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 005 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 mate- rials 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 005 • 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 006 • 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 ORMATION 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 origi- nal expectations for the whole year were met. It must be noted that even in an extremely competitive and dif- ficult 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 acquisi- tions 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- Pacic 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 Pacic 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 strate- gic 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 prot (EBIT) Danfoss is currently going through a period of reorganisation and restruc- Operating prot excl. other income and expenses turing which will secure the Group’s future profitability and competitiveness. Prot 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 exclud- ing 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.