SIEMENS AKTIENGESELLSCHAFT 20-F 2008
Documents found in this filing:
As filed with the Securities and Exchange Commission on December 2, 2008
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended September 30, 2008.
For the transition period from to
Date of event requiring this shell company report
Commission file number: 1-15174
(Exact name of Registrant as specified in its charter)
Federal Republic of Germany
(Jurisdiction of incorporation or organization)
Federal Republic of Germany
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
The number of outstanding shares of each of the issuers classes of capital or common stock as of September 30, 2008: 861,557,756 common shares, no par value.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o Not applicable o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
This Form 20-F contains forward-looking statements and information that is, statements related to future, not past, events. These statements may be identified by words such as expects, looks forward to, anticipates, intends, plans, believes, seeks, estimates, will, project or words of similar meaning. Such statements are based on our current expectations and certain assumptions, and are, therefore, subject to certain risks and uncertainties. A variety of factors, many of which are beyond Siemens control, affect our operations, performance, business strategy and results and could cause the actual results, performance or achievements of Siemens to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. For us, particular uncertainties arise, among others, from changes in general economic and business conditions (including margin developments in major business areas); the behavior of financial markets, including fluctuations in interest and exchange rates, commodity and equity prices, debt prices (credit spreads) and financial assets generally; continued volatility and further deterioration of the capital markets; the commercial credit environment and, in particular, additional uncertainties arising out of the subprime, financial market and liquidity crises; future financial performance of major industries that we serve, including, without limitation, the Sectors Industry, Energy and Healthcare; the challenges of integrating major acquisitions and implementing joint ventures and other significant portfolio measures; introduction of competing products or technologies by other companies; lack of acceptance of new products or services by customers targeted by Siemens; changes in business strategy; the outcome of pending investigations and legal proceedings, especially the corruption investigations we are currently subject to in Germany, the United States and elsewhere and actions resulting from the findings of these investigations; the potential impact of such investigations and proceedings on our ongoing business including our relationships with governments and other customers; the potential impact of such matters on our financial statements; as well as various other factors. More detailed information about certain of these factors is contained throughout this report and in our other filings with the SEC, which are available on the Siemens website, www.siemens.com, and on the SECs website, www.sec.gov. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the relevant forward-looking statement as expected, anticipated, intended, planned, believed, sought, estimated or projected. Siemens does not intend or assume any obligation to update or revise these forward-looking statements in light of developments which differ from those anticipated.
In this Form 20-F, references to we, us, our, Company, Siemens or Siemens AG are to Siemens Aktiengesellschaft and, unless the context otherwise requires, to its consolidated subsidiaries. In Item 4: Information on the CompanyDescription of Business, we use the terms we and us to refer to a specific Siemens Sector or Cross-Sector Business. Throughout this annual report, whenever a reference is made to our Companys website, such reference does not incorporate information from the website by reference into this annual report.
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Effective with the first quarter of fiscal 2007, we prepare our primary financial reporting according to International Financial Reporting Standards (IFRS) and its interpretations issued by the International Accounting Standards Board (IASB), as adopted by the European Union (EU). The Consolidated Financial Statements of Siemens also comply with IFRS as published by the IASB. Therefore, there are no differences and a reconciliation between IFRS as adopted by the EU and IFRS as published by the IASB is not needed. Until fiscal year end 2006, our primary financial reporting was prepared in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP).
We have presented the selected financial data below as of and for each of the years in the four-year period ended September 30, 2008 in accordance with IFRS. For fiscal years 2008 and 2007, we present our Consolidated Financial Statements prepared in accordance with IFRS. In addition, we published our first IFRS Consolidated Financial Statements for fiscal years 2006 and 2005 as supplemental information in December 2006. The IFRS selected financial data set forth below should be read in conjunction with, and are qualified in their entirety by reference to, the Consolidated Financial Statements and the Notes thereto presented elsewhere in this document.
We have also presented the selected financial data below as of and for each of the years in the four-year period ended September 30, 2007 in accordance with U.S. GAAP. For fiscal 2008, Siemens is not required to prepare and present financial data in accordance with U.S. GAAP. For fiscal years 2007 to 2005, the selected financial data has been derived from a reconciliation of our IFRS Consolidated Financial Statements to U.S. GAAP. For fiscal 2004, we present our Consolidated Financial Statements prepared in accordance with U.S. GAAP.
The number of shares outstanding at September 30, 2008, 2007, 2006, 2005 and 2004 was 861,557,756, 914,203,038; 891,086,826; 891,076,457 and 891,075,461, respectively.
The following table sets forth in euros and in dollars the dividend paid per share for the years ended September 30, 2004, 2005, 2006, 2007 and the proposed dividend per share for the year ended September 30, 2008. Owners of our shares who are United States residents should be aware that they will be subject to German withholding tax on dividends received. See Item 10: Additional InformationTaxation.
We publish our Consolidated Financial Statements in euros. As used in this document, euro or means the single unified currency that was introduced in the Federal Republic of Germany on January 1, 1999. U.S. dollar, U.S.$, USD or $ means the lawful currency of the United States of America. The currency translations made in the case of dividends we have paid have been made at the noon buying rate at the date of the Annual Shareholders Meeting at which the dividends were approved. As used in this document, the term noon buying rate refers to the rate of exchange for euro, expressed in U.S. dollar per euro, as announced by the Federal Reserve Bank of New York for customs purposes as the rate in The City of New York for cable transfers in foreign currencies.
In order that you may ascertain how the trends in our financial results might have appeared had they been expressed in U.S. dollars, the table below shows the average noon buying rates in The City of New York for cable
transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York for U.S. dollar per euro for our fiscal years. The average is computed using the noon buying rate on the last business day of each month during the period indicated.
The following table shows the noon buying rates for euro in U.S. dollars for the last six months and for November, 2008 up to and including November 24, 2008.
On November 24, 2008, the noon buying rate was U.S.$1.2890 per 1.00.
Our shares are traded on the Frankfurt Stock Exchange in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro price of the shares on the Frankfurt Stock Exchange and, as a result, are likely to affect the market price of the American Depositary Shares (ADS) on the New York Stock Exchange. We will declare any cash dividends in euro and exchange rate fluctuations will affect the U.S. dollar amounts received by holders of ADSs on conversion of cash dividends on the shares represented by the ADSs.
Our business, financial condition or results of operations could suffer material adverse effects due to any of the following risks. We have described below all the risks that we consider material, but those risks are not the only ones we face. Additional risks not known to us or that we currently consider immaterial may also impair our business operations.
Our business is affected by the uncertainties of economic and political conditions: Our business environment is influenced by conditions in the domestic and global economies. During fiscal 2008, the capital and credit markets experienced extended volatility and disruption that have reached unprecedented levels. If as a consequence of the credit market crisis these levels of market volatility and disruption continue or worsen, there can be no assurance that we will not experience an adverse effect that may be material to our revenues, results of operations, financial condition and ability to access capital. For example, the current tightening of credit in the financial markets may make it more difficult for our customers to obtain financing and as a result, they may modify, delay or cancel plans to purchase our products and services or to execute transactions. Additionally, if customers are not successful in generating sufficient revenue or securing access to the capital markets they may not be able to pay, or may delay payment of, the amounts they owe us, which may adversely affect our results of operations and cash flows.
Numerous other factors, such as fluctuation of energy and raw material prices as well as global political conflicts, including situations in the Middle East and other regions, continue to impact macroeconomic parameters and the international capital and credit markets. The uncertainty of economic and political conditions can have a material adverse impact on our financial condition or results of operations and can also make our budgeting and forecasting more difficult.
In addition, our Sectors and Cross-Sector Businesses are affected by market conditions. For example the Industry Sector would be affected considerably by unfavorable market conditions in segments of the industry market. The Healthcare Sector is dependent on the healthcare markets, particularly in the United States. Our Energy Sector in particular is affected considerably by the markets in Asia as well as the Middle East.
Our financial results and cash flows may be adversely affected by continued strategic reorientations and cost-cutting initiatives: We are in the process of strategic reorientations and constantly perform cost-cutting initiatives, including headcount reduction such as the previously announced SG&A cost reduction program, capacity adjustments through consolidation of business activities and manufacturing facilities, as well as streamlining product portfolios. These measures impact our earnings results, and any future contribution of these measures to our profitability will be influenced by the actual savings achieved and by our ability to sustain these ongoing efforts.
We operate in highly competitive markets, which are subject to price pressures and rapid changes: The worldwide markets for our products are highly competitive in terms of pricing, product and service quality, development and introduction time, customer service and financing terms. We face strong competitors, some of which are larger and may have greater resources in a given business area and some from emerging markets which may have a better cost structure. Siemens faces downward price pressure and is exposed to market downturns or slower growth. Some industries in which we operate are undergoing consolidation, which may result in stronger competitors and a change in our relative market position. In some of our markets, new products must be developed and introduced rapidly in order to capture available opportunities, and this can lead to quality problems. Our operating results depend to a significant extent on our abilities to adapt to changes in markets and to reduce the costs of producing high-quality new and existing products. Any inability to do so could have a material adverse effect on our financial condition or results of operations.
Our businesses must keep pace with technological changes and develop new products and services to remain competitive: The markets in which our businesses operate experience rapid and significant changes due to the introduction of innovative technologies. To meet our customers needs in these businesses, we must continuously design new, and update existing, products and services and invest in and develop new technologies. This is especially true for our Healthcare Sector. Introducing new offerings and technologies requires a significant commitment to research and development, which may not always result in success. Our sales and profits may suffer if we invest in technologies that do not function as expected or are not accepted in the marketplace as anticipated, if our products or systems are not brought to market in a timely manner or as they become obsolete.
Our financial results and cash flows may be adversely affected by cost overruns or additional payment obligations particularly with respect to our long-term contracts: Our Energy and Industry Sectors as well as our Cross-Sector Business Siemens IT Solutions and Services perform a significant portion of their business, especially large projects, under long-term contracts that are awarded on a competitive bidding basis. The profit margins realized on such fixed-priced contracts may vary from original estimates as a result of changes in costs and productivity over their term. We sometimes bear the risk of quality problems, cost overruns or contractual penalties caused by unexpected technological problems, unforeseen developments at the project sites, performance problems with our subcontractors or other logistical difficulties. Certain of our multi-year contracts also contain demanding installation and maintenance requirements, in addition to other performance criteria relating to timing, unit cost requirements and compliance with government regulations, which, if not satisfied, could subject us to substantial contractual penalties, damages, non-payment and contract termination. There can be no assurance that all of our fixed-priced contracts can be completed profitably. For additional information, see Item 5: Operating and Financial Review and ProspectsCritical Accounting Estimates.
We may be adversely affected by our equity interests and strategic alliances: Our strategy includes strengthening our business interests through joint ventures, associated companies and strategic alliances. Certain of our investments are accounted for using the equity method, including, among others, Nokia Siemens Networks (NSN), BSH Bosch und Siemens Hausgeräte GmbH (BSH) and Areva NP. Any factors negatively influencing the profitability of our equity investments could have a negative impact on our own results and may negatively affect our cash flow and our ability to recover the full amount of our investments. In addition, such portfolio transactions are inherently risky because of the difficulties of integrating people, operations, technologies and products that may arise. Strategic alliances may also pose risks for us because we compete in some business areas with companies with which we have strategic alliances.
Our financial results and cash flows may be adversely affected by portfolio measures: Our strategy includes divesting our interests in some business areas and strengthening others through portfolio measures, including mergers and acquisitions.
With respect to dispositions, we may not be able to divest some of our activities as planned, and our divesting activities could have a negative impact on our results of operations, our cash flow at closing, as well as in the future, and on our reputation.
Mergers and acquisitions are inherently risky because of the difficulties of integrating people, operations, technologies and products that may arise. There can be no assurance that any of the businesses we acquire can be successfully integrated or that they will perform well once integrated. In addition, we may incur significant acquisition, administrative and other costs in connection with these transactions, including costs related to integration of acquired businesses. Furthermore, portfolio activities may result in additional financing needs and adversely affect our financial leverage and our debt-to-equity ratio. Acquisitions may also lead to substantial increases in long-lived assets, including goodwill. Write-downs of these assets due to unforeseen business developments may materially and adversely affect our earnings. All of our Sectors have significant amounts of goodwill.
We are dependent upon the ability of third parties to deliver parts, components and services on time: We rely on third parties to supply us with parts, components and services. Using third parties to manufacture, assemble and test our products reduces our control over manufacturing yields, quality assurance, product delivery schedules and costs. The third parties that supply us with parts and components also have other customers and may not have sufficient capacity to meet all of their customers needs, including ours, during periods of excess demand. Component supply delays can affect the performance of certain of our Sectors. Although we work closely with our suppliers to avoid supply-related problems, there can be no assurance that we will not encounter supply problems in the future or that we will be able to replace a supplier that is not able to meet our demand. This risk is particularly evident in businesses with a very limited number of suppliers. Shortages and delays could materially harm our business. Unanticipated increases in the price of components due to market shortages or other reasons could also adversely affect the performance of certain of our Sectors.
We may be adversely affected by rising raw material prices: Our Sectors are exposed to fluctuations in energy and raw material prices. In recent times, commodities such as oil, steel and copper have been subject to volatile markets and temporarily subject to significant price increases. If we are not able to compensate for or pass on our increased costs to customers, such price increases could have a material adverse impact on our financial results.
We face operational risks in our value chain processes: Our value chain comprises all steps, from research and development to production, marketing, sales and services. Operational failures in our value chain processes could result in quality problems or potential product, labor safety, regulatory or environmental risks. Such risks are particularly present in relation to our production facilities, which are located all over the world and have a high degree of organizational and technological complexity. From time to time, some of the products we sell have quality issues resulting from the design or manufacture of such products or from the software integrated into them. Such operational failures or quality issues could have a material adverse effect on our financial condition or results of operations.
We are dependent upon hiring and retaining highly qualified management and technical personnel: Competition for highly qualified management and technical personnel remains intense in the industries and regions in which our Sectors and Cross-Sector Businesses operate. In many of our business areas, we further intend to extend our service businesses significantly, for which we will need highly skilled employees. Our future success depends in part on our continued ability to hire, assimilate and retain engineers and other qualified personnel. There can be no assurance that we will continue to be successful in attracting and retaining highly qualified employees and key personnel in the future, and any inability to do so could have a material adverse effect on our business.
We are exposed to currency risks and interest rate risks: We are particularly exposed to fluctuations in the exchange rate between the U.S. dollar and the euro, because a high percentage of our business volume is conducted in the United States and as exports from Europe. As a result, a strong euro in relation to the U.S. dollar can have a material impact on our other revenues and results. Certain currency risksas well as interest rate risksare hedged on a company-wide basis using derivative financial instruments. Depending on the development of foreign currency exchange rates, our hedging activities can have significant effects on our cash flow, particularly for our treasury activities (Corporate Treasury). Our Sectors and Cross-Sector Businesses engage in currency hedging activities which sometimes do not qualify for hedge accounting. In addition, our Corporate Treasury has interest rate hedging activities which also do not qualify for hedge accounting, and are subject to changes in interest rates. Accordingly, exchange rate and interest rate fluctuations may influence our financial results and lead to earnings volatility. A strengthening of the euro (particularly against the U.S. dollar) may also change our competitive position, as many of our competitors may benefit from having a substantial portion of their costs based in weaker currencies, enabling them to offer their products at lower prices. For more details regarding currency risks, interest rate risks, hedging activities and other market risks, please see Notes to Consolidated Financial Statements.
We are exposed to widening credit spreads: Regarding our Corporate Treasury activities, widening credit spreads due to decreasing liquidity in the financial markets might lead to decreasing fair market values of our existing derivative financial instruments and traded receivables. In addition, we also see a risk of increasing refinancing costs if the turbulences in the global financial markets would persist. Furthermore, costs for buying protection on credit default risks could increase due to a potential increase of counterparty risks.
Our future financing via Corporate Treasury may be affected by the uncertainties of economic conditions and the development of capital and bank markets: Our Corporate Treasury is responsible for the financing of the Company and our Sectors and Cross-Sector Businesses. A negative development in the capital markets could increase our cost of debt capital. The development in the subprime mortgage market in the U.S. has had a global impact on the capital markets with subsequent losses and worsening liquidity of many financial institutions, so far culminating in the Chapter 11 filing of a large U.S.-based investment bank. Such developments could influence our
possibilities of obtaining debt financing. Regarding our Corporate Treasury activities, deteriorating credit quality and/or default of counterparties may adversely affect our results.
Our financing activities subject us to various risks including credit, interest rate and foreign exchange risk: We provide to our customers various forms of direct and indirect financing in connection with large projects such as those undertaken by the Energy Sector. We finance a large number of smaller customer orders, for example the leasing of medical equipment, in part, through Siemens Financial Services (SFS). SFS also incurs credit risk by financing third-party equipment, its factoring business or by taking direct or indirect participations in financings, such as syndicated loans. We partially take a security interest in the assets we finance or receive additional collateral. We may lose money if the credit quality of our customers deteriorates or if they default on their payment obligation to us, if the value of the assets that we have taken a security interest in or additional collateral declines, if interest rates or foreign exchange rates fluctuate, or if the projects in which we invest are unsuccessful. The current financial crisis and potential adverse changes in economic conditions could cause a decline in the fair market values of financial assets and customer default rates to increase substantially and asset and collateral values to decline, resulting in losses which could have a negative effect on our financial condition or results of operations.
Downgrades of our ratings may increase our cost of capital and could negatively affect our businesses: Our financial condition, results of operations and cash flows are influenced significantly by the actual and expected performance of the Sectors and Cross-Sector Businesses, as well as the Companys portfolio measures. An actual or expected negative development of our results of operations or cash flows or an increase in our net debt position may result in the deterioration of our credit rating. Expected or actual downgrades by rating agencies may increase our cost of capital, may reduce our potential investor base and may negatively affect our businesses.
The funded status of our off-balance sheet pension benefit plans and its financial statement impact is dependent on several factors: The funded status of our pension plans may be affected by an increase or decrease in the Defined Benefit Obligation (DBO), as well as by an increase or decrease in the valuation of plan assets. Pensions are accounted for in accordance with actuarial valuations, which rely on statistical and other factors in order to anticipate future events. These factors include key pension plan valuation assumptions such as the discount rate, expected rate of return on plan assets, rate of future compensation increases and pension progression. Assumptions may differ from actual developments due to changing market and economic conditions, thereby resulting in an increase or decrease in the DBO. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets, particularly equity securities, or in a change of the expected rate of return on plan assets. Also, changes in pension plan assumptions can affect net periodic pension cost. For example, a change in discount rates or in the expected return on plan assets assumption may result in changes in the net benefit pension cost in the following financial year. For additional information, see Item 5: Operating and Financial Review and ProspectsCritical Accounting Estimates and Notes to Consolidated Financial Statements.
Public prosecutors and other government authorities in jurisdictions around the world, including the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ), are conducting investigations of Siemens and certain of its current and former employees regarding allegations of public corruption and other illegal acts. The results of these and any future investigations may have a material adverse effect on the development of future business opportunities, our financial results and condition, the price of our shares and ADSs and our reputation: Public prosecutors and other government authorities in jurisdictions around the world are investigating allegations of corruption at a number of Siemens former business Groups and regional companies. In addition to ongoing investigations, there could be additional investigations launched in the future by governmental authorities in these or other jurisdictions and existing investigations may be expanded. These governmental authorities may take action against us or some of our employees. These actions could include
criminal and civil fines, in addition to those already imposed on the Company, as well as penalties, sanctions, injunctions against future conduct, profit disgorgement, disqualifications from engaging in certain types of business, the loss of business licenses or permits or other restrictions. In addition to monetary and other penalties, a monitor could be appointed to review future business practices with the goal of ensuring compliance with applicable laws and we may otherwise be required to further modify our business practices and compliance programs. Tax authorities may also impose certain remedies, including potential tax penalties. In fiscal year 2008, Siemens accrued a provision in the amount of approximately 1 billion in connection with ongoing discussions with the Munich public prosecutor, the SEC and DOJ for the purpose of resolving their respective investigations. Depending on the development of the investigations, we may be required to accrue additional material amounts for such penalties, damages, profit disgorgement or other possible actions that may be taken by various governmental authorities. Any of the foregoing could have a material adverse effect on our business, financial results and condition, the price of our shares and ADSs and our reputation.
Additionally, we engage in a substantial amount of business with governments and government-owned enterprises around the world. We also participate in a number of projects funded by government agencies and non-governmental organizations such as the World Bank and other multilateral development banks. If we or our subsidiaries are found to have engaged in certain illegal acts or are found not to have taken effective steps to address the allegations or findings of corruption in our business, this may impair our ability to participate in business with governments or non-governmental organizations and may result in formal exclusions from such business, which may have a material adverse effect on our business. For example, legislation of member states of the European Union could in certain cases result in mandatory or discretionary exclusion from public contracts in case of a conviction for bribery and certain other offences or for other reasons. As described more fully in Item 4: Information on the CompanyLegal Proceedings, we or our subsidiaries have in the past been excluded from government contracting as a result of findings of corruption or other misconduct. Conviction for illegal behavior, or debarment from participating in contracting with governments or non-governmental organizations, in one jurisdiction may lead to debarment in other jurisdictions or by other non-governmental organizations. Even if we are not formally excluded from participating in government business, government agencies or non-governmental organizations may informally exclude us from tendering for or participating in certain contracts. From time to time, we have received requests for information from government customers and non-governmental organizations regarding the investigations described above and our response to those investigations. We expect such requests to continue.
In addition, our involvement in existing and potential corruption proceedings could also damage our reputation generally and have an adverse impact on our ability to compete for business from both public and private sector customers. The investigations could also impair our relationship with business partners on whom we depend and our ability to obtain new business partners and could also adversely affect our ability to pursue strategic projects and transactions which could be important to our business, such as alliances, joint ventures or other combinations. Current or future investigations could result in the cancellation of certain of our existing contracts, and the commencement of significant third-party litigation, including by our competitors.
Many of the governmental investigations are at this time incomplete and we cannot predict when they will be completed or what their outcome will be, including the potential effect that their results or the reactions of third parties thereto, may have on our business. Future developments in these investigations, responding to the requests of governmental authorities and cooperating with these investigations, especially if we are not able to resolve the investigations in a timely manner, could divert managements attention and resources from other issues facing our business. Management has implemented a remediation plan to address corruption and compliance risk in our business. If this remediation plan is unsuccessful, there could be an increased risk that one or more of the risks described above could materialize.
Our business could suffer as a result of current or future litigation: We are subject to numerous risks relating to legal proceedings to which we are currently a party or that could develop in the future. In the ordinary course of our business, we become party to lawsuits, and/or similar proceedings, and become subject to governmental investigations and proceedings involving allegations of improper delivery of goods or services, product
liability, product defects, quality problems and intellectual property infringement and/or alleged or suspected violations of applicable laws. In addition, we may face third party claims as a result of the circumstances that led to the corruption proceedings described above. For additional information with respect to legal proceedings, see Item 4: Information on the CompanyLegal Proceedings. There can be no assurance that the results of these or other legal proceedings will not materially harm our business, reputation or brand. We record a provision for legal proceedings risks when (i) a present obligation as a result of a past event exists; (ii) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (iii) a reliable estimate can be made of the amount of the obligation. We maintain liability insurance for certain legal risks at levels our management believes are appropriate and consistent with industry practice. We may incur losses relating to legal proceedings beyond the limits, or outside the coverage, of such insurance and such losses may have a material adverse effect on the results of our operations or financial condition and our provisions for legal proceedings-related losses may not be sufficient to cover our ultimate loss or expenditure.
We are subject to risks associated with our international operations: Changes in regulatory requirements, tariffs and other trade barriers and price or exchange controls could impact our sales and profitability and make the repatriation of profits difficult. In addition, the uncertainty of the legal environment in some regions could limit our ability to enforce our rights. We expect that sales to emerging markets will continue to be an increasing portion of total sales, as our business naturally evolves and as developing nations and regions around the world increase their demand for our offerings. Emerging market operations present several risks, including civil disturbances, health concern, cultural differences such as employment and business practices, volatility in gross domestic product, economic and governmental instability, the potential for nationalization of private assets and the imposition of exchange controls. In particular, the Asian markets are important for our long-term growth strategy, and our sizeable operations in China are influenced by a legal system that is still developing and is subject to change. Our growth strategy could be limited by governments supporting local industries. The demand for many of the products of our Sectors and Cross-Sector Businesses, particularly those that derive their revenue from large projects, can be affected by expectations of future demand, prices and gross domestic product in the markets in which those Sectors and Cross-Sector Businesses operate. If any of these risks or similar risks associated with our international operations were to materialize, it could have a material adverse effect on our results of operations and financial condition.
We are subject to environmental and other government regulations: Some of the industries in which we operate are highly regulated. Current and future environmental and other government regulations, or changes thereto, may result in significant increases in our operating or product costs. We could also face liability for damage or remediation for environmental contamination at the facilities we design or operate. See Item 4: Information on the CompanyEnvironmental Matters for a discussion of significant environmental matters. We accrue for environmental risks when (i) a present obligation as a result of a past event exists; (ii) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (iii) a reliable estimate can be made of the amount of the obligation. With regard to certain environmental risks, we maintain liability insurance at levels that our management believes are appropriate and consistent with industry practice. We may incur environmental losses beyond the limits, or outside the coverage, of such insurance, and such losses may have a material adverse effect on the results of our operations or financial condition and our provisions for environmental remediation may not be sufficient to cover the ultimate losses or expenditures.
Changes in tax regulations could result in lower earnings and cash flows: We operate in approximately 190 countries and therefore are subject to different tax regulations. Changes in tax regulation could result in higher tax expenses and payments. Furthermore, changes in tax regulation could impact our tax liabilities as well as deferred tax assets.
Siemens traces its origins to 1847. Beginning with advances in telegraph technology, the Company quickly expanded its product line and geographic scope and was already a multi-national business by the end of the 19th century. The Company formed a partnership under the name Siemens & Halske in 1847, reorganized as a limited partnership in 1889 and as a stock corporation in 1897. The Company moved its headquarters from Berlin to Munich in 1949, and assumed its current name as Siemens Aktiengesellschaft, a stock corporation under the Federal laws of Germany, in 1966. The address of our principal executive offices is Wittelsbacherplatz 2, D-80333 Munich, Germany; telephone number +49 (89) 636 00.
During fiscal 2008, Siemens employed an average of 420,841 people and operated in approximately 190 countries worldwide. In fiscal 2008, we had revenue of 77.327 billion. Our balanced business portfolio is based on leadership in electronics and electrical engineering. During fiscal 2008, Siemens reorganized its operations to create three Sectors according to its strategic orientation. These Sectors are Industry, Energy and Healthcare. We have combined the expertise in these three Sectors with a commitment to original research and development (R&D) to build strong global market positions. The Industry Sectors portfolio ranges from industry automation and drives products and services to building, lighting and mobility solutions and services as well as system integration and solutions for plant business. The Industry Sector is primarily comprised of the business activities of the former Groups Automation and Drives (A&D), Industrial Solutions and Services (I&S), Transportation Systems (TS), Siemens Building Technologies (SBT) and OSRAM. The Energy Sector offers a complete spectrum of products, services and solutions for the generation, transmission and distribution of power and for the extraction, conversion and transport of oil and gas. Our Energy Sector essentially comprises the business activities of the former Power Generation (PG) and Power Transmission and Distribution (PTD) Groups and the Oil and Gas activities of the former Industrial Solutions and Services (I&S) Group. The Healthcare Sector develops, manufactures and markets diagnostic and therapeutic systems, devices and consumables, as well as information technology systems for clinical and administrative purposes. The Sector comprises the former Medical Solutions Group (Med). Besides these activities, Siemens IT Solutions and Services as well as Siemens Financial Services (SFS) support Sector activities as business partners (Cross-Sector Businesses) while continuing to build up their own business with external customers. Our businesses operate under a range of regional and economic conditions. In internationally-oriented long-cycle industries, for example, customers have multi-year planning and implementation horizons that tend to be independent of short-term economic trends. Our activities in these areas include the Energy and Healthcare Sectors and the mobility solutions business within the Industry Sector. In fields with more industry-specific cycles, customers tend to have shorter horizons for their spending decisions and greater sensitivity to current economic conditions. Our activities in these areas include automation and drives as well as lighting operations within the Industry Sector. Some businesses, especially the Healthcare Sector are also influenced by technological change and the rate of acceptance of new technologies. Effective with the fourth quarter of fiscal 2008, the former Strategic Equity Investments (SEI) has been expanded and renamed Equity Investments. Equity Investments includes equity investments that are not allocated to a Sector or Cross Sector Business by reason of strategic fit; available-for-sale financial assets; and assets held for disposal.
As a globally operating organization, we also conduct business with customers in Iran, Sudan, Syria and Cuba. The U.S. Department of State designates these countries as state sponsors of terrorism and subjects them to export controls. Our activities with customers in these states are insignificant relative to our size (less than 1% of our sales in fiscal 2008) and do not, in our view, represent either individually or in aggregate a material investment risk. In light of current humanitarian conditions in Sudan, Siemens ceased its business activities in that country as of June 30, 2007. However, we may participate in humanitarian efforts of internationally recognized organizations in Sudan. We actively employ systems and procedures for compliance with applicable export control programs, including those in the United States, the European Union and Germany.
Our Fit42010 program, which we initiated in fiscal 2007, has been continued in fiscal 2008. The overall objectives of Fit42010, defined as Performance targets, are to achieve profitable growth and to increase the value of the company. Drivers of Performance are Portfolio, People Excellence, Corporate Responsibility and Operational Excellence.
Performancesets medium-term goals for Siemens to further enhance our competitiveness and our company value by defining targets for return, growth, cash, capital structure and reduction of marketing, selling and general administrative expenses for the company as well as margin ranges for our Sectors and their Divisions and our Cross-Sector Businesses.
Portfolioinvolves reaching or holding leading positions in all our businesses with the focus on our three Sectors Industry, Energy and Healthcare where we intend to round out our portfolio with new products and technologies by organic growth as well as acquisitions.
People Excellencemeans achieving and maintaining a high-performance culture. We are committed to systematically developing top talents, especially emerging leaders and technical, subject matter experts. People Excellence entails fostering outstanding knowledge and unique skills in every individual and developing the capability to work in high-performance teams across organizational boundaries.
Corporate Responsibilitycomprises our commitment to the society. This includes Corporate Governance, Compliance, Climate Protection, and Corporate Citizenship. Corporate Governance is the basis of all our decision-making and monitoring processes. With our Compliance system, we are seeking to set the standard for high integrity and transparency. With binding rules and guidelines, we intend to ensure that our employees and managers always conduct themselves in a legal and ethical manner in relation to each other and to our business partners. Climate Protection is an obligation to society but also a business opportunity with significant growth rates. Siemens is developing technological innovations that help save energy and limit greenhouse gas emissions. Furthermore we have launched an energy efficiency program for our production facilities worldwide. Within Corporate Citizenship, the global rollout of both Siemens-wide citizenship programs, Siemens Generation21 in the field of education and Siemens Caring Hands for social assistance services, was continued. During the fourth quarter of fiscal 2008 Siemens established a foundation to enhance the sustainability and visibility of its corporate citizenship activities. The foundation will focus primarily on technology, education, charitable programs, the arts and culture and will begin operations as an independent entity in fiscal 2009 with an endowment of 390 million. Siemens will transfer its Siemens Generation21 and Siemens Caring Hands programs to the foundation. A further goal of our corporate citizenship activities is to implement projects that foster social and business benefits by more strongly integrating Siemens specific expertisefor example by providing support for infrastructure deficiencies.
Operational Excellencefocuses on Innovation and Global supply chain management. Innovation has been a hallmark of Siemens since its inception, and our commitment to innovation remains strong, with increasing R&D expenses in fiscal 2008 compared to fiscal 2007. With Global supply chain management, Siemens intends to expand its global market presence and market penetration, especially in fast growing regions like Asia and to close the gap between Siemens and its most profitable competitors through a global value chain network for different functions such as R&D, product development, sourcing or production.
Since fiscal 2006, we have completed the following significant transactions to optimize our business portfolio for sustainable profitability and growth:
Dispositions and Discontinued operations
For a detailed discussion of our acquisitions, dispositions and discontinued operations, see Notes to Consolidated Financial Statements.
In addition to measures of financial performance calculated in accordance with IFRS, we used the metrics ROCE and Free cash flow as performance indicators with a focus on capital efficiency and cash generation. We also used economic value added (EVA) as a measure for the performance of each of our former Groups and through and including fiscal 2007 also of our Company as a whole.
The measures and targets for ROCE, EVA and Free cash flow are defined as follows:
Other companies that use EVA, ROCE or Free cash flow may define and calculate these measures differently.
Beginning with the third quarter of fiscal 2008, our financial reporting comprises six reportable segments. These segments consist of:
The following figure shows Siemens reporting structure:
The Industry Sector offers a complete spectrum of products, services and solutions for efficient use of resources and energy and for improvements of productivity in industry and infrastructure. Our integrated technologies or holistic solutions address primarily industrial customers, such as process and manufacturing industries, and infrastructure customers, especially in the areas of transport, buildings and utilities. The portfolio spans industry automation and drives products and services, building, lighting and mobility solutions and services and system integration and solutions for plant businesses. The Sector consists of six Divisions: Industry Automation, Drive Technologies, Mobility, Industry Solutions, Building Technologies and OSRAM. These six divisions essentially reflect the business activities of the former Groups Automation and Drives (A&D), Transportation Systems (TS), Industrial Solutions and Services (I&S), Siemens Building Technologies (SBT) and OSRAM.
The following chart provides key financial data concerning the Industry Sector.
The following chart shows the geographic distribution of the Industry Sectors revenue in fiscal 2008.
The Industry Automation Division offers automation systems such as programmable logic controllers and process control systems, low-voltage switchgear such as circuit protection and distribution products, sensors such as process instrumentation and analytics and industrial software such as product lifecycle management and manufacturing execution systems software. The Divisions portfolio ranges from standard products and systems for the manufacturing, process and construction industries to solutions for whole industrial vertical markets that encompass the automation of entire automobile production facilities and chemical plants. In May 2007, to enhance its industrial software portfolio, the Division acquired UGS Corp., a Texas (USA) based leading provider of product lifecycle management software and services. This Industry Automation Division inherited major parts of the former A&D Group.
The Drive Technologies Division offers integrated technologies that cover a wide range of drive applications with electrical components such as standard motors and drives for conveyor belts, pumps and compressors, heavy duty motors and drives for rolling steel mills, compressors for oil and gas pipelines and mechanical components such as gears for wind turbines and cement mills. Drive Technologies offers products such as automation systems and services for production machinery and machine tools and complete surface mount technology placement systems that mount components onto printed circuit boards. The Divisions portfolio includes standard products as well as industry-specific control and drive solutions for wind power, metal forming, printing and electronic manufacturing as well as solutions for manufacturers of glass, wood, plastic, ceramic, textile and packaging equipment and crane systems. The Division also inherited major parts of the former A&D Group. During fiscal 2008, the Siemens Management Board decided to carve out the surface mount technology placement systems business into a legal sub-group consisting of separate legal entities in Germany and other countries.
The Building Technologies Division offers products, services and solutions for building automation, comfort, building safety and security and building operations. In addition, the Division provides energy solutions and services, aiming to improve a buildings energy cost, reliability and performance while minimizing impact on the environment. The Divisions broad range of offerings includes heating and ventilation controls, security systems and devices such as intruder detection, video surveillance and building access control, fire safety solutions such as fire detection, protection alarm systems and non-water based fire extinguishing and electrical installation equipment for buildings such as switches, sockets and circuit breakers. All these offerings are focused towards commercial, industrial, public and residential buildings. The Division inherited all businesses of the former SBT Group as well as the electrical installation equipment business of the former A&D Group.
OSRAM supplies lighting solutions for all aspects of life and living environments, providing its customers with an extensive product portfolio of lamps such as incandescent, halogen, compact fluorescent, fluorescent, high-intensity discharge and Xenon lamps, opto-electronic semiconductor light sources such as light emitting diodes (LEDs), organic LEDs, high power laser diodes, LED systems and LED luminaires, relevant electronic equipment such as electronic ballasts and lighting control and management systems as well as precision material and components. These products are used in applications in households, in industrial and commercial applications and in public spaces and infrastructure. In fiscal 2008, the division sold its Global Tungsten Powder business with products such as glass for bulbs, phosphor powders, tungsten and other metals for filaments. The Division inherited all businesses of the former OSRAM Group.
The Industry Solutions Division is Siemens systems integrator and solutions provider for industrial plant businesses, and covers planning, construction, operation and maintenance over a plants entire lifecycle. The Division helps to increase the productivity and competitiveness of enterprises in various industriesand to meet the need for environmentally compatible solutionswith its water processing and raw material processing systems. Our systems and processes are applied for iron and steel production such environmental technologies and strip rolling and in pulp and paper, cement, marine and mining industries. We also offer treatment equipment for the treatment of potable water and wastewater such as membranes and lab water/high purity water systems, treatment and outsourcing solutions for industrial wastewater, electrical and automation solutions for municipal wastewater and water transport as well as water treatment services. The division inherited a substantial share of businesses of the former I&S Group.
The Mobility Divisions goal is to network distinct transportation systems with one another to move people and goods efficiently. The Division combines Siemens products, solutions and services in operating systems for rail transportation such as central control systems, interlockings and automated train controls, for road traffic including traffic detection, information and guidance, for airport logistics including cargo tracking and baggage handling, for postal automation including letter parcel sorting, and for rail electrification, as well as rail vehicles for mass transit, regional, long-distance transportation, and locomotives. The Division inherited the businesses of the former TS Group as well as the postal automation, airport logistics and road traffic solutions business of the former I&S Group.
The Industry Sector sells its products primarily through its sales force in Germany and through dedicated personnel in Siemens worldwide network of regional sales units. Apart from direct sales a larger fraction of our sales reaches our end customers through original equipment manufacturers, solution providers, installers, general contractors, third-party distributors and independent agents. Our small project businesses (e.g. Building Technologies) have a decentralized business organization with a local branch network to deliver solutions and services to our customers.
Overall, the end customers of the Industry Sector are industrial and infrastructure customers, which can be grouped in markets such as construction & real estate, transport & logistics (e.g. transport authorities), metals & mining, machinery, utilities and automotive.
The Industry Sector addresses customers and markets globally, with important growth regions in the emerging countries, such as those in the Asia-Pacific region. Apart from the Siemens Brand we market some parts of our portfolio under different brand names (such as OSRAM and Sylvania for lighting products or Flender for gears) depending on geography and technology.
The large size of some of our projects (especially in the Mobility Division and in parts of the Industry Solutions and Building Technologies Divisions) occasionally exposes us to risks associated with technical performance, a customer or a country. In the past, we have experienced losses in connection with such risks. For additional information with respect to our long-term contracts, Item 3: Key InformationRisk Factors.
We have manufacturing locations throughout North and South America, Western and Eastern Europe and Asia, allowing us to stay close to our major customers and keep shipping charges low. In recent years, materials costs have been negatively affected by significant price increases for metals, energy and other raw materials. We continue to work on reducing the use of hazardous materials (e.g. mercury or lead) or to substitute for these in our products and processes. Sustainable products, such as energy-saving lamps, coking coal free iron production processes (COREX), energy efficient motors, and energy management play a major role in our innovation strategy.
Average product lifetimes in our product businesses tend to be short (typically from one to five years from introduction) and are even shorter where software and electronics play an important role. The lifecycle in our solutions businesses tends to be longer, as we support our customers with significant service business through the whole lifecycle of their infrastructures.
No single competitor has a broad business portfolio similar to that of the Industry Sector. Our principal competitors with broad portfolios are multinational companies such as ABB, Alstom, Bombardier, Emerson, General Electric, Honeywell, Johnson Control, Philips, Schneider Electric and Tyco. In our industry consolidation is occurring on several levels. Suppliers of automation solutions have supplemented their activities with actuator or sensor technology. Suppliers of components and products have supplemented their portfolio with adjacent products for their sales channels.
Moreover, our Divisions compete with many specialized companies. The main competitors of our Industry Automation Division are ABB, Schneider Electric, Rockwell and Emerson Electric. Within its Product Lifecycle Management business the Division also competes among others with Dassault Systemes and PTC. Competitors of our Drive Technologies Division include companies with broad business portfolios such as ABB, Emerson and Mitsubishi Electric but also specialist companies such as Fanuc, SEW and Baldor. For our Building Technologies Division, the main global competitors of its solutions businesses are large system integrators such as Tyco, Honeywell, Johnson Controls, UTC and Bosch as well as Schneider Electric in some markets. The security business is also facing increased competition from information technology (IT) integrators due to the convergence of physical and IT security. The main competitors of Building Technologies products business are large multi-national suppliers such as GE, Johnson Controls, Honeywell, Bosch and Schneider Electric. We also face competition from niche competitors and from new entrants, such as utility companies and consulting firms, exploiting the fragmented energy efficiency market. Competitors of our Industry Solutions Division vary by business area and region. They range from large, diversified multinational to small, highly specialized local companies. Industry Solutions main competitors internationally include ABB, General Electric, SMS, Danieli and Veolia. In the worldwide lighting market, as a result of acquisitions and consolidations over the last decades, OSRAM, Philips and General Electric are the key players today. Price competition is intense in some areas of both the traditional and innovative lighting product markets, due to competition among Philips, OSRAM, General Electric and the Japanese LED manufacturer Nichia, as well as rising competition from new entrants, including a growing number of Chinese manufacturers. Our Mobility Division competes in its industry globally with a relatively small number of large companies and with numerous small to midsized competitors who are either active on a regional level or specialize within narrow product spectrums. Mobilitys principal competitors are Alstom and Bombardier.
We also compete with many local companies, particularly in the European, Chinese and Indian markets. Asian competitors are generally focused on large-scale production and cost cutting. European competitors are focused on high quality lifecycle service. Nevertheless, most of our major competitors have established global bases for their businesses. In addition, competition in the field has become increasingly focused on technological improvements and price. Intense competition, budget constraints and rapid technical progress within our industry place significant downward pressure on prices. In addition, competitors continuously shift production to low-cost countries.
The Energy Sector offers a wide spectrum of products, services and solutions for the generation, transmission and distribution of power, and for the extraction, conversion and transport of oil and gas. The Sector primarily addresses the needs of energy providers, but also serves industrial companies, particularly in the oil and gas industry. The Energy Sector consists of six Divisions: Fossil Power Generation, Renewable Energy, Oil and Gas, Energy Service, Power Transmission and Power Distribution. The first four of these essentially comprise the business activities of the former Power Generation Group and the Oil and Gas activities of the former Industrial Solutions and Services Group. Power Transmission and Power Distribution reflect the business activities of the former Power Transmission and Distribution Group.
The following chart provides key financial data concerning the Energy Sector.
The following chart shows the geographic distribution of the Energy Sectors external revenue in fiscal 2008:
The Fossil Power Generation Division offers high-efficiency products and solutions for fossil-based power generation. The offerings extend from gas and steam turbines and generators to complete turnkey power plants. The Division concentrates on turbo generators, gas and steam turbines in the larger power range, with an emphasis on combined-cycle gas and steam power plants. The Division also develops process instrumentation and control systems for all types of power plants and for use in power generation, including information technology solutions providing management applications from the plant to the enterprise level and is working on the development and production of systems based on emerging technologies such as fuel cells and fuel gasification. Fossil Power Generation has stakes in joint ventures such as Areva NP in the nuclear power sector and the Russian power plant supplier Power Machines. The Division is also represented in a number of joint ventures in China, including an increasing share in Shanghai Electric Power Generation Equipment Co.
The Renewable Energy Division provides solutions for the production of electricity out of renewable energy sources, including wind, photovoltaic and hydropower. In the rapidly growing global wind power market, the Division builds wind turbines from 1.3 MW to 3.6 MW with rotor diameters spanning 62 to 107 meters for on- and offshore applications; provides service to off- and onshore wind farms; in coordination with other Divisions within the Energy Sector the Division ensures the efficient linking of wind farms to power grids. In addition to wind power and solar power, Siemens holds a minority stake in a joint venture in hydropower generation, Voith Siemens Hydro Power Generation, which is accounted for using the equity method.
The Oil & Gas Division supplies products and solutions for production, transport and processing of oil, gas and water, which are used in the oil and gas industries as well as other industries. The portfolio includes steam and gas turbines in the small and medium range as well as process turbocompressors, generators, power generation and distribution solutions, process and automation technology and integrated IT solutions. The Divisions activities encompass design, engineering and supply.
The Energy Service Division offers comprehensive services for complete power plants and for rotating machines such as gas and steam turbines, generators and compressors. These services utilize advanced plant diagnostics and systems engineering. The Division is also responsible for power plant maintenance and operations and the provision of emissions control services and systems. All financial results relating to the Energy Service Division are reflected in the Fossil Power Generation Division and the Oil & Gas Division and are therefore not reported separately.
The Power Transmission Division covers high-voltage transmission solutions, power transformers, high-voltage switching products and systems, and innovative alternating and direct current transmission systems. The Division supplies energy utilities and large industrial power users with equipment, systems and services used to process and transmit electrical power from the source, typically a power plant, to various points along the power transmission network. In the power transmission process, electricity generated by a power plant is transformed to a high voltage that can be transported efficiently over long distances along overhead lines or underground or subsea cables. This voltage step-up occurs at or near the site of the power plant, and requires transformation, control, transmission, switching and protection systems. High-voltage power then passes through one or more substations, which use distribution switchgear to control the amounts delivered, circuit breakers and surge arresters to protect against transmission hazards and transformers to step-down the voltage to a medium level for safe distribution in populated areas.
Since October 2007, Power Transmission has secured key components through its participation in a joint venture with Infineon Technologies AG in Germany for design, manufacturing and sale of high performance semiconductors. The Division also fosters Siemens Russian market presence through a new joint venture with Elektrozavod OJSHC for project management and engineering of high voltage substations.
The Power Distribution Division combines medium-voltage components, systems and solutions, power automation solutions and products as well as services for power equipment and transmission and distribution networks. The Division supplies energy utilities and large industrial power users with equipment, systems and services used to process and distribute power via a distribution grid to the low voltage grid and the end-user respectively. Metering systems measure and record the locations and amounts of power transmitted.
Power Transmission together with Power Distribution provides customers with: turnkey transmission systems and distribution substations; discrete products and equipment for integration by our customers into larger systems; information technology systems and consulting services relating to the design and construction of power transmission and distribution networks. These include power systems control equipment and information technology systems, transformers, high voltage products and power equipment for both alternating and direct current transmission systems; protection and substation control systems; and medium voltage equipment, including circuit breakers and distribution switchgear systems and components.
In addition to equipment and systems, the Power Transmission and Power Distribution Divisions offer a growing range of services and integrated solutions for various stages in the power transmission and distribution process. The Power Transmission and Power Distribution Divisions provide analytical and consulting services, as well as equipment and systems, in the power quality field that are designed to improve the availability and reliability of power transmitted by analyzing and reducing the causes of power fluctuations and failures. Power quality systems and services have become increasingly important with the growing use of sensitive computerized, electronic and other equipment requiring continuous power with very little fluctuation in voltage or frequency.
Overall, the principal customers of the Energy Sector are large power utilities and independent power producers and power distributors, construction engineering firms and developers. Due to ongoing deregulation in the power industry, our customer base continues to diversify from one formerly composed almost exclusively of power utilities responsible for all stages of power generation, transmission and distribution to one that includes an increasing number of independent system operators and power distributors supplying services at different points of the power generation, transmission and distribution network. Because certain significant areas of our business, such as power plant construction, involve working on medium- or longer-term projects for customers who may not require our services again in the short term, our most significant customers will tend to vary significantly from year to year. In fiscal 2008, Kahramaa in Qatar, Shuaibah Water and Electricity Company in Saudi Arabia, Marchwood
Power Ltd in the United Kingdom, Dubai Electricity & Water Authority in Dubai, Sloe Centrale B.V. in the Netherlands and Doosan Heavy Industries and Construction Co., Ltd. in South Korea were among the Sectors largest customers. The Energy Sector is generating an increasing portion of revenue from its oil and gas activities as well as from industrial customers, who represent an important market for smaller turbines and compressor solutions. While regions in the developing world represent growth markets for power generation, transmission and distribution products and systems, our activities there can also expose us to risks associated with economic, financial and political disruptions that could result in lower demand or affect our customers abilities to pay.
Our revenues derive mainly from power plant construction, service and maintenance. We have further increased our sales to oil and gas and industrial customers, providing them with equipment and systems for exploration, processing and production, as well as power networks associated with manufacturing facilities. The Energy Sectors revenue is strong in nearly all areas of activity due to high order levels and positive market development. Revenues are evenly distributed geographically, with significant revenues in Europe and the region comprising Asia, Australia and the Middle East. As to our Fossil Power Generation Division, the worldwide market for new power plants is near the high level experienced in the early 2000s. The development in 2008 was driven primarily by strong economic development in China, which again was the strongest single market for worldwide power equipment orders in fiscal 2008. In the next several years, we foresee that the demand for power generation products in China could slow, although this might be compensated for by rising demand in other regional markets including Middle East, Russia, India and rest of Asia. The increasing need to replace older, mainly coal-fired units in industrialized countries has contributed to increased demand. This relatively high level of demand causes tight external supply markets, which are expected to relax over the next several years. The sustained and significant increase in oil and gas prices in recent years, ongoing ecological discussions and uncertainty relating to fuel markets together create uncertainty surrounding the expected distribution of demand among gas, steam and nuclear power plants. As to our Oil & Gas Division, market development is driven by growing demand for energy and business activities vary from component delivery and relatively small projects to complex process solutions. The Power Transmission and Power Distribution Divisions generate their revenue from project business, as well as from sales of systems, equipment and services. A relatively small portion of the Divisions project business involves construction of large power networks and other projects with project values of more than 50 million each. Although the order volume from larger projects increased compared to the previous fiscal year, in fiscal 2008, most of Power Transmissions and Power Distributions business was still generated from smaller projects and sales of systems and components to a large number of smaller customers. Power Transmission and Power Distribution focus on emerging markets in Brazil, China, India and the Middle East. Both divisions also focus on mature markets with large modernization and new installation potential such as the United States, Russia and Spain.
We distribute our systems, components and services through our own dedicated sales force and through dedicated personnel in the regional Siemens sales units worldwide.
Fossil Power Generations market has a relatively small number of companies, some with very strong positions in their domestic markets. Siemens principal competitors in gas turbines are General Electric (GE), ALSTOM Power and Mitsubishi Heavy Industries; and in steam turbines are ALSTOM Power, BHEL, Toshiba and GE. In China, Chinese manufacturers are mainly focused on their large steam home market. In instrumentation and controls, ABB is Siemens principal competitor. Siemens principal renewable energy competitors in the growing wind turbine market are Vestas, Gamesa, Enercon and GE, with smaller and low-cost competitors increasingly challenging the dominant players large market share. The oil and gas market is characterized by a relatively small number of companies, some with very strong market positions, including our principal competitors in automation and controls, ABB, Honeywell and GE, and in rotating equipment (compressors and steam and gas turbines), GE, Solar, MAN Turbo and Dresser Rand.
Competition in power transmission and distribution markets comes primarily from a small group of large, multinational companies offering a wide variety of products, systems and services. In power transmission, Siemens key global competitors are ABB and Areva. Further competition comes from regional and niche manufacturers and, increasingly, local competitors in low-cost countries such as India and China. In power distribution, Siemens key competitors are ABB, Schneider and Areva, as well as regional competitors in certain markets such as China and India where local competitors have lately also begun to venture into export markets. Increasing international
competition from local and regional competitors in low-cost countries is one driver for the participation of Power Transmission and Power Distribution in several joint ventures in China, our largest single transmission and distribution market.
The Energy Sectors business activities vary widely in size from component delivery and comparatively small projects to turnkey contracts for new power plant construction with contract values of more than half a billion euros each. The large size of some of our projects occasionally exposes the Energy Sector to risks related to technical performance, a customer or a country. For additional information about our long-term contracts, see Item 3: Key InformationRisk Factors.
The Healthcare Sector develops, manufactures and markets diagnostic and therapeutic systems, devices and consumables, as well as information technology systems for clinical and administrative purposes. The Sector provides technical maintenance, professional and consulting services, as well as financing services together with Siemens Financial Services.
The following chart provides key financial data concerning the Healthcare Sector.
The following chart shows the geographic distribution of the Healthcare Sectors external revenue in fiscal 2008:
The Healthcare Sector comprises the former Medical Solutions Group. Following our recent acquisitions in the field of in-vitro diagnostics, Siemens formed an integrated healthcare company, offering its customers a unique and comprehensive portfolio of medical solutions across the value-added chainranging from medical imaging, in-vitro diagnostics, interventional systems to clinical ITall from a single source.
The Imaging & IT Division comprises our medical imaging systems, including x-ray, computed tomography, magnetic resonance, molecular imaging and ultrasound, as well as computer-based workstations, enabling the healthcare professional to retrieve and process relevant information. Our imaging systems are used to generate morphological and functional images of the human body. This information is used both for diagnostic purposes and in preparation for potential treatment, including interventional and minimally-invasive procedures. The Division also includes information technology systems, which are used to digitally store, retrieve and transmit medical images and other clinical and administrative information. Our solutions also include knowledge-based technologies for assisting diagnoses and facilitating efficient workflows in health care environments.
The Workflow & Solutions Division provides integrated solutions for disease areas such as cardiology, oncology, womens health, urology, surgery and audiology. The portfolio includes x-ray imaging systems for mammography and surgery applications as well as urology systems; oncology care systems including linear
accelerators used for cancer therapy; and audiology products (hearing aids) and their related products and supplies. The Division is also responsible for product related services and consulting services.
The Diagnostics Division comprises our in-vitro diagnostics businesses. In-vitro diagnostics is based on the analysis of bodily fluids such as blood or urine, and supplies vital information for the detection and management of disease, and also for an individual patients risk assessment. Our portfolio represents a full range of diagnostic testing systems and consumables, including clinical chemistry and immunodiagnostics, molecular diagnostics (i.e. testing for nucleic acids), hematology, hemostasis, microbiology, point-of-care testing and clinical laboratory automation solutions. We entered the in-vitro diagnostics business through the acquisitions of Diagnostic Products Corporation (DPC), the Diagnostics Division of Bayer AG, and the acquisition of Dade Behring, Inc., which closed in November 2007. For additional information on the acquisitions of DPC, Bayer Diagnostics and Dade Behring, see Notes to Consolidated Financial Statements.
The Healthcare Sector also provides electromedical systems through our joint venture Dräger Medical of Lübeck, Germany. The portfolio of Dräger Medical includes solutions for patient monitoring, aneastesia and respiratory care, which are primarily used during critical care and surgery.
The customers of the Healthcare Sector include healthcare providers such as hospital groups and individual hospitals, group and individual medical practices, reference and physician office laboratories and outpatient clinics. We typically sell the majority of our product spectrum through direct sales persons who are located within our operations in the individual countries where our products are sold and supported by product specialists. In addition, in some countries we sell primarily low-end products (such as low-end ultrasound and low-end x-ray) through dealers. Our in-vitro diagnostics product spectrum, while typically sold through a dedicated diagnostics sales force, is in some regions sold through dealer relationships. A small portion of our revenue involves delivery of certain of our products and components to competitors on an original equipment manufacturer (OEM) basis. Our products are serviced primarily through our own dedicated personnel.
We have research and development and OEM cooperation agreements with various companies, including with Bruker, in the field of magnetic resonance imaging; Toshiba, in the field of ultrasound and magnetic resonance imaging; Matsushita, for low-and mid-range ultrasound systems; and Jeol in the field of in-vitro diagnostics. We also have joint ventures including with Philips and Thales, to manufacture flat panel detectors for medical imaging; and with Mochida Pharmaceutical Co. Ltd., in the field of ultrasound in Japan.
Our principal competitors in medical imaging are General Electric, Philips, Toshiba, Hitachi and Hologic. Other competitors include McKesson and Cerner, for healthcare information technology systems; Sonova (formerly Phonak), William Demant and GN Resound, for audiology (hearing aids); Elekta and Varian Medical, for oncology care systems; and Roche, Abbott and Beckman Coulter, for in-vitro diagnostics. The trend toward consolidation in our industry continues. Competition among the leading companies in our field is strong, including with respect to price.
During fiscal 2008, the scope of the former segment Strategic Equity Investments (SEI) was expanded and SEI was renamed as Equity Investments. Results for Equity Investments are stated on a retroactive basis to provide a meaningful comparison with prior periods. In general, the segment Equity Investments comprises investments of Siemens, accounted for by the equity method, at cost, or as assets held for sale, and current available-for-sale financial assets, which are not allocated to a Sector, a Cross-Sector Business, SRE, Pensions or Treasury for strategic reasons.
The main investments within Equity Investments are:
Further main investments within Equity Investments resulted from organizational adjustments:
In the fourth quarter of fiscal 2008, Siemens sold a 51% stake in Siemens Enterprise Communications GmbH & Co. KG (SEN) a leading provider of open communications solutions for enterprise customers to The Gores Group, U.S, which contributed a network equipment and security solutions provider as well as a call center software company to complement the SEN business and form a new company called Enterprise Networks Holding B.V. (EN) based in the Netherlands. During the fourth quarter of fiscal 2008, Siemens share of 49% in the newly formed EN business was included in Equity Investments. SEN was previously reported within discontinued operations.
Also at the end of fiscal 2008, Siemens stake of 49% in Krauss-Maffei Wegmann GmbH & Co. KG, which was formerly reported within Corporate Items, was reclassified as part of Equity Investments. Krauss-Maffei Wegmann has a leading position in the defence technology market.
Furthermore during the fourth quarter of fiscal 2008 we transferred our share of 50% in Siemens Elin Buildings & Infrastructure GmbH & Co. KG, Austria, a provider of technical building equipment and installation services, to Equity Investments. Siemens Elin Buildings & Infrastructure GmbH & Co. KG was previously reported within Other Operations. Beginning of fiscal 2009, Siemens Elin Buildings & Infrastructure GmbH & Co. KG was renamed as ELIN GmbH & Co. KG.
Beginning of fiscal 2009, Siemens closed the sale of Siemens Home and Office Communication Devices GmbH & Co. KG (SHC) to ARQUES Invest Potenzial GmbH, Germany, which was renamed as Gigaset Communications GmbH (GC). In fiscal 2008, SHC was wholly owned by Siemens and reported within Other Operations. During the fourth quarter of fiscal 2008, Siemens acquired a stake of 19.8% in ARQUES Value Development GmbH, which owns all shares of GC. Our stake in ARQUES Value Development GmbH is reported within Equity Investments as of September 30, 2008. GC focuses on cordless phones and broadband and home entertainment devices.
For additional information on investments held in Equity Investments, see Item 5: Operating and Financial Review and ProspectsFiscal 2008 Compared to Fiscal 2007Segment Information AnalysisEquity Investments, Item 7: Major Shareholders and Related Party TransactionsRelated Party Transactions, as well as Notes to Consolidated Financial Statements.
Siemens IT Solutions and Services designs, builds and operates both discrete and large scale information and communications systems. Siemens IT Solutions and Services offers comprehensive information technology and communications solutions from a single source. While mainly performing operations related services, we create solutions for customers by drawing on our management consulting resources to redesign customer processes; on our professional services to integrate, upgrade, build and install information technology systems; and on our operational capabilities to run these systems on an ongoing basis.
The following chart provides key financial data concerning Siemens IT Solutions and Services.
The following chart shows the geographic distribution of Siemens IT Solutions and Services external revenue in fiscal 2008:
In its current form, Siemens IT Solutions and Services offers its solutions and services to external customers in the following areas:
On a combined basis, Siemens is the largest customer of Siemens IT Solutions and Services, accounting for 28% of total revenue in fiscal 2008.
The types of services we offer include:
Siemens IT Solutions and Services solutions and services are designed to support the following core processes of our customers:
Most of our consulting and design services involve information technology and communications systems that we also build and operate. At the same time, we also design and build systems and provide services using the software of several companies with which we have established relationships, such as SAP, Microsoft and Fujitsu Siemens Computers.
The largest customers of Siemens IT Solutions and Services in fiscal 2008 included Nokia Siemens Networks (NSN), the BBC, National Savings & Investment, Deutsche Bank and RAG AG.
We have our own sales and delivery force. We operate worldwide in more than 40 countries.
Our most significant competitors vary by region and type of service. A few are global, full-service IT providers such as IBMs Global Services division, EDS, Accenture, CSC and HP Services. One of our competitors that focuses more narrowly on specific regions or customers is T-Systems, a unit of Deutsche Telekom, in Germany. As a service business, we require strong local presences and the ability to build close customer relationships and provide customized solutions while achieving economies of scale and successfully managing risks in large projects.
The IT services market has recovered but continues to be highly competitive; in fiscal 2008 ongoing commoditization of the IT services industry and the entry of new players such as Indian companies into the European market kept price pressure and the need for cost reduction at a high level, and we expect these trends to continue. According to Gartner, Inc., the IT service market is further consolidating.
We enter into large scale, and sometimes long-term projects. The large size of some of these projects, as well as the long-term frame contracts with our largest customers occasionally expose us to technical performance, customer- or country-related risks. Risks associated with long-term outsourcing contracts remain a management priority at Siemens IT Solutions and Services. For additional information with respect to our long-term contracts, see Item 3: Key InformationRisk Factors.
Siemens Financial Services provides a variety of financial services and products both to third parties and, on arms length terms, to other Siemens entities and their customers. We are comprised of five business units, which can be classified as either capital businesses (consisting of the Commercial Finance Europe/APAC (COFEA), Commercial Finance U.S. (COFUS) and the Equity component of the business unit Equity & Project Finance) or fee businesses (consisting of the Treasury and Investment Management business unit, the Insurance business unit and the Project and Export Finance component of the business unit Equity & Project Finance). The capital businesses offer vendor programs to external manufacturers and support Siemens sales with leasing and lending programs. The capital businesses also provide receivables financing to external parties and make equity investments in mainly infrastructure projects where Siemens is a principal supplier. However, receivable financing within the Siemens group has been discontinued. The fee businesses support and advise Siemens concerning financial risk management and investment management and provide an important contribution to Siemens by arranging financing for Siemens projects. Most of our fee business is generated internally (i.e. with other Siemens entities as the customer), and most of our capital business is generated externally. Within Commercial Finance businesses, which are our largest capital businesses, we use internal vendors (the Siemens group), but also external vendors and other indirect origination channels such as the secondary market as intermediators to generate leasing and lending business.
We act according to banking industry standards in the international financial markets in our transactions with both Siemens and third parties.
The following chart provides key financial data concerning Siemens Financial Services.
Total assets increased from 8.912 billion at September 30, 2007 to 11.328 billion at September 30, 2008, due to increased activities in purchasing loan receivables from the secondary market by business unit COFEA for the United Kingdom and COFUS for the United States. Lease receivables and equipment leased under operating leases (together accounting for approximately 56% of our assets) were our principal assets at September 30, 2008. The main sources of our earnings are interest income, dividends and fee income, with the latter stemming primarily from our internal advisory businesses.
Commercial Finance Europe/APAC (COFEA) and Commercial Finance U.S. (COFUS). Our principal product in these business units is equipment lease financing, where we typically purchase equipment supplied by various Siemens entities or third-party manufacturers and lease it to the customer for a specified term, generally with an option for the customer to purchase the equipment or renew the lease at the end of the term. Our leasing business consists of finance leases, and of operating leases (21% of the total book value of our leased assets at September 30, 2008) where we take residual risks. We also offer our clients services complementary to our leasing business, including services relating to the management of their leased equipment base and product upgrade services.
Siemens Financial Services plans to modify its assets structure going forward to give greater weight to commercial finance and project loans. These are loans that are used not only to finance equipment, but also to provide corporate or project funding, in most cases in senior secured structures. For COFEA we have established a structured finance team through which we participate in large transactions via syndications. This team is also involved in the origination of financings for larger Siemens related transactions. All these transactions are individually assessed by our own risk management team and are intended to be held until maturity.
COFEA purchases trade receivables and other accounts from external customers and COFUS offers our clients asset-based lending, i.e. loans that are primarily secured by accounts receivable and inventory.
COFEA and COFUS finance both Siemens and third-party equipment. The associated Siemens products are delivered primarily by the Healthcare Sector, but to a lesser extent also by Divisions within the Industry and Energy Sectors as well as by Fujitsu Siemens Computers (only COFEA), Siemens IT and Solutions Services.
Equity and Project Finance. The Equity and Project Finance business unit advises other Siemens entities (e.g., Sectors and Divisions) on project and sales financing transactions. Equity and Project Finance advisory comprises the work of structuring and arranging sales related financing for Siemens Sectors or operating companies and consortia where Siemens is participating. Advisory is supplemented by Centers of Competences to complex and state-of-the art financing topics like Public-, Private Partnerships, as well as Forfeiting and Export- and Investment guarantees. We have built up a global network and cooperate with various financial institutions on both the national and international level. We have established contacts with special international financing institutions like World Bank and Asian Developments Bank as well as with national and international export credit agencies, like Euler Hermes, Coface, Sace and USExim and Japanese Trading Houses, et al. Services are centered around administration, application and issuance of bonds, guarantees and other sureties from banks either for Siemens AG or SFS. Furthermore, Services comprises the letters of credit team. Both Advisory and Services (guarantees) are based and supplemented by its involvement in various corporate governance tasks resulting from corporate directives such as the Credit and Guarantee guidelines.
Through the Equity and Project Finance business unit Siemens Project Ventures GmbH, we also develop and make equity investments in a broad range of infrastructure projects. We concentrate entirely on projects with a visible role for Siemens as a supplier or service provider. Our investment focus is on power projects (thermal and renewable), medical projects and other infrastructure projects such as airports or transportation systems.
From October 1, 2007, Siemens Venture Capital (SVC), Siemens corporate venture organization, has been integrated into SFS and is today part of the business unit Equity and Project Finance. Its goal is to identify and fund investments in emerging and innovative technologies that will enhance the core business scope of Siemens, particularly in the focus areas Industry, Energy and Healthcare. Siemens Venture Capital therefore conducts direct investment in start-up companies and indirect investments in Venture Capital funds and has built a Private Equity Advisory business as well.
At September 30, 2008, the equity investment in infrastructure projects and Venture Capital amounted to approximately 4% of the total assets of Siemens Financial Services and 0.4% of the total assets of Siemens.
Treasury and Investment Management. The Treasury segment of this business unit provides services to Siemens Corporate Finance, including cash management and payment (including inter-company payments) and capital market financing. It is planned to warehouse all short term trade accounts receivable (essentially all with an original tenor of up to 365 days) of the Siemens group at Siemens Corporate Finance under the roof of Siemens Credit Warehouse. The objective of warehousing the groups trade receivables is central risk management as well as providing the means for receivables securitization, i.e. providing for an additional funding instrument. In addition, we pool and manage interest rate and currency risk exposure of other Siemens entities and, in the name and for the account of Siemens Corporate Finance, enter into derivative financial instruments with third-party financial institutions to offset pooled exposures. Derivative activities in the name of Siemens Corporate Finance are described under Item 11: Quantitative and Qualitative Disclosure About Market Risk. We also offer treasury consulting services and cash management systems to third-party customers. The Investment Management segment of this business unit manages pension assets for Siemens and other institutional clients as well as mutual funds. This segment operates in Germany and Austria through its companies Siemens Kapitalanlagegesellschaft mbH (SKAG) and Innovest AG.
Insurance. This business unit acts as insurance broker for Siemens and external customers. With our Industrial Insurance Solutions we support Siemens and non-affiliated industrial companies as a competent partner for all insurance related matters, such as claims management including risk transfer to insurance and financial markets. We also act as a broker of company-financed insurances for employees on business trips and foreign assignments. With our Private Finance Solutions we offer a wide range of quality products in the areas of insurance, asset management, pensions and home loan banking for staff at Siemens and non-affiliated companies. The focus of our activities is in Germany. We offer our services via the Internetpartly for direct online conclusion.
Most of our fee business is generated internally (with Siemens being our customer), and more than 75% of the profit of our capital business (leasing, loans, receivables financing, asset-based lending, equity investments) is generated externally. Within the Commercial Finance businessour largest capital businesswe work with internal vendors (the Siemens entities) and external vendors to generate equipment business, but we also have some direct business. Moreover, we use financial intermediaries (i.e. other banks and financial institutions) for business origination mainly on the secondary markets.
Our main sources of risk are our external customers credit risk and the risk associated with our equity portfolio. If the spill-over effects of the financial market crisis into the real economy continue, increased risk charges may be expected. Interest rate and currency exposures are typically matched. The funding for Siemens Financial Services is provided by the Siemens corporate treasury.
Our competition mainly includes captive finance companies, independent commercial finance companies and leasing/receivables financing operations related to banks as well as asset management companies. Particularly in the Commercial Finance business, competition consists of many local players and therefore is different from country to country. There are, however, a few international competitors such as General Electric Commercial Finance, CIT Group, Société General Equipment Finance and the De Lage Landen. In the course of the recent credit crisis there are opportunities for financial institutions with a strong balance sheet and funding basis such as SFS as part of Siemens. Some banks have pulled out of the Commercial Finance business, but there is still significant pressure from companies that have not been hit severely by the credit crisis.
The following tables show the division of our employees by segments and geographic region as of September 30 for each of the years shown:
A significant percentage of our manufacturing employees, especially in Germany, are covered by collective bargaining agreements determining working hours and other conditions of employment, and are represented by works councils. Works councils have numerous rights to notification and of codetermination in personnel, social and economic matters. Under the German Works Constitution Act (Betriebsverfassungsgesetz), works councils are required to be notified in advance of any proposed employee termination, they must confirm hiring and relocations and similar matters, and they have a right to codetermine social matters such as work schedules and rules of conduct. Management considers its relations with the works councils to be good.
During the last three years, we have not experienced any major labor disputes resulting in work stoppages.
In each of the jurisdictions in which we operate, Siemens is subject to national and local environmental and health and safety laws and regulations that affect our operations, facilities, products, and, in particular, our former nuclear power generation business. These laws and regulations impose limitations on the discharge of pollutants into the air, soil and water, establish standards for the treatment, storage and disposal of solid and hazardous waste.
Whenever necessary, remediation and clean up measures are implemented and budgeted accordingly. Because of our commitments to protecting the environment and conservation and because we recognize that leadership in environmental protection is an important competitive factor in the marketplace, we have incurred significant costs to comply with these laws and regulations and we expect to continue to incur significant compliance costs in the future.
In 1994, we closed a site in Hanau, Germany, that we had used for the production of uranium and mixed-oxide fuel elements. A smaller related site in Karlstein, where we operated a nuclear research and service center, was closed in 1989. We are in the process of cleaning up both facilities in accordance with the German Atomic Energy Act. We have developed a plan to decommission the facilities that involves the following steps: clean-out, decontamination and disassembly of equipment and installations, decontamination of the facilities and buildings, sorting of radioactive materials and intermediate and final storage of radioactive waste. This process will be supported by ongoing engineering studies and radioactive sampling under the supervision of German federal and state authorities. The German Atomic Energy Act requires that radioactive waste be transported to a government-developed storage facility, which, in our case, we do not expect to be available until 2030. We expect that the process of decontamination, disassembly and sorting of radioactive waste will continue until 2012. We will be responsible for storing the material until the government-developed storage facility is available. With respect to the Hanau facility, the process of setting up intermediate storage for radioactive waste has neared completion; on September 21, 2006 we received official notification from the competent authorities that the Hanau facility has been released from the scope of application of the German Atomic Energy Act and that its further use is unrestricted under that Act. However, the State of Hessen still requires us to monitor the ground water until uranium levels consistently meet targets set by the State. The ultimate costs of this project will depend, in part, on where the government-developed storage facility is located and when it becomes available. We have a provision of 648 million at September 30, 2008, with respect to this matter. This provision is based on a number of significant estimates and assumptions as to the ultimate costs of this project. We evaluated this amount to be adequate to cover the present value of the costs associated with this project, based on current estimates. For additional information, see Notes to Consolidated Financial Statements.
The Directive of the European Parliament and of the Council on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (2002/95/ECRoHS) has an impact on some of our products. The RoHS-Directive bans the use in electrical and electronic equipment of certain hazardous substances. We are complying with the substance bans of the RoHS-Directive. However, with the recent divestitures of SEN and SHC, two of the entities most affected by this directive are no longer members of the Siemens Group, thereby significantly reducing the impact of the directive on Siemens. The current review of the RoHS-Directive by the EU-Commission may lead to changes in the scope of that Directive (e.g. inclusion of medical equipment after 2014), but details are not yet known. Restrictions on the use of certain substances comparable to those of the RoHS-Directive are under discussion in several other states, such as the U.S., Australia, Argentina, China and South Korea.
The Regulation (EC) No 1907/2006 of the European Parliament and of the Council of December 18, 2006 concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), which entered into force in part on June 1, 2007, has a certain impact on our business.
We do not expect the existing and the upcoming product related regulations (such as REACH, RoHS and WEEE (Waste Electrical and Electronic Equipment No 2002/96/ECWEEE)) to have a material adverse affect on our results of operations or financial condition.
In Germany a new Environmental Code (Umweltgesetzbuch) is scheduled for the near future. As a first step, the rules regarding an integrated permit for industrial installations will be transferred from the Federal Immissions Protection Law (Bundes-Immissionsschutzgesetz) to the new Environmental Code. However, we do not expect substantial changes as regards content. The codification mainly targets a better systematic arrangement and simplification of the existing law.
A significant number of our production sites are affected by the EU-Directive (2004/35/CE) addressing the prevention and remediation of environmental damage. In addition to the previously applicable remediation measures, the directive requires remediation for damage to protected species and natural habitats. However, the
directive applies for damages caused by emissions made after 2007. We have obtained insurance coverage which is available in the market for the increased risks.
It is our policy to comply with environmental requirements and to provide workplaces for employees that are safe, environmentally sound, and that do not adversely affect the health or environment of their communities. We have obtained all material environmental permits required for our operations and all material environmental authorizations required for our products. In fiscal year 2008, as in previous years, we conducted an audit of our environmental compliance, and on that basis we believe that we are in substantial compliance with all environmental and health and safety laws and regulations. In principle, however, there is a risk that we may incur expenditures significantly in excess of our expectations to cover environmental liabilities, to maintain compliance with current or future environmental and health and safety laws and regulations and/or to undertake any necessary remediation.
Siemens and its consolidated subsidiaries have, as of September 30, 2008, approximately 216 production and manufacturing facilities (more than 50% production space ratio) throughout the world. Approximately 90 of these are located in the Europe/C.I.S./Africa region, with approximately 42 in Germany, and approximately 89 are located in the Americas region, with approximately 74 in the United States. We also have 37 facilities in the Asia/Australia/Middle East region. Siemens also owns or leases other properties including office buildings, warehouses, research and development facilities and sales offices in approximately 190 countries.
Siemens principal executive offices are located in Munich, Germany.
None of our properties in Germany is subject to mortgages and other security interests granted to secure indebtedness to financial institutions. We have granted security interests in other jurisdictions.
We believe that our current facilities are in good condition and adequate to meet the requirements of our present and foreseeable future operations.
Siemens worldwide has several thousand patents and licenses covering its products and services. Research and development is a priority throughout Siemens on a Sector, Cross-Sector Business and Division basis. For a discussion of the main focus of the current research and development efforts of each Sector, see Item 5: Operating and Financial Review and ProspectsBusiness OverviewResearch and Development. Siemens also has thousands of trademark registrations worldwide. However, neither the Company, nor any Sector or Cross-Sector Business or Division is dependent on any single patent, license or trademark or any group of related patents, licenses or trademarks.
Public Corruption Proceedings
Governmental and Related Proceedings
Public prosecutors and other government authorities in jurisdictions around the world are conducting investigations of Siemens and certain of our current and former employees regarding allegations of public corruption, including criminal breaches of fiduciary duty including embezzlement, as well as bribery, money laundering and tax evasion, among others. These investigations involve allegations of corruption at a number of Siemens business units.
On October 4, 2007, pursuant to the application of the Munich prosecutor, the Munich district court imposed a fine of 201 million on Siemens. According to the courts decision, a former manager of the former Communications (Com) Group, acting in concert with others, committed bribery of foreign public officials in Russia,
Nigeria and Libya in 77 cases during the period from 2001 to 2004 for the purpose of obtaining contracts on behalf of the Company. In determining the fine, the court based its decision on unlawfully obtained economic benefits in the amount of at least 200 million which the court determined the Company had derived from illegal acts of the former employee, to which an additional fine in the amount of 1 million was added. The decision of the Munich district court and the settlement (tatsächliche Verständigung) entered into the same day with the German tax authorities, and which was reflected in the fiscal 2007 consolidated financial statements, concluded the German investigations into illegal conduct and tax violations only as they relate to Siemens AG and only as to the former Com Group.
The Munich public prosecutor continues to conduct an investigation of certain current and former employees of the Company on suspicion of criminal breaches of fiduciary duty including embezzlement, as well as bribery and tax evasion. The investigation of the Munich public prosecutor extends beyond the former Communications (Com) group. To date, the Munich public prosecutor has announced that groups under investigation include Siemens former Power Transmission and Distribution (PTD) group, in which a former member of the Managing Board is a suspect, the former Power Generation (PG) group, the former Medical Solutions (Med) group, the former Transportation Systems (TS) group and Siemens IT Solutions and Services group.
The Munich prosecutor also announced an investigation against the former Chairman of the Supervisory Board, the former CEO and other former members of the Supervisory Board and of the Managing Board of Siemens AG. The investigation is based on Section 130 of the German Law on Administrative Offences regarding violations of the duty to take appropriate supervisory measures required to prevent breaches of criminal and administrative law.
In addition, there is a significant number of ongoing investigations into allegations of public corruption involving the Company, certain of our current and former employees or projects in which the Company is involved in a number of jurisdictions around the world, including Argentina, Austria, Bangladesh, China, Germany, Greece, Hungary, Indonesia, Israel, Italy, Malaysia, Nigeria, Norway, Poland, Russia, Switzerland, Vietnam and the U.S. among others. Specific examples include the following:
As previously reported, the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commissions (SEC) enforcement division are conducting investigations of possible criminal and civil violations, respectively, by Siemens of the U.S. Foreign Corrupt Practices Act (FCPA), some of which relate to the matters described above. The Company is cooperating with these investigations.
The SEC and the DOJ are also investigating possible violations of U.S. law by Siemens in connection with the Oil-for-Food Program. The Company is cooperating with the SEC and DOJ. A French investigating magistrate
commenced a preliminary investigation regarding the participation of French companies, including Siemens France S.A.S., in the Oil-for-Food Program. German prosecutors also began an investigation in this matter in August 2007. Siemens is cooperating with the authorities in France and Germany.
As a result of the above described matters and as a part of its policy of cooperation, Siemens contacted the World Bank and offered to assist the World Bank in any matter that might be of interest to the World Bank. Since that time, Siemens has been in contact with the World Bank Department of Institutional Integrity and intends to continue its policy of cooperation. Siemens was also contacted by representatives of regional development banks, including the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development and the European Investment Bank, regarding anti-corruption inquiries and other matters of relevance to them.
In May 2008, Siemens received a decision issued by the Controller of the United Nations upon the recommendation of the Vendor Review Committee of the United Nations Secretariat Procurement Division (UNPD). According to the decision, which is based on the Fifth and Final Report (IIC Report) of the Independent Inquiry Committee into the United Nations Oil for Food Program, Siemens Medical Solutions was to be suspended for a minimum period of six months, effective as of May 23, 2008, from the UNPD Vendor Roster. Siemens appealed the decision. The review of the decision is pending.
In November 2008, Siemens AG announced that it would accrue a provision in the amount of approximately 1 billion in fiscal year 2008 in connection with ongoing discussions with the Munich public prosecutor, the SEC and DOJ for the purpose of resolving their respective investigations.
In February 2007, an alleged holder of Siemens AG American Depositary Shares filed a derivative lawsuit with the Supreme Court of the State of New York against certain current and former members of Siemens AGs Managing and Supervisory Boards as well as against Siemens AG as a nominal defendant, seeking various forms of relief relating to the allegations of corruption and related violations at Siemens. The suit is currently stayed.
In July 2008, OTE filed a lawsuit against Siemens AG in the district court of Munich, Germany seeking to compel Siemens to disclose the outcome of its internal investigations with respect to OTE. OTE seeks to obtain information with respect to allegations of undue influence and/or acts of bribery in connection with contracts concluded with OTE from 1992 to 2006. On September 25, 2008, Siemens was served with the complaint by the district court.
The Company has become aware of media reports that in June 2008 the Republic of Iraq filed an action requesting unspecified damages against 93 named defendants with the United States District Court for the Southern District of New York on the basis of findings made in the IIC Report. Siemens S.A.S France, Siemens A.S. Turkey and Osram Middle East FZE, Dubai are reported to be among the 93 named defendants. None of the Siemens affiliates have been served to date.
The Company remains subject to corruption-related investigations in the United States and other jurisdictions around the world. As a result, additional criminal or civil sanctions could be brought against the Company itself or against certain of its employees in connection with possible violations of law, including the FCPA. In addition, the scope of pending investigations may be expanded and new investigations commenced in connection with allegations of bribery and other illegal acts. The Companys operating activities, financial results and reputation may also be negatively affected, particularly due to imposed penalties, fines, disgorgements, compensatory damages, third-party litigation, including by competitors, the formal or informal exclusion from public procurement contracts or the loss of business licenses or permits. As previously reported and as described above, the Munich district court imposed a fine in October 2007 and the Company recorded a provision in fiscal 2008 in connection with the investigations. However, no additional charges or provisions for any such penalties, fines, disgorgements or damages have been recorded or accrued as management does not yet have enough information to estimate such amounts reliably. The Company expects that additional expenses and provisions will need to be recorded in the future for penalties, fines, damages or other charges, which could be material, in connection with the investigations. The Company will also have to bear the costs of continuing investigations and related legal
proceedings, as well as the costs of on-going remediation efforts. Furthermore, changes affecting the Companys course of business or changes to its compliance programs beyond those already taken may be required, including any changes that may be mandated in connection with a resolution of the ongoing investigations.
The Company engaged Debevoise, an independent external law firm, to conduct an independent and comprehensive investigation to determine whether anti-corruption regulations have been violated and to conduct an independent and comprehensive assessment of the compliance and control systems of Siemens. Debevoise reports directly and exclusively to the Compliance Committee of the Supervisory Board and is being assisted by forensic accountants from the international accounting firm Deloitte & Touche.
In July 2008, the Supervisory Board of Siemens AG resolved to claim damages from former members of the former Corporate Executive Committee of the Managing Board of Siemens AG. The claims are based on breaches of their organizational and supervisory duties in view of the accusations of illegal business practices and extensive bribery that occurred in the course of international business transactions and the resulting financial burdens to the Company. Claims are being asserted against ten former executives, including two former Chief Executive Officers of Siemens and a former Chief Financial Officer. Claims for damages are also being brought against one of the aforementioned ten former executives and one additional former member of the Managing Board in connection with payments made to the former head of the independent employee association AUB (Arbeitsgemeinschaft Unabhängiger Betriebsangehöriger). The former executives have been invited to respond to the claims before legal action for damages is taken. In addition, in September 2008, two former chairmen of the Supervisory Board, one of whom is also a former CEO and referred to above, have been invited to respond to allegations that they had breached their supervisory duties, before the Company considers further steps and the possible enforcement of damage claims against them.
As previously reported, during fiscal year 2007, the Company conducted an analysis of the impact on the Companys financial statements of issues raised by allegations of violations of anti-corruption legislation. Please refer to Item 5: Operating and Financial Review and ProspectsFinancial Impact of Compliance Matters of the Annual Report on Form 20-F for the fiscal year ended September 30, 2007. During fiscal year 2008, Debevoise has identified and reported to the Company evidence of payments to business consultants, sales-related intermediaries and cash payments. The Company has analyzed whether such payments were considered in its analysis of income tax non-deductible payments conducted in fiscal 2007 and identified no additional income tax impact from such payments. The Company is also analyzing certain inter-company transactions identified by Debevoise and does not expect a significant impact on its consolidated financial statements from these transactions.
As previously reported, the Company also investigates evidence of additional bank accounts at various locations. The Company is investigating the amount of the funds, as well as whether such funds can be recorded on the Companys balance sheet. Certain funds have been frozen by authorities. Approximately 11 million was recorded in the Companys consolidated balance sheet for fiscal 2007, mostly relating to funds paid back by a former officer in January 2007 and funds received from a trust account in October and November 2007. In October and November 2008, the Company recovered additional funds in immaterial amounts from certain such accounts.
The Company has implemented a number of remediation measures to improve the compliance procedures and internal controls and is committed to continuing to diligently and vigorously review its anti-corruption controls and processes. Please refer to Item 15: Controls and Procedures.
The Company is the subject of antitrust investigations and proceedings in a number of jurisdictions around the world. Specific examples are described below.
A Mexican governmental control authority barred Siemens Mexico from bidding on public contracts for a period of three years and nine months beginning November 30, 2005. This proceeding arose from allegations that Siemens Mexico did not disclose alleged minor tax discrepancies when it was signing a public contract in 2002. Upon appeal by Siemens Mexico, the execution of the debarment was stayed on December 13, 2005 and
subsequently reduced to a period of four months. Upon further appeal, the execution of the reduced debarment was stayed by the competent Mexican court in April 2006. A final decision on the appeal has not yet been announced.
In December 2006, the Japanese Fair Trade Commission (FTC) searched the offices of more than ten producers and dealers of healthcare equipment, including Siemens Asahi Medical Technologies Ltd., in connection with an investigation into possible antitrust violations. Siemens Asahi Medical Technologies is cooperating with the FTC in the ongoing investigation. In February 2008, the FTC announced its findings. Siemens was found not guilty of participating in antitrust violations, and was therefore not fined or otherwise punished.
In February 2007, the French Competition Authority launched an investigation into possible antitrust violations involving several companies active in the field of suburban trains, including Siemens Transportation Systems S.A.S. in Paris, and the offices were searched. The Company is cooperating with the French Competition Authority.
In February 2007, the Norwegian Competition Authority launched an investigation into possible antitrust violations involving Norwegian companies active in the field of fire security, including Siemens Building Technologies AS. The Company is cooperating in the ongoing investigation with the Norwegian Competition Authority. The Norwegian Competition Authority has not yet announced a schedule for the completion of the investigation.
In February 2007, the European Commission launched an investigation into possible antitrust violations involving European producers of power transformers, including Siemens AG and VA Tech, which Siemens acquired in July 2005. The German Antitrust Authority (Bundeskartellamt) has become involved in the proceeding and is responsible for investigating those allegations which relate to the German market. Power transformers are electrical equipment used as major components in electric transmission systems in order to adapt voltages. The Company is cooperating in the ongoing investigation with the European Commission and the German Antitrust Authority. The European Commission and the German Antitrust Authority have not yet announced a schedule for the completion of their investigation.
In April 2007, Siemens AG and VA Tech filed actions before the European Court of First Instance in Luxemburg against the decisions of the European Commission dated January 24, 2007, to fine Siemens and VA Tech for alleged antitrust violations in the European Market of high-voltage gas-insulated switchgear between 1988 and 2004. Gas-insulated switchgear is electrical equipment used as a major component for turnkey power substations. The fine imposed on Siemens amounted to 396.6 million. The fine imposed on VA Tech, which Siemens AG acquired in July 2005, amounted to 22.1 million. VA Tech was declared jointly liable with Schneider Electric for a separate fine of 4.5 million. The European Court of First Instance has not yet issued a decision. Furthermore, authorities in Brazil, New Zealand, the Czech Republic, Slovakia and South Africa are conducting investigations into the same possible antitrust violations. On October 25, 2007, upon the Companys appeal, a Hungarian competition court reduced administrative fines imposed on Siemens AG from 0.320 million to 0.120 million and from 0.640 million to 0.110 million regarding VA Tech. We have appealed this decision. In January 2008, the Competition Authority of Slovakia imposed a fine of 3.3 million on Siemens and VA Tech. The Company has filed an appeal against this decision. In June 2008, a court of first instance in the Czech Republic reversed the decision by the national competition authority and ordered the authority to repay to Siemens the 11.7 million fine imposed by the authority. The authority has the right to appeal the decision.
In April 2007, the Polish Competition Authority launched an investigation against Siemens Sp. z.o.o. Poland regarding possible antitrust violations in the market for the maintenance of diagnostic medical equipment. In May 2008, the Authority issued a final decision finding that Siemens Poland had not violated antitrust regulations.
In June 2007, the Turkish Antitrust Agency confirmed its earlier decision to impose a fine of approximately 6 million on Siemens AS Turkey based on alleged antitrust violations in the traffic lights market. Siemens Turkey has appealed this decision and this appeal is still pending. It is possible that as a result of this decision, Siemens could be debarred from participating in public sector tender offers in Turkey for a one- to two-year period.
In December 2007, a suit and motion for approval of a class action was filed in Israel to commence a class action based on the fines imposed by the European Commission for alleged antitrust violations in the high-voltage
gas-insulated switchgear market. Thirteen companies have been named as defendants in the suit and motion, among them Siemens AG Germany, Siemens AG Austria and Siemens Israel Ltd. The class action alleges damages to electricity consumers in Israel in the amount of approximately 575 million related to higher electricity prices claimed to have been paid because of the alleged antitrust violations. The court has not yet ruled on the motion for approval of the class action.
In February 2007, the Company announced that public prosecutors in Nuremberg are conducting an investigation of certain current and former employees of the Company on suspicion of criminal breach of fiduciary duties against Siemens, tax evasion and a violation of the German Works Council Constitution Act (Betriebsverfassungsgesetz). The investigation related to an agreement entered into by Siemens with an entity controlled by the former head of the independent employee association AUB (Arbeitsgemeinschaft Unabhängiger Betriebsangehöriger) and payments made during the period 2001 to 2006 for which Siemens may not have received commensurate services in return. In April 2007, the labor union IG Metall lodged a criminal complaint against unknown individuals on suspicion that the Company breached the provisions of Section 119 of the Works Council Constitution Act by providing undue preferential support to AUB in connection with elections of the members of the Companys works councils. In November 2008, the Regional Court of Nuremberg-Fürth found a former member of the Managing Board of Siemens AG guilty of criminal breach of fiduciary duty and tax evasion. The Nuremberg-Fürth prosecutor is also conducting an investigation against two other former members of the Managing Board on suspicion of abetting breach of fiduciary duty.
As previously reported, Siemens requested arbitration against the Republic of Argentina before the International Center for Settlement of Investment Disputes (ICSID) of the World Bank. Siemens claimed that Argentina unlawfully terminated its contract with Siemens for the development and operation of a system for the production of identity cards, border control, collection of data and voters registers and thereby violated the Bilateral Investment Protection Treaty between Argentina and Germany (BIT). Siemens sought damages for expropriation and violation of the BIT of approximately U.S.$500 million. Argentina disputed jurisdiction of the ICSID arbitration tribunal and argued in favor of jurisdiction of the Argentine administrative courts. The arbitration tribunal rendered a decision on August 4, 2004, finding that it had jurisdiction over Siemens claims and that Siemens was entitled to present its claims. A hearing on the merits of the case took place before the ICSID arbitration tribunal in Washington in October 2005. An unanimous decision on the merits was rendered by the ICSID arbitration tribunal on February 6, 2007, awarding Siemens compensation in the amount of U.S.$217.8 million on account of the value of its investment and consequential damages, plus compound interest thereon at a rate of 2.66% since May 18, 2001. The tribunal also ruled that Argentina is obligated to indemnify Siemens against any claims of subcontractors in relation to the project (amounting to approximately U.S.$44 million) and, furthermore, that Argentina would be obligated to pay Siemens the full amount of the contract performance bond (U.S.$20 million) in the event this bond was not returned within the time period set by the tribunal (which period subsequently elapsed without delivery). On June 4, 2007, Argentina filed with ICSID an application for the annulment and stay of enforcement of the award, alleging serious procedural irregularities. An ad hoc committee has been appointed to consider Argentinas application. On June 6, 2008, Argentina filed with ICSID an application for revision and request for stay of enforcement of the award alleging the discovery of new, previously unknown facts that would have decisively affected the award. Argentina relies on information reported in the media alleging bribery by Siemens, which it argues makes the BIT inapplicable. The application for revision was registered by ICSID on June 9, 2008 and forwarded to the original members of the ICSID arbitration tribunal. The application for revision may result in a stay with respect to Argentinas application for annulment pending before the ad hoc committee. On September 12, 2008, the arbitral tribunal issued its initial procedural order requiring that Argentina submit its memorial supporting the application for revision by February 13, 2009. The tribunal postponed its decision regarding leave to submit a counterclaim until the request has been formulated and substantiated. No deadline was set.
Pursuant to an agreement dated June 6, 2005, the Company sold its mobile devices business to Qisda Corp. (formerly named BenQ Corp.), a Taiwanese company. A dispute arose in 2006 between the Company and Qisda concerning the calculation of the purchase price. From September 2006 onwards, several subsidiaries in different
countries used by Qisda for purposes of the acquisition of various business assets from the Company filed for insolvency protection and failed to fulfill their obligations under various contracts transferred to them by the Company under the 2005 agreement. On December 8, 2006, the Company initiated arbitration proceedings against Qisda requesting a declaratory award that certain allegations made by Qisda in relation to the purchase price calculation are unjustified. The Company further requested an order that Qisda perform its obligations and/or the obligations of its local subsidiaries assumed in connection with the acquisition or, in the alternative, that Qisda indemnify the Company for any losses. The Companys request for arbitration was filed with the International Chamber of Commerce in Paris (ICC). The seat of arbitration is Zurich, Switzerland. In March 2007, Qisda raised a counterclaim alleging that the Company made misrepresentations in connection with the sale of the mobile devices business and asserted claims for the adjustment of the purchase price. In November 2007, the Company expanded its claims that Qisda indemnify the Company in relation to any losses suffered as a result of Qisdas failure to perform its obligations and/or the obligations of its locally incorporated subsidiaries. Qisda amended its counterclaim in March 2008 by (i) changing its request for declaratory relief with regard to the alleged misrepresentations to a request for substantial damages, and (ii) raising further claims for substantial damages and declaratory relief. The Company has requested that the arbitral tribunal dismiss the counterclaim.
Siemens AG is member of a supplier consortium consisting of Siemens AG and a further consortium consisting of Areva NP SAS and its 100% affiliate Areva NP GmbH. The Company holds a 34% share in Areva NP SAS. The supplier consortium was contracted by Teollisuuden Voima Oyj (TVO) for the nuclear power plant project Olkilouto 3 in Finland. The Companys participation in the project is approximately 27%. The project is expected to be delayed by a minimum of 30 months for reasons disputed by TVO and the supplier consortium. TVO and the supplier consortium are attempting to resolve their dispute amicably. However, if they are unsuccessful, the commencement of arbitration proceedings is likely.
In July 2008, Mr. Abolfath Mahvi filed a request for arbitration with the ICC seeking an award of damages against Siemens in the amount of DM 150 million (approximately 77 million) plus interest. Mr. Mahvis claim is based on a contract concluded in 1974 between a then subsidiary of Siemens and two companies, one domiciled in the Bermudas and the other in Liberia. Mr. Mahvi alleges that he is the successor in interest to the Bermudan and Liberian companies and that the companies assisted Siemens with the acquisition of a power plant project in Bushehr, Iran. Siemens believes Mr. Mahvis claim to be without merit, particularly because the contract on which his claim is based was the subject of a previous ICC arbitration that resulted in the dismissal of the action filed against Siemens.
The Company has become aware that a claim form and particulars of claim were issued by National Grid Electricity Transmission Plc. (National Grid) in the High Court of England and Wales on November 17, 2008, in connection with the January 24, 2007 decision of the European Commission regarding alleged antitrust violations in the high-voltage gas-insulated switchgear market. Twenty-one companies have been named as defendants, including Siemens AG and eight Siemens affiliates. National Grid asserts claims in the aggregate amount of approximately £249 million (approximately 316 million) for damages and compound interest. Siemens AG has not yet been served in this matter.
On November 25, Siemens announced, that the Company and the BenQ Mobile GmbH & Co. OHG Insolvency Administrator, have reached a settlement after constructive discussions that began in 2006. In the settlement agreement, Siemens agreed to a gross payment of 300 million, which is expected to result in a net payment of approximately 255 million after taking into account Siemens creditor claims. Since Siemens has made a sufficient provision for the expected settlement, the settlement will not have any material negative impact on results of operations for fiscal 2009.
Siemens AG and its subsidiaries have been named as defendants in various other legal actions and proceedings arising in connection with their activities as a global diversified group. Some of these pending proceedings have been previously disclosed. Some of the legal actions include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. Siemens is from time to time also involved in regulatory investigations beyond those described above. Siemens is cooperating with the relevant authorities in several jurisdictions and, where appropriate, conducts internal investigations regarding potential wrongdoing with the assistance of in-house and external counsel. Given the number of legal actions and other proceedings to which
Siemens is subject, some may result in adverse decisions. Siemens contests actions and proceedings when it considers it appropriate. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, Siemens often cannot predict what the eventual loss or range of loss related to such matters will be. Although the final resolution of these matters could have a material effect on Siemens consolidated operating results for any reporting period in which an adverse decision is rendered, Siemens believes that its consolidated financial position should not be materially affected by these various other legal actions and proceedings.
This Form 20-F contains forward-looking statements and informationthat is, statements related to future, not past, events. These statements may be identified by words such as expects, looks forward to, anticipates, intends, plans, believes, seeks, estimates, will, project or words of similar meaning. Such statements are based on our current expectations and certain assumptions, and are, therefore, subject to certain risks and uncertainties. A variety of factors, many of which are beyond Siemens control, affect our operations, performance, business strategy and results and could cause the actual results, performance or achievements of Siemens to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. For us, particular uncertainties arise, among others, from changes in general economic and business conditions (including margin developments in major business areas); the behavior of financial markets, including fluctuations in interest and exchange rates, commodity and equity prices, debt prices (credit spreads) and financial assets generally; continued volatility and further deterioration of the capital markets; the commercial credit environment and, in particular, additional uncertainties arising out of the subprime, financial market and liquidity crises; future financial performance of major industries that we serve, including, without limitation, the Sectors Industry, Energy and Healthcare; the challenges of integrating major acquisitions and implementing joint ventures and other significant portfolio measures; introduction of competing products or technologies by other companies; lack of acceptance of new products or services by customers targeted by Siemens; changes in business strategy; the outcome of pending investigations and legal proceedings, especially the corruption investigations we are currently subject to in Germany, the United States and elsewhere and actions resulting from the findings of these investigations; the potential impact of such investigations and proceedings on our ongoing business including our relationships with governments and other customers; the potential impact of such matters on our financial statements; as well as various other factors. More detailed information about certain of these factors is contained throughout this report and in our other filings with the SEC, which are available on the Siemens website, www.siemens.com, and on the SECs website, www.sec.gov. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the relevant forward-looking statement as expected, anticipated, intended, planned, believed, sought, estimated or projected. Siemens does not intend or assume any obligation to update or revise these forward-looking statements in light of developments which differ from those anticipated.
TABLE OF CONTENTS
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related Notes prepared in accordance with IFRS as described in Notes to Consolidated Financial Statements as of, and for the years ended, September 30, 2008, 2007 and 2006.
In this report, we present a number of financial measures that are or may be non-GAAP financial measures as defined in the rules of the SEC. The following discussion explains these non-GAAP financial measures and the reasons why we believe that they provide useful information to investors. Measures bearing the same or similar names disclosed by other companies may be calculated differently and therefore may not be directly comparable to the measures discussed below. None of the measures discussed below should be viewed in isolation as alternatives to measures of our financial condition, results of operations or cash flows as presented in accordance with IFRS in our Consolidated Financial Statements.
Currency translation effects and portfolio effectsThe comparability of our Consolidated Financial Statements between different periods is affected by currency translation effects resulting from our international operations. In fiscal 2008, 2007 and 2006, foreign currency translation effects impacted our results arising from the comparison of the euro, in which our Consolidated Financial Statements are denominated, to other currencies, most notably the U.S. dollar. All of our Sectors and their respective Divisions as well as Cross Sector Businesses are subject to foreign currency translation effects; however, some Divisions are particularly affected since they generate a significant portion of their operations through subsidiaries whose results are subject to foreign currency translation effects, particularly in the U.S. In this report, we present, on a worldwide basis and for our Sectors and Cross Sector Businesses, the percentage change in orders and revenue as adjusted for currency translation effects and portfolio effects (i.e. the effects of acquisitions and dispositions). We believe that meaningful analysis of trends in orders and revenue from one year to the next requires an understanding of these factors and accordingly our management considers these factors in its management of our business. For this reason, we believe that investors may find it useful to have portfolio effects and currency translation effects quantified and to consider the percentage change in orders and revenue as adjusted for these effects. Percentage changes in orders and revenue as adjusted for currency translation effects and portfolio effects should not be viewed in isolation as an alternative to the corresponding unadjusted percentage changes in orders and revenue. For significant quantitative effects of currency translation and portfolio effects on revenue of the Company and for our Sectors and Cross Sector Businesses, see Fiscal 2008 Compared to Fiscal 2007 and Fiscal 2007 Compared to Fiscal 2006. For additional
information on foreign currency translation, see Notes to Consolidated Financial Statements. In addition, the effect of acquisitions and dispositions on our consolidated revenues and expenses also affects the comparability of our Consolidated Financial Statements between different periods.
Free cash flowIn this report, we present Free cash flow, which we define as net cash provided by (used in) operating activities less additions to intangible assets and property, plant and equipment. We believe this measure is helpful to investors to compare cash generation among the Sectors and Cross Sector Businesses. Our management considers Free cash flow in its management of our business. Free cash flow should not be viewed in isolation as an alternative to cash flow from operations as reported in accordance with IFRS.
Net debt results from total debt less total liquidity. Total debt comprises Short-term debt and current maturities of long-term debt and Long-term debt. Total liquidity comprises Cash and cash equivalents and current Available-for-sale financial assets. Management uses the net debt measure for internal corporate finance management, as well as for external communication with rating agencies, and accordingly we believe that presentation of net debt may be useful for investors. Net debt should not be considered in isolation as an alternative to total debt as presented in accordance with IFRS.
Business overview and Economic Environment
In fiscal 2008 we achieved many operating goals while rapidly transforming Siemens as a Company and as a competitor. We exceeded our revenue target, completely realigned our operations, streamlined our management, identified substantial cuts to our cost structure, restructured business activities, divested or closed numerous non-strategic businesses, and integrated a major acquisition. In addition, we closed a successful divestment of Siemens VDO Automotive (SV), resulting in a substantial gain and cash inflows. We further strengthened our cash position, in part through long-term debt transactions in capital markets, under favorable conditions ahead of the global financial crisis. We also reduced the number of outstanding shares by approximately 53 million shares through our share buyback plan.
A number of the steps mentioned above took place under our previously announced transformation programs, principally involving our program for reducing selling and general administrative expenses (SG&A), restructuring programs in our Healthcare Sector and Mobility Division and streamlining our portfolio within Other Operations. These programs were the major factors resulting in 1.741 billion in transformation charges to earnings in fiscal 2008. These include charges for severance, impairments, and other measures. In addition, we booked a provision of approximately 1 billion in connection with ongoing settlement negotiations with authorities in Germany and the U.S. These factors reduced income from continuing operations and net income for the fiscal year, among other measures, and will negatively affect cash flow in fiscal 2009.
As a result of our progress in fiscal 2008, we believe that Siemens is now a faster, more efficient and more focused company with greater potential for profitable growth.
Orders rose 11%, to 93.495 billion, and revenue increased 7%, to 77.327 billion. Orders rose 13% and revenue increased 9% on an organic basis, excluding the net effect of currency translation and portfolio transactions, compared to fiscal 2007. Within these effects, currency translation effects took five percentage points from both orders and revenue growth. Order growth included double-digit expansion in Energy and Healthcare and 9% growth in Siemenss largest Sector, Industry. Revenue growth showed a similar pattern. Our largest region, which comprises Europe, the Commonwealth of Independent States (C.I.S.) and Africa, contributed 15% order growth and 7% revenue growth, including large orders in Industry and Energy. The Asia/Australia/Middle East region contributed 10% order and revenue growth. Due in part to the large orders mentioned above, our book-to-bill ratio for fiscal 2008 was 1.21.
Total Sector profit was burdened by transformation costs and project charges. Total Sectors profita measure of the combined profit from our three Sectorswas 6.520 billion in fiscal 2008 compared to 6.662 billion a year earlier. This represents a decline of 2%, even though the current fiscal year included more than 1 billion in project charges at the Fossil Power Generation and Mobility Divisions as well as 325 million in costs related to transformation programs at the Healthcare Sector and Mobility. The Industry Sector delivered strong profit growth driven by substantial increases in three of its largest Divisions, Industry Automation, Drive Technologies and Industry Solutions. Profit declined in the Energy Sector due to the project charges at Fossil Power Generation. All other Divisions in Energy generated higher profits year-over-year. Healthcare saw strong profit growth in its Diagnostics Division, benefiting from its acquisition of Dade Behring Holdings, Inc. (Dade Behring). Overall Healthcare saw a profit decline primarily due to the transformation costs mentioned above. All three Sectors devoted significant management attention during the year to realigning our eight former operating Groups into three Sectors. For information on our new organizational structure, see Strategic Overview.
Income from continuing operations was 1.859 billion compared to 3.909 billion in fiscal 2007. Basic earnings per share (EPS) from continuing operations declined correspondingly, to 1.91 from 4.13 a year earlier. The largest factor in this decline was the 1.741 billion in pre-tax transformation costs mentioned above. Within these costs were 1.081 million associated with severance programs aimed at a rapid yet sustainable SG&A reduction. Also included in transformation costs were 271 million in charges connected to divesting or closing non-strategic businesses in Other Operations. In addition, continuing operations included the provision of approximately 1 billion (pre-tax) associated with ongoing settlement negotiations and a one-time endowment
of 390 million (pre-tax) related to the establishment of the Siemens foundation in Germany. The prior year was burdened by 440 million related to a European antitrust investigation.
Net income rose to 5.886 billion from 4.038 billion in fiscal 2007. Basic EPS were 6.41 compared to 4.24 in fiscal 2007. The decline in income from continuing operations discussed above was outweighed by higher income from discontinued operations, principally due to the SV divestment mentioned above. The combined result for SV in fiscal 2008, including positive operating results, was approximately 5.5 billion. This factor was partly offset by a loss of approximately 1.0 billion associated with the transfer of 51% of Siemens Enterprise Communications (SEN) and a 120 million provision related to the expected settlement of a claim by the insolvency administrator of BenQ Mobile GmbH & Co. OHG (BenQ) recorded in the fourth quarter. A year earlier, discontinued operations benefited from a then preliminary pre-tax non-cash gain of approximately 1.6 billion resulting from the transfer of our telecommunications carrier business into Nokia Siemens Networks B.V. (NSN). This positive effect, in addition to positive operating results at SV, was partly offset in the prior-year period by approximately 1.1 billion in tax expense associated with the carve-out of SV pending the close of its sale; a 567 million in impairments at the SEN business; and a penalty of 201 million imposed by German authorities in ending their investigation of past misconduct at the former Communications Group (Com).
Free cash flow from continuing operations was 5.739 billion. For comparison, Free cash flow for continuing operations of 6.755 billion in fiscal 2007 benefited from a substantial decrease in receivables of approximately 2.2 billion related to the SV carve-out and the transfer of carrier activities into NSN, only partly offset by a 431 million penalty payment related to a European Union antitrust investigation.
Expenses for compliance investigations reflect progress regarding settlement. Expenses for outside advisors engaged in connection with investigations into alleged violations of anti-corruption laws and related matters as well as remediation activities were 510 million in fiscal 2008 compared to 347 million in the prior year. On a quarterly basis, these expenses reached a peak in the second quarter of fiscal 2008 and then declined significantly in the two subsequent quarters. For fiscal 2008, expenses within continuing operations were 430 million and the remaining 80 million came within discontinued operations. A year earlier, expenses within discontinued operations were 195 million. For more information regarding these matters see Notes to Consolidated Financial Statements.
Siemens share buyback plan reduced outstanding shares by approximately 53 million. The first tranche of the program, in the amounts of 2.0 billion and 24,854,541 shares, was completed on April 8, 2008. The second tranche totaled 2.0 billion in purchases for 27,916,664 shares, and was completed on July 22, 2008. For further information, see Liquidity and Capital Resources.
Dividend. The Siemens Managing Board and Supervisory Board have proposed a dividend of 1.60 per share. The prior year dividend was also 1.60 per share.
Siemens strategy aims to achieve leading, profitable positions in regional and technological markets where major global trends (so-called megatrends) are creating strong demand for our solutions. Those trends are urbanization, demographic change, climate change and globalization. Our Fit42010 strategic program specifies performance targets for effectively meeting market demand related to megatrends. For example, one of our performance targets is to shape our business portfolio so that we are one of the top two companies in each of our businesses as measured by market share. For further information on our Fit42010 program see Item 4: Information on the CompanyFit42010 Program.
In fiscal 2008 we completed or launched a number of major management initiatives to better enable us to reach our performance targets and execute our strategy. One of the most fundamental was to realign our operating businesses into a new organizational structure with three Sectors and two Cross-Sector Businesses. The three Sectors are Industry, Energy, and Healthcare. The Cross-Sector Businesses support the Sectors in the areas of finance and information technology. For further information on this structure, see Basis of Presentation.
During fiscal 2008 we defined new target margins for the Sectors and their 14 externally reported Divisions. In doing so, we also raised the target ranges for all three Sectors.
We believe the new structure has a number of advantages to Siemens and its investors beyond simplifying our reporting and offering clearer comparisons with our main competitors. In particular, it defines clear lines of responsibility from the top down. Each Sector has a CEO who sits on our Managing Board. In addition, each Sector has a CFO reporting to the CFO of Siemens. CEOs of each Division within the Sector report to the Sector CEO, and accordingly such structure is mirrored on the Business Unit level. We expect the CEO principle to provide clearer responsibilities for profit and loss, streamline decision-making and enable Siemens to respond more quickly to customer needs. In the same way as for the CEOs, a separate reporting line for the CFOs has been established accordingly on the levels below the Sectors.
For similar reasons, we implemented a new setup for our regional companies in fiscal 2008. These companies are now grouped into 20 clusters of countries, which in turn are organized into three world regions. The regions are defined as follows: Europe, the Commonwealth of Independent States (C.I.S.) and Africa; the Americas; and Asia, Australia and the Middle East. Regional companies in each cluster now share support functions and administrative resources, so that they can focus more tightly on the customers, suppliers, media and other stakeholders in their respective countries.
Inherent in the organizational changes described above is a substantial opportunity for us to reduce SG&A, such as by consolidating and sharing these activities. Our SG&A program targets sustainable elimination of 1.2 billion in SG&A by the end of fiscal 2010 from the level in fiscal 2007. For further information on our SG&A program, see Global SG&A Program.
At the end of fiscal 2008 we introduced a new management incentive program to go into effect with fiscal 2008 results. The primary purpose of the new program is to increase the alignment of management interests with those of our shareholders. To that end it mandates that our top 500 managers must hold a defined multiple of their base salary in Siemens shares; awards stock for performance; and rewards employees who hold Siemens shares for a defined period with one free share per three held. The incentive program also pays out financial bonuses based on achievement of personal and organizational targets. The entire program is designed to be effective, objective, easy to understand, and best-in-class.
According to estimates of Global Insight, Inc., gross domestic product (GDP) in 2008 is expected to grow 2.7% on a global basis. In 2007, GDP grew by 3.9%.
Of Siemens three reporting regions, the largest is Europe/C.I.S./Africa. Growth of GDP in this region is expected to be 2.0% in 2008, down from 3.6% in 2007. This decline is due primarily to Europe, which is expected to post 1.3% GDP growth in 2008 compared to 3.0% in 2007. Within Europe, 1.1% GDP expansion is anticipated for the Western Europe nations, down from 2.8% in 2007 due generally to the strong euro and slowing global demand for exports. This was also evident in GDP growth in Germany, which is expected to slow to 1.3% for the year, down from 2.5% a year earlier. Other economies experienced additional impacts, such as a sharp slowing in the housing markets of Spain, Great Britain and Ireland. The C.I.S. countries and Africa are projected to grow 7.1% and 5.6%, respectively, faster than the region overall but slower than in 2007.
In the Americas region, GDP growth is expected to fall to 1.8% in 2008 from 2.7% in 2007, primarily because of a decline in U.S. economic growth from 2.0% to 1.3%. This decline includes sharply reduced consumer spending in an environment of rising unemployment, falling house prices, falling equity values and higher living costs. Tighter credit due to the financial crisis also restricted economic growth. While Latin America benefited from higher raw materials prices, GDP growth in the region is still expected to slow to 4.0% from 5.3% in 2007 due in part to weaker demand for the regions exports in the U.S.
Siemens third region is Asia/Australia/Middle East. This region, which had GDP growth of 6.1% in 2007, is projected to grow 4.8% in 2008. Because of its strong dependence on exports, the region is exposed to downturns in demand from importing countries. This was particularly evident in Japan, estimated to grow 0.4% in 2008
compared to 2.0% in 2007. While China is expected to again grow substantially faster than the region as a whole, reduced export demand and appreciation of its currency are among the factors slowing GDP growth to an estimated 9.8% in 2008 compared to 11.9% the year before. India is seen as posting growth of 6.5%, down from 9.0% in 2007 due in part to inflation. Despite a rapid decline in oil prices in the latter half of 2008, leading to planned cuts in production, the Middle East is anticipated to grow faster in 2008 than in 2007, with GDP expansion rising to 6.9% from 5.5%.
The estimates and projections presented in this section are based upon a report dated November 14, 2008 prepared by Global Insight, Inc. and have not been independently verified by Siemens. Due to effects on the world economy resulting from the financial market crisis, figures for 2008 might deviate significantly.
The most important market trends for Siemens are the four megatrends that cover the entire range of our activities, both geographically and technologically. These are urbanization, demographic change, climate change and globalization.
Urbanization refers to the growing number of large, densely populated cities around the world. This includes both established metropolitan centers in industrialized nations and fast-rising urban centers in emerging economies. Urbanization is driven by a number of forces, including in-migration from rural areas and population growth in urban areas. This megatrend is important to Siemens because we provide solutions for manufacturing, urban transit, building construction, power distribution and hospitals, among others.
Demographic change includes a number of trends, with one of the most important being the increasing average age of the populations of many countries, particularly industrialized nations. This trend is important to Siemens because we provide a wide range of solutions for preventative healthcare and early diagnosis of diseasetwo essential requirements for living longer, healthier lives.
Climate change embraces many trends, including but not limited to increasing the efficiency of power generation from fossil fuels; generating energy from renewable sources such as wind; increasing the efficiency and performance of the electrical grid; increasing the energy efficiency of transportation and industrial processes; reducing the energy needs of buildings; and reducing emissions from all of the above. This trend is important because we generate approximately one quarter of our revenues from solutions related to environmental and climate protection, spanning all the trends just mentioned.
Globalization in the Siemens context refers to the increasing percentage of the global economy that involves multinational operations both within individual organizations and among disparate organizations. An example of the former is standardized manufacturing in multiple countries by a single company. An example of the latter is the integration required to manufacture products designed in one country from components made in a number of other countries. Globalization is important to Siemens because we operate in approximately 190 countries with common solutions, technologies, logistics, information systems, and business processes across all regions. This global network enables us to help simplify the process of globalizing almost any business for our customers.
A major driver of global growth in GDP is growth in gross fixed investment. Gross fixed investment is important because most of our businesses provide customers with fixed assets including infrastructure, industrial systems and equipment. GDP growth is driven also by expansion in consumer and close-to-consumer industries. In 2008 gross fixed investment grew an estimated 3.5% compared to 5.5% in 2007. Slower growth was due primarily to mature industrial nations. Growth in gross fixed investment was negative in the U.S., declining an estimated 3% in 2008, and growth in Western Europe slowed to an estimated 2% compared to 5% in 2007. In contrast, growth in emerging and developing countries is projected to expand 12% in 2008 due to pent-up demand for infrastructure and industrial systems.
Most of the major market segments that are important to our Industry Sector follow the global pattern described above. The machinery and equipment market is estimated to contract 7% in the U.S. and grow slowly in Western Europe in 2008, while remaining above 10% in such emerging markets as China and India. The construction markets we serve in the U.S. and Western Europe are also expected to see slower growth in gross fixed investment compared to 2007. Within the global market for the Industry Sectors electronics and electrical engineering solutions, contraction in the U.S. is projected to largely offset 2% growth in Western Europe. While the electronics and electrical engineering market is growing more rapidly in emerging economies, the fast growth of prior years is expected to slow in some nations, such as a decline from 16% to 8% in China and from 30% to 15% in India. The major exception to the global pattern for the Industry Sector was the metals and mining market, where gross fixed investment is expected to grow 6% in 2008.
The overall energy solution market, which we participate in with our Energy Sector, is projected to achieve global growth of 17% in 2008 despite supply constraints in a number of segments. The overall development, including fast growth and supply constraints, included both fossil power generation and renewable energy. The power transmission and distribution segments shared in the growth, in part due to the need for higher-efficiency long-distance solutions for off-shore wind farms. The oil and gas production market is expected to expand 7% in 2008.
Gross fixed investment in the global healthcare market, which we serve via our Healthcare Sector, is projected to expand approximately 3% and develop similarly to the global pattern discussed above. While expansion in the U.S. market flattens or falls, Western Europe anticipates at least stable investment year-over-year and emerging economies will continue to supply most new growth. China, for example, expects to see 12% growth in gross fixed investments within the healthcare industry in 2008, in line with 13% expansion for emerging markets overall.
The estimates and projections presented in this section are also considering data prepared by Global Insight, Inc. during autumn 2008 and have not been independently verified by Siemens. Due to effects on the world economy resulting from the financial market crisis, figures for 2008 might deviate significantly.
In fiscal 2008, Siemens increased its research and development (R&D) expenses to 3.784 billion from 3.399 billion in the prior year. The average number of employees engaged in R&D in fiscal 2008 was 32.2 thousand, compared to 30.9 thousand in fiscal 2007. Siemens patent portfolio consists of more than 55,000 patents worldwide. In fiscal 2008, our researchers and developers submitted approximately 8,200 inventions and we filed approximately 5,000 patent applications. In the patent statistics for 2007, Siemens is number 2 in Germany, number 3 in Europe and number 11 in the U.S.
Our corporate R&D organization provides two primary forms of support to the R&D teams in our Sectors and Divisions, which spend a large majority of our overall R&D budget. The first is looking at least one product generation further ahead than the Sectors, to identify how current technology will evolve to meet societys future needs as well as how those needs might require entirely new technologies or new integration of existing technologies. This activity enables our corporate R&D team to make its second fundamental contribution, which is ensuring a robust flow of scientific and technical information into Siemens from outside the company. The process includes building relationships with external sources of fundamental research in global technology fields important to Siemens, and then facilitating transfer of trend-setting science and technology to the Sectors for application in new products and solutions. The fields include materials and microsystems; production and processes; software and engineering, power and sensors; automation, medical informatics and imaging; information and communication; exploitation and processing of natural resources; off-grid energy and rural healthcare; and the development of so-called SMART products (simple, maintenance-friendly, affordable, reliable, and timely to market) for competing in price-sensitive markets such as Asia.
Among the R&D priorities at our Industry Sector is virtual product development, as a part of the entire product lifecycle management. Virtual product development enables our customers to understand and visualize the entire lifecycle of a new product before or along-side creation of the physical facilities and systems for developing and making it. Industry Sector R&D also focuses on complementary production technologies, such as factory
automation and process automation. A third major category includes contributions to Siemens environmental portfolio, such as climate-friendly motors and drives, technologies for energy-efficient buildings, and energy-saving lighting solutions.
R&D in the Energy Sector focuses on more efficient and effective ways to generate, transmit and distribute energy. Examples include coal-fired power plants with an efficiency rating of 50% that are expected to emit 40% less carbon dioxide per kilowatt hour than todays power plant; combined-cycle plants in which the exhaust heat from a gas turbine generates steam for other steam turbines; floating wind turbines for use far offshore; and technologies for carbon dioxide capture and storage.
As a result of recent acquisitions, our Healthcare Sector has become the first company capable of offering a comprehensive diagnostics chain incorporating the key solutions of in vitro and in vivo diagnostics in connection with information technology for laboratories, hospitals, clinics and doctors. Thus one focus of R&D at Healthcare is increasing integration among these disciplines, so that healthcare professionals can diagnose disease at an early stage with information from multiple diagnostic sources and better personalize the therapy for patients. Healthcare R&D also includes focused work on the Sectors core imaging technologies as well as miniaturization, instrument throughput, and other topics essential to the field of advanced medicine.
As mentioned above, we initiated a global SG&A reduction program in fiscal 2008 as part of Siemens transformation programs, with the goal of securing our competitive position against the backdrop of an impending global economic downturn. The program is targeted at improving the efficiency of the selling and administration processes in our corporate functions, in our Sectors, Divisions and Cross-Sector Businesses, as well as in our regional Clusters.
Under this program, we intend to reduce global SG&A costs until fiscal 2010 by approximately 1.2 billion from the level of fiscal 2007. We plan to achieve some of these reductions by cutting expenditures for IT infrastructure and consultants. Savings in personnel are also part of the SG&A program, now that the company has considerably streamlined its top management. Substantial synergies are also being generated internally following the formation of three new Sectors from previous eight Groups. In addition, Siemens is bundling a large number of administrative tasks of its roughly 70 Regional Companies into 20 Regional Clusters. The total cost reduction target was allocated to the Sectors, Cross-Sector Businesses and central functions as well as to the regional Clusters, in order to manage this global project effectively.
During fiscal 2008, a number of key drivers were identified to support the achievement of the overall cost reduction target. The following chart includes the fiscal 2007 starting point as well as the fiscal 2010 target values of our most important drivers.
As a consequence of the implementation of the SG&A program, Siemens expects to cut around 12,600 jobs worldwide. Expenses in the amount of 1.081 billion were accounted for job reduction measures under the SG&A program and related to the program in fiscal 2008. Within Segment Information, these expenses are recognized under Corporate items.
In fiscal 2008, the Company rearranged its organization. As announced in November 2007, Siemens AG reorganized its operations to create the three Sectors Industry, Energy and Healthcare which in turn comprise 15 Divisions. Siemens financial reporting was adapted to reflect the new organizational structure in the second half of the current fiscal year. External financial reporting on the basis of three sectors and for 14 divisions was commenced in the third quarter of fiscal 2008. Financial results relating to the Energy Service Division, which is part of the Energy Sector, are reflected in the Fossil Power Generation Division and the Oil & Gas Division. The three Sectors, as well as Equity Investments, Siemens IT Solutions and Services and Siemens Financial Services (SFS), constitute reportable segments in accordance with International Financial Reporting Standards (IFRS).
This new structure consolidates the previous twelve reportable segments referred to as Groups. The following figure contrasts the previous basis of presentation as of September 30, 2007 and the current basis of presentation as of September 30, 2008, and also indicates some additional adjustments made as part of the reorganization.
Prior-year information in our Managements discussion and analysis and Consolidated Financial Statements is presented according to the new organizational structure on a retroactive basis, to provide a meaningful comparison with results for fiscal 2008.
The Company removed its previous component model presentation which divided Siemens consolidated financial statements into Operations, Financing and Real Estate and Eliminations, reclassifications and Corporate Treasury.
As of September 30, 2007, the reportable segment Strategic Equity Investments (SEI) comprised the Companys investments in Nokia Siemens Networks B.V. (NSN), BSH Bosch und Siemens Hausgeräte GmbH (BSH) and Fujitsu Siemens Computers (Holding) B.V. (FSC). During the fourth quarter of fiscal 2008, the scope of the segment was expanded and SEI was renamed Equity Investments. Prior-year figures were adjusted for purposes of comparison. Equity Investments includes equity investments not allocated to a Sector, Cross-Sector Business, SRE, Pensions or Treasury for strategic reasons; assets held for disposal; and available-for-sale financial assets. As of September 30, 2008, equity investments not allocated to a Sector or Cross Sector Business include NSN and BSH, both of which were previously included in SEI; our 49% stake in Enterprise Networks Holding, BV; and our 49% investment in Krauss-Maffei Wegmann GmbH & Co. KG, which was reported within Corporate Items as of September 30, 2007. Assets held for disposal include FSC, which was previously included in SEI.
While we implemented a new organizational structure in fiscal 2008, we largely retained our previous segment performance measures. In the following discussion and analysis, we provide data and comment on these segment performance measures for each Division as well as for the Sectors in which they are included. For further
information on our reportable segments, definitions of our performance measures and reconciliations to our Consolidated Financial Statements, see Notes to Consolidated Financial Statements.
Under our policy for the recognition of new orders, we generally recognize a new order when we enter into a contract that we consider effective and binding based on our review of a number of different criteria. In general, if a contract is considered effective and binding, we recognize the total contract value as promptly as practicable. Contract value is the agreed price or fee of the irrevocable portion of the contract to deliver goods and/or render services. Agreed fees on service, maintenance and outsourcing contracts with a remaining contractual term of more than 12 months, for which management believes that it is highly uncertain whether all the contract terms will be met by the customer, are recognized as new orders on a revolving basis for the next 12 months. In case an order is cancelled during the current year or its amount is modified, we adjust our new order total for the current period accordingly, rather than retroactively adjusting previously published new order totals. However, if an order from previous year(s) is cancelled, generally, current period new orders are not adjusted, instead, existing orders on hand are revised if the adjustment exceeds a certain threshold. There is no standard system for compiling new order information among companies in our fields of activities. Accordingly, our new order totals may not be comparable with new order totals reported by other companies. Our new order totals are not audited, however we do subject our new orders to internal documentation and review requirements. We may change our policies for recognizing new orders in the future without previous notice.
Further, Siemens implemented a new geographical structure in accordance with Managing Board responsibilities. Accordingly, beginning with the third quarter of fiscal 2008, external financial reporting for Siemens is based on the three regions
In addition, information for Germany which is part of the region Europe, C.I.S., Africa, for the United States, which are part of the region Americas, and for China and India, which are part of the region Asia, Australia, Middle East, is reported separately on a Siemens level. As of September 30, 2007, five regions were externally reported, including Germany.
Fiscal 2008 Compared to Fiscal 2007
Consolidated Operations of Siemens
Results of Siemens
The following discussion presents selected information for Siemens for the fiscal year ended September 30, 2008:
Orders were 93.495 billion, up 11% from the prior-year period, while revenue rose 7% year-over-year, to 77.327 billion. This resulted in a book-to-bill ratio of 1.21 for the current period. On an organic basis, excluding the net effect of currency translation and portfolio transactions, orders increased 13% year-over-year and revenue rose 9%. Within the full-year growth trend, we saw signs of slowing demand in the latter half of the year as commercial credit continued to tighten on a global basis and economic growth slowed or stopped in numerous regional and industrial markets important to Siemens. In particular, some Divisions reported lower orders in the second half of the fiscal year or in the fourth quarter compared to the same period a year earlier.
Order growth related to external customers in fiscal 2008 included double-digit increases in all three Sectors. The Industry SectorSiemens largest Sectorincreased orders by 10% compared to fiscal 2007, with the strongest growth coming at Mobility and Industry Automation. Order growth at Mobility included Siemens largest-ever rolling stock order, a 1.4 billion contract for more than 300 trains from the Belgian state railway system. Two of the larger Divisions of the Industry Sector, Industry Automation and Drive Technologies, saw their book-to-bill ratios slide to 0.98 and 1.03, respectively, in the second half of the fiscal year, compared to 1.08 and 1.22, respectively, in the first half-year. In the Energy Sector, orders rose 17% on growth in all Divisions. Renewable Energy contributed both the largest absolute increase and greatest percentage increase compared to the prior year, driven by large wind power orders in the U.S. and the U.K. This Division also reported an expected drop in fourth-quarter orders compared to the same quarter a year earlier. The Healthcare Sector recorded order growth of 15%, which benefited from substantial new volume at Diagnostics due to its first-quarter consolidation of Dade Behring.
The Europe/C.I.S./Africa region recorded order growth of 15%, including double-digit increases in all three Sectors and a higher level of large orders compared to the prior year. These include the major orders noted above as well as a large contract win for Energy in Germany. This latter order helped lift orders in Germany 6% for the year. In the Americas, reported orders of 24.010 billion were 5% higher than in the prior year, highlighted by the Renewable Energy order mentioned above. New volume from acquisitions, primarily in the U.S., only partly offset strong negative currency translation effects in fiscal 2008. Excluding these effects, organic order growth in the Americas was 11% year-over-year. Healthcare saw solid order growth in the region due mainly to the Dade Behring acquisition, while orders at Industry declined compared to a year earlier. In contrast, Industry led growth in Asia/Australia/Middle East, where orders climbed 10% year-over-year. Healthcare also achieved double-digit
growth in the region as well, again benefiting from Dade Behring. Energy posted a higher level of large orders in the region in fiscal 2007, resulting in a decline in fiscal 2008.
Revenue related to external customers for Siemens in 2008 rose 7% year-over-year, on double-digit growth in Healthcare and Energy. Industry delivered 6% revenue growth, including double-digit increases at Industry Automation and Drive Technologies which more than offset declines at Mobility, Building Technologies and OSRAM. The Energy Sector recorded 12% growth in revenue, with increases in all Divisions including a 53% surge at Renewable Energy. Revenue was up 13% in Healthcare, which benefited substantially from Dade Behring.
In the Europe/C.I.S./Africa region, revenue grew 7% year-over-year, on double-digit increases in Healthcare and Energy and 6% growth in Industry. Within the region, revenue in Germany rose 2%, including growth in all three Sectors. The Americas region posted a 4% increase on 16% growth in Energy and 6% growth in Healthcare. Revenue in Industry declined 1% compared to the prior-year level. Negative currency translation effects took 14 percentage points from reported growth in the U.S. On an organic basis, revenues rose 7% in the U.S. and 9% for the Americas overall. Asia/Australia/Middle East saw 10% expansion in revenue, including double-digit growth in Healthcare and Industry and 4% expansion in Energy. Revenue in China and India climbed 18% and 12%, respectively, compared to the prior year, primarily on high double-digit growth in Industry.
Gross profit for fiscal 2008 increased 1% year-over-year, well under the rate of revenue growth. The slower growth in gross profit was due to a number of factors, chief among them the total of more than 1 billion in project charges at Fossil Power Generation and Mobility mentioned earlier. Gross profit growth was also held back by expenses in connection with the Mobility in Motion restructuring program, primarily including severance charges and asset impairments. In combination, the factors just mentioned contributed to a decline in gross profit margin, which came in at 27.2% for fiscal 2008 compared to 28.8% a year earlier.
Research and development (R&D) expenses increased to 3.784 billion, or 4.9% of revenue, from 3.399 billion or 4.7% of revenue in fiscal 2007. R&D expenses rose most notably at Industry Automation and Diagnostics, both of which made major acquisitions in the periods under review.
Marketing, selling and general administrative (SG&A) expenses rose to 13.586 billion, or 17.6% of revenues, from 12.103 billion or 16.7% of revenue in the prior year. The difference is due primarily to our SG&A reduction program, as the majority of the 1.081 billion in severance charges mentioned earlier were recorded as SG&A expenses. SG&A expenses for the year were also driven higher by the acquisitions at Industry Automation and Diagnostics.
Other operating income rose to 1.047 billion in fiscal 2008, compared to 680 million a year earlier. This increase is due mainly to higher gains from sales of real estate and sales of businesses, including a pre-tax net gain of 131 million on the sale of the wireless modules business at Industry Automation and a 130 million pre-tax net gain on the sale of the Global Tungsten & Powders unit at OSRAM. The current year benefited also from the release of an accrual of 38 million following reversal of a previous judgment related to Italian electrical utility Enel. A year earlier, other operating income benefited from a net gain of 76 million on the sale of the locomotive leasing business at Mobility.
Other operating expense was 2.228 billion in fiscal 2008, up from 1.053 billion in fiscal 2007. The difference year-over-year is due primarily to the provision of approximately 1 billion mentioned earlier, which we took in connection with ongoing settlement negotiations regarding legal and regulatory matters. The current year also includes an one-time endowment of 390 million related to the establishment of the Siemens foundation and a goodwill impairment of 70 million related to a building and infrastructure business at which 50% were divested during fiscal 2008. A year earlier, other operating expense included the 440 million in sanctions related to an European antitrust investigation mentioned earlier, 81 million primarily to fund job placement companies for former Siemens employees affected by the bankruptcy of BenQ, and a goodwill impairment of 52 million at a regional payphone unit. Expenses for outside advisors engaged in connection with investigations into alleged violations of anti-corruption laws and related matters as well as remediation activities were 430 million in fiscal 2008, substantially higher than 152 million a year earlier.
Income from investments accounted for using the equity method, net rose year-over-year to 260 million in the current period. The change was due primarily to a significantly reduced equity investment loss related to NSN, partly offset by an equity investment loss related to FSC, which posted positive equity investment income in fiscal 2007.
Financial income (expense), net increased to 122 million, up from a negative 8 million in fiscal 2007, primarily due to a swing in Interest income (expense), net, to a positive 60 million from a negative 139 million a year earlier, stemming mainly from a combination of lower indebtedness in Siemens operating businesses and lower interest rates on U.S. dollar denominated debt compared to the prior fiscal year.
Income from continuing operations before income taxes was 2.874 billion in fiscal 2008, compared to 5.101 billion a year earlier. The major factors in the change were the SG&A reduction costs and the provision accrued in connection with the ongoing settlement negotiations, as discussed above, partly offset by an increase in gross profit which was held back by the substantial project charges and restructuring costs mentioned above. The effective tax rate on income from continuing operations was 35% in fiscal 2008. This rate was adversely affected by the provision of approximately 1 billion mentioned above, a majority of which was not deductible for tax purposes. A year earlier, the effective tax rate was significantly lower at 23%, positively influenced by special items arising from tax audits in Germany and Austria. As a result, income from continuing operations after taxes was 1.859 billion in fiscal 2008, down from 3.909 billion a year earlier.
Discontinued operations include former Com activities as well as SV, which was sold to Continental AG in the first quarter of fiscal 2008. The former Com activities include the enterprise networks business (SEN), in which Siemens divested a 51% stake during the fourth quarter of the current fiscal year, the telecommunications carrier activities transferred into NSN in the third quarter of fiscal 2007, and the mobile devices business sold to BenQ Corporation in fiscal 2005. Income from discontinued operations in fiscal 2008 was 4.027 billion, up substantially from 129 million a year earlier, mainly due to SV. A substantial gain on the sale and positive operating results at SV before the sale contributed approximately 5.5 billion to income from discontinued operations in fiscal 2008. This positive contribution was partly offset by effects related to former Com activities, including a preliminary loss related to the above-mentioned divestment of SEN of approximately 1.0 billion and severance charges and impairments of long-lived assets at SEN earlier in the year. As as result, former Com activities reduced income from discontinued operations by 1.433 billion in fiscal 2008. Therein included is a 120 million provision related to expected settlement of a claim by the insolvency administrator of BenQ that was recorded in the fourth quarter of fiscal 2008. In fiscal 2007, discontinued operations included positive results from former Com activities, primarily a then preliminary, pre-tax non-cash gain of approximately 1.6 billion associated with the transfer of Siemens carrier-related assets into NSN. This gain more than offset impairments totaling 567 million at SEN, and a 201 million fine related to Com imposed on Siemens in Germany, of which 200 million was tax deductible. The prior year benefited from positive operating results at SV, more than offset by approximately 1.1 billion in tax expense related to its carve-out. Expenses for outside advisors engaged in connection with investigations into alleged violations of anti-corruption laws and related matters were 80 million in fiscal 2008, considerably down from 195 million a year earlier. For additional information regarding discontinued operations, see Notes to Consolidated Financial Statements.
Net income for Siemens in fiscal 2008 was 5.886 billion, compared to 4.038 billion in the same period a year earlier. Net income attributable to shareholders of Siemens AG was 5.725 billion, up from 3.806 billion in fiscal 2007.
Segment Information Analysis
In fiscal 2008, Sector profit at Industry increased to 3.861 billion, 10% higher than 3.521 billion in fiscal 2007. The Sectors largest DivisionsDrive Technologies, Industry Automation, Industry Solutions and Building Technologiesall achieved profit increases, pushing up profit margin for the Sector as a whole. Industry delivered these results despite lower profit at OSRAM and a substantial loss at Mobility year-over-year, as both Divisions pursued structural initiatives. Mobility incurred further charges relating to major projects.
Orders at Industry rose to 42.795 billion, a 9% increase compared to 39.095 billion a year earlier, and revenue increased 6% year-over-year, to 38.085 billion. The Drive Technologies, Industry Automation and Industry Solutions Divisions were the major contributors to revenue and order growth on a fiscal-year basis. Nevertheless, the book-to-bill ratios for these Divisions declined quarter by quarter through the fiscal year as macroeconomic conditions worsened. As a result, Industrys book-to-bill ratio in the final quarter of fiscal 2008 came in slightly below one. Orders for the full year included Siemens largest-ever rolling stock order, at Mobility, and strong growth in the Asia/Australia/ Middle East region.
The Industry Automation and Drive Technologies Divisions each achieved double-digit growth rates for orders and revenue in fiscal 2008 compared to fiscal 2007. Orders at Building Technologies were flat year-over-year and revenue declined slightly, while orders and revenue at OSRAM decreased 1% compared to a year earlier. Reported revenue for Building Technologies and OSRAM were influenced by negative currency translation effects related to their substantial presence in the U.S. market. Growth at OSRAM was held back also by adverse market conditions, particularly in the consumer and automotive markets. Orders and revenue at Industry Solutions increased 9% and 8%, respectively, with particularly strong demand for the Divisions metals technology solutions. The Division increased its strength in this area with an acquisition during fiscal 2008, and also expanded its water treatment business by acquiring a Singapore-based company with operations in the Asia/Australia/Middle East region. Orders at Mobility increased 21% to 7.842 billion, including a 1.4 billion contract for more than 300 trains from the Belgium state railway system. Revenue declined 5% to 5.841 billion, in part due to lower billings at large projects in the Divisions turnkey systems business.
Profit at Industry Automation increased 46% year-over-year, to 1.606 billion. The Divisions profitability benefited from high capacity utilization and economies of scale. Both periods under review included purchase price accounting (PPA) effects and integration costs related to acquisition of UGS Corp., acquired in the third quarter of fiscal 2007. PPA effects of 145 million and integration costs of 17 million in the current period were more than offset by a pre-tax net gain on Divisional level of 125 million on the sale of the Divisions wireless modules business and a gain of 38 million from the sale of another business. A year earlier, PPA effects were 105 million and integration costs were 16 million. At the end of fiscal 2008, Industry Automation acquired Innotec GmbH of Germany to strengthen its software portfolio.
Drive Technologies contributed 1.193 billion to Sector profit, a 31% increase compared to 913 million in fiscal 2007. The Divisions profitability benefited from high capacity utilization and economies of scale. Both periods included PPA effects from the fiscal 2005 acquisition of Flender Holding GmbH. These effects were the same, at 38 million in fiscal 2008 and in the prior year. Fiscal 2007 also included integration costs of 7 million.
Profit at Building Technologies rose to 466 million, a 9% increase compared to 429 million in fiscal 2007, which had benefited from a gain on the sale of a business in Germany. Both profit and profit margin in the current period showed the positive influence of a favorable business mix.
OSRAM saw its profit decline 18% year-over-year, to 401 million. Profitability was negatively influenced as its two largest businesses, general and automotive lighting were exposed to a challenging market environment at the end of fiscal 2008. Lower capacity utilization and an unfavorable revenue mix contributed to the Divisions profit decline year-over-year. Charges related to OSRAMs structural initiatives in the fourth quarter, including severance charges and impairments were offset by a 130 million net gain on the sale of the Divisions Global Tungsten & Powders unit. OSRAM expects adverse market conditions to continue in fiscal 2009, particularly in the consumer and automotive markets.
Industry Solutions raised its profit to 439 million, a 41% increase compared to fiscal 2007. The metals technologies and industrial technologies businesses drove the Divisions profit and margin growth, which benefited also from a 30 million gain on the sale of the Divisions hydrocarbon service business.
Mobility posted a loss of 230 million in fiscal 2008, compared to a profit of 274 million in the prior year. The result in the current year included charges of 209 million taken in the second-quarter related to major projects, as well as provisions related primarily to software challenges with projects in the rail automation business and further charges of 32 million for the Combino railcar business. Mobility initiated its Mobility in Motion transformation program in the second half of the fiscal year to realign its organization and improve its cost structure. The program resulted in costs of 151 million in the fourth quarter, primarily for severance charges and impairments. Fiscal 2007 included a net gain of 76 million on the sale of Mobilitys locomotive leasing business.
Energy posted Sector profit of 1.434 billion, a 21% decline compared to 1.818 billion a year earlier. Four of the Sectors five Divisions delivered rapid growth in profit and profit margin compared to the prior year, including Power Transmission, Oil & Gas, Renewable Energy and Power Distribution. In contrast, Fossil Power Generation posted a loss of 89 million in fiscal 2008 following a profit of 792 million a year earlier.
Orders and revenue grew on a Division-wide basis, with orders climbing 17% to 33.428 billion and revenue rising 11% to 22.577 billion. These increases in turn pushed the Sectors book-to-bill ratio above the high level of fiscal 2007. On a regional basis, the Europe/C.I.S./Africa and Americas regions turned in double-digit increases in both orders and revenue. The Asia/Australia/Middle East region posted a 4% increase in revenue, while slower demand in China and India contributed to a 6% decline in orders for the year for this region.
Orders at Fossil Power Generation grew 11% year-over-year, to 12.993 billion, including major contract wins in Germany, Austria, the UK and Russia. Revenue was up 1%, at 8.171 billion. After the Divisions turnkey solutions business took charges at major projects in the second quarter, the Energy Sector adjusted the Divisions target business mix with the aim of improving overall profitability. In particular, this adjustment entailed bringing the Divisions products business, services business and turnkey solutions business into balance with one third of our volume coming from our turnkey solutions business and two thirds coming from our products and service businesses.
Orders at Renewable Energy climbed 81% year-over-year, to 4.434 billion, including large contracts for wind turbines in Europe and the U.S. Revenue rose 53% compared to fiscal 2007. The Oil & Gas Division, benefiting from market conditions favoring increased oil and gas production, increased revenue quarter by quarter through the fiscal year for a 20% increase overall compared to the prior year. Demand remained robust at Power Transmission and the Power Distribution Divisions, including year-over-year order and revenue growth at Power Transmission of 9% and 12%, respectively, and 8% and 13% at Power Distribution, respectively.
In fiscal 2008, Fossil Power Generation recorded a loss of 89 million compared to a profit of 792 million in fiscal 2007. In contrast, Renewable Energy, Oil & Gas, Power Transmission and Power Distribution all achieved high double-digit profit growth. The profit increase at Renewable Energy was driven by strong revenue growth and execution of higher-margin orders. Oil & Gas benefited from the favorable market conditions mentioned above leading to high capacity utilization and economies of scale. Power Transmission and Power Distribution continued to gain volume-driven economies of scale by successfully meeting demand for higher efficiency and security in regional power grids.
Within Fossil Power Generation, the substantial decline in profit was due to the turnkey solutions business, where resource constraints leading to project delays, expiring supplier price agreements and significantly higher commodity prices resulted in charges of 559 million in the second quarter of fiscal 2008. Furthermore, the Division took additional charges totaling more than 300 million in the first and fourth quarter of fiscal 2008, involving a number of large projects. The project having the greatest impact was again a large, technologically advanced project in Olkiluoto, Finland, where Fossil Power Generation took 344 million in charges. In fiscal 2007, charges at Olkiluoto and other projects were partly offset by a gain on the sale of a business and positive effects related to the settlement of an arbitration proceeding. Both periods under review included negative equity investment income related to Energys equity stake in Areva NP, amounting to a negative 26 million in the current period and a negative 45 million a year earlier, which is also substantially affected by the project in Finland mentioned above. The Division expects continued volatility in equity investment income in coming quarters.
Healthcare posted Sector profit of 1.225 billion in fiscal 2008, compared to 1.323 billion a year earlier. The primary factors in the decline year-over-year were 174 million in transformation costs associated primarily with refocusing of certain business activities in the Imaging & IT and the Workflow & Solutions Divisions and reducing costs. This reduced Sector profit margin for the fiscal year by approximately 150 basis points. Profitability in both years under review was also negatively influenced by PPA effects and integration costs related to three major acquisitions at the Sectors Diagnostics Division, one each in fiscal 2006, fiscal 2007 and fiscal 2008. These factors took approximately 310 basis points from Sector profit margin in fiscal 2008. PPA effects and integration costs had a lesser impact in the prior year, reducing profitability by approximately 180 basis points, and were also partially offset by a divestment gain of 23 million from the sale of a portion of Healthcares stake in a joint venture, Draeger Medical AG & Co. KG.
Orders and revenue at Healthcare rose 15% and 13%, respectively, compared to the prior year. These increases include substantial new volume from the acquisition of Dade Behring in the first quarter of fiscal 2008. On an organic basis, orders rose 4% and revenue increased 2%.
At the Imaging & IT Division, orders came in 3% lower and revenue was 4% lower compared to fiscal 2007. Both results were strongly influenced by negative currency translation effects. Orders rose 9% at the Workflow & Solutions Division in part due to a major order in the second quarter. Revenue was level with the prior year. Primarily due to the Dade Behring acquisition, the Diagnostics Division doubled its orders and revenue year-over-year. From a regional perspective, the Healthcare Sector found its strongest growth in the region comprising Europe, C.I.S., Africa and the region comprising Asia, Australia, Middle East. Both regions combined steady growth in established markets with faster growth in emerging markets. Overall, the book-to-bill ratio for Healthcare for the fiscal year was 1.05.
Profit at Imaging & IT was 899 million, down from the prior-year level. The decline was due mainly to 90 million in transformation costs, consisting primarily of severance charges, impairments and related costs following the review of certain business activities. In addition to the market challenges mentioned above for the Sector overall, the Division also faced challenges in the medical imaging market in the U.S., including the Deficit Reduction Act (DRA) and uncertainty regarding future reimbursements, and a persistently weak market in Japan.
Profit at Workflow & Solutions was 66 million compared to 163 million a year earlier. The decline was influenced strongly by 81 million in transformation costs related primarily to the strategic review of certain business activities.
Profit rose sharply at Diagnostics, to 248 million for the fiscal year, benefiting from acquisitions. The Divisions profit margin in both fiscal 2008 and fiscal 2007 was influenced similarly by PPA effects and integration costs arising from the acquisitions mentioned above. The negative effect on Diagnostics profit margin was approximately 1080 basis points in fiscal 2008, including PPA effects of 176 million (including 7 million of
inventory step-up charges) and integration costs of 168 million. A year earlier, the negative effect on profitability was approximately 1120 basis points, including 91 million in PPA effects (including 23 million of inventory step-up charges) and 84 million in integration costs.
As of September 30, 2007, the reportable segment Strategic Equity Investments (SEI) comprised the Companys investments in NSN, BSH and FSC. During the fourth quarter of fiscal 2008, the scope of the segment was expanded and SEI was renamed into Equity Investments. Prior-year figures were adjusted for purposes of comparison. Equity Investments includes investments accounted for using the equity method; assets held for disposal; and available-for-sale financial assets not allocated to a Sector, Cross-Sector Business, SRE, Pensions or Corporate Treasury for strategic reasons. As of September 30, 2008, Equity Investments include NSN and BSH; our 49% stake in Enterprise Networks Holding, BV (EN); and our 49% investment in Krauss-Maffei Wegmann GmbH & Co. KG, which was reported within Corporate Items as of September 30, 2007. EN was formed during the fourth quarter following the divestment of a 51% stake in Siemens Enterprise Communications GmbH & Co. KG (SEN) to The Gores Group, U.S., which contributed a network equipment and security solutions provider as well as a call center software company to complement the new EN business. SEN was formerly reported within discontinued operations. Assets held for disposal include FSC.
Profit from Equity Investments in fiscal 2008 was a positive 95 million compared to a negative 96 million in fiscal 2007. The major factor in this improvement was NSN, which reported improved operating results and also substantially reduced its restructuring charges and integration costs year-over year. In fiscal 2008 NSN incurred restructuring charges and integration costs of 480 million, down from 991 million in fiscal 2007. As a result, our equity investment loss related to NSN decreased to 119 million in fiscal 2008 from 429 million a year earlier. FSC which posted positive equity income in fiscal 2007, turned negative in fiscal 2008.
Profit at Siemens IT Solutions and Services declined sharply year-over-year to 144 million from 252 million a year earlier. This was due mainly to charges at major projects in the U.K., which had a net negative effect on profit of 76 million. Orders for fiscal 2008 were up 2%, at 5.272 billion, while revenue was down 1% year-over-year, at 5.325 billion.
Income before income taxes (IBIT) at SFS was 286 million in fiscal 2008 compared to 329 million a year earlier. IBIT for both fiscal years benefited from special dividends resulting from divestment gains by a company in which SFS holds an equity position. The dividends received in fiscal 2007 were higher. IBIT of SFS equity and project finance business in fiscal 2007 also included gains on the sales of investments. Total assets as of September 30, 2008 increased significantly to 11.328 billion compared to 8.912 billion at the prior year end, primarily due to growth in the commercial finance business including asset purchases in secondary markets.
The following table provides further information on the capital structure of SFS as of September 30, 2008 and 2007:
Both Moodys and Standard & Poors view SFS as a captive finance company. These ratings agencies generally recognize and accept higher levels of debt attributable to captive finance subsidiaries in determining long-term and short-term credit ratings.
The allocated equity for SFS is determined and influenced by the size and quality of its portfolio of commercial finance assets (primarily leases) and equity investments. This allocation is designed to cover the risks of the underlying business and is oriented at common credit risk management standards in banking. The actual risk profile of the SFS portfolio is evaluated and controlled monthly and is reflected in the quarterly (commercial finance) and annual (equity investments) adjustments of allocated equity.
Reconciliation to Consolidated Financial Statements includes Other Operations, Siemens Real Estate (SRE) and various categories of items which are not allocated to the Sectors and Cross-Sector Businesses because Management has determined that such items are not indicative of the Sectors and Cross-Sector Businesses performance.
Other Operations consist primarily of operating business activities not allocated to a Sector or Cross-Sector Businesses. Under the previously announced transformation program for Other Operations, by the end of fiscal 2009 all business activities are to be integrated into an existing Siemens Sector or Cross-Sector Business, divested, moved to a joint venture, or closed. By the end of fiscal 2008, Siemens reached or concluded the implementation phase for a majority of business activities. The loss from Other Operations increased to 367 million from 232 million a year earlier. A significant factor in the change are transformation costs in the amount of 271 million in the current period. These include expenses related to the divestment of a 50% stake in a building and
infrastructure business, including a goodwill impairment of 70 million, as well as costs related to the closure of a regional payphone unit in Europe, primarily for severance. The divestment of SHC resulted in transformation costs of 124 million primarily associated with impairments of assets and a loss on the sale. In addition, the SHC transaction involved costs of 21 million related mainly to carve-out activities. Partly due to reallocation, centrally carried regional costs not allocated to a Sector or Cross-Sector Business declined significantly compared to fiscal 2007. In the prior period, Other Operations also included an impairment of 52 million at the regional payphone unit mentioned above. Revenue for Other Operations was 2.470 billion for fiscal 2008, down 14% from 2.884 billion a year earlier, including negative portfolio effects of 7%.
Income before income taxes at SRE was 356 million in fiscal 2008, compared to 228 million in the prior year, mainly due to higher gains from sales of real estate. SRE intends to continue real estate disposals in coming quarters, depending on market conditions.
Corporate items and pensions totaled a negative 3.853 billion in fiscal 2008 compared to a negative 1.684 billion a year earlier. The major factor in this change was Corporate items, which increased to a negative 3.959 billion from a negative 1.754 billion in fiscal 2007. The current period includes factors already discussed above, including the approximately 1 billion provision related to the ongoing settlement negotiations, 1.081 billion in charges related to the SG&A reduction program, and the one-time endowment of 390 million to the Siemens foundation. These factors were partly offset by the release of an accrual of 38 million following reversal of a previous judgment related to Italian electrical utility Enel. A year earlier, Corporate items included the 440 million related to a European antitrust investigation mentioned earlier and the 81 million primarily to fund job placement companies for former Siemens employees affected by the bankruptcy of BenQ. Both periods under review included expenses related to a regional sales organization in Germany. These totaled 128 million in fiscal 2008 and 108 million in fiscal 2007, in both periods including an impairment. Both periods also included expenses for outside advisors engaged in connection with investigations into alleged violations of anti-corruption laws and related matters as well as remediation activities. These expenses were significantly higher in fiscal 2008, totaling 430 million compared to 152 million the year before.
Income before income taxes from Eliminations, Corporate Treasury and other reconciling items in fiscal 2008 was a negative 307 million, compared to a negative 358 million a year earlier. The difference year-over-year is mainly due to an improved interest income (expense), net stemming from a combination of lower indebtedness in Siemens operating businesses as well as lower interest rates on U.S. dollar denominated debt compared to the prior fiscal year. These positive factors were partly offset by charges of approximately 50 million in the fourth quarter of fiscal 2008 related to counter-party risks, principally involving banks adversely affected by developments in international financial markets.
Fiscal 2007 Compared to Fiscal 2006
Consolidated Operations Of Siemens
Results of Siemens
The following discussion presents selected information for Siemens for the fiscal years ended:
Siemens booked 83.916 billion in new orders in fiscal 2007. This 12% rise compared to fiscal 2006 resulted in a book-to-bill ratio of 1.16 for the year. Europe, C.I.S., Africa was the largest region by volume, followed by the Americas and Asia, Australia, Middle East. Order growth was well-balanced, with double-digit expansion in all three regions. Orders in the region consisting of Europe, C.I.S. and Africa increased by 12% to 43.374 billion for the year, supported by numerous large new contracts.
In the Americas region, orders rose 13% in fiscal 2007, to 22.831 billion. Due primarily to the considerable weakening of the U.S. dollar against the euro, the U.S. share of orders in the region fell to 73% compared to 78% in fiscal 2006. On an organic basis, excluding the net effect of portfolio transactions and currency translation effects, orders were up 18% and 11% in the Americas and the U.S. respectively. Orders in Asia, Australia, Middle East came in at 17.711 billion, 11% higher than in fiscal 2006. Orders in China and India were 4.871 billion and 2.015 billion, and grew at 12% and 15% respectively, accounting for 39% of new orders in the region. A year earlier, their combined share was 38%.
Revenue for fiscal 2007 totaled 72.448 billion, a 9% increase compared to fiscal 2006. Revenue in the region Europe, C.I.S., Africa rose 8% year-over-year, to 38.180 billion, with all Sectors contributing to the increase. Revenue growth was more restrained in the Americas, affected by the considerable weakening of the U.S. dollar against the euro during the year, coming in 5% higher than in fiscal 2006 at 19.321 billion. The U.S. accounted for 77% of the regions revenue for the year, compared to 80% in fiscal 2006. On an organic basis, revenue for the Americas and the U.S. climbed 9% and 7% year-over-year, respectively.
Revenue grew more rapidly in the region Asia, Australia, Middle East, reaching 14.947 billion on a 17% rise. Revenue in China was up 13% to 4.146 billion, as the Industry Sector and the Energy Sector converted major orders from prior periods into current business. While all Sectors booked more sales in China than in India, revenue for India jumped 62% year-over-year from 1.034 billion to 1.676 billion. Together China and India accounted for 39% of the regions revenue, up from 37% in fiscal 2006.
Gross profit for fiscal 2007 increased 20% year-over-year, as all Sectors increased gross profit. Gross profit margin increased to 28.8% from 26.1% a year earlier. This increase is due to improved gross profit margins over all Sectors, and in particular at Siemens IT Solution and Services, benefiting from an improved cost structure following severance charges in fiscal 2006.
Research and development expenses increased to 3.399 billion, led by higher outlays at the Industry Sector and the Healthcare Sector. Despite the increase in our revenue year-over-year, R&D expenses as a percentage of revenue increased slightly to 4.7% from 4.6% in fiscal 2006. Marketing, selling and general administrative expenses declined as a percentage of revenue, to 16.7% from 17.9% a year earlier, due to the substantial increase in our revenue year-over-year.
Other operating income was 680 million in fiscal 2007, compared to 629 million a year earlier. Gains on sales of property, plant and equipment and intangibles increased from 208 million in fiscal 2006 to 289 million in fiscal 2007. In fiscal 2007, gains on disposals of businesses were 196 million, benefiting from a sale of a locomotive leasing business at the Industry Sector, compared to 55 million in fiscal 2006. Fiscal 2006 included a gain of 70 million related to the settlement of an arbitration proceeding.
Other operating expense increased significantly from 260 million in fiscal 2006 to 1.053 billion in fiscal 2007. The change year-over-year is due to expenses related to major legal and regulatory matters in fiscal 2007. This included 440 million stemming from sanctions on major suppliers of gas-isolated switchgear, and 152 million in expenses for external advisors and consultants related to legal and compliance issues, as well as 81 million in funding primarily for job placement companies for former Siemens employees affected by the bankruptcy of BenQ
Mobile GmbH & Co. OHG (BenQ). Other operating expense in fiscal 2007 also included 60 million for goodwill impairment.
Income from investments accounted for using the equity method, net decreased to 108 million from 404 million a year earlier, due to the loss of 429 million in fiscal 2007 from NSN. Financial income (expense), net decreased from a positive contribution of 254 million in fiscal 2006 to a negative 8 million in fiscal 2007, primarily due to higher interest for financial liabilities, which were raised primarily at the end of fiscal 2006. Fiscal 2006 benefited from a pre-tax gain of 84 million related to the sale of the Companys interest in SMS Demag AG.
Income from continuing operations before income taxes increased by 49% to 5.101 billion in fiscal 2007, from 3.418 billion a year earlier, driven by a combination of increased revenue and margins, partly offset with negative equity investment income of 429 million related to NSN and expenses related to major legal and regulatory matters in fiscal 2007. Fiscal 2006 included severance charges at Siemens IT Solution and Services of 576 million.
Income from continuing operations in fiscal 2007 was 3.909 billion, up 48% from 2.642 billion in fiscal 2006, due to an increased income from continuing operations before income taxes. The effective tax rate was 23% in fiscal 2007 and 2006. Income tax expenses include adjustments related to the previously reported compliance investigation. As a result of that investigation, payments were identified that had been recorded as deductible business expenses in prior periods when determining income tax provisions. The Companys investigation has determined that certain of these payments were non-deductible under the tax laws of Germany and other jurisdictions.
Income from discontinued operations contributed 129 million to net income in fiscal 2007, compared to 703 million a year earlier. Contribution to net income from SV activities was a negative 550 million in fiscal 2007 compared to a positive 410 million in fiscal 2006. This decrease was due to an approximate 1.1 billion tax expense as well as interest expense and closing costs related to the carve-out. Full-year results at Com-related activities contributed positively in both fiscal 2007 and fiscal 2006, with 765 million and 357 million, respectively. The fiscal 2007 result was higher primarily due to the 1.6 billion NSN non-cash gain. This gain was partly offset by 567 million in impairments at the enterprise networking business, a 201 million fine imposed on us in Germany, of which 200 million was tax deductible for tax purposes, and 104 million in other costs related to compliance matters. The remainder of the change year-over-year is due to an operating loss in the fiscal 2007 compared to operating profit at Com a year earlier. While the profitable carrier activities were included for all of fiscal 2006, they were transferred out of discontinued operations and into NSN midway through fiscal 2007. Effects related to BenQ reduced net income by 86 million and 64 million, respectively, in fiscal 2007 and fiscal 2006. For additional information with respect to discontinued operations, see Notes to Consolidated Financial Statements.
Net income for Siemens in fiscal 2007 was 4.038 billion, a 21% increase compared to 3.345 billion in the same period a year earlier. Net income attributable to Shareholders of Siemens AG was 3.806 billion, up 21% from 3.135 billion in fiscal 2006.
Segment Information Analysis
In fiscal 2007 profit in the Industry Sector was up 34% to 3.521 billion compared to the prior year. All Divisions within the Sector increased profit year-over-year. Apart from OSRAM all Divisions achieved double digit profit growth rates andapart from Industry Automationincreased profit margins, raising the Sectors profit margin by two percentage points. Orders in the Industry Sector were up 6% to 39.095 billion, and revenue grew by 7% to 36.059 billion. The two largest Divisions of Sector, Industry Automation and Drive Technologies, drove both orders and revenue growth. On a regional basis, Industry achieved strong growth of external revenue in the region Europe, C.I.S., Africa as well as in the region Asia, Australia, Middle East, while external revenue in the Americas was level with the prior year.
Within the Sector all Divisions contributed to growth except for the Mobility Division. Orders and revenue in the Industry Automation Division grew by 17% and 18%, respectively compared to fiscal 2006 and benefited from the acquisition of UGS. UGSs PLM business got off to a good start within the Industry Automation Division, launching its technology integration and winning new customers for the Division. In the Drive Technologies Division orders increased by 20% to 8.883 billion and revenue grew by 21% to 7.793 billion. Building Technologies orders of 6.351 billion grew modestly, rising 2% compared to fiscal 2006, in part due to adverse currency translation effects and slowing construction growth in the U.S., but also as a result of selective order intake. Revenue in the Division rose 5% year-over-year, to 6.038 billion. Building Technologies closed among others the acquisition of an Indian system provider in fiscal 2007 and the acquisition of Bewator in Sweden in fiscal 2006, each bringing the Division new capabilities in building and infrastructure security. OSRAM increased orders and revenue to 4.690 billion in fiscal 2007, up from 4.563 billion a year earlier on broad-based demand throughout the Division. Excluding adverse currency translation effects, primarily in OSRAMs large U.S. market, revenue and orders rose 7% compared to the prior year on rising demand in Europe and Asia-Pacific. The trend towards energy-efficient lighting solutions had a positive impact on the performance for the 2007 fiscal year. OSRAM was successful in innovative compact fluorescent lamps, high-intensity discharge lamps and LEDs. Energy-efficient products accounted for approximately 60 percent of revenue. Orders at Industry Solutions for fiscal 2007 rose to 7.704 billion, 12% higher than in fiscal 2006, while revenue of 6.601 billion in fiscal 2007 was up 2%, partly held back by industry-wide resource constraints. In the Mobility Division, orders of 6.475 billion in fiscal 2007 reflect a significantly lower level of large orders for the Division as a whole in the second and third quarters of fiscal 2007 compared to the same periods of the prior year. Mobilitys revenue of 6.160 billion was 4% below to the prior-year level including a decline in revenue in the mass transit and infrastructure logistics businesses.