Siemens 2007 Annual Report Download - page 196

196 Management’s discussion and analysis
Overall, we believe we are in a good position to achieve our near-term targets
for Group profi t from Operations, given that all our Groups operated within their
current target margin ranges for all or part of fi scal 2007. We will continue to
monitor our earnings performance in Operations and the margins achieved by
our most successful competitors, as well as global macroeconomic trends, to
ensure that we are setting our profi tability targets appropriately.
Income and EPS. In fi scal 2007, Group profi t from Operations was the primary
driver of growth in income from continuing operations. We expect this relation-
ship to continue in the next two fi scal years. Furthermore, we expect the contribu-
tion to net income from discontinued operations will be strongly positive in fi scal
2008, due to a substantial gain on the sale of SV. We expect this transaction to
close in the fi rst quarter of fi scal 2008. We expect a substantial increase in earn-
ings per share (EPS) from continuing and discontinued operations in fi scal 2008
compared to fi scal 2007. Some potential effects on income related to compliance
matters are not yet quantifi able for fi scal 2008 or 2009, which could have a mate-
rial impact on our EPS. For information on our risk factors with respect to our
compliance matters, see “Risk management.”
Cash Generation and Cash Conversion. In addition to our growth and profi t-
ability goals, we have added new fi nancial measures as part of Fit42010. Free cash
fl ow, shows how successfully we generate cash from operating activities minus
additions to intangible assets and property, plant and equipment (capital expendi-
tures). In fi scal 2007 we substantially increased free cash fl ow compared to the
prior year. In fi scal 2008 and fi scal 2009, we expect to focus management attention
on two key determinants of free cash fl ow: net working capital within operating
activities, and capital expenditures. In particular, we have set a mid-term target to
keep additions to PPE (property, plant and equipment) and intangible assets as a
percentage of depreciation and amortization to 95% – 115%.
Along with free cash fl ow we are now reporting on our cash conversion rate
(CCR), which is defi ned as the ratio of free cash fl ow to income. This measure
shows how effectively we convert income into cash that can be used to fi nance
business growth or other objectives. Our 2010 target for CCR is 1 minus our
annual revenue growth rate.
Two major portfolio transactions that we announced in fi scal 2007 will have
major infl uence on our cash fl ows in fi scal 2008. The fi rst is our acquisition of
Dade Behring for approximately $7 billion (€5 billion). We paid for this purchase
at the closing of the transaction at the beginning of November 2007. The second
portfolio transaction is our sale of SV for a preliminary purchase price of approxi-
mately €11.4 billion. We anticipate the closing of this transaction in the fi rst quar-
ter of fi scal 2008.
Capital Structure and ROCE. Our other new fi nancial measures are intended
to show how effi ciently we structure the capital on our balance sheet and how
effectively we invest it in our business. The target for our capital structure is cal-
culated as adjusted industrial net debt divided by earnings before interest
expense, income taxes, depreciation, amortization and impairments (EBITDA),
also as adjusted. For additional information with respect to our capital structure