20-F 1 d426430d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on November 28, 2012

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

  ¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)

OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

  x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2012

OR

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

OR

 

  ¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                 

Commission file number: 1-15174

Siemens Aktiengesellschaft

Wittelsbacherplatz 2

80333 Munich

Federal Republic of Germany

Telephone: +49 (89) 636-00

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

     

Name of each exchange on which registered

American Depositary Shares, each representing one    
Common Share, no par value     New York Stock Exchange
Common Shares, no par value*     New York Stock Exchange

 

* Listed, not for trading or quotation purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.

 

 

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 issuer’s classes of capital or common stock as of September 30, 2012: 856,274,326 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    x        No     ¨

 

 

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    ¨        No     x

 

 

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    x        No    ¨        Not applicable    ¨

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes    ¨        No     ¨

 

 

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. (Check one):

 

Large accelerated filer   x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP    ¨                                       International Financial Reporting Standards as issued                                     Other    ¨
   by the International Accounting Standards Board    x   

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    ¨        Item 18    ¨

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    ¨        No     x

 

 

 


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FORWARD-LOOKING STATEMENTS

This document contains statements related to our future business and financial performance and future events or developments involving Siemens that may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. 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. We may also make forward-looking statements in other reports, in presentations, in material delivered to shareholders and in press releases. In addition, our representatives may from time to time make oral forward-looking statements. Such statements are based on the current expectations and certain assumptions of Siemens’ management, and are, therefore, subject to certain risks and uncertainties. A variety of factors, many of which are beyond Siemens’ control, affect Siemens’ 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 or anticipated on the basis of historical trends. These factors include in particular, but are not limited to, the matters described in Item 3: Key information—Risk factors of this annual report on Form 20-F filed with the SEC.

Further information about risks and uncertainties affecting Siemens is included throughout this annual report on Form 20-F and in our other filings with the SEC, which are available on the Siemens website, www.siemens.com, and on the SEC’s website, www.sec.gov. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results, performance or achievements of Siemens may vary materially from those described in the relevant forward-looking statement as being expected, anticipated, intended, planned, believed, sought, estimated or projected. Siemens neither intends, nor assumes 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. Throughout this Form 20-F, whenever a reference is made to our Company’s website, such reference does not incorporate information from the website by reference into this annual report.

Due to rounding, numbers presented throughout this Form 20-F may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.

 

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TABLE OF CONTENTS

 

         Page  

PART I

  

Item 1 :

  Identity of directors, senior management and advisers      1   

Item 2 :

  Offer statistics and expected timetable      1   

Item 3 :

  Key information      1   
 

Selected consolidated financial and statistical data

     1   
 

Dividends

     2   
 

Exchange rate information

     2   
 

Risk factors

     3   

Item 4 :

  Information on the Company      12   
 

Overview

     12   
 

Strategy

     13   
 

Portfolio activities

     15   
 

Description of business

     16   
 

Employees and labor relations

     28   
 

Environmental matters

     28   
 

Environmental Portfolio

     30   
 

Property

     32   
 

Intellectual property

     33   
 

Research and development

     33   
 

Supply chain management

     36   
 

Legal proceedings

     38   

Item 4A :

  Unresolved staff comments      45   

Item 5 :

  Operating and financial review and prospects      45   
 

Introduction

     45   
 

Business and economic environment

     45   
 

Fiscal 2012 compared to fiscal 2011

     57   
 

Fiscal 2011 compared to fiscal 2010

     70   
 

Reconciliation to adjusted EBITDA (continuing operations)

     84   
 

Liquidity and capital resources

     86   
 

Net assets position

     101   
 

Subsequent events

     104   
 

Report on expected developments

     105   
 

Critical accounting estimates

     112   
 

Recent accounting pronouncements

     115   
 

Supplemental financial measures

     115   

Item 6 :

  Directors, senior management and employees      129   
 

Management

     129   
 

Compensation report

     133   
 

Stock-based compensation

     146   
 

Share ownership

     148   

Item 7 :

  Major shareholders and related party transactions      149   
 

Major shareholders

     149   
 

Related party transactions

     150   

Item 8 :

  Financial information      150   

Item 9 :

  The offer and listing      150   
 

Trading markets

     150   
 

Market price information

     151   
 

Trading on the New York Stock Exchange

     152   

 

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         Page  

Item 10 :

  Additional information      153   
 

Articles of association and relevant provisions of German law

     153   
 

Material contracts

     165   
 

Exchange controls

     165   
 

Taxation

     166   
 

Documents on display

     170   

Item 11 :

  Quantitative and qualitative disclosure about market risk      171   

Item 12 :

  Description of securities other than equity securities      171   
 

American depositary shares

     171   

PART II

  

Item 13 :

  Defaults, dividend arrearages and delinquencies      174   

Item 14 :

  Material modifications to the rights of security holders and use of proceeds      174   

Item 15 :

  Controls and procedures      174   
 

Disclosure controls and procedures

     174   
 

Management’s annual report on internal control over financial reporting

     174   
 

Report of independent registered public accounting firm

     175   
 

Changes in internal control over financial reporting

     176   

Item 16A :

  Audit committee financial expert      176   

Item 16B :

  Code of ethics      176   

Item 16C :

  Principal accountant fees and services      176   
 

Audit Committee pre-approval policies

     176   
 

Audit services

     177   
 

Audit-related services

     177   

Item 16D :

  Exemptions from the listing standards for audit committees      178   

Item 16E :

  Purchases of equity securities by the issuer and affiliated purchasers      178   

Item 16F :

  Change in registrant’s certifying accountant      179   

Item 16G :

  Corporate governance      179   
 

Significant differences between Siemens’ corporate governance and NYSE Corporate Governance Standards

     179   

Item 16H :

  Mine Safety Disclosure      180   

PART III

  

Item 18 :

  Financial Statements      F-1   
 

Index to Consolidated Financial Statements

     F-1   

Item 19 :

  Exhibits      III-1   

 

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PART I

 

ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3: KEY INFORMATION

SELECTED CONSOLIDATED FINANCIAL AND STATISTICAL DATA

The following table sets forth our selected consolidated financial data as of and for each of the years in the five-year period ended September 30, 2012. The selected consolidated financial data has been derived from, and should be read in conjunction with, our audited Consolidated Financial Statements (including the Notes thereto) presented in Item 18: Financial Statements. The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union and are also in accordance with IFRS as issued by the International Accounting Standards Board (IASB).

 

Consolidated Statements of Income Data (1)

   Year ended September 30,  
   2012     2011     2010     2009     2008  
     (in millions of €, unless otherwise stated)  

Revenue

     78,296        73,275        68,828        70,053        69,577   

Income from continuing operations before income taxes

     7,279        9,608        6,045        4,035        2,440   

Income from continuing operations

     5,184        7,376        4,329        2,533        1,574   

Income (loss) from discontinued operations, net of income taxes

     (595     (1,055     (261     (36     4,312   

Net income

     4,590        6,321        4,068        2,497        5,886   

Basic earnings per share

          

Income from continuing operations

     5.77        8.23        4,80        2.70        1.60   

Income (loss) from discontinued operations

     (0.68     (1.20     (0.31     (0.05     4.81   

Net income

     5.09        7.04        4.49        2.65        6.41   

Diluted earnings per share

          

Income from continuing operations

     5.71        8.14        4.75        2.67        1.60   

Income (loss) from discontinued operations

     (0.67     (1.18     (0.31     (0.04     4.79   

Net income

     5.04        6.96        4.44        2.63        6.39   

Consolidated Statements of Financial Position Data:

   September 30,  
   2012     2011     2010     2009     2008  
     (in millions of €)  

Total assets

     108,282        104,243        102,827        94,926        94,463   

Long-term debt

     16,880        14,280        17,497        18,940        14,260   

Total equity

     31,302        32,156        29,096        27,287        27,380   

Common stock

     2,643        2,743        2,743        2,743        2,743   

 

(1) Under IFRS, the historical results of our Solar business, OSRAM, Siemens IT Solutions and Services and the former operating segments Communications and Siemens VDO Automotive are reported as discontinued operations in the Company’s Consolidated Statements of Income for all periods presented and the assets and liabilities were classified on the Consolidated Statements of Financial Position as held for disposal. For further information see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 4.

The number of shares outstanding at September 30, 2012, 2011, 2010, 2009 and 2008 was 856,274,326; 874,251,347; 869,837,005; 866,425,760 and 861,557,756, respectively.

 

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DIVIDENDS

The following table sets forth in € and in US$ the dividend paid per share for the years ended September 30, 2008, 2009, 2010, 2011 and the proposed dividend per share for the year ended September 30, 2012. 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 information—Taxation.

 

     Dividend paid
per share
 

Year ended September 30,

       US$  

2008

     1.60        2.11   

2009

     1.60        2.25   

2010

     2.70        3.68   

2011

     3.00        3.90   

2012

     3.00 (1)        

 

(1) Proposed by the Managing Board in agreement with the Supervisory Board; to be approved by the shareholders at the Annual Shareholders’ Meeting on January 23, 2013.

EXCHANGE RATE INFORMATION

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,” “US$” or “USD” means the lawful currency of the United States of America. The currency translations made in the case of dividends we have paid have been made at the noon buying rate at the date of the Annual Shareholders’ Meeting at which the dividends were approved. As used in this document, the term “noon buying rate” refers to the rate of exchange for €, expressed in US$ per €, 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 US$, the table below shows the average noon buying rates in The City of New York for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York for US$ per € 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.

 

Fiscal year ended September 30,

   Average  

2008

     1.5067   

2009

     1.3556   

2010

     1.3539   

2011

     1.3988   

2012

     1.3011   

The following table shows the noon buying rates for € in US$ for the last six months and for November 2012 up to and including November 16, 2012.

 

2012

   High      Low  

May

     1.3226         1.2364   

June

     1.2703         1.2420   

July

     1.2620         1.2062   

August

     1.2583         1.2149   

September

     1.3142         1.2566   

October

     1.3133         1.2876   

November (through November 16)

     1.2937         1.2715   

On November 16, 2012, the noon buying rate was US$1.2715 per €1.00.

 

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Our shares are traded on the Frankfurt Stock Exchange in €. Fluctuations in the exchange rate between the € and the US$ will affect the US$ equivalent of the € 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 € and exchange rate fluctuations will affect the US$ amounts received by holders of ADSs on conversion of cash dividends on the shares represented by the ADSs.

RISK FACTORS

Our business, financial condition (including effects on assets, liabilities and cash flows), and results of operations could suffer material adverse effects due to any of the risks described below. While we have described below all the risks that we consider material, 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.

STRATEGIC RISKS

We operate in highly competitive markets, which are subject to price pressures and rapid changes:    The worldwide markets for our products and solutions are highly competitive in terms of pricing, product and service quality, development and introduction time, customer service and financing terms. In many of our businesses, we face downward price pressure and we are or could be exposed to market downturns or slower growth, which may increase in times of declining investment activities and consumer demand. We face strong competitors, some of which are larger and may have greater resources in a given business area, as well as competitors from emerging markets, which may have a better cost structure. Some industries in which we operate are undergoing consolidation, which may result in stronger competition and a change in our relative market position. Certain competitors might be more effective and faster in capturing available market opportunities, which in turn may negatively impact our market share. These factors alone or in combination may negatively impact our business, financial condition, and results of operations.

Our business, financial condition and results of operations may be affected by the uncertainties of economic and political conditions, particularly in the current macroeconomic environment, which is characterized by the continuing crisis in financial markets and the potential threat of a global economic downturn:    Our business environment is influenced by conditions in the domestic and global economies. Since the second half of fiscal 2011, we have seen a high degree of volatility in the global financial markets, primarily as a result of the ongoing Eurozone sovereign debt crisis. The uncertainty in the macroeconomic environment became more and more present in our business segments resulting in a more challenging overall business climate in fiscal 2012. Future economic developments and, in consequence, the speed of macroeconomic growth and the sustainability of our market environment are dependent upon the evolution of a number of global and local factors such as the crisis in the credit markets, economic crises arising from sovereign debt overruns, and government budget consolidation measures related thereto, reduced levels of capital expenditures, declining consumer and business confidence, increasing unemployment in certain countries, fluctuating commodity prices, bankruptcies, natural disasters, political crises and other challenges.

In light of the latest economic developments, the high degree of unemployment in certain countries, the level of public debt in the United States as well as in Greece, Ireland, Italy, Portugal, Spain and other European countries, uncertainties with respect to the stability of the emerging markets, especially the Chinese economy, and the potential impact of budget consolidation measures by governments around the world, the bases for our expectations relating to the overall economic situation and specific conditions in markets relevant to us are subject to considerable uncertainties. In general, due to the significant proportion of long-cycle businesses in our Sectors and the importance of long-term contracts for Siemens, there is usually a time lag between the development of macroeconomic conditions and their impact on our financial results. Important exceptions include our short-cycle businesses in the Industry Sector, particularly those in Industry Automation and parts of Drives Technologies, as well as parts of the Power Grid Solutions & Products Business within the Infrastructure & Cities Sector, which are highly sensitive to volatility in market demand. If the macroeconomic environment deteriorates further and if we are not successful in adapting our production and cost structure to subsequent changes to conditions in the markets, in which we operate, there can be no assurance that we will not

 

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experience adverse effects that may be material to our business, financial condition, results of operations and our ability to access capital. For example, it may become 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. Furthermore, prices may decline as a result of adverse market conditions to a greater extent than currently anticipated. In addition, contracted payment terms, especially regarding the level of advance payments by our customers relating to long-term projects, may become less favorable, which could negatively impact our cash flows. 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 business, financial condition and results of operations.

Numerous other factors, such as fluctuations of energy and raw material prices, as well as global political conflicts, including those in the Middle East, North Africa 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 business, financial condition and results of operations and can also make our budgeting and forecasting more difficult.

Our business is affected by a variety of market conditions and regulations. For example, our Energy Sector is exposed to the development of global demand for energy and is considerably affected by regulations related to energy and environmental policies. Our Healthcare Sector, in turn, is dependent on developments and regulations in healthcare systems around the world, particularly in the important U.S. healthcare market. Our Industry Sector is vulnerable to unfavorable market conditions in certain segments of the automotive and manufacturing industries. Our Infrastructure & Cities Sector focuses, among other things, on business with public authorities around the world and is thus vulnerable to restrictions in public budgets.

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 areas, we must continuously design new, and update existing products and services, and invest in, and develop new technologies. Introducing new products and technologies requires a significant commitment to research and development, which in return requires expenditure of considerable financial resources that may not always result in success. Our sales and profitability may suffer if we invest in technologies that do not operate, or may not be integrated, as expected or that are not accepted in the marketplace as anticipated, or if our products or systems are not introduced to the market in a timely manner, in particular, compared to our competitors, or become obsolete. We constantly apply for new patents and actively manage our intellectual property portfolio to secure our technological position. However, our patents and other intellectual property may not prevent competitors from independently developing or selling products and services similar to or duplicate of ours. There can be no assurance that the resources invested by us to protect our intellectual property will be sufficient or that our intellectual property portfolio will adequately deter misappropriation or improper use of our technology. Furthermore, in some of our markets, the need to develop and introduce new products rapidly in order to capture available opportunities may lead to quality problems. Our operating results depend to a significant extent on our ability to anticipate and adapt to changes in markets and to reduce the costs of producing high-quality, new and existing products. As one of the latest technology trends we carefully estimate the potential and relevance of cloud computing. We believe that the potential and usage scenarios of this technology vary between our products, solutions and services depending on the degree of information technology utilized. However, we also believe that this trend needs to be monitored closely, because it might bear the potential to change the competitive landscape. Any inability to adapt to the factors aforementioned could have a material adverse effect on our business, financial condition and results of operations.

Our business, financial condition and results of operations may be adversely affected by continued strategic alignments and cost-cutting initiatives:    We are in a continuous process of strategic alignments and constantly engage in cost-cutting initiatives, including in connection with ongoing capacity adjustment measures and structural initiatives. Capacity adjustments through consolidation of business activities and manufacturing facilities, and the streamlining of product portfolios are also part of these cost reduction efforts. These measures may not be implemented as planned, may turn out to be less effective than anticipated, may only become effective later than estimated or may not become effective at all. Each of these factors alone or in combination

 

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may negatively impact our business, financial condition, and results of operations. 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.

Our business, financial condition and results of operations may be adversely affected by portfolio measures:    Our strategy includes divesting activities 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 the divestitures we do carry out could have a negative impact on our business, financial condition, results of operations and, potentially, our reputation. For example, we have announced to divest OSRAM, our solar business and the business activities included in the Industry Sector’s Water Technologies Business Unit, which as of September 30, 2012 was part of the Industry Automation Division.

Mergers and acquisitions are inherently risky because of difficulties that may arise when integrating people, operations, technologies and products. There can be no assurance that any of the businesses we acquire can be integrated successfully and as timely as originally planned 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 measures 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 intangible assets, including goodwill. Our Statements of Financial Position reflects a significant amount of intangible assets, including goodwill. Among our businesses, the largest amount of goodwill is allocated to the Diagnostics Division and the Imaging & Therapy Division of the Healthcare Sector, and the Industry Automation Division of the Industry Sector. In fiscal 2010, the annual test for impairment of goodwill of the Diagnostics Division within the Healthcare Sector was performed as of September 30, 2010. As a result, in the Diagnostics Division of the Healthcare Sector an impairment of €1,145 million was recognized to reduce the carrying amount of goodwill. If we were to encounter continuing adverse business developments including negative effects on our revenues, profits or cash, or adverse effects from an increase in the weighted average cost of capital (WACC) or from foreign exchange rate developments, or if we were otherwise to perform worse than expected at acquisition, then these intangible assets, including goodwill, might have to be written off, which could materially and adversely affect our business, financial condition and results of operations. The likelihood of such adverse business developments increases in times of difficult or uncertain macroeconomic conditions.

Our business, financial condition and results of operations may be adversely affected by our equity interests, other investments 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 B.V. (NSN), Enterprise Networks Holdings B.V. (EN) and Bosch und Siemens Hausgeräte GmbH (BSH). Furthermore we hold other investments, for example Atos S.A. Any factors negatively influencing the profitability of our equity and other investments, including negative effects on revenues, profits or cash, could have an adverse effect on our equity pick-up related to these equity interests or may result in a write-off of these investments. In addition, our business, financial condition and results of operations could also be adversely affected in connection with loans, guarantees or non-compliance with financial covenants related to these equity and other investments. Furthermore, such investments are inherently risky as we may not be able to sufficiently influence corporate governance processes or business decisions taken by our equity investments, other investments and strategic alliances that may have a negative effect on our business. In addition, joint ventures bear the risk of difficulties that may arise when integrating people, operations, technologies and products. Strategic alliances may also pose risks for us because we compete in some business areas with companies with which we have strategic alliances.

We are subject to changes of regulations, laws and policies concerning our products:    As a diversified company with global businesses we are exposed to various product related regulations, laws and policies influencing our processes. Recently, some jurisdictions around the world have adapted certain regulations, laws and policies requiring us to extend our recycling efforts, limit the sourcing and usage of certain raw materials and request additional due diligences and disclosures on sourcing and usage of the regulated raw materials. In particular, there is new U.S. legislation to improve transparency and accountability concerning the sourcing of

 

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“conflict minerals” from mines located in the conflict zones of the Democratic Republic of Congo (DRC) and its adjoining countries. The term “conflict minerals” currently encompasses tantalum, tin, tungsten (or their ores) and gold. Conflict minerals can be found in a vast array of products. This U.S. legislation requires manufacturers, such as us, to investigate and disclose their use of any conflict minerals originating in the DRC or adjoining countries. It also implements guidelines to assist the manufacturer in preventing, by way of performing due diligence in its supply chain, any such sourcing from potentially financing or benefitting armed groups in this area. We are currently evaluating the potential impact of, and developing an implementation strategy for, the above-referenced legislation. As we are operating within highly complex value chains, we may be required to undertake a significant due diligence process requiring considerable investments of human resources and finances in order to comply with the conflict minerals due diligence and disclosure requirements. If our (sub) suppliers are unable or unwilling to provide us with requested information and to take other steps to ensure that no conflict minerals, financing or benefitting armed groups in the DRC, are included in minerals or components supplied to us, we may be forced to disclose in our SEC filings about the use of conflict minerals in our supply chain, which may expose us to reputational risks. In addition, since the applicability of the new conflict minerals legislation is limited to companies publicly listed in the U.S, not all of our competitors need to comply with this legislation or undertake similar efforts to disclose the usage of conflict minerals. If we are unable to achieve sufficient confidence along our supply chain, or if any of these risks or similar risks associated with such kinds of regulations, laws and policies were to materialize, our reputation, business, financial condition and results of operations could be materially adversely affected.

OPERATIONS

Our business, financial condition and results of operations may be adversely affected by cost overruns or additional payment obligations related to the management of our long-term, fixed price or turnkey projects:    We perform a portion of our business, especially large projects, under long-term contracts that are awarded on a competitive bidding basis. Some of these contracts are inherently risky because we may assume substantially all of the risks associated with completing the project and the post-completion warranty obligations. For example, we face the risk that we must satisfy technical requirements of a project even though we may not have gained experience with those requirements before we win the project. The profit margins realized on 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 unanticipated project modifications, shortage of key personnel, quality problems, financial difficulties of our customers, cost overruns or contractual penalties caused by unexpected technological problems, unforeseen developments at the project sites, unforeseen changes or difficulties in the regulatory or political environment, performance problems with our suppliers, subcontractors and consortium partners 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 and compliance with government regulations requirements, which, if not satisfied, could subject us to substantial contractual penalties, damages, non-payment and contract termination. There can be no assurance that contracts and projects, in particular those with long-term duration and fixed-price calculation, can be completed profitably.

Increased IT security threats and higher levels of professionalism in computer crime could pose a risk to our systems, networks, products, solutions and services as well as to those of our service providers:    Our business portfolio includes a broad array of systems, networks, products, solutions and services across our Sectors that rely on digital technologies. We observe a global increase in IT security threats and higher levels of professionalism in computer crime, which pose a risk to the security of systems and networks and the confidentiality, availability and integrity of data. We attempt to mitigate these risks by employing a number of measures, including employee training, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems such as firewalls and virus scanners. To the extent we employ service providers, such as in the area of IT infrastructure, we have contractual arrangements in place in order to ensure that these risks are reduced in a similar manner. Nonetheless, our systems, networks, products, solutions and services, as well as those of our service providers remain potentially vulnerable to attacks. Depending on their nature and scope, such attacks could potentially lead to the leakage of confidential information, improper

 

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use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and supply shortages, which in turn could adversely affect our reputation, competitiveness, business, financial condition and results of operations.

We may face operational failures and quality problems in our value chain processes:    Our value chain comprises all steps, from research and development to supply chain management, 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 and construction 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 might have quality issues resulting from the design or manufacture of such products or from the software integrated into them. Particularly our Healthcare Sector is subject to requirements of the U.S. Food and Drug Administration, which require certain efforts safeguarding our product quality. If we are not able to comply with these requirements our reputation, competitiveness, business, financial condition and results of operations may be adversely affected.

Furthermore, failures on the part of service providers we employ, such as in the area of IT, may have an adverse effect on our processes and operations and our ability to meet our commitments to customers or increase our operating costs. Any operational failures or quality issues could have a material adverse effect on our business, financial condition and results of operations.

We are dependent upon hiring, developing and retaining highly qualified management and technical personnel:    Competition for highly qualified personnel remains intense in the industries and regions in which our business operates. In many of our business areas, we intend to expand our business activities, for which we will need highly skilled employees. Our future success depends in part on our continued ability to hire, integrate, develop and retain engineers and other qualified personnel. There can be no assurance that we will continue to be successful in attracting and retaining all the highly qualified employees and key personnel needed in the future, including in appropriate geographic locations, and any inability to do so could have a material adverse effect on our business.

We may face interruption of our supply chain, including the inability of third parties to deliver parts, components and services on time, and we may be subject to rising raw material prices:    Our financial performance depends in part on reliable and effective supply chain management for components, sub-assemblies and other materials. Capacity constraints and supply shortages resulting from ineffective supply chain management may lead to delays and additional cost. 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 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 or raw materials due to market shortages or other reasons could also adversely affect the performance of our Sectors. Furthermore, we may be exposed to the risk of delays and interruptions of the supply chain as a consequence of natural disasters in case we are unable to identify alternative sources of supply in a timely manner or at all. A general shortage of materials, components or sub-components as a result of natural disasters also bears the risk of unforeseeable fluctuations in prices and demand, which might adversely affect our results of operations.

Our Sectors purchase raw materials including so-called rare-earth metals, copper, steel, aluminum and oil, which exposes them to fluctuations in energy and raw material prices. In recent times, commodities have been subject to volatile markets, and such volatility is expected to continue. If we are not able to compensate for our increased costs or pass them on to customers, price increases could have a material adverse impact on our financial results. In contrast, in times of falling commodity prices, we may not fully profit from such price decreases as we attempt to reduce the risk of rising commodity prices by several means, such as long-term

 

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contracting or physical and financial hedging. In addition to price pressure that we may face from our customers expecting to benefit from falling commodity prices or adverse market conditions, this could also adversely affect our business, financial condition and results of operations.

FINANCIAL

We are exposed to currency risks and interest rate risks:    We are exposed to fluctuations in exchange rates, especially between the U.S. dollar and the euro, because a high percentage of our business volume is conducted in the U.S. and as exports from Europe. In addition, we are exposed to currency effects involving the currencies of emerging markets, in particular the Chinese Yuan. As a result, a strong euro in relation to the U.S. dollar and other currencies could have an adverse impact on our revenues and results of operations. Certain currency risks as well as interest rate risks are hedged on a Company-wide basis using derivative financial instruments. Depending on the development of foreign currency exchange and interest rates, our hedging activities could have significant effects on our cash flow. Our Sectors and Financial Services (SFS) engage in currency hedging activities which sometimes do not qualify for hedge accounting. In addition, our Corporate Treasury has interest rate hedging activities which do not qualify for hedge accounting either, and are subject to changes in interest rates. Accordingly, exchange rate and interest rate fluctuations may lead to higher volatility and adverse effects on our business, financial conditions and results of operations. A strengthening of the euro (particularly against the U.S. dollar) may 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.

We are exposed to volatile credit spreads:    Regarding our Corporate Treasury activities, widening credit spreads due to uncertainty and risk aversion in the financial markets might lead to adverse changes of fair market values of our financial assets, in particular concerning our derivative financial instruments. In addition, we see a risk of widening credit spreads leading to increasing refinancing costs if the Eurozone sovereign debt crisis with its ongoing significant impact on global financial markets and the European financial sector in particular, continues or even worsens. Any such development could also further increase the costs for buying protection against credit risks due to a potential increase of counterparty risks.

Our future financing via Corporate Treasury may particularly be affected by the uncertainty of economic conditions and the development of capital and financial markets:    Our Corporate Treasury is responsible for the financing of the Company. Negative developments in the foreign exchange, money or capital markets, such as limited availability of funds (particularly U.S. dollar funds), may increase our overall cost of funding. The ongoing Eurozone sovereign debt crisis continues to have an impact on global capital markets. The resulting higher risk awareness of governments lead to more regulations on the use of financial instruments through (i) the Regulation on OTC derivatives, central counterparties and trade repositories (European Market Infrastructure Regulation) and (ii) other similar regulations in other jurisdictions, which may have an impact on the future availability or the costs of adequate hedging instruments for the company. It may even lead to further regulation of the financial sector and the use of financial instruments. Such further regulations could adversely influence our future possibilities of obtaining debt financing, and/or may significantly increase our refinancing costs. Deteriorating credit quality and/or default of business partners may adversely affect our business, financial conditions and results of operations.

Downgrades of our ratings could increase our cost of capital and could negatively affect our businesses:    Our business, financial condition and results of operations are influenced significantly by the actual and expected performance of the Sectors and SFS, as well as the Company’s portfolio measures. An actual or expected negative development of our results of operations or cash flows or an increase in our net debt position could result in the deterioration of our credit rating. Downgrades by rating agencies could increase our cost of capital, may reduce our potential investor base and may negatively affect our business, financial conditions and results of operations.

Our financing activities subject us to various risks, including credit, interest rate and foreign exchange risk:    We provide our customers with various forms of direct and indirect financing in connection with large projects. We also finance a large number of customer orders, for example, the leasing of medical

 

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equipment, mainly through SFS. SFS also incurs credit risk by financing third-party equipment or by taking direct or indirect participation in financings, such as syndicated loans. In part, we take a security interest in the assets we finance or we receive additional collateral. Our business, financial condition and results of operations may be adversely affected if the credit quality of our customers deteriorates or if they default on their payment obligation to us, if the value of the assets in which we have taken a security interest or additional collateral declines, if interest rates or foreign exchange rates fluctuate, or if the projects in which we invest are unsuccessful. Potential adverse changes in economic conditions could cause a decline in the fair market values of assets, derivative instruments as well as collateral, resulting in losses which could have an adverse effect on our business, financial condition and results of operations.

Our business, financial condition and results of operations may be adversely affected by several parameters influencing the funded status of our pension benefit plans:    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 value 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, rate of future compensation increases and pension progression. Actual developments may differ from assumptions due to changing market and economic conditions, thereby resulting in an increase or decrease in the DBO. Significant movements in financial markets or a change in the portfolio mix of invested assets could result in corresponding increases or decreases in the value of plan assets, particularly equity securities. Also, changes in pension plan assumptions could affect net periodic pension cost. For example, a change in discount rates may result in changes in the net periodic benefit cost in the following financial year. In order to comply with local pension regulations in selected foreign countries, we may face a risk of increasing cash outflows to reduce an underfunding of our pension plans in these countries, if any. Furthermore, changes in the accounting pronouncements concerning pensions could require adaptations in the way pension obligations are recorded in our Consolidated Financial Statements and thus could have adverse effects on our business, financial condition and results of operations.

For further information on financial risks and financial risk management see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 32.

COMPLIANCE

We are subject to regulatory risks associated with our international operations:    Protectionist trade policies and changes in the political and regulatory environment in the markets in which we operate, such as foreign exchange import and export controls, tariffs and other trade barriers and price or exchange controls, could affect our business in several national markets, impact our sales and profitability and make the repatriation of profits difficult, and may expose us to penalties, sanctions and reputational damage. In addition, the uncertainty of the legal environment in some regions could limit our ability to enforce our rights. For example, as a globally operating organization, we conduct business with customers in countries that are subject to export control regulations, embargoes, sanctions or other forms of trade restrictions imposed by the U.S., the European Union or other countries or organizations. The sanction regime against Iran was recently tightened further following the approval of the Council Regulation (EU) No. 267/2012 on March 23, 2012 concerning restrictive measures against Iran and repealing Regulation (EU) No 961/2010 and the Implementing Regulation (EU) No. 945/2012 dated October 15, 2012 that built thereupon, which lists 34 additional companies and institutions (primarily from the Oil and Gas industry sector). In addition, the signing into law of the American “Iran Threat Reduction and Syria Human Rights Act of 2012” on August 10, 2012 tightens the restrictions on the ability of non-U.S. companies to do business or trade with Iran and Syria and imposes additional disclosure obligations. As described in more detail under Item 4: Information on the Company—Overview, we have issued, and regularly update, restrictive internal guidelines governing business with customers in Iran. We may, however, still conduct certain business activities and provide products and services to customers in Iran under limited circumstances. Although we believe that our business activities have not had a material negative impact on our reputation or share value, we cannot exclude any such impact in the future. New or tightened export control regulations, sanctions, embargos or other forms of trade restrictions imposed on Iran, Syria or on other sanctioned countries

 

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in which we do business may result in a curtailment of our existing business in such countries and in an adaptation of our policies. In addition, the termination of our activities in Iran, Syria or other sanctioned countries may expose us to customer claims and other actions.

We expect that sales to emerging markets will continue to account for an increasing portion of our total revenue, as our business naturally evolves and as developing nations and regions around the world increase their demand for our offering. Emerging market operations involve various risks, including civil unrest, health concerns, 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. The Asian markets, in particular, 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. Our Sectors, particularly those that derive their revenue from large projects, could be adversely affected if future demand, prices and gross domestic product in the markets in which those Sectors operate do not develop as favorably as expected. If any of these risks or similar risks associated with our international operations were to materialize, our business, financial condition and results of operations could be materially adversely affected.

Current and future investigations regarding allegations of public corruption and other illegal acts could have a material adverse effect on our business, financial condition and results of operations, the price of our shares and American depository shares (ADS) and our reputation:    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 intergovernmental and supranational organizations such as multilateral development banks. If we are found to have been engaged in public corruption and other illegal acts, such activities may impair our ability to do business with these or other organizations. Corruption and related proceedings may lead to criminal and civil fines as well as penalties, sanctions, injunctions against future conduct, profit disgorgements, disqualifications from directly and indirectly engaging in certain types of business, the loss of business licenses or permits or other restrictions. Accordingly, we may be required to record material provisions to cover potential liabilities arising in connection with such investigations and proceedings, including potential tax penalties. Moreover, any findings related to public corruption that are not covered by the 2008 and 2009 corruption charge settlements which were concluded with American and German authorities may endanger these, further monitors could be appointed to review future business practices and we may otherwise be required to further modify our business practices and our compliance program.

Our involvement in ongoing and potential future corruption proceedings could damage our reputation and have an adverse impact on our ability to compete for business from public and private sector customers around the world. If we or our subsidiaries are found to have engaged in certain illegal acts or not to have taken effective steps to address allegations or findings of corruption in our business, this may impair our ability to participate in business with governments or intergovernmental organizations and may result in our formal exclusion from such business. Even if we are not formally excluded from participating in government business, government agencies or intergovernmental or supranational organizations may informally exclude us from tendering for or participating in certain contracts. For example, legislation of member states of the European Union could in certain cases result in our mandatory or discretionary exclusion from public contracts in case of a conviction for bribery and certain other offences or for other reasons. As described in more detail in Item 4: Information on the Company—Legal proceedings, we or our subsidiaries have in the past been excluded or currently are excluded from some contracting, including with governments, development banks and multilateral financial institutions, as a result of findings of corruption or other misconduct. Ongoing or potential future investigations into allegations of corruption could also impair existing relationships with, and our ability to acquire new, private sector business partners. For instance, such investigations may adversely affect our ability to pursue potentially important strategic projects and transactions, such as strategic alliances, joint ventures or other business combinations, or could result in the cancellation of certain of our existing contracts and third parties, including our competitors, could initiate significant third-party litigation.

In addition, future developments in ongoing and potential future investigations, such as responding to the requests of governmental authorities and cooperating with them, could divert management’s attention and

 

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resources from other issues facing our business. The materialization of any of these risks could have a material adverse effect on our business, financial condition and results of operations, the price of our shares and ADS and on our reputation.

Our business, financial condition and results of operations could suffer as a result of current or future litigation:    We are subject to numerous risks relating to legal, governmental and regulatory proceedings to which we are currently a party or to which we may become a party in the future. We routinely become subject to legal, governmental and regulatory investigations and proceedings involving, among other things, requests for arbitration, allegations of improper delivery of goods or services, product liability, product defects, quality problems, intellectual property infringement, non-compliance with tax regulations and/or alleged or suspected violations of applicable laws. In addition, we may face further claims in connection with the circumstances that led to the corruption charges. For additional information with respect to specific proceedings see Item 4: Information on the Company—Legal proceedings. There can be no assurance that the results of these or any other proceedings will not materially harm our business, reputation or brand. Moreover, even if we ultimately prevail on the merits in any such proceedings, we may have to incur substantial legal fees and other costs defending ourselves against the underlying allegations. Under certain circumstances we record a provision for risks arising from legal disputes and proceedings. In addition, we maintain liability insurance for certain legal risks at levels our management believes are appropriate and consistent with industry practice. Our insurance policy, however, does not protect us against reputational damage. Moreover, we may incur losses relating to legal proceedings beyond the limits, or outside the coverage, of such insurance. Finally, there can be no assurance that we will be able to maintain adequate insurance coverage on commercially reasonable terms in the future. Each of these risks may have a material adverse effect on our business, financial condition and results of operations, and our provisions for legal proceedings-related losses may not be sufficient to cover our ultimate losses or expenditures.

Examinations by tax authorities and changes in tax regulations could adversely affect our business, financial condition and results of operations:    We operate in around 190 countries and therefore are subject to different tax regulations. Changes in tax law could result in higher tax expense and payments. Furthermore, legislative changes could materially impact our tax receivables and liabilities as well as deferred tax assets and deferred tax liabilities. In addition, the uncertain tax environment in some regions could limit our ability to enforce our rights. As a globally operating organization, we conduct business in countries subject to complex tax rules, which may be interpreted in different ways. Future interpretations or developments of tax regimes may affect our tax liability, return on investments and business operations. We are regularly examined by tax authorities in various jurisdictions.

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 require us to change the way we run our operations and could result in significant increases in our operating or product costs. In addition, while we have procedures in place to ensure compliance with applicable governmental regulations in the conduct of our business operations, it cannot be excluded that violations of applicable governmental regulations may occur either by us or by third parties that we contract with, including suppliers or service providers, whose activities may be attributed to us. Any such violations expose us to the risk of liability, reputational damage or loss of licenses or permits that are important to our business operations. In particular, we could also face liability for damage or remediation for environmental contamination at the facilities we design or operate. For example, we are required to bear environmental clean-up costs mainly related to remediation and environmental protection liabilities which have been accrued based on the estimated costs of decommissioning facilities for the production of uranium and mixed-oxide fuel elements in Hanau, Germany, as well as a nuclear research and service center in Karlstein, Germany. For further information, see Item 4: Information on the Company—Environmental matters and Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 24. Under certain circumstances we establish provisions for environmental risks. 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 our business, financial condition and results of our operations. In addition, our provisions for environmental liabilities may not be sufficient to cover our ultimate losses or expenditures resulting therefrom.

 

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ITEM 4: INFORMATION ON THE COMPANY

OVERVIEW

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, 80333 Munich, Germany; telephone number +49 (89) 636 00.

During fiscal 2012, Siemens employed an average of 366,700 people on a continuing basis and operated in around 190 countries worldwide. In fiscal 2012, we had revenue of €78.296 billion. Our balanced business portfolio is based on leadership in electronics and electrical engineering. Following our strategy to benefit from global megatrends, we initiated a change in the organizational structure of our Sectors during fiscal 2011, which became effective October 1, 2011. Beginning with fiscal 2012, we formed a fourth Sector, Infrastructure & Cities, in addition to our existing three Sectors Energy, Healthcare and Industry, in order to benefit from the growth of urban centers. We combine the expertise in our four Sectors with a commitment to original research and development (R&D) to build strong global market positions. The Energy Sector offers a wide spectrum of products, services and solutions for the generation and transmission of power and for the extraction, conversion and transport of oil and gas. 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 Industry Sector’s portfolio ranges from industry automation and drives products and services to system integration and solutions for plant business. The Infrastructure & Cities Sector bundles capabilities in the area of building and mobility solutions, low and medium voltage components, systems and solutions as well as power distribution, including Smart Grid applications. These functions were included in the Energy and Industry Sectors until the end of fiscal 2011. Besides these activities, Financial Services (SFS) supports Sector activities as a business partner while continuing to build up its own business with external customers. The segment Equity Investments comprises equity stakes held by Siemens that are either accounted for by the equity method, at cost or as current available-for-sale financial assets and are not allocated to a Sector, SFS, Centrally managed portfolio activities, Siemens Real Estate (SRE), Corporate items or Corporate Treasury for strategic reasons. 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 primarily the Energy Sector and the transportation and logistics solutions business within the Infrastructure & Cities Sector. The Healthcare Sector’s business activities are relatively unaffected by short-term economic trends but are dependent on regulatory and policy developments around the world. 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 parts of drives operations within the Industry Sector as well as low and medium voltage operations within the Infrastructure & Cities Sector. Our businesses, especially the Healthcare Sector, are also substantially influenced by technological change and the rate of acceptance of new technologies.

As a globally-operating organization, we also conduct business with customers in Iran, 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 (substantially less than 1% of our revenue in fiscal 2012) and do not, in our view, represent either individually or in aggregate a material investment risk. We actively employ systems and procedures for compliance with applicable export control programs, including those in the United States, the European Union and Germany.

As previously disclosed, Siemens has decided that, subject to certain limited exceptions, it will not enter into new contracts with customers in Iran and has issued group-wide policies establishing the details of its general decision. Under the original version of the policies, among other exceptions, which have been previously disclosed, products and services required to maintain the installed base (e.g. deliveries of spare parts,

 

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maintenance and assembly services) were permitted to be provided. However, in the beginning of calendar year 2012, Siemens resolved to amend the policies to provide that no new business with respect to products and services destined to maintain the installed base in Iran’s oil & gas sector may be entered into under any circumstances. In addition, even outside the oil & gas sector, products and services for the installed base in Iran may be provided only in strictly limited circumstances which can be demonstrated to satisfy humanitarian purposes or private purposes serving the common good (e.g. water supply and healthcare of the civilian population). In the fourth quarter of fiscal 2012, Siemens revised its credit risk assessment for Iran. In accordance with project accounting principles, Siemens therefore revised project calculations for the affected projects that were still permitted to be provided under these policies. The change in credit risk assessment resulted in an earnings impact of €347 million. We expect further profit impacts related to Iran in fiscal 2013. For additional information, see Item 3: Key information—Risk factors.

STRATEGY

GLOBAL MEGATRENDS

Global megatrends are long-term developments that are expected to have an impact on all humanity. We at Siemens view demographic change, urbanization, climate change and globalization as megatrends that will drive global demand in coming decades. We have aligned our strategy with these developments and accordingly have organized our business into four Sectors: Energy, Healthcare, Industry, and Infrastructure & Cities.

Demographic change includes two major trends: the world’s population continues to grow rapidly, and it continues to get older. Together, these two trends will challenge the ability of future healthcare systems to make affordable healthcare available to everyone. Urbanization refers to the growing number of large, densely-populated cities around the world. This trend intensifies the already strong demand for sustainable and energy-efficient infrastructures for buildings, transportation systems, energy and water. Climate change is a fact. The average global surface temperature increased by 0.76°C between 1850 and the beginning of the 21st century. The reduction of greenhouse gas emissions is vital to avoiding increasingly drastic effects on our ecosystem. There is a strong need for innovative technologies to increase efficiency and reduce the emissions related to energy generation and consumption. Globalization refers to the increasing integration of the world’s economies, politics, culture and other areas of life. Globalization leads to increased competitive pressure and demand for economical, timely-to-market, high-quality products and solutions.

STRATEGY OF THE SIEMENS GROUP

Our vision is to be a pioneer in

 

   

energy efficiency,

 

   

industrial productivity,

 

   

affordable and personalized healthcare, and

 

   

intelligent infrastructure solutions.

Our company strategy guides us in turning our vision into reality. We are aiming to be a market and technology leader in our businesses, based on our values—to be responsible, excellent and innovative. We believe that this will position us to achieve sustainable, profitable growth and thereby continually increase our company value. As an integrated technology company, we intend to profit from the megatrends described above.

Our strategy comprises what we call our three strategic directions:

 

   

focusing on innovation-driven growth markets,

 

   

getting closer to our customers, and

 

   

using the power of Siemens.

 

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One Siemens is our framework for sustainable value creation, with a financial target system for capital-efficient growth and the goal of continuous improvement relative to the market and our competitors.

The financial target system of One Siemens defines financial key performance indicators for revenue growth, for capital efficiency and profitability, and for the optimization of our capital structure. In addition, we set hurdle rates that generally need to be considered before acquisitions are executed. Further, we defined an indicator targeted at an attractive dividend policy. We believe that these indicators will play a key role in driving the value of our Company. For further information, see Item 5: Operating and financial review and prospects—Business and economic environment—Financial performance measures.

To achieve our One Siemens goal of sustainably enhancing the value of Siemens and of exploiting the full potential of our integrated technology company, we have defined three concrete focus areas along each of the three strategic directions set forth above, which we aim to address in the years ahead.

In the strategic direction of focusing on innovation-driven growth markets, our first focus area is to be a pioneer in technology-driven markets. Here, we intend to concentrate on markets that are believed to have future growth potential, for example, in vertical IT and software. Our second focus area is to strengthen our portfolio. We are actively and systematically managing our portfolio with the principal aim of achieving or maintaining a No. 1 or No. 2 position in our current and future markets. To provide a leading environmental portfolio is our third focus area: Our Environmental Portfolio enhances our Company’s revenue and makes a significant contribution to climate protection.

In the second strategic direction of getting closer to our customers, one of our focus areas is to grow in emerging markets while maintaining our position in our established markets. We plan to offer more products, solutions and services for the rapidly growing entry-level segments, which are more price-sensitive and mostly found in emerging markets. A second focus area is to expand our service business. We believe that the large installed base of our products and solutions at our clients provides promising growth opportunities for our service business. Services play a key role in profitability at Siemens and, in addition, long-term service agreements are less likely to be impacted by economic fluctuations. To intensify our customer focus is our third focus area. We believe that customer proximity and local presence are important factors in being able to respond quickly to changing market requirements.

In the strategic direction of using the power of Siemens, our first focus area is to encourage lifelong learning and development of our employees. We invest continuously in expanding the expertise of our people through demanding training and education programs. We aim to develop our employees worldwide by identifying talent and offering challenging tasks. To empower our diverse and engaged people worldwide is our second focus area. We believe that the strong potential of our employees’ skills, experience and qualifications can give us a clear competitive advantage in our global markets. The third focus area is to stand for integrity. On the basis of our values, we have formulated clear and binding principles of conduct that cover all aspects of our entrepreneurial activities.

Beginning with fiscal 2013, we are implementing “Siemens 2014,” a company-wide program supporting the One Siemens framework for sustainable value creation. The goal of the program is to reduce cost, increase competitiveness, and become faster and less bureaucratic. We intend to improve profitability through five key enablers: cost reduction, strengthening core activities, go-to-market, optimizing our infrastructure, and simplifying governance. The program is aimed at raising Total Sectors profit margin to at least 12% by fiscal 2014. To achieve this goal, we are targeting substantial productivity gains over the next two fiscal years from the activities just mentioned. In the area of cost reduction, which is expected to yield the majority of these gains, we want to, for example, enhance product design by better integrating engineering, development, manufacturing and purchasing processes; improve global capacity utilization and presence; and increase process efficiency and quality. To achieve these results, our Sectors are undertaking a broad range of measures that are expected to result in charges to earnings in the next two fiscal years.

 

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PORTFOLIO ACTIVITIES

Since fiscal 2010, we have completed the following transactions to optimize our business portfolio for sustainable profitability and growth:

ACQUISITIONS

 

   

At the beginning of May 2012, Siemens acquired all of the shares of five entities constituting the Connectors and Measurements Division of Expro Holdings UK 3 Ltd. The acquired business engineers and manufactures subsea components such as cable connectors, sensors and measuring devices;

 

   

Acquisition of various other entities in fiscal 2012, which were not material individually including RuggedCom Inc., the NEM B.V. business and eMeter Corporation;

 

   

At the beginning of July 2011, OSRAM completed the acquisition of 100% of Siteco Lighting GmbH, a developer, designer and manufacturer of professional lighting fixtures;

 

   

Siemens increased its stake in its publicly listed Indian subsidiary Siemens Ltd. from about 55% to 75%. The transaction was completed at the end of April 2011;

 

   

Acquisition of various other entities in fiscal 2011, which were neither material individually nor in aggregate;

 

   

At the beginning of November 2009, the Sector Energy’s previous Renewable Division completed the acquisition of 100% of Solel Solar Systems Ltd., a solar thermal power technology company;

 

   

Acquisition of various other entities in fiscal 2010, which were neither material individually nor in aggregate.

DISPOSITIONS AND DISCONTINUED OPERATIONS

Dispositions

 

   

In July 2011, Siemens signed an agreement to sell its 25% stake in OAO Power Machines, held by the Energy Sector, and classified it as held for disposal; the transaction closed in the first quarter of fiscal 2012;

 

   

In March 2011, Siemens completed the sale of its 34% stake in the joint venture Areva NP S.A.S., held by the Energy Sector, to Areva S.A. following the receipt of the expert opinion on the fair market value and the payment from Areva S.A.;

 

   

The sale of the 49% stake in Krauss-Maffei Wegmann GmbH & Co. KG, held by the Segment Equity Investments, was completed in January 2011;

 

   

At the beginning of January 2011, Siemens closed the disposal of its Electronics Assembly Systems business, which was reported in Centrally managed portfolio activities, to ASM Pacific Technology Ltd;

 

   

At the end of December 2009, the Sector Healthcare sold its 25% minority stake in Dräger Medical AG & Co. KG to the majority shareholder Drägerwerk AG & Co. KGaA;

 

   

At the beginning of November 2009, the Sector Industry’s Mobility Division sold its Airfield Solutions Business.

Discontinued operations

 

   

In the fourth quarter of fiscal 2012, Siemens decided to dispose of its solar business and classified its solar business as held for disposal and as discontinued operations as of September 30, 2012;

 

   

At the end of March 2011, Siemens announced that it plans to publicly list its subsidiary OSRAM. Following the announcement, Siemens classified OSRAM as held for disposal and as discontinued

 

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operations. Now, the Company intends to dispose of OSRAM via a spin-off to Siemens shareholders, which is subject to approval by the Annual Shareholders’ Meeting on January 23, 2013. Siemens considers a listing via spin-off as highly probable until June 2013 and therefore classifies OSRAM again as held for disposal and discontinued operation. Siemens intends to retain a minority stake in OSRAM;

 

   

In December 2010, Siemens and Atos S.A. (AtoS) signed an option agreement which granted AtoS the right to acquire Siemens IT Solutions and Services. This option was exercised by AtoS in February 2011 and Siemens classified Siemens IT Solutions and Services as held for disposal and as discontinued operations. On July 1, 2011, the transaction closed following the relevant antitrust approvals and the approval by AtoS shareholders.

For a detailed discussion of our acquisitions, dispositions and discontinued operations, see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 4.

DESCRIPTION OF BUSINESS

Our financial reporting as of September 30, 2012 comprised six reportable segments. These segments consisted of:

 

   

four Sectors Energy, Healthcare, Industry and Infrastructure & Cities,

 

   

Equity Investments and

 

   

Financial Services (SFS).

In addition, we report separately two Businesses and eight Divisions of our Sectors. Those are

 

   

in the Energy Sector: the Fossil Power Generation Division, the Wind Power Division, the Oil & Gas Division and the Power Transmission Division,

 

   

in the Healthcare Sector: the Diagnostics Division,

 

   

in the Industry Sector: the Industry Automation Division and the Drive Technologies Division and

 

   

in the Infrastructure & Cities Sector: the Transportation & Logistics Business, which includes the Rail Systems and Mobility and Logistics Divisions, the Power Grid Solutions & Products Business, which includes the Low and Medium Voltage and the Smart Grid Divisions as well as the Building Technologies Division.

The following figure shows Siemens’ segment reporting structure for the periods covered by this annual report:

 

LOGO

ENERGY

The Energy Sector offers a wide spectrum of products, services and solutions for the generation and transmission of power, and the extraction, conversion and transport of oil and gas. It primarily addresses the needs of energy providers, but also serves industrial companies, particularly in the oil and gas industry.

 

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The following table provides key financial data concerning the Energy Sector.

 

     Year ended
September 30, 2012

Total revenue

   €27.537 billion

External revenue

   €27.302 billion

External revenue as percentage of Siemens revenue

   34.87%

Sector profit

   €2.159 billion

The following chart provides a geographic breakdown of the Energy Sector’s external revenue in fiscal 2012.

 

LOGO

At the end of fiscal 2012, the Energy Sector comprised the following five Divisions: Fossil Power Generation; Wind Power; Oil & Gas; Power Transmission and Energy Service. In the fourth quarter of fiscal 2012, Siemens decided to divest its solar thermal business and photovoltaic business (solar business). Following the decision the solar thermal and photovoltaic businesses are reported as discontinued operations for all periods covered in this annual report. Energy formed a new Sector-led unit, Hydro & Storage. This unit comprises the Sector’s hydro power generation activities including its minority stake in Voith Hydro Holding GmbH & Co. KG as well as its energy storage devices.

The Fossil Power Generation Division offers high-efficiency products and solutions for fossil-based power generation. The offering extends from gas and steam turbines and generators to complete turnkey power plants. The Division concentrates on gas and steam turbines and turbo generators, including control systems, in the larger power range, with an emphasis on combined-cycle (gas and steam) power plants, heat recovery steam generators, steam power plants and conventional islands for nuclear power plants. It also develops solutions for 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 integrated gasification and carbon capture and storage. In fiscal 2012, the Division acquired the NEM B.V. business, a specialist in heat recovery steam generators for combined-cycle power plants. To further expand its global gas turbine manufacturing network, Fossil Power Generation launched a subsidiary, Siemens Gas Turbine Technologies Holding B.V. in fiscal 2012. The Division has a 65% stake in the subsidiary. As part of the transaction, Fossil Power Generation completed the sale of its 25% interest in OAO Power Machines, Russia. The Division is represented in a number of joint ventures in China, including Shanghai Electric Power Generation Equipment in which Fossil Power Generation holds a stake of 40%.

The Wind Power Division manufactures wind turbines with a power rating ranging from 2.3 megawatts to 6.0 megawatts and rotor diameters spanning 82 to 154 meters for on- and offshore applications. It also provides services to off- and onshore wind farms. The Division holds a 49% equity stake in a joint venture with Dong Energy A/S, A2Sea A/S, a supplier of installation services for the construction of offshore wind-farms. In fiscal 2012, the Division entered into agreements for two joint ventures with Shanghai Electric Group (SEG) for the production and sales of wind turbines in China.

The Oil & Gas Division supplies highly efficient small and medium gas and steam turbines for industrial power generation and mechanical drives as well as turbo compressors for a broad range of applications to the oil and gas industries, the process industry and other industries. The Oil & Gas Division further offers a variety of automation and electrical products, systems and solutions for field, production and management levels, enterprise intelligence solutions for safe and reliable operation, planning, scheduling and life-cycle services, including

 

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feasibility studies, as well as design and performance enhancement programs. In addition, the Division offers a broad range of water treatment, (re-)injection and management systems for onshore installations and for fixed and floating facilities offshore. Recent acquisitions, including all of the shares of five entities constituting the Connectors & Measurements business of Expro Holdings UK 3 Ltd., help the Division to strategically expand its range of products, solutions and consulting services for subsea activities.

The Energy Service Division offers comprehensive services, including parts and components, for complete power plants including on- and offshore wind farms as well as rotating machines such as gas and steam turbines, generators and compressors. It provides these services using advanced plant diagnostics and systems engineering. The Division also offers power plant maintenance and operation services and emissions control services and systems. Financial results relating to the Energy Service Division are reflected in the Fossil Power Generation Division, the Oil & Gas Division and the Wind Power Division and are therefore not reported separately.

The Power Transmission Division covers high-voltage transmission solutions, power and distribution transformers, high-voltage switching and non-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. The Division is working with joint ventures in China with different partners and has a joint venture with Infineon Technologies in Germany for design, manufacturing and sale of high performance semiconductors.

Through the Power Transmission Division and the business activities of the Infrastructures & Cities Sector’s Low and Medium Voltage and Smart Grid Divisions, Siemens provides customers with turnkey power transmission systems and distribution substations, discrete products and equipment for integration by their customers into larger systems, information technology systems and consulting services relating to the design and construction of power transmission and distribution networks. These offerings 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, Siemens offers a growing range of services and integrated solutions for various stages in the power transmission and distribution value chain through the Power Transmission Division and the business activities of the Infrastructure & Cities Sector’s Smart Grid Division. They 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. As a leading international supplier of intelligent power networks, or smart grids, which use digital technology to improve power reliability, unite large, centralized generation units with small, decentralized ones and achieve cost and energy savings, Siemens through its Power Transmission Division and the offering of its Infrastructure & Cities Sector’s Smart Grid Division is responding to and anticipating these market trends.

The Energy Sector distributes its products and services through its own dedicated sales force, supported by Siemens’ worldwide network of regional companies. Additional sales channels include joint ventures and license partners, especially in markets requiring a high degree of local knowledge.

Overall, the Sector’s principal customers are large power utilities and independent power producers. Because certain significant areas of the Sector’s business, such as power plant construction, involve working on medium- or longer-term projects for customers who may not require the Sector’s services again in the short term, the Sector’s most significant customers tend to vary significantly from year to year.

The Energy Sector’s business activities vary widely in size from component delivery and comparatively small projects to turnkey contracts for the construction of new power plants with contract values of more than €0.5 billion each. The large size of some of the Sector’s projects occasionally exposes it to risks related to technical performance, a customer or a country. The Sector has experienced, and may continue to experience significant losses on individual projects in connection with such risks. For example, the Power Transmission

 

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Division is currently building several offshore high voltage direct current grid connections for wind farms in the German North Sea. Some of these projects are delayed and Siemens booked project charges totaling EUR 570 million in fiscal 2012. For additional information about our long-term contracts, see Item 3: Key information—Risk factors. Moreover, the Sector generates an increasing portion of its revenue from oil and gas activities and industrial customers in the developing world. While this region represents a growth market for power generation, and transmission products and systems, the Sector’s activities in that region expose it to risks associated with economic, financial and political disruptions that could result in lower demand or affect customers’ abilities to pay.

While the Sector historically competed primarily with large industrial companies from western countries, emerging market competitors have become more and more important, as they are increasingly expanding their operations beyond the borders of their home markets. The Sector’s competitors vary by Division. The Fossil Power Generation Division’s market consists of a relatively small number of companies, some with very strong positions in their domestic markets. Its principal competitors in gas turbines are Alstom, General Electric and Mitsubishi Heavy Industries, whereas its main competitors in steam turbines are Alstom, Bharat Heavy Electricals Limited, General Electric and Toshiba. In China, manufacturers are mainly focused on their large home market, but have recently begun to transform from local to international suppliers. The Division aims to participate in growth through a Chinese joint venture. Korean engineering and procurement companies offer a large product and solutions range and establish themselves as one-stop-shops which offer customer solutions out of one hand. In instrumentation and controls, ABB and Emerson Electric are the Division’s principal competitors. The principal competitors in the market served by the Wind Power Division are Enercon, Gamesa, General Electric, Goldwind, Sinovel, Suzlon and Vestas. The competitive situation differs between the market segments. In the market for onshore wind-farms, competition is widely dispersed, without any one company holding a dominant share of the market. In contrast, there are only a few major players in the market for technologically more complex offshore wind-farms. Overall, the industry currently suffers from overcapacity and is largely regarded as being in an early stage of consolidation. The principal competitors of the Oil & Gas Division vary by product; in automation and electrical equipment, they are ABB and Honeywell above all, whereas in compressors and steam and gas turbines, they are Dresser Rand, General Electric, MAN Diesel & Turbo and Solar Turbines. Overall, competition in the markets served by the Oil & Gas Division is characterized by a relatively small number of companies, some with a very strong position in the markets and some with a regional focus, playing key roles. The primary competitors of the Power Transmission Division are a small group of large, multinational companies offering a wide variety of products, systems and services. Its key global competitors are ABB and Alstom. Further competition comes from emerging countries, regional and niche manufacturers, such as XD from China, Crompton Greaves from India, HHI from Korea and Mitsubishi Electric from Japan. The Power Transmission Division has entered into several joint ventures in China, which is the Sector’s largest national power transmission market.

HEALTHCARE

The Healthcare Sector offers customers a comprehensive portfolio of medical solutions across the treatment chain—ranging from medical imaging to in-vitro diagnostics to interventional systems and clinical information technology systems—all from a single source. In addition, the Sector provides technical maintenance, professional and consulting services, and, together with Financial Services (SFS), financing to assist customers in purchasing the Sector’s products.

The following table provides key financial data concerning the Healthcare Sector.

 

     Year ended
September 30, 2012

Total revenue

   €13.642 billion

External revenue

   €13.600 billion

External revenue as percentage of Siemens revenue

   17.37 %

Sector profit

   €1.815 billion

 

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The following chart provides a geographic breakdown of the Healthcare Sector’s external revenue in fiscal 2012.

 

LOGO

The Healthcare Sector comprises the following three Divisions, one Operational Unit and one separate sector-led Business Unit. In addition to the financial results for the Sector, financial results are also reported externally for the Diagnostics Division.

The Imaging & Therapy Systems Division provides a broad range of medical devices for diagnostic imaging and for therapy solutions. Imaging equipment includes computer tomographs, magnetic resonance imaging equipment, and positron emission tomography. Siemens is a market leader in this field. Therapy solutions mainly comprise angiography systems, particle therapy systems, and minimally invasive procedures. These systems are closely linked with imaging equipment, in particular in the area of therapy planning. The Division leverages synergies between imaging equipment and therapy solutions in order to strengthen its leading position in these markets. Starting in fiscal 2011, the Division shifted the focus of certain particle therapy projects primarily to research. For further information, see Item 5: Operating and financial review and prospects—Fiscal 2012 compared to fiscal 2011—Segment information analysis—Healthcare. In fiscal 2012, the Sector restructured its radiation oncology business and stopped the sales of linear accelerators as of January 1, 2012.

The Clinical Products Division mainly comprises the business with ultrasound and X-ray equipment including mammography. In addition to providing innovative high-end solutions, the Clinical Products Division focuses on the development of cost-efficient, less complex equipment that meets essential customer requirements, particularly in emerging economies. The Clinical Products Division also comprises the internal supplier Components and Vacuum Technology which also provides components to the Imaging & Therapy Systems Division.

The Diagnostics Division offers products and services in the area of in-vitro diagnostics. 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 as well as an individual patient’s risk assessment. The Division’s product portfolio represents a comprehensive 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.

The Sector’s Operational Unit Customer Solutions manages the sales and service organization as well as the Business Unit covering hospital information systems. Audiology Solutions provides hearing aids and is a sector-led Business Unit.

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. The Sector sells the majority of its products and services through in-house sales staff, which is grouped in its Customer Solutions Operational Unit, supported by dedicated product specialists. In some countries, it also uses dealers, particularly for the sale of low-end products (such as low-end ultrasound and X-ray equipment). A small portion of the Sector’s revenue derives from the delivery of products and components to competitors on an original equipment manufacturer (OEM) basis. The Sector’s products are serviced primarily by its own dedicated personnel.

As a large part of Healthcare’s revenue stems from recurring business, the Sector’s business activities are to a certain extent resilient to short-term economic trends but are dependent on regulatory and policy developments around the world.

 

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The Healthcare Sector faces market risks in connection with ongoing health care reform efforts. In the U.S., a health care reform was enacted in the spring of 2010. In particular in connection with this reform, it is currently expected that an excise tax will be charged on certain medical devices from 2013 onwards. Siemens believes that this tax will impact all businesses except of Audiology.

In fiscal 2012, the Healthcare Sector launched Agenda 2013, a global initiative to grow its innovative capacity and make itself more competitive. Agenda 2013 is the Sector’s proactive response to the challenges emerging from a changing market environment. To meet these challenges, Agenda 2013 includes measures targeting innovation, regional presence, competitiveness, and human resource development. These include focused investments in product development and expanded sales activities in growth markets. Agenda 2013 also encompasses a realignment of the radiation therapy business unit that includes rightsizing measures. In addition, Agenda 2013 includes a program to improve the cost position in the Diagnostics Division. For further information, see Item 5: Operating and financial review and prospects—Fiscal 2012 compared to fiscal 2011—Segment information analysis—Healthcare.

The Healthcare Sector has research and development and OEM cooperation agreements with various companies, including Bruker and Toshiba in the field of magnetic resonance imaging, and Biosense Webster, Mochida and Toshiba and in the field of ultrasound. In fiscal 2012, the Sector announced a strategic global partnership with Varian Medical Systems, providing for joint marketing and sales efforts in the radiation therapy field. The Sector is also party to several joint ventures, including with Philips and Thales to manufacture flat panel detectors for medical imaging.

The Healthcare Sector’s principal competitors in medical imaging are General Electric, Philips, Toshiba, Hitachi and Hologic. Other competitors include Roche, Abbott and Danaher for in-vitro diagnostics, McKesson and Cerner for healthcare information technology systems and Sonova, GN Resound, William Demant and Starkey for audiology (hearing aids). The trend toward consolidation in the Sector’s industry continues. Competition among the leading companies in the field is strong, including with respect to price.

INDUSTRY

The Industry Sector offers a broad spectrum of products, services and solutions for the efficient use of resources and energy and improvements of productivity and flexibility in industry. Its integrated technologies and holistic solutions address primarily industrial customers, such as process and manufacturing industries. The portfolio spans industry automation, industrial software and drives products and services, system integration and solutions for industrial plant businesses. After the close of fiscal 2012, the Sector decided to dispose of its business of mechanical, biological and chemical treatment and processing of water.

The following table provides key financial data concerning the Industry Sector.

 

     Year ended
September 30, 2012

Total revenue

   €20.508 billion

External revenue

   €18.872 billion

External revenue as percentage of Siemens revenue

   24.10 %

Sector profit

   €2.467 billion

The following chart provides a geographic breakdown of the Industry Sector’s external revenue in fiscal 2012.

 

LOGO

 

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The Industry Sector consists of the three Divisions Industry Automation, Drive Technologies and Customer Services as well as the sector-led Metals Technologies Business Unit. Financial results relating to the Customer Services Division are reflected in the Industry Automation Division, the Drive Technologies Division and the Metals Technologies Business Unit and are therefore not reported separately.

The Industry Automation Division offers automation systems such as programmable logic controllers and process control systems, sensors such as process instrumentation and analytics, and industrial software such as product lifecycle management and manufacturing execution systems software. The Division’s portfolio ranges from standard products and systems for the manufacturing, processing and construction industries to solutions for entire industrial vertical markets, including automation solutions for entire automobile production facilities and chemical plants. Furthermore, the Division’s offerings in fiscal 2012 comprised equipment and related services for industrial process water, industrial and municipal wastewater treatment such as water purification systems, clarification systems and systems and solutions for water recycling and reuse. As noted above, Industry has decided to divest its business of mechanical, biological and chemical treatment and processing of water. The Division will continue to offer efficient solutions for the control, management and instrumentation of water processes. In fiscal 2012, Industry Automation completed the acquisitions of RuggedCom Inc., a provider of robust, industrial-quality ethernet communication products and network solutions as well as several other acquisitions to enhance its offerings for industrial software. After the close of fiscal 2012, the Division announced the acquisition of LMS International, a provider of mechatronic simulation software that expands and complements the Division’s product lifecycle management portfolio.

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. With its e-Car business, the Division develops motors and inverters for electric cars for the automotive industry. Drive Technologies offers products such as automation systems and services for production machinery and machine tools. The Division’s 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. In addition, the Division offers integrated drive and automation solutions especially for the marine and shipbuilding, minerals and pulp and paper industries, including related services over the lifecycle of the solutions.

The Customer Services Division offers a comprehensive portfolio of services and supports industrial customers in their efforts to increase their productivity. The portfolio includes product-related services which seek to enhance reliability, profitability, efficiency and environmental compatibility of industrial plants.

The Sector-led Metals Technologies Business Unit offers engineering and plant-building services for the iron and steel industry, as well as for the rolling sector of the aluminum and non-ferrous industries. The Business Unit provides technologies, solutions, and services for metallurgical plants, integrated steelworks and minimills. Its vertically integrated supply capability includes mechanical equipment, drives, motors, electrics, automation, mechatronics, technological packages and all environmental systems.

The Industry Sector’s principal customers are industrial customers in a broad range of markets, including transportation and logistics, metals and mining, machinery, utilities and automotive. The Sector is active globally, including in emerging markets, especially those in the Asia, Australia region, which Sector management believes have a long-term growth potential. Apart from the Siemens brand, the Sector markets some parts of its portfolio under different brand names (such as Flender for gears or Winergy for wind turbine components), depending on geography and technology.

The Sector sells its products primarily through dedicated personnel in Siemens’ worldwide network of regional sales units. In addition, it uses original equipment manufacturers, solution providers, installers, general contractors, third-party distributors and independent agents.

The large size of some of the Sector’s projects occasionally exposes it to risks related to technical performance or specific customers or countries. In the past, the Sector has experienced significant losses on individual projects in connection with such risks. For additional information on these risks, see Item 3: Key information—Risk factors.

 

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The Sector has manufacturing locations worldwide, especially throughout North and South America, Western and Eastern Europe, and Asia, allowing it to stay close to its major customers and keep shipping charges low. In recent years, material costs have been negatively affected by significant price increases for metals, energy and other raw materials. The Sector continues to work on reducing the use of hazardous materials (e.g., lead) and to replace them in its products and processes. Sustainable products and processes, such as coking coal free iron production processes (COREX), energy efficient motors and energy management play a major role in its innovation strategy.

Average product lifetimes in the Sector’s product businesses tend to be short (typically ranging from one to five years from introduction) and are even shorter where software and electronics play an important role. The lifecycles in the solutions businesses tend to be longer, as the Sector supports its customers with significant services through the whole life of their infrastructures. The timing and extent to which a Division of the Industry Sector is affected by economic cycles depends largely on the kind of business activities it conducts. Business activities that tend to react very quickly to changes in the overall economic environment include many of the business activities of Industry Automation and those business activities of Drive Technologies that serve customers in the manufacturing industries. Business activities that are generally affected later by the changes in the overall economic environment include those business activities of Drive Technologies that serve customers in process industries as well as in the energy and infrastructure sector.

The competitors of our Industry Sector can be grouped into multinational companies that offer a relatively broad portfolio and companies that are active only in certain of the geographic or product markets served by the Industry Sector. The Sector’s principal competitors with broad portfolios are multinational companies such as ABB, Emerson Electric and Schneider Electric. In the industries in which the Sector is active, consolidation is occurring on several levels. In particular, suppliers of automation solutions have supplemented their activities with actuator or sensor technology, while suppliers of components and products have supplemented their portfolio with complementary products for their sales channels.

The main competitors of the Industry Automation Division are ABB, Schneider Electric, Rockwell and Emerson Electric. Within its product lifecycle management business, the Division also competes with, among others, Dassault Systemes and PTC. Competitors of the Drive Technologies Division include companies with broad business portfolios such as ABB, Emerson Electric and Mitsubishi Electric but also specialist companies such as Fanuc and SEW. The main competitors of our Metals Technologies Business Unit are Danieli and SMS.

Asian competitors are generally focused on large-scale production and cost cutting. European competitors are focused on high-quality lifecycle service. Nevertheless, most 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 the industry place significant downward pressure on prices. In addition, competitors continuously shift their production to low-cost countries.

INFRASTRUCTURE & CITIES

The Infrastructure & Cities Sector offers a wide range of sustainable technologies for metropolitan centers and urban infrastructures worldwide, such as integrated mobility solutions, building and security systems, power distribution equipment, smart grid applications and low- and medium-voltage products.

The following table provides key financial data concerning the Infrastructure & Cities Sector:

 

     Year ended
September 30, 2012

Total revenue

   €17.585 billion

External revenue

   €16.731 billion

External revenue as percentage of Siemens revenue

   21.37 %

Sector profit

   €1.102 billion

 

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The following chart provides a geographic breakdown of the Infrastructure & Cities Sector’s external revenue in fiscal 2012.

 

LOGO

The Sector consists of five Divisions: Rail Systems; Mobility and Logistics; Low and Medium Voltage; Smart Grid; and Building Technologies. Financial results of the Rail Systems and the Mobility and Logistics Divisions are reported together in the Transportation & Logistics Business. Financial results of the Divisions Low and Medium Voltage and Smart Grid are reported together in the Power Grid Solutions & Products Business.

The Rail Systems Division comprises Siemens’ rail vehicle business. The Division’s activities consist mainly of the businesses relating to rail vehicles for mass transit, regional and long-distance transportation, driverless systems, locomotives for passengers or rail freight, traction systems, bogies and onboard power supplies.

The Mobility and Logistics Division primarily provides products, solutions (including IT solutions) and services in operating systems for rail transportation such as central control systems, interlockings and automated train controls and for road traffic including traffic detection, information and guidance. After the close of fiscal 2012, Infrastructure & Cities decided to divest its airport logistics business comprised of cargo tracking and baggage handling and its postal automation business comprised of letter and parcel sorting. Also after the close of fiscal 2012, the Division announced its intention to acquire Invensys Rail, the rail automation business of Invensys plc., U.K.

The Low and Medium Voltage Division supplies electrical grid operators and large industrial electricity consumers with medium and low-voltage equipment. Furthermore, the Division provides systems and services for the distribution of electrical power from high-voltage transmission grid access to medium or low-voltage grids directing the electrical energy to end consumers and their access points.

The Smart Grid Division provides energy automation solutions, smart grid applications, transmission and distribution services, applications for electromobility solutions and rail infrastructure electrification solutions for mainline and mass transit applications. In fiscal 2012, the Division acquired the U.S.-based company eMeter in order to position the Division to expand its energy information and meter data management solutions.

The Building Technologies Division offers products, services and solutions for commercial, industrial, public and residential buildings, including building automation, comfort, building safety and security and building operations. In addition, the Division offers energy solutions aiming to improve a building’s energy cost, reliability and performance, while minimizing its impact on comfort and the environment. The Division’s offerings include 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.

The Infrastructure & Cities Sector also holds the Atos S.A. (AtoS) shares and the convertible bond, which Siemens received following the sale of Siemens IT Solutions and Services to AtoS.

The Infrastructure & Cities Sector distributes its products and services through its own dedicated sales force, supported by Siemens’ worldwide network of regional companies. In addition, the Divisions of the Sector use, to varying degrees, third-party distributors, panel builders, original equipment manufacturers, value added partners, installers and general contractors.

Overall, the Sector’s principal customers are railway operators, public utilities, industrial and infrastructure customers, electrical grid operators, construction and real estate customers and manufacturers of heating,

 

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ventilation and air-conditioning solutions. The timing and extent to which a Division of the Infrastructure & Cities Sector is affected by economic cycles depends largely on the kind of business activities it conducts. Business activities that tend to react very quickly to changes in the overall economic environment include Low and Medium Voltage. Divisions where business activities are generally affected later by the changes in the overall economic environment include Smart Grid and Building Technologies. The development of markets served by our Rail Systems Division and Mobility and Logistics Division is primarily driven by public spending. Customers of these Divisions usually have multi-year planning and implementation horizons. They therefore tend to be independent of short-term economic trends.

The Sector is globally active in a broad range of markets, including construction and real estate, transportation and logistics and utilities. The Sector’s activities include emerging markets, e.g., those in the Asia, Australia region. While the Sector believes that these markets offer significant growth potential, the Sector’s activities in that region expose it to risks associated with economic, financial and political disruptions that could result in lower demand or affect customers’ abilities to pay. Some markets, such as those served by our Divisions Rail Systems, Mobility and Logistics and Smart Grid, are significantly influenced by public spending. The large size of some of the Sector’s projects (especially in the following Divisions: Rail Systems, Mobility and Logistics and in parts of Building Technologies) occasionally exposes it to risks related to technical performance or specific customers or countries. In the past, the Sector has experienced significant losses on individual projects in connection with such risks. For additional information on these risks, see Item 3: Key information—Risk factors.

The Sector’s principal competitors are multinational companies such as ABB, Alstom, Ansaldo, Bombardier, General Electric, Honeywell, Johnson Controls, Schneider Electric and Tyco. The Sector’s competitors vary by Division. The main competitors of the Rail Systems Division and the Mobility and Logistics Division are Alstom, Ansaldo, Bombardier and General Electric. The primary competitors of the Low and Medium Voltage Division are ABB, General Electric, Honeywell and Schneider Electric. The principal competitors of the Smart Grid Division are ABB, Alstom, General Electric, and Schneider Electric. The main competitors of the Building Technologies Division are Honeywell, Johnson Controls, Schneider Electric and Tyco. Infrastructure & Cities also faces competition from niche competitors and from new entrants, such as utility companies and consulting firms, exploiting the fragmented energy efficiency market. The Sector’s solution businesses also compete with engineering, procurement and construction (ECP) providers while competitors in the service field often include small local players.

EQUITY INVESTMENTS

In general, the segment Equity Investments comprises equity stakes held by Siemens that are either accounted for by the equity method, at cost or as current available-for-sale financial assets and are not allocated to a Sector, SFS, Centrally managed portfolio activities, SRE, Corporate items or Corporate Treasury for strategic reasons.

The main investments within Equity Investments are:

 

   

A stake of approximately 50.0% in Nokia Siemens Networks B.V. (NSN), Netherlands: NSN began operations in the third quarter of fiscal 2007 and includes the carrier-related operations of Siemens and the Networks Business Group of Nokia. NSN is a leading supplier in the telecommunications infrastructure industry.

 

   

A 50.0% stake in BSH Bosch und Siemens Hausgeräte GmbH (BSH), Germany: BSH is a leading manufacturer of household appliances, offering an extensive range of innovative products tailored to customer needs and global megatrends alike. BSH was founded as a joint venture in 1967 between Robert Bosch GmbH, Germany and Siemens.

 

   

A 49.0% stake in Enterprise Networks Holdings B.V. (EN), Netherlands, a provider of open communications, network and security solutions to enterprise customers. EN was founded in fiscal 2008 as a joint venture between The Gores Group, U.S. and Siemens.

In the first quarter of fiscal 2012, Siemens closed the sale of its 50% stake in ELIN GmbH & Co. KG (ELIN), Austria, a provider of technical building equipment and installation services to the Ortner Gruppe, Austria.

 

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For additional information on investments held in Equity Investments, see Item 5: Operating and financial review and prospects—Fiscal 2012 compared to fiscal 2011—Segment information analysis—Equity Investments, Item 7: Major shareholders and related party transactions—Related party transactions, as well as Item 18: Financial Statements—Notes to Consolidated Financial Statements.

FINANCIAL SERVICES (SFS)

Financial Services provides a variety of financial services and products both to third parties and to other Siemens entities and their customers. SFS has three strategic pillars: supporting Siemens Sectors with financing solutions for their customers, manage financial risks of Siemens and offering third-party financing services and products. To better achieve this goal, Financial Services intends to grow its business in a profitable, controlled manner.

The following table provides key financial data concerning SFS.

 

     Year ended
September 30, 2012

Total assets

   €17.405 billion

Total assets as percentage of Siemens assets

   16.07 %

Income before income taxes

   €479 million

SFS’ business can be divided into capital business and fee business. The capital businesses support activities for Siemens’ sales as well as third party vendors and customers and consist of leasing, loans, asset-based lending and equity investments (both in infrastructure projects and corporate venture capital). The fee businesses comprise support and advisory activities concerning financial risk and investment management, project & export financing, and arranging of project financing for Siemens’ projects, treasury & financing services, pension asset/ investment management, insurance brokerage as well as re-insurance of Siemens risks.

SFS conducts its business through seven Business Units: Commercial Finance; Project and Structured Finance Energy; Project-, Structured and Leveraged Finance Healthcare; Project- and Structured Finance Infrastructure and Cities & Industry; Treasury; Financing Services & Investment Management and Insurance. In addition, one Business Segment (Venture Capital) is directly assigned to SFS’ CEO. The SFS functions Trade Finance Advisory and Corporate Pensions provide advisory and assistance services to the entire Siemens Company. In addition, SFS host a number of functions to support its own business.

The Commercial Finance Business Unit offers a comprehensive range of equipment finance, leasing, rental and related financing solutions to organizations of all sizes to finance equipment supplied by Siemens or third-party providers. The focus of Commercial Finance financing solutions is in the medical, industrial, construction, environmental/energy and IT areas. Commercial Finance has customers over many countries, including small- and medium-sized enterprises, corporations and public sector organizations. The Business Unit’s large number of customers and diversity of financed equipment helps in its efforts to balance its risk portfolio. Services were provided through a network of Commercial Finance companies, located in 13 countries throughout Europe, Asia Pacific and North America, comprising regulated, partially or non-regulated entities.

The globally active Project & Structured Finance Energy; Project, Structured & Leverage Finance Healthcare and Project & Structured Finance, Infrastructure and Cities & Industry Business Units offer a broad range of financing solutions in the energy and natural resource, healthcare, industry and infrastructure markets. Their products comprise debt financing, equity participations as well as financial advisory. In addition, the Project, Structured & Leveraged Finance Healthcare Business Unit offers leveraged solutions across all businesses. In debt financing, the Business Units offer solutions ranging from senior secured corporate loans to mezzanine debt and from structured investment financing to infrastructure and project financing. The Business Units aligned their scope to the activities of the four Siemens Sectors. The increased focus on project and structured finance solutions tends to extend the average tenor of SFS’ financings.

In their financial advisory roles, the Business Units structure, arrange and implement project and structured financing worldwide. Specifically, they review alternate financing solutions and risk-mitigation concepts for projects and are typically engaged in the early stages of projects.

 

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The Treasury Business Unit is mandated by the Corporate Treasurer to provide treasury services to all Siemens entities. These activities comprise cash management and payment (including intercompany payments) services as well as all external Siemens’ financing activities (especially capital market financing). In addition, it pools and manages centralized Siemens’ interest rate risk, certain currency and commodity risk exposures and uses derivative financial instruments in transactions with external financial institutions to mitigate such exposures. For more information on the use of derivatives to hedge risk, see Item 11: Quantitative and qualitative disclosure about market risk. Results from Corporate Treasury activities are reported in Eliminations, Corporate Treasury and other reconciling items.

The Financing Services & Investment Management Business Unit consists of receivables management and investment management. It is engaged in the process of monitoring and warehousing short-term trade accounts receivable. The investment management function provides investment management services relating to pension assets to Siemens as well as to external institutional clients and management of mutual funds to the general public. The Business Unit operates its investment management business through its company Siemens Kapitalanlagegesellschaft mbH (SKAG), Germany.

The Insurance Business Unit acts as an insurance broker for Siemens and external customers, providing both industrial insurance and private finance solutions. In the area of industrial insurance solutions, the Business Unit supports Siemens and non-affiliated companies in all insurance-related matters, including claims management as well as risk transfer to insurance and financial markets. It also acts as broker of selected Siemens-financed insurances for employees. In the area of private finance solutions, the unit offers a variety of products in the areas of insurance, retirement planning and residential construction financing for staff at Siemens and non-affiliated companies. Through RISICOM Rückversicherungs AG, SFS provides reinsurance solutions as an integral part of Siemens’ risk financing program.

The Venture Capital Business Segment identifies and finances young companies worldwide during their start-up phase. Venture Capital helps Siemens’ Sectors to access new technological solutions and tap new markets. In addition, Venture Capital supports the Siemens Pension Fund in Germany to structure its private equity portfolio, provides private equity advisory services and manages a venture capital fund of funds.

In its transactions with Siemens and third parties, SFS acts consistently with banking industry standards in the international financial markets that are both applicable and mandatory for these transactions. In December 2010, the Siemens Bank GmbH was granted a license by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht—BaFin) to engage in banking business. In particular, the license covers engaging in loan, guarantee business and deposit taking. Siemens Bank GmbH was established to support the operational businesses of Siemens’ Sectors by providing financing solutions and the license enables the bank to gain access to the deposit and refinancing facilities of the European Central Bank.

While SFS originates transactions in its capital businesses (leasing, loans, receivables financing, asset-based lending, equity investments) from external customers either directly or through the Siemens Sectors or through internal or external vendors, its fee business is mainly sourced internally from other Siemens entities. In certain cases, SFS uses financial intermediaries for business origination, mainly in secondary markets.

SFS’ main sources of risk are associated with its external credit exposure and its equity portfolio. For further information, see Item 3: Key information—Risk factors. In general SFS funds its credit business on a matched funding basis. Therefore, interest risk, foreign currency risk and liquidity risk have a limited impact on SFS´ overall risk. Nevertheless, such risks can arise due to unexpected customer payment behavior.

Most of SFS’ services are geared towards Europe and North America. However, SFS is also actively seeking to expand its on-balance sheet financing business in China, Russia and India, in order to better support Siemens regional companies and clusters with financial services.

SFS’ competition mainly includes commercial finance operations of banks, independent commercial finance companies, captive finance companies and asset management companies. International competitors include BNP Paribas Equipment Finance, De Lage Landen, General Electric Commercial Finance, Macquarie and Société Générale Equipment Finance. Particularly in the commercial finance business, SFS’ competitors are often local financial institutions and competition therefore varies from country to country.

 

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EMPLOYEES AND LABOR RELATIONS

The following tables show the division of our employees by segments and geographic region as of September 30 for each of the years shown. Part-time employees are included on a proportionate basis.

 

     As of September 30,  

Employees by segments(1)

   2012      2011      2010  
     (in thousands)  

Energy

     86         82         74   

Healthcare

     51         51         49   

Industry

     105         103         96   

Infrastructure & Cities

     89         87         82   

Financial Services

     3         3         2   

Other(2)

     35         35         32   
  

 

 

    

 

 

    

 

 

 

Total

     370         359         335   
  

 

 

    

 

 

    

 

 

 

 

(1)     Continuing operations.

 

(2)     Includes employees in corporate functions and services and business units not allocated to any Sector or Financial Services.

 

        

        

     As of September 30,  

Employees by geographic regions(1)

   2012      2011      2010  
     (in thousands)  

Europe, C.I.S., Africa, Middle East

     222         217         204   

therein Germany

     119         116         110   

Americas

     84         82         78   

therein U.S.

     57         56         53   

Asia, Australia

     63         60         52   

therein China

     31         29         26   

therein India

     19         18         14   
  

 

 

    

 

 

    

 

 

 

Total

     370         359         335   
  

 

 

    

 

 

    

 

 

 

 

(1) Continuing operations.

During 2012, we had an average of 44,000 temporary employees in our continuing and discontinued operations.

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 labor disputes that significantly affected our operations.

ENVIRONMENTAL MATTERS

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 and 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 commitment to protecting and conserving the environment and because we recognize that

 

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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, which 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 (Atomgesetz). 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. We expect that the process of decontamination, disassembly and sorting of radioactive waste will continue until 2015. We will be responsible for storing the material until the government-developed storage facility becomes available. With respect to the Hanau facility, the process of setting up intermediate storage for radioactive waste has neared completion and the facility has been released from the scope of application of the German Atomic Energy Act so 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 will be located and when it becomes available. We set up a provision with respect to this matter, which as of September 30, 2012 amounted to €1.224 billion. This provision is based on a number of significant estimates and assumptions as to the ultimate costs of this project. Several parameters relating to the development of a final storage facility for radioactive waste were specified based on the so called Schacht Konrad final storage. Parameters related to the life-span of the German nuclear reactors reflect a planned phase-out until 2022. For additional information on our asset retirement obligations attributable to environmental clean-up costs, see Item 18: Financial Statements—Notes to Consolidated Financial Statements.

Some of our products are subject to the Directive 2002/95/EC of the European Parliament and of the Council on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the RoHS Directive). The RoHS Directive bans the use of certain hazardous substances in electrical and electronic equipment. We are in compliance with current requirements under the RoHS Directive. Revisions to certain exemptions from the RoHS Directive were published in September 2010. These revisions introduce certain mercury reduction requirements that affect OSRAM AG.

In 2011 the review of the RoHS Directive by the EU Commission resulted in the publication of Directive 2011/65/EU (the RoHS II Directive) which will replace the RoHS Directive and, after national transposition, will lead inter alia to changes in the future scope of the ban to encompass use of certain hazardous substances in electrical and electronic equipment (e.g., inclusion of medical equipment by July 2014) and the requirement for manufacturers to declare the conformity of products with the Directive. During the review process, the exemptions from the RoHS Directive were also amended. We are in preparation to adapt relevant business processes to the expected changes of the RoHS II Directive.

The EU Commission’s recent review of Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the WEEE Directive) resulted in publication of new Directive 2012/19/EU (the new WEEE Directive). Within the next six years the scope of this new WEEE Directive will remain comparable to the existing WEEE Directive. After this period, additional requirements could result from the inclusion of photovoltaic panels into the scope of the new WEEE Directive. Due to our recent decision to phase out our solar business, we currently do not expect to incur substantial costs as a result of these additional requirements.

Restrictions on the use of certain substances comparable to those of the RoHS Directive and of the WEEE Directive remain under discussion in several other countries, such as the U.S., Australia, Argentina, Brazil, China and South Korea.

We are also subject to the Regulation (EC) No 1907/2006 of the European Parliament and of the Council concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), which

 

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entered into force in part on June 1, 2007. We do not expect to incur substantial costs to comply with the current version of the REACH regulation. We plan to implement any additional measures which may be necessary for us to comply with possible future enhancements of this regulation.

The experience of the last two years has shown that neither the Directive 2004/35/EC of the European Parliament and of the Council on Environmental Liability with Regard to the Prevention and Remediation of Environmental Damage nor the applicable remediation measures for damage to protected species and natural habitats, have yet had any impact on Siemens. Nevertheless we continue to maintain insurance coverage for these risks, which is available in the market.

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. Compliance with environmental requirements is also a focus of the environmental process reviews we conduct. In remediation of the results of recent environmental process reviews additional cost for the implementation and operation of R&D, production and modified logistic processes may be incurred over the next three years. Taking such remediation measures into account, we believe that we are in substantial compliance with all relevant environmental and health and safety laws and regulations. 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.

ENVIRONMENTAL PORTFOLIO

 

      Fiscal year  ended
September 30,
 

Key performance indicators

   2012      2011  

Revenue generated by the Siemens Environmental Portfolio (continuing operations; in billions of €)

     33.2         30.2   

Accumulated annual customer reductions of carbon dioxide emissions generated by elements from the Siemens Environmental Portfolio (continuing operations; in millions of tons)

     332         257   

Our Environmental Portfolio serves as an example of how we strive to align our business activities with the aforementioned megatrends, in this case climate change. The Environmental Portfolio consists of products, systems, solutions and services (Environmental Portfolio elements) that reduce negative impacts on the environment and emissions of carbon dioxide and other greenhouse gases (defined together in the following as carbon dioxide emissions) responsible for climate change.

In addition to its environmental benefits, our Environmental Portfolio enables us to compete successfully in attractive markets and generate profitable growth. In fiscal 2010, we set ourselves a revenue target for the Environmental Portfolio within the One Siemens framework: to exceed €40 billion in revenue from the Environmental Portfolio by the end of fiscal 2014. We continue to strive for that goal, although due to the planned disposal of OSRAM, our Water Technologies Business Unit, and our solar business it will be much more challenging to achieve it.

In fiscal 2012 revenues from continuing operations from the Environmental Portfolio amounted to €33.2 billion, up from comparable revenues of €30.2 billion in the previous fiscal year. Therefore our Environmental Portfolio accounted for 42% of our revenues from continuing operations in fiscal 2012. These revenues include revenues from newly developed and additionally qualified elements, and exclude revenues from elements that no longer fulfill our qualifications.

With our Environmental Portfolio we intend, among other things, to help our customers reduce their carbon dioxide footprint, cut their energy costs and improve their profitability through an increase in productivity. Taking together all elements of the Environmental Portfolio that were installed at customer locations since the beginning of fiscal 2002 and remain in use today, we have reduced customer carbon dioxide emissions by 332 million tons in fiscal 2012, equaling 41% of Germany’s total annual carbon dioxide emissions in calendar year 2010.

 

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REPORTING PRINCIPLES

We report the revenue from our Environmental Portfolio and the annual customer reductions of carbon dioxide emissions generated by it in accordance with internal regulations defined in our Environmental Portfolio Guideline. This Guideline is based on the Reporting Principles of the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard, revised edition, and the Greenhouse Gas Protocol for Project Accounting; both published by World Resources Institute (WRI) and World Business Council for Sustainable Development (WBCSD).

Those principles are relevance, completeness, consistency, transparency, accuracy and conservativeness. As there are currently no accepted international standards for identification and reporting of so-called green products, we are engaging in standardization activities with external organizations. The revenue generated by the Environmental Portfolio is recognized in accordance with revenue recognition policies as described in Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 2.

GOVERNANCEPROCESSES AND DEFINITIONS

The qualification of Environmental Portfolio elements as well as their respective reporting is based on defined processes and criteria. In principle, any product, system, solution or service of Siemens’ continuing operations may qualify for the Environmental Portfolio. The business portfolio of Siemens’ continuing operations is reviewed annually regarding the qualification of Environmental Portfolio elements based on the criteria described below. This covers the inclusion of newly developed elements as well as the integration of additionally qualified elements where evidence of fulfillment of the qualification criteria was not available in prior reporting periods. For additionally qualified Environmental Portfolio elements, we report their prior-year revenue and prior-year contribution to reducing customer carbon dioxide emissions on a comparable basis. Elements that no longer fulfill our qualification criteria are excluded from our Environmental Portfolio.

Prior to inclusion in the Environmental Portfolio, potential new Environmental Portfolio elements have to undergo a multilevel internal evaluation process. The Sustainability Board annually acknowledges changes in the composition of the Environmental Portfolio. One task of the Sustainability Board is also to discuss potential concerns of stakeholders with regard to the inclusion or deletion of certain technologies in the Environmental Portfolio.

CRITERIA FOR INCLUSION OF ENVIRONMENTAL PORTFOLIO ELEMENTS

An Environmental Portfolio element can be a product, a system, a solution or a service as defined above. Furthermore, a core component of a system or solution may qualify as an Environmental Portfolio element if the component provided by Siemens is key to enabling environmental benefits resulting from the system’s or solution’s overall application. To qualify for inclusion in the Environmental Portfolio, an element must meet one of the selection criteria described below, which are energy efficiency, renewable energy or environmental technologies. Products, systems, solutions and services with planned application in military use or nuclear power are not included in the Environmental Portfolio.

 

   

Energy efficiency: The criteria for energy efficiency are an improvement in energy efficiency of 20% or more during the customer use phase compared to the applicable baseline, or a reduction of at least 100,000 metric tons of carbon dioxide equivalents per reporting period in the customer use phase. Examples of elements that meet the energy efficiency criterion are combined cycle power plants and intelligent building technology systems.

 

   

Renewable energy: This criterion covers technologies in the field of renewable energy sources such as wind turbines or smart grid applications and their respective core components.

 

   

Environmental technologies: This criterion is related to water and wastewater treatment, air pollution control, waste reduction, recycling, e-car infrastructure and its core components. Additionally, a criterion for the Healthcare Sector is an environmental impact reduction in terms of noise, radiation or total weight of at least 25% compared to the baseline.

 

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BASELINE METHODS

Energy efficiency, annual customer reduction of carbon dioxide and environmental impact are all assessed by a comparison with a reference solution (baseline). There are three different options for the reference solution: before-after comparison, comparison with a reference technology or comparison with the installed base. The baselines are reviewed annually and, if necessary, adjusted, such as when statistical data on the installed base is updated because of technical innovations or regulatory changes. The calculation of the reduction of carbon dioxide emissions is based on a comparison for every relevant Environmental Portfolio element with a baseline. For this calculation, we focus on those elements that have a material impact on the overall carbon dioxide emissions reduction. For some emission reduction calculations, the baseline reference for the installed base is determined using known global emission factors such as those for power production. The baselines used for our calculations are mainly based on data of the International Energy Agency (IEA) for gross power production and for grid losses, on data from the Intergovernmental Panel on Climate Change (IPCC) for fuel based emission factors, and our own assessments of power production efficiency. For consistency reasons, we generally apply global emission factors for calculating emission reductions.

REPORTING ESTIMATES

The inclusion of elements in the Environmental Portfolio is based on criteria, methodologies and assumptions that other companies and other stakeholders may view differently. Factors that may cause differences, among others, are: choice of applicable baseline methodology, application of global emission factors that may be different from local conditions, use patterns at customers that may be different from standard use patterns used for carbon dioxide abatement calculations and expert estimates if no other data is available.

To date, there is no applicable international standard that applies across companies for qualifying products, systems, solutions and services for environmental and climate protection, or for compiling and calculating the respective revenues and the quantity of reduced carbon dioxide emissions attributable to such products, systems, solutions and services. Accordingly, revenues from our Environmental Portfolio and the reduction of our customers’ annual carbon dioxide emissions may not be comparable with similar information reported by other companies. Furthermore, we subject revenues from our Environmental Portfolio and the reduction of our customers’ annual carbon dioxide emissions to internal documentation and review requirements that are less sophisticated than those applicable to our financial information. We may change our policies for recognizing revenues from our Environmental Portfolio and the reduction of our customers’ annual carbon dioxide emissions in the future without previous notice.

As in previous years, we again commissioned an independent accounting firm with a limited assurance engagement to review the reported results for our Environmental Portfolio for fiscal 2012. This review was conducted in accordance with the International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information. Nothing came to the attention of the independent accounting firm that would cause them to believe that the section Siemens Environmental Portfolio 2012 of the Environmental Portfolio Report 2012—containing the revenues generated by the Environmental Portfolio and the annual customer reduction of carbon dioxide emissions attributable to it—has not been prepared, in all material respects, in accordance with the defined reporting principles.

PROPERTY

Siemens operates more than 290 major production and manufacturing plants in more than 40 countries worldwide, including facilities at certain joint ventures and associated companies. A major production and manufacturing plant is defined as a facility at the Business Unit level, in which raw or source materials are transformed into finished goods on a large scale by using equipment and production resources such as machines, tools, energy and labor. Around 150 major production and manufacturing plants are located in the region Europe, C.I.S., Africa, Middle East; around 80 major production and manufacturing plants are located in the region Americas and around 70 major production and manufacturing plants are located in the region Asia, Australia. With around 110 major production and manufacturing plants, the Energy Sector accounts for the greatest

 

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proportion of these, followed by the Infrastructure & Cities Sector (around 80 major facilities), the Industry Sector (around 70 major facilities) and the Healthcare Sector (around 40 major facilities).

Siemens also owns or leases other properties including office buildings, warehouses, research and development facilities and sales offices.

Siemens’ principal executive offices are located in Munich, Germany.

We believe that our current facilities are in good condition and adequate to meet the requirements of our present and foreseeable future operations.

None of our properties are subject to mortgages and other security interests granted to secure indebtedness to financial institutions.

INTELLECTUAL PROPERTY

Siemens has several thousand patents and licenses covering its products and services worldwide. 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 4: Information on the Company—Research and development. Siemens also owns thousands of registered trademarks worldwide. Neither the Company nor any Sector or SFS or Division is dependent on any single patent, license or trademark or any group of related patents, licenses or trademarks. For information on certain patent law suits to which OSRAM is party, see Item  4: Information on the Company—Legal proceedings.

RESEARCH AND DEVELOPMENT

RESEARCH AND DEVELOPMENT ORGANIZATION AND STRATEGY

In fiscal 2012, we continued to focus on the following areas in research and development (R&D):

 

  (1) ensuring long-term future viability,

 

  (2) enhancing technological competitiveness, and

 

  (3) optimizing the allocation of R&D resources.

Our R&D activities are geared toward ensuring sustainable energy supplies, which is essential to our long-term viability and competitiveness in the energy and infrastructure industries. Accordingly, major focus areas include:

 

   

increasing the efficiency of both renewable and conventional power generation,

 

   

improving low-loss power transmission, and

 

   

finding new solutions for intelligent power networks (smart grids), carbon dioxide separation in power plants, and energy storage systems for volatile renewable energies.

Another major focus is promoting more efficient energy use in buildings, industrial facilities, and the transport sector—for example through the development of electric drives and faster charging stations for electric vehicles.

Across all focus areas, we recognize the vital importance of sophisticated software solutions—not just for the areas mentioned above but also in nearly all of the other fields in which Siemens is active. Siemens software was used, for example, to virtually develop, build, test, and continually optimize the Red Bull Formula 1 championship-winning car throughout the 2011 season. The same is true of the Mars rover “Curiosity,” which landed on the red planet in August 2012. Siemens software was used here to digitally design, assemble, and test a virtual rover before the first prototype was even constructed.

R&D activities are carried out by both our Sectors and our Corporate Technology (CT) department. The Sectors focus their R&D efforts on the next generations of their products and solutions. In contrast, the aim of CT is to be a strong innovation partner for operational units and to help secure our technology and innovation future while strengthening Siemens as an integrated technology company.

 

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CT has more than 7,000 employees and is set up as a worldwide network with primary locations in Germany, the U.S., Austria, Russia, India, and China. Among CT’s employees, approximately 4,000 software engineers at locations in Asia, Europe and the Americas develop and implement software for new products and services for our Sectors. CT makes important contributions along the entire value chain, from research and development to production technology, manufacturing processes, and testing procedures.

The technology fields cover all technological areas of Siemens. They include research on materials that help make our products more efficient and the creation of IT platforms, security solutions, software architecture, technical systems, energy technologies, sensors, and electronic components. CT also conducts research into new solutions for automation, medical information systems, and imaging processes. This portfolio is supplemented by innovation projects for electric mobility, sustainable urban development, and biotechnology—in other words, fields with major strategic importance for us. All of CT’s activities are chosen to optimize the allocation of R&D resources, with a balance between support for the Sectors’ current offerings and development of longer-term opportunities.

CT also strategically handles the intellectual property of Siemens. Around 350 experts help the Company register patents and trademarks, establish them, and put them to profitable use. CT also acts as a coordinator and leader with regard to key strategic issues at Siemens, such as lean management and production, standardization, and project management.

Cooperations with universities and non-university research institutes make an important contribution to Siemens’ capacity to innovate. The key goals of these partnerships are:

 

   

tapping the potential for joint research and development projects,

 

   

developing and extending the network of universities or research institutes with which Siemens works and increasing communication between Siemens and these universities or institutes, and

 

   

strengthening the appeal of Siemens to highly qualified young people as a potential employer.

In addition, Siemens takes part in publicly funded research programs. The most important research areas include the development of sustainable technologies, the networking of machines, and the creation of new materials and sustainable recycling.

RESEARCH & DEVELOPMENT FIGURES

In fiscal 2012, we recognized research and development expenses of €4.238 billion, compared to €3.899 billion in fiscal 2011 and €3.547 billion in fiscal 2010. The resulting R&D intensity, defined as the ratio of R&D expenses and revenue, of 5.4% was higher than in fiscal 2011 and fiscal 2010.

 

LOGO

R&D expenses and intensities for the Sectors in fiscal 2012, 2011 and 2010 were as follows:

 

     R&D expenses (in millions of €)      R&D intensity  
     FY 2012      FY 2011      FY 2010      FY 2012     FY 2011     FY 2010  

Energy

     840         756         651         3.0     3.1     2.9

Healthcare

     1,314         1,173         1,116         9.6     9.4     9.0

Industry

     1,215         1,128         993         5.9     5.8     5.7

Infrastructure & Cities

     699         696         591         4.0     4.1     3.6

 

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Corporate Technology incurred additional R&D expenses.

 

R&D indicators(1)

   FY 2012      FY 2011  
     (in thousands)  

Employees(2)

     29.5         27.7   

Inventions(3)

     8.9         8.6   

First patent applications(4)

     4.6         4.3   

 

(1) Continuing operations.

 

(2) Average number of employees in fiscal year.

 

(3) Number of inventions submitted by Business Units based on an internal reporting.

 

(4) First filings as part of the inventions submitted to patent offices.

In our continuing operations, we had an average of approximately 12,900 R&D employees in Germany and approximately 16,700 R&D employees in about 30 countries outside of Germany during fiscal 2012, including the U.S., China, Austria, India, Slovakia, Switzerland, the U.K., Croatia, Sweden, Denmark, Mexico, and France.

As of September 30, 2012, the Company held approximately 57,300 patents worldwide in its continuing operations, compared to approximately 53,300 patents as of September 30, 2011. In terms of the number of published patent applications in calendar year 2011, Siemens in total ranked third in Germany and—for the second consecutive year—first in Europe. In terms of the number of patents granted in the U.S., Siemens in total ranked tenth in calendar year 2011.

 

Positions in patent office statistics

   2011      2010      2009  

Germany—German Patent and Trademark Office (DPMA)

     3         3         3   

Europe—European Patent Office (EPO)

     1         1         2   

U.S.—United States Patent and Trademark Office (US PTO)

     10         9         13   

RESEARCH & DEVELOPMENT IN THE SECTORS

Our R&D activities in the Energy Sector are focused on developing processes for the efficient generation and transmission of electrical energy. Major R&D areas in this respect are the development of

 

   

technologies for low-loss electricity transmission,

 

   

advanced gas turbines that increase the efficiency and reduce emissions of power plants,

 

   

combined cycle power plants to increase the availability of electricity through higher flexibility,

 

   

wind turbine innovations,

 

   

technologies that extract the greenhouse gas carbon dioxide from the flue gas that occurs during fossil fuel-fired power generation (carbon capture and storage), and

 

   

a subsea power grid to extract deep-sea oil and natural gas drilling economically.

Examples of research and development at Energy include Type B75 rotor blades for wind turbines, each of which has a length of 75 meters; this makes them, to our knowledge, the longest rotor blades in operation in the world at the moment. At 25 tons, the B75 is also a lightweight, as it is 10% to 20% lighter than similar rotor blades. Heavy rotor blades are subjected to higher stress loads and also require more massive nacelles, towers, and foundations. Intelligent design and low weight therefore have a positive effect on the cost of electricity produced.

In 2011, a combined cycle power generation island delivered by Siemens in Irsching, Germany, proved an unprecedented net efficiency rating of 60.75% at an output of 578 megawatts. An even more efficient combined cycle plant will soon be built in Düsseldorf. With an anticipated efficiency rating of more than 61% and a previously unattained district heating range, Siemens expects to set new records in both categories. The total capacity factor for natural gas as a fuel will reach around 85%.

 

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High-voltage direct-current (HVDC) technology is now making it possible to transport electricity over great distances with minimal losses. In 2009, Siemens put the first overhead HVDC line into operation with an unprecedented direct current capacity of 800,000 volts. Siemens recently successfully tested its first HVDC transformer technology with a voltage of 1.1 million volts. The higher the voltage carried by HVDC cables, the lower the transmission losses and the higher the transmission capacity.

R&D activities in our Healthcare Sector focus on meeting customer challenges from three major trends: the world’s population continues to grow rapidly and to get older. In addition, older people make up a higher percentage of the population. These trends put increasing pressure on healthcare providers to gather more accurate diagnostic information more efficiently about a wider range of potential disease conditions and to integrate that information more effectively with treatment options.

One focus area involves combining various imaging methods that provide increasingly detailed and faster three-dimensional insights into the body of a patient, while subjecting him or her to less discomfort. We combine such imaging processes with therapeutic measures, laboratory diagnostics, and information technology to create more coordinated workflows. One example is the world’s only fully integrated whole-body magnetic resonance (MR) and positron emission tomography (PET) system, Biograph mMR, which for the first time allows physicians to simultaneously see the position of organs within the body, their function, and their metabolism. In this way they can, for example, see the position of a tumor, identify its type, and observe its activity.

Another focus area is automating clinical work processes and optimizing laboratory diagnostics, which puts physicians in a position to identify diseases even more precisely and at an earlier stage. Physicians are then able to tailor therapies more closely to a patient’s needs, by monitoring the effect of medications more accurately and exploiting the evaluation and analytical capabilities of modern computer technology. The Sector also develops products that meet the specific, targeted requirements of the healthcare systems of emerging countries.

Among the R&D priorities in the Industry Sector is the software-based integration of product planning and production processes within the framework of product lifecycle management. The objective is to accelerate processes at every point along the value chain, so that time to market can be reduced by as much as 50%. The further development of automation technology, and industrial IT and industry software in particular, plays a major role here. This is especially true in the case of metal production, where the IT-supported planning and operation of entire steel mills has significantly changed and will further influence manufacturing processes in the steel sector. In addition, the Industry Sector also strives to achieve greater energy efficiency, reduce raw material consumption, and reduce emissions. These objectives also guide the development of technology-based service concepts such as energy management and remote maintenance systems, and the creation of efficient solutions for steel production that also conserve resources.

R&D activities in our Infrastructure & Cities Sector focus on urban growth issues. Main research fields therefore cover sustainable technologies for major metropolitan areas and their infrastructures. The aims are to increase energy efficiency, reduce burdens on the environment, and improve the overall economy and the quality of life in cities. To this end, the Sector develops building technologies that conserve energy, solutions for ensuring an efficient and secure supply of electricity in cities, and intelligent traffic and transport systems. Examples here include the extremely light and almost fully recyclable Inspiro modular subway train, and the Desigo building management system, which integrates several system components within the buildings themselves, and which also leads to significant energy savings. In addition, researchers are looking for ways to integrate buildings into smart grids so as to allow them to transfer the electricity they produce into the network and provide additional power during peak demand times. One innovative technology that can be used for this is SIESTORAGE—a modular storage unit that balances out the power generation fluctuations that are typical of electricity produced from renewable sources by stepping in to provide energy during brief power outages.

SUPPLY CHAIN MANAGEMENT

Supply chain management at Siemens aims to contribute to the success of our businesses in a significant and sustainable way. The principal goal of our supply chain management activities is to ensure the availability and quality of the materials we require to serve our customers.

 

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In fiscal 2012, Siemens’ purchasing volume, i.e. external spend, amounted to approximately €40 billion which equals roughly half of our total revenue.

 

LOGO

We focused on continuing to enhance our supply chain management and strengthening Siemens’ competitiveness by achieving substantial savings. The main enablers for that were already part of the Supply Chain Management initiative that was successfully completed prior to fiscal 2012. In line with our strategic priorities, we further developed and continuously rolled out our enablers for leveraging saving potential. These enablers include

 

   

Siemens-wide managed volume: We bundle more than half of our purchasing volume on the corporate level where it is managed by dedicated organizations for both direct and indirect material. For the direct material, we set up more than 20 category management teams and started more than 200 cross-functional commodity engineering projects aiming to bring down material cost together with our suppliers. The strategic and operational procurement for all indirect material throughout Siemens has been brought together in a global organization. By integrating the former procurement offices for indirect material in the Sectors and regions, we achieve substantial economies of scale effects through worldwide bundling of volume and consolidation of resources.

 

   

Sourcing from emerging markets: One essential element of moving towards a globally balanced supply chain network is to constantly increase the share of sourcing from emerging markets (Global Value Sourcing countries, GVS). To accomplish this goal, we identify, select and fully qualify suppliers from Global Value Sourcing countries, and engage them in a continuous development process thereafter. Additionally, we encourage and support our suppliers to expand their operations in order to follow our manufacturing footprint in Global Value Sourcing countries. In fiscal 2012 we further increased our GVS share on a comparable basis.

 

   

E-sourcing: We significantly increased the share of external purchases that we award via electronic bidding over the last few years from low single digit levels to significantly more than 10%.

Strengthening Siemens’ innovation power by leveraging our supplier network is another strategic priority. With our Siemens Supplier Forum we have established a platform for the regular dialogue on CEO level with our top strategic suppliers, aiming to ensure long-term cost leadership, realize shared growth potential and sustainably increase innovation capabilities. To promote outstanding suppliers for their excellence, we have introduced the Siemens Supplier Awards for a number of categories.

As in previous years, the supply chain management organization had to face external challenges in fiscal 2012. Although the strong pricing pressure in supplier markets declined compared to fiscal 2011, we see indications from the geopolitical environment that prices may increase again in the near future. Despite this possibility, we expect to maintain the procurement savings gains and overall productivity increases for Siemens that our supply chain management organization has achieved in recent years.

Another important topic for our supply chain management is sustainability in our supply chain. We require all of our suppliers to comply with the principles of our Code of Conduct for Siemens Suppliers and to support its implementation in their own supply chains as well. We also continued with worldwide on-site sustainability audits by external experts to ensure the compliance with our standards and to encourage sustainable business conduct throughout our entire global supply chain. In addition, we further rolled out our Siemens Energy Efficiency Program for suppliers. We work with our suppliers to conduct environmental and energy efficiency checks of their own facilities, so they can identify opportunities for reducing their consumption of energy and

 

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other resources. In this regard, we draw upon the expertise and know-how gained in connection with our own environmental program and our Environmental Portfolio. By the end of fiscal 2012, more than 900 of our suppliers worldwide have completed these comprehensive assessments and nearly 400 others are involved in the program.

LEGAL PROCEEDINGS

PUBLIC CORRUPTION PROCEEDINGS

Governmental and related proceedings

As previously reported, in May 2011 Siemens AG voluntarily reported a case of attempted public corruption in connection with a project in Kuwait in calendar 2010 to the U.S. Department of Justice, the SEC, and the Munich public prosecutor. The Munich public prosecutor discontinued the investigations, which related to certain former employees, but imposed conditions on them. Siemens is cooperating with the U.S. authorities in their ongoing investigations.

As previously reported, in July 2011 the Nuremberg-Fuerth public prosecutor notified Siemens AG of an investigation against several employees in connection with payments related to the healthcare business in the Caribbean. In November 2012, the Nuremberg-Fuerth public prosecutor discontinued its investigation.

As previously reported, in July 2011 the Munich public prosecutor notified Siemens AG of an investigation against an employee in connection with payments to a supplier related to the oil and gas business in Central Asia from calendar 2000 to 2009. Siemens is cooperating with the public prosecutor.

As previously reported, in October 2011, the Turkish Prime Ministry Inspection Board notified Siemens Sanayi ve Ticaret A.S., Turkey, of an investigation in connection with alleged bribery in Turkey and Iraq from calendar 1999 to 2007. Siemens is cooperating with the authority.

As previously reported, in 2011, the Brasilia public prosecutor, Brazil, opened proceedings to assess allegations against Siemens in connection with a metro project in calendar 2007. Siemens is cooperating with the authority.

As previously reported, authorities in Russia were conducting an investigation into alleged misappropriation of public funds in connection with the award of contracts to Siemens for the delivery of medical equipment to public authorities in Yekaterinburg in calendar 2003 to 2005. In July 2011, the investigation was closed with respect to all material charges. In November 2011, all remaining charges were dropped as well.

As previously reported, in calendar 2008 the São Paulo public prosecutor, Brazil, started certain investigations into the use of business consultants and suspicious payments in connection with the former Transportation Systems Group in or after calendar 2000. In fiscal 2011 Siemens learned that this investigation was not discontinued in calendar 2009 but treated confidential. Siemens is cooperating with the authority.

As previously reported, Siemens AG had filed a request for arbitration against the Republic of Argentina (Argentina) with the International Center for Settlement of Investment Disputes (ICSID) of the World Bank. Siemens AG claimed that Argentina had 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 (DNI project) and thereby violated the Bilateral Investment Protection Treaty between Argentina and Germany (BIT). A unanimous decision on the merits was rendered by the ICSID arbitration tribunal in February 2007, awarding Siemens AG, inter alia, compensation in the amount of US$217.8 million, plus compound interest thereon at a rate of 2.66% since May 18, 2001. Argentina subsequently filed applications with the ICSID aiming at the annulment and reversal of the decision and a stay of enforcement of the arbitral award. In August 2009, Argentina and Siemens AG reached an agreement to mutually settle the case and discontinue any and all civil proceedings in connection with the case without acknowledging any legal obligations or claims. No payment was made by either party. As previously reported, the Argentinean Anti-Corruption Authority is conducting an investigation against individuals into corruption of government officials in connection with the award of the contract for the DNI project to Siemens in calendar 1998. Searches were undertaken at the premises of Siemens Argentina and Siemens IT Services S.A. in Buenos Aires in August 2008 and in February 2009. The

 

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Company is cooperating with the Argentinean Authorities. The Argentinean investigative judge also repeatedly requested judicial assistance from the Munich public prosecutor and the federal court in New York. In December 2011, the U.S. Securities and Exchange Commission (SEC) and U.S. Department of Justice filed an indictment against nine individuals based on the same facts as the investigation of the Argentinean Anti-Corruption Authority. Most of these individuals are former Siemens employees. The former member of the Managing Board of Siemens AG, Dr. Uriel Sharef, is also involved. Siemens AG is not party to the proceedings.

As previously reported, in February 2010 a Greek Parliamentary Investigation Committee (GPIC) was established to investigate whether any politicians or other state officials in Greece were involved in alleged wrong-doing of Siemens in Greece. The GPIC’s investigation was focused on possible criminal liability of politicians and other state officials. Greek public prosecutors are separately investigating certain fraud and bribery allegations involving – among others – former board members and former executives of Siemens A.E., Elektrotechnische Projekte und Erzeugnisse, Greece (Siemens A.E.), and Siemens AG. In January 2011, the GPIC alleged in a letter to Siemens A.E. that the damage suffered by the Greek state amounted to at least €2 billion. Furthermore, the GPIC issued a report repeating these allegations. In addition, the Hellenic Republic Minister of State indicated in a letter to Siemens that the Greek state will seek compensation from Siemens for the alleged damage. In April 2012, the Greek Parliament approved a settlement agreement between Siemens and the Greek State, the material provisions of which include the following: Siemens waives public sector receivables in the amount of €80 million. Furthermore Siemens agrees to spend a maximum of €90 million on various anti-corruption and transparency initiatives, as well as university and research programs and to provide €100 million of financial support to Siemens A.E. to ensure its continued presence in Greece. In exchange, the Greek State agrees to waive all civil claims and all administrative fines related to the corruption allegations and to utilize best efforts to resolve all pending disputes between Siemens and the Greek state-companies or its public authorities.

In February 2012, the Munich public prosecutor notified Siemens AG of a request for mutual assistance in criminal matters by a foreign authority. The investigation of the foreign authority involves a Siemens subsidiary located in North West Europe in connection with alleged payments to employees of a Russian company between calendar 1999 and 2006. In November 2012, the foreign authority notified Siemens about its intention to bring a charge against two individuals and to open proceedings against Siemens. Siemens is cooperating with the authorities.

As previously reported, the Nigerian Economic and Financial Crimes Commission (EFCC) was conducting an investigation into alleged illegal payments by Siemens to Nigerian public officials between calendar 2002 and 2005. In October 2010, the EFCC filed charges with the Federal High Court in Abuja and the High Court of the Federal Capital Territory against, among others, Siemens Ltd., Nigeria (Siemens Nigeria), Siemens AG and former board members of Siemens Nigeria. In November 2010, the Nigerian Government and Siemens Nigeria entered into an out of court settlement, obligating Siemens Nigeria to make a payment in the mid double-digit € million range to Nigeria in exchange for the Nigerian Government withdrawing these criminal charges and refraining from the initiation of any criminal, civil or other actions – such as a debarment – against Siemens Nigeria, Siemens AG, and Siemens employees.

As previously reported, the Vienna public prosecutor, Austria, is conducting an investigation into payments between calendar 1999 and 2006 relating to Siemens Aktiengesellschaft Österreich, Austria, and its subsidiary Siemens VAI Metal Technologies GmbH & Co., Austria, for which valid consideration could not be identified. In September 2011, the Vienna public prosecutor extended the investigations to include a potential corporate liability of Siemens AG Austria for tax evasion. Siemens is cooperating with the authorities.

As previously reported, in September 2009, the Anti-Corruption Commission of Bangladesh (ACC) filed criminal charges against two current and one former employee of Siemens Bangladesh Ltd.’s (Siemens Bangladesh) Healthcare business. It is alleged that the employees colluded with employees of a public hospital to overcharge for the delivery of medical equipment in the period before calendar 2007. The ACC has not substantiated the criminal charges within the time limit provided by local law. Siemens Bangladesh filed a motion to dismiss the charges in October 2009. The court stayed its proceedings in November 2009.

As previously reported, in December 2009, the ACC sent a request for information to Siemens Bangladesh related to telecommunications projects of Siemens’ former Communications (Com) Group undertaken prior to

 

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calendar 2007. In January 2010, Siemens Bangladesh was informed that in a related move the Anti Money Laundering Department of the Central Bank of Bangladesh is conducting a special investigation into certain accounts of Siemens Bangladesh and of former employees of Siemens Bangladesh in connection with transactions for Com projects undertaken in the period from calendar 2002 to 2006. In February 2010 and June 2012, the ACC sent requests for additional information.

As previously reported, in November 2009 and in February 2010, a subsidiary of Siemens AG voluntarily self-reported possible violations of South African anti-corruption regulations in the period before calendar 2007 to the responsible South African authorities. The authorities have requested further documentation. Siemens is cooperating with the authorities.

As previously reported, in June 2010, the Frankfurt public prosecutor searched premises of Siemens in Germany in response to allegations of questionable payments relating to an Infrastructure & Cities project in Thailand. Siemens is cooperating with the authority.

As previously reported, in August 2010, the Inter-American Development Bank (IADB) issued a notice of administrative proceedings against, among others, Siemens IT Solutions and Services Argentina alleging fraudulent misstatements and antitrust violations in connection with a public invitation to tender for a project in the province of Cordoba, Argentina, in calendar 2003. Siemens is cooperating with the IADB.

As previously reported, in August 2010, the IADB issued a notice of administrative proceedings against, among others, Siemens Venezuela alleging fraudulent misstatements and public corruption in connection with a public invitation to tender for healthcare projects in the Venezuelan provinces of Anzoategui and Merida in calendar 2003. Siemens is cooperating with the IADB.

The Company remains subject to corruption-related investigations in several 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. In addition, the scope of pending investigations may be expanded and new investigations commenced in connection with allegations of bribery or other illegal acts. The Company’s operating activities, financial results and reputation may also be negatively affected, particularly as a result of penalties, fines, disgorgements, compensatory damages, third-party litigation, including with competitors, the formal or informal exclusion from public invitations to tender, or the loss of business licenses or permits. Additional expenses and provisions, which could be material, may need to be recorded in the future for penalties, fines, damages or other charges in connection with the investigations.

Civil litigation

As previously reported, Siemens AG reached a settlement with nine out of eleven former members of the Managing and Supervisory Board in December 2009. The settlement relates to claims of breaches of organizational and supervisory duties in view of the accusations of illegal business practices that occurred in the course of international business transactions in calendar 2003 to 2006 and the resulting financial burdens for the Company. The Annual Shareholders’ Meeting approved all nine settlements between the Company and the former members of the Managing and Supervisory Board in January 2010. The shareholders also approved a settlement agreement between the Company and its directors and officers insurers regarding claims in connection with the D&O insurance of up to €100 million. Siemens recorded €96 million gains, net of costs, from the D&O insurance and the nine settlements. In January 2010, Siemens AG filed a lawsuit with the Munich District Court I against the two former board members who were not willing to settle, Thomas Ganswindt and Heinz-Joachim Neubürger, which is currently pending. Siemens AG and Mr. Ganswindt are in discussions to resolve the matter.

As previously reported, 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 “Report of the Independent Inquiry Committee into the United Nations Oil-for-Food Programme.” Siemens S.A.S. France, Siemens Sanayi ve Ticaret A.S., Turkey, and OSRAM Middle East FZE, Dubai, are among the 93 named defendants. Process was served upon all three Siemens subsidiaries. The three Siemens subsidiaries will defend themselves against the action.

 

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ANTITRUST PROCEEDINGS

As previously reported, in February 2007, the European Commission launched an investigation into possible antitrust violations involving European producers of power transformers, including Siemens AG and VA Technologie AG, Austria (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 that relate to the German market. Power transformers are electrical equipment used as major components in electric transmission systems in order to adapt voltages. In October 2009, the European Commission imposed fines totaling €68 million on seven companies with regard to a territorial market sharing agreement related to Japan and Europe. Siemens was not fined because it had voluntarily disclosed this aspect of the case to the authorities. The German Antitrust Authority continued its investigation with regard to the German market. In September 2012, the German Antitrust Authority and the Company ended the legal proceeding by entering into a settlement agreement. Siemens agreed to pay a fine in the single-digit € million range.

As previously reported, in April 2007, Siemens AG and former VA Tech companies 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 former VA Tech companies for alleged antitrust violations in the European Market of high-voltage gas-insulated switchgear between calendar 1988 and 2004. Gas-insulated switchgear is electrical equipment used as a major component for power substations. The fine imposed on Siemens AG amounted to €396.6 million and was paid by the Company in calendar 2007. The fine imposed on former VA Tech companies, which Siemens AG acquired in July 2005, amounted to €22.1 million. In addition, former VA Tech companies were declared jointly liable with Schneider Electric for a separate fine of €4.5 million. In March 2011, the European Court of First Instance dismissed the case regarding the fine imposed on Siemens AG and re-calculated the fines for the former VA Tech companies. Former VA Tech companies were declared jointly liable with Schneider Electric for a fine of €8.1 million. Siemens AG and former VA Tech companies appealed the decision in May 2011.

In addition to these proceedings, authorities in Brazil, the Czech Republic and Slovakia are conducting investigations into comparable possible antitrust violations. In October 2010, the High Court of New Zealand dismissed corresponding charges against Siemens.

As previously reported, in September 2011, the Israeli Antitrust Authority requested Siemens to present its legal position regarding an alleged anti-competitive arrangement between April 1988 and April 2004 in the field of gas-insulated switchgear. Siemens is cooperating with the authority.

In connection with the January 24, 2007 decision of the European Commission regarding alleged antitrust violations in the high-voltage gas-insulated switchgear market, claims are being made against Siemens. Among others, a claim was filed by National Grid Electricity Transmission Plc. (National Grid) with the High Court of England and Wales in November 2008. Twenty-one companies have been named as defendants, including Siemens AG and various of its subsidiaries. National Grid originally asserted claims in the aggregate amount of approximately £249 million for damages and compound interest. In November 2012, National Grid increased the aggregate amount to £364 million due to accrued compound interest. Siemens believes National Grid’s claim to be without merit. As discussed, the European Commission’s decision has been appealed to the European Court of First Instance. In June 2009, the High Court granted a stay of the proceedings pending before it. In June 2009, the Siemens defendants filed their answers to the complaint and requested National Grid’s claim to be rejected. A case management conference was held in November 2012. The High Court of England and Wales lifted the stay of the proceedings granted in June 2009 and decided on the scope of further discovery and set a time schedule leading up to a court session expected to be held in 2014.

As previously reported, in November 2010, the Greek Competition Authority searched the premises of Siemens S.A. in Athens in response to allegations of anti-competitive practices in the field of telecommunication and security. Siemens is cooperating with the authority.

As previously reported, in December 2010 and in March 2011, the Turkish Antitrust Authority searched the premises of several diagnostic companies including, among others, Siemens Healthcare Diagnostik Ticaret

 

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Limited Sirketi in Turkey, in response to allegations of anti-competitive agreements. Siemens cooperated with the authority. In May 2012, the Turkish Antitrust Authority decided that the law has not been violated, and discontinued the proceedings.

As previously reported, the Italian Antitrust Authority searched the premises of several healthcare companies, among others those of Siemens Healthcare Diagnostics S.r.l. and Siemens S.p.A. in February 2010. The investigation addresses allegations of anti-competitive agreements in relation to a tender of the procurement entity for the public healthcare sector in the region of Campania for the supply of medical equipment in calendar 2009. In May 2011, the Italian Antitrust Authority sent a Statement of Objections to the companies under investigation which confirmed that the proceedings against Siemens Healthcare Diagnostics S.r.l. were closed, but accused Siemens S.p.A. of having participated in an anti-competitive arrangement. In August 2011, the Italian Antitrust Authority fined several companies, including Siemens S.p.A. for alleged anti-competitive behavior. The fine imposed on Siemens S.p.A. amounts to €1.1 million. The company appealed the decision. In April 2012, the Regional Administrative Court overturned the decision of the Italian Antitrust Authority. In November 2012, the Italian Antitrust Authority appealed the decision of the Regional Administrative Court.

As previously reported, in September 2011, the Competition Commission of Pakistan requested Siemens Pakistan Engineering Co. Ltd., Pakistan (Siemens Pakistan), to present its legal position regarding an alleged anti-competitive arrangement since calendar 2007 in the field of transformers and air-insulated switchgears. Siemens cooperated with the authority. In December 2011, Siemens Pakistan filed a leniency application. In April 2012, the Competition Commission of Pakistan accepted the leniency application and granted Siemens Pakistan a 100% penalty reduction for the alleged behavior.

As previously reported, in October 2011, the local Antitrust Authority in Rovno, Ukraine, notified DP Siemens Ukraine (Siemens Ukraine) of an investigation into anti-competitive practices in connection with a delivery of medical equipment to a public hospital in calendar 2010. Siemens cooperated with the authority. The authority imposed a fine in an amount equivalent to €4,000. Siemens Ukraine did not appeal the decision.

As previously reported, in June 2007, the Turkish Antitrust Agency confirmed its earlier decision to impose a fine in an amount equivalent to €6 million on Siemens Sanayi ve Ticaret A.S., Turkey, based on alleged antitrust violations in the traffic lights market. Siemens Sanayi ve Ticaret A.S. has appealed this decision and this appeal is still pending.

In May 2012, the Brazilian Anti Trust Authority notified Siemens Ltda., Brazil of an investigation into anti-trust behavior in the field of air-insulated switchgear and other products from calendar 1997 to 2006. Siemens is cooperating with the authorities.

OTHER PROCEEDINGS

As previously reported, Siemens AG is a member of a supplier consortium that has been contracted to construct the nuclear power plant “Olkiluoto 3” in Finland for Teollisuuden Voima Oyj (TVO) on a turnkey basis. Siemens AG’s share of the consideration to be paid to the supplier consortium under the contract is approximately 27%. The other member of the supplier consortium is a further consortium consisting of Areva NP S.A.S. and its wholly-owned subsidiary, Areva NP GmbH. The agreed completion date for the nuclear power plant was April 30, 2009. Completion of the power plant has been delayed for reasons which are in dispute. In December 2011, the supplier consortium informed TVO that the completion of the plant is expected in August 2014. The supplier consortium and TVO currently assess potential further slippage in the schedule. The final phases of the plant completion require the full cooperation of all parties involved. In December 2008, the supplier consortium filed a request for arbitration against TVO demanding an extension of the construction time, additional compensation, milestone payments, damages and interest. In June 2011, the supplier consortium increased its monetary claim to €1.94 billion (and has not updated it since then). TVO rejected the claims and made counterclaims against the supplier consortium consisting primarily of damages due to the delay. In June 2012, the arbitral tribunal rendered a partial award ordering the release of withheld milestone payments to the supplier consortium of approximately €101 million plus interest. As of September 2012, TVO’s alleged counterclaims amounted to €1.59 billion based on a delay of up to 56 months. Based on a completion in August

 

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2014, TVO estimates that its counterclaims amount to €1.77 billion. The further delay of more than 56 months (beyond December 2013) as well as the potential materialization of further schedule uncertainties in the completion of the plant could lead TVO to further increase its counterclaims. The arbitration proceedings may continue for several years.

As previously reported, Siemens AG terminated its joint venture with Areva S.A. (Areva) in January 2009. Thereafter Siemens AG entered into negotiations with the State Atomic Energy Corporation Rosatom (Rosatom) with a view to forming a new partnership active in the construction of nuclear power plants, in which it would be a minority shareholder. In April 2009, Areva filed a request for arbitration with the ICC against Siemens AG. Areva sought an order enjoining Siemens AG from pursuing such negotiations with Rosatom, a declaration that Siemens AG is in material breach of its contractual obligations and a reduction of the price payable to Siemens AG for its stake in the Areva NP S.A.S. joint venture. The final award of the arbitral tribunal was notified in May 2011. According to this award, Siemens had to pay Areva liquidated damages of €648 million plus interest. Pursuant to the arbitral award, the disputed non-compete obligation was reduced to four years (ending in September 2013).

As previously reported, Siemens is involved in a power plant construction project in the United States in which one of the other parties to the project filed an arbitration proceeding in June 2011 asserting material claims against certain other parties to the project. While no claims are being asserted against Siemens in the arbitration at this time, it is possible that such claims against Siemens may follow as matters progress.

As previously reported, OSRAM is party to a number of patent lawsuits involving Samsung group companies and LG group companies. On the one hand, OSRAM has sued Samsung group companies and/or LG group companies and some of the customers of these companies in the U.S., South Korea, Germany, China and Japan for patent infringements, and is requesting injunctions against unauthorized use of the asserted patents and, in some cases, import bans and compensation. In addition, OSRAM has commenced patent invalidation lawsuits relating to LG patents and Samsung patents on Light Emitting Diode (LED) technology in South Korea and relating to LG patents on LED technology in China, Germany and the US. Samsung group companies and/or LG group companies have, on the other hand, initiated patent invalidation lawsuits relating to OSRAM patents on LED technology, in particular white LEDs, in South Korea, Germany, the US, China and Japan. In addition, Samsung group companies and/or LG group companies have filed patent infringement lawsuits in various jurisdictions, such as the U.S., South Korea, Germany and China, requesting injunctions against unauthorized use of the asserted patents and, in some cases, import bans and compensation from OSRAM. The patent infringement lawsuits initiated by LG group companies and Samsung group companies partly involve direct and indirect customers of OSRAM. In August 2012, OSRAM and Samsung entered into a settlement agreement and terminated the lawsuits pending between them. In October 2012 OSRAM and LG entered into a settlement agreement and are in the process of terminating the lawsuits pending between them.

In July 2008, Hellenic Telecommunications Organization S.A. (OTE) filed a lawsuit against Siemens AG with the district court of Munich, Germany, seeking to compel Siemens AG 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 between Siemens AG and OTE from calendar 1992 to 2006. In May 2009, OTE was granted access to the public prosecutor’s files in Greece. At the end of July 2010, OTE expanded its claim and requested payment of damages by Siemens AG of at least €57.07 million to OTE for alleged bribery payments to OTE-employees. While Siemens AG continues to defend itself against the expanded claim, Siemens AG and OTE remain in discussions to resolve the matter.

As previously reported, Siemens A.E. entered into a subcontract agreement with Science Applications International Corporation, Delaware, USA, (SAIC) in May of 2003 to deliver and install a significant portion of a security surveillance system (the C4I project) in advance of the Olympic Games in Athens, Greece. Siemens A.E. fulfilled its obligations pursuant to the subcontract agreement. Nonetheless, the Greek government claimed errors related to the C4I-System and withheld amounts for abatement in a double-digit million € range. Furthermore, the Greek government withheld final payment in a double-digit million € range, claiming that the system had not been finally accepted. Although Siemens A.E. is not a contractual party of the Greek government, under Siemens A.E’s subcontract agreement with SAIC non-payment by the Greek government also has an economic effect on

 

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Siemens A.E. SAIC has filed for arbitration contesting all the Greek government’s claims and its ability to withhold payments. The Greek State filed, inter alia, a motion to stay the arbitration in view of the ongoing criminal investigations conducted by the Greek public prosecutor. This motion was denied by the Arbitral Tribunal in July 2011. Resolution of this dispute has been complicated by bribery and fraud allegations (either made in public or within the arbitration proceedings) against Siemens A.E. in Greece, which have resulted in extensive negative media coverage concerning the C4I system.

As previously reported, Russian authorities are conducting widespread investigations regarding possible fraudulent activities of resellers and governmental officials relating to procurement of medical equipment in the public sector. As is the case with other providers of medical equipment, OOO Siemens, Russia, has received numerous information requests and inquiries were made on-site by the authorities regarding tenders in the public healthcare sector. OOO Siemens is cooperating in the ongoing investigations which also relate to certain individual employees.

As previously reported, in April 2009, the Defense Criminal Investigative Service of the U.S. Department of Defense conducted a search at the premises of Siemens Medical Solutions USA, Inc., United States, in Malvern, Pennsylvania, in connection with an investigation relating to a Siemens contract with the U.S. Department of Defense for the provision of medical equipment.

As previously reported, in June 2009, Siemens AG and two of its subsidiaries voluntarily self-reported, among others, possible violations of U.S. Export Administration Regulations to the responsible U.S. authorities. On October 4, 2011, the U.S. Department of Commerce notified Siemens that it closed its case without taking further action. On October 5, 2011, the U.S. Department of the Treasury notified Siemens that it opened an investigation. Siemens is cooperating with the authorities.

As previously reported, since July 2009 the EU Anti-Fraud Office OLAF, its Romanian equivalent DELAF and the Romanian public prosecutor DNA have been investigating allegations of fraud in connection with the 2007 award of a contract to FORTE Business Services (later Siemens IT Solutions and Services Romania) to modernize the IT infrastructure of the Romanian judiciary. In September 2010, OLAF put the matter on monitoring status and decided not to open formal proceedings. DELAF referred the matter to DNA and closed its investigations. After the sale of Siemens’ global IT Solutions and Services business to AtoS, Siemens Romania is no longer directly involved in the DNA investigation. In September 2012, the Romanian Ministry of Finance filed civil claims in the amount of €12 million against AtoS Romania within the framework of the criminal proceedings. AtoS Romania could hold Siemens AG contractually liable if it were required to make this payment.

In December 2011, the United States Attorney’s Office for the Northern District of New York served a Grand Jury subpoena on Siemens that seeks records of consulting payments for business conducted by the Building Technologies business unit in New York State over the period from January 1, 2000 through September 30, 2011. Siemens is cooperating with the authority.

In February 2012, the United States Attorney’s Office for the Eastern District of New York served a subpoena on Siemens Healthcare Diagnostics Inc., United States, for information relating to a diagnostics process. Siemens is cooperating with the authority.

In addition to the investigations and legal proceedings described above, 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 or potential claims for 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 indeterminate damages, Siemens may not be able to predict what the eventual loss or range of loss related to such matters will be. The final resolution of the matters discussed in this paragraph could have a material effect on

 

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Siemens’ business, results of operations and financial condition for any reporting period in which an adverse decision is rendered. However, Siemens currently does not expect its business, results of operations and financial condition to be materially affected by the additional legal matters not separately discussed in this paragraph.

 

ITEM 4A: UNRESOLVED STAFF COMMENTS

Not applicable

 

ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS

INTRODUCTION

This document contains statements related to our future business and financial performance and future events or developments involving Siemens that may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. 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. We may also make forward-looking statements in other reports, in presentations, in material delivered to shareholders and in press releases. In addition, our representatives may from time to time make oral forward-looking statements. Such statements are based on the current expectations and certain assumptions of Siemens’ management, and are, therefore, subject to certain risks and uncertainties. A variety of factors, many of which are beyond Siemens’ control, affect Siemens’ 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 or anticipated on the basis of historical trends. These factors include in particular, but are not limited to, the matters described in Item 3: Key information—Risk factors of this annual report on Form 20-F filed with the SEC.

Further information about risks and uncertainties affecting Siemens is included throughout this annual report on Form 20-F and in our other filings with the SEC, which are available on the Siemens website, www.siemens.com, and on the SEC’s website, www.sec.gov. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results, performance or achievements of Siemens may vary materially from those described in the relevant forward-looking statement as being expected, anticipated, intended, planned, believed, sought, estimated or projected. Siemens neither intends, nor assumes any obligation, to update or revise these forward-looking statements in light of developments which differ from those anticipated.

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 issued by the IASB and as adopted by the EU, as described in Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 1. Due to rounding, numbers presented throughout this Form 20-F may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.

In this report, we present a number of supplemental financial measures that are or may be “non-GAAP financial measures” as defined in the rules of the SEC. For definitions of these financial measures and a discussion of the most directly comparable IFRS financial measures, the usefulness of Siemens’ supplemental financial measures, the limitations associated with these measures and reconciliations to the most comparable IFRS financial measures, see Item 5: Operating and financial review and prospects—Supplemental financial measures.

BUSINESS AND ECONOMIC ENVIRONMENT

THE SIEMENS GROUP—ORGANIZATION AND BASIS OF PRESENTATION

We are a globally operating, integrated technology company with core activities in the fields of energy, healthcare, industry, and infrastructure, and we occupy leading market positions worldwide in the majority of our

 

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businesses. We can look back on a successful history spanning 165 years, with groundbreaking and revolutionary innovations such as the invention of the dynamo, the first commercial light bulb, the first electric streetcar, the construction of the first public power plant, and the first images of the inside of the human body. On a continuing basis, we have around 370,000 employees as of September 30, 2012 and business activities in approximately 190 countries and reported consolidated revenue of €78.296 billion in fiscal 2012. We operate in excess of 290 major production and manufacturing plants worldwide. In addition, we have office buildings, warehouses, research and development facilities or sales offices in almost every country in the world.

Siemens comprises Siemens AG, a stock corporation under the Federal laws of Germany, as the parent company and a total of about 1,000 legal entities, including minority investments. Our Company is incorporated in Germany, with our corporate headquarters situated in Munich. Siemens operates under the leadership of its Managing Board, which comprises the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) as well as the heads of selected corporate functions and the CEOs of the Sectors.

Our fundamental organizational principles are:

 

   

the CEO principle,

 

   

the end-to-end business responsibility of the Sectors, Divisions and Business Units, and

 

   

the unrestricted right of selected corporate functions to issue instructions in relation to a function to the extent legally permissible.

The Siemens Managing Board is the sole management body and has overall business responsibility in accordance with the German Stock Corporation Act (Aktiengesetz, AktG). At all other organizational levels within our Company, management responsibility is assigned to individuals who make decisions and assume personal responsibility (CEO principle). This principle establishes clear and direct responsibilities and fosters efficient decision-making.

Our Sectors, Divisions, Business Units and Financial Services (SFS) are “global entrepreneurs” and have end-to-end business responsibility worldwide, including with regard to their operating results. They therefore have “right of way” over the regional units (Clusters and Countries) in business matters. The Clusters and Countries are responsible for the local customer relationship management and for implementing the business strategies of the Sectors and SFS as well as the requirements set by the corporate functions.

In addition to their particular authority to issue binding company-wide guidelines and to their monitoring and coordinating responsibilities, the heads of selected corporate functions (Finance and Controlling, Legal and Compliance, Human Resources and Supply Chain Management, for example) have an unrestricted right to issue instructions in relation to a function across all parts of the Company to the extent legally permissible.

Below the Managing Board, Siemens is structured organizationally into Sectors, SFS which acts as business partner for the Sectors and also conducts its own business with external customers, Cross-Sector Services that support other Siemens units, Corporate Units with specific corporate functions, and regional Clusters. The Sectors are principally broken down into Divisions and these in turn into Business Units.

During fiscal 2011, we initiated a change in the organizational structure of our Sectors which became effective October 1, 2011. Beginning with fiscal 2012, we formed a fourth Sector, Infrastructure & Cities, in addition to our existing three Sectors, Energy, Healthcare and Industry, in order to benefit from the growth of urban centers and the demand for infrastructure solutions. The Infrastructure & Cities Sector comprises the activities of the former Industry Sector’s Divisions Building Technologies and Mobility and the former Energy Sector’s activities of the Power Distribution Division, including Smart Grid applications. Results for prior years are presented on a comparable basis.

 

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Following this change in the organizational structure, our business activities focus on four Sectors, Energy, Healthcare, Industry and Infrastructure & Cities. These Sectors form four of our reportable segments. In addition to our four Sectors, we have two additional reportable segments: Equity Investments and SFS.

 

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Within this Item, we provide financial measures for our four Sectors and for two Businesses, each combining two Divisions within a Sector as well as for eight Divisions of our Sectors. These financial measures include: new orders, revenue, profit and profit margin. Divisions within a Sector may do business with each other, leading to corresponding new orders and revenue. Such orders and revenues are only eliminated on a Sector level. Furthermore, our reportable segments may do business with each other, leading to corresponding new order and revenue. Such orders and revenues are eliminated on the Siemens level within Eliminations, Corporate Treasury and other reconciling items and are not included in new orders and revenue with external customers (external orders and external revenue, respectively) reported in this document. Free cash flow and further information is reported for each reportable segment in the Notes to Consolidated Financial Statements. For information related to the definition of these financial measures and to the reconciliation of segment financial measures to the Consolidated Financial Statements, see Item 5: Operating and financial review and prospects—Supplemental financial measures as well as Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 36.

On a geographic basis, Siemens is subdivided into 14 Regional Clusters, which are in turn assigned to one of our three reporting regions. We report financial measures for these three regions:

 

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In addition, we report financial information at group level for certain major countries within each region, including Germany (within the region Europe, C.I.S., Africa, Middle East), the U.S. (within the region Americas), and China and India (within the region Asia, Australia).

 

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FINANCIAL PERFORMANCE MEASURES

This section on financial performance measures describes several measures that are or may be non-GAAP financial measures. Other companies that report or describe similarly titled financial measures may calculate them differently. For further information about these measures, please see Item 5: Operating and financial review and prospects—Supplemental financial measures.

As of the beginning of fiscal 2011, we introduced One Siemens—our framework for sustainable value creation; for further information see Item 4: Information on the Company—Strategy—Strategy of the Siemens Group. As part of One Siemens, we have developed a financial target system for capital-efficient growth that we believe will increase the value of our Company. Our goal is to achieve continuous improvement relative to the market and our competitors. The financial target system defines indicators for revenue growth, capital efficiency and profitability, the optimization of our capital structure, and our dividend policy. In addition, we set hurdle rates that generally must be considered before we make acquisitions.

Revenue growth

We believe that an important driver for increasing our Company’s value over the long term is profitable revenue growth. Specifically, our goal is to grow our revenue faster than the average revenue growth of our most relevant competitors. For purposes of comparison to the revenue growth of our competitors, our revenue growth is calculated as the growth rate of reported revenue as presented in the Consolidated Financial Statements.

 

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Capital efficiency and profitability

Our aim is to work profitably and as efficiently as possible with the capital of our shareholders and lenders. We monitor our capital efficiency using adjusted return on capital employed, or ROCE (adjusted), which is reported on a continuing operations basis. This measure assesses our generated income from the point of view of our shareholders and lenders. ROCE (adjusted) is defined as income from continuing operations before interest after tax divided by average capital employed. For information on the calculation of ROCE (adjusted) and its components, see Item 5: Operating and financial review and prospects—Supplemental financial measures. Our target is to achieve a ROCE (adjusted) of 15% to 20%. ROCE (adjusted) in the fiscal years 2012 and 2011 was 17.0% and 25.3%, respectively. Siemens’ weighted average cost of capital (WACC) is currently 7.5%.

 

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Our financial indicator for measuring capital efficiency at Financial Services (SFS) is return on equity after tax, or ROE (after tax), in line with common practice in the financial services industry. We define ROE (after tax) as SFS’ profit after tax, divided by SFS’ average allocated equity. For purposes of calculating ROE (after tax), the relevant income tax is calculated on a simplified basis, by applying an assumed 30% flat tax rate to SFS’ profit, excluding income (loss) from investments accounted for using the equity method, net, which is basically net of tax already, and tax-free income components and other components which have already been taxed or are generally tax-free. For information on the calculation of ROE (after tax) and its components, see Item 5: Operating and financial review and prospects—Supplemental financial measures. Our goal is to achieve ROE (after tax) of 15% to 20% at SFS.

 

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Our goal is to achieve margins comparable to the best competitors within our industries throughout the entire business cycle. We therefore seek to maintain or improve the profitability of our businesses as appropriate. Our measure in this regard is adjusted EBITDA margins, defined as the ratio of adjusted EBITDA (as presented in Item 5: Operating and financial review and prospects—Reconciliation to adjusted EBITDA (continuing operations)) to revenue. We have defined adjusted EBITDA margin ranges for the respective industries of our four Sectors. Adjusted EBITDA target margin ranges for the Sectors, and their performance in fiscal 2012, are shown in the chart below. The adjusted EBITDA margin for Energy was 9.3%, compared to 15.1% a year earlier. Healthcare’s adjusted EBITDA margin was 18.5%, up from 15.7% in fiscal 2011. The adjusted EBITDA margin for our Industry Sector was 14.9%, down from 16.8% in the prior year. The adjusted EBITDA margin for Infrastructure & Cities was 7.5%, compared to 8.3% a year earlier.

 

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Capital structure

Sustainable revenue and profit development can be achieved only on the basis of a healthy capital structure. A key consideration for us in this regard is maintaining ready access to the capital markets through various debt products and preserving our ability to repay and service our debt obligations over time. Therefore, we use the ratio of adjusted industrial net debt to adjusted EBITDA for optimizing our capital structure. For information on this calculation and its components, see Item 5: Operating and financial review and prospects—Liquidity and capital resources—Capital structure. Our goal is to achieve a ratio in the range of 0.5 – 1.0.

 

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Dividend

At the Annual Shareholders’ Meeting, the Managing Board, in agreement with the Supervisory Board, will submit the following proposal to allocate the unappropriated net income of Siemens AG for the fiscal year ended September 30, 2012: to distribute a dividend of €3.00 on each no-par value share entitled to the dividend for fiscal year 2012 existing at the date of the Annual Shareholders’ Meeting, with the remaining amount to be carried forward. Payment of the proposed dividend is contingent upon approval by Siemens shareholders at the Annual Shareholders’ Meeting on January 23, 2013. The prior-year dividend was €3.00.

We intend to provide an attractive return to shareholders. We previously set a target range for our dividend payout percentage of 30% to 50% of net income. The proposed dividend of €3.00 per share for fiscal 2012 represents a total payout of €2.569 billion based on shares outstanding as of September 30, 2012. Based on net income of €4.590 billion for fiscal 2012, the dividend payout percentage would be 56%. The percentage for fiscal 2011 was 42%, based on a total dividend payout of €2.629 billion and net income of €6.321 billion.

 

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We intend in the years ahead to propose a dividend payout which, combined with outlays for share buybacks during the fiscal year, results in a sum representing 40% to 60% of net income, which for this purpose we may adjust to exclude exceptional non-cash effects. As in the past, we intend to fund the dividend payout from free cash flow.

 

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Additional measures

In addition to the financial performance measures discussed above, we use several other metrics to assess the economic success of our business activities. To determine whether a particular investment is likely to generate value for Siemens, we use net present value or economic value added (EVA™). EVA™ considers the cost of capital in calculating value creation by comparing the expected earnings of an investment against the cost of capital employed. EVA™ is also an indicator for measuring capital efficiency in our Sectors and at SFS.

To measure liquidity management of our operating activities, we analyze net operating working capital turns. In addition, we set hurdle rates that generally must be considered before we make acquisitions. In particular, acquisitions should have the potential to be accretive to EVA™ within three years after the integration and generate a 15% cash return within five years. Cash return is defined as Free cash flow divided by average capital employed.

 

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ECONOMIC ENVIRONMENT

Worldwide economic environment

Growth in the global economy continues to slow down in 2012, with real global gross domestic product (GDP) expected to rise by only 2.5% compared to 3.0% in 2011. Above all, the unstable economic situation in Europe burdens economic activity worldwide. Concerns about the stability of the banking sector, the sovereign debt crisis and the fragile economy continue to hamper private-sector investment and consumer spending. Moreover, austerity policies to cut government deficits and bring down debt levels in Europe have led to a significant reduction of government spending. In addition, the U.S. economy remains sluggish and growth in emerging markets has cooled down due to spillover effects from advanced economies and various country-specific factors.

 

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From a regional perspective, the slowdown is sharpest in Europe, with economic growth coming to a standstill in 2012. Restrictive fiscal policies, rising unemployment, large capital outflows to northern countries and the sovereign debt crisis have all deepened the contraction in the southern periphery economies. This in turn increasingly hampers growth in the core northern countries such as Germany. On top of that, the uncertain economic situation in Europe keeps consumer spending and private-sector investments on a low level. Gross fixed investment, one way in which gross domestic product is used, is expected to decline by 2.1% in 2012 compared to 2011. To foster the stability of the Eurozone, European governments have taken important measures. The establishment of the permanent European Stability Mechanism (ESM) as a substitute for the temporary European Financial Stability Facility is aimed at ensuring the financial solvency of the Eurozone countries. Moreover, in order to bring down government bond yields and to ensure the functioning of monetary operations in every country of the monetary union, the European Central Bank (ECB) has declared its willingness to buy sovereign bonds on the secondary market without limit if a country meets the criteria of the ESM. This announcement calmed financial markets and reduced yields of Italian and Spanish bonds, making refinancing cheaper for these countries. Economic development in the Middle East is still affected by severe geopolitical tensions involving Iran and ongoing violence and unrest in Yemen and Syria, where the economy is contracting rapidly. In contrast, growth in other oil-exporting countries remains robust, due to high oil prices. Growth in Africa is surprisingly strong in 2012. But the continent still suffers from an unstable political environment, and economic growth in many countries is highly dependent on raw material prices. The C.I.S. countries have to deal with relatively low growth of 3.6% in 2012. The whole region is negatively affected by the European sovereign debt crisis due to financial and trade linkages.

In the Americas, GDP growth is expected to slow slightly in 2012, to 2.3%. On one hand, the growth rate in Latin America is expected to decrease to 2.9%, due in part to lower export demand from a weak global economy. Furthermore, the global slowdown also causes some commodity prices to fall, which strongly affects Latin America as a major seller of commodities. Hence, investment spending has slowed down considerably.

 

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Representative for the economic development in Latin America is Brazil, which is expected to grow by only 1.6% in 2012. On the other hand, the U.S. is expected to grow slightly faster year-over-year, with 2.1 % growth compared to 1.8% in 2011. U.S. investment growth is expected to be particularly strong: 5.6% in 2012 compared to 3.4% in 2011. Additionally, the American housing market seems to be stabilizing towards the end of the year. Nevertheless, the U.S. faces a high level of debt and low employment growth. Moreover, the country’s political gridlock creates economic uncertainty particularly regarding tax increases and spending cuts that will take place automatically at the beginning of 2013 if no agreement can be reached (the so-called fiscal cliff).

In Asia, Australia growth is accelerating slightly in 2012, although China’s and India’s extraordinarily high growth levels are expected to cool down to 7.4% and 5.1%, respectively. China, a leading exporter, is significantly affected by the decrease in global demand, so gross fixed investments are trending in line with slower GDP growth. The Chinese government has implemented expansionary fiscal and monetary measures in order to support the economy. The Indian economy is negatively affected by strong credit linkages with a struggling Europe and weaker capital inflows. Moreover, India was also hit by a series of major electricity failures throughout the whole country. Japan’s economy started to recover from the consequences of the earthquake and tsunami in March 2011. Its expected growth rate of 2.3% is caused mainly by increased government spending, with a boost from stronger household spending. Furthermore, Indonesia, Thailand and Vietnam continue to grow rapidly and support the economy’s growth of the Asia, Australia region of 4.7 % in 2012.

 

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A key factor for Siemens as a manufacturer is real manufacturing value added, a component used in calculating gross domestic product by means of the production approach. Despite accelerating growth in both the Asia, Australia and Americas regions, growth in manufacturing value added on a global basis is expected to decline in 2012 to 4.1% from 4.5% in 2011. This is due to significantly slower growth in the Europe, C.I.S., Africa, Middle East region, including a slight decline in Europe.

The partly estimated figures presented here for gross domestic product, gross fixed investments and manufacturing value added are drawn from an IHS Global Insight report dated October 15, 2012. Siemens has not independently verified this data.

In addition to the common currency of the European Monetary Union (the euro, €) another key currency for Siemens is the US$. Following an appreciation of the € against the US$ at the beginning of fiscal 2012, concerns over the sovereign debt crisis in a number of southern European member states of the European Monetary Union led to decline of € against the US$. For the remainder of fiscal 2012, the value of the € relative to the US$ remained below its level at the end of fiscal 2011. During July 2012, the value of the € against the US$ reached its lowest levels of the fiscal year. Only at the end of fiscal 2012 did the value of the € begin to

 

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recover somewhat. Among the contributing factors were the German constitutional court’s rejection of applications to block the ESM and the ECB’s announcement of the modalities of a new government bond purchase program. Nevertheless at September 30, 2012, the value of the € against the US$ was around 4% below the level a year earlier.

 

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Our businesses are dependent on the development of raw material prices. Key materials to which we have significant cost exposure include copper, various grades and formats of steel and aluminum. In addition, within stainless steel we have considerable exposure related to nickel and chrome alloy materials.

The average monthly price of copper (denominated in € per metric ton) for September 2012 was 4% higher than the average monthly price in September 2011; this reversed a previously negative trend year-over-year and was due to the release of financial and fundamental stimulus programs. Prices on a fiscal-year average were 8% lower in fiscal 2012 than the average for fiscal 2011. Prices for copper are still supported by tight supply and demand fundamentals and by speculative influences in the commodity markets. Nevertheless, because copper is produced in multiple locations and traded, such as across the London Metal Exchange, the risk to Siemens is primarily a price risk rather than a supply risk.

Average monthly prices of aluminum traded at the London Metal Exchange faced more pressure year-over-year, losing 4% in September 2012 compared to September 2011. While, among other factors, high energy costs put upward pressure on aluminum, these were more than offset by oversupply. As with copper, we see developments in the aluminum market as posing a price risk, rather than a supply risk.

The average monthly steel prices for September 2012 came down by 3% compared to the average monthly prices in September 2011. Especially at the end of fiscal 2012, steel markets and prices for upstream raw materials (e.g. iron ore) softened significantly (source: CRU, an independent business analysis and consultancy group focused on, among other things, the mining and metals sectors).

 

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In addition to the above-mentioned raw materials, we have exposure related to rare earth metals and magnets. The market situation for buyers improved considerably throughout fiscal 2012, with respect to both price and availability. Nevertheless, we track these factors closely as they could still pose significant price or supply risks for technology manufacturers, including Siemens.

Our main exposure to the prices of copper and related products, and to steel and stainless steel, is in the Sectors Energy, Industry and Infrastructure & Cities. Our main price exposure related to aluminum is in the Energy Sector. In addition, Siemens is generally exposed to energy and fuel prices, both directly (electricity, gas, oil) and indirectly (energy used in the manufacturing processes of suppliers). Some of our continuing operations face price and supply risks related to rare earth metals, particularly the Industry Sector’s Drive Technologies Division and the Energy Sector’s Wind Power Division.

Siemens employs various strategies to reduce the price risk in its project and product businesses, such as long-term contracting with suppliers, physical and financial hedging and price escalation clauses with customers.

Market development

According to an analysis published by IHS Global Insight on July 20, 2012, investments in 2012 are expected to continue to grow in nominal terms compared to 2011. But the pace of growth for 2012 is expected to slow down considerably compared to the prior year in almost all of the market segments that are significant for our Sectors. This is due largely to the sovereign debt crisis in the euro zone, especially in countries affected by bank solvency risks, credit availability and austerity measures, and also to repercussions of the sovereign debt crisis in other regions, particularly including emerging markets.

In markets significant for the Energy Sector, investments in power utilities are expected to grow by around 5% in 2012, slightly down from around 6% in 2011. Within these numbers, investments in many emerging markets are expected to continue to grow clearly or significantly in 2012 compared to 2011—yet the expected growth rates in the majority of these countries are still slower than a year earlier. Demand in Europe is particularly weak. Following a recovery in 2011, power utility investments are expected to show a decline in nearly all European countries in 2012, especially in countries affected by the sovereign debt crisis. In contrast, investments in the U.S. are expected to grow moderately in 2012, following a decline a year earlier. Investments in the oil and gas markets are expected to grow around 6% year-over-year, down markedly from around 17% in 2011. Some of the most important countries in this market, including the U.S., Russia and Saudi Arabia, which increased their investments in 2011 substantially year-over-year, are expected to either clearly reduce investment growth in 2012 or to keep investments on the prior-year level. In the chemical industry, which is particularly sensitive to changes in current economic conditions, growth in investments is also expected to slow considerably year-over-year, down to around 5% in 2012 compared to around 17% a year earlier. This includes lower growth in China, the world’s largest national market, and shrinking investments year over-year in other major countries, among them Japan and Germany. In contrast, the growth rate in the U.S. is expected to remain nearly steady.

Investments within the international healthcare markets, served by our Healthcare Sector, are expected to increase by around 2% in 2012, following a rise of around 10% in the year before. This decline in growth includes reduced investments not only in many European countries, but also in some emerging markets such as Brazil. Furthermore, growth in other large emerging markets, is expected to slow down year-over-year, such as in China and Russia, or come to a halt, as in India. In the U.S. market, which is particularly significant for our Healthcare Sector, growth in investments is expected to increase slightly in 2012 compared to the prior year.

The Industry Sector is influenced by the development in some of the markets mentioned for the Energy Sector, including by the oil and gas markets and the chemical industry. In other markets significant for the Industry Sector, investments in the automotive industry are expected to grow by around 5% in 2012, down from growth in investments of around 15% a year earlier. This change includes all major countries, which are showing either significantly slower growth or declining investments year-over-year. These factors are particularly evident in Europe. Investment growth is declining also in a number of emerging markets, where investments were recently driven by strong demand for vehicles. Notable examples include China, which is experiencing significantly lower growth, and India, where investments are declining year-over-year following strong

 

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expansion a year earlier. Against this trend, growth in investments year-over-year is expected to accelerate in Japan. Even in the food and beverage industry, which is usually less susceptible to fluctuations in the economy, growth in investments is expected to decline significantly in 2012 to around 5%, down from around 15% a year earlier. This is due to significant declines in investments in many European countries, especially those affected by high unemployment and low consumer confidence. Investments are also expected to decline in a number of emerging markets as their populations are affected by rising food prices. Investments in the minerals sector are expected to grow by around 5% in 2012, sharply lower than growth of around 19% a year earlier. Within this sector, growth in investments in the largest industry, mining, is expected to contract most significantly: from around 21% in 2011 to around 5% in 2012. Among major countries in industrial mining, this decline in growth includes sharply lower growth in China and Canada and a reduction in investments in India year-over-year, while growth in investments in Australia is expected to come down only slightly. Investments in the machine building industry are expected to grow by around 7% year-over-year in 2012, compared to around 18% a year earlier. Growth in investments in the last few years was driven by exceptionally rapid expansion in China, which is by far the world’s most important investor in machine building. In contrast, growth in China is expected to slow markedly in 2012 as demand weakens in the country’s manufacturing sector. For the pharmaceutical industry, investment growth is estimated to decline to around 6% in 2012, after around 15% in 2011. Within these numbers, the largest investors, China and Japan, are expected to continue to increase their investments in 2012 but at a slower pace than in 2011. Against this trend, the U.S. shows increasing growth in investments year-over-year. Investments in the pulp and paper sector are expected to grow by around 4% in 2012, following investment growth of around 13% a year earlier. The development within the largest markets is expected to be mixed. While investment growth in China is slowing significantly and growth in Japan is nearly coming to a halt, investments in the U.S. are growing moderately following a decline in the prior year. In the metals industry, investments in 2012 are expected to grow by around 5% compared to around 16% a year earlier. Growth in China is expected to slow to single digits, and India is forecast to reduce its investments following a substantial increase a year earlier. Investment growth in Japan and South Korea is expected to decline less significantly year-over-year. Investments in water and wastewater utilities are expected to grow by around 4% in 2012 compared to around 8% in 2011. While investment growth in China is expected to be higher in 2012 compared to the prior year, and the U.S. is expected to increase investments in 2012 following a decline a year earlier, many other major countries, especially in Europe, are forecast to reduce their investments in 2012.

The Infrastructure & Cities Sector is influenced by developments in a number of markets mentioned above for the Sectors Energy, Healthcare and Industry, including power utilities, oil and gas, healthcare and pharmaceuticals. In other markets important to the Sector, investments in both, the transportation infrastructure and transportation services markets, are expected to grow by around 5% in 2012. The pace of growth in the prior year was around 15% in transportation infrastructure, faster than growth of around 8% in transportation services. For transportation infrastructure, investments are expected to slow in the large Chinese market and shrink in some of the larger European countries, including France and Germany. The U.S. and Russia are expected to keep investment growth near the prior-year level. Overall growth in transportation service is held back by declining investments in Europe, even as China is expected to clearly increase investments in 2012 following a decline in investments a year earlier. Growth in investments in the public, research and education sector is expected to decline to around 3% in 2012, down from around 9% in 2011. While the large majority of European countries and also a number of emerging countries including Brazil and India are expected to reduce investments in 2012 compared to 2011, the U.S. is forecast to expand its public investments year-over-year. For construction and real estate, investments are expected to grow around 3% in 2012 compared to the prior year. A year earlier, growth in investments was around 12%. While these markets are depressed in Europe, growth in the U.S. is accelerating, as these industries are benefiting from low mortgage rates and improved consumer confidence. In the post and logistics sector, investment growth in 2012 is forecast to slow to around 2% year-over-year, compared to around 13% a year earlier. While growth in fiscal 2012 is particularly burdened by shrinking investment in large parts of Europe, the change year-over-year is particularly strong in Brazil, where sharp growth a year earlier is expected to be followed by a clear decline in investments. In the wholesale and retail sector, investment growth is expected to decline to around 3% year-over-year, down from around 13% a year earlier, following the same pattern as investments in post and logistics.

 

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FISCAL 2012 COMPARED TO FISCAL 2011

FISCAL 2012—FINANCIAL SUMMARY

In fiscal 2012 we increased revenue by 7% year-over-year to €78.296 billion, with all four Sectors and all three reporting regions contributing to growth. New orders came in near the level of revenue but 10% lower compared to the prior year, which included substantially higher volumes from large orders in our Sectors Infrastructure & Cities and Energy. For example, orders a year earlier included Siemens’ largest-ever order for trains, worth €3.7 billion.

In fiscal 2012, we achieved income from continuing operations of €5.184 billion. While this was one of our highest results ever, it was substantially lower than in the prior year and lower than we expected one year ago. The decline was due mainly to our Energy Sector which took substantial charges mainly related to projects with a complex marine and regulatory environment in the current period and benefited from the divestment of its share in Areva NP in the prior year. Due mainly to challenges in these projects we reduced our income guidance during fiscal 2012. Furthermore, profit in Energy in fiscal 2012 was also burdened by profit impacts of €327 million (pretax) related to a change in credit risk assessment for Iran. Income from continuing operations in fiscal 2012 was also held back by a less favorable market environment in the second half of the fiscal year. This was particularly evident in the Industry Sector where profit came in 10% lower year-over-year. Profit at Infrastructure & Cities in fiscal 2012 also declined year-over-year, as the Sector took €86 million (pretax) in charges at a rolling stock project in Germany. In contrast, our Healthcare Sector increased profit year-over-year. For comparison, profit at Healthcare in fiscal 2011 was burdened by charges related to particle therapy projects. In fiscal 2012, income from continuing operations was also burdened by a sharply higher loss at Equity Investments. This was due primarily to our share in NSN. In fiscal 2012, NSN took substantial restructuring charges in connection with its previously announced measures aimed at maintaining its long-term competitiveness and improving profitability.

Net income in fiscal 2012 was €4.590 billion, down from €6.321 billion a year earlier. This decline was due to lower income from continuing operations, only partly offset by lower losses from discontinued operations. In the prior year, discontinued operations were burdened by a substantial loss related to our former Siemens IT Solutions and Services business, partly offset by income from discontinued operations related to OSRAM. Income from discontinued operations related to OSRAM turned negative in the current period.

As a result of the above-mentioned profit impacts, two of our Sectors, Energy and Infrastructure & Cities, missed their respective adjusted EBITDA target ranges in fiscal 2012.

We achieved our target for capital efficiency measured in terms of ROCE (adjusted) on a continuing basis, with a result of 17.0%, well within our target range of 15% to 20%. ROCE (adjusted) on a continuing basis a year earlier was 25.3%, benefiting from the above-mentioned divestment at Energy.

Our Free cash flow from continuing operations declined to €4.790 billion, down 19% year-over-year. Free cash flow development was particularly influenced by lower income from continuing operations. Additional factors included cash outflows in the current period related to project-related charges in Healthcare.

In the fourth quarter of fiscal 2012, we initiated a share buyback program of up to €3.0 billion, to be financed partly by long-term debt, and issued bonds totaling €2.7 billion. These measures are aimed at taking advantage of favorable capital market conditions while reducing the gap to our capital structure target. We have set this target, defined as the ratio of adjusted industrial net debt to adjusted EBITDA, in the range of 0.5 to 1.0. In fiscal 2012, our capital structure was a positive 0.24 compared to a negative 0.14 in the prior fiscal year.

We believe that we achieved the goals we had announced in our Interim report for the third quarter of fiscal 2012. With regard to One Siemens, our framework for sustainable value creation, we believe that we did not fully succeed in our fundamental goal of continuous improvement relative to our markets and competitors. We believe that Agenda 2013, an initiative started by our Healthcare Sector at the beginning of fiscal 2012 is making a contribution to achieve these goals. We intend to expand these efforts on a company level. We therefore initiated “Siemens 2014”, a company-wide program aimed at improving our productivity. We defined action areas for cutting our costs, strengthening our portfolio and becoming faster and less bureaucratic. These goals apply

 

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company-wide, with specific implementation measures to be developed by each Sector. While program-related productivity measures will burden Total Sectors profit, particularly in fiscal 2013, we expect that the productivity gains realized will enable us to achieve a Total Sectors profit margin of at least 12% by fiscal 2014.

In the fourth quarter of fiscal 2012 in connection with the “Siemens 2014” company program, we decided to divest our solar business, consisting of our solar thermal and photovoltaic activities, because they have not met our expectations with regard to a number of factors, including changed market conditions, lower growth and strong price pressure.

We intend to provide an attractive return to shareholders. We previously set a target range for our dividend payout percentage of 30% to 50% of Net income excluding selected exceptional non-cash effects. The Siemens Managing Board, in agreement with the Supervisory Board, proposes a dividend of €3.00 per share, unchanged from a year earlier. This proposal represents a dividend payout percentage of 56%, based on shares outstanding as of September 30, 2012.

RESULTS OF SIEMENS

The following discussion presents selected information for Siemens for the fiscal year ended September 30, 2012:

New orders and revenue

Revenue increased steadily quarter by quarter throughout fiscal 2012 and came in at €78.296 billion, up 7% from the prior-year period. Revenue growth included increases in all Sectors and all three reporting regions, supported by Siemens’ strong order backlog. Slowing growth in the world economy was evident in the development of new orders, which decreased 10% year-over-year primarily due to substantially lower volume from large orders compared to the prior-year period. This resulted in a book-to-bill ratio of 0.98 for Siemens in fiscal 2012. On an organic basis, excluding currency translation and portfolio effects, orders decreased 13% and revenue came in 3% above the prior year. The order backlog (defined as the sum of order backlogs of our Sectors) was €98 billion as of September 30, 2012, up from €97 billion a year earlier, including positive currency translation effects of €3 billion.

 

     New orders (location of customer)  
     Year ended September 30,      % Change
vs. previous year
     therein  
         2012              2011          Actual      Adjusted(1)      Currency      Portfolio  
     (in millions of €)                              

Europe, C.I.S.(2), Africa, Middle East

     38,655         46,711         (17)%         (19)%         1%         1%   

therein Germany

     9,894         17,353         (43)%         (43)%         0%         0%   

Americas

     22,271         22,077         1%         (5)%         5%         1%   

therein U.S.

     15,403         15,732         (2)%         (9)%         6%         1%   

Asia, Australia

     15,987         16,378         (2)%         (7)%         4%         0%   

therein China

     6,037         6,241         (3)%         (11)%         8%         0%   

therein India

     1,689         3,310         (49)%         (45)%         (4)%         0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Siemens

     76,913         85,166         (10)%         (13)%         2%         1%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excluding currency translation and portfolio effects.

 

(2) Commonwealth of Independent States.

Orders related to external customers in fiscal 2012 declined 10% overall, with results varying among the Sectors. Orders for Healthcare were up 5%, with most of its businesses contributing increases, and were level in Industry. Order intake declined in Energy and Infrastructure & Cities due to substantially lower volumes from large orders compared to the prior-year period, which included a number of orders for large wind-farms in Energy and a €3.7 billion order for trains in Germany won by Infrastructure & Cities. Orders from emerging markets on a global basis, as these markets are defined by the International Monetary Fund, declined 7%, less than orders overall, and accounted for €26.244 billion, or 34%, of total orders for fiscal 2012.

 

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In the region Europe, C.I.S., Africa, Middle East, orders declined 17% including double-digit decreases in Infrastructure & Cities and Energy, which were due to the high basis of comparison from large orders mentioned above. This high basis of comparison was also the primary factor in the order decline in Germany. Orders for Industry in the region were level compared to the prior-year period and Healthcare’s orders came in slightly below the level of fiscal 2011. In the Americas, order intake rose slightly on increases in three of the four Sectors. The Energy Sector showed a slight decrease due in part to a lower volume from large orders compared to the prior-year period. Order intake in the Asia, Australia region showed a slight decrease in fiscal 2012. Double-digit order growth in Healthcare was more than offset by decreases in the other Sectors. Order intake in India decreased sharply compared to the prior-year period, due primarily to a major contract win at Energy in the prior-year period.

As previously disclosed, Siemens has decided that, subject to certain limited exceptions, it will not enter into new contracts with customers in Iran and has issued group-wide policies establishing the details of its general decision. Under the original version of the policies, among other exceptions, which have been previously disclosed, products and services required to maintain the installed base (e.g. deliveries of spare parts, maintenance and assembly services) were permitted to be provided. However, in the beginning of calendar year 2012, Siemens resolved to amend the policies to provide that no new business with respect to products and services destined to maintain the installed base in Iran’s oil & gas sector may be entered into under any circumstances. In addition, even outside the oil & gas sector, products and services for the installed base in Iran may be provided only in strictly limited circumstances which can be demonstrated to satisfy humanitarian purposes or private purposes serving the common good (e.g. water supply and healthcare of the civilian population). In the fourth quarter of fiscal 2012, Siemens revised its credit risk assessment for Iran. In accordance with project accounting principles, Siemens therefore revised project calculations for the affected projects that were still permitted to be provided under these policies. The change in credit risk assessment resulted in an earnings impact of €347 million. We expect further profit impacts related to Iran in fiscal 2013. For additional information, see Item 3: Key information—Risk factors.

 

     Revenue (location of customer)  
     Year ended September 30,      % Change
vs. previous year
     therein  
         2012              2011          Actual      Adjusted(1)      Currency      Portfolio  
     (in millions of €)                              

Europe, C.I.S.(2), Africa, Middle East

     39,909         38,448         4%         2%         1%         0%   

therein Germany

     11,072         10,810         2%         2%         0%         0%   

Americas

     22,864         20,470         12%         5%         6%         1%   

therein U.S.

     16,670         14,368         16%         7%         8%         1%   

Asia, Australia

     15,523         14,357         8%         3%         5%         0%   

therein China

     6,348         6,389         (1)%         (7)%         7%         (1)%   

therein India

     2,311         2,353         (2)%         4%         (5)%         0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Siemens

     78,296         73,275         7%         3%         3%         0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excluding currency translation and portfolio effects.

 

(2) Commonwealth of Independent States.

Revenue related to external customers rose 7% compared to fiscal 2011, including increases in all Sectors. Strong conversion from the Sectors’ order backlogs played a major role in broad-based revenue growth. Energy revenue increased 12% in fiscal 2012 and Healthcare revenue increased 9%. Revenue in Industry and Infrastructure & Cities showed a moderate growth compared to the prior-year period. On a global basis, emerging markets grew 7%, and accounted for €25.652 billion, or 33%, of total revenue in fiscal 2012.

 

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On a geographic basis, revenue increased in all three reporting regions, led by double-digit growth in the Americas. In the Europe, C.I.S., Africa, Middle East region, revenue increased 4% year-over-year, including increases in all Sectors. In the Americas, higher revenue included double-digit increases in Energy, Industry and Infrastructure & Cities, due to revenue growth of 16% in the U.S. In the Asia, Australia region, revenue rose 8% on substantial increases in Energy and Healthcare, which were partly offset by decreases in Infrastructure & Cities and Industry.

 

LOGO

Consolidated Statements of Income

 

     Year ended
September 30,
       
     2012     2011     % Change  
     (in millions of €)        

Gross profit

     22,204        22,229        0

as percentage of revenue

     28.4     30.3       

Research and development expenses

     (4,238     (3,899     9

as percentage of revenue

     5.4     5.3       

Marketing, selling and general administrative expenses

     (11,162     (10,239     9

as percentage of revenue

     14.3     14.0       

Other operating income

     516        547        (6 )% 

Other operating expense

     (276     (374     (26 )% 

Income (loss) from investments accounted for using the equity method, net

     (266     210        n/a   

Interest income

     2,234        2,200        2

Interest expense

     (1,728     (1,716     1

Other financial income (expense), net

     (5     649        n/a   

Income from continuing operations before income taxes

     7,279        9,608        (24 )% 

Income taxes

     (2,094     (2,232     (6 )% 

as percentage of income from continuing operations before income taxes

     29     23       

Income from continuing operations

     5,184        7,376        (30 )% 

Loss from discontinued operations, net of income taxes

     (595     (1,055     (44 )% 

Net income

     4,590        6,321        (27 )% 

Net income attributable to non-controlling interests

     132        176          

Net income attributable to shareholders of Siemens AG

     4,458        6,145        (27 )% 

In fiscal 2012, we achieved Income from continuing operations of €5.184 billion. While this was one of our highest results ever, it was substantially lower than in the prior year. The primary factors in the decline were cost of goods sold; research and development expenses; marketing, selling and general administrative expenses; and income (loss) from investments accounted for using the equity method, net. In addition, the prior year included substantially higher financial income associated with a major divestment. Each of these factors is described in more detail below. Other line items in the Consolidated Statements of Income are discussed in Item 18: Financial Statements—Notes to Consolidated Financial Statements—Notes 5, 6 and 8.

 

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While revenue for fiscal 2012 rose 7% year-over-year as discussed earlier, gross profit was nearly unchanged from the prior-year level and declined as a percent of revenue. Industry, Energy and Infrastructure & Cities all dealt with a less favorable revenue mix year-over-year, which reduced their gross profit margins. Gross profit in Energy included €570 million in project charges related to offshore grid-connection projects. The majority of Healthcare’s charges for its Agenda 2013 initiative also impacted gross profit. In fiscal 2011, Healthcare’s €381 million in charges in the third quarter related to particle therapy were included in gross profit.

Furthermore, all Sectors increased their spending for marketing, selling and administrative expenses and research and development expenses in anticipation of an improving global economic environment in the second half of the fiscal year. In fact, global economic growth slowed instead of picking up in the second half, leaving the Sectors with cost positions that adversely affected income. For more details on our research and development activities, including a split of research and development expenses for the Sectors, see Item 4: Information on the Company—Research and development.

Income (loss) from investments accounted for using the equity method, net swung from a positive €210 million in fiscal 2011 to a negative €266 million in fiscal 2012. The primary factor was Nokia Siemens Networks B.V. (NSN), which took substantial restructuring charges in connection with repositioning its business. This in turn led to an equity investment loss of €741 million associated with NSN, compared to a loss of €280 million in the prior year. For additional information, see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 7.

Income from continuing operations in fiscal 2011 benefited from a gain of €1.520 billion on the sale of Energy’s interest in Areva NP S.A.S. (Areva NP), partly offset by the negative impact of €682 million related to an adverse arbitration decision associated with our decision to exit our nuclear power joint venture with Areva S.A. (Areva). The net effect of these factors is included in Other financial income (expense) net. For additional information, see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 8.

In the current period, Income from continuing operations included €148 million in gains related to changes in other post-employment benefits (OPEB) in the U.S., more than offset by profit impacts of €347 million, primarily in the Energy Sector, related to a change in credit risk assessment for Iran. These gains and impacts were distributed among various line items.

As a result of these developments, Income from continuing operations before income taxes declined 24%. Income taxes declined 6% year-over-year. The effective tax rate was 29%. For comparison, the effective tax rate of 23% a year earlier benefited from the mainly tax-free Areva disposal gain.

Loss from discontinued operations, net of income taxes in fiscal 2012 was €595 million, compared to €1.055 billion in fiscal 2011. Loss from discontinued operations, net of income taxes was comprised of the following:

 

     Year ended
September 30,
       
     2012     2011     % Change  
     (in millions of €)        

Siemens IT Solutions and Services

     41        (826     n/a   

OSRAM

     (121     309        n/a   

Siemens’ solar business

     (241     (365     (34 )% 

Other former activities

     (274     (172     59

Results related to Siemens IT Solutions and Services, which was sold to Atos S.A. (AtoS) in the fourth quarter of fiscal 2011, differed substantially year-over-year. In fiscal 2012, income was a positive €41 million, compared to a loss of €826 million in fiscal 2011, which included significant expenses related to the disposal.

Results for OSRAM in fiscal 2012 included a non-cash effect of a negative €443 million (pretax). This effect arises from the fact that Siemens no longer considered it highly probable to complete its original plan to dispose of OSRAM via an initial public offering (IPO) in the third quarter of fiscal 2012, and therefore had to recognize accumulated depreciation, amortization, impairments and equity pick-ups related to OSRAM which under IFRS were not recognized beginning with the announcement of the IPO plan in March 2011. The Company

 

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intends to dispose of OSRAM via a spin-off to Siemens shareholders, which is subject to approval by the Annual Shareholders’ Meeting on January 23, 2013. While revenue rose 7% year-over-year, benefiting from currency translation and portfolio effects, ongoing market challenges held back profit development.

In addition, discontinued operations include Siemens’ solar business, which posted losses of €241 million and €365 million in fiscal 2012 and 2011, respectively. Both years included pre-tax impairment charges: €150 million in fiscal 2012 and €231 million in fiscal 2011.

Discontinued operations also include certain remaining items related to former activities that were disposed of in prior years. Fiscal 2012 included pretax expenses of €143 million related to a settlement with the Greek State, and negative tax effects of €115 million, both related to former Com activities. For additional information, see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 4.

Net income for Siemens in fiscal 2012 declined to €4.590 billion from €6.321 billion a year earlier. Net income attributable to shareholders of Siemens AG was €4.458 billion, down from €6.145 billion in the same period a year earlier.

SEGMENT INFORMATION ANALYSIS

Energy

 

     Year ended
September 30,
    % Change     therein  
     2012     2011     Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                    

Sector

        

Profit

     2,159        4,230        (49 )%       

Profit margin

     7.8     17.2        

New orders

     26,881        31,407        (14 )%      (18 )%      2     2

Total revenue

     27,537        24,645        12     7     3     1

External revenue

     27,302        24,390        12      

therein:

            

Europe, C.I.S.(2), Africa, Middle East

     14,077        13,447        5      

therein Germany

     1,927        1,668        16      

Americas

     8,131        7,075        15      

Asia, Australia

     5,093        3,869        32      

 

(1) Excluding currency translation and portfolio effects.

 

(2) Commonwealth of Independent States.

Energy reported a profit of €2.159 billion in fiscal 2012, a sharp decrease compared to fiscal 2011. Sector profit was held back by project charges related to offshore grid connection projects totaling €570 million. In the fourth quarter of fiscal 2012, Siemens revised its credit risk assessment for Iran. In accordance with project accounting principles, we therefore revised project calculations for the affected contracts. The change in credit risk assessment resulted in earnings impacts totaling €327 million mainly at Oil & Gas. Energy also recorded burdens of €152 million associated with the Olkiluoto project in Finland. In addition, Energy’s business expansion strategy resulted in higher marketing, selling and general administrative expenses as well as higher research and development expenses, and profit development was also held back by a less favorable revenue mix. For comparison, profit of €4.230 billion in fiscal 2011 benefited from the Areva NP gain of €1.520 billion mentioned earlier, only partly offset by the €682 million profit impact related to the arbitration decision discussed earlier and the Sector’s €60 million share of special employee remuneration costs. The Sector expects further profit impacts related to Iran in fiscal 2013.

 

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Revenue rose on conversion from the Sector’s strong order backlog in all three reporting regions, including a substantial increase in Asia, Australia. Orders came in 14% lower compared to the prior year, when the Sector recorded a substantially larger volume from major orders. This comparison effect was particularly notable in Europe, C.I.S., Africa, Middle East. Energy’s book-to-bill ratio for fiscal 2012 was 0.98 and its order backlog was €55 billion at the end of the period.

 

     New Orders  
     Year ended
September 30,
     % Change     therein  
     2012      2011      Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                     

Businesses

         

Fossil Power Generation

     11,116         12,487         (11 )%      (17 )%      2     4

Wind Power

     4,932         6,461         (24 )%      (26 )%      2     0

Oil & Gas

     5,307         5,551         (4 )%      (10 )%      2     3

Power Transmission

     5,824         7,271         (20 )%      (21 )%      1     0

 

(1) Excluding currency translation and portfolio effects.

 

     Revenue  
     Year ended
September 30,
     % Change     therein  
     2012      2011      Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                     

Businesses

         

Fossil Power Generation

     11,161         10,203         9     5     3     2

Wind Power

     5,066         3,686         37     29     8     0

Oil & Gas

     5,115         4,719         8     3     2     3

Power Transmission

     6,593         6,334         4     2     2     0

 

(1) Excluding currency translation and portfolio effects.

 

     Profit     Profit Margin  
     Year ended
September 30,
           Year ended
September 30,
 
     2012      2011      % Change     2012     2011  
     (in millions of €)                     

Businesses

         

Fossil Power Generation

     1,933         2,837         (32)     17.3     27.8

Wind Power

     304         357         (15)     6.0     9.7

Oil & Gas

     218         467         (53)     4.3     9.9

Power Transmission

     (302)         566         n/a        (4.6)     8.9

Fossil Power Generation generated profit of €1.933 billion on strong profit contributions from the service and products businesses, while results from the solutions business were significantly lower due to a less favorable project mix compared to a year earlier. Profit benefited from a €87 million gain from the sale of the 25% interest in OAO Power Machines. In addition, the Division recorded higher expenses for marketing and selling year-over-year. For comparison, profit a year earlier included the €1.520 billion Areva NP gain and a more favorable project mix in the component business, partly offset by the €682 million Areva arbitration impact. Profit in both years was burdened by charges related to the Olkiluoto project in Finland, amounting to €152 million in the current year and €87 million a year ago. Revenue rose 9% year-over-year, with substantial growth in Asia, Australia and significant growth in the Americas more than offsetting a moderate decline in Europe, C.I.S., Africa, Middle East. Due to a lower volume from major orders, fiscal 2012 orders came in 11% lower than a year earlier, including a substantial decline in Europe, C.I.S., Africa, Middle East.

Profit at Wind Power was lower year-over-year. Positive contributions from substantially higher revenue were offset by higher expenses for research and development, marketing and selling associated with expansion, a less favorable revenue mix, and increased pricing pressure. In addition, earnings came in lower due to a €32 million provision related to a wind turbine component from an external supplier and a charge of €20 million

 

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related to capacity adjustment. Revenue rose 37% year-over-year, due to conversion of large orders into current business mainly in Europe, C.I.S., Africa, Middle East, and, to a lesser degree, in the Americas and Asia, Australia. Revenue growth was supported clearly by positive currency translation effects. New orders were down 24% due primarily to a lower volume from large offshore orders in Germany. New order intake in the U.S. was down compared to fiscal 2011. With the expected near-term expiration of tax incentives in the U.S., orders in that country nearly ceased towards the end of fiscal 2012. Given market developments in the U.S., Wind Power announced plans to reduce its production capacity. Challenging market conditions at Wind Power, including pricing pressure, are expected to continue in coming quarters.

Profit at Oil & Gas declined sharply year-over-year from the prior year due primarily to €275 million in earnings impacts stemming from the change in credit risk assessment for Iran mentioned above. In other respects, Oil & Gas performed well, including a higher earnings contribution from its services business as well as from its turbines business. Revenue increased clearly due primarily to growth in Asia, Australia. Orders decreased substantially in Asia, Australia, taking orders lower for the Division overall.

Power Transmission reported a loss of €302 million for fiscal 2012, compared to profit of €566 million for fiscal 2011. The major factor was €570 million in project charges related primarily to technically complex grid connections to offshore wind-farms in Germany. These charges were due to project delays resulting from a complex regulatory environment and the projects’ complex marine environment, which required revised estimates of resources and personnel. In addition, profit was impacted by charges totaling €66 million to address structural issues in the transformers business. Earnings were also held back by a less favorable revenue mix, due in part to low-margin orders booked during prior periods with significant pricing pressure. These factors were only partly offset by the release of a provision of €64 million related to a successful project completion. For comparison, prior-year period profit included charges of €57 million, including for staff reduction measures, associated with optimizing the Division’s global manufacturing footprint. Order intake decreased 20% compared to the prior year, which included a higher volume from large orders and a sharp drop in orders in the solutions business due in part to more selective order intake. All three reporting regions saw lower orders. The Division expects continuing challenges, including the technically complex grid-connection projects mentioned above and structural issues in certain businesses.

Healthcare

 

    Year ended
September 30,
    % Change     therein  
    2012     2011     Actual     Adjusted(1)     Currency     Portfolio  
    (in millions of €)                    

Sector

       

Profit

    1,815        1,334        36%         

Profit margin

    13.3     10.7        

New orders

    13,806        13,116        5%        0     4     0

Total revenue

    13,642        12,517        9%        4     4     0

External revenue

    13,600        12,463        9%         

therein:

           

Europe, C.I.S.(2), Africa, Middle East

    4,593        4,489        2%         

therein Germany

    1,056        992        6%         

Americas

    5,692        5,233        9%         

Asia, Australia

    3,315        2,741        21%         

 

(1) Excluding currency translation and portfolio effects.

 

(2) Commonwealth of Independent States.

The healthcare market environment reflected continuing pressure on public health budgets in developed countries while healthcare spending increased in emerging market countries, particularly including China. In fiscal 2012, the Healthcare Sector launched “Agenda 2013”, which is a global initiative targeting innovation, regional presence, competitiveness, and human resource development. The initiative encompasses a realignment of the radiation therapy business that includes rightsizing measures and a program to improve the cost position at Diagnostics.

 

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The Healthcare Sector delivered €1.815 billion in profit in fiscal 2012, led by continued strong earnings performance from its imaging and therapy systems businesses. Results for the year were influenced by “Agenda 2013”, including €184 million in charges. The Sector expects additional charges in coming quarters. Profit development also included higher expenses for research and development as well as higher marketing, selling and general administrative expenses, due in part for investments in product development and expanded sales activities in emerging markets. These effects were partly offset by the Sector’s €49 million portion of the OPEB-gain in the U.S. mentioned earlier and a net gain of €34 million from the successful pursuit of a patent infringement claim. For comparison, Healthcare profit in fiscal 2011 was held back by negative impacts related to particle therapy projects, primarily including €381 million in the third quarter when the Sector shifted the focus of certain projects primarily to research. Within this impact was a negative effect of approximately €100 million related to reducing revenue from prior periods. In addition the Sector took €32 million in charges stemming from increased cost estimates for completing particle therapy contracts in the first quarter. Fiscal 2011 profit was held back also by the Sector’s €43 million share of the special employee remuneration allocation mentioned earlier and a loss of €32 million on the sale of a healthcare IT business in France.

Profit at Diagnostics came in at €314 million compared to €300 million a year earlier, driven primarily by higher revenue. In connection with the “Agenda 2013” initiative, Diagnostics took €80 million in charges in fiscal 2012 related to improving its cost position. For comparison, profit at Diagnostics in fiscal 2011 was impacted by an increase in valuation allowances for receivables triggered by a debt rating downgrade related to Greece. Purchase price allocation (PPA) effects related to past acquisitions at Diagnostics were €173 million in fiscal 2012. A year earlier, Diagnostics recorded €169 million in PPA effects.

Revenue for Healthcare in fiscal 2012 increased 9% compared to the prior-year period, including growth on a broad basis among its businesses. Revenue a year earlier included the negative revenue effect of approximately €100 million related to particle therapy projects mentioned above. Orders came in 5% higher, with most businesses contributing increases. On a geographic basis, Asia, Australia and the Americas drove revenue and order growth, due to increases in China and the U.S. The book-to-bill ratio was 1.01, and Healthcare’s order backlog was €7 billion at the end of fiscal 2012.

The Sector’s Diagnostics business contributed to overall growth. Revenue and orders were up 8%, both reaching €3.969 billion from €3.667 billion and €3.678 billion, respectively, in the prior-year period. Diagnostics showed the same development as the Sector with regard to the regions. On an organic basis, both revenue and orders rose 4%.

Industry

 

     Year ended
September 30,
    % Change     therein  
     2012     2011     Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                    

Sector

            

Profit

     2,467        2,752        (10 )%       

Profit margin

     12.0     14.0        

New orders

     19,985        20,184        (1 )%      (3 )%      2     0

Total revenue

     20,508        19,590        5     2     3     0

External revenue

     18,872        18,124        4      

therein:

            

Europe, C.I.S.(2), Africa, Middle East

     9,789        9,376        4      

therein Germany

     4,487        4,293        5      

Americas

     4,280        3,801        13      

Asia, Australia

     4,802        4,947        (3 )%       

 

(1) Excluding currency translation and portfolio effects.

 

(2) Commonwealth of Independent States.

 

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In fiscal 2012, profit at Industry declined 10% year-over year as market conditions for the Sector became less favorable in the second half of the period. This was particularly evident in China and to a lesser extent in Germany, two of the Sector’s most important national markets. Profit development in fiscal 2012 was also held back by a less favorable business mix as well as higher marketing, selling, general and administrative expenses associated with innovation and growth opportunities. Furthermore, profit at Industry was impacted by market challenges for its renewable energy offerings. The Sector took €28 million in charges related to severance programs for adjusting capacity and adapting its portfolio primarily related to those offerings. These factors were only partially offset by Industry’s €30 million portion of the OPEB gain mentioned earlier. For comparison, profit in fiscal 2011 was burdened by Industry’s €75 million share of a special remuneration allocation.

Revenue in fiscal 2012 for Industry rose moderately year-over-year on broad-based increases across its businesses. Industry’s orders declined slightly compared to the prior fiscal year as higher orders at Industry Automation were more than offset by a decrease at Drive Technologies and the metal technologies business. On a regional basis, revenue was up in the Americas and Europe, C.I.S., Africa, Middle East, more than offsetting a decline in Asia, Australia. The decline in orders was due primarily to lower demand from Asia, Australia. Revenue and order development in fiscal 2012 benefited from positive currency translation effects. On a book-to-bill ratio of 0.97, Industry’s order backlog was €11 billion at the end of fiscal 2012, unchanged from a year earlier.

 

     New orders  
     Year ended
September 30,
     % Change     therein  
     2012      2011      Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                     

Businesses

              

Industry Automation

     9,547         8,983         6     4     3     0

Drive Technologies

     9,395         9,995         (6 )%      (8 )%      2     0

 

(1) Excluding currency translation and portfolio effects.

 

     Revenue  
     Year ended
September 30,
     % Change     therein  
     2012      2011      Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                     

Businesses

         

Industry Automation

     9,563         8,974         7     3     3     0

Drive Technologies

     9,640         9,179         5     3     2     0

 

(1) Excluding currency translation and portfolio effects.

 

     Profit     Profit Margin  
     Year ended
September 30,
           Year ended
September 30,
 
     2012      2011      % Change     2012      2011  
     (in millions of €)                      

Businesses

          

Industry Automation

     1,335         1,411         (5 )%      14.0%         15.7%   

Drive Technologies

     970         1,158         (16 )%      10.1%         12.6%   

Profit at Industry Automation declined 5% year-over year. The decline compared to the prior fiscal year was due mainly to a less favorable business mix, higher marketing and selling, general and administrative expenses and lower earnings from the Division’s offerings for renewable energy. On growth in all three reporting regions, revenue for the Division was up 7% and orders increased 6% year-over-year. Both fiscal years under review included PPA effects from the acquisition of UGS Corp., acquired in fiscal 2007. PPA effects were €149 million in fiscal 2012 and €137 million a year earlier.

Profit at Drive Technologies in fiscal 2012 came in at €970 million, down significantly from a year earlier also due mainly to a less favorable business mix, lower earnings from its offerings for renewable energy, and

 

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higher research and development as well as marketing, selling and general administrative costs compared to fiscal 2011. The Division’s portion of the severance charges mentioned for the Sector was €20 million. While revenue for Drive Technologies grew moderately compared to fiscal 2011, orders declined clearly year-over year. On a regional basis, revenue growth was driven by the Americas and supported by moderate growth in Europe, C.I.S, Africa, Middle East. The decline in orders was due to weak demand from Asia, Australia.

Infrastructure & Cities

 

    Year ended
September 30,
    % Change     therein  
    2012     2011     Actual     Adjusted(1)     Currency     Portfolio  
    (in millions of €)                    

Sector

       

Profit

    1,102        1,126        (2 )%       

Profit margin

    6.3     6.6        

New orders

    17,150        21,348        (20 )%      (22 )%      2     0

Total revenue

    17,585        16,976        4     1     3     0

External revenue

    16,731        16,166        3      

therein:

           

Europe, C.I.S.(2), Africa, Middle East

    10,121        9,590        6      

therein Germany

    2,880        2,938        (2 )%       

Americas

    4,344        3,882        12      

Asia, Australia

    2,267        2,694        (16 )%       

 

(1) Excluding currency translation and portfolio effects.

 

(2) Commonwealth of Independent States.

Profit at Infrastructure & Cities came in at €1.102 billion, down slightly year-over-year. While the Power Grid Solutions & Products business and the Building Technologies Division both improved profit year-over-year, profit at Transportation & Logistics declined substantially due mainly to €86 million in charges at a rolling stock project in Germany. Profit development for the Sector was also held back by €42 million in charges related to severance programs. These negative effects were partly offset by a positive €50 million contribution from the Sector’s interest in AtoS and the Sector’s €30 million portion of the OPEB gain mentioned earlier. For comparison, profit in fiscal 2011 was burdened by the Sector’s €63 million share of a special employee remuneration allocation.

Revenue grew moderately year-over-year, as higher revenue in the regions America and Europe, C.I.S., Africa, Middle East more than offset a decline in Asia, Australia. Revenue growth was driven by Power Grid Solutions & Products and Building Technologies. Revenue at Transportation & Logistics declined slightly year-over-year. Orders for the Sector decreased 20% compared to the prior year, which included a sharply higher volume from major orders at Transportation & Logistics. This included Siemens’ largest-ever train order in Germany, worth €3.7 billion, and a major order for high-speed trains in the U.K. As a result, fiscal 2012 orders came in substantially lower in Europe, C.I.S., Africa, Middle East. Order intake was also clearly lower in Asia, Australia, only partly offset by a slight increase in the Americas. On a book-to-bill ratio of 0.98, Infrastructure & Cities’ order backlog was €24 billion at the end of fiscal 2012, unchanged from a year earlier.

 

     New orders  
     Year ended
September 30,
     % Change     therein  
     2012      2011      Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                           

Businesses

            

Transportation & Logistics

     5,382         10,052         (46 )%      (48 )%      1     0

Power Grid Solutions & Products

     6,275         5,905         6     4     2     0

Building Technologies

     5,809         5,597         4     0     3     0

 

(1) Excluding currency translation and portfolio effects.

 

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     Revenue  
     Year ended
September 30,
     % Change     therein  
     2012      2011      Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                     

Businesses

              

Transportation & Logistics

     5,969         6,041         (1 )%      (4 )%      2     0

Power Grid Solutions & Products

     6,068         5,657         7     5     2     0

Building Technologies

     5,820         5,468         6     3     3     0

 

(1) Excluding currency translation and portfolio effects.

 

     Profit     Profit Margin  
     Year ended
September 30,
           Year ended
September 30,
 
     2012      2011      % Change     2012      2011  
     (in millions of €)                      

Businesses

             

Transportation & Logistics

     236         365         (35 )%      4.0%         6.0%   

Power Grid Solutions & Products

     457         413         11     7.5%         7.3%   

Building Technologies

     379         364         4     6.5%         6.7%   

Profit at the Transportation & Logistics business declined 35% year-over-year. This decline was due mainly to the above-mentioned €86 million in charges related to delays in fulfilling a rolling stock order in Germany. In addition, the revenue mix in fiscal 2012 was less favorable due to lower margins associated with large, long-term contracts from prior periods which Transportation & Logistics began to convert into current business in fiscal 2012. Revenue came in slightly lower year-over-year, as higher revenue in the Europe, C.I.S., Africa, Middle East region was more than offset by lower revenue in Asia, Australia and the Americas. Order intake decreased 46% year-over-year, due to the sharply higher volume from large orders a year earlier. This comparison effect was particularly evident in the Europe, C.I.S., Africa, Middle East region, where Transportation & Logistics won the above-mentioned large orders in fiscal 2011 for trains in Germany and the U.K.

The profit improvement at Power Grid Solutions & Products was driven by the business’ low and medium voltage activities. Profit from smart grid activities was held back by higher research and development, marketing, selling and general administrative expenses for growth initiatives. Revenue and orders increased clearly year-over-year, particularly including double-digit growth in the Americas.

Profit at Building Technologies increased moderately year-over-year. Profit development in fiscal 2012 was held back by higher research and development, marketing, selling and general administrative expenses associated with growth initiatives. Growth in revenue and orders was driven by demand for the Division’s energy efficiency solutions. On a regional basis, revenue and orders were up in all three reporting regions.

Equity Investments

In fiscal 2012, Equity Investments recorded a loss of €549 million compared to a loss of €26 million in fiscal 2011. The difference year-over-year is due mainly to a sharply higher equity investment loss related to our share in NSN, which increased to €741 million in fiscal 2012 compared to a loss of €280 million a year earlier. NSN reported to Siemens that it took restructuring charges and associated items totaling €1.059 billion in fiscal 2012 up from €151 million in the prior fiscal year. In fiscal 2012, NSN started implementing its previously announced global restructuring program aimed at maintaining its long-term competitiveness and improving profitability. Equity investment loss related to our share in EN declined to €23 million in fiscal 2012 compared to €46 million a year earlier. Losses in both fiscal years were partly offset by income from equity investments related to our share in BSH. Furthermore, results from Equity Investments in fiscal 2011 benefited from a €90 million gain on the sale of our share in KMW. Results at Equity Investments are expected to remain volatile in coming quarters.

 

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Financial Services (SFS)

 

     Year ended
September 30,
        
     2012      2011      % Change  
     (in millions of €)         

Income before income taxes

     479         428         12

Total assets

     17,405         14,602         19

In fiscal 2012, SFS recorded a higher profit (defined as income before income taxes) year-over-year. While both interest result and operating expenses associated with SFS’ growth strategy increased year-over-year, the current period was primarily affected by a €78 million gain on the sale of a stake in Bangalore International Airport Limited, a public-private partnership, reducing SFS’ equity participation from 40% to 26%. This gain was partly offset by higher credit hits. The growth strategy at SFS has led to a significant build-up in total assets, from €14.602 billion at the end of fiscal 2011 to €17.405 billion at the end of fiscal 2012, including positive currency translation effects.

The following table provides further information on the capital structure of SFS as of September 30, 2012 and 2011:

 

     Year ended
September 30,
 
     2012      2011  
     (in millions of €)  

Allocated equity

     1,790         1,593   

Total debt

     14,558         12,075   

therein intragroup financing

     14,510         12,066   

therein debt from external sources

     47         9   

Debt to equity ratio

     8.13         7.58   

Cash and cash equivalents

     116         178   

Both Moody’s and Standard & Poor’s view SFS as a captive finance company. These rating 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 mainly determined and influenced by the size and quality of its portfolio of commercial finance as well as project and structured finance assets (primarily loans and leases) and equity investments. This allocation is designed to cover the risks of the underlying business and is in line with common risk management standards. The actual risk of the SFS portfolio is evaluated and controlled on a regular basis. The allocated equity is calculated quarterly.

Reconciliation to Consolidated Financial Statements

Reconciliation to Consolidated Financial Statements includes Centrally managed portfolio activities, Siemens Real Estate (SRE) and various categories of items which are not allocated to the Sectors and to SFS because the Company’s management has determined that such items are not indicative of the Sectors’ and SFS’ respective performance.

Centrally managed portfolio activities

Centrally managed portfolio activities reported a loss of €29 million in fiscal 2012, compared to a loss of €40 million in fiscal 2011.

Siemens Real Estate (SRE)

Income before income taxes at SRE was €115 million in fiscal 2012, compared to €150 million in fiscal 2011. This decrease is due in part to lower income related to the disposal of real estate. SRE expects to continue with real estate disposals depending on market conditions.

 

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Corporate items and pensions

Corporate items and pensions totaled a negative €302 million in fiscal 2012 compared to a negative €257 million a year earlier.

The difference was due mainly to centrally carried pension expense, which totaled a negative €47 million in fiscal 2012, compared to a positive €75 million in the prior year. The change is due primarily to a negative effect resulting from a lower expected return on plan assets and higher interest costs.

Corporate items were a negative €255 million in fiscal 2012 compared to a negative €331 million in fiscal 2011. The amount for fiscal 2012 benefited from positive effects related to legal and regulatory matters, compared to net expenses, including a provision of regional risks of €99 million, related to such matters in the prior year. In addition, fiscal 2012 includes an amount of €103 million related to reimbursements to AtoS, compared to €53 million in the prior year. It also includes a net gain of €19 million related to a major asset retirement obligation, compared to a net loss of €28 million in fiscal 2011. The prior year benefited from management’s allocation of €267 million of personnel-related costs related to special employee remuneration, which had been accrued in Corporate items in fiscal 2010. Within this amount, €240 million was allocated to the Sectors.

Eliminations, Corporate Treasury and other reconciling items

In fiscal 2012, income before income taxes from Eliminations, Corporate Treasury and other reconciling items was a positive €23 million, compared to a negative €90 million a year earlier. The main factor of the improvement was Corporate Treasury activities, due mainly to positive changes in the fair market value of interest rate derivatives not qualifying for hedge accounting used for interest rate management, partly offset by negative currency effects relating to corporate financing activities.

FISCAL 2011 COMPARED TO FISCAL 2010

RESULTS OF SIEMENS

The following discussion presents selected information for Siemens for the fiscal year ended September 30, 2011:

New orders and revenue

In fiscal 2011, orders rose 15% year-over-year, to €85.166 billion, including a substantially higher volume from major orders compared to the prior-year period. Revenue increased steadily throughout fiscal 2011 and came in at €73.275 billion, up 6% from the prior-year period. This resulted in a book-to-bill ratio of 1.16 for Siemens in fiscal 2011. Organic volume development was almost in line with reported figures, given that effects from currency exchange fluctuations during fiscal 2011 largely offset one another. The order backlog (defined as the sum of order backlogs of our Sectors) was €97 billion as of September 30, 2011, up from €88 billion a year earlier.

 

     New orders (location of customer)  
     Year ended
September 30,
     % Change
vs. previous year
     therein  
     2011      2010      Actual      Adjusted(1)      Currency      Portfolio  
     (in millions of €)                       

Europe, C.I.S.(2), Africa, Middle East

     46,711         39,445         18%         19%         0%         0%   

therein Germany

     17,353         10,690         62%         63%         0%         (1)%   

Americas

     22,077         21,441         3%         5%         (2)%         0%   

therein U.S.

     15,732         15,179         4%         7%         (3)%         0%   

Asia, Australia

     16,378         13,102         25%         24%         2%         (1)%   

therein China

     6,241         5,281         18%         20%         0%         (2)%   

therein India

     3,310         2,286         45%         44%         1%         0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Siemens

     85,166         73,987         15%         16%         0%         0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excluding currency translation and portfolio effects.

 

(2) Commonwealth of Independent States.

 

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Orders related to external customers in fiscal 2011 increased by 15% compared to the prior year, including higher demand in all Sectors. Infrastructure & Cities reported order growth of 30%. The largest of contribution to this increase came from Transportation & Logistics, where a higher volume from large orders compared to the prior-year period included the €3.7 billion order for trains mentioned earlier. Order intake in the Energy Sector rose by double digits in fiscal 2011 and included growth at all businesses. A higher volume from major orders in the Energy Sector was most notable at Fossil Power Generation. The Industry Sector contributed double-digit order growth in fiscal 2011 with increases at Drive Technologies and Industry Automation. Orders in Healthcare increased moderately compared to the prior-year period, due to robust growth at its imaging and therapy systems businesses. Orders in emerging markets on a global basis grew faster than orders overall, by 17% year-over-year, and accounted for €28.075 billion, or 33%, of total orders for fiscal 2011.

On a geographic basis, Siemens reported order growth in all three reporting regions in fiscal 2011. In the region Europe, C.I.S., Africa, Middle East, orders rose 18% on double-digit increases in Infrastructure & Cities, Energy and Industry. Infrastructure & Cities orders rose 50% in the region, due largely to the major contract win for trains at Transportation & Logistics mentioned above. This was also the primary driver for 62% order growth in Germany. The Energy Sector delivered order growth of 11% in the Europe, C.I.S., Africa, Middle East region, due primarily to a higher volume from major orders at Fossil Power Generation and Wind Power compared to the prior-year period. Order growth for Industry in the region included strong demand at Drive Technologies and Industry Automation. Healthcare’s orders in the region came in slightly below the level of fiscal 2010. In the Americas, order intake rose 3% on increases in Industry, Energy and Infrastructure & Cities. Order growth in Industry in the Americas region was led by a strong double-digit increase at Drive Technologies. Higher orders in the Energy Sector were due primarily to higher demand at Power Transmission and Fossil Power Generation. Healthcare’s orders in the region came in level compared to the prior-year period. Order intake in the Asia, Australia region climbed 25% in fiscal 2011, including double-digit growth in three of four Sectors. Orders in the Energy Sector in the region climbed 55% compared to the prior-year period, including a higher volume from major orders mainly at Fossil Power Generation and Oil & Gas. Industry reported 20% order growth in the region, including strong demand at Drive Technologies and Industry Automation. Orders in the Asia, Australia region increased 16% in Healthcare compared to the prior-year period, due mainly to strong order growth at its imaging and therapy systems businesses. Infrastructure & Cities showed a slight order decline. Order intake in India increased significantly compared to the prior-year period, due primarily to a major contract win at Fossil Power Generation in the first quarter of fiscal 2011.

 

     Revenue (location of customer)  
     Year ended
September 30,
     % Change
vs. previous year
     therein  
     2011      2010      Actual      Adjusted(1)      Currency      Portfolio  
     (in millions of €)                       

Europe, C.I.S.(2), Africa, Middle East

     38,448         37,408         3%         3%         0%         (1)%   

therein Germany

     10,810         10,221         6%         6%         0%         (1)%   

Americas

     20,470         18,642         10%         12%         (3)%         0%   

therein U.S.

     14,368         13,308         8%         12%         (4)%         0%   

Asia, Australia

     14,357         12,778         12%         12%         1%         (1)%   

therein China

     6,389         5,526         16%         17%         0%         (1)%   

therein India

     2,353         1,877         25%         27%         (2)%         0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Siemens

     73,275         68,828         6%         7%         0%         0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excluding currency translation and portfolio effects.

 

(2) Commonwealth of Independent States.

Revenue related to external customers rose 6% compared to fiscal 2010, including increases in all Sectors. Strong conversion from the Sectors’ order backlogs played a major role in broad-based revenue growth.

 

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Revenue in the Industry Sector increased 15% year-over-year, led by strong double-digit growth at Drive Technologies and Industry Automation. Energy reported a revenue increase of 9% in fiscal 2011 on increases in all businesses, led by Fossil Power Generation, Wind Power and Oil & Gas. Revenue at Healthcare and Infrastructure & Cities came in slightly above the prior-year period. On a global basis, emerging markets grew faster than revenue overall, at 11%, and accounted for €24.001 billion, or 33%, of total revenue in fiscal 2011.

On a geographic basis, revenue increased in all three reporting regions, led by double-digit growth in the Americas and Asia, Australia. In the Europe, C.I.S., Africa, Middle East region, revenue increased 3% year-over-year, including double-digit growth in Industry and moderate growth in Energy and a decrease in Healthcare and Infrastructure & Cities. Revenue growth of 6% in Germany was driven by double-digit increases at Drive Technologies and Industry Automation. In the Americas, higher revenue included double-digit increases in Energy and Industry. Growth in the Energy Sector was led by Fossil Power Generation and Wind Power. Higher revenues in Industry in the Americas region included a clear increase at Industry Automation. The U.S. contributed 8% revenue growth driven by a sharp increase at Fossil Power Generation. In the Asia, Australia region, revenue rose 12% on increases in all Sectors. While revenue development in China followed the pattern for the region overall, growth of 25% in India was driven by substantially higher revenue in Energy.

Consolidated Statements of Income

 

     Year ended
September 30,
       
     2011     2010     % Change  
     (in millions of €)        

Gross profit

     22,229        20,012        11

as percentage of revenue

     30.3     29.1       

Research and development expenses

     (3,899     (3,547     10

as percentage of revenue

     5.3     5.2       

Marketing, selling and general administrative expenses

     (10,239     (9,632     6

as percentage of revenue

     14.0     14.0       

Other operating income

     547        839        (35 )% 

Other operating expense

     (374     (1,548     (76 )% 

Income (loss) from investments accounted for using the equity method, net

     210        16        >200

Interest income

     2,200        2,045        8

Interest expense

     (1,716     (1,758     (2 )% 

Other financial income (expense), net

     649        (383     n/a   

Income from continuing operations before income taxes

     9,608        6,045        59

Income taxes

     (2,232     (1,716     30

as percentage of income from continuing operations before income taxes

     23     28       

Income from continuing operations

     7,376        4,329        70

Loss from discontinued operations, net of income taxes

     (1,055     (261     >200

Net income

     6,321        4,068        55

Net income attributable to non-controlling interests

     176        169          

Net income attributable to shareholders of Siemens AG

     6,145        3,899        58

Income from continuing operations was €7.376 billion in fiscal 2011, up from €4.329 billion in fiscal 2010. Gross profit for fiscal 2011 rose €2.217 billion year-over-year, driven by a strong double-digit percent increase in the Industry Sector due to high capacity utilization. For comparison, Industry’s gross profit in fiscal 2010 was held back by €205 million in charges related to a project engagement with a local partner in the U.S. Gross profit rose 9% in Energy compared to fiscal 2010, driven by a strong operating performance at Fossil Power Generation, which combined excellent project execution with a more favorable business mix year-over-year. In contrast, gross profit declined at Power Transmission, due in part to a negative swing in effects related to commodity hedging. Lower gross profit in Healthcare was driven by negative impacts related to the particle therapy business, primarily including third-quarter charges of €381 million related to the reevaluation of the commercial feasibility of particle therapy. For comparison, charges related to the particle therapy business in fiscal 2010 amounted to €96 million. Gross profit was also higher at Infrastructure & Cities than in fiscal 2010.

 

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In fiscal 2010, gross profit in all four Sectors benefited from their respective portions of gains related to a curtailment of pension plans in the U.S. In addition, gross profit in fiscal 2010 included €169 million of the expenses related to the special remuneration for non-management employees mentioned earlier.

In addition, all Sectors increased their spending for marketing, selling and administrative expenses and research and development expenses associated with business expansion.

Other operating income in fiscal 2011 included €64 million related to a settlement of legal matters in connection with portfolio activities. For comparison, fiscal 2010 benefited from gains in connection with compliance-related matters, higher gains related to the disposal of businesses and higher gains related to the disposal of real estate. Further, Siemens ceased to consolidate a subsidiary in the third quarter of fiscal 2010 due to a loss of control and recorded a related gain of €40 million. For additional information, see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 5.

Other operating expense decreased primarily due to impairment charges at the Diagnostics Division in fiscal 2010, including €1.145 billion for goodwill and €39 million for real estate. In addition, fiscal 2010 included €106 million provided for in connection with an expected loss from the sale of our electronics assembly systems business to ASM Pacific Technology. Fiscal 2011 included higher charges year-over-year related to legal and regulatory matters. For additional information, see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 6.

Income from investments accounted for using the equity method, net increased year-over-year. In fiscal 2011, the equity investment loss related to NSN decreased to €280 million, down from a loss of €533 million a year earlier. In contrast, equity investment income related to our stakes in EN, BSH and KMW declined to a total of €145 million in fiscal 2011 from a total of €282 million in fiscal 2010. In addition, fiscal 2011 included a gain of €90 million on the sale of our 49% interest in KMW to the Wegmann Group. For additional information, see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 7.

Income from continuing operations in fiscal 2011 benefited from a gain of €1.520 billion on the sale of Energy’s interest in Areva NP, partly offset by the negative impact of €682 million related to an adverse arbitration decision associated with our decision to exit our nuclear power joint venture with Areva. The net effect of these factors is included in Other financial income (expense) net. Changes in the fair market value of interest rate and foreign currency derivatives not qualifying for hedge accounting also contributed to the increase in that line item year-over-year. For additional information, including information on interest income and interest expense, see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 8.

As a result of these developments, Income from continuing operations before income taxes increased to €9.608 billion in fiscal 2011, compared to €6.045 billion in fiscal 2010. The effective tax rate was 23% in fiscal 2011 and benefited from the income tax treatment of the Areva disposal gain, which was mainly tax-free. For comparison, the effective tax rate of 28% in fiscal 2010 was adversely affected by the goodwill impairment charges at the Diagnostics Division, the majority of which was not deductible for tax purposes. This effect was more than offset in fiscal 2010 by the release of tax provisions after the conclusion of tax audits, and the release of tax liabilities after the positive decision on appeal related to non-deductible expenses in connection with certain foreign dividends. As a result, Income from continuing operations was €7.376 billion in fiscal 2011, up from €4.329 billion in fiscal 2010.

Loss from discontinued operations, net of income taxes in fiscal 2011 was €1.055 billion, compared to €261 million in fiscal 2010. Loss from discontinued operations, net of income taxes was comprised of the following:

 

     Year ended
September 30,
       
     2011     2010     % Change  
     (in millions of €)        

OSRAM

     309        318        (3 )% 

Siemens’ solar business

     (365     (67     >200

Siemens IT Solutions and Services

     (826     (468     76

Other former activities

     (172     (44     >200

 

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OSRAM, which Siemens planned to list publicly, contributed a positive €309 million after tax to income from discontinued operations in fiscal 2011, nearly unchanged from a positive €318 million after tax a year earlier. OSRAM reported a 8% revenue increase compared to the previous fiscal year. Growth was driven by demand for specialty lighting products as well as by increased LED business.

The solar business posted losses of €365 million in fiscal 2011 and €67 million in fiscal 2010. Fiscal 2011 included pre-tax impairment charges of €231 million.

Results related to Siemens IT Solutions and Services, which was sold to Atos S.A. (AtoS) in the fourth quarter of fiscal 2011, were sharply lower year-over-year. The loss in fiscal 2011 included pretax charges of €659 million for impairments of long-lived assets, including €136 million for goodwill; €250 million in pretax charges in connection with the integration and training program related to the transfer of the business to AtoS; as well as pretax charges of €168 million related to establishing Siemens IT Solutions and Services as a separate legal group. For comparison, the result associated with Siemens IT Solutions and Services in fiscal 2010 was a loss of €468 million after tax, including pretax charges of €385 million related to the completion of staff reduction measures related to the strategic reorientation of Siemens IT Solutions and Services aimed at strengthening the competitive position of the business.

Discontinued operations also include certain remaining items related to former activities that were disposed of in prior years. For additional information, see Item 18: Financial Statements—Notes to Consolidated Financial Statements—Note 4.

Net income for Siemens in fiscal 2011 increased to €6.321 billion, compared to €4.068 billion a year earlier. Net income attributable to shareholders of Siemens AG was €6.145 billion, up from €3.899 billion in fiscal 2010.

SEGMENT INFORMATION ANALYSIS

Energy

 

     Year ended
September 30,
    % Change     therein  
     2011     2010     Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                    

Sector

            

Profit

     4,230        3,043        39      

Profit margin

     17.2     13.4        

New orders

     31,407        27,280        15     15     0     0

Total revenue

     24,645        22,712        9     9     (1 )%      0

External revenue

     24,390        22,435        9      

therein:

            

Europe, C.I.S.(2), Africa, Middle East

     13,447        12,934        4      

therein Germany

     1,668        1,756        (5 )%       

Americas

     7,075        6,122        16      

Asia, Australia

     3,869        3,380        14      

 

(1) Excluding currency translation and portfolio effects.

 

(2) Commonwealth of Independent States.

The Energy Sector delivered another strong operating performance in fiscal 2011, including excellent project execution at Fossil Power Generation. Profit for the Sector rose to €4.230 billion, notwithstanding significant increases in spending for R&D, marketing and selling associated with new technologies and expansion of the Sector’s global footprint, particularly at Wind Power. Profit for the year was positively influenced by the net effect related to Areva, including the €1.520 billion disposal gain and the negative €682 million impact related to the arbitration decision mentioned earlier. In contrast, profit was held back by Energy’s €60 million share of the special employee remuneration allocation mentioned earlier.

Revenue in the Energy Sector rose 9% year-over-year, to €24.645 billion in fiscal 2011, on increases in all Divisions and conversion of the Sector’s strong order backlog. On a geographic basis, revenue rose in all regions,

 

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with double-digit increases in the regions Americas and Asia, Australia. The Sector’s order intake rose 15% compared to fiscal 2010 on broad-based growth in all Divisions. Fossil Power Generation contributed the largest increase, driven by a higher volume from major orders. On a geographic basis, strong growth in emerging markets was the primary driver for higher orders in all regions. On a book-to-bill ratio of 1.27, the Sector’s order backlog rose to €55 billion at the end of fiscal 2011, up from €51 billion a year earlier.

 

     New Orders  
     Year ended
September 30,
     % Change     therein  
     2011      2010      Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                     

Divisions

         

Fossil Power Generation

     12,487         9,920         26     26     (1 )%      0

Wind Power

     6,461         5,856         10     11     (1 )%      0

Oil & Gas

     5,551         4,943         12     10     2     1

Power Transmission

     7,271         6,770         7     8     0     0

 

(1) Excluding currency translation and portfolio effects.

 

     Revenue  
     Year ended
September 30,
     % Change     therein  
     2011      2010      Actual     Adjusted(1)     Currency     Portfolio  
     (in millions of €)                     

Divisions

         

Fossil Power Generation