Annual Report 2006 www.siemens.com Key figures in millions of euros 2006(1) 2005(1) New orders(2) 96,259 83,791 Sales(2) 87,325 75,445 Income from continuing operations 3,087 3,058 Loss from discontinued operations, net of income taxes (54) (810) Net income 3,033 2,248 Net cash from operating and investing activities(2) 739 (1,489) therein: Net cash provided by operating activities 5,174 4,217 Net cash used in investing activities (4,435) (5,706) Shareholders’ equity (September 30) 29,306 27,022 Employees(2) (September 30, in thousands) 475 461 (1) Fiscal year from October 1 to September 30 (2) Continuing operations (excluding the discontinued mobile devices activities) Contents Letter to our Shareholders 7 Managing Board 14 Fit4More 16 Performance and Portfolio 18 Operational Excellence 22 People Excellence 24 Corporate Responsibility 28 Research and Development 32 Worldwide Presence 34 Regional Highlights 36 Group Presidents 46 Business Areas 48 Shanghai and Siemens 64 Report of the Supervisory Board 73 Corporate Governance Report 80 Compensation Report 86 Information for shareholders* 96 Management’s discussion and analysis 98 Consolidated Financial Statements 148 Statement of the Managing Board 236 Independent Auditors’ Report 237 Siemens financial calendar 253 Corporate Structure** * With separate table of contents ** See foldout inside back cover. Innovations of the year www.siemens.com/megatrends www.siemens.com/innovation Healthcare I SOMATOM Definition Faster than a heartbeat Siemens has developed a new computed tomography tem uses two X-ray tubes and two detectors at the same (CT) scanner that produces images at unprecedented time, allowing physicians to better differentiate blood speed while cutting cardiac patients’ radiation exposure vessels, bone and soft tissue. by up to 50 percent. This innovative dual-source CT sys- Mobility I Ruhrpilot Less traffic congestion in Europe’s largest conurbation A consortium headed by Siemens has developed an minute traffic data and forecasts, this innovative system integrated traffic management system for Germany’s promises to substantially reduce the number of traffic Ruhr region, launching the Ruhrpilot system in time for jams and accidents in Europe’s largest urban area while the 2006 Soccer World Cup. By providing up-to-the- significantly cutting carbon dioxide emissions. Power I Gas turbine New gas turbine poised to set a world record for efficiency The efficiency of Siemens’ combined cycle turbine 340 megawatts, our latest gas turbine will be the largest power plants will soon exceed 60 percent, thanks to and most efficient in the world. improved blade materials and coatings and optimized blade and compressor designs. With a capacity of Healthcare I Telemedicine IT platform facilitates early detection Scotland’s National Health Service (NHS) is using 73 locations. DR is a common complication of diabetes Siemens’ Soarian IT platform to carry out a large-scale which – if detected too late – can result in blindness. The telemedicine initiative in which nearly 300,000 diabet- Soarian platform enables the screening results to be trans- ics are being screened for diabetic retinopathy (DR) at mitted to experts at five regional centers for evaluation. Security I Dubai police headquarters New command and control center expedites emergency response Siemens has equipped the new world-class police head- room staff can access images from security cameras and quarters in the Emirate of Dubai with communications satellites within seconds, enabling them to initiate police, technology, IT infrastructure, software and security sys- fire and medical dispatching faster than ever before. tems. In the event of an accident or emergency, control Industry I SIPROCESS Automated micro process technology enhances chemical syntheses SIPROCESS, Siemens’ modular micro process system, components are only the width of a hair, several tons of is accelerating product development and increasing substances can be chemically synthesized annually using production efficiency in the chemical and pharmaceu- this innovative technology. tical industries. Although the system’s microstructured Mobility I Siemens Airport Center The only thing missing is the planes It’s always been difficult to design and evaluate sys- carousels or walking onto the aircraft maneuvering area tems solutions for airports, with no means available and disrupting traffic. The newly opened Siemens Airport to simulate real-life factors such as passengers moving Center is the world’s first planning, simulation and test through passport controls, crowding around baggage center for airport logistics and infrastructure projects. “In fiscal 2006, we took major steps to further optimize profit and growth.” Dr. Klaus Kleinfeld President and Chief Executive Officer, Siemens AG Letter to our Shareholders 7 Dear Shareholders, In fiscal 2006, we made substantial progress toward achieving sustainable profitable growth Company-wide. We based our efforts on the rigorous implementation of our Fit4More program, which comprises the four pillars Performance and Portfolio, Operational Excellence, People Excellence and Corporate Responsibility (see also pages 16 – 31 of this Report). We’re satisfied with the results we achieved in fiscal 2006. In every quarter, we exceeded our main target: sustainable profitable growth at twice the global GDP rate. Year-on-year, new orders surged 15 percent to €96 billion. Six percent of this growth was organic (excluding portfolio measures and currency effects). Sales climbed 16 percent to €87 billion, and eight percent of this increase was organic. Despite further restructuring costs due to portfolio adjustments, we increased Group profit from Operations 12 percent to roughly €5.3 billion. Net income soared 35 percent to €3.0 billion, and earnings per share rose 35 percent to €3.40. Global megatrends are putting wind in our sails. To drive our businesses, we’re leveraging two global megatrends – demographic change and increasing urbanization. These megatrends are exerting an ever-greater impact on the world we live in. According to UN projections, the world’s population will have increased by about one- third and the average age will have jumped from 26 to 36 by 2050. More and more people are moving to urban areas in search of better jobs, better education and a better life. The UN pre- dicts that next year more people will be living in cities than rural areas for the first time in human history. In light of these developments, how can we meet the growing demand for energy without degrading the environment? How can we shape the future of manufacturing so that more and better goods can be produced using fewer natural resources? How can we safeguard and improve the mobility of people and goods? And how can we ensure the availability of high- quality, affordable healthcare while keeping pace with advances in medical technology? Innovation can make a major contribution to mastering these challenges. And this is precisely where our opportunities lie, since we already hold leading positions worldwide in many of the technologies required. Our portfolio policies aim to strengthen and expand these positions. 8 Letter to our Shareholders A two-pronged strategy is positioning Siemens for the future. The first Fit4More pillar – Performance and Portfolio – comprises two main elements: targeted acquisitions and the strategic reorientation of specific businesses, in particular our Information and Communications activities. In fiscal 2006, we implemented a number of key portfolio- enhancing measures in both areas. On the one hand, we made a series of acquisitions that will expand our positions in the long-term growth markets of power, environmental technology, medical solutions, automation systems and public and industrial infrastructures. On the other hand, we introduced numerous measures to get Siemens Business Services (SBS) back on track. These measures included a strategic reorganization, which was completed at the end of fiscal 2006 (see also pages 58, 74, 108, 145 of this Report). Two portfolio adjustments were of particular importance: a broadening of the focus of our Medical Solutions Group (Med) and the decision to fold the carrier business of our Communica- tions Group (Com) into a joint venture with Nokia. I Med’s acquisitions of U.S.-based Diagnostic Products Corporation and Bayer Diagnostics are moving us into the new, highly attractive growth segment of in-vitro diagnostics. Once both acquisitions have been finalized, we’ll occupy an excellent starting position on a par with the No. 2 global provider. These two acquisitions will also make Med the world’s first supplier to deliver products, systems and services across the entire healthcare continuum, from prevention and diagnosis to treatment and follow-up care. Since IT plays a key role in integrating clinical workflows, increasing efficiency and lowering costs, Med’s leading global position in healthcare IT will give it an additional competitive edge. Letter to our Shareholders 9 I The decision to put our telecommunications carrier business into a 50-50 joint venture with Nokia was not easy. After weighing all the options, however, this seemed to be the best way to remain a leading supplier of telecommunications infrastructure given the dramatic changes now taking place in the world market. Size is a critical factor for manufacturers and providers of telecommunications solutions and services. This new joint venture will give us the critical mass and financial clout we need