Sustainable success is our number one priority. s Annual Report 2002 BUSINESS EXCELLENCE For 155 years, the Siemens name has been synonymous with cutting- edge technologies and continuous growth in profitability. With our wide array of products, systems and services, we are world leaders in information and communications, automation and control, power, medical solutions, trans- portation and lighting. Sustainable success is our number one priority. Our activities focus on meeting the needs of our customers and creating value for our shareholders and employees. Our innovations Ð generated in our own lab- oratories and in cooperation with customers, business partners and universi- ties Ð are our greatest strength. Siemens’ global network of innovation is developing new products and services for a world that Ð while limited in resources Ð is boundless in possibilities. GLOBAL PRESENCE 12 Letter to our shareholders 38 Information for shareholders* 140 Supervisory Board 18 At a glance 40 Report of the Supervisory Board 142 Managing Board 20 Business areas 48 Management’s discussion and analysis 146 Financial calendar 32 Corporate governance 86 Consolidated financial statements Corporate structure** * with separate table of contents ** see fold-out inside back cover financial highlights (in millions of euros) 2002(1) 2001(1) 2000(1) New orders 86,214 92,528 83,426 Net sales 84,016 87,000 77,484 Net income 2,597 2,088 8,860 Net cash provided by operating activities 5,564 7,016 6,154 Net cash used in investing activities (810) (5,886) (435) Research and development expenses 5,819 6,782 5,848 Shareholders’ equity (September 30) 23,521 23,812 28,480 Employees (September 30, in thousands) 426 484 448 FINANCIAL (1) Fiscal year (October 1 Ð September 30) INTEGRITY CORPORATE RESPONSIBILITY 4 Business excellence At Siemens, we view innovation as To ensure that our businesses are world the key to entrepreneurial success. That‘s market leaders, we reevaluate our portfolio why rigorous innovation management is at regular intervals. The breadth of our a top priority for us. Every year, we invest portfolio will continue to safeguard the approximately €5.8 billion in research and Company’s stability in the future. development. We generate more than 30 You can’t be a star performer without inventions a day and Ð in close cooperation world-class employees. At Siemens, we with our customers Ð transform them into invest roughly €500 million each year in new products, systems and solutions. expanding the competencies of our work- To sustain this level of achievement, force Ð to the benefit of our customers and we’re continually optimizing our business our shareholders. processes. That’s where our top+ Business Excellence Program comes in. Benchmark- ing, asset management, quality manage- ment and professional project management are the Program’s key tools. 5 6 Global presence 7 We provide innovative products and services in 190 countries around the world. More than 400,000 Siemens employees Ð two-thirds of them outside Germany Ð are linked in a global knowledge network. These individuals cooperate in an atmos- phere of openness, tolerance and mutual respect, exchanging know-how and sharing experience to the benefit of our customers around the globe. In many countries we’ve been active for more than a century, main- taining development labs, production facili- ties and engineering offices. Purchasing goods and services locally, we’re an integral part of those countries’ economies. Nearly one-fifth of our employees work in emerg- ing countries where their efforts are help- ing improve local infrastructures. The diversity of our workforce is an advantage for our customers as well as for ourselves. 8 Financial integrity We have a reputation for conservative accounting practices and sound financial management. This approach Ð combined with our highly transparent financial reporting Ð has enabled us to earn and maintain the trust of the financial markets, our business partners and the general public. We at Siemens are fully committed to implementing the highest standards of corporate governance. 9 10 Corporate responsibility 11 Our aim is to be a good corporate citi- zen Ð an enterprise whose actions are guided by a keen awareness of corporate responsibility and environmental considera- tions. We play an active role in the social and cultural arenas, supporting initiatives and organizations that share our values. We contribute to the development of emerging countries by training young peo- ple at all our major locations worldwide. Technology transfer is a part of our rich tradition of good corporate citizenship. 12 letter to our shareholders Dear shareholder letter to our shareholders 13 We are living in a time of extraordinary uncertainty. Confidence in the capabilities and integrity of once-respected institutions has crumbled. Restoring trust is now at the top of the agenda. We at Siemens feel that recent events have validated our traditional approach. Refusing to be drawn into the excesses of the New Economy, we have kept an unwavering focus on substance. And we have remained true to our principles of con- servative accounting and sound financial management. These principles aim to provide the greatest transparency possible and to ensure our long- term business success. We welcome the current discussion in the media and in public policy arenas on strenghtening corporate management and oversight systems. Corporate governance is a vital concern for us. We have given careful con- sideration to the recommendations of the German Corporate Governance Code and the corresponding regulations in the U.S. and Europe. Siemens’ corporate governance system is described in detail on pages 32 to 37 of this Report. Despite dramatic structural crises in key sectors and a difficult and unstable macroeconomic environment, Siemens’ overall results in fiscal 2002 were generally satisfactory. Net income totaled €2.6 billion. EBIT from operations amounted to €2.5 billion. And Ð what is particularly important for us Ð total net cash provided by operating activities, less net cash used in investing activities, was €4.8 billion. These figures show a considerable improvement over last year. And, although a difficult year for equity markets has not left the Siemens share unscathed, we have been less affected than many other companies. For fiscal 2002, we will again propose a dividend of €1.00 per share. 14 letter to our shareholders There are several reasons why we are mastering today’s challenges better than many of our competitors. We boast an extensive and generally robust business portfolio. We do not permit our operating units to neglect innovation management, even when the going gets tough. As a global network of innovation active in 190 countries, we are profiting from favorable developments in growth regions all around the world. Positive ratings by the financial markets underscore the soundness of our balance sheet. And as part of our top+ initiative, we have introduced management systems that give our people the tools they need to further optimize busi- ness excellence. We benefit from the fact that many of our activities are subject to long- term market cycles. This applies, for example, to power plant systems, “There are several reasons power transmission and distribution, medical solutions and rail systems. why we are mastering In all these sectors, we have captured strong positions in recent years and, today’s challenges better thanks to innovative products and efficient processes, increased our earn- than many of our com- ings margins. We anticipated that conditions in the power plant sector petitors.” would normalize at the end of the gas turbine boom in the U.S. and took the necessary measures to ensure continued high earnings. Other Company activities depend on regular industry-specific busi- ness cycles. Two good examples are our automation and drives business and Osram’s lighting business. Both have developed reliable early-warn- ing systems and, thanks to flexible production structures, are well- equipped to weather dry spells. One exception in the Automation and Control area is our Industrial Solutions and Services Group. This Group faces difficulties resulting not only from the general economic downturn but also from structural prob- lems in Germany and several other regions. Small-to-midsized technical service companies increasingly dominate the market for low-tech indus- trial solutions. With our current setup, we cannot compete with these low-cost operations over the long term. However, we are taking the steps required to provide Industrial Solutions and Services with a solid basis for future success. letter to our shareholders 15 The challenges now confronting our Information and Communica- tions businesses and the activities that are indirectly dependent on them are even greater. Following a period of overheating, our largest customer group in this sector Ð telecom operators Ð is now struggling. Major invest- ments in new technologies, UMTS licenses and the globalization of their activities have put enormous strains on these companies. Consequently, they have now reduced their investment budgets dramatically. As a suppli- er, we have borne the full brunt of this reduction in capital spending. Our telecom customers are experiencing a paradigm shift. In past years, investments were technology-driven. Today, the question is: Which products and systems will provide businesses with the fastest return on investment? We have to adapt to this change. More than ever before, we have to transform ourselves from a technology provider with a broad product spectrum into a partner who makes a concrete contribution to solving customers’ business problems. Our solutions for migrating voice networks into data transmission systems quickly and economically give us a competitive advantage. However, the high business volumes of the 1990s are not likely to recur in the foreseeable future. As a result, we have to adjust our operations, even when this is very painful for the individuals and locations affected.