Siemens 2007 Annual Report Download - page 109

Management’s discussion and analysis 109
Management’s discussion and analysis
Earnings at Financing and Real Estate rose to €557 million for fi scal 2007, from
€421 million a year earlier. Corporate Treasury activities contributed earnings of
€153 million compared to a loss of €18 million in the same period a year earlier,
which includes a €143 million net negative effect related to mark-to-market valua-
tion of a cash settlement option associated with the €2.5 billion convertible bond
issued in 2003. This option was irrevocably waived in the third quarter of fi scal
2006, effectively eliminating subsequent earnings effects.
Strong global growth. Our revenue increased 9% year-over-year, to €72.448
billion, with higher revenue in every region of the world. Both revenue and orders
include new business from acquisitions, particularly at Med and A&D, which
largely offset negative effects from currency translation involving the U.S. dollar.
On an organic basis (that is excluding the net effect of currency translation and
portfolio transactions), revenue grew 10%. All our operating Groups increased
revenue organically year-over-year, highlighted by double-digit rises at A&D, PG
and PTD. Orders grew even faster, rising 12% to €83.916 billion, with double-digit
increases at PG, PTD, A&D, Industrial Services and Solutions (I&S) and Med. On an
organic basis, orders rose 13% year-over-year.
Higher cash fl ows and ROCE. We generated €6.755 billion in free cash fl ow
(defi ned as net cash provided by (used in) operating activities less additions to
intangible assets and property, plant and equipment) from continuing operations
in fi scal 2007, well above €1.820 billion in free cash fl ow a year earlier. Our cash
conversion rate, calculated as free cash fl ow from continuing operations divided
by income from continuing operations, was 1.73 in fi scal 2007, well above our
target of 0.90 for fi scal 2007. Free cash fl ow from continuing and discontinued
operations increased from €1.607 billion in fi scal 2006 to €3.577 billion in the
current period.
Return on capital employed (ROCE) is defi ned as income before interest
expense divided by capital employed. Income before interest expense is calculated
as net income excluding other interest income (expense), net and excluding taxes
on other interest income (expense), net. Taxes on other interest income (expense),
net are calculated in simplifi ed form by applying the current tax rate (which can
be derived from the Consolidated Statements of Income) to other interest income
(expense), net. Net capital employed is calculated as total equity plus long-term
debt plus short-term debt and current maturities of long-term debt, minus cash
and cash equivalents. Because Siemens reports discontinued operations, Siemens
also calculates ROCE on a continuing operations basis, using Income from con-
tinuing operations rather than Net income. For purposes of this calculation, capi-
tal employed is adjusted by the net fi gure for Assets classifi ed as held for disposal
included in discontinued operations less Liabilities associated with assets classi-
fi ed as held for disposal included in discontinued operations. ROCE rose on a con-
tinuing basis to 12.7% for the year up from 9.6% a year earlier. Our medium-term
target for ROCE is 14-16%.