123456 7/8/03 09:54 Página 1 ANNUAL REPORT 2002 INDEX Letter from the Chairman 03 Corporate Governance 07 Approval of Proposals by the Board of Directors 13 Financial Information 17 Auditor’s Report 25 Industrial Activity and Strategies 29 Corporate Structure 44 Activities of the Business Lines 47 Directory 75 123456 7/8/03 09:54 Página 2 123456 7/8/03 09:54 Página 3 LETTER FROM THE CHAIRMAN Dear Shareholders: As Chairman of Duro Felguera it is a great satisfaction for me to appear before you once again to inform you of the company’s results, the most relevant events of the last financial year and the outlook for the future. Firstly, I would like to point out that the favourable effects of having implemented the 2002- 2004 Strategy Scheme have already started to show. Consequently, the company’s core business has been perfectly defined and this has allowed us to: · Mantain and improve our business turnover. · Reinforce our technological alliances. · Re-order the markets in cooperation with other relevant companies. · Optimise our resources by improving the professional, financial and industrial profile of Duro Felguera, all of which places us at the third stage of planned development, already announced in my letter to you in last year’s Annual Report. 2002 YEARLY RESULTS Having said this and as all of you have been able to verify by the documentation handed to you at the start of this meeting as well as by the information made public by the company over the last months, the results of Duro Felguera during the last financial year, although not optimum, may be qualified as reasonably favourable given the special developments of the markets where the company is present. Consolidated profits have risen by 7% with respect to the previous financial year. The most sig- nificant increase has been made by the Parent Company, which more than triples last year’s results. This great difference is due to the fact that a large portion of business undertaken by companies which make up the group, is now concentrated in the Parent Company. It is equally important to note that general business has experienced a growth of 179%, rising from 4.4 million euros in 2001 to 12.3 million in 2002. ORDER INTAKE & BACKLOG Possibly the most outstanding aspect of Duro Felguera over the last year has been the great increase registered in orders, showing a growth of 66% with respect to the previous year. It is also noteworthy that at last year’s closure, orders to the amount of 430 million euros were expec- ted in comparison to the previous year’s 303 million euros; an overall increase of 42%. Apart from the importance of this rise, the previously mentioned 430 million euros assure not only the com- pany’s activities over a continuous period of time, but are also a favourable reflection on the pro- fit and loss accounts. All Duro Felguera subsidiaries that have reached business expectations and results foreseen in the Strategy Scheme, as gathered in their respective accounts, contribu- te to the Profit and Loss Account except those who are still in an adaptation phase. The subsi- diary Duro Felguera, S.A. de C.V. in Mexico and its engineering subsidiary Pycorsa have begun to make a profit, if modestly. Over 2002, order intake has been orientated in favour of the domestic market mainly due to the fact that better business opportunities have been appraised and as a consequence of the con- tracts that have been awarded and their proximity to production centres, streamlining costs more effectively. All of this can be observed in greater detail throughout this report. The fact that an increase in orders has been maintained during 2002 is especially significant bearing in mind the enormous difficulties that the international markets have gone through, in a climate of industrial, financial and political uncertainty. 3 123456 7/8/03 09:54 Página 4 LEADERS IN TURNKEY PROJECTS You will remember that during our previous meeting we insisted that our strategy was to make Duro Felguera a company focused towards turnkey projects and that it should have its own techno- logy or technology in consortium with others. Well, our primary aspirations have come true during 2002: Duro Felguera has become a leader in turnkey industrial projects. Among our principal successes is having become the first Spanish com- pany in history to be awarded, as Main Contractor, the construction and commissioning of two gas combined cycle power generation plants for our client Endesa, namely Son Reus II and Barranco de Tirajana. Having achieved this objective drives us even more to double our efforts for the future. STRATEGIC ALLIANCES Last year when we talked about our own technology or technology in consortium with others, we referred, in the latter supposition, to the procedure by means of which to acquire this technology, by securing alliances with the most appropriate technological partners in each case. But, this would always be based on the fact that the Duro Felguera name should be sufficiently attractive to the large multinationals in possession of the technology. Well, the solid performance of Duro Felguera in years past and confirmed throughout 2002, has allowed us to further increase our prestige in the capital goods sector and to consolidate our strategy. We are present in each of the business sectors where the Company carries out its purpose backed by stable, long-term alliances with large multinationals thereby complementing our strengths. This has been applied with great success till now and we will continue to do so in the future. In previous General Meetings I have informed you of the various agreements signed with interna- tional and foremost companies in the power generation sector where Duro Felguera is at the fore- front. During this fiscal year we have added another technological alliance. This was signed with the English construction company Balfour Beatty to develop high-speed railway track components. In addition, a joint venture has been set up with the prestigious Japanese industrial group Mitsubishi Heavy Industries to undertake joint ventures in Europe. This is the first time that the Japanese company creates a joint venture in Europe to open up new markets. Although initially this enterprise is foreseen to market, design and manufacture tunnel boring machines, it will later extend its activities, employing other commercially viable technologies developed by the Japanese multina- tional in Europe and South America. It is thanks to these agreements that Duro Felguera has taken a step forward into the infrastruc- ture sector. The alliances with important Mexican partners aimed at strengthening activities in the petroche- mical engineering sector are also worth noting. A majority share in the engineering company Pycorsa has meant a significant entrance into the Mexican Oil industry. A major qualitative leap forward has also been made into the of Petrochemical Product Storage sector, which is carried out by Felguera-IHI. This advance opens up improved perspectives for the future in this field. Without having to abandon its traditional role of construction and engineering, Felguera-IHI has evolved towards crude storage management as logistical operator. In addition, the significant achievements in construction of cryogenic storage tanks have consolidated Duro Felguera’s position in the regasification of increasingly demanded liquid gas. It is a great pride for us that top international companies accept alliances with Duro Felguera to further penetrate into various markets. Even more so when you consider that these alliances are established without any significant limits for business expansion. These important developments go to fulfil one of Duro Felguera’s needs and apparent weaknes- ses, interpreted by some analysts as being the possible lack of technology in the Company. As I alre- ady informed you in my previous letter, at last year’s closure the needs expressed in the Company’s Strategy Scheme to reinforce engineering and manufacturing capacity of capital goods and turnkey plants have been covered. Duro Felguera is currently focused towards power systems, petrochemi- cal, infrastructure, engineering, erection and start-up of industrial installations. 4 123456 7/8/03 09:54 Página 5 | LETTER FROM THE CHAIRMAN INVESTMENTS Another major objective for Duro Felguera during 2002 was to pay particular attention to its tangi- ble assets, in order to maintain the highest quality and to assure delivery schedules whilst at the same time optimising production costs and results of the multiple business units. Therefore, in order to improve productivity more than 5 million euros have been invested in moder- nising machinery, work centres and environments of various industrial and administrative installa- tions in the certainty that this initiative will favour Duro Felguera’s competitiveness. Attention has also been focused on the corporate Image. Significant financial resources have been allocated to increase communication capacity, to make Duro Felguera known both internally and externally among clients, suppliers, and shareholders, to institutions of all kinds and the social set- ting where the Company carries out its activities. The magnificent opportunities that Internet has to offer have been acknowledged as one of the methods to achieve this objective. The permanently updated Duro Felguera website contains infor- mation considered of general interest and is available to the shareholders and to anybody that wishes to make us a virtual visit. At the same time, the Shareholders Bulletin hosted on the website is updated every three months. This substitutes the traditional hardcopy format and includes a summary of the mandatory report that is periodically sent to the Comisión Nacional del Mercado de Valores (CNMV). HUMAN RESOURCES In the Company’s Human Resources area the process to optimise resources has continued. This has been developed in the usual climate of understanding and good relations with the only exception of the conflicts which arose just before the union elections at Felguera Calderería Pesada and Felguera Calderería Pesada Servicios causing some tension, though this has gradually eased.