increased slightly in the same period.

Case: Lower consumption of packaging Danfoss Silicon Power in Germany has lowered the amount of packaging materials for finished goods by more than 50%. New packaging enables the customer to return it to Danfoss Silicon Power for re-use. The customers benefit from reduced amount of waste and the consumption of resources for the manufacturing of packaging material is dramatically reduced. A further benefit is that the products are better protected against moisture and static electricity in the new returnable package.

Auxiliary materials In 2005 the individual factories were asked to report the consumption of auxiliary materials to make the reporting more complete. Reporting is made on the consumption of cutting fluids and cleaning agents used in the production process.

Potentially harmful substances Objective: To reduce the relative consumption of harmful substances. ”Potentially harmful substances” is a collective designation for substances or materials, which can be harmful to humans or the external environment. Danfoss uses potentially harmful substances in the manufacturing of products and components, and the substances cannot easily be avoided. Thus, the challenge lies in replacing them with other substances (through substitution), using them as efficiently as possible and in providing optimum protection for employees and the environment.

Cases: Substitution of potentially harmful substances In 2005, Thermia Värme AB in Sweden, which produces heat pumps, converted all 22 company cars to use the bio fuel ethanol. The cars drive a total of almost 900,000 km a year and the conversion has reduced the emission of

CO2 from the cars by 80%. Ethanol has the advantage that it is CO2 neutral as

the CO2 emission stems from organic material as opposed to conventional fuel CRAN substances which has a fossil origin. Tonnes Thermia Värme AB has substituted ethylenglycol with propylenglycol in 800 their test equipment for the heat pumps. Propylenglycol can be mixed with 700 EII ordinary waste water and let out to the local waste water treatment facility 600 100 opposed to ethylenglycol which must be collected and disposed of as chemi- 500 80 cal waste. This was expensive and not environmentally friendly. 400 60 The manufacturing area for small thermostatic expansion valves in 300 Nordborg, Denmark, has increased its production of valves to the American 40 200 market. The valves can, opposite previous types, be adjusted at tempera- 100 20 tures above 0° Celsius. This makes adjustment in a water bath possible, where

01 02 03 04 05 organic solvents were used previously. An annual consumption of 7,000 litres Tonnes of solvent has been eliminated to great benefit for the working environment. EII

Annual Report 2005 127 The Danfoss Group Greenhouse gasses, EII The following section shows the relative development in consumption for the EII major types of substances. 160 140 CRAN substances 120 ”CRAN substances” is the collective designation for substances, which are 100 undesirable in the working environment, either because they are carcinogenic 80 (C), may be harmful to the ability to reproduce healthy children (R), may cause 60 allergies (A) or harm the central nerve system (N). Taking into consideration the 40 working environment, Danfoss puts special focus on reducing the consump- 20 tion of CRAN substances and has set specific global targets as of 2006. 01 02 03 04 05 The consumption of CRAN-substances has fallen since 2001 however, com- HCFC HFC CFC and trichloroethylene pared to 2004 there has been a consumption decrease of 22%. This is due to a dramatic reduction in the use of carcinogenic raw materials in the Plastics fac- Solvents tory in Nordborg. These types of plastic are classified as C-substances because Tonnes of the content of flame retardants. 400

350 EII Greenhouse gases 300 100 The consumption of the refrigerants HCFC and HFC has increased in 2005 250 80 due to the acquisition of Thermia AB in Sweden, which uses HFC in their heat 200 60 pumps. The consumption of CFC gasses has been reduced by more than 150 80% from 2004 since the factories in China have almost stopped using CFCs 40 100 in 2005. CFC is a refrigerant which depletes the ozone layer. The use of CFC is 50 20 generally banned, but it is permitted in China, among others. CFC is used to test compressors at the factories in China and Slovenia and the consumption 01 02 03 04 05 in 2005 was only 115 kg. Tonnes ToxicEII substances Danfoss has of 2006 set global targets for the development in the con- Tonnes sumption of HFC gases. 40 EII Solvents 100 30 For many years Danfoss has worked to reduce the consumption of solvents, 80 because they are harmful to the working environment and the external envi- 20 60 ronment. The relative consumption of solvents has increased by 3% from 2004

40 whereas the absolute consumption has fallen 6% which equals 20 tonnes. The 10 gap between the figures is caused by the 10% reduction in raw materials. Sol- 20 vents are included in the global environmental targets. 01 02 03 04 05 Tonnes Toxic substances EII Toxic substances are toxic for humans and are labelled with a skull. The Danfoss Group’s total consumption of toxic labelled substances was 25 tonnes in 2005, which to a large extent is the same as in 2004. The relative amount Development in waste Tonnes increased slightly due to the decrease in activities. 80,000 Environmentally harmful substances 60,000 EII Environmentally harmful substances are harmful to the environment (e.g. 100 to plants, animals, water organisms and the ozone layer). Danfoss’ total con- 40,000 80 sumption in 2005 was 270 tonnes which is an increase of 16 tonnes from 2004 60 equal to 6%. This is due to an increase of more than 50 tonnes environmen- 20,000 40 tally harmful substances in China. The relative comsumption of environmen- 20 tal harmful substances has been reduced by more than 50% because the raw material consumption in China was dobled in 2005. 01 02 03 04 05 The consumption of environmentally harmful substances in the remaining EII total waste Incineration Oil and chemicals factories in the Group has been reduced significantly from 2004. Land ll Recycling

Annual Report 2005 128 The Danfoss Group Heavy metals in waste water Other harmful substances Danfoss uses a broad range of chemical substances in, among others, the galvanic processes in the Nordborg factories. The development in the consump-

EII tion of these substances is illustrated and described in the graphs below. 120 Chlorinated process oils, Kerosene, Chromium in galvanic processes, Nickel salts in 100 galvanic processes, Cyanides in galvanic processes 80 60 Waste and recycling 40 Objective: To reduce the relative amount of waste 20 The aim is to reduce the relative amount of waste, but in spite of this, the 01 02 03 04 05 amount has been unchanged over the past 5 years. The total amount of waste kg has however decreased by 10% compared to 2004. EII 83% of the waste is recycled and the major part hereof is metal and paper/ cardboard. Accidents The amount of waste for landfill decreased 25% from 2004 and the amount Frequency ofDistribution oil and chemical waste has decreased 12%. 30 Fingers/ Head/ 25 Emissionshands to the air neck 8% Objective:57% To reduce the relative emission of flue gasses 20 Energy consumption results inLegs/ emissions of various flue gasses. Some of the most critical are CO , SO and NOfeet . CO is a greenhouse gas whereas SO and 15 2 2 17%x 2 2 NOx acidify and pollute the air. The absolute emission of flue gasses follows 10 the development in energy consumption and has increased by 3%. The relative emission increasedRest by of 11% due to the reduction in raw materials. 5 the body Refer to figures showing18% Emissions to the air

Accidents 01 02 03 04 05 Heavy metals in waste water Frequency Distribution Objective: To reduce the relative emission 30 The discharge of heavy metals in waste water only comprises the parameters Fingers/ Head/ that the companies and the authorities have jointly determined. Most facto- 25 hands neck 8% 57% ries have their own purification plants, which settle the heavy metals in sludge 20 during the purification process, resulting in a minimum of discharge to the Legs/ feet water environment from waste water. 15 17% The factories in Nordborg, Denmark, and Flensburg, Germany, process 10 and reuse their sludge, whereas sludge from other Group companies is sent Rest of to storage places. The Groups total emission of heavy metals in waste water 5 the body 18% is 132 kg and has increased by 70% from 2004. The facility in Mexico started to measure the amount of waste water and heavy metals instead of estimat-

01 02 03 04 05 ing the as it was done previously. The relative amount of heavy metals shows therefore a significant increase. Half of the Groups 170,000 m3 of industrial waste water is discharged from the factories in Nordborg, Denmark, whilst the rest is primarily discharged from the facilities in Germany, Poland, Slovenia and Mexico.

Ground pollution Since 1983, voluntary pollution examinations have been carried out at the Danfoss site at Nordborg, Denmark, due to the demonstration of pollution resulting from organic solvents. According to an agreement with the County of Southern Jutland, Danfoss carries out an intensive monitoring program and purifies polluted groundwater from the upper groundwater basin to prevent spreading of pollution. How- ever, there is a risk that underlying pollution in the long term can influence the

Annual Report 2005 129 The Danfoss Group water supply. Hence, activities have been instigated for risk analyses and possible preventive initiatives.

Violation of environmental legislation or permissions The factories have a number of permissions, which are generally complied with, but in 2005, there were a total of 26 violations, which is 2 less than in 2004. Three of the violations took place in the waste oil incineration system in Nordborg, Denmark, where the maximum concentration of dust (50 mg/Nm3) had been exceeded. The system has now been closed due to tighter requirements that cannot be met. Danfoss in Nordborg, Denmark, had 22 violations of the requirements for discharge of waste water from the ultra filtration system used for treating waste with oils. The concentration of nickel was too high in 15 cases, 6 violations were caused by too high concentration of zinc in the waste water and one violation was due to poor neutralisation of the waste water. The above violations were primarily caused by critical substances in the oil-containing waste making optimal treatment of the waste water difficult. The facility works to limit the violations by spreading the treatment of the critical part of the oil- containing waste water over the whole year. DEVI A/S in Vejle, Denmark, discharged 320 liter cooling water per day in 2005 even though their environmental approval only permitted 225 liter. The local authorities will issue a revised permit for discharge of water water in 2006.

Violation of working environment legislation The Danfoss Group had in 2005 a total of 5 violations of the local working environment or safety legislation where the case was investigated by the police or the factory received an improvement notice. Notices were given to the compressor factory in Slovenia on inadequate protection of production equipment and to Gear Motors in Munich, Germany, for allowing eating in the production areas. Notices were also given to 3 Danish factories: to Press Works in Nordborg, Denmark, for using an unsafe hook for a crane and to Gemina Termix, Denmark, for not clearly marking driveways in production areas. The cooling laboratory in Nordborg had a serious accident in Septem- ber 2005 where an explosion in a test panel badly injured an employee. The Danish Working Environment Authority issued an improvement notice order- ing Danfoss to make risk assessments and preventive measures. The accident was reported to the police who ordered Danfoss to pay a fine. All factories have already followed the improvement notices or will do so from the beginning of 2006.

Working environment and accidents Danfoss is highly concerned with preventing accidents at work. Accidents can be difficult to avoid altogether in a Group with a large number of production facilities. An accident is considered a mishap entailing at least one day of absence from the work place. The accident rate for 2005 follows the positive trend of recent years, decreasing from 28 in 2001 to 17.7 in 2005. The number of accidents was reduced from 426 in 2001 to 297 in 2005, a more than 30% reduction in 5 years. The accident rate decreased 9% from 2004. 67% of the accidents were minor causing absence of less that 10 days while the remaining accident were of a more serious nature with more than 10 days

Annual Report 2005 130 The Danfoss Group of absence. Half of these accidents caused the employee to be absent in more than 20 days. It is positive that the number of accidents keeps falling but the positive trend is for the minor accidents only. 58% of the accidents injured hands or fingers. 8% of the accidents included head injuries (14% in 2004). The rest of the accidents were evenly spread on leg/feet and the rest of the body.

Certification of the working environment All Danish manufacturing facilities have been certified on their working environment according to the OHSAS 18001 standard. Danfoss Distribution Serv- ice in Rødekro, Denmark, and a few minor areas in the Nordborg facility are expected to be certified in 2006. The compressor factories in Slovakia and France are also certified on their working environment.

Case: Working environment and safety DEVI’s floor heating factory in Vejle, Denmark, has after a successful working environment certification initiated an annual working environment award to be given to the employees. Awards are given for good psycho-social environment, for safety at work and for clean and tidy workplaces. The latter award is called “The Golden Broomstick”. A sum of money accompanies the award to give the employees a possibility to make further improvements of the working environment. All employees can vote for their favourite award candidate. Danfoss’ building site in Moscow has been given a safety award. Danfoss began building a new factory outside the city in the summer of 2004. The project was lead by Bovis Lend Lease International Limited. A safety commis- sion has in 2005 assessed all 16 Bovis Lend Lease building projects in Russia and Danfoss’ was awarded as the best project and the local contractor was awarded as contractor of the year. The project was supported by a nurse from Danfoss’ Occupational Health Service in Moscow.

Annual Report 2005 131 The Danfoss Group C orporate citizen sh i p Accounting principles, environment

Accounting principles for the environmental section of ume of production. A decreasing EII indicates a lower relative the Corporate Citizenship report environmental impact.

General to the Environmental Accounts – foundation and aux- The environmental impact index is calculated as follows: iliary tools Index for environmental data EII = Index for activity (production) Data in the Environmental Accounts The Danfoss Environmental Accounts cover input data in the Environmental data and activities are compared to 2001, for form of raw materials, energy, water and potentially harmful which the index is 100, since the accounts show environmen- substances and output data in the form of wastewater, heavy tal data for the past five years. The activity index is calculated metals, and waste. The factories report on these data once a on the basis of the raw material consumption level, since the year. Other outputs in the form of emission of flue gases are latter best reflects the size of the production. centrally calculated. cf. the calculation principles later in this Danfoss is a growing enterprise, and consequently the com- document. pany’s environmental impact is growing in absolute terms. In addition to the aforementioned environmental data, the Most figures in these accounts show both the relative and factories must report the number and type of accidents and if absolute development of the Group’s impact on the environ- they have exceeded the terms of the environmental approvals ment. or other agreements with the environmental authorities. Increases in the consumption level, which exceed the Group’s total activity development, will be reflected in an Standards and databases increasing relative environmental impact in the shown charts. The foundation of the reporting of data for the Group Environmental Accounts is available in two Danfoss stand- Principles of (consumption) statements ards: The first, “Corporate Environmental Reporting” (corpo- Consumption of raw material and potentially harmful sub- rate standard 500B0806), defines the general guidelines for stances occurs according to two principles: either at the regis- reporting of data. The second, “Reporting of raw materials, tering of movements in stock or at purchasing. Most factories auxiliary materials and potentially harmful substances” (corpo- of the Group use the latter. Other data is mainly stated in pro- rate standard 500B734), defines the precise guidelines for the portion to drawn up invoices in connection with purchasing/ reporting of raw materials, auxiliary materials and potentially sales. This applies for example to the purchasing of energy harmful substances. The latter also defines what to observe in and water or generation of waste. order to avoid reporting by double entry due to internal trad- Heavy metals in wastewater data is normally measured by ing with other Danfoss factories and what should be done to external laboratories. ensure inclusion of all relevant data in the reporting. In order to support the factories in their work to provide valid data Raw materials and auxiliary materials to be used in the Environmental Accounts, a Group environ- The consumption of raw materials is reported as 25 dif- mental reporting seminar is held once a year and training also ferent types of raw materials. The raw material types have takes place during factory visits. been selected for their significance as to volume or since The factories must report a total of 90 different parameters they include important information on the sectors in which (data types) via Hyperion Financial Management (HFM), which Danfoss is active. Raw material types that cannot be related is also used for reporting of financial figures in the Group. To to a specific raw material type are reported under “Other raw ensure a uniform and valid reporting of data, guidelines and materials”. help texts are available for each parameter Auxiliary materials have been added as a new category in 2005 and consist of cutting fluids and cleaning agents used in Accounting principles production processes. The overall principles of the preparation of the accounts are materiality, relevance and transparency. Potentially harmful substances The materiality criterion of potentially harmful substances in Environmental Impact Index (EII) the Environmental Accounts is the volume or hazardousness The Environmental Accounts include an environmental of the substances, or that they are covered by the factories’ impact index (EII), to express the Group’s relative environmen- environmental approvals. In order to facilitate clarity, the sub- tal impact. EII reflects how efficiently resources are used and stances are grouped. It should be noted that some substances the Group’s ability to reduce the discharges relative to the vol- are only included in regard to the work environment. This

Annual Report 2005 132 The Danfoss Group applies for example to the substances that are called CRAN Consolidation substances. These substances are considered carcinogenic, When consolidating data, extracts are made for the differ- harmful to the ability to reproduce healthy children, allergenic, ent kinds of information and these are being consolidated or harmful to the central nervous system. at Group level. This applies for example to raw materials and 13 substance groups exist in the potentially harmful sub- potentially harmful substances. It is also checked that data are stances category. Some substances are found in several sub- in accordance with previous years’ consolidated data. stance groups, for example the chlorinated refrigerants HCFC, Due to the fact that Danish factories have access to HFC and CFC, which, apart from being individually reported, Danfoss’ Material Safety Data Sheet system, separate calcula- are also included in the Group of organic solvents. Danfoss tion of the factories’ consumption of potentially harmful sub- has selected this approach to show the development in con- stances is made. The calculation is centrally made since the sumption of the substances that are particularly important in data are compared with the central consumption database the public environmental issues debate but also to emphasise and the Danish Material Safety Datasheet database. that the substances often have several characteristics. Central reporting of wastewater emission data, energy and The CRAN substances are stated according to national law water consumption and consumption of piped media is per- on the labelling of substances, to ensure best possible coher- formed for the factories in Nordborg, since these are shared ence with the factories’ environmental management systems. facilities. Examples of piped media are petroleum and spirits. Subsequently, these data are checked and consolidated with Erroneous reporting other data on Group level. If systematic errors are revealed in the reported data or in the foundation of the data, the data in question are corrected five Calculation of flue gas emissions years back to ensure comparability. If changes are made to The calculation of flue gas emissions is made on basis of the the classifying of chemical substances, the change only takes energy consumption multiplied by relevant emission fac- effect as of the year referred to, since it creates an entirely new tors. The source of the emission factors is the Danish Energy situation. Agency. The calculation is based on Danfoss’ consumption of Changes in historical data must be approved by the exter- oil and gas, its own energy production and heating consump- nal audit (refer below). tion as a result of purchased electricity and district heating at external energy manufacturers. The calculation is made Internal audit of data prior to consolidation according to EU standards, where about half of all electricity is An internal audit team reviews a total of about 5,000 data manufactured from fossil fuels. reported each year by the factories, before the consolidation Average considerations like these do not accurately reflect of data. During the internal audit comparisons are made on the actual conditions but Danfoss believes that this amounts basis of previous years’ of data, and a number of correlations to a distinct improvement when it comes to showing the between different data are reviewed. An example is the corre- environmental impact from the Group’s production plants. lation between raw material consumption, energy consumption and waste, or the question whether the different kinds Transport of waste types or potentially harmful substances have been The environmental impact of internal transport and transport correctly reported. of products are not included in the Environmental Accounts The Environmental Accounts includes 57 reporting enti- 2005. This is due to the weighing between the impacts on the ties. Some factories are split into several reporting entities factories and on the other hand lack of methodical simplicity (mostly located in Nordborg). Other factories make an aggre- in the statement of the environmental impact of transport. gate reporting because a split of e.g. electricity is impossible between the factories if located at the same premises. Factories included in the environmental accounts The accounts include all the factories of which Danfoss had Internal audits the majority share throughout 2005. The spring factory in The factories are responsible for the provision of correct data. Tinglev, Denmark, and Danfoss Analytical in Sønderborg, Two internal audits have been carried out in 2005 at the heat Denmark, are not part of the accounts in 2005. Thermia AB in pump factory in Arvika, Sweden and at compressor factory in Arvika, Sweden, is new in 2005. Flensburg. The visit to Flensburg gave a good basis for ensur- Convec A/S in Silkeborg, Denmark, rapports under the ing that the planned move of production to Slovakia does not radiator thermostat factory in Silkeborg and Floor Heating have an adverse effect on the reporting of data. Hydronic in Vejle, Denmark, reports under DEVI in Vejle.

Annual Report 2005 133 The Danfoss Group Division’s environmental conditions more experience with environmental management, Danfoss Danfoss’ Divisions have, to a large extent, similar environmen- has extended the area of external verification to include all tal conditions and impact: consumption of resources, sub- Danfoss factories globally. The verification is performed as stances and materials and generation of waste and emissions. samples, site audits and as verification of the applied data It would not be logical to detail each Division’s environmen- reporting procedures. tal impact. However, if specific environmental impacts in the All factories are in principle subject to third-party verifica- Divisions influence the overall environmental impacts in the tions. Exemptions can be made for the factories that at the Group, they will be described in this report. time of the external audit have valid EMAS verifications for the accounting year in question. External verification External, independent third-party verification of the environmental accounts is performed. As the factories gain

Annual Report 2005 134 The Danfoss Group Significant environmental impacts

Energy 2001 2002 2003 2004 2005 Energy consumption (TJ) 1,513 1,551 1,591 1,625 1,686 EII – Energy 100 89 82 77 89 Natural gas (%) 32,7 Electricity (%) 56,0 Gas oil (%) 2,1 Heavy fuel (%) 2,7 Spildolie (%) 0,2 District heating (%) 6,2 Water (m3) 2001 2002 2003 2004 2005 Water consumption 504,615 528,350 524,668 558,031 607,567 EII – Water 100 91 81 79 96 Surface water 16,3 Ground water 76,3 Recycled water 7,4 Flue gases (tonnes) 2001 2002 2003 2004 2005

CO2 111,919 115,212 117,788 121,425 124,841

EII – CO2 100 90 82 78 89

SO2 55 56 55 59 57

EII – SO2 100 88 78 76 81

NOx 228 234 241 247 256

EII – NOx 100 89 82 77 89 Potentially harmful substances (tonnes) 2001 2002 2003 2004 2005 CRAN substances 615 683 465 601 466 EII – CRAN substances 100 97 59 70 60 Toxic substances 31 30 21 26 25 EII – Toxic substances 100 84 53 59 63 Solvents 305 268 292 311 292 EII – Solvents 100 76 75 73 76 HCFC (Montreal Protocol) 23 13 5 3 4 EII – HCFC (Montreal Protocol) 100 50 18 10 14 HFC (Kyoto Protocol) 29 27 36 33 53 EII – HFC (Kyoto Protocol) 100 82 95 82 146 CFC and TRI 1 0 0 1 0 EII – CFC and TRI 100 6 8 62 13 Process oils with chlorine 10 10 9 12 11 EII – Process oils with chlorine 100 90 74 93 93 Kerosene 17 23 23 60 45 EII – Kerosene 100 117 105 256 213 Chrome 0 0 1 0 0 EII – Chrome 100 111 113 26 29 Nickel salts 3 5 5 5 4 EII– Nickel salts 100 134 104 99 101 Cyanide 4 4 4 6 6 EII – Cyanide 100 81 67 100 116 Waste water (kg) 2001 2002 2003 2004 2005 Heavy metals in waste water 86 82 72 79 133 EII – Heavy metals in waste water 100 83 65 66 123 Waste (tonnes) 2001 2002 2003 2004 2005 Total waste 53,203 59,823 68,161 75,033 67,617 EII – Total waste 100 98 100 101 101 Incineration 1,326 1,255 1,195 1,475 1,633 EII – Incineration 100 82 70 80 98 Landfill 1,353 1,416 1,309 1,742 1,300 EII – Landfill 100 91 76 92 76 Oil and chemicals 8,467 10,050 8,735 9,678 8,563 EII – Oil and chemicals 100 103 81 82 80 Recycling 42,056 47,103 56,922 62,138 56,121 EII – Recycling 100 97 106 106 106 Accidents 2001 2002 2003 2004 2005 Frequency of accidents 27.5 25.3 20.2 19.4 17.7 Fingers/hands (%) 57 Head/neck (%) 8 Legs/feet (%) 17 Rest of body (%) 18

Annual Report 2005 135 The Danfoss Group C orporate citizen sh i p Audit endorsement, environment

Basis of opinion We have systematically reviewed recorded information, calculations, and disclosures in the environmental part of the Corporate Citizenship Report for 2005 for the Danfoss Group.

The audit has been performed in accordance with generally accepted principles and standards. The audit has been performed to ensure to a high degree that the environmental part of the Corporate Citizenship Report does not contain significant misinformation.

The audit has been performed through extensive review of the accounting material and through extensive random sampling of the accounting material for selected Group factories.

The audit also includes assessing the accounting principles used as well as evaluating the overall presentation of the environmental part of the Corporate Citizenship Report for 2005

Opinion In our opinion, the Environmental Statement and Accounts give a true and fair presentation of the environmental impacts from activities at the Danfoss Group’s factories.

Factories in Denmark, Germany, Slovenia, France, Mexico, Italy, China, Sweden, Ukraine and USA have been subjects to audit.

For the factories that have not been subjected to audit, we have assessed the procedure used for collecting data.

Nordborg, February 23, 2006

Søren Topp Tommy Lund Lead Auditor Lead Auditor Danish Standards Association Danish Standards Association

Annual Report 2005 136 The Danfoss Group

C o r p o r a t e C i t i z e n sh i p Appendix People and Values

Good leadership at Danfoss The Danfoss Core Values are the guiding principles for good conduct among leaders and employees in the Group. It is particularly important that managers adopt the values so that they show the way for their employees.

• Our business is trust • A very safe and reliable choice • Passionate about technology • Global culture, local representation • Environmentally and socially responsible

Danfoss aims for world-class leadership and this requires the will to win (performance management). In order to obtain world-class leadership, the Group will promote the six Danfoss leadership competencies:

Leaders at Danfoss • Have the Danfoss Vision as a target The manager takes responsibility for implementing plans which help Danfoss reach its targets.

• Create results through employees The manager actively creates commitment among employees in order to achieve exceptional business results.

• Comply with the Danfoss Core Values The manager personifies Danfoss values and he/she behaves in a trust worthy and reliable manner, respecting the employees and the local culture. All actions and decisions should be characterised by social and environmental responsibility.

• Communicate with the employees The manager ensures open, explicit and constructive communication and dialogue.

• Develop the employees The manager aims at optimum conditions for professional and personal development of the individual employee. The manager takes responsibility for the active prevention and solution of conflicts.

• Develop the organisation The manager develops each job and the entire team in accordance with internal and external opportunities and demands. C o r p o r a t e C i t i z e n sh i p Appendix Social Responsibility (CSR)

Global Compact

1. We will support and respect the internationally declared human rights within our spheres of influence

2. We will ensure we are not complicit in human rights abuses

3. We aim to maintain employees’ rights to unionise and recognise employees’ right to collective bargaining

4. We aim to actively fight all kinds of forced labour

5. We aim to actively fight child labour

6. We aim to eliminate discrimination in the workplace

7. We will support a precautionary approach to environmental challenges

8. We will undertake initiatives to promote greater environmental responsibility

9. We will encourage the development and diffusion of environmentally- friendly technologies

10. We will work against corruption, including extortion and bribery C o r p o r a t e C i t i z e n sh i p Appendix Social Responsibility (CSR)

Danfoss activities supporting the United Nations’ Global Compact

2002 • Danfoss joins UN Global Compact 7th October 2002 • Environmental policy revised and structured according to the three Global Compact principles on environment

2003 • First edition of CSR-policy; implementation of the six Global Compact principles on CSR • Cooperation with the Danish Institute of Human Rights (Internship regarding country analyses) • Training of leaders and employees at seminars and site visits • First edition of internal CSR-survey • Industry networking concerning sustainability and Global Compact

2004 • Training of purchasers (Global Compact and supplier evaluation) • Dilemma role-play for purchasers regarding Human Rights (e-learning) • Training new leaders in Human Rights • Training on CSR-issues at annual environmental seminar • First edition of Code of Conduct for suppliers • Danfoss member of Amnesty Business Club (Forum for discussions)

2005 • CSR policy revised (implementation of the 10th Global Compact principle on working against corruption) • Guideline for handling corruption and bribery • CSR survey revised • Training purchasers in working against corruption and bribery • Established database for purchasers (supplier evaluation) • Code of Conduct for suppliers revised (10th principle implemented)

2006 • CSR platform for Danfoss Intranet (planned) • Training sales people in working against corruption and bribery C o r p o r a t e C i t i z e n sh i p Appendix Social Responsibility (CSR)

Vejle, 25.01.2006

CSR Declaration by DEVI A/S

With this document the company declares that it lives up to certain CSR requirements within the following areas:

• Child labour

DEVI A/S ensures that: • All employees are over 13 years of age. • Employees between the ages of 13 and 15 only perform light work. • Employees between the ages of 13 and 15 work a maximum of two hours per day. • Parents of employees between the ages of 13 and 15 are informed of the work and the conditions under which the work is performed. • Employees under the age of 18 do not perform dangerous work or work at night. • All apprentices in DEVI A/S are above the age of 14 and work as part of their education.

DEVI A/S is aware of and respects the ban against child labour as expressed in the Danish Working Environment Act, Consolidated Act No. 268 of 18. March 2005 and in the Executive Order on the work of young people No. 519 of 14 June 1996.

The Danish legislation is in accordance with EU Directive 94/33/EC of 22 June 1994 on the protection of young people at work, the UN Convention on Economic, Social and Cultural Rights of 16 December 1966, ILO Convention No. 138 of 26 June 1973 on Minimum Age, ILO Convention No. 182 of 17 June 1999 on the Worst Forms of Child Labour as well as the UN Convention on the Rights of the Child of 20 November 1989.

The Danish authorities monitor whether DEVI A/S complies with Danish regulations in this area. Employees who consider that their rights are being violated may bring legal proceedings. If DEVI A/S breaches the regulations, those responsible may be punished, in the form of a fine or imprisonment. C o r p o r a t e C i t i z e n sh i p Appendix Social Responsibility (CSR)

Method of the survey Three years ago, Danfoss began to conduct annual surveys of social responsibility in the Group. The survey is based on a questionnaire sent to every factory and sales company and deals with the local management’s knowledge of and handling of the following issues: 1. The CSR Policy (Social Responsibility Policy) 2. Discrimination 3. Child labour 4. Labour rights 5. Business ethics (competition act, product safety, ethics and values) 6. Transparency

In addition, the factories must also answer questions relating to: 7. Safety 8. Relationship with the local community 9. Security service

Danfoss designed the questionnaire in 2003. It has been expanded and adapted on an ongoing basis. For example, a number of Global Reporting Ini- tiative (GRI) indicators have been incorporated and questions have been corrected according to feedback from external stakeholders such as the Danish Human Rights Institute. Business integrity, which is about living our current values, is one of the new issues in the questionnaire. Other new issues in the questionnaire are product safety, avoiding violations of competition act, and the limits of the value of gifts. Some of the questions are only relevant internally because the answers can help focus on different aspects. Other questions deal with the compliance of UN’s Global Compact or with ethics in general, and thus, the answers to them are relevant to the public. Of the 127 factories/sales companies, 120 completed the questionnaire. The answers represent almost 96% of the total of the Group’s 18,108 employees. Corporate Policy 500B0974 Social Responsibility Policy (CSR-policy) 3rd issue, 2005-12 Page 1 of 4

Approved by Executive Committee – Hans Kirk Language: en

1 Purpose and field of application This Standard establishing the Group’s general Social Responsibility Policy supports the Danfoss Vision and the Danfoss Core Values. The Group’s Environmental Policy and the Social Responsibility Policy constitute a comprehensive framework for social responsibility at Danfoss.

The Social Responsibility Policy applies throughout the Danfoss Group. The Policy should be implemented with consideration for local conditions and cultures in order to achieve optimum relevance and effect.

2 Social Responsibility Policy Danfoss aims to promote sustainable development of communities by considering the conditions which influence people’s lives when making decisions and initiating activities within the scope of our business development. This applies to the Group’s employees, the local communities in which we have companies, and to the people who are affected by the Group’s activities.

This means that we will: x Be an environmentally and socially responsible company that aims to contribute to improving quality of life. x Work determinedly to continuously improve our activities in the social field. x Ensure a good and safe working environment for our employees. The working environment activities should primarily be of a preventive nature. x Strengthen our position as a preferred supplier, recognising that social responsibility contributes to creating a sustainable and profitable business.

3 How we intend to implement By joining the UN’s “Global Compact Initiative”, the Danfoss Group has decided to be active within a number of fields that relate to social responsibility. The following six principles define how we aim – as a minimum - to fulfil our social responsibility.

3.1 We will support and respect internationally declared human rights within our spheres of influence and ensure that we are not accomplices to human rights abuses by:

x Including human rights aspects in business decisions where considered relevant. x Building competencies in relation to human rights issues in relevant parts of the organisation. Corporate Policy 500B0974 3rd issue, 2005-12 Page 2 of 4

x Making use of country analyses when evaluating the human rights situation in the countries in which we have or plan to have production facilities. x Entering into a dialogue on human rights issues with the Danfoss Group’s stakeholders, including non-governmental organisations and suppliers.

3.2 We aim to maintain the employees’ rights to unionise and recognise the employees’ rights to collective bargaining x In the countries in which the employees do not have a free choice of trade union for legislative reasons, or an established trade union system does not exist, the company will arrange for the employees to meet with the management in other ways to discuss work-related issues.

3.3 We aim to actively fight all kinds of forced labour by: x Ensuring that all employees have employment contracts or are subject to agreements that specify their terms of employment and terms of termination, showing the voluntary aspect of the employment.

3.4 We aim to actively fight child labour by: x Ensuring that children are only employed, if they are older than the age for completing compulsory school and if they are older than the local legal minimum age of work. This also applies to companies which supply goods to Danfoss.

Young people who are between 15 and 18-years-old can therefore be employed according to the following requirements: x They must be older than the local legal minimum age of work x They must be older than the age for completing compulsory school x They must not deal with hazardous work x They must not work during the night x They should have more breaks than employees over the age of 18

In special circumstances, employment of children at the age of 14 is possible, if: x Local conditions mean that by having a job, the child will have the best possible protection and development. However, the job should be a light and secure part- time employment and education should be provided at the same time. In case of employment, it should take place in close cooperation and dialogue with the child and his/her family as well as with approved international or national organisations that safeguard the interests of children.

3.5 We aim to abolish discrimination in the workplace by: x Ensuring that non-objective discriminatory treatment does not occur with regard to employment, careers, further education, dismissals, etc. x Permitting employees and job applicants to file complaints about alleged discrimination in such a way that the people in question are not affected in any negative way, for example by taking into consideration the local standards, customs, cultures etc. that could prevent the people in question filing complaints. Corporate Policy 500B0974 3rd issue, 2005-12 Page 3 of 4

3.6 We will work against corruption, including extortion and bribery Corruption is one of the most substantial obstacles to free trade and is also the biggest threat to eliminating poverty in the world. Therefore, Danfoss will work against corruption and bribery. x Participating in corruption or bribery is not compatible with being employed at Danfoss. x All employees at Danfoss should be careful not to be party to situations where cooperation partners participate in corruption or bribery. If there is reason to suspect this is the case, the immediate manager should be told immediately. x It is mandatory to report to one's immediate manager if gifts are being accepted or handed over. The lower limit for reporting has been defined in Corporate Guideline 500B1066. The local management can decide a different lower level for reporting, but if such a decision is made, it must subsequently be reported to CF-CSR.

4 Definition Social responsibility is the consideration shown and initiatives taken by the Group to safeguard the human and social aspects of its activities.

5 References The Global Compact Initiative, published by the United Nations in 1999 and joined by Danfoss in 2002.

Danfoss documents: (If no date is given, the latest issue applies)

The Danfoss Vision The Danfoss Core Values 500B1066 Handling corruption and Bribery 500B0574 Environmental Policy Corporate Policy 500B0974 3rd issue, 2005-12 Page 4 of 4

Changes made compared to the 1st issue (October 2005): The phrasing of the policy has been shortened (Item 2). An addition has been made that country analyses will be used for the evaluation of the human rights situation in the countries in which we have or plan to have production facilities (Item 3.1). The section on the right to unionise has been expanded to include alternative ways for the management and employees to meet, in countries where the free choice of trade unions does not exist for different reasons (Item 3.2). The child labour rules have been adapted to ILO conventions. The recommendations of Save the Children with regard to the employment of children have also been taken into consideration (Item 3.3). In 2004, the United Nations added a 10th principle to the Global Compact initiative, regarding the fight against corruption. The principle has now been incorporated in the Standard under Item 3.6. Added to the Policy is the statement that Danfoss does not accept corruption and bribery and there is an obligation to report to the immediate manager if employees have reason to suspect that cooperation partners are participating in corruption or bribery. There is also an obligation to report, if gifts are accepted or handed over. Guidelines stating the lower limits for reporting must be made locally. A regional guideline states the lower limit for reporting in Denmark

The structure of the Standard has been adapted to the structure of the Environmental Policy.

Changes made compared to the 2nd issue (December 2005): The lower limit for reporting has been defined in Corporate Guideline 500B01066. The local management can decide a different lower level for reporting, but if such a decision is made, it must subsequently be reported to CF-CSR.

The regional guideline for reporting gifts in Denmark (500B1063) has been abolished.