04 Bringing growth into focus. Annual Report 2004. 04 a successful year for Continental. 2 2 Continental Corporation in € millions 2004 2003 2002 2001 2000 Sales 12,597.4 11,534.4 11,408.3 11,233.3 10,115.0 EBITA¹ 1,096.4 855.2 694.3 32.8 533.0 Consolidated net income/loss for the year 673.8 314.0 226.0 - 257.6 204.7 Dividends 116.3² 70.4 58.6 – 64.1 Cash flow 1,443.8 985.9 919.0 666.5 866.3 Capital expenditure on property, plant, and equipment 672.4 583.5 581.2 704.9 682.8 Amortization and depreciation³ 665.7 603.1 670.3 891.3 654.7 Shareholders’ equity 2,842.3 1,983.2 1,715.2 1,546.7 1,844.1 Equity ratio in % 29.4 23.9 20.9 17.2 24.2 Employees at the end of the year 4 80,586 68,829 64,379 65,293 63,832 Share price (high) in € 47.26 30.98 19.53 19.45 20.94 Share price (low) in € 28.87 12.04 11.72 9.68 15.85 ¹ Earnings before interest, taxes and regular goodwill amortization ² Subject to the approval of the Annual Shareholders’ Meeting on May 12, 2005 ³ Excluding write-downs of investments 4 Excluding trainees Continental Divisions Sales in € millions 2004 2003 Automotive Systems 5,007.7 4,625.7 Passenger and Light Truck Tires 4,104.2 3,907.2 Commercial Vehicle Tires 1,500.7 1,261.6 ContiTech 2,063.4 1,812.2 EBIT in € millions 2004 2003 Automotive Systems 487.5 369.5 Passenger and Light Truck Tires 383.4 345.8 Commercial Vehicle Tires 100.3 82.4 ContiTech 150.4 144.0 Bringing growth into focus. Annual Report 2004. 2 3 C3 Key Figures for the Continental Corporation C4 Continental Divisions 6 Letter to Shareholders To Our Shareholders To 10 Capital Market Information 13 Corporate Strategy 16 Employees 19 Quality and the Environment Company Profile Management Report for Continental AG and the Corporation 24 Market Environment 26 Earnings and Financial Situation 34 Automotive Systems 36 Passenger and Light Truck Tires 38 Commercial Vehicle Tires Management Report 40 ContiTech 42 Assets, Earnings and Financial Situation of the Parent Company 45 Risks and Risk Management 48 Developments in 2005 52 Statement of the Executive Board 53 Independent Auditors’ Report 54 Consolidated Statements of Income 55 Consolidated Balance Sheets 56 Consolidated Statements of Cash Flows 57 Statements of Changes in Consolidated Shareholders’ Equity 60 Segment Reporting 61 Notes to the Consolidated Financial Statements 67 Consolidated Financial Statements – Supplemental Disclosure Pursuant to Section 292a of the Handels- gesetzbuch (HGB – German Commercial Code) Consolidated Financial Statements 104 Corporate Governance 107 Report of the Supervisory Board 109 The Supervisory Board 111 The Executive Board 112 Continental Corporation – Ten-Year Review C5 Glossary Further Information C6 Financial Calendar C6 Contact Details and Acknowledgements 3 80,5 4 6 Letter to Shareholders To Our Shareholders To people working for you around the world. We can only achieve sustained success through the hard work and commitment of our employees. Our common goal is to make individual mobility safer 86 and more comfortable. 5 Letter to Shareholders Dear Shareholders, The most moving event of 2004 for us was without The market for Electronic Stability Control (ESC) systems doubt the tsunami in South Asia at the end of the year. is still growing. We benefited from this growth again, We sympathize with the suffering of the many people increasing our sales volume by 37% to 4.3 million sys- affected by this devastating catastrophe. We donated tems in 2004. Further momentum is now coming from $500,000 to aid the rebuilding of the region, and also the U.S.A, where vehicle manufacturers are increasingly encouraged our employees to make donations. None of installing this safety system as standard equipment in our employees were directly affected by the tsunami. SUVs (sport utility vehicles) and other vehicles. We were awarded major contracts by DaimlerChrysler and Ford 2004 was another successful year for Continental. Once to equip their SUVs. We currently expect ESC system again, we were able to top the previous year’s sales sales in the U.S.A. to double in 2005 and triple in 2006 and earnings figures – despite the one-time charge compared to 2004. from the restructuring measures in the plant in Mayfield, U.S.A., amounting to €104 million. The Automotive Sys- We achieved record sales in 2004 once again in the tems, Passenger and Light Truck Tires, Commercial Ve- winter tire market after years of steady growth: the hicle Tires and ContiTech divisions all contributed to this increase of 7.3% over the prior year to 15.7 million tires encouraging development. I would like to take this op- confirmed our market leadership in this segment. portunity, as well as on behalf of my colleagues on the Executive Board, to sincerely thank our employees. We Our major challenge continues to be the passenger and paid our employees once again a special bonus in rec- light truck tires business in the NAFTA region. We man- ognition of their successful performance in 2004. aged to increase sales and earnings, before restructur- ing expenses. We made particularly healthy progress in Sales increased 9.2% to €12.6 billion. The increase the original equipment business in the U.S.A., and in- amounted to 8.8% before exchange rate effects and creased our market share significantly. This cut into our changes in the scope of consolidation, which mainly re- replacement market business due to production bottle- late to Phoenix and Continental Sime Tyre. Our operat- necks, which led us to refocus our replacement busi- ing result increased 28.2% to €1,096.4 million. Exclud- ness to where it offered adequate margins, and remove ing the restructuring measures at the Mayfield plant, low margin products from our range. The delivery situa- the increase actually amounts to 40.4%. We reduced tion is set to improve in 2005, as we will have completed our effective indebtedness, including proceeds from the transfer of production from our Mayfield plant and sales of accounts receivable and contingent liabilities on will also be importing tires from our Malaysia facilities to notes, by €733 million, despite the acquisition of Phoe- the North American market. The U.S.A. will also import nix. The Executive Board and the Supervisory Board will from Brazil as from 2006, once our new plant begins propose to increase the dividend by 53.8% to €0.80 production. We remain confident that we will break-even per share at the Annual Shareholders’ Meeting. in the NAFTA region in the fourth quarter of 2005. For Continental, the most significant event of the year Our efforts in Russia ended abruptly, teaching us an im- under review was the acquisition of Phoenix AG to portant lesson for future acquisitions or ventures abroad. strengthen and enhance the development of ContiTech. We had to abandon our tire production joint venture The merger of ContiTech and Phoenix will form a com- there prematurely due to problems with our business pany at the forefront of the global market for rubber and partner and the local authorities which led to delays plastics technology, whose competitive ability and devel- and internal project management difficulties. These de- opment potential is better positioned for the long term. velopments meant that we would have been unable to Our Air Spring Systems, Conveyor Belt Group, and Fluid ensure the long-term profitability through the venture or business units will benefit particularly from the acquisi- feasibility of the location. By abandoning the project, we tion. incurred total expenses of €26.9 million. However, our overall business in the Russian market, which we con- tinue to operate as an export market, was not negative- ly affected. 6 We started to leverage our position as Official Partner of the 2006 FIFA World Cup Germany™ in 2004 in a large number of marketing activities to further expand international awareness of Continental. We will also be involved in the FIFA Confederations Cup Germany 2005 Manfred Wen ne mer with sales promotion measures, bringing Continental as Chairman, an innovative and dynamic brand closer to the public. responsible for ContiTech 2004 was another positive year for Continental. Our earnings exceeded the one billion mark. That makes our goal for 2005 clear: to improve sales and our operating result yet again. Dr. Alan Hippe We would like to thank you, our shareholders, for your responsible for Finance, trust in our performance and in the achievements of our Controlling and Law employees, now numbering around 80,000. We will not shy any efforts, again in 2005, to continue to earn this trust. Yours sincerely, Martien de Louw responsible for Passenger and Light Truck Tires Manfred Wennemer Dr. Karl-Thomas Neumann responsible for Automotive Systems Dr. Hans-Joachim Nikolin responsible for Commercial Vehicle Tires, Corporate Quality and Environment Thomas Sattelberger responsible for Human Resources, Director of Labor Relations 7 55.4 8 9 10 Capital Market Information 13 Corporate Strategy 16 Employees 19 Quality and the Environment Company Profile increase in the Continental share price in 2004 – a 48.1% improvement compared to the DAX. The stock market is rewarding our successful entre- preneurial approach and the systematic implementa- tion of our strategy. In line with our customers’ needs, we deliver components, modules and systems that prove their worth in the market. We are known in the automotive industry as an innovative and reliable de- velopment partner.