A n n u a l R e p o r t | 2 0 0 6 A n n u a l R e p o r t | 2 0 … · A n n u a l R e p o r t | 2 0 0 6 KNORR-BREMSE GROUP 2002 2003 2004 2005 2006 Sales EUR mill. 2,118 2,206 2,423

K n o r r - B r e m s e G r o u p

A n n u a l R e p o r t | 2 0 0 6

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KNORR-BREMSE GROUP 2002 2003 2004 2005 2006

Sales EUR mill. 2,118 2,206 2,423 2,743 3,121

Income before taxation EUR mill. 105 158 211 246 294

Net income EUR mill. 69 108 130 154 185

Employees (as per Dec. 31) 10,959 10,763 11,143 12,119 13,035

Personnel costs EUR mill. 496 488 508 538 592

Balance-sheet total EUR mill. 1,378 1,291 1,438 1,607 1,646

Capital expenditure (not including investments in � nancial assets) EUR mill. 70 70 78 114 107

Depreciation (not includinginvestments in � nancial assets) EUR mill. 83 79 94 97 104

Incoming orders EUR mill. 2,377 2,265 2,447 2,849 3,541

Research and development EUR mill. 119 120 124 133 141

AT A GLANCE

K n o r r - B r e m s e G r o u pK n o r r - B r e m s e G r o u pMAIN MA JORIT Y-OWNED SUBSIDIARIES

The Americas Europe – Middle East – Africa Asia – Australia

Knorr Brake Holding CorporationWatertown, NY (USA)*

Bendix CommercialVehicle Systems LLC (USA)

Bendix Spicer Foundation Brake LLC (USA)*

Di-Pro Inc. (USA)

Hasse & Wrede North America Inc. (USA)

Knorr Brake Corporation (USA)

Knorr Brake Ltd. (CDN)

New York Air Brake Corporation (USA)

Indústria Freios Knorr Ltda.São Paulo (BR)

Knorr-Bremse Sistemas para Veículos Comerciais Brasil Ltda. (BR)

Knorr-Bremse Sistemas para Veículos Ferroviários Ltda. (BR)

Knorr-Bremse AG

Knorr-Bremse Systeme für Schienenfahrzeuge GmbHMunich (D)

Freinrail Systèmes Ferroviaires S.A. (F)

Frensistemi S.r.I. (I)

Knorr-Bremse Ges. m. b. H. (A)

Knorr-Bremse Nordic Rail Services AB (S)*

Knorr-Bremse Systemy dla Kolejowych Srodków Lokomocji PL Sp. z o.o. (PL)

Knorr-Bremse Rail Systems (UK) Ltd.

Knorr-Bremse S.A. (Pty.) Ltd. (RSA)

Knorr-Bremse Vasúti Jármű Rendszerek Hungária Kft. (H)

Merak Sistemas Integradosde Climatización, S. A. (E)*

Microelettrica Scientifica S.p.A. (I)*

Oerlikon-Knorr Eisenbahntechnik AG (CH)

Sociedad Española de Frenos, Calefacción y Señales, S.A. (E)*

Dr. techn. Josef Zelisko Ges. m. b. H. (A)

Knorr-Bremse Systeme für Nutzfahrzeuge GmbHMunich (D)**

Bost Ibérica S.L. (E)

Hasse & Wrede GmbH (D)

Knorr-Bremse Benelux B.V.B.A. (B)

Knorr-Bremse Fékrendszerek Kft. (H)

Knorr-Bremse Polska SfN Sp. z o.o. (PL)

Knorr-Bremse Sistemi per Autoveicoli Commerciali S.p.A. (I)

Knorr-Bremse Systèmes pour Véhicules Utilitaires France S.A. (F)

Knorr-BremseSystem för Tunga Fordon AB (S)

Knorr-BremseSystems for Commercial Vehicles Ltd. (UK)

Knorr-Bremse Systémy pro užitková vozidla, ČR, s.r.o. (CZ)

Knorr-Bremse Asia Pacific (Holding) Ltd. Hongkong (CHN)

Hasse & Wrede CVS Dalian China Ltd. (CHN)*

IFE-VICTALL Railway Vehicle Door Systems (Qingdao) Co., Ltd. (CHN)*

Knorr-Bremse Australia Pty. Ltd. (AUS)

Knorr-Bremse Brake Equipment(Shanghai) Co., Ltd. (CHN)

Knorr-Bremse CARS LD Vehicle Brake Disc Manufacturing (Beijing) Co., Ltd. (CHN)*

Knorr-Bremse Commercial Vehicle SystemsJapan Ltd. (J)**

Knorr-Bremse India Pvt. Ltd. (IND)

Knorr-Bremse/Nankou Air Supply Unit (Beijing) Co., Ltd. (CHN)*

Knorr-Bremse Rail Systems Japan Ltd. (J)*

Knorr-Bremse Rail Systems Korea Ltd. (ROK)*

Knorr-Bremse Braking Systems for Commercial Vehicles (Dalian) Co., Ltd. (CHN)

Knorr-Bremse Systems for Commercial Vehicles India Pvt. Ltd. (IND)*

Knorr-Bremse Systems for Rail Vehicles (Suzhou) Co., Ltd. (CHN)

Westinghouse Platform Screen Doors (Guangzhou) Ltd. (CHN)*

* Minority holding in subsidiary by non-Group companies

** 20 % stake held by Robert Bosch GmbH, Stuttgart (D)

As at December 31, 2006

Contact:

Knorr-Bremse AG

Moosacher Straße 80

80809 Munich

Germany

Corporate Communications

Tel: +49 89 3547-0

Fax: +49 89 3547-2767

E-Mail: [email protected]

Additional information about

Knorr-Bremse:

www.knorr-bremse.com

C o n t e n t s | �

04 TheExecutiveBoardandSupervisoryBoardofKnorr-BremseAG

06 ReportoftheSupervisoryBoard

08 TheStateandDevelopmentofKnorr-BremseAGand theKnorr-BremseGroup

28 FurtherInformationonBusinessTrends

82 HumanResources

ConsolidatedFinancialStatementsofKnorr-BremseAG

88 NotestotheConsolidatedFinancialStatements

104 ConsolidatedCashFlowStatement

105 SegmentReporting

106 StatementofChangesinGroupEquity

107 IndependentAuditor’sReport

108 ConsolidatedBalanceSheet

109 ConsolidatedStatementofIncome

ContentS

� | T h e E x e c u t i v e B o a r d a n d S u p e r v i s o r y B o a r d

tHeexeCutiveBoARDAnDSuPeRviSoRYBoARDoFKnoRR-BRemSeAG

Dr.RaimundKlinkner

(sinceJan.1,2007)

JanPeternonnenkamp

Dr.DieterWilhelm

Jenstheuerkorn

Dr.Hans-PeterBinderBerg

Chairman

Retd.MemberoftheBoardofManagementofDeutscheBankAG,MunichBranch

Dr.eduardGerum*Rosenheim

1stDeputyChairman(sinceNov.10,2006)

VicePresidentR&DBrakeSystems

Dr.-ing.e.h.WilfriedLochteGroßSchwülper

2ndDeputyChairman

Retd.ChairmanofMANNutzfahrzeugeAGandretd.MemberoftheBoardofManagementofMANAG.

DanielaFischer*Bruckmühl

(sinceNov.10,2006)

HeadoftheLegalOfficeoftheIGMetallTradeUnion,MunichOffice

executiveBoard SupervisoryBoard

HeinzHermannthiele

Chairman

T h e E x e c u t i v e B o a r d a n d S u p e r v i s o r y B o a r d | �

elfriedeHilger*Munich

(sinceNov.10,2006)

ChairpersonoftheGeneralWorksCouncilofKnorr-BremseSystemefürSchienenfahrzeugeGmbH

ChairpersonoftheWorksCouncilofKnorr-BremseAG,Knorr-BremseSystemefürSchienenfahrzeugeGmbH,MunichPlant,andKBMediaGmbH

Dr.KurtKietheMunich

Attorneyatlaw

WernerRatzisberger*Aldersbach

(sinceNov.10,2006)

ChairpersonoftheWorksCouncilofKnorr-BremseSystemefürNutzfahrzeugeGmbH,AldersbachPlant

Dr.h.c.HorstZimmerLampertheim-Hofheim

Retd.MemberoftheBoardofManagementofMercedes-BenzAG

KlausGegenfurtner*Aidenbach

Toolmaker

HeinzHausner*Salzweg

(sinceNov.10,2006)

AssistantRepresentativeoftheIGMetallTradeUnion,PassauOffice

ArnoHager*Berlin

RepresentativeoftheIGMetallTradeUnion,BerlinOffice

HorstLischka**Haar

AssistantRepresentativeoftheIGMetallTradeUnion,MunichOffice

PeterRatschnig*Freising

1stDeputyChairman

FormerChairpersonoftheGeneralandGroupWorksCouncilsofKnorr-BremseSystemefürSchienenfahrzeugeGmbH

Prof.Dr.-ing.GuntherReinhartHebertshausen

HeadoftheInstituteofMachineToolsandProductionSciencesatMunichTechnicalUniversity

KarlSchenk*Windorf

FormerChairpersonoftheWorksCouncilofKnorr-BremseSystemefürNutzfahrzeugeGmbH,AldersbachPlant

FormerChairpersonoftheGeneralWorksCouncilofKnorr-BremseSystemefürNutzfahrzeugeGmbH

*electedbytheemployees**court-appointed

ThetermofofficeofthefollowingmembersexpiredonNov.10,2006:

Report of theSupervisory Board

� | R e p o r t o f t h e S u p e r v i s o r y B o a r d

R e p o r t o f t h e S u p e r v i s o r y B o a r d | �

In the course of fiscal 2006, the Supervisory Board concerned itself in detail with the state and development of the Knorr-Bremse Group and its subsidiaries. Along with important individual transactions and human resources decisions, this also included consideration of fundamental aspects of strategic direction and corporate planning. In addition, the Supervisory Board received regular reports from the Executive Board either in the course of its meetings or in written form. The Super-visory Board examined important individual transactions, as well as deciding on items of business that required its approval either by law or in line with company statutes.

In 2006, the Knorr-Bremse Group maintained the positive developments recorded in previous years. For the first time, sales surpassed EUR 3 billion, with both divisions contributing to this growth. At the same time, internal processes and structures were enhanced, leading to improvements in productivity that will keep the Group competitive in the market-place in the future.

One focus of attention over the past year was the activities of the Rail Vehicle Systems division in China. The numerous and extensive orders being placed in this high-growth market continue to demand major efforts. As the plant in Suzhou, where production only began in 2005, is already unable to cope with the enormous increase in demand for capacity, building work commenced in 2006 on a new production plant that is scheduled for occupancy in the spring of 2007. In addition, the Rail Vehicle Systems division has entered into joint ventures with various partners in China, in each case assuming lead management, in order to further enhance its strong market position in the rail sector. Despite these immense challenges, in the interests of the customer, quality assurance and efficient logistics must remain the top priority.

The Commercial Vehicle Systems division benefited from positive market trends in Europe and North

America. However, in the course of 2006, internal preparations had to be made for the anticipated market downturn and the resultant drop in unit sales in the USA in 2007.

The 2006 Financial Statements and the Manage-ment Report on Knorr-Bremse AG, as well as the 2006 Consolidated Financial Statements and the Management Report on the Knorr-Bremse Group drawn up by the Executive Board and the company‘s accounts were examined by the auditors elected by the Annual Shareholders‘ Meeting, KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirt-schaftsprüfungsgesellschaft, Munich, and endorsed with their unqualified opinion. The Supervisory Board also examined the Financial Statements for fiscal 2006, the Management Report, the proposed allocation of unappropriated retained earnings, and the Consolidated Financial Statements and Manage-ment Report of the Knorr-Bremse Group, and appro-ved these at its meeting on March 16, 2007, making them legally binding. No objections to the above documents were raised. The Supervisory Board concurs with the Executive Board’s proposal for the allocation of unappropriated retained earnings.

The auditors attended the preparatory meeting of the financial statements committee on March 2, 2007 as well as the financial statements meeting of the Supervisory Board, reported on their key findings and answered outstanding questions.

KPMG Deutsche Treuhand-Gesellschaft AG Wirt-schaftsprüfungsgesellschaft, Munich, also examined the Executive Board‘s report on relations with affiliated companies, drawn up in line with § 312 German Corporation Law (AktG). The auditors endorsed this report with the following opinion: „Having audited and assessed this report in accordance with professional standards, we confirm that: 1. The factual contents of the report are correct. 2. The consideration furnished by the Company in the legal transactions set out in the report was not unreasonably high.“

The Supervisory Board has also examined the Executive Board‘s report on relations with affiliated companies and has no objections to the concluding statement by the Executive Board or to the auditors‘ findings.

The term of office of the former Supervisory Board expired in 2006. At the extraordinary shareholders’ meeting on November 9, 2006, the shareholders’ representatives were all re-elected to the Super- visory Board of Knorr-Bremse AG, with the exception of Prof. Gunther Reinhart, who, for personal rea-sons, did not stand for re-election. The employees’ representatives elected to the Supervisory Board are Ms. Daniela Fischer, Klaus Gegenfurtner, Dr. Eduard Gerum, Heinz Hausner, Ms. Elfriede Hilger and Werner Ratzisberger. On behalf of Knorr-Bremse AG, the Supervisory Board wishes to thank all its former members for their contributions to the work of the board.

On January 1, 2007, Dr. Raimund Klinkner was appointed a Member of the Executive Board of Knorr-Bremse AG and has assumed worldwide responsibility for the Commercial Vehicle Systems division.

Munich, March 16, 2007

The Supervisory Board

Dr. Hans-Peter Binder

Chairman

The State and Development of Knorr-Bremse AG andthe Knorr-Bremse Group

� | M a n a g e m e n t R e p o r t

The Knorr-Bremse Group is the world‘s leading manufacturer of braking systems for rail vehicles and commercial vehicles. Knorr-Bremse has also established a leading international market position in the rail vehicle on-board systems segment, particularly in the fields of automatic door systems, air conditioning, and power sup-ply. Another field of activity in the rail vehicle sector is the platform screen doors segment. In the commercial vehicle sector, apart from braking systems, the product portfolio includes vibration dampers for internal combustion engines, and these too are destined for world-wide applications.

The structure of the Knorr-Bremse Group is based on three regions – Europe, North and South America, and Asia/Australia – and the development of the Group is geared to meeting the requirements of the respective markets and customers. This regional organizational structure is designed to offer globally active customers uniform technical platforms worldwide, while at the same time taking specific local needs into account. It also ensures that customers who operate on a regional basis are supplied with globally tried-and-tested systems and components.

tHeKnoRR-BRemSeGRouP:AnoveRvieW

M a n a g e m e n t R e p o r t | �

TheKnorr-BremseTechnologyCenterinMunich.

10 | M a n a g e m e n t R e p o r t

GeneRALeConomiCDeveLoPmentS

The worldwide economic climate was positive in 2006, with global economic growth averaging out at approximately 5%, although growth rates diff ered from one region to the next.

The main drivers of growth were once again the Asian countries, led by China, where gross domestic product (GDP) grew by over 10.5%, and India, where GDP was up by more than 9%. The Japanese economy returned a sound perfor-mance with growth of over 2%.

The pace of growth picked up slightly in South America, averaging over 4.5%. The economy in Brazil, the most important market for Knorr-Bremse in the region, grew by around 3%.

In Western Europe, the Euro Zone returned growth of approximately 2.7%, not least on the back of a positive development in Germany, where GDP growth increased from 0.9% in 2005 to 2.7% in 2006. In Eastern Europe, the new EU member states showed sustained growth, as did Russia, where economic growth totaled approximately 6.5%.

KeyindicatorsfortheKnorr-BremseGroupinEURmillions

The price of steel was highly volatile in 2006. The prices of individual metals also rose sharply, with aluminum, for example, costing almost 40% more on average. As the year drew to a close, the price of crude oil returned to the level at which it started the year, following interim increases of over 30%.

The U.S. dollar, which lines up alongside the euro as the most important currency for the Knorr-Bremse Group, weakened against the euro by more than 11% in the course of the year un-der review, falling to just over USD 1.32 for one euro. The drop was at its sharpest in the last two months of 2006. As an annual average, the euro was worth USD 1.26.

Netincome

Sales

2000 2001 2002 2003 2004 2005 2006

59 5969

108 130154

185

1,4941,653

2,1182,206

2,423

2,743

3,121

In 2006, the Knorr-Bremse Group was able to sustain the positive growth pattern of previous years and for the first time sales revenues surpassed EUR 3 billion. Sales rose 13.8% year-on-year, to a total of EUR 3,120.6 million, with all regions except South America posting double-digit growth. Both the Commercial Vehicle Systems and Rail Vehicle Systems divisions were able to contribute to this positive development.

In North America, the relevant markets for both divisions were exceptionally buoyant. The same applies to the rail vehicle market in the Asia/Australia region, which continued to show very dynamic growth in particular in China. Europe presented a more diversified picture: While the commercial vehicle sector remained robust, the rail vehicle market was more subdued. In South America, following extraordinary growth rates in the previous year, the rail vehicle market returned to a normal level of activity. The nega-tive impact of higher material prices worldwide made itself felt even more clearly in 2006. At the same time, the pace of competition once again increased.

Acquisitions,additionsandjointventuresIn January 2006, Knorr-Bremse AG acquired from BLB-Beteiligungsgesellschaft mbH (BLB) the latter’s 20% stake in Knorr-Bremse Systeme für Nutzfahrzeuge GmbH (SfN GmbH) as well as BLB’s 35% holding in Knorr-Bremse Sistemas para Veículos Comerciais Brasil Ltda. (KB Truck Brazil). As a result, Knorr-Bremse AG now holds 80% of the shares in SfN and, together with its subsidiary Indústria Freios Knorr Ltda., São Paulo, 100% of the shares in KB Truck Brazil.

In North America, Bendix Spicer Foundation Brake LLC, Elyria, Ohio, (Bendix-Spicer) the joint venture managed by Bendix Commercial Vehicle Systems LLC, Elyria, Ohio, (Bendix) acquired Di-Pro Inc. Fresno, California (Dipro). Dipro’s brake cylinder business complements the Bendix-Spicer product portfolio in the wheelend segment.

In Romania, the Rail Vehicle Systems division set up the joint venture company Knorr-Bremse S.R.L., Bucharest, in conjunction with Mecano-exportimport S.A., Bucharest. Knorr-Bremse Ges. mbH, Mödling, Austria, (KB Austria) holds a 70% majority stake in the new company, whose aim is to drive forward sales of Knorr-Bremse products in Romania.

M a n a g e m e n t R e p o r t | 11

DeveLoPmentoFtHeKnoRR-BRemSeGRouPin2006


In Poland, a new sales company by the name of Knorr-Bremse Polska SfN Sp. z.o.o., Warsaw, (KB Polska SfN) was set up in response to the growing volume of business in the commercial vehicle sector in Poland.

In Spain, SfN GmbH proceeded with the scheduled acquisition of the remaining 49.98% stake in Bost Ibérica S.L. in Madrid. Bost Ibérica serves the needs of customers in the aftermarket and trailer sectors in Spain and Portugal.

In the year under review, the former Knorr- Bremse Far East Ltd., Hong Kong, was renamed Knorr-Bremse Asia Pacific (Holding) Ltd., Hong Kong (Knorr-Bremse Asia Pacific).

The expansion of the Rail Vehicle Systems division’s activities in China called for special efforts. The sharp increase in demand meant that the production plant in Suzhou (100 km west of Shanghai), which only became operational in 2005, had reached the limits of its capacity by 2006. As a result, planning and construction work began on a new plant, also in Suzhou, which will commence operations in April 2007.

The Rail Vehicle Systems division set up four new joint ventures in China in 2006. Westing-house Platform Screen Doors (Guangzhou) Ltd., Guangzhou, (JV Westinghouse Guangzhou) is to focus on the key Chinese market for platform screen doors and expand the business to the entire Asian market. Knorr-Bremse Asia Pacific holds a 65% stake in this joint venture, with the remaining 35% held by its partner Guangzhou Guangri Group Company Ltd., Guangzhou (GGGC).

Knorr-Bremse/Nankou Air Supply Unit (Beijing) Co. Ltd., Nankou, (JV Nankou) is a joint venture between CNR Beijing Nankou Air Supply Locomo-tive & Rolling Stock Machinery Works, Nankou, which holds 45%, and Knorr-Bremse Asia Pacific, which holds the remaining 55%. The purpose of the joint venture is to manufacture compressors and air dryers for the Chinese mainline market.

Also targeting the Chinese mainline market, from 2007 onwards the new joint venture Knorr-Bremse CARS LD Vehicle Brake Disc Manufactu-ring (Beijing) Co. Ltd., Daxing, (JV CARS) is to manufacture brake discs. Knorr-Bremse Asia Pacific holds a 50% stake in the new company, with the remaining 50% being held by the China Academy of Railway Sciences (CARS).

The fourth joint venture founded in China in 2006 is to produce and market door systems for high-speed trains. IFE-VICTALL Railway Vehicle Door Systems (Qingdao) Co. Ltd., Qingdao, (JV IFE-VICTALL) is a 50:50 joint venture between Knorr-Bremse Asia Pacific and Qingdao Victall Decoration Materials Manufacturing Company Ltd., Qingdao.

majorprojectsThe Commercial Vehicle Systems division has opened a new plant in Sakado (Greater Tokyo), Japan, with highly efficient logistics and full implementation of the Knorr-Bremse Truck Production System, in order to offer Japanese commercial vehicle builders maximum customer benefits. The new facility also serves as head office for the activities of the Rail Vehicle Systems division, targeting the development of additional business in the rail sector in Japan.

Within the scope of the PROGRESS project, business processes in the Commercial Vehicle Systems division are being harmonized and optimized worldwide. In the year under review, the necessary ERP software from SAP was jointly defined and exhaustively tested during the realization phase by staff from the Europe and North America regions. Following final product approval and the necessary employee training measures, the optimized processes and software will initially be rolled out in Germany and the USA in 2007.

In addition, the Commercial Vehicle Systems division also launched the gps (Global Project Management System) project for the defini-tion and implementation of a common world-wide project management standard.

The structures and processes of the Knorr-Bremse Group are subject to continuous and systematic optimization, in order to make procedures as efficient as possible and exploit the potential for cost savings. The FOKUS project (focusing on core competencies and strengths) was again consistently imple-mented in both divisions in the year under review. In the Commercial Vehicle Systems division, the STRONG FOCUS program intro-duced in 2005 was successfully continued. STRONG FOCUS provides a framework for the control and monitoring of all productivity projects as well as all growth-oriented projects worldwide.

QuALit Y

M a n a g e m e n t R e p o r t | 1�

There was further external confirmation of the efficiency and harmonization of processes at Knorr-Bremse in 2006, when the entire Knorr-Bremse Group organization in Europe, comprising Knorr-Bremse AG and all its Euro-pean subsidiaries, successfully took part in the European Excellence Award (EEA) organized by the European Foundation for Quality Management (EFQM). Awards of “Finalist” and “Prize Winner” status for pronounced results-orientation confirmed the excellence of the company’s process management. In addition, a number of different quality programs were expanded and continued in order to systemati-cally improve both process and product quality. Both divisions pursue a zero defect philosophy.

In the Commercial Vehicle Systems division the “TRUQ - Truck and Quality” program was further enhanced. TRUQ helps identify, implement and monitor numerous measures designed to im-prove or maintain quality standards. Six Sigma activities and the number of employees with Six Sigma certification also increased in the year under review.

In the Rail Vehicle Systems division, activi-ties within the scope of the “Quality First” program were further intensified. This program comprises several different methods of systematically monitoring and improving product and process quality. In September 2006, the Munich plant passed its first certification audit in line with the European rail industry’s new International Railway Industry Standard (IRIS) with flying colors. Implementation of the standard has already begun at all other plants across the division.

1� | M a n a g e m e n t R e p o r t

ASSetS,FinAnCiALStAtuS,AnDPRoFitABiLit Y

The Knorr-Bremse Group’s business showed positive overall development in 2006. Consolidated sales moved ahead 13.8% in the year under review to EUR 3,120.6 million (2005: EUR 2,743.3 million), although one third of the increase was due to initial consolidation of subsidiaries Merak Sistemas Integrados de Climatización S.A., Pinto, (Merak) and Micro-elettrica Scientifica S.p.A., Rozzano, (Micro-elettrica) in the on-board sector, both acquired in 2005.

Sales were up across all regions. In Europe, consolidated sales rose to EUR 1,975.6 million (2005: EUR 1,702.1 million), which equates to 63.3% of the consolidated total (2005: 62.1%). The Americas contributed EUR 942.1 million (2005: EUR 864.6 million) or 30.2% (2005: 31.5%). In the Asian region, sales amounted to EUR 202.9 million (2005: EUR 176.6 million), representing 6.5% (2005: 6.4%) of the total.

Incoming orders were valued at EUR 3,541.1 million (2005: EUR 2,849.4 million), again well ahead of annual sales. Orders on the books at the Knorr-Bremse Group moved ahead 26.9% to EUR 2,175.8 million (2005: EUR 1,715.1 million).

Net income for the Knorr-Bremse Group rose in the year under review to EUR 185.5 million (2005: EUR 154.1 million). Net return on sales reached 5.9% (2005: 5.6%). The European region contributed EUR 137.1 million to net income, corresponding to a net return on sales of 6.9%. Net income from the Americas totaled EUR 49.6 million, with a net return on sales of 5.3%. The Asia/Australia region posted a net loss of EUR 1.2 million, which equates to a net return on sales of -0.6%.

The consolidated balance sheet total rose 2.5% in 2006 to EUR 1,646.4 million (2005: EUR 1,606.5 million). At year-end 2006, total assets represented 52.8% of sales. As a proportion of the balance sheet total, intangibles, fixed assets, and investments remained at the prior-year level of 44.4% (2005: 44.4%). Working capital, defined as the sum of inven-tories and accounts receivable, minus accounts payable trade, totaled EUR 361.9 million at year-end (2005: EUR 336.2 million) or 41.8 days’ sales (2005: 44.1 days). The equity ratio rose from 29.1% to 30.0%.

Of the Group’s total assets, 56.2% are in the European region, 36.3% in the Americas, and 7.5% in the Asia/Australia region.

The net indebtedness of the Knorr-Bremse Group rose from EUR 111.9 million at year-end 2005 to EUR 126.9 million at the end of the year under review. The increase was due in particular to the scheduled acquisition of the BLB shares, as well as to the acquisition of Dipro in the commercial vehicle sector, which together slightly outweighed the otherwise positive cashflow generation. As a result, the ratio of net debt to shareholders’ equity stands at 25.7% (2005: 23.9%).

Ever since 2000, the Knorr-Bremse Group has been rated by the external rating agencies Standard & Poor’s and Moody’s. Both rating agencies raised their rating in the year under review (Standard & Poor’s from BBB to BBB+, and Moody’s from Baa2 to Baa1). Knorr-Bremse thus retains its investment grade status.


overallassessmentof theeconomicpositionoftheGroupWithin the general economic environment described above, the Knorr-Bremse Group has further strengthened its overall position with regard to assets, financial status, and profi-tability. The Group’s profitability was again enhanced by rigorous cost management, rising output volumes, and above all by internal process optimization. With an equity ratio of 30.0% and a gearing of 25.7%, the structure of the Group’s assets is very stable, so that it can readily meet its financial obligations.

Knorr-BremseAGAs the parent company, Knorr-Bremse AG performs the role of a holding company as well as a strategic management function on the operational side.

The earnings situation of Knorr-Bremse AG is largely determined by the dividends paid by its subsidiaries and by the provision and charging of central Group services. A profit/loss transfer agreement was concluded in 2005 between Knorr-Bremse AG and SfS GmbH. Owing to a scheduled decrease in income from investments in associated and related companies, income before taxation fell from EUR 121.2 million in 2005 to EUR 84.8 million in the year under review. However, on account of the retained earnings brought forward from the previous year, the unappropriated retained earnings of Knorr-Bremse AG rose to EUR 124.3 million (2005: EUR 119.7 million).

Along with interests in affiliated companies, the balance sheet of Knorr-Bremse AG largely reflects receivables from and payables to Group

companies, which are centrally administered within the framework of the cash-pooling process managed by Knorr-Bremse AG. It also shows the main component of the Group’s external borrowings in the shape of the EUR 175 million bond issued by the Group.

As a result of the acquisition of the holdings of BLB described above, the proportion of the balance sheet total accounted for by intangibles, fixed assets and investments rose to 48% (2005: 37%). Overall, the balance sheet total increased 4.4% to EUR 623.6 million. The equity ratio remained virtually unchanged at 32%.

The Corporate Excellence project initiated back in 2003 and continued successfully ever since, has analyzed, documented, and optimized all business processes within the parent company. Knorr-Bremse AG’s participation in the European Excellence Award 2006 provided external con-firmation of the efficient integration of these business processes into the process management systems of the Rail Vehicle Systems and Commer-cial Vehicle Systems divisions.

Structureofassets,liabilities,andfinances

Assets Liabilities

Balancesheettotal 1,606.5 1,646.4 1,646.4 1,606.5 BalancesheettotalinEURmillions inEURmillions

Fixedassets/intangibles

0

20

40

60

80

100

0

20

40

60

80

100

Investments

Currentassets/RAP

Liquidassets

Shareholders’equity

Pensionaccruals

Short-termdebt

Borrowings

43%

5%

51%

1%

43%

4%

52%

1%

30%

12%

46%

12%

29%

12%

46%

13%

2005 2006 2006 2005


ReGionALDeveLoPmentSBYDiviSion

The Commercial Vehicle Systems division contributed EUR 1,967.8 million (2005: EUR 1,773.5 million) to consolidated Group sales, the Rail Vehicle Systems division EUR 1,173.6 million (2005: EUR 990.6 million).

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CommercialvehicleSystemsProduction of commercial vehicles and buses with air brakes in Western Europe outpaced the previous year’s high level in 2006 to reach approximately 493,000 units, an increase of more than 6%. At the same time, demand in Eastern Europe also rose, particularly in the trailer and aftermarket segments. On account of its strong market position, the Commercial Vehicle Systems division was able to benefit from this robust economic backdrop. Incoming orders were more than 20% up on the previous year.

In January 2006, the Aldersbach plant in Bavaria turned out the ten-millionth disc brake, providing impressive proof of this product’s success in the marketplace. In all, 2.3 million disc brakes were manufactured in the year under review, making this business unit the largest contributor to sales in the European region.

In addition to increased sales of original equip-ment to vehicle manufacturers, sales in the trailer market and aftermarket also showed an upturn owing to more intensive marketing efforts in these segments. The aftermarket also benefited from the growing proportion of vehicles that are fitted with Knorr-Bremse products as original equipment.

A joint venture agreement in the field of driver assistance systems was concluded with Robert Bosch GmbH, Stuttgart (Bosch). The aim of

collaboration here is initially to enhance and adapt components and software for Adaptive Cruise Control systems (ACC) from Bosch, so that these can be used in commercial vehicles and marketed worldwide.

At Hasse & Wrede GmbH, Berlin, sales of torsional vibration dampers remained stable in the year under review.

RailvehicleSystemsAfter the recession of the previous year and the associated drop in incoming orders, the situation in the European railway industry showed a modest improvement in the year under review.

In France, Italy and Spain in particular, substantial orders were obtained for projects in the mass transit and mainline sectors. In Spain, for example, Knorr-Bremse equipped the Ve-laro high-speed trains with advanced braking systems. While in the mass transit sector, metro units in Rome, Barcelona and Madrid were fitted with braking and on-board systems from Knorr-Bremse.

Along with braking and on-board systems as original equipment, Knorr-Bremse also provides aftermarket services under the heading of “rail-services.” Here, too, there was further growth, thanks not least to a good record of schedule effectiveness and short turnaround times, and a clear operational focus on customer require-ments. The automatic door systems business, branded as IFE Automatic Door Systems, was also further expanded.

Along with organic growth, sales were given a significant boost by the initial consolidation of the two subsidiaries in the on-board sector acquired in 2005: Microelettrica (in the power

Europe,MiddleEast,Africa63%

Asia,Australia7%

TheAmericas30%

Consolidatedsalesbyregion


generation and distribution segment) and Merak (in the air conditioning segment).

tHeAmeRiCAS

northAmericaCommercialvehicleSystemsIn North America, production of commercial vehicles including buses attained a new record level of 512,000 units. In the process, many manufacturers reached the limits of their capacity. The main reason for this development was an emissions regulation that will apply from 2007 onwards, the requirements of which will make commercial vehicles more expensive. To avoid these additional costs in the short term, many fleet operators brought forward their planned purchases into 2006. Conse-quently, most market players are expecting to see a slump in the original equipment market of around 40% in 2007, and Knorr-Bremse has already adapted its planning accordingly.

The Group’s Bendix subsidiary successfully built on its strong market position and benefited from the robust economy in the year under review. In the electronics sector in particular, sales moved ahead strongly, above all as a result of the market success of the new anti-lock brakes product family (ABS6) with integrated stability program.

The Bendix-Spicer joint venture in the wheel-end segment, which is managed by Bendix, met expectations and attained its objectives in the year under review. In addition, the joint venture acquired the US company Dipro. Dipro’s brake cylinder business will complement the Bendix-Spicer portfolio and further strengthen the joint venture’s position, particularly in the North American aftermarket.

RailvehicleSystemsThe North American passenger transportation market remained stable in 2006, as did the Knorr-Bremse Group’s business in this sector. The door systems business of the IFE division, under the regional management responsibility of Knorr Brake Corporation, developed well. Knorr Brake Corporation also took over the North American activities of Merak, with the aim of driving forward the rail vehicle air conditioning systems business as a sepa-rate division under its current name. In 2006, supplies of complete braking and air condition-ing systems for 1,266 cars for the Long Island Railroad M-7 project were completed.

The freight car market progressed well in the year under review. The number of freight cars sold in North America rose 9% to approximately 75,000 units, outpacing the high market volume of the previous year. In addition, over 1,000 locomotives were sold in the domestic market alone.

Along with the buoyant economy in the original equipment and aftermarket sectors, the successful launch of new products, such as the driver assistance system LEADER, also contributed to rising sales. Growth was also supported by direct exports to China and South Africa, as well as by domestic market orders from vehicle manufacturers, whose end-users are based in China.

SouthAmericaCommercialvehicleSystemsIn 2006, Brazil remained the largest and thus most important commercial vehicle market in this region. Commercial vehicle out-put, including buses, fell by around 6% in the year under review to 137,000 units. The number

of buses built showed a slight increase, while truck production fell-off sharply.

At Knorr-Bremse, all locally required OE products and all components destined for the local aftermarket are manufactured in Brazil. The introduction of innovative products such as the new handbrake valve product family enabled the company to increase its market share.

RailvehicleSystemsIn South America, following a surge in growth in 2005, the number of freight cars manufactured fell by 3,400 units to 4,300 in the year under review. For Knorr-Bremse, this meant a sharp drop in sales in local currency terms. The mass transit market remained stable at the previous year’s level.

In the year under review, two new CCB26 brake systems for locomotives were supplied to customers for the first time, with technology designed for retrofitting to locomotives already in service. In future, additional sales potential will be realized through newly concluded service and maintenance agreements.

art production systems enable the manufacture of high quality compressors tailored to specific customer requirements.

In the torsional vibration damper sector, the Hasse & Wrede Dalian joint venture, which also operates a plant in Dalian, was able, among other things, to acquire an order for original equipment from Dalian Diesel, thus achieving a significant increase in production output and sales compared to 2005. Also in the year under review, the new head office for commercial vehicle activities in China was opened in Shanghai.

RailvehicleSystemsThe rail vehicle market in the Asia/Australia region continued its very positive development in the year under review. The main driver was once again the high-growth Chinese railway market. In addition to the dynamic development of the mass transit sector, the market for locomotives and high-speed trains also moved into higher gear in 2006 and looks set to maintain this pace over the next few years.

The expansion of the Rail Vehicle Systems division’s activities in China called for special efforts in the year under review. The increase in demand was so strong that the production plant in Suzhou, which had only become operational in 2005, quickly reached the limits of its capacity. As a result, planning and construction work began on a new plant, also in Suzhou.

In addition, four joint ventures were founded in China in the rail vehicle sector. JV Westinghouse Guangzhou is to focus on the extensive Chinese market for platform screen doors and expand the


ASiA/AuStRALiA

CommercialvehicleSystemsIn the Asia/Australia region, 2006 witnessed an overall rise in the output volumes in the major commercial vehicle markets. As a result of intensified business activities, in particular in India, the Commercial Vehicle Systems division of Knorr-Bremse was able to post an increase in sales of more than 6% in euro terms.

In Japan, production of trucks and buses with air brakes fell 4% in the year under review to 185,000 units, a downturn that also impacted on business development for the local subsidiaries. To ensure that customers in this key market continue to benefit from efficient service, a new production facility complete with advanced logistics was opened in Sakado.

In India, commercial vehicle production moved ahead by around 30% to 277,000 units. The Pune plant, which was opened in 2005 and belongs to the joint venture Knorr-Bremse Systems for Commercial Vehicles India Pvt. Ltd., Pune, has shown a positive development and has steadily increased local production output. The main customer is the Indian commercial vehicle manufacturer Tata Motors Ltd. A stake in this joint venture is held by Tata AutoComp. Systems Ltd. (TACO), a member of the Tata Group.

In China, production of commercial vehicles and buses reached approximately 600,000 units and was thus well above the prior-year level. In addition to existing sales activities, Knorr- Bremse also opened its own production plant in Dalian in the year under review. State-of-the-

business to the entire Asian market. Starting in 2007, JV Nankou is to manufacture compressors and air dryers for the Chinese mainline market, providing a local manufacturing base that will underpin the existing strong market position. From 2007 onwards, a new joint venture with CARS will also target the mainline market, manufacturing brake discs for local customers. The fourth joint venture founded in 2006, JV IFE-VICTALL, is to undertake local production and marketing of door systems for high-speed trains.

In the mass transit sector, metro lines were equipped in Guangzhou, Shanghai, Beijing, Tianjin and Nanjing in 2006. There was also strong growth in incoming orders for locomotives and high-speed trains for the mainline sector.

Apart from business in China, projects with Japanese vehicle manufacturers and in other Asian countries also contributed to growth, including, for example, the equipment of metro cars for the capital of the Philippines, Manila.


In the year under review, the Knorr-Bremse Group invested EUR 107.0 million in fixed and intangible assets, which was less than in the previous year (2005: EUR 114.3 million). At EUR 68.3 million, 63.8% of the company‘s capital expenditure was invested in Europe. EUR 30.0 million (28.0%) was invested in the Americas and EUR 8.7 million (8.2%) in Asia/Australia.

Allocation of capital expenditure was such that the Commercial Vehicle Systems division benefited to the amount of EUR 69.5 million (2005: EUR 62.4 million) and the Rail Vehicle Systems division to the amount of EUR 36.8 million (2005: EUR 50.4 million). The break-down of depreciation shows that EUR 55.8 million (2005: EUR 52.8 million) was accounted

CAPitALexPenDituRe/DePReCiAtion

20062005200420032002

107

InvestitionenAbschreibungen

104

114

94

78797070

83

120

100

80

60

40

20

0

97

ConsolidatedcapitalexpenditureanddepreciationinEURmillions

20062005200420032002

107

InvestitionenAbschreibungen

104

114

94

78797070

83

120

100

80

60

40

20

0

97

for by Commercial Vehicle Systems and EUR 39.6 million (2005: EUR 44.3 million) by Rail Vehicle Systems.

Investment activity focused primarily on the expansion of production capacities and replacement investments, as well as on IT projects and the structural expansion of the Rail Vehicle Systems division in China.

Depreciation, including regular amortization of goodwill from acquisitions, increased from EUR 96.8 million in 2005 to EUR 103.7 million in the year under review. With EUR 63.0 million, Europe accounted for the majority of depreciation, followed by the Americas with EUR 32.0 million, and Asia/Australia with EUR 8.7 million.

CapitalExpenditureDepreciation


The development of sophisticated and ever more complex modules and systems, as well as the increasingly early integration of suppliers into the development process call for a large number of qualified employees. In the year under review, expenditure on research and development and project planning increased to EUR 140.8 million (2005: EUR 132.6 million) or 4.5% of consolida-ted sales.

As the technology leader in the fields of braking systems for rail and commercial vehicles, as well as on-board systems for rail vehicles and torsional vibration dampers, Knorr-Bremse develops innovative products distinguished by their safety, high quality, and reliability. For some years now, the predominant trend among European rail and commercial vehicle manu-facturers has been towards innovative modular and system solutions, with a preference for mechatronic systems. The direct combination of electronic, pneumatic, and mechanical systems within an integrated and largely autonomous unit will form a crucial part of all future devel-opment efforts. Today, Knorr-Bremse has already

made all the necessary preparations in order to continue supplying the market with such modules in the future.

This is the challenge to which, per December 2006, 1,567 (2005: 1,468) highly trained staff in the research, development and project plan-ning functions across the Knorr-Bremse Group dedicate their working hours. A significant proportion of them now work on electronic systems.

In order to optimize cost structures without compromising performance quality in the development sector, Knorr-Bremse is active-ly promoting the integration of development activities across its various sites. By promoting the exchange of staff between different produc-tion sites and using state-of-the-art communi-cations, the company has boosted the efficiency of its development activities and enabled work on carefully coordinated projects to proceed simultaneously at different locations. This leads to innovative, customer-oriented solutions being developed for local markets and then constantly enhanced to the benefit of the customer.

ReSeARCHAnDDeveLoPment

20062005200420032002

141140

120

100

80

60

40

20

0

133124120119

ConsolidatedresearchanddevelopmentexpenditureinEURmillions

M a n a g e m e n t R e p o r t | 21

HumAnReSouRCeS

Europe,MiddleEast,Africa64%

Asia,Australia9%

TheAmericas27%

Knorr-BremseGroupworkforcebyregion(Dec.31)Knorr-BremseGroupworkforce(Dec.31)

At year-end 2006, the Knorr-Bremse Group em-ployed a total of 13,035 persons or 7.6% more than at the end of 2005. With the exception of South America, all of the regions contributed to this increase as a result of the respective growth in volumes of business.

In the Europe/Africa region, there were 8,282 em-ployees on the payroll at year-end (2005: 7,981). At 63.6%, the proportion of employees in Europe continued to fall (2005: 65.9%). The workforce in Germany totaled 3,100 employees (2005: 3,083), which equates to 23.8% of the total Group pay-roll. 3,511 people were employed at the Group‘s plants in North and South America (2005: 3,370), or 26.9% of the total payroll, down from 27.8% in 2005. In Asia/Australia the size of the workforce increased from 768 to 1,242. This represents 9.5% of the total number of employees, up from 6.3% in the previous year.

In the Commercial Vehicle Systems division, the number of employees at year-end 2006 had risen to 6,588 (2005: 6,289). In the Rail Vehicle Systems division, the size of the workforce increased to 6,329 employees (2005: 5,715).

Knorr-Bremse competes worldwide with a large number of other major technology companies and remains on course for further growth. Special efforts are therefore required to recruit highly qualified managers and other employees and to retain them within the Group in the long-term. To this end, a number of measures have proved useful: maintaining contacts with universities, providing generous support for vocational training and continuing professional development programs, offering performance-related income incentives, and providing for global staff exchanges. Owing to the current expansion of the activities of both divisions in Asia and the more intensive collaboration among all Group companies worldwide, the respective human resource departments must in particular support temporary foreign assignments for qualified expert staff from the Group’s established locations.

2002 2003 2004 2005 2006

13,03512,119

11,14310,76310,959

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


SoCiALReSPonSiBiLit Y As a company with a keen sense of social respon-sibility, Knorr-Bremse has decided to continue its financial support of the non-profit association Knorr-Bremse Global Care e. V. set up in response to the tsunami catastrophe of December 26, 2004. The association supports people in need around the world by “helping them to help themselves.”

At the end of December 2006, more than 80% of the association’s budget for tsunami projects in the amount of EUR 2 million had been paid out. In all, 15 projects have been successfully im-plemented to date in Thailand, Sri Lanka and Indonesia. The association continues to benefit from funding of EUR 1 million per annum from the Knorr-Bremse Group, and in 2007 will be focusing on Africa. Knorr-Bremse Global Care has issued its own separate report.

Almost all national Knorr-Bremse companies also demonstrate social responsibility at local level by making donations, and by employees making an active commitment on behalf of Knorr-Bremse to help people in need.


APPRoPRiAtionoFRetAineDeARninGS

Knorr-Bremse AG posted unappropriated retained earnings of EUR 124.3 million in 2006 (2005: EUR 119.7 million). The Annual Share-holders Meeting will be asked to approve the proposal that an amount of EUR 91.0 million be used to pay a dividend of EUR 35.00 per dividend-bearing share with a par value of EUR 26.00, with the balance to be carried forward to new account.

KB Holding GmbH, Munich, directly holds more than half the share capital of Knorr-Bremse AG. Pursuant to § 312 German Corporation Law (AktG), a report on relations with affiliated companies has been drawn up which includes the following statement: “In the legal transactions listed in the Report on Relations with Affiliated Companies, in accordance with the circumstances known to us at the time at which the said transactions took place, our company received appropriate counter- performance in each case.” The report was audited by the Auditors and received their unqualified opinion.

ReLAtionSWitHAFFiLiAteDComPAnieS


On January 1, 2007, Dr. Raimund Klinkner was appointed to the Executive Board of Knorr-Bremse AG and has assumed worldwide responsibility for the Commercial Vehicle Systems division.

At the end of January 2007, at the Strategic IT Management Meeting hosted by the financial newspaper Handelsblatt, the Knorr-Bremse Group was presented with the IT Strategy Award 2007. This accolade honors Knorr-Bremse’s globally oriented IT management system as a transparent and efficient system that is closely aligned with corporate strategy.

No other events of special importance and with a material influence upon the assets, financial or earnings position of the Group at the balance- sheet date took place after the conclusion of fiscal 2006.

FoLLoW-uPRePoRt


RePoRtonRiSKSAnDoPPoRtunitieS

The Knorr-Bremse Group operates an established, multi-stage, worldwide planning, reporting, and controlling system. Standard reporting periods and report contents have been defined across the Group, and these formal reports are supplemented in greater depth by presentations on routine and special subjects during the course of monthly review meetings.

In addition, the Knorr-Bremse Group has put in place a standardized risk management system at top management level. This is based on a semi-annual risk report that is discussed at regular Executive Board meetings and used as a basis for introducing appropriate measures. This ensures that the operational risk management system is duly complemented at strategic level. In its entirety, this control system has proved an effective, close-knit network for the early identification and remediation of potentially undesirable developments.

Risk assessment and risk management also form an important part of the process of describing, documenting, and continuously improving business processes across the Knorr-Bremse Group (Corporate Excellence model).

BusinessRisksThe Knorr-Bremse Group is active in business segments that for years have been characterized by a dynamic process of consolidation on the customer side. This has resulted in powerful leverage on the demand-side, with correspon-

ding pressure on prices. Knorr-Bremse responds to these factors with innovative products and systems, positioning itself as a partner for long-term relationships that target cost-effective solutions for customers. The earlier Knorr-Bremse is involved in the customer‘s project as a whole, the better the chance of attaining that target.

Regional commercial vehicle and rail vehicle markets are subject to regular cycles. Market volatility and fluctuating growth can affect individual suppliers, market segments or entire regions. With its current market position and corporate structures, Knorr-Bremse is exception-ally well placed to offset fluctuations in market segments within the Group.

In the course of its dynamic growth in recent years, Knorr-Bremse has integrated a number of companies or shareholdings into the Group. In the past, the financial and cultural risks typically associated with such integration pro-cesses were minimized by means of systematic analysis and assessment of the target companies. When it comes to overcoming cultural barriers, Knorr-Bremse can look back on 20 years of experience with integration processes related to the acquisition of some 35 substantial companies. This experience will pay dividends in any future mergers and acquisitions.

Knorr-Bremse and its systems are regularly at the leading edge of technological development. This also engenders risks which, because of the

In order to limit the residual exchange rate risk related to transactions across different currency zones, Knorr-Bremse is increasingly identifying opportunities to exploit compensatory supply volumes within the Group. In selected cases, currency risks are also hedged by means of derivatives. Such measures, however, serve exclusively to hedge underlying transactions within the scope of normal business operations.

The basis for managing foreign exchange risks is provided by the Knorr-Bremse Guidelines on Managing Currency Exposure, which set out the procedures to be followed and the necessary scope of hedging transactions in binding form for all Group companies. The monitoring of compli-ance with these Guidelines is part of the relevant Corporate Excellence process.

Business processes within the Knorr-Bremse Group are supported by powerful and state-of-the-art IT systems. In order to avoid malfunc-tions, Knorr-Bremse attaches great importance to harmonization of the hardware and software architecture, the integrity and security of existing data, appropriate back-up solutions, and careful management of access control. Compliance with the IT Security Guidelines is comprehensively monitored with the aid of internal and external audits at all major sites around the world.

The Corporate Data Center (CDC) in Munich, Germany, which came on line at the end of 2005, meets the very highest requirements (industry standard) in terms of efficiency, reliability, and security. Based on this platform, the required level of global transparency and integration of all corporate sites – and of recent additions in particular – are being further enhanced.


In response to increasingly stringent environ-mental requirements, Knorr-Bremse has aligned its activities with the international standard ISO 14001. A number of the company’s sites have already been certified or re-certified accordingly.

In Asia, as well as in the other regions, imitation and counterfeit products remain a serious threat to business in the commercial vehicle and rail vehicle sectors. Countering this threat is Knorr-Bremse’s technical competence which on account of the safety-critical applications of its products is both recognized and appreciated by most customers around the world.

Going-ConcernRiskCareful analysis of the Group-wide risk profile has revealed that no identifiable risks exist that would threaten the survival of the company or have a substantial impact on its assets, financial standing or profitability. Nor are any such risks expected to arise for the future.

safety-critical nature of the applications concerned, require particularly careful monitoring. To this end, Knorr-Bremse routine-ly employs comprehensive quality planning, quality assurance, and testing procedures. To ensure continuous improvement of its quality procedures, Knorr-Bremse applies the standards set by the EFQM (European Foundation for Quality Management). The individual plants regularly undergo internal and external audits in this context. Above and beyond this, despite having already attained a very high level of quality, both divisions work intensively to continuously improve the quality and reliability of their products with the aid of their respective quality programs (“TRUQ – Truck & Quality” and “Quality First”).

operationalRisks Risks due to production downtimes are covered by commercially appropriate insurance contracts. Flexible working time models enable unexpected shifts in capacity requirements to be accommo-dated efficiently.

Knorr-Bremse maintains a close working relationship with many suppliers and service providers. In order to avoid delivery delays or quality defects, which in turn could lead to lost production time and have a negative impact on earnings, Knorr-Bremse attaches great importance to careful supplier selection procedures. Suppliers are also continuously subjected to technical and commercial audits.

Exchange rate risk is not of crucial importance for the Knorr-Bremse Group because geographic diversification over recent years has enabled the Group to establish a high proportion of local manufacturing and local suppliers within the respective currency zones.

L a g e b e r i c h t | 2�

Assuming that the development of the global economy remains stable, the Knorr-Bremse Group is expecting sales for fiscal 2007 as a whole to be on the same level as in 2006. Within this picture, the generally positive forecasts for all other regions will be offset by the projected extraordinary downturn in the North American commercial vehicle market.

In Europe, both divisions are expecting to experience a positive market environment, with the commercial vehicle market likely to sustain the high level of activity witnessed in 2006. In the course of last year, the European rail vehicle market recovered from its 2005 low and is expected to continue its positive development in 2007. As well as supporting the expansion of rail vehicle business in China, the division will also be focusing on the Russian market, which will take up additional capacity.

In the North American commercial vehicle market, the company is expecting a negative development. Owing to a new emissions direc-tive that has made engines built after January 1, 2007 more expensive, sales are expected to fall by around 40% year-on-year. For the Group’s Bendix subsidiary, this equates to a drop in sales of around USD 200 million in the original equipment sector. Also in North America, the Rail Vehicle Systems division can probably expect sales to remain at the high level of the previous year. In South America, Knorr-Bremse is projecting a stable volume of business for both divisions.

The biggest challenge in fiscal 2007 will be faced by the Rail Vehicle Systems division in China. Following substantial increases in demand in the mass transit sector in recent years, 2006 also saw the onset of significant investments in the main-

outLooK line sector. Meeting this buoyant demand while maintaining the necessary quality of products and services will call for an immense effort on the part of the entire organization. The establish-ment of the joint ventures created in fiscal 2006 and the inauguration of the new, bigger plant in Suzhou are key milestones here. Along with China, both divisions will be further expanding their structures in India, too, with development activities being added to production activities.

In July 2007, the EUR 175 million bond issued by Knorr-Bremse AG in 2001 is scheduled for redemption. At the current point in time, the company is not planning any further issues, but its ratings by Standard & Poor’s and Moody’s are to be maintained nevertheless, in order to further underpin Knorr-Bremse’s fundamental ability to access the capital market.

Following the projected sideways movement of sales in 2007, all of the Group’s regions are subsequently expected to return to growth. The aim is to boost sales through better penetration of mature markets, the introduction of inno-vative products, the global marketing of the product portfolio, and selective expansion of the company’s fields of activity. Increased benefits for the customer are at the core of all growth projects, with top priority being assigned to the quality and reliability of each and every product.


Further Information on Business Trends

2� | B u s i n e s s T r e n d s

B u s i n e s s T r e n d s | 2�

Rail Vehicle Systems

�0 | R a i l V e h i c l e S y s t e m s

GlobalsalesfortheRailVehicleSystemsGroupinEURmillions

During fiscal 2006, sales in the Rail Vehicle Systems division rose by some 18% to EUR 1,174 million – largely as a result of first-time consolidation of two acquisitions dating from 2005: Merak Sistemas Integrados de Climatización S.A. in Spain and Microelettrica Scientifica S.p.A. in Italy. Other contributing factors were the beginnings of market recovery in Europe, a strengthening of the North American market and continued growth in Asia.

In Europe, the division’s strong performance was mainly due to large-scale projects for the equipping of multiple units in Italy, Ireland, France, Germany and Switzerland. As in 2005, braking and toilet systems were supplied for large numbers of double-decker trains in Italy and Germany; in Spain, state-of-the-art braking technology was supplied for the Velaro high-speed train; and Swiss Railways equipped more of their TRAXX locomotives with the MBS modular braking system for cross-border passenger and freight operations.

In the mass-transit segment, braking and on-board systems were supplied to metro networks in Madrid, Barcelona and Rome. In France, further Citadis streetcars were equipped with hydraulic braking systems and door systems, and in Switzerland, Zurich commuter trains were fitted with new braking and door systems.

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2004 2005 2006

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R a i l V e h i c l e S y s t e m s | �1


North American sales increased in 2006 both in the AAR and mass transit segments. The highest individual sales revenues were generated by projects for Long Island Rail Road in New York and Los Angeles County Metropolitan Transportation Authority. 2006 also saw further growth in the freight car segment. In South America, a major project involved supplying equipment for mainline locomotives in Venezuela.

In Asia, 2006 brought a further increase in the existing high level of incoming orders. Knorr-Bremse is particularly well positioned in the Chinese market, especially since the company’s new facility was built in Suzhou in 2005.

Apart from braking systems, other products that are particularly successful in China include door systems from IFE, platform screen doors from Westinghouse and air-conditioning systems from Merak. In the metro segment, Knorr-Bremse has had a strong presence in the country for many years, and in 2006 supplied equipment for metro lines in Guangzhou, Shanghai, Beijing, Tianjin and Nanjing. There was also strong growth in orders for mainline trains, including many high-speed projects. One of the biggest orders in the region involved equipping DJ3 and DJ4 mainline locomotives with braking systems.

Supplies of equipment for multiple units in China also helped boost sales in the Asia region. In the Philippines, equipment was supplied for cars that will operate on an extension to the metro system in the capital, Manila. And in Iran, braking systems were sup-plied for Line 1 of Teheran Metro.

Knorr-Bremse also succeeded in further boosting sales in the aftermarket and service segment, thanks mainly to organizational and operational measures aimed at strengthening and focus-ing the performance of railservices. Increasing numbers of mainline and mass transit vehicle operators worldwide are now opting for Knorr-Bremse’s extensive portfolio of aftermarket services.

During 2006, Knorr-Bremse Rail Vehicle Systems set up several joint ventures with Chinese partners, partly in response to rapid market growth and partly also in order to meet the Chinese Railway Ministry’s requirement for a high level of local content.

In August 2006, Knorr-Bremse/Nankou Air Supply Unit (Beijing) Co., Ltd. was set up. Knorr-Bremse Asia Pacific (Holding) Ltd. has a 55% share in this new joint venture with CNR Beijing Nankou Air Supply Locomotive & Rolling Stock Machinery Works. The facility, which is located in Nankou, 50 kilometers north-west of Beijing, manufac-tures Knorr-Bremse screw compressors and air dryers as well as CNR piston compressors for the Chinese mainline market.

Knorr-Bremse CARS LD Vehicle Brake Disc Manu-facturing (Beijing) Co., Ltd. was set up to supply the rapidly expanding Chinese mainline segment with modern brake discs from local production. The equal partners in this project are Knorr-Bremse Asia Pacific and the Locomotive and

Cars Research Institute (LCRI), a division of the China Academy of Railway Sciences (CARS). The new joint venture, which is based in Daxing, 50 kilometers south of Beijing, was approved at the end of August 2006. The existing LCRI assembly lines were reorganized and further lines were added, which have been producing the latest generation of Knorr-Bremse brake discs since early January 2007. Orders are currently buoyant, and the workforce is set to expand during the course of the year.

The new joint venture fits into the comprehensive strategic partnership with CARS that was agreed back in 2005. As well as general cooperation, the agreement covers technology transfer, particularly in the fields of brake control systems and bogie equipment for locomotives and high-speed trains.

Door systems and equipment for Chinese high-speed trains are produced by IFE-VICTALL Railway Vehicle Door Systems (Qingdao) Co., Ltd. in Qing-dao, a port in the east of China. The agreement

StRAteGiCPRoJeCtS

R a i l V e h i c l e S y s t e m s | ��

ThefacilitiesinDaxing(left)andNankou(right)playanimportantroleinsupplyingtheChinesemarket.

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iRiS–thenewauditingstandardIn May 2006, the Union of European Railway Industries (UNIFE) approved IRIS (International Railway Industry Standard), the new auditing and certification standard for the rail industry, which harmonizes the certification systems operated by many individual manufacturers and suppliers. In the future IRIS is to be used as the basis for assessing management systems, replacing vehicle manufacturers’ current company-specific supplier audits.

The new regulations were developed under the aegis of UNIFE by a number of players including Alstom Transport, AnsaldoBreda, Bombardier Transportation, Siemens Transportation and Knorr-Bremse Rail Vehicle Systems. In his role as vice-chairman of the relevant committee, Knorr-Bremse’s quality management expert for customer certification was able to contribute the company’s special expertise to the process. IRIS certification enables Knorr-Bremse to demon-strate to vehicle manufacturers and operators that it meets the highest global standards for all quality-critical processes. In September 2006, the Munich site passed the first certification audit under the new IRIS standard with flying colors. Implementation of the standard has already begun at all other plants across the division.

Knorr-BremsecomplieswithnewtSifreightcarstandardThe “Technical Specification for Interoperability” (TSI) aims to harmonize country-specific regulations for rail transportation in Europe. The EU directive on this subject came into force on January 31, 2007, but Knorr-Bremse Rail Vehicle Systems had already fulfilled the relevant requirements in 2006.

QuALit YAnDenviRonmentsetting up the 50:50 joint venture was signed in mid February 2006 between Knorr-Bremse Asia Pacific and VICTALL, a producer of internal cladding and doors for rail vehicles. Production started at the end of 2006 and levels of orders have already exceeded original expectations.

Knorr-Bremse Asia Pacific holds a 65% share in Westinghouse Platform Screen Doors (Guang-zhou) Ltd., with the remainder being held by the Guangzhou Guangri Group Company (GGGC), a leading industrial company in the Guangzhou region of southern China, with which Knorr-Bremse has been collaborating since 2002. The joint venture produces and installs platform screen doors, mainly for the Chinese market but with scope also for supporting sales of such systems throughout the entire Asian-Pacific region. Knorr-Bremse Rail Systems (UK) provides the necessary technology and also supports the licensing process. The new facility was officially opened on March 6, 2006. The company is currently based at the GGGC’s production site, but there are plans to move to a larger site in Guangzhou Science Park in 2008.

Knorr-Bremse subsidiary Merak has been producing modern air-conditioning units for Chinese mass transit trains in Shanghai since 2001, and in February 2006 it also started to manufacture air-conditioning systems for mainline trains in collaboration with its Chinese partner, CPC. The new facility created for this purpose, which is located 150 km north west of Shanghai in Changzhou, is also involved in the ambitious CA250 high-speed project.


Since the fi rst quarter of 2006, the independent certifi cation agency EBCert has been examining all Knorr-Bremse interoperability components for freight cars to ensure TSI-conformity on the basis of product documentation, product quality during manufacture, test data and monitoring of components in operation. This means that all interoperability components for freight car braking systems produced by Knorr-Bremse Rail Vehicle Systems were ready for TSI certifi cation by the end of 2006. The successful result was documented by EBCert in the form of an EU Certi-fi cate of Conformity.

CertificationofhealthandsafetymanagementsystemDuring the second half of the business year, the health and safety system at Knorr-Bremse Munich achieved certifi cation under the OHRIS Occupational Health and Risk Management System. The certifi cate was issued by the Upper Bavaria trade supervisory authorities in December 2006 and is valid for three years.

The preventive safety measures involved in OHRIS reduce the risk of accidents at the work-

place, and thus focus mainly on employee safety, but they also help reduce the cost of working time lost through accidents. The result of close collaboration between the Bavarian government and Bavarian industry, OHRIS can be seamlesslyintegrated into ISO quality and environment management systems and also complies 100% with all national and international health and safety management standards, in particular the global OHSAS 18001 (Occupational Health and Safety Management System) standard. The overall aim is to improve workplace health and safety and ensure safe operation of factory plant. The trade supervisory authorities provide companies with the required certifi cation documentation, off er advice and information and carry out the actual certifi cation process. Considerable emphasis is put on companies’ own responsibility, with direct monitoring being replaced by self-monitoring, although the process is still subject to overall supervision by the authorities.

During the process of certifying the Munich site, the Upper Bavaria authorities fi rst made a comparison of documentation in order to

IRISestablishesauniformhighstandardforauditingandcertificationacrosstherailindustry.

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ascertain that the required processes and tasks were reflected in the internal REX manage-ment system. Then external auditors visited the site and inspected every aspect of it, including individual workplaces.

Certification of the company’s Munich head-quarters was only the first step - further sites will follow, completing the cycle of externally-verified quality, environment, and health and safety management systems. By introducing OHRIS certification, Knorr-Bremse has gone well beyond the expectations of its customers, who currently do not require any certified health and safety management systems.

Berlin-BrandenburgQualityAwardDuring the course of 2006, Knorr-Bremse’s Berlin site succeeded in winning a Berlin- Brandenburg Quality Award in the category “Manufacturing companies with workforces of 251 and above” against competition from a number of production and service companies of various sizes based in Berlin or Brandenburg.

The award was presented on August 24, 2006 during the 2nd Berlin-Brandenburg Quality Day at the “Rotes Rathaus” in Berlin-Mitte. The aim of the award scheme is to enhance Berlin-Brandenburg as a business location by honoring outstanding performance in the field of comprehensive quality management.

The jury made the award to Knorr-Bremse Berlin in recognition of the site’s high level of process-orientation in both strategy and practical implementation. The company was singled out as a model of quality orientation in practice, and the jury was particularly impressed by its strong performance under all headings: policy and strategy, people management, partnerships and resources, customer-related results and corporate results.

With a 330-strong workforce producing control valves, brake discs and hydraulic components for rail vehicles, Knorr-Bremse Berlin is a strategically important element in the Group’s international development and production

network. In 1993 the site achieved DIN EN ISO 9001 certification, and since 2001 has implemen-ted the Group-wide Rail EXcellence management system. This means that Knorr-Bremse Berlin also bases its processes on the Business Excel-lence Model defined by the European Foundation for Quality Management (EFQM).

L.tor.:Dr.ThomasGloger,Dr.AlbrechtKöhlerandDr.MatthiasKrug,Knorr-Bremse,attheawardceremonyinBerlin.

Knorr-Bremsereceivedtheawardforoutstandingperformanceinthefieldofcomprehensivequalitymanagement.


GloballystandardizeddesignfornewfacilitiesKnorr-Bremse applies the same consistently high quality standards throughout its global operations. Even the layout of new production facilities is largely identical throughout the world. The core configuration of Knorr-Bremse plants is always the same, with the architecture designed for maximum process efficiency. To ensure that this is the case, the Knorr-Bremse Production System (KPS) lays down the basic principles for workplace design and the choice of colors and area markings. The result is architecture that is conducive to optimum workflow, with seamless links to logistics

operations and a rapid flow of information between production and administration. This is achieved by appropriate configuration of administration, production, warehousing and dispatch operations. At the centre of it all is a production hall with as few supporting pillars as possible,so as to leave maximum scope for flexible configuration of production plant and assembly elements in the future. Distances for employees and materials are kept to a minimum, for example by a U-shaped layout of the production flow. And the external impact of the main façade of any new production facility is enhanced by the use of clear-cut lines and large expanses of glass.

GLoBALPRoDuCtion

HeinzHermannThiele,ChairmanoftheExecutiveBoard(l.),speaksatthecornerstoneceremonyforthenewfacilityinSuzhou.


By contrast, the entire rear of the building is reserved for loading and unloading operations and is also the location of the warehouse, with the front part housing management, adminis-tration, engineering and sales offices. Between them is the production area, configured in several U-shaped segments, each of which starts and ends at the warehouse. Between the ware-house and the production area there is space for test benches and paint shops operated by the technical department.

A good example of this concept in action is the new Souzhou II facility in southern China, the cornerstone for which was laid on October 16, 2006. Expansion of the Suzhou site had become

urgently necessary because of Knorr-Bremse’s success in the Chinese market - sales in 2006 amounted to some EUR 20 million, and are fore-cast to treble during the course of 2007. By the middle of the year a total workforce of 380 will be employed in Suzhou.

In July of last year, construction of another new facility to Knorr-Bremse standards started in Spain. The new facility in Getafe, near Madrid, which is due for completion by October 2007, is a good example of Knorr-Bremse’s strategy of merging several units and putting them in a location with good transport links. The Group’s subsidiaries Frenos (braking systems) and Merak (air-conditioning systems) will in future be

ThehighstandardsestablishedbytheKnorr-BremseKPSProductionSystemareappliedworld-wide–likehereinSuzhou.

TheverydesignofthenewfacilityinGetafe,Spain,underlinesKnorr-Bremse’semphasisonquality(simulation).

based in Getafe on a 9,000 m2 production site with an additional 4,000 m2 of office space. The site is ideally located between the Spanish capital of Madrid and Pinto, hitherto the administrative base for both companies.


innovAtionAnDteCHnoLoGY modularbrakingsystemintRAxxlocomotivesThe modular design of the Knorr-Bremse MBS braking system in TRAXX locomotives combines a high degree of flexibility with the cost advantages of standardization. It cuts main-tenance and repair times, increases vehicle availability and reduces life cycle costs.

All MBS modules are designed as line replace-able units (LRUs) with sub-functions of a particular function (e.g. brake cylinder pressure control) integrated into a single module.

A differentiation can be made between purely pneumatic, electro-pneumatic and electronic modules. The electronic modules, for example, combine software, electronics and mechanical/pneumatic functions in a single product.

In the case of the mechatronic modules for brake pipe and C-pressure control, the electronic “brain” is integrated into the module. This means that there is no need for complex cabling to link the control sensors and actuators to a central electronic unit. The modules are simply connected to the bus system and the central power supply, reducing internal cabling by some 50% compared with traditional solutions. A total of 12 different functions can be differentiated, and each has an appropriate module. The layout of individual modules on the brake equipment panel is thus much simpler and easier for the driver to operate.

A further advantage of the MBS system’s decen-tralized electronics is that, if a defect occurs, it can be identified with the help of diagnostics software containing the locally stored data. If

ThemodulardesignoftheMBSbrakingsystemreflectsthevariousfunctionsinvolved.


the module needs to be replaced, the data does not remain in the vehicle but is automatically supplied to the service workshop together with the module.

The modular design of MBS meets a wide range of operator and manufacturers’ needs and has a significant impact on overall system availability. The decentralized configuration means that faults in individual components of the electronic brake control system do not result in complete vehicle failure. Sufficiently functionality to clear the line is always guaran-teed. The module’s backup functions operate both pneumatically and electrically, so that full emergency braking control is retained even in the event of power supply failure.

As none of the modules weigh more than 25 kg, defective units can easily be replaced by a single technician if necessary.

european-levelresearchanddevelopmentKnorr-Bremse invests considerable resources in its own research activities in order to drive forward the technological development of braking and other vehicle systems. The company also participates in publicly-funded research projects in which vehicle manufacturers and operators, their suppliers and academic institutions work in close collaboration. During the period under review, the main focus of research activities was on MODTRAIN, a major European research project designed to drive improvements in locomotives and multiple units with maximum speeds of 190 km/h and above. This European initiative has been running since February 2004 and is due for completion by the end of January 2008. The aim is to enhance the competitiveness of rail transportation by achieving interoperability of high-speed trains.

TheEUPAXmock-upcreatedbyMODLINKwaspresentedatInnoTrans2006.

The idea of the MODTRAIN project is to divide the train into individual modules such as “Human-Machine Interfaces (HMIs)“, “Bogie”, “Power Supply” etc. Each module will then be closely scrutinized and improved where appropriate, with the creation of standardized interfaces between modules. In line with this modular approach, MODTRAIN is divided into a number of sub-projects, with Knorr-Bremse and its subsidiaries Frensistemi (Italy) and IFE (Austria) focusing mainly on MODLINK.

One important element in the MODLINK sub-project is a desire to improve the design of the train interior to meet the needs of passengers with restricted mobility. Under the leadership of IFE, HMIs are being defined for train doors that can be easily operated by such passengers, and Frensistemi is the lead company for develop-ment of disabled-friendly toilets and passenger information systems.

Large-scaledisplaysprovideimprovedpassengerinformation.


One highly visible result of MODLINK is the EUPAX mockup - a 1:1 model of part of the interior of a high-speed train that has been designed to present current project results to the general public. Thus, for example, EUPAX enabled visitors to the 2006 InnoTrans exhibition to inspect IFE door systems and Frensistemi passenger information systems and toilet systems that have been optimized for passengers with restricted mobility. At the same time, however, the EUPAX mock-up serves as a test platform, for example for establishing the optimum door width. EUPAX also played an important role in the process of developing an emergency module - in which both Frensistemi and IFE are involved - that cleverly combines emergency door opening functions, the emergency brake, a two-way communication system and video-monitoring.

There is considerable scope for rationalizing braking systems for European high-speed trains by reducing the number of different variants and standardizing test procedures and manu-facturing processes. With this in mind, the MOD-BRAKE project for the modularization of braking systems was launched in addition to MODTRAIN, with Knorr-Bremse as the lead company. Another objective of MODBRAKE is to find new ways of reducing maintenance requirements and improving system reliability.

Parallel to MODTRAIN, a major research project for mass transit systems entitled MODURBAN was also launched in January 2005. The main focus in this case is on measures to achieve European standardization and cost reductions, especially in the metro sector. Five Knorr-Bremse subsidiaries are involved in this project, under

Thedoorsystem,includingallitsoperatingelements,andthetoiletsystemhavebeendesignedtomeettheneedsofpassengerswithrestrictedmobility.

the overall supervision of Knorr-Bremse’s central innovation department in Munich. Knorr-Bremse has been charged with the areas of door systems (IFE), platform screen doors (Knorr-Bremse Rail Systems UK) and passenger information systems (Frensistemi). Freinrail is also involved in inves-tigating vehicle communication systems, and Merak’s air-conditioning expertise is being used to examine energy-efficiency throughout the entire system.

Over the next few years Knorr-Bremse aims to continue working with customers, researchers, legislators, standardization bodies and suppliers - for example under the EU’s 7th Research Programme - on projects designed to improve customer benefits and enhance the competitiveness of the railways.


innovativefreightcarbrake-CFCBThe new CFCB compact freight car brake developed by Knorr-Bremse Rail Vehicle Systems increases the economy of freight car operation. Its innovative design signifi cantly reduces the weight of a freight car, and it is also easier to install on the bogie.

In developing the CFCB, Knorr-Bremse exploited the scope for improving the braking systems of the current generation of freight cars, in which long brake rods often transmit the braking force via several open bearings and contain many parts that are subject to wear and tear and require expensive maintenance and repair.

In the compact CFCB, the braking force is trans-mitted directly from the cylinder to the brake blocks via a single rod. The piston module and

TheCFCBcompactfreightcarbrakeattractedconsiderableinterestatInnoTrans2006.

transmission mechanism are protected from external infl uences in sealed casings and the system automatically adjusts to wear and tear of the brake pad and wheel. If a pad needs to be replaced, the brake can be retracted via an easy-access mechanism. The brake remains highly effi cient throughout its lifetime, converting virtu-ally the entire cylinder pressure into braking force.

Reduced maintenance requirements even under intensive operation in harsh conditions, combined with a weight reduction of up to one ton, pave the way for signifi cantly lower freight operation costs. The brake is also much easier to install, as the complete, pre-assembled CFCB is simply attached to the bogie by four vibration-damped brackets. The innovative features of the new compact freight car brake make it the most modern and

effi cient brake technology available. It is currently being fi eld-tested in several European countries prior to market launch, which is scheduled for autumn 2007.

Theinnovativeengineeringandstate-of-the-artdesignoftheCFCBhelpreducecosts.

Mountings (4x)

Brake blocks (4x)


ModulardesignoftheMotionControllerKit.

motionControllerKit Europe-wide harmonization of locomotivedriver control systems continues, with the aim of developing a standardized concept for loco-motive and multiple unit operation that will facilitate cross-border operations. Currently, however, there are still considerable diff erences between the concepts developed by various operators.

Knorr-Bremse’s answer is the Motion Controller Kit, which enables standardization of all current components for the pneumatic operation of braking systems via the driver brake valve and extends the possible applications to include the drive and master controller. Thesystem is based on consistent use of modularelements, and to this extent the Motion

Controller Kit can be compared with success-ful modular electro-pneumatic brake control systems like CCBII, MBS and EP2002. The fl exi-bility of these systems was taken one step further in the modular EP Compact system, which enlarged the scope for adapting the system to specifi c customer requirements.

The experience gathered with these systems has now been fl owed into the Motion ControllerKit, which makes it possible to fl exibly combinestandardized mechanical, electrical and pneumatic components into diff erent kinds ofoperating units. The module off ers all the required functions for a time-dependent driver brake valve with pneumatic emergency brake, for example, or a position-dependent drive/brake control. Moreover, a wide variety of

diff erent electrical and electronic interfaces used by customers can also be catered for. The angle encoders with integrated electronic interfaces are simply combined with the mechanical functions. The Motion Controller Kit thus enables tried-and-tested design elements to be used, reducing the cost of development and production.

Production costs are also reduced by increased batch sizes, without restricting the range of possible project-specifi c variants of the opera-ting units. Standardization is achieved via control of variety.

Theinnovativeengineeringandstate-of-the-artdesignoftheCFCBhelpreducecosts. Installationindiesel-electriclocomotivesforLithuania.


ServiceCenternetworkextendedMore and more medium-sized cities are opting for streetcars as an eco-friendly, cost-efficient alternative to expensive metro systems. When operators and manufacturers of streetcars are choosing suppliers of braking systems, along with the technology itself, service quality is a crucial factor – and here Knorr-Bremse has innovative concepts to offer. During the period under review, the company steadily expanded its Europe-wide service network for hydraulic systems. In addition to the lead hydraulics service center in Munich, superbly-equipped centers in Switzerland, Sweden and France were either newly opened or integrated into the network. Further service centers are currently being planned and will be set up in line with market requirements.

ongoingCustomerDialogueIf Knorr-Bremse is to further enhance its products and services, it needs to regularly check customer satisfaction levels. But the usefulness of customer feedback depends on the way the questions are asked, and the company is therefore constantly fine-tuning its channels of communication.

In spring 2004, the decision was made to stop collecting customer feedback in the form of written questionnaires and to introduce personal interviews instead. The “Customer Dialogue” program was launched, which sets up direct contact between Knorr-Bremse managers and specialists and project leaders at its customers.

Following a successful pilot phase involving rail vehicle operators, the program was expanded in 2005 to cover various manufacturers as well. During the period under review, Knorr-Bremse in Mödling (Austria), IFE in Waidhofen (Austria), OKE in Niederhasli (Switzerland) and Frenos in Pinto (Spain) launched a Customer Dialogue with local operators and vehicle manufacturers. Further sites will follow suit during 2007.

The Knorr-Bremse Customer Dialogue has proved an effective method of gathering customer feed-back. It involves a set procedure:

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First an interview guideline is drawn up for the specifi c manufacturer or operator concerned, taking into account all aspects of the relation-ship. The next step is to identify contact persons on the customer side, paying particular attention to their infl uence on the relationship and their ability to provide useful fi rst-hand information.The chosen partners are then provided with written information about the Customer Dialogue.

Every interview is based strictly on the prepared guideline and lasts about 90 minutes. In addition to considering current customer requirements, future needs are also identifi ed. The interviewers are trained in using the guidelines and prepare themselves thoroughly for the task.

Following the interview and evaluation sessions, a cross-departmental workshop is organized in which suggestions for improvements are discussed on the basis of the results. Then customers are informed about all activities aff ecting them. Implementation is carefully monitored to ensure that agreed measures to improve customer satisfaction are actually carried out, and regular status reports are sent tothe Knorr-Bremse management. Customer inter-views should be repeated at regular intervals.

TheKnorr-BremseCustomerDialogueisanongoingprogramtoincreasecustomersatisfactionlevelsthatwillbecontinuedandexpandedduring2007.

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railservicesimprovesperformanceIn recent years, Knorr-Bremse has implemented a number of organizational and operational measures related to its aftermarket services with the aim of steadily increasing customer satisfaction levels. During fiscal 2006, the company’s aftermarket activities were further expanded under the railservices banner. The impact of these measures can be seen from the increasing success of railservices: last year

Knorr-Bremse Rail Vehicle Systems received some 40,000 service requests worldwide.

Schedule effectiveness is crucial to success in the aftermarket, and Knorr-Bremse’s performance in this respect has been consistently high since the end of 2004, with more than 95% of orders fulfilled by the agreed deadline. During the past year, deadlines were also brought steadily forward, reducing turnaround times by some 30%. This was made possible, amongst other

Highlydynamic-Knorr-Bremserailservices.


things, by improvements in the efficiency of aftermarket supply chain management. An aftermarket-focused European network was set up to optimize the strengths of the company’s sites by standardizing processes and pooling resources. The process begins with across-the-board planning and management of “fast movers”, but also involves improving warehouse throughput times. In addition, logistics operations in Hungary and Austria were designed to enable customers to be supplied

directly from production facilities. Another project involves transferring a spare parts logistics center within Munich. From April 2007, the center will be operated by a reliable logis-tics partner with an established track record in the automotive industry. This means that international customers can now be supplied with original spare parts even more rapidly. In 2006, a total of 9 million original Knorr-Bremse parts were supplied worldwide. Cooperation with suppliers in crucial areas was also intensified,

with targeted programs enabling the company to introduce aftermarket service improvements deep into the supply chain.

Knorr-Bremse solutions and systems have an extremely long life cycle - in some cases more than 30 years - and manufacturers and operators therefore have high expectations when it comes to long-term availability of spare parts. Knorr-Bremse’s response has been to introduce an obsolescence management system that covers

ServiceCenterswiththesamehighqualitystandardsasthecompany’sOEoperationsareatrademarkofKnorr-Bremserailservices.


current stock and requirements for discontinued parts, with care being taken to maintain invento-ries even when suppliers have stopped producing certain components. In close consultation with its suppliers and customers, Knorr-Bremse main-tains stocks of individual parts and even com-plete subassemblies as part of its obsolescence management program. In addition, the use of current Knorr-Bremse technologies ensures

Finalcheckingofafreshlyoverhauledcompactbrakecaliperonaspecialtestbench.

Optimuminterplayofmanandmachineduringcleaning,disassembly,examination,overhaul,reassemblyandfinalcheckingofservicecomponents.


provision of the system functionalities that will be required in the long term.

Considerable potential for improving the effi-ciency of spare parts management is offered by electronic data interchange (EDI), a system of automated order processing that involves providing customers and suppliers with access to Knorr-Bremse’s ordering and confirmation

system. This speeds up business processes and reduces the cost of correspondence, freeing up the specialists in the disposition and order- processing departments to concentrate on core tasks and on monitoring time-critical deliveries.

EDI, which was launched in 2006, has enabled streetcar operating company Stuttgarter Straßenbahnen AG, for example, to considerably

reduce the cost of ordering spare parts. During the current business year the plan is to incor-porate further customers into Knorr-Bremse’s automated order processing system for OE parts.


SuccessesDuring the period under review, Knorr-Bremse‘s efforts to improve its performance in the field of maintenance and repair opened up a number of interesting new prospects. In response to a worldwide increase in demand, the company established several new service centers as well as expanding existing ones.

Customers in Poland were clearly impressed by the services on offer from Knorr-Bremse - sales revenues from services provided to Warsaw Metro increased significantly. 2006 saw more than 3,000 units being sent to the company for overhaul, including an increasing proportion of hydraulic units. Aftermarket business in the Czech Republic also received a boost with the signing, in 2006, of a long-term agreement worth several

million euros with Prague Metro for maintenance of braking systems in 240 vehicles.

In China, demand for aftermarket services kept pace with the expansion of Knorr-Bremse‘s OEM business. To cope with this increase, a service center with state-of-the-art testing equipment is being set up in Suzhou in addition to the expanded production capacities.

EverysparepartismanufacturedtoKnorr-Bremse’sOEspecifications.

Knorr-Bremserailserviceshasitsownproductionfacilitiestoensurerapidavailabilityofpartsandminimumdown-times.


Demand is also expected to grow in Australia, Japan, India, Taiwan and Malaysia, driven by expansion of mass transit systems and new acquisitions of multiple units. Knorr-Bremse is also planning to become involved in Japanese mainline operations, supplying modern bogie equipment for the Shinkansen high-speed train. In the Japanese mass transit sector, the company also plans to introduce the oil-free compressor and EP2002 brake control system. In India there will be further expansion of capacity in response to the potential for increasing the volume of domestic market business.

Expansion in the North American market is expected to continue, with growth driven in particular by various projects to extend and modernize metro and streetcar systems. Any possible shrinking of the freight sector is likely to be compensated by an expansion of sales of driver assistance systems. Increasing numbers of rail vehicle operators are now purchasing systems designed to improve efficiency and comfort, and in this field Knorr-Bremse can offer innovative solutions such as the LEADER driver assistance system or intelligent passenger information systems.

In the aftermarket/service segment Knorr- Bremse expects to outpace the market in bene- fiting from further growth across the globe, thanks to the various measures it has taken to enhance the performance of railservices and boost levels of customer satisfaction. One con-tributory factor here will be the expansion of aftermarket services in the Chinese market.

Knorr-Bremse expects the market to develop positively in 2007 against a background of increasing demand for mobility which the railways are best placed to satisfy in the long term. A modest overall expansion in the global rail vehicle market is forecast, and Knorr-Bremse intends to benefit from this growth by concen-trating on product innovation in braking systems and further penetration of the on-board market.

The forecast in Europe is for market recovery, with a further boost for the markets in Germany, France and Spain coming from purchases of new multiple units for local services. In addition, cross-border passenger and freight transportation is becoming more important. In the European freight car market, Knorr-Bremse is now in a strong position to offer its own solutions and help shape current and future technological requirements. One indication of this was the company’s successful completion of TSI certification during 2006.

Continued strong growth is forecast for Asia, with China in particular continuing to expand its railroad system. During the period under review, Knorr-Bremse was once again selected to supply rail vehicle braking and door systems for many Chinese projects. There was also strong demand for products from the two subsidiaries acquired by Knorr-Bremse in 2005 - Merak (air conditioning) and Microelettrica (power supply). The entire Chinese fleet of CA250 high-speed trains is to be equipped with braking, door, air conditioning and power supply systems made by the Knorr-Bremse Group. The new facility in Suzhou due to open in 2007 and the joint ventures set up in 2006 put Knorr-Bremse in a strong position to respond to future demand.

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Knorr-Bremse uses regional and international trade fairs as an effective way of introducing potential customers to the full range of its systems and services. During the year under review, the company radically overhauled the design of its exhibition stand for both the Rail Vehicle Systems and Commercial Vehicle Systems divisions. The new stand is of modular design and can thus be used for both large and small exhibitions. As a leading provider of safety- critical solutions, Knorr-Bremse has to respond to the requirements of a global market that is currently characterized by increasing demand for mobility. Under the slogan “Answers for a World of Mobility“ the company responds to customers’ questions and demonstrates its ability to offer tailor-made solutions on a local basis world-wide.

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the fourth heading the company demonstrated how the scalable systems it produces can be tailored to the needs of individual customers.

Products exhibited at the IAA included compres-sors, disc brakes, complete wheelends and driver assistance systems, including the ESP electronic stability program and the ACC adaptive cruise control with PSS predictive safety system for avoiding rear-end collisions. Knorr-Bremse also held a press conference on the topic of „Increas-ing Safety with Driver Assistance Systems“ for journalists from the world’s trade press.

Regular daily outdoor demonstrations of selected vehicle safety systems proved as popular as expected.

theiAACommercialvehicles,HanoverAt the IAA Commercial Vehicles from September 21 to 28, 2006 in Hanover, Knorr-Bremse exhibited innovative solutions for the commercial vehicle industry in the areas of “quality, relia-bility and safety”, “energy-saving and economy”, “diagnostics and service” and “scalable systems and worldwide applications”.

The TRUQ label demonstrated how the company ensures the high quality and reliability of its products.

Another focus was on efficient systems for reducing costs and saving resources. Workshops also illustrated how the new NEO platform can help automate error diagnostics, and under

NewexhibitionstanddesignattheIAAinHanover.


AutomechanikaFrankfurtBetween September 12 and 17, 2006, dealers and service providers from the automotive industry attended the Automechanika exhibition in Frankfurt, where Knorr-Bremse exhibited products, services and strategies aimed at im-proving aftermarket efficiency and increasing cost-effectiveness. Among the key products offered to the service segment is Knorr-Bremse‘s newly developed NEO diagnostics platform. This modular tool can be used by both large and small workshops and automatically recognizes virtually all current braking systems. NEO examines the electronic braking systems with a high degree of precision and automatically delivers a diagnosis accompanied by repair instructions.

Attractive multimedia demonstrations explained the functioning of NEO, and examples were given of possible applications and the resulting bene-fits for users.

Other innovations such as the APU mono-block and standardized disc brake actuators were also well received. APU Monoblock is a compact, flexible and adaptable air treatment unit offering a wide range of functions. The standardized brake actuators reduce more than 1,100 different versions to a mere 112, cutting logistics costs and improving availability. Another innovation introduced in Frankfurt was the new, Internet-supported ordering system based on an electronic product catalogue. This

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offers customers immediate access to extensive product information including technical documentation and servicing and repair instructions.

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passenger information system and disabled-friendly toilet manufactured by Frensistemi.

PresenceatinternationalexhibitionsDuring the first six months of 2006, Knorr-Bremse used a number of opportunities to present modern systems and solutions from both its divisions at international exhibitions all over the world.

Between April 25 and 27, 2006, the British commercial vehicle industry met at the Birming-ham Commercial Vehicle Show, where Knorr-Bremse Bristol impressed visitors with multimedia presentations of innovative technologies such as the ACC cruise control system, the LDW lane departure warning system, and the latest generation of the ESP electronic stability program.

Bremse subsidiaries also exhibited important product innovations: IFE and Westinghouse Platform Screen Doors presented the new S3 range of doors combined with half-height platform safety gates, Merak exhibited an inno-vative air-conditioning system, Microelettrica its power supply systems, transformers and switch-gear, and Zelisko its new ticket management systems.

Knorr-Bremse Group products were also to be found on the stand operated by the Berlin-based FAV research network (Forschungs- und Anwen-dungsverbund Verkehrssystemtechnik) as part of the European MODTRAIN joint project. A full-size mockup of a section of the high-speed train of the future was on display, containing an integrated door system with newly-designed operating elements from IFE, together with a

innotransBerlinInnoTrans 2006 took place from September 19 to 22, 2006 in Berlin, and once more lived up to its reputation as the world‘s leading trade fair for the rail vehicle industry. As part of its new, inter-active approach, Knorr-Bremse offered visitors a broad overview of its innovative solutions in the fields of braking systems, train technology and railservices. Its new brochure design arranges the solutions according to areas of application, making it easier for readers to find their way around the various products.

Among the products on display were the latest generation of the MBS modular braking system for cross-border operations in Europe and the CFCB compact freight car brake with improved performance and multifunctional components offering considerable weight-savings. Knorr-

ImpressivelightwallsinchangingcolorsdrewvisitorstotheKnorr-BremsestandatInnoTrans. Theseatingareaprovidedasettingforone-to-onediscussions.


The latest trends in transportation and logistics were the main focus of the Transpotec exhibition, which took place from April 27 to 30, 2006 for the first time at the new exhibition centre in Rho-Pero, Milan. Knorr-Bremse’s Italian site at Arcore used the opportunity to put its latest products on display.

Rail Solutions Asia is rapidly becoming the leading event for the rail vehicle industry in Asia. Between May 17 and 19, 2006 the exhibition was held for the seventh time, accompanied for the third time by the annual congress of the Asian Railway Operators Association. Among products presented by Knorr-Bremse were the VV 180 T oil-free compressor, the EP2002 braking system and platform screen doors. The positive response of visitors to the exhibition again demonstrated the

enormous potential for Knorr-Bremse products in the Southeast Asian market.

In Russia, Knorr-Bremse took part in Trans- Russia Moscow, one of the country’s leading rail industry exhibitions. From March 20 to 23, the company used presentations, exhibits and additional information material to demonstrate the advantages of the VV 180 T oil-free com-pressor, the WZK compact brake caliper and other state-of-the-art solutions for Russian rail-ways. A skeleton locomotive brake was used to demonstrate how the compact brake control and air treatment system are installed. Considerable interest was also triggered by Knorr-Bremse‘s latest automatic door system solutions. A few days after the exhibition, the company also attended a congress near Moscow on the to-pic of „Braking Technology and Systems“ at the

Knorr-Bremsemaintainsapresenceattradefairsandexhibitionsworldwide-likehereinTaiwan(left)orItaly(right).

invitation of Russian state railway company RZD, where Knorr-Bremse presented its products to Russian rail vehicle manufacturers.

Finally, Knorr-Bremse was also among the exhibitors at EXPO Ferroviaria in Italy, which took place from May 16 to 18, 2006 in Turin and attracted visitors from the Italian rail vehicle market and elsewhere. Among the products showcased by Frensistemi were innovative braking systems and components, toilets, video monitoring equipment and platform screen doors.

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CommercialVehicle Systems

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GlobalsalesfortheCommercialVehicleSystemsGroupinEURmillions

During fiscal 2006, the companies in the Commercial Vehicle Systems division posted worldwide sales of EUR 1,968 million - an increase of 11% over the previous year. This came against the backdrop of a generally positive economic climate in the commercial vehicle sector world-wide, particularly in North America and Europe.

Having experienced significant sales growth in recent years, the European companies in the division achieved a further rise in sales of approximately 11% in 2006 to EUR 1,204 million, compared with EUR 1,088 million in the previous year. This was partly due to an increase of more than 6% in commercial vehicle production in Western Europe, but was also a result of positive developments in the aftermarket and trailer segments. In the service segment, the high proportion of vehicles being fitted with its brakes and electronic braking systems helped to boost sales.

During 2006, North America came second only to Europe in terms of its contribution to Group sales. The North American companies benefited fully from record levels of orders for trucks and buses in anticipation of the new EPA07 emission regulations that came into effect on January 1, 2007. The new laws have increased the cost of purchasing commer-cial vehicles, and fleet operators were therefore concerned to upgrade or expand by purchasing models manufactured in 2006. In addition to this, Bendix succeeded in achieving strong growth in the trailer segment.

Following a double-figure increase the previous year, sales in South America (calculated in local currency) remained stable, despite a slight drop in vehicle production. As a result of favorable shifts in exchange rates, in euro terms this actually equated to a 10% rise in the value of sales.

In the Asia/Australia region, both India and China proved sources of growth. Despite a slight drop in Japanese sales as a result of declining vehicle production and only a marginal increase in Australia, overall sales for the region were 7% up, thanks to the strong growth experienced by the company’s Indian and Chinese sites.

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StRAteGiCPRoJeCtS CooperationwithBoschSince early 2006, Robert Bosch GmbH and Knorr-Bremse have been collaborating on the development of commercial vehicle driver assistance systems. The starting point was the Bosch ACC Adaptive Cruise Control System that has been installed in passenger cars since 2000 and has now been adapted by Knorr-Bremse for commercial vehicles and will be sold worldwide under the Knorr-Bremse and Bendix labels. The next step will be a version of the Bosch PSS Predictive Safety System adapted for commercial vehicles.

With vehicles covering increasing distances, systems such as ACC and PSS have an important role to play in reducing driver stress and increasing overall road safety. Adaptive Cruise Control monitors the vehicle in front, calculating its speed and automatically adjusting the brakes and engine output to maintain an appropriate safe distance. The Predictive Safety System emits a warning signal or briefly applies the brakes to alert the driver if there is any danger of a collision. Collaboration with Bosch enables Knorr-Bremse to further consolidate its lead in the driver assistance segment.

WheelenddevelopmentpartnershipIn May 2006, Knorr-Bremse Systeme für Nutzfahrzeuge GmbH signed a cooperation agreement with Georg Fischer Automobilguss GmbH and Schaeffler KG for the development,

production and sale of wheelends for trucks, trailers and buses in Europe. The idea is to develop innovative solutions aimed, among other things, at prolonging the life of brake discs and wheel bearings, minimizing wheelend component weight and maximizing serviceability.

The plan is for Knorr-Bremse, the lead company in the collaborative venture, to supply commercial vehicle manufacturers with tried and tested, pre-assembled wheelends, thereby reducing logistics and assembly costs. Wheel-ends essentially consist of a wheel hub, wheel bearings and brake disc, each of which used to be separately developed by different manu-facturers.

By working together with Georg Fischer, the leading European foundry for the production of wheel hubs, and Schaeffler, a major produ-cer of wheel bearing units under the FAG label, Knorr-Bremse can improve the interaction of the braking system and the wheelend. The new de-velopment partnership underlines the position of Knorr-Bremse as the world’s leading supplier of systems solutions for greater commercial vehicle safety.

C o m m e r c i a l V e h i c l e S y s t e m s | �1

newfacilityinPolandEarly in July 2006, Knorr-Bremse Polska SfN Sp. z.o.o. started up business on its own site in the Polish capital - the latest move in Knorr-Bremse’s steady expansion of its Polish opera-tions that began in the 1990s. There is already a nationwide network of over 20 Knorr-Bremse service centers operated by partners in Poland, but the company’s strategic decision to establish its own facility underlines its determination to expand in the Polish aftermarket and also to develop the trailer segment. Given the need to

maintain regular contact with manufacturers, this was a very important move as Poland is the undisputed leader in Eastern Europe with some 80 different vehicle manufacturers.

Since the year 2002, Knorr-Bremse’s sales in the Polish market have quadrupled. Predicted growth in Polish fleets and upgrading through imports of western European vehicles mean that current sales levels are likely to double again by 2010.

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BendixtakesoverDi-ProWith eff ect from October 1, 2006, Bendix Spi-cer Foundation Brake LLC (BSFB) acquired a 100% share in California-based Di-Pro Inc., a manufacturer of diaphragm and combination cylinders. With a workforce of 130, Di-Pro posted sales of some USD 38 million in 2005. Di-Pro‘s products are strategically important for Bendix in the American aftermarket and constitute an important element in the company’s growth plans.

The new acquisition is a major milestone on the road towards Bendix achieving its medium and long-term corporate goals. It enables the com-

pany to continue to supply reliable, attractively-priced brake cylinders and to respond more eff ectively to customer wishes.

Di-Pro will operate in the American market as an independent company with its own manage-ment team, but will cooperate closely with BSFB. It will remain located in Fresno, California.

CollaborationbenefitscustomersIn March 2006, Bendix Spicer Foundation Brake LLC set up a strategic alliance with GorillaBrake & Components Inc. in order to further expand its product and service portfolio. The partnership with the Ontario-based brake shoe remanufacturer will strengthen the position of both companies in the aftermarket, enhance the competitiveness of Bendix and further improve its high-quality customer service. Gorilla Brake has more than a hundred years’ experience in high-quality brake-shoe remanufacturing, and Bendix, for its part, invests heavily in research and development, possesses comprehensive technical expertise and operates a wide-

ranging sales network in the USA. Both Bendixand Gorilla will therefore benefi t from the resulting synergies.

Another example of successful cooperation is Bendix’ collaboration with VIPAR Heavy Duty Inc., which sells brake linings and toolkits in the United States and Canada under the brand


name of VIProTM “The Professional’s Choice”. The products manufactured by Bendix and supplied to VIPAR are characterized by their long life and excellent braking performance.

Strongerfocuson growthandprofitabilityAt the start of 2006, Knorr-Bremse Commercial Vehicle Systems and Bendix launched the STRONG FOCUS program, which brings together initiatives for growth and profi tability on an IT-supported platform. The launch of the program in Japan and Brazil during the period under review marked the completion of worldwide deployment throughout the division. This follow-up program to “Fokus“ is

completely integrated into strategic planning and business processes, with country-specifi c goals being set in close consultation with local companies. Standardized key indicators support the central con-trol process and decentralized implementation at local sites.

long-term corporate goals. It enables the com- technical expertise and operates a wide- the division. This follow-up program to “Fokus“ is


One of the most important characteristics of STRONG FOCUS is the transparency it offers with regard to the status of the programs integrated into the platform. Active pipeline-management, for example, makes it possible to estimate far in advance the extent to which goals are likely to be achieved and take the necessary measures to correct deviations from tar-gets. Specific information can be provided, even for individual centers of competence within each site. Powerful visual representation of the various project pipelines encourages a focus on ongoing identifica-tion of new growth and profitability potential.

With its inner logic, STRONG FOCUS offers all the advantages of a common platform and standardized reporting culture. A wide variety of ideas on how to increase growth and profitability can be taken up at an early stage and made available throughout the entire organization as potential examples of best practice. This encourages a lively exchange of expe-rience and expertise across all continents, making STRONG FOCUS a powerful tool for disseminating and enhancing the resource “knowledge” that is so crucial to maintaining competitiveness in the Commercial Vehicle Systems division.

gps–GlobalProjectmanagementSystemgps helps strengthen the project management skills of Knorr-Bremse Commercial Vehicle Systems and its national subsidiaries. The aim is to harmonize approaches to project management worldwide by establishing global standards. The Global Project Management System currently draws on the expertise of specialists in Europe, North America and South America, and Asian colleagues will be involved at a later date.

gps is a project management system that offers practical methods and tools for day-to-day project work and provides support in the form of software for project initiation, planning

and implementation. Clear definition of roles and responsibilities also helps strengthen the position of the project leaders in each case. The overarching goal of gps is to optimize collaboration in projects by making sure it is based on a jointly-agreed approach and a common project language. This is essential for creating an international project culture that utilizes the individual strengths of the nation-alities involved.

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gps Project Portfolio Management (PPM )

gps Program Management

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Introduction gps Online Manual

gps Lifecycle (Generic Phases and Dol‘s)

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gps Project Organization

gps Project Team Work

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PROJECT CULTUREGLOBAL PM STANDARDS

PROJECT PORTFOLIO


QuALit YAnDenviRonment SuppliermanagementwithintRuQTrue Quality (TRUQ), the quality standard applied byKnorr-Bremse Commercial Vehicle Systems world-wide, symbolizes the importance Knorr-Bremseattaches to quality as the key to greater reliability and safety of braking and vehicle stability systems. The year under review not only saw further intensive project work in the fi elds of management, design, production, human resources and customers but also a special focus on supplier management, with a view to reducing potential risks in collaboration with suppliers.

One step taken towards minimizing risk took the form of a supplier early-warning system. Suppliers are given a special classifi cation based on risk parameters such as quality, logistics, cost reductions, economic situation and process technologies, with a view to avoiding potential risks or protecting against

them. Supplier management at Knorr-Bremse is essentially based on the following overarching areas of activity: risk and contract management, supplier classifi cation and development, supplier auditing, training programs and supplier reduction.

Supplier development is pursued on a partnershipbasis in order to continuously improve supply quality and identify at an early stage any weak points or risks in the international network.

With its uncompromising focus on quality, TRUQ refl ects the rigorous demands that Knorr-Bremsemakes on its own companies in meeting the expectations of the global commercial vehicle industry. In 2006, the quality standard was further boosted by measures such as staff awards, video features, optimizing of control tools etc.

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CheckingtheeffectivenessofprocessesthroughtheKPisystem

Risk and contract management

CheckingtheeffectivenessofprocessesthroughtheKPisystem

■ Contracts and standard documents (QMPP, QM cert. etc.)

■ Monitoring risk suppliers

Supplier classifi cation and further

development

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■ Supplier evaluation

■ Supplier goals

■ Improvement projects

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■ VDA 6.3 audits

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■ TPS audit

■ Procurement risk assessment

Training programs

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■ Outsourcing of C-parts

■ Phase-out / transfer projects

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■ Supplier training

■ Internal training sessions


Health,Safety,environmentHealth, Safety and Environment, or HSE, covers the entire range of company measures related to workplace safety, health and environmental protection. Back in 2005, standardized methods of HSE management were built into Knorr-Bremse’s Truck Production System (TPS).

This enabled a pooling of resources to take place during the period under review and con-tributed signifi cantly towards across-the-board optimization of the company’s worldwide HSE activities. There was also an intensifi ed exchange of experience with Bendix in this fi eld, with HSE experts from both companies drawing up joint methods and practices for successful HSE management and incorporating the topic into the TPS guidelines.

As part of a Safety Culture Project, 2006 saw an analysis of workplace HSE carried out at Knorr-Bremse and Bendix sites, the results being used to develop measures for improved standardization of methods and processes in the TPS. Areas covered included risk prevention and accident analysis. Following introduction of these measures the accident rate at Europeanand Brazilian sites fell by more than 25% compared with the previous year, and absences due to accidents were 35% down.

HSE provisions at Knorr-Bremse meet all the requirements of the international OHSAS 18001 standard, and compliance with the inter-national environmental standards laid down in ISO 14001:2004 has been confi rmed by audits carried out by the external monitoring agency

BVQI (Bureau Veritas Quality International). Once again, the Commercial Vehicle Systems division achieved “best-in-class” status and improved its overall rating.

Among the measures laid down in the environ-mental program drawn up by Knorr-Bremse and Bendix are energy-saving, waste reduction and recycling measures, and programs for the recovery and reconditioning of cooling lubricants used in metalworking. Many Knorr-Bremse companies have introduced recyclingprograms in response to increased public interest in environmental protection. In Huntington, Hong Kong and Bristol, for example, a program introduced as far back as 1991 involves the recycling and refurbishing of brake cylinders and compressors. By the end of the year under review, some 1.3 million units had been returned to the market – representing signifi cant savings in raw materials and energy.

On the product development side, the focus is on measures to save materials and replace thosethat might have a negative environmental impact during the product lifecycle.

Bendix successfully introduced eff ective programs to raise awareness of health and safety issues among the workforce. For the third year in succession it achieved world-class success in this respect at its US and Mexico sites. With 0.91 incidents per 100 employees per year and no working days lost as a result of accidents, the US company leads the entire commercial vehicle supply industry in this respect.

ImplementationoftheISO14001internationalenvironmentalstandardintheKnorr-BremseCommercialVehicleSystemsdivision.

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2006

83

Year

CustomersatisfactionontheincreaseGauging levels of customer satisfaction has always played a central role in the management system at Knorr-Bremse Commercial Vehicle Systems. In the OE segment, surveys are carried out by Knorr-Bremse staff directly with customers, but during the year under review the independent aftermarket was also surveyed for the first time, using the criteria of the European Foundation for Quality Management (EFQM). The initial survey covered Germany, Austria and Switzerland and was carried out by an external body – the Deutsche Gesellschaft für Qualität (DGQ). The results of both surveys were extremely positive.

Customer satisfaction surveys have been carried out since 2000. During the period under review, an encouraging trend was identified in quality management in particular, and this can be attri-buted to the TRUQ quality standard introduced

by Knorr-Bremse in 2005. Other aspects that again scored positive evaluations included innovative capability, expertise and improvement of customer focus. In its evaluation of customer satisfaction, the EFQM stressed the company’s strong relationship with its key account customers. The plan is now to extend the aftermarket study to cover a wider area.

SixSigmafurtherintegratedDuring the period under review, the Six Sigma program, which aims at greater transparency of programs, elimination of process errors and further improvement of product and service quality, was further integrated into the division’s activities. The main emphasis was on training projects in the testing and development depart-ments. Systematic use of the Six Sigma method during the early stages of product development can help avoid potential sources of error before they have an impact on production. For the first

time ever, Six Sigma experts in the Knorr-Bremse Group also had an opportunity for an exchange of experience at an international network meeting that included Bendix as well as the company’s two main divisions.

In 2006, a further six employees successfully completed their Black Belt certification, demon- strating their ability to manage extensive, sophisticated Six Sigma projects. And a further Master Black Belt was also certified, who can now act as a coach for Six Sigma projects or even entire project portfolios and supervise the necessary training sessions.

After completing their training, Green Belts and Black Belts carry out further projects focused in particular on improving the application of Six Sigma methodology for optimizing existing projects - DMAIC: Define, Measure, Analyze, Improve, and Control.

CertificationceremonyforSixSigmaBlackBelts.


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FirstGreenbeltstrainedatAldersbach(Germany)plant.

internalBusinessexcellenceAwardSince 1997 the Knorr-Bremse Commercial Vehicle Systems division has presented annual Business Excellence Awards to its most successful sites. The award ceremony for 2005 took place on April 7, 2006 during the International Group Meeting in Munich.

In the category “Top Performance 2005“ the absolute annual performance of sites was compared, with first place going to Bristol (UK), followed by Aldersbach (Germany) and the Bendix Huntington site (Indiana, USA).

In the category “Improvement 2002-2005“ the focus was on positive business development over a period of three years. Here the Hasse & Wrede site in Berlin was the winner, with second and third place going to Lisieux (France) and São Paulo (Brazil).

The criteria for the Award were based on the European Business Excellence Award of the European Foundation for Quality Management (EFQM), thus ensuring that the internal require-ments for the division to become an “EQA Prize Winner 2006“ were fulfilled.

BestPracticeAwards2005At the first joint World Meeting of quality, HSE and TPS experts held in June 2006, internal awards were made for best practices in the Commercial Vehicle Systems division that had brought lasting improvement of products and processes.

The awards were made to sites that had deliv-ered outstanding performance in development, production, logistics, procurement, quality or process management, but improvements in health, safety and environment (HSE) were also recognized.

HeinzHermannThiele(l.)presentstheBusinessExcellenceAwardtoSimonCraddock,ManagingDirectorKnorr-BremseBristol.

In the first category, the winner was the Berlin site for achieving a 30% productivity increase on the assembly line for its customer Caterpil-lar through across-the-board implementation of the Truck Production Systems (TPS). Second prize went to Lisieux (France) for developing a quality matrix for preventive error recognition in the production process. And Aldersbach came in third for its introduction of real-time process monitoring and a standardized error rectification process for disc brake assembly lines.

When it came to Best HSE Practices, Bristol (UK) won first prize for an energy-saving concept, followed by Acuña (Mexico) for its communication of environmental and HS issues and Huntington (USA) for its training videos.


BestPracticeAwardsintheCommercialVehicleSystemsdivision.


tPStakesrootinthecompanyThe Knorr-Bremse Truck Production System TPS reconciles two apparently opposed ambitions: to constantly improve production quality standards and at the same achieve ongoing cost reductions. Three years after it was fi rst introduced, the system has now been applied to all commercial vehicle sites. Audits completed at all locations during 2006 confi rmed a generally high degreeof implementation; the fi rst steps towards extending the focus to the entire supply chain have also been taken.

The vision underlying TPS is that of an “ideal” plant capable of supplying zero-defect products at the lowest feasible cost and as quickly as possible. The Truck Production System in-volves an across-the-board approach aimed at gradually bringing current production perfor-mance up to the desired level. In 2006, one of the measures taken in this context was value stream mapping. An analysis of material fl ows in production enabled improvement targets to be drawn up with the aim of reducing warehousingand transportation times for materials and products during the production process.

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place safety/layout. This introduced a new element - “people“ - into the equation. An eighth element involves providing a framework for cross-site HR development.

One important element within TPS is the world-wide exchange of best practices, and the scope for communicating these has therefore been steadily expanded. Measures include TPS guide-lines, various posters, an Intranet presence, the poka yoke database, articles in the workforce magazine, a fi lm, manuals and basic training materials. The presentation of best-practice awards during the international TPS and Quality/

Cross-departmentalWorldMeeting.

Methods like the “quality matrix“ can make an important contribution towards achieving the “zero-defect“ vision of TPS by identifying and rectifying errors where they occur. This brings the achievement of zero defects within closer reach.

TPS was originally conceived purely as a methodological toolbox, but today it has matured into a comprehensive approach to in-troducing improvements that go well beyond production processes. During the year underreview, two further elements were added to the existing fi ve that directly infl uence quality – environmental protection and work-

HSE Meeting underlined the importance of the program at international level.

Close links with other programs such as STRONG FOCUS and TRUQ enabled TPS to tap into further synergies during the period under review. The STRONG FOCUS feedback loop, with its sys-tematic target/actual comparisons, helps identifythe productivity potential of individual sites, while TRUQ supports the process of continuous quality improvement for processes and products.

WorldmeetingoftPS,tRuQandHSeAs the TPS Truck Production System takes root within the company, it is becoming increasingly interlinked with quality projects coordinated mainly through the TRUQ program and also with Health, Safety and Environment (HSE) activities. The fi rst ever joint World Meeting of experts from all three areas was held from June 20 to 22, 2006 in Munich, off ering an opportunity to set up networks for a better exchange of informationand a more coordinated approach. All three areas have certain goals in common: achieve-ment of top quality, a good price/performance ratio, largely defect-free products and avoid-ance of any negative impact on people and the environment.


morethan10milliondiscbrakesOn January 16, 2006, the Aldersbach plant delivered its ten millionth disc brake. Back in 1992 when small-batch production of disc brakes first started, the plant produced a mere 348 units per year; now daily output has risen to more than 8,000.

The huge market success of the disc brake is due, among other things, to its compact design, easy

maintenance and significantly improved braking performance compared with drum brakes. The disc brake’s superior responsiveness makes for safer braking, particularly at high speeds.

Knorr-Bremse has been mass-producing pneumatically-operated disc brakes since 1996.

At the end of the 1990s disc brakes replaced drum brakes as standard equipment on trucks, buses and trailers in Europe and took over the lead in the European market.

Following its success in Europe, the disc brake recently started to penetrate the American market. For three years now, Knorr-Bremse has been manufacturing and marketing disc brakes

in Brazil and since 2005 has had some initial success in the US market, which until then had been dominated by drum brakes.

Current development work aims to further improve performance, cutting stopping distances and reducing weight and space requirements.

PlantdirectorFranzBirkeneder(l.)andHRdirectorHeinzKöhler,Knorr-BremseAldersbach,withthe10millionthdiscbrake.


newcompressorplantinDalianIn August 2006, Knorr-Bremse started to produce compressors in the Chinese city of Dalian. The annual output capacity of the new plant is currently approx. 150,000 units. State-of-the-art production machinery facilitates the manufacture of high-quality compressors that are tailored to customers’ requirements. The plant not only supplies the domestic market

but also the entire Asia-Pacific region and other Knorr-Bremse Group markets.

With its lean production systems, Dalian meets all the international quality standards of the Commercial Vehicle Systems division’s Truck Production System (TPS). Space requirements

and throughput times have been minimized, thanks to a one-piece flow system and a U-shaped workplace configuration, and production errors are rectified immediately by means of poka yoke checks. In the future, Knorr-Bremse China intends to significantly expand its presence in domestic and foreign compressor markets.

Productionstart-upinindiaIn India, one of the world’s major growth markets, a new Knorr-Bremse facility went into operation in May 2005. During the period under review, a steady rise in local production helped to significantly strengthen Knorr-Bremse’s market position in India. The plant in Pune is

operated by Knorr-Bremse Systems for Commercial Vehicles India Pvt. Ltd., a joint venture between Knorr-Bremse Asia Pacific (Holding) Ltd., Hong Kong, and Tata Auto-Comp Systems Ltd. The new plant has put in an impressive performance and already supplies India’s fifth biggest truck manufacturer, Tata Motors, with a growing range of products. Thus the foundations have been laid for acquiring new customers and further expanding the business. The joint venture attaches great importance to a high proportion of locally-sourced parts and a minimum volume of imports. The result is high-quality products at competitive prices.

Knorr-Bremse’s strategy of combining local cost advantages with the scope offered by its international activities is not just appreciated by Indian customers. Close cooperation between the local global sourcing team and the international procurement department means that all Knorr-Bremse plants worldwide can benefit from the cost advantages of the Indian joint venture. Customers also appreciate the systems expertise in new technologies that Knorr-Bremse has made available in India.NewproductionplantinPune,India.


innovAtionAnDteCHnoLoGY

newtechnologiesimprovevehiclesafetyDespite growing traffi c volumes in and around major economic centers, steady progress has been made in improving road safety in recent years. It is important that this trend should continue, but if there is any further increase in the volume of traffi c operating in a limited space,this will greatly restrict the scope for further infrastructure improvements and the focus will increasingly shift to improvements in the vehicles themselves.

Knorr-Bremse’s response to this challenge is to further enhance active safety systems in commercial vehicles. One of the most important driver assistance systems currently off ered by the company is the Adaptive Cruise Control (ACC) system, which ensures that a driver maintains a steady speed on the open road and helps him keep a constant distance between his vehicle and the one in front. The company is currently working on extending the range of speeds at

which the system operates – at present they lie between 30 and 100 km/h. In combination with the PSS Predictive Safety System and the LDW Lane Departure Warning system, ACC can signifi cantly reduce collision risk.

When the assistance system is activated, it warns the driver of an imminent collision so that he can take suitable avoiding action. If a collision cannot be prevented by the driver alone, ACC triggers emergency braking. The electronic lane departure warning system alerts the driver if he unintentionally drifts out of lane. In the case of a driver momentarily falling asleep, LDW can prevent a major accident.

If driver assistance systems are to be fully eff ective in practice, they need to be further integrated into the vehicle’s other systems. The big advantage of the EBS5 electronic braking system, for example, is that it can be linked to a wide range of other electronic systems. Since series production of EBS with integrated vehicle

ACCAdaptiveCruiseControlwithPSSPredictiveSafetySystem.©Bosch


stability system first started in 2003, more than 750,000 systems have been sold. The central electronic control unit (ECU) can control and integrate up to five electronic modules, inclu-ding the ABS anti-lock braking system, the ASR traction control system and the DTC drag torque control system, which prevents the drive wheels blocking when acceleration is suddenly reduced.

An important feature of EBS5 is its cost- effective integration of the ESP electronic stability program, which monitors changes in the vehicle’s lateral and longitudinal dynamics that could lead to skidding or rollover and prevents vehicle under- or oversteer. The ECU controls this system together with the improved braking, traction and coupling force control. In the case of braking, it ensures that the same pedal position always results in the same degree of braking irrespec-tive of load or other parameters. Traction and coupling force control allow for different axle loads when the braking force is distributed.

HierfehlteineBUHierfehlteineBU

The new EBS5 system also has an extremely beneficial influence on economy of operation, environmental impact and serviceability, thanks firstly to a brake pad wear adjustment system that reduces the need for brake pad replacement from 10 to 7 times per 1 million kilometers, and secondly to retarder blending, which ensures optimum utilization of the wear-free retarder system for braking.

In the case of trailers, EBS controls the electronic braking system via the Trailer Control Module (TCM), with the pressure being regulated by the ECU. Trailer EBS improves brake response to such an extent that the stopping distance at a speed of 80 km/h can be shortened by up to 2.7 m. Unlike traditional EBS systems, the new TEBS is capable of maintaining the power supply via the brake light in the event of failure of the electrical connection.

The idea of integrating various different functions into modules is a leitmotif running

through the entire product strategy. Two further examples - Electronic Air Control (EAC) and the Knorr-Bremse wheelend - illustrate how Knorr-Bremse is using state-of-the-art manufacturing methods to produce innovative systems that combine several sub-systems. EAC is manufactured by an automated production process involving manual input from only two employees. All the function tests are fully integrated into the assembly line, and pro-duction can be flexibly adapted to customers’ specific requirements. EAC, with the OSC oil separator cartridge, optimizes the supply and distribution of clean compressed air. Efficient information management provides comprehen-sive information about current system status, identifies errors and takes over the task of communicating with other vehicle systems. In order to be able to provide these innovative electronic systems at attractive prices, Knorr-Bremse always uses the same major components wherever possible. There is close coordination between the centers of competence involved

DasElektronischeBremssystemEBSeröffnetedenHerstellernneueSpielräume:DurchdieModulbauweisewurdenInstallationundWartungentscheidendvereinfachtunddieVoraussetzungfürSicherheits-systemewieESP,RSPundKoppelkraftregelunggeschaffen.

EBS5electronicbrakingsystem.


and the development department in Budapest to ensure that standardization of components is taken into account during the development stage.

Finally, the Knorr-Bremse wheelend achieves optimum quality, service and value for money by involving a number of different manufacturers. Knorr-Bremse has overall systems responsibility, coordinating development and production and supplying customers with complete read-to- install wheelends from a single source.

Such joint development work has tangible advantages. By using new combinations of materials, the weight and temperature load for the bearings have been reduced. The pole wheel of the ABS speed sensor is an integral part of the wheel hub casting in order to protect it from external influences, and the bearing requires neither adjustment nor additional lubrication during the entire life of the wheelend. Plans also envisage integrating active ABS sensors into the wheelend in future.

preferably in the EAC system can help cut fuel consumption. Other measures for improving the drive train are currently at the pre-development stage.

Enhanced compressor cooling can also help reduce consumption of valuable resources. Various improvements have lengthened the life of the compressor, significantly reduced oil carbon deposits and halved oil consumption.

During the period under review, demand for state-of-the-art safety technologies from the Knorr-Bremse Group also rose sharply in the USA. The ABS system with integrated ESP (electronic stability program) is particularly popular and is already available as standard or optional equipment from a number of leading American original equipment manufacturers. Indeed, ESP has already achieved a higher degree of penetration in the USA than in Europe.

enhancingdrivetrainefficiencyFaced with rising energy costs, commercial vehicle manufacturers all over the world are looking for new ways of reducing vehicle fuel consumption. The scope for achieving this through further improvements in engine design would appear to be exhausted, at least in the medium term. In response to the challenges faced by the commercial vehicle industry, Knorr-Bremse has started to develop its own ideas on reducing fuel consumption.

The innovative concepts currently under de-velopment draw on Knorr-Bremse’s expertise in the field of braking and mechatronic systems. Thus, for example, intelligent combination of a compressor with built-in clutch with an electronic control system

EACelectronicairtreatmentwithOSCoilseparatorcartridge.


innovationsfortheJapanesemarketDuring the year under review, virtually all ma-jor Japanese commercial vehicle manufacturers decided to make use of diesel particulate filters in order to comply with Japanese emissions regula-tions, which are among the strictest in the world. A new diesel particulate filter valve from Knorr-Bremse ensures high exhaust gas temperatures and makes an important contribution towards meeting these strict environmental standards.

essential elements – the ECU, wheelspeed sensor, pressure control valve, yaw and acceleration sensor, ASR solenoid valve and 2-way valve. Building on the success of ABS6, work is also taking place with a truck manufacturer on developing an EBS5 system with ESP and additional functions. Further growth for Knorr-Bremse in Japan will depend crucially on tailor-made innovations like these electronic braking systems and the diesel particulate filter.

In addition, Knorr-Bremse Japan has joined forces with two major Japanese truck manufacturers to develop an ABS6 system with integrated vehicle stability program (ESP) and various additional functions. Initially, heavy trucks already fitted with a Knorr-Bremse ABS6 system will be equip-ped with the new system. Vehicle testing was successfully completed in Arjeplog, Sweden in February and Boxberg (Germany) in September, and the system is due for market launch in 2007. Knorr-Bremse Japan will be supplying all the

Discbrake(above)andABS6anti-lockbrakingsystem.


SuccessfulmarketlaunchofneoIn September of the year under review, Knorr-Bremse launched NEO – the new generation of diagnostics systems – at two major trade fairs: Automechanika and IAA Commercial Vehicles. NEO helps commercial vehicle workshops diagnose all current braking systems, irrespective of manufacturer. Like its predecessor, MTS, NEO is capable of identifying a fault, diagnosing the cause and carrying out measurements to localize it. The new system is economical, ergonomic and future-proof.

NEO is modular in design and off ers a range of versions to match individual needs. The basic system, NEO | green, communicates with virtuallyany make of electronic braking system via the vehicle’s diagnostics interface, reading error messages and off ering simple instructions on erroridentifi cation and remediation. NEO | orange, with its measuring system, off ers faster error localization, automatic evaluation and documen-tation of all measured data, as well as further applications such as compressed air pressure

SeRviCeAnDAFteRmARKet

checking, road train matching and safety testing. Like the top-of-the-range version, NEO | blue, the system can also establish a wireless link between the Communication and Measuring Unit (CMU) and the PC. NEO | blue also communicates with the ECU and carries out diagnosis, measurement and error searches automatically. All versions are designed for braking system diagnostics on both tractor units and trailers. For workshops re-quiring only a version for trailer applications, Knorr-Bremse off ers an economical solution in the form of NEO | trailer.

The NEO software runs on any Windows®-basedcomputer that meets certain technical re-quirements. Another ideal option is to order

generation of diagnostics systems – at two major trade fairs: Automechanika and IAA Commercial Vehicles. NEO helps commercial vehicle workshops diagnose all current braking systems, irrespective

NEOsystemsdiagnostics.

Improving effi ciency is an important goal in developing service strategies. The aim is to fi nd solutions that combine product rationalization with a reduced range of diff erent variants and at the same time ensure increased availability.This has a positive impact on capital tie-up and is therefore advantageous for all customer segments. The same applies to process design, where increased effi ciency is also the order of the day. An Internet-based ordering system will in future off er the aftermarket similar advantagesto the Internet-based Knorr-Bremse product catalogue. In addition to all the relevant data for effi cient order processing, the digital catalogue contains a large amount of regularly updated product information. The catalogue is also avail-able on CD-ROM for offl ine use. Knorr-Bremse has also expanded its team of experts for the technical hotline. There is also a new 24-hour helpline designed in the fi rst instance for drivers who also require assistance and support on the road.

the NEO | top industrial laptop, which has been specially designed for workshops and runs two separate Windows® operating systems, one of which is reserved for NEO, leaving the second available for other workshop applications.

improvedaftermarketperformanceIn the aftermarket, the focus in fi scal 2006 was on a number of measures aimed at enhancing the division’s service profi le by improving levels of support off ered to workshops and dealers. Strategies covered the entire product lifecycle right back to the development stage.

Systematic measures were taken to ensure that the aftermarket is consulted and involved in the development processes carried out by the centers of competence (CoCs), to make sure that subsequent service requirements are taken into account when new products and technologies are at the design stage. This should result in more effi cient service concepts and improved overall product lifecycle costs. Workshops anddealers stand to benefi t equally from this

deliberate positioning of Knorr-Bremse as an active service organization. Electronic vehicle systems have reached such a level of sophistica-tion that detailed specialist expertise is required for their servicing, and for this reason the main focus of Knorr-Bremse’s aftermarket activities has been on transferring know-how from the company to repair workshops. A wide range ofpractical training provisions, user-friendly servicing instructions and state-of-the-art testing systems now enables workshops of all sizes to professionally maintain and repair braking systems of all kinds – not just those manufactured by the Knorr-Bremse Group.

Further measures during the year focused on dealers – the most important partners for the workshops. The main emphasis was on productrationalization, streamlining and improved availability. The service strategies initiated during the period under review, e.g. for the APU air processing unit, EAC electronic air control and EBS electronic braking system, will in future have an increasing impact on the aftermarket.


E-commerceanddigitalproductcatalogue.


All in all, the measures adopted over the last few years have helped to further improve customers’ perception of Knorr-Bremse. A clear indication of this enhanced image came in the year under review when Knorr-Bremse was nominated “Best Brand 2006” in the category “Brakes” by readers of the trade journals trans aktuell, FERNFAHRER and lastauto omnibus.

For the second time running, the vote was held in parallel with nomination of “The Best Commer-cial Vehicles“ by specialist publishers ETM and the DEKRA vehicle inspection service, with some 8,300 readers providing feedback. The awards were presented at a ceremony in Stuttgart on June 28, 2006 before an audience of representa-tives of the commercial vehicle industry.

CommitmenttobrandprotectionUnlicensed copies of brake components for trucks and rail vehicles are economically damaging for original equipment manufacturers. But above all, illegal imitations do not offer the same quality as legal products and therefore represent a threat to road safety. And if such copies are marketed under the OEM manufacturer’s name, it also puts that company’s reputation at risk.

Combating intellectual theft is therefore a priority issue for Knorr-Bremse. Worldwide counter-measures are coordinated via the company’s central patent department in Munich, and Bendix also has its own team for the US market. Patent attorneys keep a look-out for possible license infringements, for example at product exhibitions, and take legal action against any that they identify. On many occasions they are able to use injunctions to have illegal copies removed from the market.

With their assistance, patent and trademark registration has also been integrated into product development processes, so that new products are protected from the very outset. The lawyers also ensure that any transfers of technology take place within a properly agreed legal framework.

It is not just the Knorr-Bremse Group that is affected by infringements of intellectual property rights – many other companies are

Knorr-Bremsewinstitleof“BestBrand2006”.


involved in cross-sectoral efforts to combat the problem, and the issue of product piracy is increasingly raised at events and conferences – in some cases with government involvement. Thus, for example, an “Anti-Counterfeiting & Brand Protection Conference“ took place in October 2006 in New York with Bendix among the experts invited to discuss intellectual property theft and brand protection issues.

The Knorr-Bremse Group has developed a three-stage program for staff training and the registration and protection of technical property rights such as patents and trade-marks. A comprehensive internal process of registering trademarks currently used within the Group was launched, and checks were made that products with these trademarks were being correctly identified. In order to put an end to imports of unlicensed copies, all registered trademarks were recorded and, in collaboration with national customs

authorities and governments, customs were informed of which patents in particular were frequent targets of illegal copying. Another area covered by the program is ongoing product development. In future there will also be greater focus on identifying the manufacturers of illegal copies so as to block production from the outset. Knorr-Bremse is a member of APM (Aktionskreis Deutsche Wirtschaft gegen Produkt- und Marken- piraterie), a German industry campaign against product and trademark piracy.

trainingandserviceinSoutheastAsiaIn 2006, Knorr-Bremse Hong Kong orga-nized four major road safety seminars in the South East Asia region attended by some 140 high-ranking representatives of the state transportation authorities and professional associations, major fleet operators and a large number of academic researchers. The company used the opportunity to demon-

strate how intelligent braking systems can contribute towards greater road safety in the countries of the region.

The number of new product launches in the technology sector of the South East Asian market continues to grow steadily, and the Knorr-Bremse truck team in Hong Kong is determined to continue to expand its service network to ensure that end-users benefit from rapid and efficient solutions.


Under the title “Chronology of a Successful Partnership” the most important milestones in a relationship dating back to 1925 were described, and tribute was paid to Knorr-Bremse’s consis-tency and reliability over the years.

Knorr-Bremse was also one of the most important suppliers invited to DaimlerChrysler’s Global Supplier Meeting on July 25, 2006. Executives and sales managers represented the company among guests from 16 diff erent nations.

SuccessfullaunchofRideandDriveShow On July 17 and 18, 2006, the fi rst Ride and Drive Show organized by the Motor & Equipment Manu-facturer Association (MEMA), took place in the RFK Stadium in Washington D.C., off ering an opportunity to present the latest developments in the fi elds of safety and fuel economy for cars and trucks.

150 visitors, including some Members of Congress and more than 50 representatives of the NationalHighway and Transportation Administration (NHTSA), took up the invitation to the two-day event, at which Bendix presented innovative vehicle safety solutions. As well as passenger cars with state-of-the-art safety and fuel economy systems, heavy trucks – some with Bendix systems on board – were also on display. The vehicles were used to demonstrate the eff ectiveness of brake monitoring and electronic stability systems as well as modern collision warning systems. MEMA declared itself highly satisfi ed with the success of the event.

‡ Trade fairs see p. 54

ArticleinDaimlerChrysler’sGlobalSupplierMagazine.HeinzHermannThiele(r.)attheopeningoftheShanghaiheadquarters.

newheadquartersinChinaIn the presence of members of management and the Chinese workforce, Heinz Hermann Thiele opened the new Shanghai headquarters of Knorr-Bremse Commercial Vehicle Systems on October 15, 2006. The modern building houses offi ces for the sales and engineering teams and also for the global purchasing staff for Knorr-Bremse’s European, North American, Japanese and Chinese subsidiaries.

Knorr-Bremse’s Shanghai site also off erstechnical training facilities, a laboratory and a spacious exhibition area where Knorr-Bremse’s products for the Chinese market are on display.

The inauguration of the new headquarters was marked by a Chinese fi rework display and a traditional lion dance to bring good fortune and success for the launch.

Long-termpartnershipacknowledgedLast year saw Knorr-Bremse Commercial Vehicle Systems receive a journalistic accolade from DaimlerChrysler in the form of an article in the company’s Global Supplier Magazine looking back over many years of cooperation in the commercial vehicle segment.

eventS

ArticleinDaimlerChrysler’sGlobalSupplierMagazine.


outLooK Knorr-Bremse Commercial Vehicle Systems division’s assessment of future market trends in the commercial vehicle segment over the next few years varies according to the region con-cerned. While the Western European truck market is expected to remain at a high-level, a decline is forecast for North America and Japan. In particular in North America, new emissions regulations and the resultant increase in vehicle ownership costs are expected to result in a massive 40% slump in 2007, which should then level out in subsequent years until 2010, when the next stage of the emissions regulations comes into force. By contrast, further market growth is expected in China, India and Eastern Europe.

There continues to be a strong global trend towards consolidation in the global commercial vehicle industry. For European truck manufacturers, Asia is increasingly becoming the market of the future, and in India, Japan and China in particular, many of the big names have already secured a foothold in the truck market, with others gearing up to follow. However there are also signs that this trend is taking place in reverse, with Asian truck manufacturers seeking to establish a bridge-head in Europe and North America. Examples are Tata Motors and Ashok Leyland from India and Hino from Japan.

Globalization of procurement and sales continues apace. On the procurement side, Knorr-Bremse plans to use its sites in low-wage countries to significantly increase sourcing in these regions. On the sales side, an increasing global trend towards standardization of vehicle platforms can be observed, for example in the form of worldwide engine series etc. Knorr-Bremse is responding to this trend by developing and implementing worldwide product strategies for electronic systems (ABS, EBS, ESP, etc.), wheelends (disc brake, drum brake, brake cylinder, slack adjuster, hub and disc), compressors, air treatment and

visco-dampers, with priority going to adapting these global strategies to local conditions. Any remaining regional gaps are being closed by internal projects or acquisitions, as in the case of the takeover of Di-Pro brake cylinder production in North America.

In the next few years, Knorr-Bremse’s growth will be based on several elements: future chassis systems, drive train, complete wheelend systems, driver interface modules and a strengthening of business activities in the growth regions of Asia and Eastern Europe. In support of the company’s ambitious goals for profitable growth, the STRONG FOCUS program will be further implemented.

High quality is a crucial factor for long-term market success, and the TRUQ quality campaign will therefore be continued and strengthened by the implementation of new measures. To drive forward global harmonization and optimization of business processes, the new ERP software from SAP will be rolled out worldwide. This supports identification of best practices at individual sites within the global Knorr-Bremse network.

The overall aim is to maintain and expand the company’s global technological lead while at the same time maintaining profitable growth. The main trends that Knorr-Bremse sees driving the commercial vehicle industry over the next years are energy-saving measures combined with improvements in active safety and reduction of total costs of ownership. All new developments will have to take these trends into account.

Human Resources

�2 | H u m a n R e s o u r c e s

The past financial year was one of the most successful in the history of Knorr-Bremse, and the foundations for that success were laid by the company’s employees with their exceptional commitment and readiness to shoulder respon-sibility.

With a view to strengthening its position as technology leader, in 2006 Knorr-Bremse made targeted investments in the continuing develop-ment of its employees. Training measures were introduced around the world with the aim of fostering product development and boosting the focus on quality across the Group.

These efforts were rewarded not least by the company’s successful participation in the European Quality Award. With all its European locations, Knorr-Bremse became the largest company to be awarded Prize Winner status in the entire history of the award.

H u m a n R e s o u r c e s | ��

tHAnKStotHeWoRKFoRCeWe would like to thank the entire workforce for their contribution to the company’s success. Thanks also go to the employee representatives on the supervisory boards, the members of the works councils, and the members of the economic committees at the various plants for their positive and constructive collaboration. The good results of the past year would not have been possible without the commitment and responsible approach of all concerned. The Executive Board and the Supervisory Board wish to express their sincere thanks to all Knorr-Bremse employees.

DeveLoPmentoFStAFFLeveLSBy the end of fiscal 2006, the number of employees had risen from 12,119 (year-end 2005) to 13,035. This equates to a 7.6% year-on-year increase in the size of the Knorr-Bremse Group workforce. The rise was primarily due to the initial consolidation of the Merak (Spain) and Microelettrica (Italy) companies, while another contributory factor was the strong growth in the Asia/Australia region.

In the Commercial Vehicle Systems division, the size of the workforce increased from 6,289 at year-end 2005 to 6,588 at the end of the year under review. In the Rail Vehicle Systems division, the number of employees rose from 5,715 at year-end 2005 to 6,329 at the end of 2006 (+ 10.7%).

WoRLDWiDeDiStRiButionAt year-end 2006, 23.8% of the workforce was employed at the Group’s German facilities (2005: 25.4%). A review of the percentage distribu-

tion of the workforce across the various regions reveals that the proportion of employees in Germany continues to fall. However, this percen-tage change is due to the growth of the Group companies outside Germany. In absolute terms, the number of employees in Germany increased to 3,100.

The proportion of the workforce in the Asia/Aus-tralia region rose to 9.5% (2005: 6.3%) which represents a relatively strong increase of 3.2 percentage points. The growth in this region led to shifts in the percentage distribution of employees in the remaining regions. The proportion of employees in the European region showed a slight downturn in percentage terms from 65.9% in 2005 to 63.6% at year-end 2006. And while the proportion of the workforce in North America remained almost unchanged at 22.2%, the percentage in South America also faded slightly, falling from 5.4% in 2005 to 4.7% at year-end 2006.

�� | H u m a n R e s o u r c e s

Groupworkforcebyregion(Dec.31)

EuropeexceptGermany,MiddleEast,Africa40%

Germany24%

NorthAmerica22%

SouthAmerica5%

Asia,Australia9%


PRoDuCtivit YFor the Group as a whole, average annual sales per employee moved ahead from EUR 240,000 in 2005 to EUR 250,000 in 2006, reflecting the initial effects of the productivity measures introduced in the year under review.

By means of structural improvements and the consistent and long-term utilization of the skills and knowledge of the workforce, we ensure that an increasingly complex portfolio of products and services can be supplied at a constant high level of quality, while at the same time constantly identifying new potential for innovation.

Group personnel costs rose in absolute terms to EUR 592 million, 10% up on the previous year (2005: EUR 538 million). These include wage and salary payments.

HumAnReSouRCeDeveLoPmentInnovations in the fields of products, pro-cesses and services can only be implemented effectively if they are backed up by targeted human resource development measures. Knorr-Bremse has aligned its extensive training program with the needs of the marketplace and offers a range of specific development activities. The aim is to build on the individual strengths of our employees and to equip them with the competencies they will need in the future. Since Knorr-Bremse has employees of 69 different nationalities on the payroll, another core concern is to foster the intercultural skills of our employees. Knorr-Bremse also offers a wide range of foreign assignments at over 60 plants worldwide and actively supports employees during their periods abroad.

GRADuAtetRAineePRoGRAmSTrainee programs for graduates form a key element in Knorr-Bremse’s human resource development activities. The company’s Manage-ment Evolution Program (MEP) offer university graduates with technical or business degrees broad-based cross-company training. Partici-pants perform a coordinated succession of roles within the two divisions, acquiring core skills in project management and employee leadership.

Along with these generalist training programs, the company’s talent management activities also include specific programs that take account of the rising need for young management talent in specific regions and segments of Knorr-Bremse. The Professional Development Program (PDP) was established to respond to specific needs in a prompt and targeted manner. The Professional Development Program China (PDP China) is designed for young Chinese high potentials, who are trained for longer periods in Germany and Europe before returning to China to help establish local production operations and support the know-how transfer process. The Professional Development Program Purchasing (PDP Purchasing) helps to meet the company’s specific needs for next-generation management staff in the field of international purchasing.

emPLoYeeSAtiSFACtionSuRveYOctober 2006 witnessed the company’s third worldwide employee satisfaction survey. As well as measuring satisfaction with working

�� | H u m a n R e s o u r c e s


conditions, the survey is designed above all to generate suggestions for improving these conditions. The high – 83% – rate of returns indicates how well the survey was again received among the workforce. Since our first survey in 2002, systematic follow-up processes have resulted in employee satisfaction and identification with the company showing a continuous and lasting increase. Based on the findings of the survey, further optimization measures were identified and implemented. Ultimately, the effectiveness of the feedback process can only be measured in terms of the changes implemented.

neWimPetuSInternational collaboration has led to the further harmonization of human resources processes, driving the company’s ability to offer employees the same level of service no matter in what part of the Knorr-Bremse network they are working. To further support this system, the year under review saw the introduction of an electronic job

application process in Germany. Given the decidedly positive results, this process will also be introduced in other regions, moving the applicant selection process onto a more international level and enabling Knorr-Bremse to access a wider pool of candidates.

88 N o t e s t o t h e C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

N o t e s t o t h e C o n s o l i d a t e dF i n a n c i a l S t a t em e n t s

o f K n o r r - B r em s e AG

N o t e s t o t h e C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 89

(1) Principles andmethods The consolidated financial statements have been

drawn up in accordance with generally accepted

accounting principles, complying with the accoun-

ting requirements of the German Commercial Code

(HGB) and additional statutory provisions. Figures

in the consolidated financial statements are shown

in thousands of euros (TEUR). Certain items on the

balance sheet and in the statement of income are

combined for the sake of greater clarity. These

items are explained separately in the Notes to the

Consolidated Financial Statements.

Accounting and valuationThe financial statements of the companies in-

cluded in the consolidated financial statements

are prepared according to uniform principles of

accounting and valuation applied to the Group.

For the purposes of consolidation according to

the equity method, any valuations that deviate

from the uniform principles applied to the Group

are retained in the financial statements of the

associated companies.

Intangible assets are valued at acquisition cost less

scheduled depre-ciation; additional depreciation is

taken where necessary.

Property, plant and equipment is recorded at acqui-

sition or production cost, less scheduled deprecia-

tion in the case of items subject to wear and tear;

additional depreciation is taken where necessary. In

the case of companies in the Federal Republic of Ger-

many, the scheduled depreciation is largely calcu-

lated using the declining balance method to the ex-

tent permissible under fiscal legislation, switching

to the straight-line method as soon as the latter re-

sults in higher depreciation. Minor fixed assets with

KB_GB_LO-03.indd 82 24.02.2006 13:08:28 Uhr


acquisition or production costs less than or equal to

EUR 410 are fully depreciated in the year of acquisi-

tion.

Interests in affiliated, associated and related com-

panies and miscellaneous investments are stated at

cost or, in the event of a probable sustained diminu-

tion in value, at fair value (where the latter is lower).

Loans bearing no or low interest are stated at their

discounted cash value.

Materials and supplies are carried in inventories at

the lower of average acquisition cost or replacement

cost. Provision against realization risks is made

where necessary.

Work in process and finished products are stated at

production cost, but in no case higher than the pro-

jected sales revenues less any costs accruing prior to

sale. Production cost includes direct cost of materi-

als and labor, as well as production overhead. A rea-

sonable allowance is made where there is a risk of a

decline in inventory values.

In the case of receivables and miscellaneous assets,

perceivable risks are minimized by appropriate

downward valuation adjustments. A one-off

allowance has been made to cover the general

credit risk.

Accrued liabilities include reasonable and sufficient

allowance for all perceivable risks and any contin-

gent liabilities. In Germany, pension plan accruals

and similar commitments are set up according to ac-

tuarial principles, using the method of computation

provided for in the German Income Tax Act, based on

a rate of interest at 6 percent. For the year under re-

view, they were calculated on the basis of the mor-

tality tables published by Prof. Dr. Heubeck in July

2005. Our foreign subsidiaries cover pension plans

and similar commitments by accruals which are cal-

culated according to principles similar to those used

in Germany.

Liabilities are stated at the amounts repayable.

Consolidated companiesIn addition to Knorr-Bremse AG, a total of 16 Ger-

man and 72 foreign subsidiaries over which Knorr-

Bremse has uniform control are included in the con-

solidated financial statements.

Investments in one German and one foreign com-

pany are shown in the consolidated financial state-

ments as investments in associated companies. Two

German and five foreign subsidiaries have not been

included in consolidation because of their minor sig-

nificancewith respect to the net worth, financial po-

sition and results of the Group. For the same reason,

two German subsidiaries and one foreign subsidiary

are not shown as associated companies.

During fiscal year 2006, the Group set up or acquired

the following companies, which are included

in consolidation: KB Alpha Beteiligungs GmbH,

Munich/Germany; KB Beta Beteiligungs GmbH,

Munich/Germany; KB Gamma Beteiligungs GmbH,

Munich/Germany; Di-Pro Inc., Fresno, Califor-

nia/USA; Knorr-Bremse S.R.L., Bucharest/Romania;

Knorr-Bremse Polska SfN Sp.zo.o., Warsaw/Poland;

Westinghouse Platform Screen Doors (Guangzhou)

Limited, Guangzhou/China; Knorr-Bremse/Nankou

Air Supply Unit (Beijing) Co. Ltd., Nankou/China;

Knorr-Bremse CARS LD Vehicle Brake Disc Manufac-

turing (Beijing) Co. Ltd., Daxing/China; IFE-Victall

Railway Vehicle Door Systems (Qingdao) Co. Ltd.,

Qingdao/China.

Knorr-Bremse & Kamax Sp.zo.o., registered at Prze-

mysl in Poland has been merged with Knorr-Bremse

Systemy dla Kolejowych Srodków Lokomocji PL

Sp.zo.o., based at Cracow in Poland.

Knorr-Bremse UK Ltd., Bristol/UK, was wound up in

the year under review.

This means that compared to the previous year, the

number of companies included in consolidation has

increased by three German and seven foreign com-

panies. One foreign company was merged. In the

case of the seven foreign companies included in con-

solidation for the first time, the investments have

been consolidated by applying § 301 (2) of the Ger-

man Commercial Code (HGB), based on their values

as at December 31, 2006. This approach diverges

from GAS (German Accounting Standard) 4, which

does not provide for a voting option as specified in

§ 302 (2) of the German Commercial Code (HGB). The

above-mentioned changes in the scope of consolida-

tion had no significant impact on the Group’s net as-

sets, financial position and operating results. A de-

tailed list of affiliated and associated companies ap-

pears in a separate breakdown of the Group’s share-

holdings.

As a result of the changes detailed above, figures

under the consolidated balance sheet headings

listed below showed the following increases as at

the balance sheet date: Intangibles, fixed assets

and investments EUR 12.6 million; Current assets

EUR 27.8 million; Accruals EUR 3.9 million; Accounts

KB_GB_LO-03.indd 83 24.02.2006 13:08:33 Uhr


payable (trade) and Other liabilities EUR 6.4 million;

Balance sheet total EUR 41.5 million.

In order to make the above-mentioned acquisitions,

the Group paid out EUR 14.4 million in fiscal year

2006.

Principles of consolidationIn consolidating our investments in subsidiaries, we

offset the book values against the value of our inter-

ests in the shareholders’ equity of the subsidiaries

at the time of the initial consolidation. Since 2002,

any resulting goodwill has been entered on the as-

sets side in compliance with GAS standards, subject

to scheduled depreciation over a period of not more

than 20 years. The principle of offsetting goodwill

against retained earnings resulting from first-time

consolidations in the years preceding 2002 has been

retained. Wherever possible, a negative goodwill re-

sulting from the consolidation in investments is re-

leased for the year in which it arises, as permitted by

German commercial law and accounting standards.

Associated companies are consolidated using the

equity method, with goodwill generally included as

part of the cost of acquiring interests in associated

and related companies. Our share in the annual

results of companies consolidated in accordance

with this method, including amortization on

goodwill, is shown in the statement of income

under Investment performance.

Receivables and liabilities are offset between conso-

lidated companies. Unrealized intercompany profits

resulting from intercompany trade in goods and ser-

vices are eliminated in the consolidated statements.

In the consolidated statement of income, earnings

from intercompany sales and other intercompany in-

come are offset against the corresponding expenses.

If consolidation entries affects incomedeferred taxes

are recognized.

Foreign currency translationIn the individual financial statements, receivables

and liabilities in foreign currencies are translated at

the rate existing at the transaction date or - if less

favourable - at the rate at the balance sheet date.

Where foreign currency items have been hedged,

they are valued at the corresponding hedging rate.

The balance sheets of the foreign companies in-

cluded in the consolidated financial statements are

translated at the year-end rate (median price). The

revenues and expenses shown in the statements

of income are translated at average rates for the

year. The year-end rate (median price) is used to

calculate depreciation, earnings and employment of

earnings. In this sense, GAS 14 has not been applied

for purposes of foreign currency translation.

Any translation differences by comparison with the

previous year’s figures are offset against retained

earnings; differences between the rate on the

balance sheet date and the average rate are shown

under Other operating income or Other operating

expenses, thereby diverging from GAS 14.


(2) Changes in intangibles, fixedassets and investments

Costs of acquisition or production

in EUR thousands (TEUR)

Industrial property rights/trademarks

Goodwill

Intangible assets

Land, equivalent rights to real property,

and buildings, including buildings on land

not owned

Technical equipment and machinery

Other equipment, plant and office

equipment

Advances to suppliers and construction in

progress

Fixed assets

Investments in affiliated companies

Investments in associated companies

Miscellaneous investments

Investments

Intangibles, fixed assets and investments


Carried forward

Jan. 1, 2006

Additions Reclassifications Retirements Currency

differences

Balance

Dec. 31, 2006

Accrued

deprecia-

tion/amortization

Net value

Dec. 31, 2006

Net value

Dec. 31, 2005

Depreciation/amortization

during the

fiscal year

232,668 15,702 855 (3,483) (11,193) 234,549 111,918 122,631 132,609 17,476

207,074 48,516 0 0 (16,806) 238,784 48,421 190,363 175,429 19,812

439,742 64,218 855 (3,483) (27,999) 473,333 160,339 312,994 308,038 37,288

247,406 5,474 4,772 (757) (4,296) 252,599 101,158 151,441 150,539 5,457

314,183 34,395 886 (12,303) (7,148) 330,013 209,122 120,891 119,850 34,384

229,724 26,436 20,038 (11,230) (7,147) 257,821 165,160 92,661 83,880 26,599

33,120 35,516 (26,551) (4,173) (1,885) 36,027 4,025 32,002 29,092 0

824,433 101,821 (855) (28,463) (20,476) 876,460 479,465 396,995 383,361 66,440

5,379 500 0 (214) (438) 5,227 706 4,521 4,669 0

26 0 217 (47) 6 202 0 202 26 0

34,268 55 (217) (80) (1,460) 32,566 16,866 15,700 17,387 0

39,673 555 0 (341) (1,892) 37,995 17,572 20,423 22,082 0

1,303,848 166,594 0 (32,287) (50,367) 1,387,788 657,376 730,412 713,481 103,728

Investments in fixed and intangible assets for the operational side of the business amounted to TEUR 106,955 in fiscal year 2006, or TEUR 166,039 if non-operational

items are included.


(3) Intangible assets This item is mainly accounted for by the acquisition of goodwill, patents, rights to the use of names and trademarks,

and IT software. The increased goodwill derives from companies included in consolidation for the first time in the

reporting period.

Any resulting goodwill is subject to scheduled depreciation over a period of not more than 20 years. Other intangible

assets are subject to scheduled depreciation over periods of between 3 and 10 years. No additional depreciation was

applied during the fiscal year.

(4) Fixed assets Movements of fixed assets for the Group are presented in the compilation above. No additional depreciation was

applied during the fiscal year.

(5) Investments Movements of investments are also set out in the compilation above.

Miscellaneous investments consist of investments in associated and other companies (TEUR 704), long-term

investments (TEUR 1,902), loans to affiliated companies (TEUR 12,524) and miscellaneous loans (TEUR 570).


List of shareholdings

1. Consolidated affiliated companies Share in capital

(%)

Albatros GmbH, Munich/Germany 100.0

Albatros Railway Technologies (Shanghai) Co., Ltd., Shanghai/China 100.0

BCVS Canadian Holdings LLC, Anjou, Quebec/Canada 100.0

BCVS Mexican Holdings LLC, Cd Acuña, Coah/Mexico 100.0

Bendix Commercial Vehicle Systems LLC, Elyria, Ohio/USA 100.0

Bendix CVS Canada Inc., Anjou, Quebec/Canada 100.0

Bendix CVS de Mexico SA de CV, Cd Acuña, Coah/Mexico 100.0

Bendix Spicer Foundation Brake Canada, Inc., Kingston, Ont./Canada 100.0

Bendix Spicer Foundation Brake LLC, Elyria, Ohio/USA 80.0

Bost Ibérica S.L., Madrid/Spain 100.0

BSFB Holdings, Inc., Elyria, Ohio/USA 100.0

Di-Pro, Inc., Fresno, California/USA 100.0

Dr. techn. Josef Zelisko Ges.m.b.H., Mödling/Austria 100.0

Freinrail Systèmes Ferroviaires S.A., Reims/France 100.0

Frensistemi S.r.l., Florence/Italy 100.0

Hasse &Wrede CVS Dalian, China Ltd., Dalian/China 70.0

Hasse &Wrede GmbH, Berlin/Germany 100.0

Hasse &Wrede North America Inc., North Aurora, IL/USA 100.0

IFE CR a.s., Brno/Czech Republic 100.0

IFE North America Inc., Westminster, Md./USA 100.0

IFE-Tebel Australia Pty. Ltd., Granville/Australia 100.0

IFE-Tebel Technologies B.V., Leeuwarden/The Netherlands 100.0

IFE Victall Railway Vehicle Door Systems (Qingdao) Co. Ltd., Qingdao/China 50.0

Indústria Freios Knorr Ltda., São Paulo/Brazil 100.0

KB Alpha Beteiligungs GmbH, Munich/Germany 100.0

KB Beta Beteiligungs GmbH, Munich/Germany 100.0

KB Gamma Beteiligungs GmbH, Munich/Germany 100.0

KB Media GmbHMarketing undWerbung, Munich/Germany 100.0

Knorr Brake Corporation, Westminster, Md./USA 100.0

Knorr Brake Holding Corporation, Watertown, NY/USA 89.3

Knorr Brake Ltd., Kingston, Ont./Canada 100.0

Knorr Brake Truck Systems Company, Watertown, NY/USA 100.0

Knorr-Bremse / Nankou Air Supply Unit (Beijing) Co., Ltd., Nankou/China 55.0

Knorr-Bremse Asia Pacific (Holding) Ltd., Hong Kong 100.0

Knorr-Bremse Australia Pty. Ltd., Granville/Australia 100.0

Knorr-Bremse Benelux B.V.B.A., Heist-op-den-Berg/Belgium 100.0

Knorr-Bremse Beteiligungsgesellschaft mbH, Munich/Germany 100.0

Knorr-Bremse Brake Equipment (Shanghai) Co., Ltd., Shanghai/China 100.0

Knorr-Bremse Braking Systems for Commercial Vehicles (Dalian) Co., Ltd., Dalian/China 100.0

Knorr-Bremse CARS LD Vehicle Brake Disc Manufacturing (Beijing) Co. Ltd., Daxing/China 50.0

Knorr-Bremse Commercial Vehicle Systems Japan Ltd., Tokyo/Japan 80.0

Knorr-Bremse Fékrendszerek Kft., Kecskemét/Hungary 100.0

Knorr-Bremse Ges.m.b.H., Mödling/Austria 100.0


1. Consolidated affiliated companies Share in capital

(continued) (%)

Knorr-Bremse India Pvt. Ltd., Faridabad/India 100.0

Knorr-Bremse Investment GmbH, Munich/Germany 100.0

Knorr-Bremse Nordic Rail Services AB, Lund/Sweden 75.0

Knorr-Bremse Polska SfN sp.zo.o., Warsaw/Poland 100.0

Knorr-Bremse Rail Systems Japan Ltd., Tokyo/Japan 94.0

Knorr-Bremse Rail Systems Korea Ltd., Seoul/South Korea 90.0

Knorr-Bremse Rail Systems (UK) Ltd., Melksham, Wiltshire/Great Britain 100.0

Knorr-Bremse S.A. (Pty.) Ltd., Kempton Park/South Africa 100.0

Knorr-Bremse S.R.L., Bucharest/Romania 70.0

Knorr-Bremse Sistemas para Veículos Comerciais Brasil Ltda., São Paulo/Brazil 100.0

Knorr-Bremse Sistemas para Veículos Ferroviários Ltda., São Paulo/Brazil 100.0

Knorr-Bremse Sistemi per Autoveicoli Commerciali S.p.A., Arcore/Italy 100.0

Knorr-Bremse System för Tunga Fordon AB, Malmö/Sweden 100.0

Knorr-Bremse Systeme für Nutzfahrzeuge GmbH, Munich/Germany 80.0

Knorr-Bremse Systeme für Schienenfahrzeuge GmbH, Munich/Germany 100.0

Knorr-Bremse Systeme für Schienenfahrzeuge Ibero Holding GmbH, Munich/Germany 70.0

Knorr-Bremse Systèmes pour Véhicules Utilitaires France S.A., Lisieux/France 100.0

Knorr-Bremse Systems for Commercial Vehicles India Pvt. Ltd., Pune/India 74.0

Knorr-Bremse Systems for Commercial Vehicles Ltd., Bristol/Great Britain 100.0

Knorr-Bremse Systems for Rail Vehicles (Suzhou) Co., Ltd., Suzhou/China 100.0

Knorr-Bremse Systemy dla Kolejowych Srodków Lokomocji PL Sp. z o.o., Cracow/Poland 100.0

Knorr-Bremse Systémy pro uzitková vozidla CR s.r.o., Hejnice/Czech Republic 100.0

Knorr-Bremse Vasúti Jármü Rendszerek Hungária Kft., Budapest/Hungary 100.0

Knorr-Bremse Verwaltungsgesellschaft mbH, Munich/Germany 100.0

Maquiladora de Acuña SA de CV, Cd Acuña, Coah/Mexico 100.0

Merak North America Company, Albany/USA 100.0

Merak Sistemas Integrados de Climatización S.A., Madrid/Spain 100.0

Microdigit S.r.l., Lodi/Italy 100.0

Microelettrica Power Devices (Pty) Ltd., Johannesburg/South Africa 95.0

Microelettrica Power (Pty) Ltd., Johannesburg/South Africa 74.0

Microelettrica Scientifica (Pty) Ltd., Johannesburg/South Africa 100.0

Microelettrica Scientifica S.p.A., Rozzano/Italy 70.0

Microelettrica USA LLC, Randolph, New Jersey/USA 90.0

Micro Ener S.A.S., Noisy le Grand/France 89.9

M.S. Resistances S.A.S., Saint Chamond/France 51.0

New York Air Brake Corporation, Watertown, NY/USA 100.0

Oerlikon-Knorr Eisenbahntechnik AG, Niederhasli/Switzerland 100.0

Skach Ges.m.b.H., Mödling/Austria 100.0

Sociedad Española de Frenos, Calefacción y Señales S.A., Pinto (Madrid)/Spain 100.0

Stahlwerk Volmarstein GmbH, Wetter (Ruhr)/Germany 100.0

Unicupler GmbH, Niederurnen/Switzerland 100.0

Westinghouse Brakes Australia Pty. Ltd., Granville/Australia 100.0

Westinghouse Platform Screen Doors Ltd., Walsall/Great Britain 100.0

Westinghouse Platform Screen Doors (Guangzhou) Ltd., Guangzhou/China 65.0

Zelisko Instrument Transformers Gesellschaft mbH, Berlin/Germany 100.0


2. Associated companies valued using the equity method Share in capital

(%)

Gorilla Brake & Components, Inc., Brantford, Ont./Canada 20.0

Webasto Kiekert Bustüren GmbH, Karlsfeld/Germany 50.0

3. Affiliated companies not included in consolidation Share in capital

– due to minor significance and/or lack of commercial activity – (%)

Black River Air Logistics Corp., Watertown, NY/USA 100.0

Frenos Knorr Argentina S.A., Buenos Aires/Argentina 100.0

Gesellschaft mit beschränkter Haftung ”Knorr-Bremse RUS“, Nizhny Novgorod/Russia 100.0

IFE Door Systems for Rail Vehicles (Shanghai) Co. Ltd., Shanghai/China 100.0

KB Investment UK Ltd., Chippenham/Great Britain 100.0

Metco Technical Consulting AG, Zug/Switzerland 100.0

– Deutsche-Immobilien-Leasing GmbH holds majority voting rights –

4. Associated companies valued without using the equity method Share in capital

(%)

Megalith Grundstücksverwaltungsgesellschaft mbH & Co. Vermietungs KG, Mainz/Germany 100.0

– Deutsche-Anlagen-Leasing GmbH holds majority voting rights –

Merak-CPC Air-conditioning System (Jiangsu) Co., Ltd., Changzhou/China 50.0

Sanctor Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Marzahn KG, Düsseldorf/Germany 99.0

– Deutsche-Immobilien-Leasing GmbH holds majority voting rights –

5. Interests (exceeding 20%) in associated and related companies Share in capital

(%)

OLB Oberlandbahn Fahrzeugbereitstellungs GmbH, Munich/Germany 24.8


(6) Inventories 2006

TEUR

2005

TEUR

Materials and supplies 140,015 105,455

Work in process 69,123 65,972

Finished products, merchandise 126,489 126,104

less advances received on orders (112,217) (81,777)

Total 223,410 215,754

(7) Receivables and other assets 2006 2006 2005

Remaining term

more than 1 year in total in total

TEUR TEUR TEUR

Accounts receivable, trade 1,209 488,065 427,473

Other assets 5,515 89,524 97,742

Total 6,724 577,589 525,215

(8) Cash and cash equivalents This item includes cash at bank, checks and cash on hand.

(9) Prepaid expenses Group prepaid expenses amounting to TEUR 52,426 (2005: TEUR 65,950) include deferred tax assets totaling

TEUR 69,793 (2005: TEUR 77,648) as well as deferred tax liabilities totaling TEUR 23,349 (2005: TEUR 20,218), which, as

in the previous year, were offset against this heading in the year under review, in a departure from the provisions of

GAS 10. Of the total deferred tax assets, TEUR 10,809 (2005: 8,844) relate to projected consolidated results and

TEUR 35,635 (2005: TEUR 48,586) relate to deferred tax assets on individual group accounts. Tax on consolidation

activities is charged at 40 percent and based on projected rates of taxation at the time of realization. Of the residual

amount totaling TEUR 5,982 (2005: TEUR 8,520), TEUR 168 (2005: TEUR 476) relate to a debt discount.

(10) Capital stock The capital stock of Knorr-Bremse AG is divided up into 2,600,000 bearer shares, each with a nominal value of EUR 26.

Stella Vermögensverwaltungs GmbH and KB Holding GmbH, both based in Munich, have informed Knorr-Bremse AG

that directly or indirectly, they hold a majority interest in Knorr-Bremse AG.

(11) Capital reserves Capital reserves totaling TEUR 153 relate exclusively to Knorr-Bremse AG.

(12) Retained earnings While Capital stock and Capital reserves correspond to the relevant parent company items, this heading reflects all

Group items that exert an influence on shareholders’ equity. Movements are shown in the statement of changes in

group equity.


(13) Other accrued liabilities 2006

TEUR

2005

TEUR

Provisions for taxes 27,882 26,780

Miscellaneous accruals 298,786 312,139

Total 326,668 338,919

The taxation provisions include amounts for the current year and for previous years.

Miscellaneous accruals relate primarily to warranty obligations, personnel costs, provisions for restructuring measures,

anticipated losses on contracts and other risks in connection with current operations, as well as invoices outstanding.

(14) Liabilities 2006 2006 2005

Remaining term less than 1

year in total in total

TEUR TEUR TEUR

Bonds and loans 175,000 175,000 175,000

Accounts payable, banks 9,756 14,381 23,015

Accounts payable, trade 349,398 349,549 307,034

Other liabilities:

Liabilities from accepted bills 1,152 1,298 1,354

Miscellaneous liabilities 87,331 92,327 91,123

(thereof for taxes) (13,205) (13,205) (13,390)

(thereof for social security) (7,659) (7,659) (7,060)

88,483 93,625 92,477

Total liabilities 622,637 632,555 597,526

(thereof with a remaining term of more than 5 years) (1,505) (2,942)

(15) Contingencies andmiscellaneousfinancial commitments

2006

TEUR

2005

TEUR

Contingent liabilities on notes 824 731

Warranties 10,279 8,251

Guarantees 7,862 9,126

Land charge 11,000 11,000

Leasing commitments 189,857 183,823

A long-term purchase agreement exists between Group company Bendix Spicer Foundation LLC, Elyria, Ohio/USA and

Gorilla Brakes & Components, Inc., Brantford, Ontario/Canada. Under the terms of this agreement, Bendix Spicer

Foundation LLC undertakes to purchase from Gorilla Brakes & Components, Inc. 85 percent of the spare part deliveries

made within the latter company’s regional sphere of influence.


(16) Other operating income Other operating income consists primarily of rental income, insurance compensation, income from disposals of fixed

assets and income from the reversal of reserves.

(17) Cost of materials 2006

TEUR

2005

TEUR

Expenditure on materials, supplies and merchandise 1,674,782 1,457,628

Expenditure on services purchased 39,337 30,053

Total 1,714,119 1,487,681

(18) Personnel expenses/staff 2006

TEUR

2005

TEUR

Wages and salaries 469,382 427,057

Statutory social welfare contributions and expenses relating to pensions and employee benefits 122,170 111,248

Personnel costs 591,552 538,305

(thereof for retirement benefits) (26,954) (26,147)

Average number of employees during the fiscal year Number Number

Wage earners 6,356 5,908

Salary earners 6,013 5,399

Apprentices 125 122

Total 12,494 11,429

(19) Depreciation 2006

TEUR

2005

TEUR

Depreciation on intangibles and fixed assets 103,728 96,767

In addition, rental and leasing expenses totaling TEUR 43,072 (2005: 38,094) were incurred during the reporting

period.

(20) Other operating expenses Other operating expenses consist primarily of maintenance costs, direct sales costs, legal and consulting fees and travel

expenses, as well as miscellaneous administrative expenses and commissions.

In the year under review, translation differences arising from the translation of the profit and loss account at the rate on

the balance sheet date and the average rate for the year amounted to TEUR -3,860 and are shown under Other

operating expenses. In the previous year, a positive translation result of TEUR 4,397 was shown under Other operating

income.

Other taxes for the Group amounted to TEUR 7,814 (2005: TEUR 6,789).


(21) Investment performance and otherfinancial results

2006

TEUR

2005

TEUR

Investment performance

Income from investments in associated and related companies 0 2,118

Other financial results

Income from other marketable securities and loans from financial assets 414 117

Miscellaneous interest and similar income 8,930 6,025

Depreciation on interests in affiliated companies 0 (430)

Interest and similar expenses (22,345) (14,283)

Income from associated companies (46) 0

Total (13,047) (6,453)

(22) Net income 2006

TEUR

2005

TEUR

Net income 185,499 154,126

Minority interests in earnings of consolidated subsidiaries (32,169) (45,373)

Retained earnings brought forward from the previous year 44,332 1,280

Transfers to (2005: transfers from) retained earnings (73,330) 9,699

Unappropriated consolidated net income (Knorr-Bremse AG unappropriated retained earnings) 124,332 119,732

(23) Financial derivatives Forward exchange and option transactions are performed purely and exclusively in order to hedge current and future

foreign currency payables and receivables. The aim of hedging operations at Knorr-Bremse is to reduce the risks posed

by foreign exchange fluctuations to the ordinary course of business. Currency hedging is based on the volume of

open commitments arising or expected to arise from core business activities. Maturities are based on the life spans

of the underlying business transactions. Knorr-Bremse hedges foreign exchange risks by trading in forward exchange

contracts and currency options. In addition, Knorr-Bremse AGmakes use of interest rate options and interest rate swaps

in order to minimize the negative impact on Group funding of possible interest rate fluctuations. Financial instruments

are not held for trading purposes. The use of financial derivatives within the Knorr-Bremse Group is governed by strict

guidelines. Among other things, these guidelines stipulate that all derivative transactions shall be carried out and

coordinated by Knorr-Bremse AG, and that risks shall be assessed and monitored on a continuous basis.

The nominal amounts shown in the following table represent the sum total of all transactions with parties out-

side the Group (purchase and sale figures). They do not include amounts exchanged between parties within the

Group.


The nominal and market values of financial instruments as at December 31, 2006 are shown below:

Total

Dec 31, 2006

Total

Dec. 31, 2006

Total

Dec 31, 2005

Total

Dec. 31, 2005

in EUR millions Nominal value Market value Nominal value Market value

Foreign exchange contracts

Forward exchange transactions 264 10 219 3

Currency options 266 16 234 8

Interest rate contracts

Cross currency swaps 134 15 146 5

Interest rate swaps 183 4 190 8

Interest rate options 75 0 75 0

The market value of financial derivatives is best defined as the price one party is prepared to pay in order to assume the

rights and/or obligations of another party. Market values are calculated on the basis of market information available at

the balance sheet date and by applying standard market valuation methods as follows:

Currency hedging contracts are valued on the basis of reference rates, taking account of forward premiums and dis-

counts.

Interest rate contracts are valued on the basis of discounted, projected cash-flows, using market interest rates for the

remaining life spans of the instruments.

Interest rate options are valued using recognized models for calculating option prices (e.g. Black-Scholes).

Market values are calculated by independent financial services companies. Financial derivatives carry a credit risk

equivalent to the positive market value of the derivatives in question.

(24) Independent auditor’s fees Fees paid out in respect of services provided by the independent auditor, KPMG Deutsche Treuhand-Gesellschaft

Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, of Munich in Germany, during fiscal year 2006 amounted to:

2006

TEUR

Breakdown of fees

Audit fees 324

Audit-related fees 16

Tax consulting fees 27

Other fees 31

398

The item Independent auditor’s fees records the sum total of fees paid to KPMG for conducting the annual audit of the

Group accounts and statutory financial statements for Knorr-Bremse AG and its affiliated subsidiaries in Germany. In

addition, fees shown under this heading relate to the submission of statutory audit certificates to the appropriate

official bodies and compliance with other regulatory requirements. The item Audit-related fees includes fees paid in

return for advice on how best to account for current or planned transactions, due-diligence services associated with

acquisitions, certification of adherence to specific contractual arrangements, as well as the auditing of pension plans

and other agreed-upon procedures.


The item Tax consulting fees refers to consulting services focusing on turnover tax-related issues in particular.

(25) Miscellaneous The Group financial statements are published in the official electronic Federal Gazette and in the Commercial Register

at the local first-instance court in Munich. Under the terms of § 264 para. 3 of the German Commercial Code (HGB), the

subsidiary companies Knorr-Bremse Systeme für Schienenfahrzeuge GmbH and Knorr-Bremse Systeme für

Nutzfahrzeuge GmbH, both based in Munich, are exempt from the obligation to publish their figures as required under

§ 325 of the German Commercial Code.

The report on Group relationships with affiliated companies submitted as part of the group management report for

fiscal year 2006 also includes the statutory disclosures required under GAS 11 (German Accounting Standard).

(26) Total remuneration of theSupervisory Board and Board ofManagement

The total remuneration of members of the Supervisory Board amounted to TEUR 256 and the total remuneration of the

Board of Management to TEUR 9,115. Pension commitments to former members of the Board of Management and

their surviving dependents are covered by an accrual of TEUR 6,407; payments in the fiscal year amounted to TEUR 754.


Heinz Hermann Thiele Jan P. Nonnenkamp Jens Theuerkorn

Dr. Raimund Klinkner Dr. Dieter Wilhelm

104 C o n s o l i d a t e d C a s h F l o w S t a t e m e n t

Consolidated cash flow statement in compliance with GAS 2 (German Accounting Standard)

2006

TEUR

2005

TEUR

Profit for the period (including minority interests in results of consolidated subsidiaries) 185,499 154,126

Write-downs/write-ups on non-current assets 103,728 96,634

Changes in accruals (12,861) (4,509)

Profit/loss on disposals of intangibles, fixed assets and investments 1,957 (18,188)

Changes in inventories, receivables and other assets not related to investing or financing activities (49,084) (59,053)

Changes in payables and other liabilities not related to investing or financing activities 52,975 16,912

Cash-flows from operating activities 282,214 185,922

Purchases of intangible assets (12,029) (8,271)

Purchases of fixed assets (94,926) (106,056)

Proceeds from disposals of fixed and intangible assets 5,767 21,008

Purchases of non-current financial assets (719) (304)

Proceeds from disposals of non-current financial assets 418 13,932

Purchases involving the acquisition of companies included in consolidation (99,641) (40,955)

Cash-flows from investing activities (201,130) (120,646)

Dividends paid (94,845) (105,734)

Repayments of borrowings (9,046) (4,416)

Cash-flows from financing activities (103,891) (110,150)

Change in cash funds resulting from exchange rate movements and changes in group structure (808) 9,689

Changes in cash funds resulting from cash-relevant transactions (23,615) (35,185)

Cash funds at the beginning of the period 86,128 121,313

Cash funds at the end of the period 62,513 86,128

Cash funds are comprised of the Group’s cash and cash equivalents and marketable securities.

S e g m e n t R e p o r t i n g 105

Segment reporting in compliance with GAS 3 (German Accounting Standard)In order to comply with GAS 3, Knorr-Bremse AG has compiled the following report on three segments that are subject to reporting requirements. The breakdown by segment isbased on the Group’s activities in the three major geographical regions that provide the geographical framework for the Group’s internal organizational and reporting structures.The operating segments cover three regions: Europe, the Americas and Asia/Australia, each of which is characterized by differentmarket and customer demands. The Knorr-BremseGroup’s main product lines – braking systems for rail and commercial vehicles – are represented in all three regions.

Fiscal year 2006 Europe America Asia/Australia Knorr-Bremse AG Groupin EUR thousands (TEUR)

Sales by region 2,105,602 960,383 208,020 3,274,005

thereof net sales with third parties 1,975,618 942,053 202,949 3,120,620

thereof net sales with other segments 129,984 18,330 5,071 153,385Net income 137,092 49,612 (1,205) 185,499

Income tax charge 79,934 28,927 (702) 108,159

Investments (excluding financial investments) 68,237 30,058 8,660 106,955

Depreciation (excluding financial investments) 63,002 32,040 8,686 103,728Assets 925,841 597,532 122,977 1,646,350

Fiscal year 2005 Europe America Asia/Australia Knorr-Bremse AG Groupin EUR thousands (TEUR)

Sales by region 1,820,353 872,203 178,661 2,871,217

thereof net sales with third parties 1,702,074 864,591 176,610 2,743,275

thereof net sales with other segments 118,279 7,612 2,051 127,942Net income 93,957 54,401 5,768 154,126

Income tax charge 55,900 32,365 3,432 91,697

Investments (excluding financial investments) 74,428 28,429 11,470 114,327

Depreciation (excluding financial investments) 60,083 33,530 3,154 96,767Assets 875,519 631,231 99,778 1,606,528

The analysis does not show borrowings or interest payable by region, because these items are controlled centrally across the Group by the parent company, thus are not dependenton regional decisions associated with day-to-day business operations.

Fiscal year 2006 Net sales Investments(excl. financial investments)

Depreciation(excl. financial investments)


Rail vehicle systems 1,173,648 36,767 39,561

Commercial vehicle systems 1,967,781 69,502 55,759

Miscellaneous/consolidations (20,809) 686 8,408Knorr-Bremse AG Group 3,120,620 106,955 103,728

Fiscal year 2005 Net sales Investments(excl. financial investments)

Depreciation(excl. financial investments)


Rail vehicle systems 990,583 50,437 44,269

Commercial vehicle systems 1,773,455 62,369 52,847

Miscellaneous/consolidations (20,763) 1,521 (349)Knorr-Bremse AG Group 2,743,275 114,327 96,767

106 S t a t e m e n t o f C h a n g e s i n G r o u p E q u i t y

Statement of changes in group equity in compliance with GAS 7 (German Accounting Standard)

Changes in group equity 2006 Capital stock Capital reserves Retained earnings Unappropriated

consolidated net

income

Minority interests Knorr-Bremse AG

Group


As at Dec. 31, 2005 67,600 153 169,025 119,732 111,351 467,861

Dividend payments (75,400) (19,445) (94,845)

Net income 2006 153,330 32,169 185,499

Transfers to retained earnings 73,330 (73,330) 0

Currency fluctuations (26,754) (2,796) (29,550)

Other fluctuations (35,547) (35,547)

As at Dec. 31, 2006 67,600 153 215,601 124,332 85,732 493,418

Changes in group equity 2005 Capital stock Capital reserves Retained earnings Unappropriated

consolidated net

income

Minority interests Knorr-Bremse AG

Group


As at Dec. 31, 2004 67,600 153 165,182 66,280 96,649 395,864

Dividend payments (65,000) (40,734) (105,734)

Net income 2005 108,753 45,373 154,126

Withdrawals from retained earnings (9,699) 9,699

Currency fluctuations 13,542 4,324 17,866

Other fluctuations 5,739 5,739

As at Dec. 31, 2005 67,600 153 169,025 119,732 111,351 467,861

I n d e p e n d e n t A u d i t o r ’ s R e p o r t 107

Independent auditor’s report We have audited the consolidated financial statements prepared by Knorr-Bremse Aktiengesellschaft, Munich, compris-

ing the balance sheet, the income statement, statement of changes in equity, cash flow statement and the notes to the

consolidated financial statements, together with the group management report for the business year from January 1 to

December 31, 2006. The preparation of the consolidated financial statements and the group management report in ac-

cordancewith German commercial law are the responsibility of the parent company’smanagement. Our responsibility is

to express an opinion on the consolidated financial statements and on the groupmanagement report based on our audit.

We conducted our audit of the consolidated financial statements in accordance with § 317 HGB [German Com-

mercial Code] and German generally accepted standards for the audit of financial statements promulgated by

the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit such that

misstatements materially affecting the presentation of the net assets, financial position and results of operations in

the consolidated financial statements in accordance with German principles of proper accounting and in the group

management report are detected with reasonable assurance. Knowledge of the business activities and the economic

and legal environment of the Group and expectations as to possible misstatements are taken into account in the

determination of audit procedures. The effectiveness of the accounting-related internal control system and the

evidence supporting the disclosures in the consolidated financial statements and the group management report are

examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial

statements of those entities included in consolidation, the determination of entities to be included in consolidation, the

accounting and consolidation principles used and significant estimates made bymanagement, as well as evaluating the

overall presentation of the consolidated financial statements and group management report. We believe that our audit

provides a reasonable basis for our opinion.

Our audit has not led to any reservations.

In our opinion, based on the findings of our audit, the consolidated financial statements comply with the legal

requirements and give a true and fair view of the net assets, financial position and results of operations of the Group

in accordance with these requirements. The group management report is consistent with the consolidated financial

statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and

risks of future development.


KPMG Deutsche Treuhand-Gesellschaft

Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft

signed Rupprecht

Independent auditor

signed Schmalzl

Independent auditor

108 C o n s o l i d a t e d B a l a n c e S h e e t

Consolidated balance sheet as at December 31, 2006Assets

Notes Dec. 31, 2006

TEUR

Dec. 31, 2005

TEUR

Intangible assets (3) 312,994 308,038

Fixed assets (4) 396,995 383,361

Investments (5) 20,423 22,082

Intangibles, fixed assets and investments (2) 730,412 713,481

Inventories (6) 223,410 215,754

Accounts receivable, trade (7) 488,065 427,473

Other assets (7) 89,524 97,742

Marketable securities 20 21

Cash and cash equivalents (8) 62,493 86,107

Current assets 863,512 827,097

Prepaid expenses (9) 52,426 65,950

1,646,350 1,606,528

Shareholders’ equity and liabilities Notes Dec. 31, 2006

TEUR

Dec. 31, 2005

TEUR

Capital stock (10) 67,600 67,600

Capital reserves (11) 153 153

Retained earnings (12) 215,601 169,025

Unappropriated consolidated net income 124,332 119,732

Minority interests 85,732 111,351

Shareholders’ equity 493,418 467,861

Accruals for pension plans 190,422 201,130

Other accrued liabilities (13) 326,668 338,919

Accruals 517,090 540,049

Bonds and loans 175,000 175,000

Accounts payable, banks 14,381 23,015

Accounts payable, trade 349,549 307,034

Other liabilities 93,625 92,477

Liabilities (14) 632,555 597,526

Deferred income 3,287 1,092

1,646,350 1,606,528

C o n s o l i d a t e d S t a t e m e n t o f I n c o m e 109

Consolidated statement of income for the fiscal year from January 1 toDecember 31, 2006

Notes 2006

TEUR

2005

TEUR

Net sales 3,120,620 2,743,275

Changes in inventories 11,498 (15,639)

Own work capitalised 277 399

Total operating performance 3,132,395 2,728,035

Other operating income (16) 82,534 94,734

Cost of materials (17) (1,714,119) (1,487,681)

Personnel expenses (18) (591,552) (538,305)

Depreciation and amortization on intangible fixed assets and tangible assets (19) (103,728) (96,767)

Other operating expenses (20) (498,825) (447,740)

Investment performance and other financial results (21) (13,047) (6,453)

Income before taxes 293,658 245,823

Taxes on income (108,159) (91,697)

Net income (22) 185,499 154,126

Minority interests in results of consolidated subsidiaries 32,169 45,373

Documents

A n n u a l R e p o r t | 2 0 0 6 A n n u a l R e p o r t | 2 0 … · A n n u a l R e p o r t | 2 0 0 6 KNORR-BREMSE GROUP 2002 2003 2004 2005 2006 Sales EUR mill. 2,118 2,206 2,423