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Annual Report 2003 THE GLOBAL LOGISTICS NETWORK KUEHNE & NAGEL Experiencing dimensions. In an age of global trade lanes and communication networks, it has become matter of fact for goods to be transported from one end of the planet to the other. Safely, reliably and just in time. That is the task of logistics. And it’s a challenge taking us into new dimensions every day – raising warehouse capacities, recording volume growth, optimising global flows of goods and managing complex supply chains for our customers all over the world. Behind all this are the people who make our services possible. And figures that impressively put the dimensions of a global logistics partner in a visible perspective. Group Key Data >> KUEHNE & NAGEL GROUP KEY DATA (CHF million) 1999 2000 2001 2002 2003 Turnover 6,635.7 8,247.4 8,435.0 8,805.0 9,548.0 Gross profit 1,238.3 1,452.7 1,727.0 1,911.2 2,064.3 % of turnover 18.7 17.6 20.5 21.7 21.6 EBITA 1 133.0 203.8 244.3 276.8 315.9 % of Gross profit 10.7 14.0 14.1 14.5 15.3 EBT 133.9 193.8 227.7 4.5 286.1 % of Gross profit 10.8 13.3 13.2 0.2 13.9 Net earnings for the year 95.2 125.9 160.5 0.1 195.7 % of Gross profit 7.7 8.7 9.3 0.0 9.5 Depreciation and amortisation 60.0 77.5 116.7 362.5 137.2 % of Gross profit 4.8 5.3 6.8 19.0 6.6 Operational cash flow 1 155.5 200.7 274.3 364.5 345.6 % of Gross profit 12.6 13.8 15.9 19.1 16.7 Capital expenditures 94.5 125.9 620.2 171.0 178.3 % of operational cash flow 60.8 62.7 226.1 46.9 51.6 Balance sheet Total 1,795.7 2,413.1 2,385.8 2,693.9 2,719.9 Non current assets 426.9 459.5 1,005.4 747.8 770.3 Equity 450.4 884.0 985.0 877.0 1,012.7 % of Total assets 25.1 36.6 41.3 32.6 37.2 Employees at year end 12,605 13,765 17,412 17,689 19,004 Manpower expense 711.8 799.2 955.8 1,042.8 1,130.1 % Gross profit 57.5 55.0 55.3 54.6 54.7 Gross profit in CHF 000 per employee 98,2 105,5 99,2 108,0 108,6 Manpower expense in CHF 000 per employee 56,5 58,1 54,9 59,0 59,5 Net earnings per share (nominal CHF 5) Consolidated net income for the year (KN share) 3 4.88 5.46 6.95 0.01 8.44 Distributable net income for the year 3 2.95 2.31 2.91 3.00 3.50 Distribution in the following year 3.00 2 2.25 2.90 3.00 3.50 in % of the consolidated net income of the year 61% 41% 42% n/a 41% Development of share price Zurich (high/low in CHF) 62/50 110/59 103/59 118/76 160/82 Average trading volume per day 1,360 14,360 8,189 9,310 4,810 1 adjusted for comparison purposes (1999–2002) 2 including exceptional bonus of CHF 0,75 3 excluding treasury shares IMPRINT Published by Kuehne & Nagel International AG P.O. Box 67, CH-8834 Schindellegi Phone +41 (44) 786 95 11 Fax +41 (44) 786 95 95 www.kuehne-nagel.com Photos Alexander Sauer CH-8048 Zürich Concept / Layout Denon Publizistik AG, Cornelia Kaufmann CH-8640 Rapperswil Printed by Kürzi Druck AG CH-8840 Einsiedeln Kuehne & Nagel Annual Report 5 Contents 2 KUEHNE & NAGEL GROUP KEY DATA 16 BOARD OF DIRECTORS AND MANAGEMENT BOARD 64 GLOBAL NETWORK 18 Report of the Board of Directors 24 Report of the Management Board 67 REPORTS OF THE BUSINESS UNITS 68 International Forwarding 29 STATUS REPORT 80 Contract Logistics 30 Turnover 84 Insurance Broker 31 Income 34 Financial Position 87 CORPORATE GOVERNANCE 36 Investments, Depreciation and Amortisation 99 CONSOLIDATED FINANCIAL STATEMENTS 39 Corporate Development OF THE KUEHNE & NAGEL GROUP 41 Research and Development 101 Income Statement 45 Human Resources 102 Balance Sheet 56 Kuehne-Foundation 104 Changes in Equity 58 Quality Management 105 Cash Flow Statement 60 Environment and Security Management 106 Notes to the Consolidated 62 Information Technology Financial Statements 130 Main Investments 134 FINANCIAL STATEMENTS OF KUEHNE & NAGEL INTERNATIONAL AG 135 Income Statement 136 Balance Sheet 138 Notes to the Financial Statements 6 INTERNATIONAL FORWARDING: Seafreight Experiencing dimensions. 7 1,250,000 TEU in container shipments make Kuehne & Nagel undisputed market leader. 8 INTERNATIONAL FORWARDING: Airfreight Experiencing dimensions. 9 Almost 500,000 were handled by Kuehne & Nagel last year. tonnes of airfreight 10 INTERNATIONAL FORWARDING: Overland Transport More than 21% growth underlines Kuehne & Nagel’s strengthened position in the market for road transport. Experiencing dimensions. 11 12 INTERNATIONAL FORWARDING: Rail Experiencing dimensions. 13 More than 7 million tonnes of freight were shipped by rail in Europe alone in 2003. 14 CONTRACT LOGISTICS Experiencing dimensions. 15 Kuehne & Nagel manages close to 3 million m of warehousing space worldwide for its customers. 2 16 BOARD OF DIRECTORS • Klaus-Michael Kuehne, Schindellegi • Dr. Willy Kissling, Hurden Executive Chairman • Dr. Georg Obermeier, Munich • Bernd Wrede, Hamburg • Dr. Alfred Pfeiffer, Trostberg Vice Chairman • Bruno Salzmann, Pfäffikon • Prof. Dr. Otto Gellert, Hamburg • Wong Kok Siew, Singapore • Dr. Joachim Hausser, Munich • Dr. Thomas Staehelin, Basel • Koh Soo Keong, Singapore Board of Directors and Management Board 17 Board of Directors and Management Board Kuehne & Nagel International AG, Schindellegi, Switzerland MANAGEMENT BOARD • Klaus Herms, Schindellegi • Gerard van Kesteren, Schindellegi Chief Executive Officer • Reinhard Lange, Schindellegi • Thomas Engel, Schindellegi • Klaus-Dieter Pietsch, Schindellegi • Dr. Axel Hansen, Schindellegi • Dirk Reich, Schindellegi Status December 31, 2003 18 KLAUS-MICHAEL KUEHNE EXECUTIVE CHAIRMAN OF THE BOARD OF DIRECTORS Report of the Board of Directors 19 Significant increase in shareholder value | Dear Madam, Dear Sir, 2003 was a very successful year for the Kuehne & Nagel Group. Turnover increased by 8 per cent and the operational result improved by 14 per cent. At CHF 195.7 million, net earnings represent the best result in the company’s history. Shareholders No significant changes occurred in the shareholder structure. Klaus-Michael Kuehne continues to hold 55.75 per cent of Kuehne & Nagel International AG’s share capital. SembCorp Logistics Ltd, Singapore, has a 20 per cent stake in the company. Of the remaining shares, 20.88 per cent are in free float and 3.37 per cent are held as treasury shares. Board of Directors At the Annual General Meeting held on May 14, 2003, Prof. Dr. Otto Gellert, Dr. Joachim Hausser, Klaus-Michael Kuehne, Dr. Georg Obermeier, Dr. Alfred Pfeiffer and Dr. Thomas Staehelin were confirmed as members of the Board of Directors for a further three years. In addition, Dr. Willy Kissling was elected to the Board of Directors for a period of three years. Klaus-Michael Kuehne remains Executive Chairman of the Board of Directors, and Bernd Wrede was appointed Vice Chairman of the Board of Directors. Management Board No changes occurred in the Management Board, which consists of seven members headed by the Chief Executive Officer, Klaus Herms. Results As in the previous year, the Group’s international forwarding activities significantly contributed to the results, especially sea- and airfreight operations in the triad Europe, Asia Pacific and North America. Strongest volume growth was recorded in the Asia Pacific region, where business was driven by China’s continued dynamic export market. European overland transportation operations registered a material improvement. Due to restructuring measures taken in the USA, the business unit Contract Logistics realised a favourable improvement of results. 20 Dividend The Board of Directors of Kuehne & Nagel International AG has decided to recommend to the Annual General Meeting on May 12, 2004, the allocation of an increased dividend of CHF 3.50 per share (previous year: CHF 3.00). Business development In seafreight, Kuehne & Nagel realised far above market growth. Volumes increased by 25 per cent to a total of 1.25 million TEU (20’ container units) shipped. In particular, high growth rates were realised on the trade lanes from Asia to Europe and North America respectively. Recording favourable growth rates, the airfreight business was characterised by an above average increase in profitability, mainly as a result of productivity improvements. The expansion of European overland transportation was pursued in line with the strategic goals. In the fourth quarter of 2003, Kuehne & Nagel concluded a contract to acquire Pracht Spedition + Logistik GmbH, based in Haiger/Hesse, Germany, as of January 1, 2004. Pracht is a member of the IDS groupage network and operates comprehensive warehousing and logistics activities. In addition, the company acquired the WM Group’s contract logistics operations in Eastern Germany, with two warehouses in Leipzig and Chemnitz, as well as a 40 per cent equity stake in WM Cargonet AG & Co. KG, Bocholt, Germany, its system-driven groupage business. WM Cargonet is likewise a member of the IDS network. Thus Kuehne & Nagel has substantially strengthened its position in the German overland transportation market, a move complemented by corre- sponding activities in most other European countries. The contract logistics business was characterised by significant restructuring measures and new business contracts on the part of the USCO Logistics Group in the USA. The unsatisfactory results for 2002 were turned around in the year under review. In Europe, contract logistics operations also proved increasingly successful. Report of the Board of Directors 21 Summary and outlook The Kuehne & Nagel Group belongs to the global market leaders, particularly in sea- and airfreight. A turnaround in results for the contract logistics business was achieved, and first steps have been undertaken to considerably strengthen European overland activities. In view of the excellent business result, the Board of Directors wishes to express its appreciation to the Management Board and the entire staff throughout the world for their successful work and dedication. It also wishes to thank all customers and business partners for their cooperation and the confidence they have placed in the organisation. It remains Kuehne & Nagel’s strategic goal to provide high value services backed by its global network. Further improving the service offering to customers, the application of information technology as well as the optimisation of online communication will play an ever-increasing role. In addition to contract logistics, the European overland transportation business in particular is to be expanded, receiving further dynamic through acquisitions and the extension of the network. In this way, Kuehne & Nagel aims to significantly minimise the gap to market leaders in contract logistics and overland transportation and secure its position among the leading global full service providers. KLAUS-MICHAEL KUEHNE EXECUTIVE CHAIRMAN OF THE BOARD OF DIRECTORS 22 KLAUS-DIETER PIETSCH DR. AXEL HANSEN REINHARD LANGE KLAUS HERMS EXECUTIVE VICE PRESIDENT EXECUTIVE VICE PRESIDENT CHIEF OPERATING OFFICER CHIEF EXECUTIVE OFFICER HUMAN RESOURCES GENERAL COUNSEL INTERNATIONAL FORWARDING Management Board 23 Kuehne & Nagel International AG GERARD VAN KESTEREN THOMAS ENGEL DIRK REICH CHIEF FINANCIAL OFFICER CHIEF INFORMATION OFFICER EXECUTIVE VICE PRESIDENT CONTRACT LOGISTICS 24 Record result confirms strategy Kuehne & Nagel’s competence as service provider, its ability to quickly adapt to changing market conditions and its customer-oriented logistics offering, all contributed to the further strengthening of its global market position in 2003. The operational result improved by 14 per cent and underlines the effectiveness of the company’s strategic orientation. As a globally operating company, Kuehne & Nagel faced great challenges in view of the political and macroeconomic global environment in 2003. At the same time, however, with its worldwide network the company was able to benefit from globalisation and the increasing trend to relocate production facilities from Central Europe and North America to Eastern Europe and Asia. In addition, stringent cost management and high operational efficiency throughout the company were once again essential factors contributing to business success. Development of business units International Forwarding With a 25 per cent growth in volume to 1.25 million TEU, Kuehne & Nagel’s global leadership in seafreight remains undisputed. The company was able to participate above average in the increase in container traffic to, from and intra- Asia. In order to sustain and extend the strong position in the market, ambitious objectives are set for 2004. Kuehne & Nagel aims to again achieve far above market growth and gain further market shares globally. Faced with the limited availability of transport equipment, maintaining good relationships with leading carriers as well as the systematic expansion of IT-based products are of equal importance in order to continue the dynamic growth. Generating excellent profitability, in airfreight Kuehne & Nagel as well recorded an above market increase in tonnage. This is all the more remarkable considering the highly competitive and volatile environment as well as imbalanced traffic. The results confirm Kuehne & Nagel’s strategy of offering customers Report of the Management Board 25 premium IT-based airfreight solutions. Increased efficiencies in freight handling on the basis of the successful worldwide implementation of Cargo 2000 in 2003, as well as the introduction of new, time-defined products and the expansion of activities in key markets will contribute to achieving future growth targets. In rail transportation, which is consolidated across Europe under the Ferroviasped Group, the focus was on the expansion of rail logistics structures. The concentration on market segments with a high proportion of logistics requirements proved favourable for business and will be pursued further. However, unexpectedly high start-up costs for the new product, KN Nordic Rail, negatively affected the operational result. Measures were taken to improve the product and increase efficiencies. In close cooperation with the Kuehne & Nagel organisation, Ferroviasped will concentrate on exploiting business opportunities in intermodal transport concepts and the eastern enlargement of the European Union. In Germany, the development of road transportation activities continued successfully and will gain further momentum in 2004 with the operations of Pracht Spedition + Logistik GmbH and the WM Group. Next steps are the optimisation of interfaces with the traditional business and to expand the offering of national and pan-European groupage line services, as well as industry- and customer- specific transportation solutions. Contract Logistics All regions contributed towards the favourable improvement of operational results in 2003. In North America, new and extended contracts as well as the reduction of costs and empty space helped to stabilise the results. In Europe, Kuehne & Nagel significantly expanded its network of logistics and distribution centres. With large investments in modern facilities and the standardisation of infor- mation technology and operational processes, the company has created the foundation to increase the global competitiveness of its contract logistics busi- ness. The task will now be to maximise on opportunities in the market and achieve sustained growth in this business unit. 26 Insurance Broker Nacora, Kuehne & Nagel’s insurance broker subsidiary, has again delivered excellent results. The continued expansion of its global network and a concen- tration on tailor-made cargo insurance solutions resulted in a favourable gain in market shares. Regions Although being exposed to different economic cycles, all regions contributed towards strengthening Kuehne & Nagel’s global market position. From quarter to quarter, activities were expanded and earnings continually improved, despite significant currency effects. As the growth engine within the Kuehne & Nagel Group, Asia Pacific in particular is of great importance. But also in Europe and North America, the second half of the year especially saw notable growth in all business fields. In Central Asia and Africa, restructuring measures and the focus on specific industries or trade lanes led to a favourable improvement of operational results, while in Central and South America Kuehne & Nagel expanded its international forwarding business. The implementation of an industry-specific global key account management programme consolidated and expanded existing business as well as gaining access to new global key accounts. Customer-oriented service offering guarantees further global growth Kuehne & Nagel’s offering of industry-specific services, integrated logistics concepts and global process management capacities is continuously advanced to meet the current logistics and quality requirements of companies in trade and industry worldwide. In line with globalisation, the trend towards worldwide sourcing and production will continue. With its global presence and capabilities, Kuehne & Nagel is well positioned to remain at its customers’ disposal as a capable logistics partner, decisively supporting their procurement and distribution systems. Report of the Management Board 27 The Management Board is confident that the positive business development will continue in the current year. Kuehne & Nagel’s ability to provide customers with measurable added value through comprehensive logistics solutions, its strength of innovation and its dedicated and highly motivated staff and manage- ment are the best foundation for sustained growth and economic success. KLAUS HERMS CHIEF EXECUTIVE OFFICER 28 Status Report: Contents 29 Status Report 30 Turnover 31 Income 34 Financial Position 36 Investments, Depreciation and Amortisation 39 Corporate Development 41 Research and Development 45 Human Resources 56 Kuehne-Foundation 58 Quality Management 60 Environment and Security Management 62 Information Technology 30 Turnover Exchange rate fluctuations based on average yearly exchange rates between 2002 and 2003 led to a higher valuation of the Euro (plus 3.5 per cent) and to a lower valuation of the US Dollar and depending currencies on it (e.g. Hong Kong, Taiwan, Singapore as well as a number of the countries in South America) of 13.9 per cent against the Swiss Franc. When comparing the turnover in the inco- me statement, the currency impact of the Swiss Franc in 2003 amounted to approximately minus 3.8 per cent. REGIONAL TURNOVER In 2003 Kuehne & Nagel realised an invoiced turnover of CHF 9,548 million (plus 8.4 per cent versus 2002) and a net invoiced turnover of CHF 7,532 million 584 CHF million 6.1% (excluding customs duties and taxes) respectively. This increase was realised by 1,003 CHF million 10.5% organic growth as no acquisitions took place in 2003. At regional level, Europe increased its turnover by 14.0 per cent, Asia Pacific 2,607 CHF million 27.3% by 12.3 per cent and the Middle East/Central Asia and Africa by 4.6 per cent. As 5,354 CHF million 56.1% a result of the negative currency impact the turnover in the Americas decreased by 1.9 per cent. Europe Americas At business unit level, International Forwarding reported an increased turnover Asia Pacific of 10.2 per cent. Seafreight increased its turnover by 11.5 per cent and Middle East/Central Asia and Africa airfreight retained its turnover at the previous year’s level. Contract Logistics achieved a marginally increasing turnover of 0.9 per cent. Warehousing increased its turnover by 5.1 per cent and the turnover in distribution decreased by 7.9 per cent due to the loss of a major distribution customer in the USA. It should be noted, however, that in the forwarding industry – with its con- siderable outlays such as customs duties and freight charges – turnover provides only a limited indication of the way business is progressing, as is proven by the following remarks on income. REGIONAL TURNOVER CHF million 1999 3,776 1,813 754 293 6,636 2000 4,643 2,322 906 376 8,247 2001 4,696 2,430 847 462 8,435 2002 4,696 2,658 893 558 8,805 2003 5,354 2,607 1,003 584 9,548 Europe Americas Asia Pacific Middle East/Central Asia and Africa Status Report: Income 31 Income Gross profit, which in the logistics and forwarding industry provides a better indication of performance than turnover, reached CHF 2,064 million in 2003, an increase of 8.0 per cent, of which minus 5.7 per cent were due to currency impact. Seafreight and airfreight contributed a gross profit of 50.8 per cent. Contract Logistics is the other main business unit with a gross profit share of 37.7 per cent. At regional level, Europe was the largest contributor to gross profit with REGIONAL GROSS PROFIT 50.9 per cent, followed by the Americas with 34.2 per cent, and Asia Pacific with 11.4 per cent. The balance of 3.5 per cent relates to Middle East/Central 70 CHF million 3.4% Asia and Africa. 236 CHF million 11.4% Operational cash flow – the sum of the net earnings for the year plus non cash related transactions – decreased slightly from CHF 365 million in 2002 to 706 CHF million 34.2% CHF 346 million in 2003, mainly caused by the 2002 impairment booking. 1,052 CHF million 51.0% When considering the EBITA, further improvements have been realised, parti- cularly in the business field seafreight from CHF 132 million in 2002 to CHF Europe Americas 153 million in 2003 (plus 15.9 per cent); the business field airfreight showed Asia Pacific strong growth in comparison with 2002 (CHF 96 million in 2003 versus CHF 78 Middle East/Central Asia and Africa million in 2002, plus 23.2 per cent). The business field international overland achieved a growth of 21.6 per cent with a result of CHF 15 million in 2003. GROSS PROFIT OPERATIONAL CASH FLOW EARNINGS BEFORE TAX CHF million CHF million CHF million 1999 1,238 19991 156 1999 134 2000 1,453 20001 201 2000 194 2001 1,727 2001 274 2001 228 2002 1,911 2002 365 2002 5 2003 2,064 2003 346 2003 286 1 adjusted for comparison purposes 32 Start-up costs in the Nordic Rail product reduced the result in the business field rail from CHF 9 million in 2002 to CHF 4 million in 2003. The business unit Contract Logistics achieved an EBITA of CHF 31 million in 2003, which is an improvement of CHF 8 million versus 2002, mainly due to the strong recovery in North America. As of 1/1/2003, the business unit Special Logistics was dissolved as all non-core activities were divested. All regions improved their results in 2003. These improvements were realised in Europe (CHF 13 million or 8.3 per cent), in the Americas (CHF 13 million or 39.5 per cent) and in the Asia Pacific region (CHF 11 million or 13.5 per cent). The operational expense including depreciation shows an increase of 6.0 per cent (manpower 8.4 per cent) versus an increase in gross profit of 8.0 per cent, resulting in an improvement of the EBITA margin as a percentage of gross profit from 14.5 per cent in 2002 to 15.3 per cent in 2003. REGIONAL RESULTS EBITA CHF million 1999 1 60 35 37 1 133 2000 1 101 48 54 1 204 2001 1 127 45 69 3 244 2002 1 154 33 84 6 277 2003 167 47 95 7 316 Europe 1 adjusted for comparison purposes Americas Asia Pacific Middle East/Central Asia and Africa Status Report: Income 33 EARNINGS BEFORE TAX/ NET EARNINGS FOR THE YEAR CHF million 1999 134 95 2000 194 126 2001 228 160 2002 5 0 2003 286 196 Income before tax Net income for the year The net finance result amounted to CHF 5 million in 2003 versus a loss of CHF 13 million in 2002. This result was realised by the elimination of exchange losses. OPERATIONAL EXPENSE CHF million 1999 712 100 80 78 75 1,045 2000 799 121 94 83 89 1,186 2001 956 173 108 81 97 1,415 2002 1,043 211 117 86 97 1,554 2003 1,130 213 113 103 95 1,654 Personnel expense Facility expense Communication, travel and selling expense Vehicle and operational expense Administrative expense 34 Financial Position The equity ratio of the Kuehne & Nagel Group improved from 32.6 per cent in 2002 to 37.2 per cent in 2003, mainly due to the realised result in 2003. The return on equity increased as a result of the net earnings of the year of CHF 196 million to 23.5 percent in comparison to the return of equity of zero per cent in 2002. The net-cash position (cash and cash equivalents less short term bank liabilities) amounts to CHF 407 million in 2003 versus CHF 242 million in 2002. The increase is a result of the improved cash flow. The total assets of CHF 2,720 million retained at the previous year’s level (CHF 2,694 million). Trade receivables (before provision for bad debts) amounting to CHF 1,025 mil- lion represent the most significant asset of the Kuehne & Nagel Group. The days outstanding of 37.7 days in 2002 increased slightly to 38.6 days in 2003 partly offset by the development of the vendor terms, which increased from 41.9 days in 2002 to 42.5 days in 2003. Developments of other key figures on capital structure are shown in the adja- cent table. ASSETS AND CAPITAL STRUCTURE ASSETS CHF million 1999 423 946 427 1,796 2000 788 1.166 459 2,413 2001 303 1,078 1,005 2,386 2002 821 1,125 748 2,694 2003 733 1,217 770 2,720 Cash and marketable securities Receivables and other current assets Non current assets Status Report: Financial Position 35 KUEHNE & NAGEL-GROUP: KEY FIGURES ON CAPITAL STRUCTURE CHF million 1999 2000 2001 2002 2003 1 Equity ratio 25.1% 36.6% 41.3% 32.6% 37.2% 2 Return on equity 25.0% 29.4% 18.9% 0.0% 23.5% 3 Self-financing ratio 350.4% 636.6% 720.8% 630.9% 743.9% 4 Debt ratio 74.7% 63.3% 58.6% 67.3% 62.6% 5 Short-term ratio of indebtedness 61.2% 54.2% 50.6% 60.9% 56.0% 6 Intensity of long-term indebtedness 13.5% 9.1% 8.0% 6.3% 6.6% 7 Fixed asset coverage ratio 163.4% 240.6% 117.2% 140.7% 155.3% 8 Working capital (CHF million) 270.5 646.1 173.3 304.6 426.1 9 Receivable terms (in days) 41.5 40.4 37.8 37.7 38.6 10 Vendor terms (in days) 48.3 43.1 42.6 41.9 42.5 11 Intensity of capital expenditure 23.8% 19.0% 42.1% 27.8% 28.3% 1 Total equity in relation to total assets at end of the year. 2 Net earnings for the year in relation to share capital + reserves + retained earnings as of 1.1. of the current year less dividend paid during the current year as of date of distribution + capital increase (incl. share premium) as of date of payment 3 Reserves + retained earnings + net earnings for the year in relation to share capital 4 Total liabilities + provisions in relation to total assets 5 Short-term liabilities in relation to total assets 6 Long-term liabilities + provisions for pension plans and severance payments in relation to total assets 7 Total equity (including minority interest) + long-term liabilities + provisions for pension plans and severance payments in relation to non current assets 8 Total current assets less short-term liabilities 9 Turnover in relation to the receivables outstanding at end of current year 10 Expenses for services from third parties in relation to trade liabilities/accrued trade expenses at end of current year 11 Non current assets in relation to total assets LIABILITIES CHF million 1999 942 252 148 454 1,796 2000 1,248 135 144 886 2,413 2001 1,132 126 141 987 2,386 2002 1,115 550 147 882 2,694 2003 1,234 301 167 1,018 2,720 Trade, tax and other liabilities Bank liabilities Provision for pension plans and severance payments Equity (incl. minority interest) 36 Investments, Depreciation and Amortisation In 2003, the Kuehne & Nagel Group invested a total of CHF 178 million for capital expenditures (CHF 160 million in fixed assets and CHF 18 million in intangible assets). The financing of these capital expenditures was done from the operational cash flow of CHF 346 million generated during the year under review. Investments in fixed assets comprise CHF 63 million for properties and buildings, and CHF 97 million for operating and office equipment. INVESTMENTS AND AMORTISATION CHF million 1999 95 60 2000 126 77 2001 620 117 2002 171 362 2003 178 137 Investments Depreciation and amortisation The properties and buildings include the following: Western Europe CHF million Munich 13 Construction of a new logistics centre with 12,200 sqm of warehouse space Duisburg 17 Extension of an existing logistics centre by 16,400 sqm of warehouse space Frankfurt 8 Finalisation of a new logistics centre with 9,600 sqm of warehouse space Hamburg 2 Start-up cost for a new logistics centre Luxembourg 4 Extension of an existing logistics centre by 4,700 sqm of warehouse space London 1 Purchase of an office building Vienna 14 Purchase of 67,500 sqm of land Kiev 1 Start-up cost for a new logistics centre 60 Canada Toronto 2 Extension of an existing logistics centre Middle East Istanbul 1 Extension of an existing office building Total 63 Status Report: Investments 37 Capital expenditures in operating and office equipment relate to the following categories: CHF million Operating equipment 40 Vehicles 7 IT hardware 27 Office furniture and equipment 23 Total 97 The allocation by region is as follows: CHF million Europe 34 Americas 53 Asia Pacific 6 Middle East/Central Asia and Africa 4 Total 97 Capital expenditures for intangible assets amounted to CHF 18 million cov- ering goodwill of CHF 3 million and IT software of CHF 15 million. Depreciation and amortisation in 2003 amounted to CHF 137 million and are recorded in the Consolidated Financial Statements as indicated in notes 6 and 8. 38 DEVELOPMENT OF CAPITAL EXPENDITURES, DEPRECIATION AND AMORTISATION OVER A PERIOD OF 5 YEARS: CHF million 1999 2000 2001 2002 2003 Capital expenditures Fixed assets Properties and buildings 37 40 48 46 63 Operating and office equipment 44 66 53 70 97 Financial investments Investments in associates and joint ventures 1 – – 1 – Intangible assets Goodwill in consolidated companies 6 5 500 27 3 IT software 7 15 19 27 15 95 126 620 171 178 Depreciation and amortisation Fixed assets Buildings 8 9 12 15 12 Operating and office equipment 39 48 55 61 75 Intangible assets Goodwill in consolidated companies 6 5 31 53 35 Impairment of goodwill – – – 206 – IT software 7 15 19 27 15 60 77 117 362 137 Status Report: Corporate Development 39 Corporate Development Industry analysis In the first half of 2003, the weak global economy, the outbreak of SARS and the Iraq war affected the logistics industry as well, resulting in notably lower growth and increased margin pressures. Nevertheless, the rise in cargo volumes in the third quarter indicated an upswing, the driving force behind this being beside the boom region China the traditional engine of the world economy, the USA. Economic recovery forecast for the year 2004 will give further impetus to globalisation and worldwide economic integration, which Kuehne & Nagel’s global logistics network will again significantly benefit from. The complexity of logistics services demanded requires extensive industry- specific competence and globally available implementation resources in rapidly changing market conditions. The specialised teams and infrastructures needed are primarily built up organically, but also acquired externally in order to accele- rate global availability. Consolidation in the logistics market, especially in the areas of express and contract logistics, has continued through a few large and many small acquisitions by the market leaders. It is to be assumed that this concentration process will gain further momentum in 2004. Kuehne & Nagel is examining selective external growth options accordingly. Market position and main focus of growth Kuehne & Nagel again extended its leading global position in seafreight through higher than average growth. Contributory factors were the company’s strong positioning in Asia, its entry into new markets and, not least, its focus on attrac- tive niche segments. Through the acquisition of Seabrook & Smith, Kuehne & Nagel strengthened its operations in the wine and spirits sector in the UK. It has been engaged in this segment since 2002, and with strategic investments is establishing a basis for accelerated growth in key markets. 40 In airfreight, Kuehne & Nagel also recorded above average market growth. In a continuously volatile and competitive environment, the company ranks amongst the top five leading global airfreight forwarders. Through expansion strategies in selected markets, exemplified by the cooperation with Kintetsu Worldwide Express in Latin America entered into in 2003, as well as an equity stake in GF-X and an improved product management, further steps towards a top three position are being undertaken in 2004. In the area of contract logistics the strategy focused on organic growth in 2003. Capacities were extended particularly in Europe and Asia Pacific, and the industry-specific service offering further extended. Overland transportation activities were strengthened in Germany by the acquisition of Pracht Spedition + Logistik GmbH, Haiger, and the purchase of a stake in the WM Group, Bocholt. Both companies will allow Kuehne & Nagel strategic access to the leading German groupage network IDS. The growth and investment focus for the year 2004 will concentrate on a combination of organic growth in target industry segments and strategic acquisi- tions to strengthen core business fields, especially in Europe and the Asia Pacific region. Status Report: Research and Development 41 Research and Development Logistics providers are faced with ever-growing demands from companies in industry and trade in the organisation of value added processes based on the worldwide division of labour. The management and optimisation of global flows of goods and the ability to adapt procurement and sales structures to changing conditions at short notice are of equal importance. Kuehne & Nagel has geared its service spectrum to the complex requirement profiles of its customers. It has developed lead logistics services that permit the realisation of tailor-made solutions within a short period of time. A modular product portfolio enables services to be configured to existing customer needs and considerably reduces the development and implementation cycle. Kuehne & Nagel’s lead logistics services support the efforts of commercial and industrial companies to create higher value in the supply chain and to eliminate problem areas that may emerge in the context of supply chain manage- ment. For example: – Inadequate knowledge of inventory levels across the supply chain The lead logistics product “Network Visibility & Monitoring” guarantees full visibility and monitoring of inventory, stored at sites or in motion. Buffer stocks can be reduced, logistics processes such as inbound handling in warehouses more easily planned and staff more efficiently deployed. – Inadequately coordinated processes between order management, transport planning and scheduling Significant savings potential and service performance enhancement can be achieved by synchronised and IT-supported processes between these opera- tional levels. Moreover, the lead logistics product “Network Management” sup- 42 ports the best possible consolidation of different orders into one consignment as well as achieving an optimised choice of service provider. In this way, logis- tics costs can be cut, not least by reducing the share of express deliveries. – Inadequate information on the performance quality of partners in the supply chain The management of global supply chains involving several providers for warehousing and transportation can only be successfully accomplished with the availability of comprehensive information. Within the framework of several customer projects, Kuehne & Nagel has developed its lead logistics product “Network Performance Measurement”, which is based on integrated data availability. Focused information allows the monitoring of service quality and optimal management of inventory levels. – Sub-optimal structures at warehouse locations and transport strategies Changing conditions for logistical service provision often lead to sub-optimal structures. The choice of location for warehousing and product completion, as well as the choice of transport modes with corresponding consolidation and deconsolidation platforms therefore need to be reviewed at regular intervals. Kuehne & Nagel’s considerable experience accruing from such examinations has been summarised in the lead logistics product “Network Engineering”. This product provides customers with a proven method and the operational know-how of a lead logistics provider to build up supply chains that enable an efficient and cost-optimised service. With this product portfolio, Kuehne & Nagel could prove its capabilities as lead logistics provider in the year under review, especially to customers in the high-tech, automotive and industrial goods sectors. Due to its network compe- tence, in fields where it positioned itself as best service provider the company also took on a considerable volume of transport and contract logistics activities. Customers considered the combination of supply chain management and opera- tional services as a form of partnership tailored to their needs. Status Report: Research and Development 43 For instance, in the first quarter of 2003 a supply chain was established for a leading company in the electronics industry, which stretches from production facilities in several Asian countries to sales markets in Europe and particularly China and other Far Eastern countries. Challenging factors are the customer’s changing production partners – these are sometimes switched on a quarterly basis – and the quickly growing number of markets to be continually added to the distribution concept. In the context of Kuehne & Nagel’s customised lead logistics concept, the above-mentioned products come into use and are supple- mented by services in the area of procurement and sales planning, all managed by a dedicated Kuehne & Nagel team working at the customer’s site. As a result of the successes achieved with new and existing lead logistics contracts, Kuehne & Nagel is convinced that this field of activity will make an increasing contribution to company growth in future. 44 HUMAN RESOURCES Transferring knowledge. 45 Transferring knowledge. Ultimately, every company is only as good as its employees. Qualification, motivation, engagement, identification and experience are vital ingredients for success. We follow the principle of “Challenge and Promote”, and with our committed human resource strategy give all employees the professional and individual support they require. Mobility Internationality Communication Continuity Human Resources 46 HUMAN RESOURCES Transferring knowledge. 47 Human Resources | Mobility Being flexible. In times of global competition, mobility has become an essential success factor. This is particularly the case for a company like Kuehne & Nagel, with operations spanning the world. International staff transfers across the globe demonstrate our ongoing endeavours to secure international know-how and experience. DURATION OF EMPLOYMENT <1 year 22% 1–3 years 35% 4–5 years 13% 6–10 years 15% 11–25 years 12% >25 years 3% 48 HUMAN RESOURCES Transferring knowledge. 49 Human Resources | Internationality The world is the market. And Kuehne & Nagel is present all over the world. This is reflected by the over 100 nationalities employed. National offices are multicultural. Our head office in Switzerland, for instance, is staffed by people from more than 20 different nations. PERSONNEL STRUCTURE Women 40% Men 60% 50 HUMAN RESOURCES Human Resources | Communication Speaking with partners. Ask, listen, understand, act. This is how the needs of demanding customers from all over the world are attended to. With solutions that last. For maximum efficiency of communication and speed of implementation, all workplaces are globally networked using the latest technology. AGE >50 years 11% 41–50 years 21% 31–40 years 34% 26–30 years 18% <25 years 16% Transferring knowledge. 51 52 HUMAN RESOURCES Human Resources | Continuity Long-term success. In times when rapid change is normality, we make a big point of continuity. Qualified and responsible logistics specialists need to take on new challenges on a daily basis – and this long-term. Therefore it is our committed strategy to invest in the training and development of our employees. Close to zero labour turnover amongst our top 200 executive positions proves our policy is working. PERSONNEL STRUCTURE Management 14% Waged 27% Salaried 59% Transferring knowledge. 53 54 Human Resources High professional competence, strength of innovation and knowledge management are competitive advantages, which enable Kuehne & Nagel to respond to custo- mer requirements in a solution-oriented manner. For this reason, the company’s human resource strategy is based on a systematic and sustained development and training of employees. Human resource management is clearly recognised as making an essential contribution to the realisation of the corporate objectives. Corporate culture An integral component of the corporate culture is to draw up career perspectives for qualified employees and to support them in their professional development. In addition to international mobility, Kuehne & Nagel’s management team is characterised by taking on entrepreneurial responsibility. These are important factors that create the foundations for dynamic and flexible careers, enabling know-how to be held, further developed and exchanged throughout the Group. Training Aside a range of individual internal and external further education measures, the Kuehne & Nagel Academy held approximately 750 trainings and seminars in 2003. Whilst also including numerous specialist trainings, the emphasis is on logistics, management and sales techniques. Furthermore, with the Kuehne & Nagel e-learning system, employees have at their disposal an efficient learning infrastructure for workplace-related knowledge transfer. Rapid changes in economic conditions and customer expectations call for both high flexibility from employees as well as the ability to continuously extend their industry-specific knowledge, keeping it up-to-date and bringing it in line with the established objectives. In order to accommodate these requirements, the company creates the necessary framework and incentives to promote self-initiative, strong links to scientific institutions playing a decisive role. In addition to the activities of the Kuehne-Foundation, the logistics group has long-standing connections to business schools, technical colleges and universities. In the year under review, 15 campus recruitment events were organised in Europe. Students are also supported in their research work, as illustrated by Kuehne & Nagel’s support of two students researching reverse logistics at the Graduate School of Management (WHU) in Koblenz, Germany, for which they were awarded a prize by the Koblenz Chamber of Industry and Commerce. Status Report: Human Resources 55 Management potential and development The identification and strategic development of management potential represents a central challenge to future business success. Through the “Fast Track” trainee programme and individual direct entries, 40 university graduates could be recruited in 2003. At Kuehne & Nagel, career development is based on international place- ments, the gathering of sales experience and the rotation between specialist and generalist positions. Whilst this policy requires constant coaching, at the same time it allows for the individual alignment of objectives. This serves to break up traditional rigid career paths and focus on the potential and abilities of the respective personalities. Kuehne & Nagel sees its strategy of promoting high potentials as a vital factor in establishing loyalty between talented employees and the company. Within the framework of high potential workshops with international business schools, logistical strategies and innovations are conceived and general management competence thus built up. At the moment, 60 employees with an average age of 27 are participating in the international high potential programme. Management development and career mobility programmes as well as “The Glocal Networker” model, implemented on an international level and describing the demands Kuehne & Nagel specialists and managers face in global competition as well as defining the according qualification criteria, enable 75 per cent of management vacancies and new positions to be filled internally. Headcount Despite an unstable economic environment, the number of employees for the Kuehne & Nagel Group increased from 17,689 in 2002 to 19,004 in 2003, a rise of 7.4 per cent. 56 Personally committed to training and further education With a grant of 3 million euros, the Kuehne-Foundation will be supporting the Hamburg School of Logistics, founded in July 2003, over the next five years. In addition to the Kuehne- Institute for Logistics at the University of St. Gallen, Switzer- land, and the Kuehne-Centre for Logistics Management at the Graduate School of Management in Vallendar near Koblenz, Germany, the public interest organisation based in Schindellegi, Switzerland, now sponsors its third academic institution. The Hamburg School of Logistics was established as a public-private partnership between the Free and Hanseatic City of Hamburg, the Kuehne-Foundation and the Technical University of Hamburg-Harburg. Starting in autumn 2004, a one-year full-time postgraduate course leading to an MBA in logistics will be offered. Such a facility has so far been missing in Hamburg and perfectly complements the image of the globally oriented city with strong international ties. The initiators of the attractive course of study expect that, apart from German students, the Hamburg School of Logistics will also attract candidates from neighbouring countries, especially from new Eastern EU states. The School’s link to the renowned Technical University of Hamburg-Harburg guarantees a merging of the technical and commercial elements of logistics in combination with the transfer of general management competences. The Kuehne-Foundation’s most important project so far, the Kuehne-Institute for Logistics (KLOG) at the University of St. Gallen, began its work on January 1, 2003. In addition to science and research, a special focus of the Institute is on the further education of logistics managers from trade, industry and services. The launch of its “Executive Master of Business Administration” (EMBA) course, a part-time post- graduate study at university level for logistics executives, proved very popular and convincing. 29 participants from seven countries commenced their studies on March 1, 2004. Kuehne-Foundation 57 Particularly worthy of mention is the 15-day seminar “Network management for logistical processes”, which was developed by the Kuehne-Institute for Logistics and conducted in coordination with five leading universities. In 2003, support of the Graduate School of Management in Vallendar, Germany, that started three years ago was extended and the “Competence Centre for Logistics and E-Commerce” renamed to “Kuehne-Centre for Logistics Management”. This centre focusses mainly on logistics research. A further highlight of the Foundation’s activities were the annual Logistics Days in Schindellegi, Switzerland – a top-class event under the motto “Trends in Logistics Management – Managing the Change”. Additionally, the Kuehne-Foundation for the first time sponsored the German Science Award for Logistics, which is endowed with a prize of 8,000 euros and was presented by the Foundation’s President, Klaus-Michael Kuehne, at the German Logistics Association’s (BVL) annual congress. In the future too, the Kuehne-Foundation will devote itself to the strategic promotion of training and further education measures in close collaboration with its partners. Apart from science and research in the fields of transportation and logistics, humanitarian and cultural projects will also be supported. The public interest Kuehne-Foundation, set up by the Kuehne family in 1976, has as its sole donor, Klaus-Michael Kuehne, the main shareholder of the Kuehne & Nagel Group. 58 Quality Management Quality has a long tradition at Kuehne & Nagel. The company founders already were guided by the principle that high operational efficiency generates competi- tive advantages to both customers and company. Today, a systematic quality management ensures the sustained and ongoing optimisation of data, process and service quality throughout the company. Certification according to quality norms and standards All Kuehne & Nagel business units and locations fulfil the latest ISO 9001:2000 quality standard, which includes customer and process orientation among its main points. Furthermore, in the year under review, 35 locations in 6 countries were certified according to the OHSAS 18001 norm, which focuses on quality standards relating to occupational health and safety. In order to meet the stringent quality requirements laid down by the chemical industry, the Belgian Kuehne & Nagel locations in Brussels and Eupen fulfil the requirements of the “Safety and Quality Assessment System” (SQAS), which additionally embraces the aspects of safety and environmental protection. After receiving this certification, Brussels became the first Kuehne & Nagel location to meet the requirements of four international quality standards. Continuous quality improvement Kuehne & Nagel is devoted to continuous quality improvement. Fulfilment of this goal is backed by the formation of cross-divisional quality management strategies and objectives, the issuing of binding quality standards and endorsement of training and further education of employees, as well as a regular information exchange between quality managers in all business areas of the company. By these measures, considerable efficiency and process improvements were achieved in 2003, whether in IT-based consignment tracking and tracing across the entire supply chain or in warehouse and distribution processes. In the reporting year, data quality was raised by a further 10 per cent, leading to an improved service quality and, as a result, enhanced customer satisfaction. Status Report: Quality Management 59 Awards for high quality standards In 2003 again, Kuehne & Nagel received numerous awards for the quality of its services and innovative IT solutions. Exemplifying this is the “Service Productivity Award”, which the Kuehne & Nagel organisation in the Asia Pacific region was presented with at the Hong Kong Awards for Services. Additionally, at the Asia Logistics Awards the organisation was named “Seafreight Forwarder of the Year” and “Lead Logistics Provider of the Year”. For Kuehne & Nagel, these awards represent as much an incentive as an obligation to continually further improve the standard of quality for the benefit of all parties involved. 60 Environment and Security Management Further to quality assurance, environment and safety management is of great importance to Kuehne & Nagel. Both issues are central components of the QSHE (quality, safety, health and environment) management system developed by the company. Additional locations certified to ISO 14001 environmental standard In 2003, the number of locations certified to the ISO 14001 environmental standard doubled to 42. Interest in certified environment management systems within the Kuehne & Nagel Group has long spread beyond Europe. Currently a number of Latin American subsidiaries are intensively preparing for certification and more audits will follow in other regions in the current year. This favourable development is facilitated by the constant transfer of know-how relating to environmental management throughout Kuehne & Nagel. Its efficiency and effec- tiveness not only pays ecological dividends, but also makes a decisive contribu- tion to business success. Economy in line with ecology For decades, Kuehne & Nagel has engaged in offering environment friendly transport services. The optimum utilisation of transport capacities, the bundling of the flow of goods at logistics hubs as well as multi-modal transportation using rail and river shipping represent significant focal points in this regard. Since 2003, for example, a maximum-length block train for the transport of containers operates twice a week from the Alpine countries to the North Sea ports, thus reducing the traffic burden on roads. In the opposite direction, import containers and other additional loads are also transported by rail. Both from an ecological as well as a financial perspective this solution has proved successful for Kuehne & Nagel and its customers. In 2003, Kuehne & Nagel Norway was one of several countries to introduce an environment management system with subsequent certification. Customers, convinced of the advantages of environment friendly transport, backed this by paying a small levy on each consignment. Moreover, they agreed to handle invoices and correspondence electronically. Status Report: Environment and Security Management 61 Safety and security first A well functioning safety and security management is a crucial component of Kuehne & Nagel’s QSHE management system. Its main elements are: – Responsible and professional handling of hazardous goods through an efficient network of highly qualified specialists trained in Kuehne & Nagel’s Hazardous Goods Competence Centre. – Early and meanwhile certified participation in the “Customs-Trade Partnership Against Terrorism” (C-TPAT) security initiative organised by the American customs authorities. In addition to a higher degree of security, this member- ship allows Kuehne & Nagel to offer its customers faster customs clearance. – Fulfilment of the high security requirements of the Technology Asset Protection Association (TAPA) at numerous Kuehne & Nagel locations, whose aim it is to significantly increase security standards for warehousing and transport of expensive high-tech products and considerably reduce the risk of theft. In the year 2004, the first TAPA certifications will be awarded. The importance of safety and security measures in transportation and warehousing will grow in coming years. Kuehne & Nagel’s QSHE management system offers an optimal platform to meet the requirements of customers in all industries and at all times. 62 Information Technology Globalisation and the increase in electronic business, shorter product lifecycles and growing demands on time, cost and quality place high requirements on an efficient information management. Kuehne & Nagel’s IT services make a consid- erable contribution to business success by providing customers around the world with information across the entire supply chain – up-to-date, consistent and in high quality. Standardised IT systems increase customer benefit In seafreight, standardised application software provides the greatest possible transparency and data security, as well as a consistently high level of quality throughout the world. The meanwhile globally available order management system enables visualisation and monitoring of purchase orders, offering cus- tomers individual access to detailed information down to item level. In airfreight, Kuehne & Nagel’s standardised process and system architecture supported the fast global implementation of Cargo 2000 Phase 2 functionality. The integration of applications allows to actively monitor consignments from door to door on a worldwide scale, resulting in cost and quality benefits. Significant progress has been made in standardising warehouse management systems. Warehouse facilities on all continents are now equipped with the modern standard CIEL warehouse management system. Thanks to the functional scope of the system, all customer requirements ranging from simple warehouse management functions to radio frequency identification and barcode technology- based operations can be fulfilled. New mobile logistics solution in pilot phase A seamless portrayal of the shipment process would not be complete without POD (proof of delivery) documentation, which even today is often paper-based and only available electronically with delay. To offer customers faster data availability, Kuehne & Nagel has developed a new internet-based mobile logistics system, which allows a wide range of functions to be performed by a single portable computer. These include barcode scanning and POD with automatic data transfer to central information systems, GPS / satellite-based location and Status Report: Information Technology 63 navigation support, plus transmission of transportation orders and the possibility to quickly amend travel routes. After successfully piloting this solution in Greater London, the system will initially be launched in continental Europe before being introduced globally. Central data availability Every Kuehne & Nagel branch throughout the world can access central informa- tion systems to retrieve or record data. One of these, for example, is the stand- ardised global sales support program KN VAST. It is already used by over 1,500 sales and management staff in order to better support customers worldwide. The global management information system provides the up-to-date information needed for the management and monitoring of key processes across the company and its business units. Focus on efficient information management and IT innovation Challenges in the coming years will be the handling and processing of a signi- ficantly increased quantity of data and making it available to customers and employees through efficient and high quality channels. After a threefold rise in the volume of electronic data exchange to and from customers in 2003 alone, the trend is expected to continue in the current year. For this reason further expansion and investment in communication infrastructure will be made. Kuehne & Nagel’s IT division pursues the policy of providing IT innovations to benefit customers. Operational systems will be successively changed to internet technology and the IT architecture aligned to real-time processing capabilities. This will make working together with customers and business partners even more effective. 64 600 BRANCH OFFICES IN 96 COUNTRIES A Afghanistan Bolivia D Denmark H Hungary Albania Brazil Angola Bulgaria E Ecuador I India Argentina Egypt Indonesia Australia C Cambodia El Salvador Iran Austria Canada Estonia Iraq Azerbaijan Chile Equatorial Guinea Ireland China Israel B Bahrain Colombia F Finland Italy Bangladesh Costa Rica France Belarus Croatia J Japan Belgium Cyprus G Germany Jordan Czech Republic Greece Guatemala Global Network 65 K Kazakhstan Mauritius Peru Spain United Arab Kenya Mexico Philippines Sri Lanka Emirates Korea Morocco Poland Sweden United Kingdom Mozambique Portugal Switzerland Uruguay L Latvia USA Lebanon N Namibia R Romania T Taiwan Uzbekistan Lithuania Netherlands Russian Federation Tanzania Luxembourg New Zealand Thailand V Venezuela Nigeria S Saudi-Arabia Turkey Vietnam M Macedonia Norway Serbia-Montenegro Turkmenistan Malaysia Singapore Z Zambia Malta P Pakistan Slovakia U Uganda Zimbabwe Panama South Africa Ukraine 66 Reports of the Business Units: Contents 67 Reports of the Business Units 68 International Forwarding 80 Contract Logistics 84 Insurance Broker 68 Seafreight | Above average growth strengthens global market leadership In seafreight, declines in margins and adverse currency effects were compensated through substantial volume growth. The total of 1.25 million TEU handled exceeded the previous year’s high level by 25 per cent and extended the company’s leading position. Container market and rate structure The global container market grew by 7.1 per cent in 2003, with China’s booming trade in particular generating the highest demand. Resulting capacity bottlenecks plus increasing transport volumes in other regions in the second half of 2003 pushed up seafreight rates on virtually all shipping routes, with a particularly strong increase on Asia–Europe and Europe–USA trade lanes. Only in export traffic to South America vessels ran at half capacity, which initially led to reduc- tions in the rate structure. Rapid increase in Kuehne & Nagel transport volumes The boom in container traffic in Asia, especially China, was decisive for Kuehne & Nagel’s above average growth. In Far East to Europe operations, the company realised an increase in handled volumes of 40 per cent, far higher than the 13 per cent market average. In transatlantic and transpacific business, Kuehne & Nagel gained further market shares and raised volumes by 12 and 18 per cent respectively. Moreover, the year under review saw the results from efforts to expand intra-Asian operations in the form of a 42 per cent growth rate. Contrary to the general trend, Kuehne & Nagel also raised volumes to and from Latin America, a consequence of its regional network of operationally linked national companies. Significant productivity increases helped Kuehne & Nagel keep costs within limits despite the high growth in volume. This had a positive effect on the operational result. Investments assure competitive advantages In the year under review, Kuehne & Nagel invested significantly in the expansion of its global key account management programme. Major customers in all parts of the world recognised the benefits of competent industry-specific consulting and globally coordinated support by the logistics partner. The strategy brought considerable new business and contract extensions. International Forwarding: Seafreight 69 Additionally, Kuehne & Nagel’s investment in expanding the functionality of its information logistics products proved successful. Global availability of the order management system, which supports detailed consignment tracking to item level and therefore control and management possibilities across the entire supply chain, met with interest from key accounts from all targeted industries and also contributed to the conclusion of new contracts. Specialisation in niche products In order to meet specific customer demands, Kuehne & Nagel has been concen- trating on various niche products and in 2003 intensified sales on a worldwide scale. In the shipment of forestry products (paper, cellulose and wood), high growth rates could be achieved above all in Germany. An increase of almost 50 per cent confirmed Kuehne & Nagel’s specific know-how in the segment of reefer container traffic. 70 PERFORMANCE SEAFREIGHT Variance 2003/2002 CHF million 2003 per cent 2002 per cent per cent Turnover 4,492.5 100.0 4,028.5 100.0 11.5 Gross profit 632.9 14.1 588.8 14.6 7.5 EBITA 152.8 3.4 131.8 3.3 15.9 Number of operational staff 4,006 – 3,740 – 7.1 Special knowledge and services are also required in the wine and spirits niche sector, in which Kuehne & Nagel has engaged since 2002 and is represented with specialists in the principal markets Australia, South America, USA and Europe. By taking over Seabrook & Smith, a worldwide provider of logistics services for wine, beer and spirits importers, Kuehne & Nagel boosted its activi- ties in Great Britain in 2003, and exceeded volume expectations by far. LCL business Tough competitive conditions and the dynamic growth of FCL (full container load) shipments had adverse effects on the global LCL (less than container load) market. Nevertheless, due to product and process optimisations and its global organisational network, Kuehne & Nagel was able to register a 20 per cent volume growth in its LCL business. “Multi Country Consolidation”, which guarantees fast and secure shipment of LCL freight, will lead to further growth in this field of activity in the current year. River shipping Kuehne & Nagel is well positioned in the European river shipping market. In spite of a six-month low water phase the result could be held at the previous year’s level. This was largely due to Kuehne & Nagel’s river shipping network and presence at important traffic hubs, which opened opportunities for development of alternative solutions, such as intermodal operations. Thus all contracts could be punctually fulfilled. Aid and relief logistics Once again Kuehne & Nagel supported the activities of reputable international relief organisations and private companies across various crisis regions in 2003. Large volumes of aid and relief goods were shipped by sea, air and overland to their destinations under the guidance of Kuehne & Nagel. Faced with most difficult conditions, the specialist team ensured that all goods reached their destinations safely, undamaged and on time. In the year under review, these special services were concentrated in crisis regions spanning the Middle East, East Africa and Central Asia. As with the reconstruction of Afghanistan, Kuehne & Nagel’s logistics capabilities and expertise are proving extremely valuable in Iraq too. International Forwarding: Seafreight 71 Prior to the war, Kuehne & Nagel was involved in the “Food for Oil” program- me through the company’s organisations in the ports of Jordan, Kuwait, Turkey, Syria and in Baghdad. At the end of the war, global aid and relief organisations were quickly able to draw upon Kuehne & Nagel’s infrastructure and services. Oil, energy and project services In these fields of activity, Kuehne & Nagel trebled its incoming orders in 2003. New large-scale projects were started in the Middle East, in New Caledonia, on Sakhalin, in South Africa and Central Asia. On Sakhalin, for example, the contract for supplying an offshore oil rig was continued in the second year with a substantial rise in turnover, and new major logistics projects started around the exploitation of oil and gas fields. In New Caledonia, South Pacific, Kuehne & Nagel was selected to provide logistics support for a comprehensive nickel mining project. In South Africa and Central Asia as well, renowned companies in the oil and energy industry chose Kuehne & Nagel as logistics partner. Particularly worth mentioning here is the complex transport of pipeline deliveries from the Caspian to the Black Sea. The reconstruction of Iraq demands know-how and proven expertise in several segments, including oil, energy and project services, in addition to global sourc- ing processes. Kuehne & Nagel’s industry competence and extensive network make it very well positioned to logistically support the reconstruction of Iraq. On the basis of major contracts, the company has already taken on complex projects and the transport of heavy goods components, which involve great challenges with respect to infrastructure and safety of people and cargo. Ambitious targets According to forecasts, the global container market will grow by between 8 and 10 per cent in 2004. Kuehne & Nagel’s goal is to realise a growth in volume far higher than the market average. Thanks to close partnerships with leading global carriers, the company is in a position to guarantee freight capacities through contractual agreements and adapt to growing trade volumes. Particular attention for the current year will be paid on providing a further increase in value to customers. Satisfied customers, benefiting from IT-supported process optimisation and value added services, are the guarantee for sustained growth in Kuehne & Nagel’s seafreight business field in the future. 72 Airfreight | Profitable growth In a continuing volatile and highly competitive environment, Kuehne & Nagel was able to enlarge its market share and achieve excellent results. Overall tonnage rose by 13 per cent over the previous year, therefore meeting the target of almost 500,000 tonnes. The operational result of CHF 95.6 million illustrates a significant increase in profitability by 23.2 per cent. International Forwarding: Airfreight 73 Business development After a moderate start, virtually all regions reported strong growth in the second half of 2003. Stronger industry-specific support to global key accounts led to new contracts, especially in the automotive, retail and pharmaceutical sectors. Effective cost management and improved productivity were responsible for the remarkable increase in profitability in this business field. Asia and especially China proved to be the growth engine for Kuehne & Nagel’s airfreight operations as well, achieving a 35 per cent increase in cargo handling in this region. The high volumes Kuehne & Nagel had to manage could only be flown out by using additional dedicated charters. Good performance was also seen in the transpacific business, especially in exports from the USA to Asia. In Europe, the national companies in Benelux and the United Kingdom registered significant rises in volume. The German airfreight business was particularly successful, with a further 12 per cent increase in exports over the previous year’s high level. Responsible for the significantly higher returns were improved productivity, stringent cost control and intensified hub activities in the new airfreight terminal at Frankfurt’s CargoCity South. Charter activities Charter activities in the year under review were further extended by the imple- mentation of dedicated charter flights into crisis areas and to overcome capacity bottlenecks in Asia Pacific. In addition to the far more than 500 dedicated charters, in the fourth quarter Kuehne & Nagel established a charter service from Shanghai to Europe and back, which met with high market acceptance. Strategic partnership with Kintetsu World Express in Latin and Central America Since October 2003 Kuehne & Nagel has been cooperating with Kintetsu World Express in Brazil, Peru, Venezuela and Mexico. The partnership offers favourable conditions for expanding the customer base and developing additional business opportunities. 74 PERFORMANCE AIRFREIGHT Variance 2003/2002 CHF million 2003 per cent 2002 per cent per cent Turnover 2,092.9 100.0 2,098.6 100.0 (0,3) Gross profit 415.2 19.8 392.3 18.7 5.8 EBITA 95.6 4.6 77.6 3.7 23.2 Number of operational staff 2,633 – 2,474 – 6.4 GF-X participation Kuehne & Nagel belongs to the group of airfreight forwarders that has supported the GF-X electronic reservation portal from the beginning. This commitment was underlined by the purchase of an equity stake in 2003. The company sees the GF-X system as a leading solution for the air cargo industry and efficient link between forwarders and carriers. Cargo 2000 implemented Following Kuehne & Nagel’s status in becoming the first logistics provider to be awarded certification for Phase 2 of the Cargo 2000 programme in the year 2002, the new IT-supported process handling has been rolled out worldwide. Cargo 2000 functionality enables Kuehne & Nagel to manage and monitor the approximately 90,000 monthly consignments across the entire door-to-door pro- cess chain. In the event of any deviation from the route map proactive measures can be taken to ensure delivery as agreed. Through process streamlining and transparency this system creates added value in customers’ supply chains. At the same time, it forms the basis for the development of new, time-defined products that will contribute to further growth. Niche products: aviation and hotel logistics In the past year, the results of the niche product aviation logistics, which pro- vides highly specialised transport solutions for the aviation industry, improved again and additional customers were attracted. Kuehne & Nagel has 39 so-called aviation gateways and supports around 70 customers in the industry. New markets in the Middle East are being targeted for the product in the current business year. International Forwarding: Airfreight 75 In hotel logistics, the positive business development continued as well. Successful handling of logistics projects relating to the opening of new hotels in the Middle East resulted in an increase in market shares and higher awareness of this niche product. The strategy of meeting the individual and comprehensive logistics needs of renowned hotel chains with tailor-made solutions will also prove successful in 2004 and lead to more contracts in this innovative field of activity. Close cooperation with airlines In the year 2003, close strategic cooperations were upheld with all major airlines, a key element of Kuehne & Nagel’s airfreight strategy. Recovering airfreight business According to a market study, in 2004 the global airfreight market will again achieve growth rates experienced in the late nineties. Reasons for a forecasted 6 per cent rise in volume are continued strong growth in the Asian markets and the economic recovery in North America. For the current year Kuehne & Nagel plans an increase in tonnage far above the market average. The more efficient handling of freight as a result of the Cargo 2000 system and new products will contribute to this objective as much as the intensive sales support to customers in all target industries. 76 Overland transport | Strategy implementation Kuehne & Nagel can look back on a successful year in regard to its overland transportation activities, which show a positive development in results. At the same time, further expansion of this business field in Germany proceeded with the acquisition of Pracht Spedition + Logistik GmbH located in Haiger/Hesse, and a stake in the WM Group, Bocholt, as of January 2004. International Forwarding: Overland Transport 77 PERFORMANCE INTERNATIONAL OVERLAND TRANSPORT Variance 2003/2002 CHF million 2003 per cent 2002 per cent per cent Turnover 749.8 100.0 514.3 100.0 45.8 Gross profit 127.1 17.0 86.7 16.9 46.6 EBITA 15.2 2.0 12.5 2.4 21.6 Number of operational staff 904 – 868 – 4.1 The European market for road transport was characterised more than ever by fierce competition and significant pressure on margins. Nevertheless, Kuehne & Nagel was able to assert its position, extending profitable businesses and winning new customers. In particular, the national companies in Benelux, Germany and Switzerland contributed to the favourable business development. Their offer of tailor-made cross-border solutions met with high acceptance amongst customers. In the Northern European countries, the deterioration in margins was countered by cost reductions and restructuring measures. In order to integrate overland transportation more strongly in complex logis- tics and supply chain management solutions, access to a system-driven groupage network is essential. In this respect, the acquisition of Pracht Spedition + Logistik GmbH and a 40 per cent stake in WM Cargonet GmbH & Co. KG, both members of Germany’s leading groupage network, IDS, will give Kuehne & Nagel access to a successful overland transport concept. Furthermore, the membership of both companies in ELIX European Logistix GmbH and ILS Gesellschaft für Osteuropa-Verkehre mbH links Kuehne & Nagel to a pan-European groupage network. Kuehne & Nagel will concentrate on exploiting synergy potential in Germany as well as creating and optimising interfaces to its traditional business. Thus the company has already begun pursuing the realisation of its ambitious development programme in European overland transportation. 78 Rail | Expansion of rail logistics structures The Kuehne & Nagel Group is pushing usage of rail transportation through its wholly owned subsidiary Ferroviasped. Turnover improved by 11.3 per cent. However, high start-up costs for a new product affected the operational result. Network expansion In 2003, rail logistics structures were particularly developed in the Nordic countries. A national company in Sweden, as well as agencies in Finland and Denmark, will be on hand in future to expand rail transportation in this region. New major orders In addition to supplying numerous major customers with raw materials by rail, especially the distribution of finished products via rail-connected logistics warehouses was expanded, using rail as the sole mode of transport from the production site to the warehouse. In this way, 5,000 full truckloads to Germany could be avoided for Italian customers. In project logistics, emphasis was placed on block train traffic with car spares to the CIS, as well as the loading of 300 rail vehicles. Growing intermodal transport In the year under review, intermodal traffic was successfully further developed, especially on trans-Alpine and Eastern European routes. KN Nordic Rail Start-up costs for the new product, KN Nordic Rail, offering transport activities from Finland to Central and Southern Europe via Travemünde, Germany, using the railship system, turned out far higher than anticipated. Restructuring meas- ures are now being implemented to improve the product and raise efficiency. PERFORMANCE RAIL Variance 2003/2002 CHF million 2003 per cent 2002 per cent per cent Turnover 277.0 100.0 248.9 100.0 11.3 Gross profit 24.5 8.8 24.6 9.9 (0.4) EBITA 3.9 1.4 8.9 3.6 (56.2) Number of operational staff 215 – 220 – (2.3) International Forwarding: Rail 79 Business potential Eastward enlargement of the European Union will significantly boost demand for logistics and transportation services in this economic area. Greater transport dis- tances and, in comparison with roads, the well developed rail infrastructure in Central and Eastern European countries present new market opportunities for the coming years. In addition, Ferroviasped will concentrate on intermodal activities in cooperation with the Kuehne & Nagel Group and extending logistics services for the automotive sector. 80 Contract Logistics | Operational result improved by 34.5 per cent Contributing significantly to the positive development of results in 2003 were the turnaround in North America, stringent cost management and the standardisation of processes and IT applications. Reports of the Business Units: Contract Logistics 81 Rising customer requirements Increasingly companies are outsourcing processes to logistics service providers within the supply chain that go far beyond traditional warehousing and distribution functions. Their needs range from logistics consulting, material flow optimisation, inventory and order management, through to final assembly, quality control and returns management. The search for a financially sound logistics provider with genuine global capability, who can offer a complete range of services from a single source, accompanies the growing complexity of customers’ requirements. Kuehne & Nagel continually adapts its contract logistics offering to market trends. In the past year, the breadth of services was further increased, regional capacities extended and the development of industry-specific and value added services intensified. This resulted both in contract extensions and new business gains. Stringent cost management and productivity increases raised the profit margin from 2.0 to 2.6 per cent. Regional developments In the year 2003, Kuehne & Nagel invested primarily in the expansion of its logistics facilities in Europe, with new distribution centres opening in Milan, Munich and Paris and extensions being undertaken at existing sites in Duisburg, Hamburg, Zagreb and Kiev. Comprehensive restructuring measures in North America led to a stabilisation of results. The low inventory levels during the first three quarters, a consequence of the economic situation, were countered by a reduction of both empty space and the number of sites, as well as the integration of USCO activities in Canada and Mexico into the respective Kuehne & Nagel national companies. In Asia Pacific, Kuehne & Nagel successfully established value added services for the retail industry, for which the company installed dedicated logistics centres in Shanghai, Xiamen and Yantian as ideal platforms for future growth. Additionally, together with the company’s strategic partner, SembCorp Logistics, comprehensive distribution services are offered in China. Process standardisation In 2003, Kuehne & Nagel globally continued to drive the standardisation of processes for new customer implementation, as well as for operational and organ- isational structures in its logistics centres, with particular focus on activities in the USA and a number of European countries. The process improvements and 82 PERFORMANCE CONTRACT LOGISTICS Variance 2003/2002 CHF million 2003 per cent 2002 per cent per cent Turnover 1,167.1 100.0 1,157.2 100.0 0.9 Gross profit 778.2 66.7 715.0 61.8 8.8 EBITA 30.8 2.6 22.9 2.0 34.5 Number of operational staff 6,306 – 5,756 – 9.6 modifications achieved led to productivity increases and cost reductions, creating higher value and benefiting customers and Kuehne & Nagel equally. For new multinational projects a team of logistics specialists ensures smooth and rapid implementation. Furthermore, operational audits are conducted at regular intervals on a local, regional and global scale, in order to assure high and consist- ent quality around the world. Global standardisation of IT systems Progress was also made in the standardisation of contract logistics applications. Logistics centres on all continents have been equipped with a modern standard warehouse management system. The functional scope of the system facilitates paperless processes, automated retrieval, the operation of vendor hubs and ulti- mately wireless data transmission. In the current year, the standardised warehouse management system will be implemented in further locations, especially in the Asia Pacific region and Central America. In the area of transportation management applications, Kuehne & Nagel has also opted for global standardisation. In 2003 pilot projects were begun in the USA and Belgium, and for the current year further projects are planned in several European countries. The objective is for all local or national solutions to have been replaced by a standardised application within the next three years. Kuehne & Nagel has also invested in providing global transparency of orders, consignments, inventory movements, and deliveries across the entire supply chain. In the year under review, the integration of information systems for contract logis- tics and international forwarding was accelerated. With respect to their logistics processes, customers can thus be provided with complete transparency at any time via one worldwide-integrated system. Reports of the Business Units: Contract Logistics 83 Extension of service offering The Kuehne & Nagel offering was supplemented by further services in the areas of transportation management, reverse logistics, final assembly and product completion. As lead logistics provider, the company consolidates and optimises freight volumes for key accounts, reducing costs, avoiding dead freight and, not least, reducing the impact on the environment. In a number of European countries, Kuehne & Nagel assumed management of product returns for customers in the high-tech and electronics sector. Due to tight- ening regulations for manufacturers, especially in the European Union, further business growth is expected in this field. The need to reduce capital employed and increase responsiveness to demand fluctuations increasingly prompts companies to seek product integration and country-specific final assembly by the logistics provider before distribution to the end customer. Kuehne & Nagel has been particularly successful in securing new business in these fields of activity and is investing to expand its capabilities for the high-tech industry. Exploit business potential Currently Kuehne & Nagel is one of the top 10 global players in the contract logistics market, which is worth an estimated 510 billion US dollars worldwide. The company is well positioned and ready to benefit from business opportunities arising from continued globalisation and the anticipated economic upswing. The short-term goal is to raise the profit margin and achieve organic growth in China, Eastern Europe and the United States. Moreover, possibilities are being examined to accelerate growth in specific industry segments through selective acquisitions. 84 Insurance Broker | Specialisation creates sustained growth The globally operating Nacora Group achieved excellent results in 2003. Continued network expansion and focus on the area of cargo insurance have proved successful. Above all, customers value the high service level of Nacora insurance brokers. Insurance markets in the year 2003 were characterised by selective approaches to risks and high premiums. It was only in the second half that a trend reversal could be identified, as a consequence of which competition amongst insurance companies intensified. Expansion of network The opening of sales offices in Buenos Aires and Shenzhen, China, marked an extension of the Nacora Group’s geographic reach. It is now represented in 22 countries with a total of 25 offices in the world’s most important trade and finance centres. All branches are staffed by small specialist teams with industry expertise and well acquainted with local and global rules and regulations. Specialisation in cargo insurance Representing Nacora’s traditional core area of competence, cargo insurance is at the centre of business activities. In 2003, the highest growth was recorded by this division, notably in the highly specialised field of logistics solutions and projects. Additionally, Nacora develops integrated insurance solutions for cus- tomers in trade and industry. Smaller to mid-sized companies with international business activities in particular take advantage of Nacora’s consulting and brokerage competence. PERFORMANCE INSURANCE BROKER Variance 2003/2002 CHF million 2003 per cent 2002 per cent per cent Turnover 86.2 100.0 68.2 100.0 26.4 Gross profit 29.8 34.6 26.9 39.4 10.8 EBITA 15.4 17.9 13.7 20.1 12.4 Number of operational staff 131 – 124 – 5.6 Reports of the Business Units: Insurance Broker 85 High service level guaranteed Risk management and tailor-made customer solutions are in the foreground of Nacora’s service. Customers are accompanied and proficiently supported, from requirements’ analyses to realisation through to claims’ handling. Substantial investment in the service component was undertaken in 2003, amongst others through taking on more qualified personnel and sales staff in the national organisations. For 2004, further expansion of the international network and the gain of additional market shares are intended. 86 Reports of the Business Units: Corporate Governance 87 Corporate Governance Good corporate governance is an important and integral part of the management culture of the Kuehne & Nagel Group. The principles of corporate governance, as defined in the Directive on Information Relating to Corporate Governance of the SWX Swiss Exchange, are laid down in the Company Statutes, the Organisational Rules and the Committee Regulations of the holding company of the Group, Kuehne & Nagel International AG, Schindellegi, Switzerland. Company structure and shareholders The operational structure of the Group is organised into the business units International Forwarding, Contract Logistics and Insurance Broker. The business unit International Forwarding is structured into five business fields: seafreight, airfreight, international overland, rail, and customs broker. The two business fields of the business unit Contract Logistics are warehousing and distribution. Further information on the business units can be found in the sections Reports of the Business Units and the Consolidated Financial Statements respectively. Kuehne & Nagel International AG is the only listed company within the scope of the Group consolidation. The company has its registered office in Schindellegi, Switzerland. The Kuehne & Nagel shares are listed on the SWX Swiss Exchange (Valor No 1254181 / ISIN CH0012541816, symbol KNIN). Significant Group subsidiaries and associated companies are disclosed in the appendix to the Consolidated Financial Statements on pages 130–133, together with domicile, share capital and capital share. The main shareholder of the Kuehne & Nagel Group continues to be Klaus-Michael Kuehne, who holds 55.75 per cent of the share capital. A cross participation exists between the holding company Kuehne & Nagel International AG and SembCorp Logistics Ltd, Singapore. Kuehne & Nagel International AG holds 5 per cent of SembCorp Logistics Ltd, which in turn holds a 20 per cent stake in the company. Per December 31, 2003, the company held 3.37 per cent of treasury shares. The remaining 20.88 per cent are spread among the general public. 88 Capital structure Capital The share capital of the company amounts to CHF 120,000,000 divided into 24,000,000 registered shares of CHF 5 nominal value each. All shares have equal voting rights and no preferential rights or similar entitlements exist. The Company Statutes do not provide for any limitations on the transfer of shares. Nominees are entered into the share register only when they agree in writing to declare the names, addresses and shareholdings of the respective persons on whose account they are holding shares. Participating certificates, convertible bonds, options, authorised or conditional capital do not exist. Change in capital over the past three years Following a decision taken at the Annual General Meeting held on May 15, 2000, the 181,000 bearer shares with a nominal value of CHF 100 which existed at the time were converted through a 2 for 1 split into registered shares with a nominal value of CHF 50. On the same date, the Board of Directors was officially authorised by the shareholders to increase the company’s share capital by up to CHF 20 million by emitting a maximum of 400,000 registered shares with a nominal value of CHF 50. The Board of Directors made use of this authority in a resolution passed on December 8, 2000. By decision of the Annual General Meeting on May 15, 2001, each share with a nominal value of CHF 50 was split into 10 shares with a nominal value of CHF 5. For information on the development of reserves and available earnings in the past two years refer to the balance sheet of Kuehne & Nagel International AG on page 137; for the year 2001 please consult the Annual Report 2001. Board of Directors Organisation of the Board of Directors The Board of Directors is elected by the shareholders and as such holds the ulti- mate decision-making authority of the Group for all matters except those reserved by law or statutes to the shareholders. The Board of Directors has elected the Executive Chairman and the Vice Chairman from its members. All remaining members hold non-executive positions. Their respective authorities are defined in the Organisational Rules. Reports of the Business Units: Corporate Governance 89 The Board of Directors consists of the following members 1: Director Term Name Age since expires Klaus-Michael Kuehne (Executive Chairman) 66 1975 2006 Bernd Wrede (Vice Chairman) 60 1999 2005 Prof. Dr. Otto Gellert 74 1992 2006 Dr. Joachim Hausser 59 1992 2006 Dr. Willy Kissling 59 2003 2006 Koh Soo Keong 52 2001 2004 Dr. Georg Obermeier 62 1992 2006 Dr. Alfred Pfeiffer 71 1994 2006 Bruno Salzmann 69 1999 2005 Dr. Thomas Staehelin 56 1978 2006 Wong Kok Siew 57 2001 2004 1 See also the biographical information on pages 94 ff. The Board members are each elected for a period of three years by the share- holders. There are no limits regarding the number of terms of service or regarding age. No non-executive member of the Board of Directors has held a position in the company’s Management Board or any Group company in the three years prior to 2003 or is in any integral business relation with the company or any Group company. The CEO of the Group, Klaus Herms, is a member of the Board of Directors of SembCorp Logistics Ltd, Singapore, which in turn is represented also on the company’s Board of Directors by Messrs Wong and Koh. No further cross- involvements exist. During 2003, the Board of Directors met four times in an all-day session. Further decisions can be taken with the written approval of all Board members. Committees The full Board of Directors has formed an Audit Committee as well as a Nomination and Compensation Committee, whose areas of responsibility and procedures are laid down in the Committees’ Regulations. The Committees meet several times a year and prepare decisions for the full Board of Directors in accordance with their areas of responsibility. 90 Management Board members, other senior executives and, if required, external advisors may be invited to the respective meetings. Audit Committee The Audit Committee is composed of the following directors: Prof. Dr. Otto Gellert (Chairman), Bruno Salzmann, Dr. Thomas Staehelin, and Bernd Wrede. In 2003, the Audit Committee met five times. The Committee ensures a comprehensive and efficient auditing concept for the company and submits its independent appraisal of the quality of the external audit, the internal control system and the annual financial statements. Nomination and Compensation Committee The Nomination and Compensation Committee is composed the following directors: Klaus-Michael Kuehne (Chairman), Dr. Georg Obermeier, and Bernd Wrede. In 2003, the Committee met three times. The Committee secures competent staffing of Management Board positions and defines the principles for compensating the members of the Board of Directors and the Management Board, including share purchase and option plans. Scope of powers According to statutes and Swiss corporate law, the main tasks of the Board of Directors comprise strategic direction and management of the company, accoun- ting matters, financial control and planning, appointing and dismissing of Management Board members and other senior executives, supervisory control of the business operations and submission of proposals to the Annual General Meeting, including the financial statements of Kuehne & Nagel International AG as well as the Group’s consolidated financial statements. The Board of Directors has assigned specified powers to the Executive Chairman of the Board of Directors, particularly in the areas of investment, finance and accounting as well as personnel. The entire Board of Directors, however, is responsible for decisions on such before-mentioned aspects that are of significant importance to the company. The scope of the Board and the Executive Chairman are stipulated in the Organisational Rules. The Board of Directors has delegated the responsibility for the development, execution and supervision of the day-to-day business operations of the Group and its associated companies to the Management Board except those reserved by law, by statutes or the Organisational Rules to the Annual General Meeting, the Audit Committee, the Board of Directors or the Executive Chairman of the Board of Directors. Reports of the Business Units: Corporate Governance 91 Information and control instruments for the Management Board A Catalogue of Competences based on a risk management approach governs the authority and the competences of the Management Board and the senior executives. All members of the Board of Directors receive monthly updates by a management information system (MIS) on core financial data (consolidated turn- over, operational result, as well as Group income of the regions, the countries, the business units and the business fields). The internal audit is assigned to examine the compliance of management with their duties and their adherence to Group guidelines and reports directly to the Executive Chairman of the Board of Directors on a regular basis. Management Board The Management Board, led by the Chief Executive Officer of the Group, Klaus Herms, assumes its duties as assigned by the Board of Directors and in accordance with the Organisational Rules. Biographical information on members of the Management Board is found on page 97 of the Annual Report. Mandates or management contracts other than those mentioned there do not exist. Compensation Remuneration The Board of Directors regulates the compensation, allocation of shares and granting of loans to the Board of Directors, whereas the Board of Directors’ Nomination and Compensation Committee regulates such matters for the Management Board. The incumbent members of the Board of Directors receive a total remuneration amounting to 1 per cent of the net profit of Kuehne & Nagel International AG. Each member is guaranteed an annual compensation amounting to CHF 30,000. The total remuneration paid to members of the Board of Directors and the Management Board in the financial year amounted to CHF 10,153,527, out of which CHF 9,563,626 were paid to the executive member of the Board of Directors and the members of the Management Board, and CHF 589,901 to the non-executive members of the Board of Directors. The member of the Board with the highest total remuneration received CHF 3,187,647. No remuneration was paid to former members of the Board of Directors or of the Management Board in the year under review. 92 Additionally, in the year 2003, further remuneration requiring disclosure was paid to members of the Board of Directors for other services rendered to the company and an associated company as follows: Prof. Dr. Otto Gellert received CHF 234,841, Bruno Salzmann CHF 143,000, and Bernd Wrede CHF 143,750. The members of the Management Board receive an income with a fixed and a profit-linked component and have the possibility to participate in a share purchase and option programme. Three members of the Management Board are provided with open unsecured loans amounting to CHF 453,750 in total at 4 per cent interest p.a. to finance the share purchase and option programme. Shares and options In the year under review, no company shares were allocated to the members of the Board of Directors, the Management Board members, or parties closely linked to them. As of December 31, 2003, the total number of company shares owned by the executive member of the Board of Directors and members of the Management Board and parties closely linked to them was 13,451,517. On the same date, the total number of company shares held by the non-executive members of the Board of Directors and parties closely linked to them was 2,521. In the year 2001, the company introduced a share purchase and option pro- gramme for members of the Management Board by which the members of the Management Board have the option to purchase a maximum of 37,125 registered shares. To date, the Management Board members have acquired all 37,125 shares at the agreed purchase price of 90 per cent of the average share closing price at the SWX Swiss Exchange in the months of April to June of the respective year. A further subscription possibility for members of the Management Board may occur in mid 2004. The sale of the shares acquired under this scheme is blocked for a period of three years. Each share bought combines two options with the right to buy one company share each at the aforementioned average price. The option is blocked for three years from the date of subscription and thereafter can be exercised in the period of the three subsequent years, after which it expires. Reports of the Business Units: Corporate Governance 93 The members of the Management Board and parties closely linked to them hold the following options per deadline: Allocation Number of End of waiting Name date options period Thomas Engel 2001 4,000 2004 2002 5,000 2005 2003 2,250 2006 Klaus Herms 2001 12,000 2004 2002 3,000 2005 2003 3,000 2006 Gerard van Kesteren 2001 9,000 2004 2002 2,250 2005 2003 2,250 2006 Reinhard Lange 2001 4,000 2004 2003 5,000 2006 Dirk Reich 2001 4,000 2004 2003 7,250 2006 Klaus Dieter Pietsch 2001 6,000 2004 2002 3,000 2005 2003 2,250 2006 Total options allocated 74,250 Shareholders’ right of participation, changes of control and defence measures There are no voting restrictions. The legal rules on quorums and terms apply. Shareholders holding shares with a total nominal value of at least CHF 1 million can demand that items be added to the agenda up to 45 days prior to the meet- ing by submitting details of the proposals. There are no opting-out or opting-up rules. No member of the Board of Directors or the Management Board or other senior management employees has clauses on changes of control in their contracts. Statutory auditors KPMG Fides Peat, Zurich, adopted the mandate initially for the business year 2002 as per declaration of acceptance dated May 8, 2002. The re-election for the business year 2003 was confirmed with the declaration of acceptance dated May 15, 2003. The head auditor responsible for the mandate, Mr R. Neininger, entered into office on July 1, 2002. According to the company’s financial records, the fees charged for auditing services for the year under review amounted to CHF 2,506,400. In addition, CHF 41,200 were paid to the statutory auditors for other consulting services within the year under review. 94 External auditing is supervised and controlled by the Board of Directors’ Audit Committee. The statutory auditors also report to the Audit Committee and attend Audit Committee meetings regularly / on specific request. Information policy The company regularly publishes news on fundamental business developments, organisational changes, new major contracts, etc. on its website. Financial information also is published on a quarterly basis on www.kuehne-nagel.com. Board of Directors of Kuehne & Nagel International AG Klaus-Michael Kuehne, Executive Chairman German, age 66 Trained as banker. Klaus-Michael Kuehne entred into the family business in 1958 and was CEO of the Kuehne & Nagel Group from 1966 to 1975. He has been a member and Delegate of the Board of Directors since 1975, Executive Chairman of the Board of Directors since 1992, and is elected until the Annual General Meeting 2006. Klaus-Michael Kuehne is Chairman of the company’s Nomination and Compensation Committee. Bernd Wrede, Vice Chairman German, age 60 Studied at the Universities of Würzburg and Hamburg and holds an MBA. From 1982 to 2001, Bernd Wrede was a member of the Board of Hapag-Lloyd AG, Hamburg, and as of 1993 its Chairman. Currently management consultant. He further is a member of the Supervisory Board of the following companies: Bankgesellschaft Berlin AG, Berlin; ERGO Versicherungsgruppe AG, Düsseldorf; Goldschmidt AG, Essen; Landesbank Berlin, Berlin; Weberbank Privatbankiers KGaA, Berlin. Additionally, Bernd Wrede is a member of the Board of Trustees of ZEIT-Stiftung, Hamburg. He has been a member of the Board of Kuehne & Nagel International AG since 1999 and is elected until the Annual General Meeting 2005. Bernd Wrede is a member of the company’s Audit Committee as well as the Nomination and Compensation Committee. Prof. Dr. Otto Gellert German, age 74 Holds a PhD and was promoted professor in business administration from the University of Hamburg. Since 1960, independent activities as accountant and tax consultant. Other significant positions are: member of the Supervisory Board and Shareholders’ Committee of M.M. Warburg & CO KGaA-Group, Hamburg; Vice Chairman of the Board of Directors of BvS Bundesanstalt für vereinigungs- bedingte Sonderaufgaben, Berlin; member of the Supervisory Board of FRoSTA AG, Bremerhaven. Otto Gellert has been a member of the Board of Kuehne & Nagel International AG since 1992 and is elected until the Annual General Meeting 2006. He is Chairman of the company’s Audit Committee. Reports of the Business Units: Corporate Governance 95 Dr. Joachim Hausser German, age 59 Holds a PhD in economics from the Université de Genève. Retired bank executive, currently an independent financial consultant. Other significant positions are: Chairman of the Supervisory Board of Ludwig Beck am Rathauseck Textilhaus Feldmeier AG, Munich; member of the Advisory Board of GETRAG Getriebe- und Zahnradfabrik Hermann Hagenmeyer GmbH & Cie, Ludwigsburg. Joachim Hausser has been a member of the Board of Kuehne & Nagel International AG since 1992 and is elected until the Annual General Meeting 2006. Dr. Willy Kissling Swiss, age 59 Holds a PhD in business administration from the University of Berne, PMD Harvard Business School, Cambridge, USA. Formerly President and CEO of Landis & Gyr Corporation (1987–1996). Since 1998, Chairman and until May 2002 CEO of Unaxis Corporation, Pfäffikon. Other significant positions are: Chairman of the Board of Directors of SIG Holding Ltd, Schaffhausen; Vice Chairman of the Board of Directors of Forbo Holding AG, Eglisau, and of Holcim Ltd, Jona; member of the Board of Directors of Schneider Electric S.A., Paris. Willy Kissling has been a member of the Board of Kuehne & Nagel International AG since 2003. He is elected until the Annual General Meeting 2006. Koh Soo Keong Singaporean, age 52 Graduated in business law and holds an MBA as well as a bachelor of engineer- ing from the National University of Singapore. 20 years of experience in the logistics industry, key project manager for defence material organisation in the Singapore Ministry of Defence. Since 1987, Koh Soo Keong is President and Chief Executive Officer of SemCorp Logistics Ltd, Singapore. He has been a member of the Board of Kuehne & Nagel Internatioal AG since 2001 and is elected until the Annual General Meeting 2004. Dr. Georg Obermeier German, age 62 Holds a PhD in business administration from the University of Munich. Georg Obermeier has been on the management board in listed companies for 12 years, 6 of which as Chairman. Currently an independent business consultant. He further is member of the Supervisory Committees of the following companies: E-Control, Vienna; Illbruck Building Systems, Leverkusen; Rheinhold und Mahla AG, Munich; Spaten-Franziskaner KGaA, Munich. Georg Obermeier has been a member of the Board of Kuehne & Nagel International AG since 1992 and is elected until the Annual General Meeting 2006. He is a member of the company’s Nomination and Compensation Committee. 96 Dr. Alfred Pfeiffer German, age 71 Holds a PhD in business administration from the University of Munich. Formerly Chairman of the Board of VIAG AG, Munich, and Chairman of the Supervisory Board for several major industrial companies. Other significant positions: member of the Board of Administration of Gerling AG, Cologne; Honorary President of the Advisory Council of Union e.V., Munich. Alfred Pfeiffer has been a member of the Board of Kuehne & Nagel International AG since 1994 and is elected until the Annual General Meeting 2006. Bruno Salzmann Swiss, age 69 Education and employment as auditor. Bruno Salzmann held the position of General Director Finance and Controlling with the Kuehne & Nagel Group from 1983 until retirement in 1999. He is currently a consultant. A member of the Board of Kuehne & Nagel International AG since 1999, Bruno Salzmann is elected until the Annual General Meeting 2005. He is a member of the company’s Audit Committee. Dr. Thomas Staehelin Swiss, age 56 Holds a PhD in law from the University of Basel. Lawyer. Other significant positions: Vice Chairman of the Board of Directors of Siegfried Holding AG, Zofingen; member of the Board and President of the Audit Committee of Inficon Holding AG, Bad Ragaz; member of the Bank Council of Basler Kantonalbank, Basel; Chairman of the Board of Directors of Swissport International SA, Opfikon, and of Rothornbahn & Scalottas AG, Vaz / Obervaz; member of the Board of Directors of Lantal Textiles, Langenthal; member of the Board and Commission President of economiesuisse; President of the Basel Chamber of Commerce; Delegate to the Board of Directors at Vereinigung der Privaten Aktiengesell- schaften; member of the Swiss Foundation for Accounting and Reporting Recommendations (FER-SWISS GAAP FER). Thomas Staehelin has been a member of the Board of Kuehne & Nagel International AG since 1978 and is elected until the Annual General Meeting 2006. He is a member of the company’s Audit Committee. Wong Kok Siew Singaporean, age 57 Bachelor in mechanical engineering from McGill University, Canada, and holds an MBA from McMaster University, Canada. Currently Deputy Chairman and Chief Executive Officer of SembCorp Industries Ltd, Singapore. Other significant positions: Chairman of Nomura Singapore Ltd, Singapore; Director of British American Tobacco plc, London, and of Port of Singapore Authority Corporation Ltd; Chairman of the International Enterprise Singapore (formerly Trade Development Board of Singapore). Wong Kok Siew has been a member of the Board of Kuehne & Nagel International AG since 2001 and is elected until the Annual General Meeting 2004. Reports of the Business Units: Corporate Governance 97 Management Board of Kuehne & Nagel Group Klaus Herms German, age 62 Graduated in business administration from DAV, Bremen. Held various positions within the Kuehne & Nagel Group since 1968, last as Head of the Group’s Asia- Pacific organisation. Since 1999 Chairman of the Management Board and Chief Executive Officer of the Group. Other significant positions: since 2001 member of the Board of Directors of SembCorp Logistics Ltd, Singapore. Thomas Engel Swiss, age 49 Dipl. EL. Ing. ETH. Held various IT positions including Divisional Director IT at Metro International AG, Baar, and Head of IT and Logistics at AMC International AG, Risch. Chief Information Officer of the Kuehne & Nagel Group. Other signifi- cant positions: member of the Board of Directors of TQ3 Travel Solutions Suisse AG, Zurich. Dr. Axel Hansen German, age 60 Law graduate and Doctor of jurisprudence. Studied at the Universities of Kiel, Berlin and Paris. Management and Board positions in steel trade, industrial plant construction and the real estate sector. General Counsel of the Kuehne & Nagel Group and Secretary of the Board of Directors. Gerard van Kesteren Dutch, age 54 Chartered accountant. 17 years at Sara Lee Corporation in various management positions in finance, last as Director of Financial Planning and Analysis. Chief Financial Officer of the Kuehne & Nagel Group. Reinhard Lange German, age 54 Trained freight forwarder. Since 1971 in various positions in the Kuehne & Nagel Group, including Head of Seafreight and of the Canadian Kuehne & Nagel organisation. Chief Operating Officer International Forwarding of the Kuehne & Nagel Group. Klaus-Dieter Pietsch German, age 62 Graduated in business administration. Various positions in industry in the areas of human resources and information technology. Executive Vice President Human Resources / Quality Management of the Kuehne & Nagel Group. Dirk Reich German, age 40 Graduated from Koblenz School of Corporate Management in Germany. Various positions at Lufthansa AG and VIAG AG. Joined Kuehne & Nagel in 1994 as Senior Vice President Corporate Development. Since 2001 Executive Vice President Contract Logistics of the Kuehne & Nagel Group. 98 Consolidated Financial Statements: Contents 99 Consolidated Financial Statements 101 Income Statement 102 Balance Sheet 104 Statement of Changes in Equity 105 Cash Flow Statement 106 Notes to the Financial Statements 130 Main Consolidated Companies, Associates and Joint Ventures 100 Consolidated Financial Statements: Income Statement 101 Income Statement CHF million Note 2003 2002 Invoiced turnover 9,548.0 8,805.0 Customs duties and taxes (2,015.7) (1,858.3) Net invoiced turnover 7,532.3 6,946.7 Net expense for services from third parties (5,468.0) (5,035.5) Gross profit 2,064.3 1,911.2 Personnel expense 15 (1,130.1) (1,042.8) Selling, general and administrative expense 16 (523.6) (510.8) Income from associates and joint ventures 4.3 4.3 Other operating income 17 3.3 17.9 EBITDA 418.2 379.8 Depreciation of fixed assets and amortisation IT software 18 (102.3) (103.0)1 EBITA 315.9 276.8 Amortisation of goodwill 23 (34.9) (53.1)1 Impairment of goodwill 23 – (206.4) EBIT 281.0 17.3 Finance result 19 5.1 (12.8) Earnings before tax 286.1 4.5 Income tax 20 (89.3) (3.3) Earnings after tax 196.8 1.2 Minority share (1.1) (1.1) Net earnings for the year 195.7 0.1 Basic earnings per share 21 8.446 0.006 Diluted earnings per share 21 8.438 0.006 1 Restated for comparison purpose (Reclassification of amortisation IT software CHF 26.9 million in 2002) 102 Balance Sheet CHF million Note 31/12/2003 31/12/2002 ASSETS Non current assets Fixed assets and IT software 22 550.9 471.2 Goodwill 23 133.3 180.9 Investments in associates and joint ventures 24 18.2 19.1 Investments in affiliated companies 24 30.0 19.5 Deferred tax assets 20 37.9 57.1 770.3 747.8 Current assets Prepayments and deposits 35.7 33.4 Work in progress 25 159.1 166.8 Trade receivables 26 975.4 874.3 Other receivables 27 46.1 51.0 Marketable securities 28 26.3 43.8 Cash and cash equivalents 29 707.0 776.8 1,949.6 1,946.1 Total assets 2,719.9 2.693.9 Consolidated Financial Statements: Balance Sheet 103 CHF million Note 31/12/2003 31/12/2002 EQUITY, MINORITY INTEREST AND LIABILITIES Equity Share capital 30 120.0 120.0 Reserves and cumulative retained earnings 31 697.0 756.9 Net earnings for the year 195.7 0.1 1,012.7 877.0 Minority interest 32 5.4 4.7 Long term liabilities and provisions Provisions for pension plans and severance payments 33 167.1 147.5 Deferred tax liabilities 20 10.5 8.3 Bank liabilities 34 0.7 8.7 Finance lease obligations 35 – 6.2 178.3 170.7 Short term liabilities Bank liabilities 29 299.8 534.7 Trade liabilities / Accrued trade expenses / Deferred trade income 36 931.1 860.3 Current tax liabilities 20 40.7 28.7 Other liabilities 37 251.9 217.8 1,523.5 1,641.5 Total equity, minority interest and liabilities 2,719.9 2,693.9 Schindellegi, March 25, 2004 KUEHNE & NAGEL INTERNATIONAL AG Klaus Herms Gerard van Kesteren CEO CFO 104 Statement of Changes in Equity CHF million Share capital Share Net unreali- Revaluation Treasury Cumulative Retained Total premium sed (loss)/ reserve 1 shares 2 translation earnings shareholders gain on avail- adjustment equity able for sale investments3 Balance 1/1/2002 120.0 452.8 1.1 9.3 (69.6) (23.9) 495.4 985.1 Change in accounting policy 1 (9.3) (9.3) Unrealised gain on 5% SembCorp investment 8.5 8.5 Foreign exchange differences (46.2) (46.2) Total gains and losses recognised directly in equity 0.0 0.0 8.5 (9.3) 0.0 (46.2) 0.0 (47.0) Disposal of treasury shares 2 0.9 4.9 5.8 Dividend paid (67.0) (67.0) Net earnings for the year 0.1 0.1 Balance 31/12/2002 120.0 453.7 9.6 0.0 (64.7) (70.1) 428.5 877.0 Balance 1/1/2003 120.0 453.7 9.6 0.0 (64.7) (70.1) 428.5 877.0 Unrealised gain on 5% SembCorp investments 10.5 10.5 Foreign exchange differences (1.8) (1.8) Total gains and losses recognised directly in equity 0.0 0.0 10.5 0.0 0.0 (1.8) 0.0 8.7 Disposal of treasury shares 2 0.3 0.4 0.7 Dividend paid 4 (69.4) (69.4) Net earnings for the year 195.7 195.7 Balance 31/12/2003 120.0 453.7 20.1 0.0 (64.4) (71.9) 555.2 1,012.7 1 The revaluation reserve related to the revaluation of certain properties in Germany. As of January 1, 2002, the Group abandoned this revaluation policy in order to account for all properties at historical cost less accumulated depreciation and impairment losses. The revaluation reserve of CHF 9.3 million as of that date was reversed against the carrying amounts of the properties concerned. 2 In 2003 the company sold under the stock option scheme 46,290 shares at a nominal of CHF 5 each for a total consideration of CHF 3.5 million and adjusted the initial value of the Treasury shares bought in 2000 by CHF 3.2 million. 3 The 5% investment in SembCorp Logistics Ltd., a publicly listed company domiciled in Singapore, was acquired in 2000 and is stated at a significant discount due to foreign currency transfer risks, and because transfer are restricted until February 2006. The original fair value estimate of the investment is revised each year to reflect the listed share price at balance sheet date, less an appropriate discount to take into account the impact of these restrictions. 4 The proposed dividend payment, subject to approval by the Annual General Meeting is as follows: Dividend Per share CHF million 2003 3.50 81.1 The legal basis for any profit distribution is the retained earnings of the statutory financial statements of Kuehne & Nagel International AG. The share premium and retained earnings of the Group may not be paid out as a dividend to the shareholders. Consolidated Financial Statements: Changes in Equity Cash Flow 105 Cash Flow Statement CHF million Note 2003 2002 Cash flow from operating activities Net earnings for the year 195.7 0.1 Non cash related transactions: Minority share of net earnings for the year 32 1.1 1.1 Income from associates and joint ventures (0.8) (1.4) Depreciation of fixed assets and amortisation of IT software 18 102.3 103.0 Profit/(loss) on disposal of fixed assets, net (0.1) (5.4) Profit/(loss) on disposal of associates, net 3.1 3.7 Amortisation of goodwill 23 34.9 53.1 Impairment of goodwill 23 – 206.4 Net addition to provision for pension plans and severance payments 9.4 3.9 Total operational cash flow 345.6 364.5 (Increase)/decrease work in process 11.3 (34.2) (Increase)/decrease receivables, prepayments and deposits (89.4) (78.9) Increase/(decrease) tax liabilities less tax assets 9.9 (49.3) Increase/(decrease) other liabilities 13.0 12.9 Increase/(decrease) trade liabilities/accrued trade expenses 67.9 70.9 Total cash flow from operating activities 358.3 285.9 Cash flow from investing activities Capital expenditures – Fixed assets 22 (163.7) (126.4) – IT software 22 (14.6) (26.9) Goodwill on purchase of consolidated companies 23 (3.7) (27.0) Increase/(decrease) minority interest 32 0.3 2.8 Disposals of fixed assets 12.9 17.4 Disposals of marketable securities 17.5 12.1 Total cash flow from investing activities (151.3) (148.0) Cash flow from financing activities Increase/(decrease) bank liabilities (12.1) (48.2) Disposals of treasury shares 0.3 5.9 Dividends paid to Kuehne & Nagel shareholders (69.4) (67.0) Profit distribution to minority shareholders 32 (0.7) (0.6) Total cash flow from financing activities (81.9) (109.9) Exchange difference on cash and cash equivalents 40.0 23.4 Increase/(decrease) in cash and cash equivalents 165.1 51.4 Cash and cash equivalents at the beginning of the year, net 29 242.1 190.7 Cash and cash equivalents at the end of the year, net 29 407.2 242.1 Tax paid for previous years 12.8 14.5 Tax paid for current year 51.4 39.7 Dividends received from affiliates, associates and joint ventures 3.1 5.9 Interest received 9.5 13.1 Interest paid 10.5 12.1 106 Notes to the Consolidated Financial Statements PRINCIPLES OF CONSOLIDATION AND VALUATION 1 Basis of preparation The consolidated financial statements of the Group are based on the individual financial statements of the consolidated subsidiaries as of December 31, 2003. The financial statements have been prepared in accordance with uniform accounting policies issued by the Kuehne & Nagel Group which comply with the requirements of International Financial Reporting Standards (IFRS) and with Swiss law. The consolidated financial statements of the Group have been prepared on a historical cost basis except for derivatives and marketable securities which are measured at fair value. No new standards have been introduced during the year and the accounting policies used are consistent with those used in the previous year. The financial statements under IFRS contain certain assumptions and estimates which affect the figures shown in the present report. The actual result may differ from these estimates. Certain comparative information has been reclassified to conform to the current year’s presentation. 2 Scope of consolidation The main consolidated companies, associates and joint ventures are listed on pages 130– 133. The material changes in the scope of consolidation in 2003 relate to the following companies: KN voting and capital share Share capital acquired in per cent in 1,000 Acquisitions Nacora, Sweden 40 SEK 100 Team Logistic, Belgium 50 EUR 125 Nacora, Brazil 30 BRL 103 Incorporation Pact, Germany 100 EUR 50 Ferroviasped, Sweden 100 SEK 1,000 Kuehne & Nagel Servicios Administrativos, Mexico 100 MXP 50 OOO Kuehne & Nagel, Russia 100 RUR 4,107 OOO Kuehne & Nagel Sakhalin, Russia 100 RUR 500 Consolidated Financial Statements: Notes 107 3 Principles of consolidation The consolidated financial statements comprise the accounts of Kuehne & Nagel International AG (the ultimate parent company) and its subsidiaries. Subsidiaries are all entities where Kuehne & Nagel International AG has the ability to control. Control exists when a company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. These subsidiaries are included in the consolidated financial statements according to the method of full consoli- dation. As a consequence, all assets, liabilities, expense and income are fully included. Subsidiaries acquired within the financial year are accounted for according to the purchase method as of the date of take-over of control. The difference between the purchase price and the Group’s share of the fair values of the acquired net assets at the date of acquisition is recognised as goodwill and amortised over its estimated useful life. The minority interest in equity and net income or loss is reported separately in the consolidated accounts. Associates and joint ventures Associates are those companies over which the Group is able to exercise significant influence over the financial and operational policies, but does not control. Joint ventures are those that are subject to contractually established joint control. Associates and joint ventures are accounted for under the equity method and carried in the balance sheet at the equity-accounted amount or, if lower, recoverable amount. The Group’s share of income (loss) of associates and joint ventures is included in the income statement. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Foreign exchange translation Year end accounts of subsidiaries are prepared in their respective functional currencies and translated into CHF (the group reporting currency) as of year end. Assets and liabilities are translated at year end exchange rates and all items included in the income statement and cash flow at average exchange rates for the year, which approximate actual rates. Exchange differences originating from such translation methods have no impact in the income statement since they are directly posted to equity. Transactions in foreign currencies within individual subsidiaries are translated into local currency at actual rates of the day of transaction, monetary assets and liabilities are translated at year end rates. Exchange differences arising on the translation of monetary items are included in the income statement. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the acquiring company and are recorded at the exchange rate at the date of the acquisition. 108 The major foreign currency conversion rates applied are as follows: INCOME STATEMENT AND CASH FLOW (Average rates for the year) 2003 Variance 2002 Variance Currency CHF per cent CHF per cent EURO 1.– 1.5192 3.5 1.4677 (2.8) USD 1.– 1.3414 (13.9) 1.5583 (7.7) BALANCE SHEET (year end rates) 2003 Variance 2002 Variance Currency CHF per cent CHF per cent EURO 1.– 1.5595 7.2 1.4546 (1.8) USD 1.– 1.2423 (10.5) 1.3875 (17.3) 4 Financial assets and The accounting policy applied to financial instruments depends on how they are classified. liabilities Financial assets and liabilities are classified into the following categories: – Financial assets or liabilities held for trading are those that are acquired or held with an intention to be sold in the short term to generate a profit from fluctuations in their fair value. All derivatives are classified as held for trading. Trading instruments are measured at their fair value at the balance sheet date. Any changes in fair value are recorded in the income statement (finance result) for the respective reporting period. – Originated receivables are those loans and receivables originated by the Group supplying goods or services or financing directly to a debtor. Originated receivables are carried at amortised cost calculated using the effective interest rate method, less allowances for impairment (see below). – Financial assets/investments available for sale, include all financial assets/investments not assignable to one of the above-mentioned categories. These include investments in affiliates that are not associates or joint ventures and investments in bonds and notes. Financial assets/investments available for sale are recognised at fair value, changes in value (after tax) are recorded directly in equity until the assets are sold at which time the amount reported in equity is transferred to the income statement. – Non-derivative financial liabilities are carried at amortised cost calculated using the effective interest rate method. The fair value of investments held for trading and investments available for sale is their quoted bid price at the balance sheet date, less an appropriate discount, if there are restrictions on the transferability. Derivatives and hedge accounting Derivative financial instruments (foreign exchange contracts) are used to hedge the foreign exchange exposures on outstanding balances in the Kuehne & Nagel internal clearing system, centralised at head office. Derivatives are not used for speculative purposes. Given that the Group’s hedging activities are limited to hedges of recognised foreign currency monetary items, the Group does not apply hedge accounting. Derivatives held to hedge foreign currency exposures are carried at fair value and all changes in fair value are recognised immediately in the income statement. Consolidated Financial Statements: Notes 109 Impairment of financial assets If there is any indication that a financial asset available for sale or originated by the enterprise may be impaired its recoverable amount is calculated. The recoverable amount of the Group’s receivables is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted. Trade receivables are reported at their anticipated recoverable amounts. The allo- wance for bad debts is determined based on an ageing analysis and considering previous experience of bad debts. The recoverable amount of available for sale equity securities is their fair value. Where an asset’s recoverable amount is less than its carrying amount, the asset is written down to its recoverable amount. All resultant impairment losses (after reversing previous revaluations recognised in equity) are recognised in the income statement. An impairment loss in respect of a financial asset is reversed if there is a subsequent increase in recoverable amount that can be related objectively to an event occurring after the impairment loss was recognised. 5 Segment reporting The segment reporting reflects the structure of the Kuehne & Nagel Group. A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The primary segmentation covers the business fields “Seafreight”, “Airfreight”, “International Overland”, “Rail”, “Customs Brokerage”, “Warehousing”, “Distribution”, “Special Logistics” and “Insurance Broker”. The secondary segmentation represents geographical areas. Assets and liabilities cover all balance sheet positions which are directly, or on a reasonable basis, attributable to a segment. 6 Fixed assets Fixed assets are included in the consolidated accounts at cost less accumulated depreciation and accumulated impairment losses (see note 10). The depreciation is calculated on a straight line basis considering the expected useful lifetime of the individual fixed assets. The following depreciation rates are applicable for the major fixed asset categories: per cent Buildings 2 1/ 2 Vehicles 25 Leasehold improvements 331/3 Office machines 25 IT hardware 331/3 Office furniture 20 110 Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditure is recognised in the income statement as an expense as incurred. 7 Leases Leases that transfer substantially all the risks and rewards of ownership of the leased asset to the Group are classified as finance leases. Other leases are classified as operating leases. Assets leased under finance leases are included at the present value of the future minimum lease payments, or their fair value if lower, less accumulated depreciation and accumulated impairment losses (see note 10). Leased assets are depreciated over the shorter of the lease term and their useful lives. The interest portion of the lease payments is expensed through the income statement based on the effective interest rate inherent in the lease. Operating lease payments are treated as operating cost and charged to the income statement on a straight line basis over the lease period unless another basis is more appropriate to reflect the pattern of benefits to be derived from the leased asset. 8 Intangible assets a) IT software IT software is carried at cost less accumulated amortisation and accumulated impairment losses. IT software is amortised over its estimated useful life. b) Goodwill Goodwill from acquisitions is recognised at cost, less accumulated amortisation and accumulated impairment losses. Goodwill is amortised over its estimated useful life. 9 Cash and cash equivalents Cash and cash equivalents comprise of cash at bank and in hand, short term deposits and bank overdrafts with an original maturity of three months or less. This definition also applies for the purpose of the consolidated cash flow statement. 10 Impairment The carrying amounts of the Group’s investments in subsidiaries, associates and joint ventures and its intangible assets and property, plant and equipment, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Calculation of recoverable amount The recoverable amount of an asset is the greater of its net selling price and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash- generating unit to which the asset belongs. Consolidated Financial Statements: Notes 111 Reversals of impairment An impairment loss in respect of goodwill is not reversed unless the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in recoverable amount relates clearly to the reversal of the effect of that specific event. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 11 Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and the amount of the obligation can be estimated. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropri- ate, the risks specific to the liability. 12 Pension plans, severance Some subsidiaries maintain pension plans in favour of their personnel in addition to the payments and share legally imposed social insurance schemes. The pension plans partly exist as independent participation plans trusts and are operated either under a defined contribution or under a defined benefit plan. Defined benefit plans The Group’s net obligation in respect of defined benefit pension plans is calculated separa- tely for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine the present value, and the fair value of any plan assets is deducted. The dis- count rate is the yield at balance sheet date on AAA credit rated bonds that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed by an independent, qualified actuary using the projected unit credit method. In calculating the Group’s obligation in respect of a plan, to the extent that any cumulative unrecognised actuarial gain or loss exceeds ten percent of the greater of the present value of the defined benefit obligation and the fair value of plan assets, that portion is recognised in the income statement over the expected average remaining working lives of the employees participating in the plan. Otherwise, the actuarial gain or loss is not recognised. Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. Severance payments The anticipated cost of severance payments, as legally required in certain countries, are also provided for over the period of service of the related employees. No compensation cost is recognized in the financial statements for options or shares granted to employees from the employee share purchase and option plan. 112 13 Revenue recognition The income statement presentation reflects the unique nature of the income generated by an entity operating in the logistics and forwarding business. Turnover from services rendered is recognised in the income statement when the related services are performed. In the logistic and forwarding industry gross profit, which represents the difference between the turnover and the services rended by third party, provides a better indication of performance than turnover. 14 Taxes All taxes on income, profit, capital and real estate are provided for. The level of the provision is calculated based on the tax laws and rates prevailing in the individual countries at the balance sheet date. Both current and deferred tax are recognised in the income statement, except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. The provision for deferred tax is recorded following the “comprehensive liability” method. As a consequence, all temporary differences between the consolidated and fiscal balance sheet are considered in the preparation of the year end accounts. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. Non recoverable withholding tax on anticipated or probable profit distributions by subsidiaries is also recorded under deferred tax liabilities. A deferred tax asset in respect of temporary differences or tax losses is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. NOTES TO THE INCOME STATEMENT 15 Personnel expense CHF million 2003 2002 Salaries and wages 838.5 793.6 Social expense and employee benefits 256.6 218.8 Pension plan expense – Defined benefit plan 19.6 16.3 – Defined contribution plan 11.0 11.9 – Others 4.4 2.2 1,130.1 1,042.8 Consolidated Financial Statements: Notes 113 16 Selling, general and CHF million 2003 2002 administrative Administrative expense 85.9 87.7 expense Communication expense 59.6 62.0 Travel and promotion expense 53.3 54.7 Vehicle expense 46.8 43.5 Operational expense 56.4 42.2 Facility expense 213.1 211.1 Provision for bad debts and collection expense 1 8.5 9.6 523.6 510.8 1 Specification provision for bad debts and collection expense 2003 2002 Addition to provision for bad debts (note 26) 8.7 6.9 Recovery of receivables previously written-off (2.5) (1.9) Credit inquires 1.2 1.3 Premiums to credit insurers net of recoveries 0.2 3.3 Collection expense 0.9 – 8.5 9.6 17 Other operating CHF million 2003 2002 income Gain on sale of fixed assets 1.2 6.4 Loss on sale of fixed assets (1.3) (0.9) Dividends received from affiliated companies 3.5 3.3 Profit on sale of consolidated companies, net – 7.9 Other (0.1) 1.2 3.3 17.9 18 Depreciation and amortisation The depreciation of fixed assets and amortisation of IT software and goodwill are shown in the notes 22 and 23. 19 Finance result CHF million 2003 2002 Interest income 9.5 13.1 Interest expense (10.5) (12.1) Exchange difference, net 6.1 (13.8) Income/(Expense) 5.1 (12.8) 114 20 Income tax CHF million 31/12/2003 31/12/2002 Deferred tax assets – on provision for pension plans 10.1 7.4 – on losses carried forward 9.6 6.6 – on other provisions 6.1 2.7 – impairment of goodwill 12.1 40.4 37.9 57.1 Deferred tax assets for unused tax loss carry-forwards and expected tax credits from temporary differences are only recognised to the extent that it is probable that future taxable profits will be available against which the assets can be utilised. The recognised deferred tax assets relating to tax losses carried forward are expected to be used by the end of 2005 at the latest. CHF million 31/12/2003 31/12/2002 Unrecognised deferred tax assets – on losses carried forward 21.1 23.8 – on temporary differences 57.6 31.9 78.7 55.7 In view of the fact that the realisation of the above deferred tax assets is considered to be unlikely, the assets were not recognised. The unrecognised deferred tax assets relating to tax losses carried forward expire by the end of the following years: Year CHF million 2004 0.7 2005 0.4 2006 0.4 2007 0.7 2008 and later 18.9 21.1 CHF million 31/12/2003 31/12/2002 Deferred tax liabilities – on non recoverable withholding tax relating to anticipated distributions from subsidiaries 1.0 0.7 – on impairment of financial investments 6.0 4.9 – on depreciation of fixed assets and provision for bad debts 3.5 2.7 10.5 8.3 Consolidated Financial Statements: Notes 115 CHF million 2003 2002 Current tax expense – current year 75.9 61.4 – under/(over) provided in prior years (8.2) (6.9) 67.7 54.5 Deferred tax expense – on changes in temporary differences 24.6 (49.0) – on changes in tax losses recognized (3.0) (2.2) 21.6 (51.2) Income tax expense in income statement 89.3 3.3 Reconciliation of the applicable tax rate CHF million 2003 2002 Earnings before tax according to the income statement as of December 31 286.1 4.5 Income tax – expected tax rate 26.0% (2003) 74.3 72.4 Tax effect of: – non-deductible expenses (0.7) 3.2 – tax losses utilized (3.1) (3.0) – allowance of deferred tax assets 21.9 (64.0) – under/(over) provision in prior years and other (3.1) (5.3) Income tax – effective tax rate 31.2% (2003) 89.3 3.3 21 Earnings per share The following reflects the income and share data used in the basic and diluted earnings per share computations for the years ended December 31. CHF million 2003 2002 Net earnings 195.7 0.1 Weighted average number of ordinary shares outstanding during the year 23,169,070 23,120,278 Effect of dilutive securities: Share options 20,678 2,254 Adjusted weighted number of ordinary shares applicable to diluted earnings per share 23,189,748 23,122,532 Basic earnings per share in CHF 8.446 0.006 Diluted earnings per share in CHF 8.438 0.006 116 Notes to the Balance Sheet 22 Fixed assets and software CHF million Properties, Properties, Other fixed IT software Total including buildings assets, buildings under operating on third financial and office parties leases equipment Cost land Balance at 1 January 2003 437.0 51.2 367.5 67.1 922.8 Acquisitions through business combinations – – – – - Other acquisitions 63.1 0.1 96.6 14.8 174.6 Disposals (14.4) – (54.1) (21.2) (89.7) Additions from initial consolidation 1.1 – 1.0 – 2.1 Adjustments/transfers 4.3 – 0.1 – 4.4 Effect of movements in foreign exchange 18.8 3.7 0.5 – 23.0 Balance at 31 December 2003 509.9 55.0 411.6 60.7 1,037.2 Depreciation and impairment losses Balance at 1 January 2003 105.8 30.0 248.7 67.1 451.6 Depreciation charge for the year 10.9 1.6 75.2 14.6 102.3 Disposals (8.9) – (47.1) (21.2) (77.2) Additions from initial consolidation – – 0.7 – 0.7 Adjustments/transfers 0.3 – 0.1 – 0.4 Effect of movements in foreign exchange 5.2 2.2 0.9 0.2 8.5 Balance at 31 December 2003 113.3 33.8 278.5 60.7 486.3 Carrying amount At 1 January 2003 331.2 21.2 118.8 – 471.2 At 31 December 2003 396.6 21.2 133.1 – 550.91 1 fire insurance value as of December 31, 2003 CHF 644 million. Consolidated Financial Statements: Notes 117 23 Goodwill CHF million 1/1/2003 Exchange Additions Disposals Additions Adjust- 31/12/2003 differences from initial ments/ consolidation Transfers Goodwill from acquisitions of consolidated companies 447.3 (41.4) 3.7 – – – 409.6 At cost 447.3 (41.4) 3.7 – – – 409.6 Goodwill from acquisitions of consolidated companies 82.6 (5.8) 34.9 – – – 111.7 Accumulated amortisation 82.6 (5.8) 34.9 – – – 111.7 Impairment goodwill 183.8 (19.2) – – – – 164.6 Net book value 180.9 (16.4) (31.2) – – – 133.3 24 Financial investments CHF million 1/1/2003 Exchange Additions Disposals 1 Additions Adjust- 31/12/2003 differences from initial ments/ consolidation Transfers 2 Investments in associates and joint ventures 21.7 0.9 3.9 (3.1) – (5.2) 18.2 Investments in affiliated companies 3 19.5 – 10.5 – – – 30.0 Total 41.2 0.9 14.4 (3.1) – (5.2) 48.2 Investments in associates and joint ventures 2.6 – – – – (2.6) – Investments in affiliated companies – – – – – – – Accumulated write-downs 2.6 – – – – (2.6) – Net book value 38.6 0.9 14.4 (3.1) – (2.6) 48.2 1 Dividends received Mio CHF 3.1 2 transfer to consolidated investments due to purchase of remaining 50 per cent 3 see note 3 in the Statements of Change in Equity Investments in affiliated companies The Group holds a 5 per cent investment in SembCorp Logistics Ltd., Singapore. The acquired shares are blocked for a period of 5 years (starting January 1, 2001) and therefore cannot be sold or traded before Feb, 2006. As a result, the share price as traded at the Singapore stock exchange is not considered to be the fair value. The investment is therefore carried at CHF 30.0 million, whereas the market value is CHF 62.2 million as per December 31, 2003. Changes in value are credited to the equity. 118 25 Work in progress This position decreased from CHF 166.8 million in 2002 to CHF 159.1 million in 2003 which represents a billing delay of 5.1 working days (basis: 240 working days per year) against the previous year’s 5.8 days. 26 Trade receivables Trade receivables outstanding as of year end averaged 38.6 days (2002: 37.7 days). The ageing of the receivables outstanding changed as follows: Ageing outstanding account 2003 2002 per cent per cent 0–90 days 93.3 92.3 91–180 days 3.8 4.1 181–360 days 0.9 0.9 over 360 days 0.3 0.4 Doubtful accounts 1.7 2.3 100.0 100.0 The provision for bad debts increased in 2003 by CHF 3.0 million to CHF 49.6 million and represents 4.8 per cent of outstanding receivables as at December 31, 2003 (2002: 5.1 per cent). An amount of CHF 106.3 million represents receivables pledged to secure own bank liabilities in the United States. The movements in the provision for bad debts were as follows: CHF million 2003 2002 Balance 1/1 46.6 49.6 add/less exchange differences 4.1 (1.5) less write-off of non collectible receivables (9.8) (8.4) add addition to provision (note 16) 8.7 6.9 Balance 31/12 49.6 46.6 Consolidated Financial Statements: Notes 119 27 Other receivables CHF million 31/12/2003 31/12/2002 Receivables from associates, joint ventures and affiliates 4.6 15.0 Advances to employees 2.5 2.3 Receivables from tax authorities – refundable withholding tax 2.6 5.0 – refundable VAT 14.6 14.8 – advance payments of tax 9.7 2.3 Receivables from social security authorities 3.2 1.9 Receivables from insurance companies 0.4 1.7 Foreign currency contracts (positiv fair value)1 0.4 0.8 Other receivables 8.1 7.2 46.1 51.0 1 The underlying amount of the contract is EUR 5.0 million (in 2002 EUR 10.6 million) 28 Marketable securities 96 per cent of marketable securities are in custody at major Swiss and German banks. The portfolio consists mainly of fixed rate bonds with high credit ratings. The marketable securities have been valued at fair market value. All marketable securities are classified as trading financial assets. CHF million 31/12/2003 31/12/2002 Marketable securities are denominated in following currencies: – Swiss Francs 6.5 5.1 – Euro 13.6 36.9 – others 6.2 1,8 26.3 43.8 29 Cash and cash equivalents a. Cash and short term bank accounts CHF million 31/12/2003 31/12/2002 Cash on hand 2.2 1.7 Current and deposit accounts with banks 704.81 775.1 707.0 776.8 1 of which CHF 87.7 million is deposited in a bank account as collateral for a US$ bank overdraft b. Short term bank liabilities CHF million 31/12/2003 31/12/2002 Short term bank liabilities 299.8 534.7 299.8 534.7 CHF million 31/12/2003 31/12/2002 Net cash and cash equivalents 407.2 242.1 120 30 Share capital Balance 31/12/2003 1/1/2003 Registered Capital Voting Registered shares share share shares of nominal of nominal CHF 5 each CHF CHF 5 each Number million per cent per cent Number 24,000,000 120.0 24,000,000 Main shareholders K.M. Kuehne, Schindellegi 13,380,000 66.9 55.75 57.69 13,380,000 SembCorp Logistics Ltd., Singapore 4,800,000 24.0 20.00 20.70 4,800,000 Public shareholders 5,012,215 25.1 20.88 21.61 4,965,925 entitled to voting rights and dividend 23,192,215 116.0 96.63 100.00 23,145,925 Treasury shares 807,785 4.0 3.37 – 854,075 Total 24,000,000 120.0 100.00 – 24,000,000 Employee Share Purchase and Option Plan During 2001, Kuehne & Nagel International AG implemented an Employee Share Purchase and Option Plan under which registered shares will be offered to members of the Management. There will be four share offerings under this plan, the first three having taken place on July 1, 2001, July 1, 2002 and July 1, 2003, the last offering will be made on July 1, 2004. The purchase price for the shares offered under this plan amounts to 90 per cent of the price corresponding to the average closing prices for one share at the SWX Swiss Exchange during the months of April to June. The shares are restricted for a period of three years before being released to the employee. In addition, for each share purchased under this plan, the company grants two options to the participants for the average price April to June. Each option entitles the participant to purchase one share of Kuehne & Nagel International AG. The vesting period starts with the day of grant and ends three years from that date. The options granted may be exercised after the vesting period during three years until the end of the option term. The following table summarises information about share options outstanding at December 31, 2003: Exercise period Strike Number as Number Number Number as price of Jan 1, issued exercised of Dec 31, CHF 2003 2003 July 1, 2004 – June 30, 2007 92.60 87,800 – – 87,800 July 1, 2005 – June 30, 2008 111.00 77,650 – – 77,650 July 1, 2006 – June 30, 2009 94.50 – 92,580 – 92,580 To date no options have lapsed. Consolidated Financial Statements: Notes 121 31 Reserves and retained earnings The development of the reserves and retained earnings in 2002 and 2003 is recorded in the consolidated statement of changes in equity on page 104. 32 Minority interest CHF million 2003 2002 Balance 1/1 4.7 1.7 Dividends paid (0.7) (0.6) Additions 0.3 2.8 Disposals – (0.3) Share in net earnings for the year 1.1 1.1 Balance 31/12 5.4 4.7 33 Provisions for pension CHF million Pension Severance Total plans and severance plans payments payments Balance 1/1/2003 138.3 9.2 147.5 Exchange differences 9.8 0.3 10.1 Amounts used (13.1) (1.4) (14.5) Additions 19.6 4.4 24.0 Balance 31/12/2003 154.6 12.5 167.1 Pension plans The Group maintains defined benefit pension plans predominantly in Germany and Benelux, as well as defined contribution plans in some other countries. Retirement benefits vary from plan to plan reflecting applicable local practices and legal requirements. Retirement benefits are based on years of credited service and the compensation as defined. The funded status of CHF 168.5 million, as included below, includes an amount of CHF 149.1 million in Germany where the assets are not allocated specifically to the pension plan. The principal assumptions used in determining pension obligations for the Group’s plans are shown below: Principal assumptions used in determining 2003 2002 pension obligation per cent per cent Discount rate 2.0–8.0 2.0–7.0 Expected rate of return on plan assets 1.5–4.0 1.5–4.0 Future compensation and pension increases 2.0–2.5 2.0–2.5 122 Development in CHF million 2003 2002 Net benefit expense – Current service cost 6.8 6.4 – Interest cost 11.3 10.1 – Actuarial (gains)/losses 3.7 0.5 – Expected return on plan assets (2.2) (0.7) Net benefit expense 19.6 16.3 Benefit liability – Present value of benefit obligation 210.4 184.2 – Fair value of plan assets (41.9) (37.3) – Funded status 168.5 146.9 – Unrecognized actuarial gains / (losses) – net (13.9) (8.6) Benefit liability 154.6 138.3 Movement in net benefit liability – Opening benefit liability 138.3 131.7 – Net benefit expense (as above) 19.6 16.3 – Exchange differences 9.8 (1.5) – Benefits paid (13.1) (8.2) Closing benefit liability (as above) 154.6 138.3 Severance payments In certain countries such as Austria, Italy and Turkey severance payments based on the years of service with the company of each employee is required. A provision is raised for these costs over the service lives of the employees concerned. 34 Bank liabilities CHF million 31/12/2003 31/12/2002 – Between 2–5 years 0.3 6.7 – After 5 years 0.4 2.0 0.7 8.7 Of which secured by mortgages – 5.6 35 Finance lease obligations CHF million 31/12/2003 31/12/2002 – Between 2–5 years – 6.2 – After 5 years – – – 6.2 Consolidated Financial Statements: Notes 123 36 Trade liabilities / Accrued trade expenses / CHF million 31/12/2003 31/12/2002 Deferred trade income – Trade liabilities 498.0 455.5 – Accrued trade expenses 384.2 346.7 – Deferred trade income 48.9 58.1 931.1 860.3 37 Other liabilities CHF million 31/12/2003 31/12/2002 – Personnel expense including profit participation and untaken annual leave 105.9 91.4 – Other operational expense 59.3 53.2 – Interest payable 5.5 8.7 – Pending claims 1 23.0 24.0 – Liabilities due to associates and affiliates companies 4.5 3.7 – Bills of exchange payable 0.8 1.4 – Other liabilities 52.9 35.4 251.9 217.8 1 The movements in the provision for pending claims were as follows: CHF million 31/12/2003 31/12/2002 Specification of pending claims Balance 1/1 24.0 30.2 – Amount used (4.5) (8.1) – Release of provision (3.1) (3.6) – Additions 6.6 5.5 Balance 31/12 23.0 24.0 Some companies are involved in legal cases based on forwarding and logistic operations. Where the risk of a negative outcome is considered to be more than likely by the corresponding legal advisers, the probable amount of future payments has been accrued for. Disclosure of the timing of the corresponding settlements is not practicable, as the timing of final court decisions is unknown and dependent on legal procedures. Some legal cases have been settled in the reporting period and corresponding payments have been made. 124 38 Segment reporting a) Primary reporting Invoiced turnover Gross profit EBITA EBIT CHF million 2003 2002 2003 2002 2003 2002 2003 2002 Seafreight 4,492.5 4,028.5 632.9 588.8 152.8 131.8 147.7 120.7 Airfreight 2,092.9 2,098.6 415.2 392.3 95.6 77.6 93.6 69.4 International Overland 749.8 514.3 127.1 86.7 15.2 12.5 14.1 10.7 Rail 277.0 248.9 24.5 24.6 3.9 8.9 3.4 7.6 Customs Brokerage 682.5 637.4 56.6 57.8 2.2 2.8 2.2 2.6 International Forwarding 8,294.7 7,527.7 1,256.3 1,150.2 269.7 233.6 261.0 211.0 Warehousing 818.9 779.0 675.5 623.5 20.2 17.2 (5.4) (219.4) Distribution 348.2 378.2 102.7 91.5 10.6 5.7 10.5 5.7 Contract Logistics 1,167.1 1,157.2 778.2 715.0 30.8 22.9 5.1 (213.7) Special Logistics – 51.9 – 19.1 – 6.6 – 6.6 Insurance Broker 86.2 68.2 29.8 26.9 15.4 13.7 14.9 13.4 Total KN Group 9,548.0 8,805.0 2,064.3 1,911.2 315.9 276.8 281.0 17.3 b) Secondary reporting Invoiced turnover Gross profit EBITA EBIT CHF million 2003 2002 2003 2002 2003 2002 2003 2002 Europe 5,353.8 4,695.5 1,051.7 934.3 167.1 154.3 163.6 151.5 Americas 2,607.4 2,657.8 706.4 699.4 46.6 33.4 15.1 (219.4) Asia Pacific 1,003.0 893.5 236.0 218.4 95.0 83.7 95.0 83.6 Middle East, Central Asia and Africa 583.8 558.2 70.2 59.1 7.2 5.4 7.3 1.6 Total KN Group 9,548.0 8,805.0 2,064.3 1,911.2 315.9 276.8 281.0 17.3 Consolidated Financial Statements: Notes 125 Assets Liabilities Investments Depreciation/ Other non cash amortisation expense CHF million 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 Seafreight 633.9 609.2 490.2 427.7 10.5 32.1 11.8 31.5 5.8 5.1 Airfreight 389.7 374.0 283.4 279.2 18.6 18.0 18.1 20.7 2.7 1.9 International Overland 138.6 94.5 122.5 84.6 6.3 6.0 5.2 4.6 1.3 0.5 Rail 45.1 44.7 45.2 41.6 1.3 3.1 2.4 2.7 0.8 0.3 Customs Brokerage 58.3 26.9 14.5 20.5 1.2 1.3 0.9 1.4 0.1 0.3 International Forwarding 1,265.6 1,149.3 955.8 853.6 37.9 60.5 38.4 60.9 10.7 8.1 Warehousing 536.3 512.4 307.6 259.7 132.8 101.2 92.8 294.3 11.0 2.6 Distribution 102.9 114.8 74.2 81.9 6.6 7.7 5.1 6.0 1.7 1.0 Contract Logistics 639.2 627.2 381.8 341.6 139.4 108.9 97.9 300.3 12.7 3.6 Special Logistics – 15.5 – 19.7 – 1.1 – 0.4 – 0.1 Insurance Broker 36.4 30.3 17.9 15.4 1.0 0.5 0.9 0.9 – 0.1 Unallocated corporate 778.7 871.6 1,364.4 1,463.6 – – – – – – Total KN Group 2,719.9 2,693.9 2,719.9 2,693.9 178.3 171.0 137.2 362.5 23.4 11.9 Assets Liabilities Investments Depreciation/ Other non cash amortisation expense CHF million 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 Europe 1,092.7 949.4 959.4 848.5 111.1 88.8 59.2 55.4 20.8 8.1 Americas 533.7 589.7 188.1 192.5 56.6 69.8 67.5 293.5 2.2 3.1 Asia Pacific Region 223.4 204.9 146.8 131.9 6.6 4.7 7.2 6.4 0.1 0.6 Middle East, Central Asia and Africa 91.4 78.3 61.2 57.4 4.0 7.7 3.3 7.2 0.3 0.1 Unallocated corporate 778.7 871.6 1,364.4 1,463.6 – – – – – – Total KN Group 2,719.9 2,693.9 2,719.9 2,693.9 178.3 171.0 137.2 362.5 23.4 11.9 126 OTHER NOTES 39 Personnel As of year end the number 31/12/2003 31/12/2002 of employees was as follows: Number Number Europe 9,156 8,740 Americas 5,894 5,514 Asia Pacific 2,546 2,182 Middle East, Central Asia and Africa 1,408 1,253 19,004 17,689 40 Contingent liabilities As of year end the following contingent 31/12/2003 31/12/2002 liabilities existed: CHF million CHF million Guarantees in favour of third parties 7.6 7.2 Contingent liabilities under unrecorded claims 36.5 37.2 44.1 44.4 Some Kuehne & Nagel companies are defendants in various court cases. Based on respective legal advice, the management is of the opinion that the outcome of those proceedings will have no material effect on the financial situation of the Kuehne & Nagel Group beyond the existing provision for pending claims (note 37) of CHF 23.0 million (2002: CHF 24.0 million). In addition, under a global logistic outsourcing contract guaranteed payments may occur, if Kuehne & Nagel does not meet certain future criteria. 41 Other financial As of year end the following financial commitments existed in respect of non cancellable commitments long term operating leases and rental contracts. Year Properties Operating TOTAL and buildings and office CHF million equipment 2004 113.2 25.9 139.1 2005 86.1 17.4 103.5 2006 62.1 6.2 68.3 2007 50.9 2.0 52.9 2008 42.8 1.5 44.3 2009–2013 171.8 0.5 172.3 Total 526.9 53.5 580.4 The Group leases a number of warehouse facilities under operating leases. The leases run for a fixed period and none of the leases includes contingent rentals. Consolidated Financial Statements: Notes 127 42 Other information The total remuneration paid to the members of the Board of Directors and of the Management Board of Kuehne & Nagel International AG, Schindellegi, Switzerland amounted in 2003 to: – Board of Directors CHF 3.8 million – Management Board CHF 6.4 million As of December 31, 2003 neither loans nor any other commitments were outstanding towards members of the Board of Directors. Three members of the Management Board received interest bearing loans amounting to CHF 0.5 million to be repaid in May 2004. 43 Financial risk management The Group is exposed to market risk, including primarily changes in interest rates and objectives and policies currency exchange rates and uses foreign exchange contracts in connection with its risk management activities. The Group does not hold or issue derivative financial instruments for trading purposes. Interest rate risks The Group’s exposure to market risk for changes in interest rates relates primarily to the Group’s investment portfolio. The Group’s interest rate exposure on its liabilities is limited due to the short term nature of most of these borrowings. The Group does not use derivative financial instruments to hedge its interest rate risk in the investment portfolio. The portfolio includes mainly bonds traded in active markets to ensure portfolio liquidity. Currency risks The Group sells its services on a worldwide basis and, as a result, is exposed to movements in foreign currency exchange rates. Derivative financial instruments (foreign exchange contracts) are in use to hedge the foreign exchange exposure on recognised monetary items. Monthly payments are conducted through a Group clearing system in Euro, which facilitates monitoring and control of Group-wide exchange exposures. Forecast transactions are not hedged. Market risks Changes of fair values in financial assets or liabilities may have an impact on the earnings and the equity of the group. The exposures are not significant because the Group does not conduct significant financial or investing activities. Credit risks The Group considers its credit risk to be minimal as excess liquidity is invested in bonds and short term deposits with first class financial institutions. The Group has strict credit approval and monitoring procedures in place. Credit approval is necessary before credit is given to any customer. The Group conducts business on a worldwide basis and there are no significant concentrations of credit risks. In respect of trade receivables, it is considered that the level of bad debt provision and/or the credit insurance is sufficient to cover potential credit risk concentrations. 128 44 Fair value of financial The fair values of financial assets and liabilities are not material different from their net assets and liabilities book values. 45 Related party transactions Freight forwarding and logistic transactions with associated companies are conducted at arm’s length. For other related parties refer to note 30 outlining shareholder’s structure and page 130 to 133 listing the main consolidated companies, associates and joint ventures. 46 Post balance sheet events The company Pracht Spedition + Logistic GmbH (Pracht) with headquarter in Haiger/ Germany was acquired by Kuehne & Nagel (AG & Co.) KG, Germany, as of 1.1.2004 from Hapag-Lloyd AG. Pracht is a member of the German IDS network. The main activity is over- land transport and logistics services. The company will be fully consolidated – 100% of the voting shares have been acquired. It was agreed between the parties that the purchase price will not be disclosed. Any goodwill arising from this transaction will be amortised over the estimated lifetime. Resolution of the Board of Directors The consolidated financial statements of Kuehne & Nagel International AG were authorised for issue by the Board of Directors on March 25, 2004. A resolution to approve the financial statements will be proposed at the Annual General Meeting of shareholders on May 12, 2004. Consolidated Financial Statements: Report of the Group auditors 129 Report of the Group auditors As Group auditors, we have audited the consolidated financial statements (consisting of to the Annual General Meeting the consolidated income statement, consolidated balance sheet, consolidated statement of of Kuehne & Nagel changes in equity, consolidated cash flow statement and the notes to the consolidated International AG, financial statements on pages 101 to 133) of Kuehne & Nagel International AG for the Schindellegi, Switzerland year ended December 31, 2003. These consolidated financial statements are the responsibility of the Board of Direc- tors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We confirm that we meet the legal requirements concerning profes- sional qualification and independence. Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession and with International Standards on Auditing (ISA), which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the consolidated financial statements. We have also assessed the accounting principles used, significant estimates made and the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the financial position, the results of operations and the cash flows in accordance with International Financial Reporting Standards (IFRS) and comply with the Swiss law. We recommend that the consolidated financial statements submitted to you be approved. KPMG Fides Peat Roger Neininger Regula Wallimann Swiss Certified Accountant Swiss Certified Accountant Auditor in Charge Zurich, March 25, 2004 130 Main Consolidated Companies, Associates and Joint Ventures* Share capital KN share Country Name of the company Location in 1000 in per cent HOLDING- AND MANAGEMENT COMPANIES Switzerland Kuehne & Nagel International AG Schindellegi CHF 120,000 100 Kuehne & Nagel Management AG Schindellegi CHF 1,000 100 Kuehne & Nagel Internationale Transporte AG Schindellegi CHF 750 100 Kuehne & Nagel Liegenschaften AG Schindellegi CHF 500 100 Kuehne & Nagel Treasury AG Schindellegi CHF 1,500 100 Nacora Holding AG Schindellegi CHF 500 100 Nacora Agencies AG Schindellegi CHF 400 100 Ferroviasped Holding AG Schindellegi CHF 1,500 100 Kuehne & Nagel Asia Pacific Holding AG Schindellegi CHF 2,500 100 OPERATING COMPANIES Europe Albania Transalbania Ltd. Tirana ALL 9,300 51 Austria Kuehne & Nagel Speditions-AG Vienna EUR 1,090 100 Kuehne & Nagel Ges.m.b.H. Vienna EUR 1,820 100 Ferroviasped Internationale Transporte Ges.m.b.H. Vienna EUR 73 100 Belgium Kuehne & Nagel NV Antwerpen EUR 6,337 100 Stute-Montan BVBA Antwerpen EUR 25 100 Ferroviasped Benelux NV Antwerpen EUR 75 100 Team Logistic NV Antwerpen EUR 125 100 Bulgaria Kuehne & Nagel e.o.o.d. Sofia BGL 365 100 Ferroviasped e.o.o.d. Sofia BGL 120 100 Croatia Kuehne & Nagel d.o.o. Zagreb HRK 4,300 100 Cyprus Nakufreight Ltd. Nicosia CYP 10 70 Czech Republic Kuehne & Nagel spol. s.r.o. Prague CZK 11,000 100 NHN spol.s.r.o. Olomouc CZK 5,000 60 Denmark Kuehne & Nagel A/S Copenhagen DKK 5,000 100 Estonia Kuehne & Nagel Eesti OÜ Tallinn EEK 800 100 Finland OY Kuehne & Nagel Ltd. Helsinki EUR 200 100 France Kuehne & Nagel (France) S.A. Paris EUR 7,000 100 Sodetair S.A. Paris EUR 460 100 Kuehne & Nagel S.A. Paris EUR 38 100 Transalfra S.A.R.L. Paris EUR 45 100 Germany Cargopack Verpackungsgesellschaft für Industriegüter Bremen EUR 307 100 KN Airlift GmbH Kelsterbach EUR 256 100 Kuehne & Nagel (AG & Co.) KG Bremen EUR 15,000 100 Kuehne & Nagel Beteiligungs-AG Bremen EUR 10,277 100 Kuehne & Nagel Euroshipping GmbH Regensburg EUR 256 100 Stute Verkehrs GmbH Bremen EUR 1,023 100 Transcharter GmbH Munich EUR 51 100 Ferroviasped GmbH Hamburg EUR 358 100 Pact GmbH Hamburg EUR 50 100 CS Parts GmbH Bremen EUR 1,550 50 Greece * Arion Real Estate & Commercial S.A. Athens EUR 411 50 * Hellenic & Intern. Transport Company ‘Proodos’ S.A. Athens EUR 3,900 50 * Sindos S.A. Warehousing & Logistics Thessaloniki EUR 4,549 50 Hungary Kuehne & Nagel Kft. Budapest HUF 130,000 100 Ferroviasped Speditions GmbH Budapest HUF 5,000 100 Ireland Kuehne & Nagel (Ireland) Ltd. Dublin EUR 500 100 Italy Kuehne & Nagel S.p.A. Milan EUR 4,589 100 Ferroviasped S.r.L. Milan EUR 100 100 Consolidated Financial Statements: Investments 131 Share capital KN share Country Name of the company Location in 1000 in per cent Latvia Kuehne & Nagel Latvia SIA Riga LVL 100 100 Luxembourg Kuehne & Nagel Spedition S.a.r.l. Luxembourg EUR 5,750 100 Kuehne & Nagel AG Luxembourg EUR 31 100 Transfluvia GmbH Luxembourg EUR 250 100 Macedonia Kuehne & Nagel d.o.o. Skopje MKD 8,232 100 Malta Kuehne & Nagel Malta Ltd. Hamrun MTL 6 100 Netherlands Kuehne & Nagel N.V. Rotterdam EUR 3,313 100 KN Europe Holding B.V. Rotterdam EUR 18 100 Stute International (Benelux) B.V. Rotterdam EUR 19 100 Stute Logistics Netherland B.V. Rotterdam EUR 250 100 Norway Kuehne & Nagel A/S Oslo NOK 3,100 100 Poland Faaberg Shipping Poland Ltd. Szczecin PLZ 4 100 Ferroviasped sp.z.oo Warszawa PLZ 1,300 100 Kuehne & Nagel sp.z.o.o. Poznan PLZ 18’350 100 Nakutrans-Poland sp.z.o.o. Poznan PLZ 10 100 Portugal Kuehne & Nagel Lda. Porto EUR 160 100 Romania Kuehne & Nagel Transport SRL Bucharest ROL 1,000,000 100 Russia ZAO Kuehne & Nagel Moscow RUR 274 100 OOO Kuehne & Nagel Moscow RUR 4,107 100 OOO Kuehne & Nagel Sakhalin RUR 500 100 OOO Nakutrans Moscow RUR 278 100 Serbia – Montenegro Kuehne & Nagel d.o.o. Beograd YUM 3,039 100 Slovakia Kuehne & Nagel spol.s.r.o. Bratislava SKK 9,150 100 Spain Kuehne & Nagel S.A. Madrid EUR 3,191 100 Sweden Kuehne & Nagel A/B Stockholm SEK 500 100 Ferroviasped A/B Stockholm SEK 1,000 100 Switzerland Kuehne & Nagel AG Embrach CHF 3,000 100 Ferroviasped Bahnmarketing & Speditions AG Buchs CHF 2,000 100 Ukraine Kuehne & Nagel Ltd. Kiev UAK 21,997 100 Ferroviasped Ltd. Kiev UAK 232 100 United Kingdom Kuehne & Nagel (UK) Ltd. London GBP 5,120 100 Kuehne & Nagel Ltd. London GBP 4,000 100 Kuehne & Nagel (NI) Ltd. Belfast GBP 10 100 North and Central America Canada Kuehne & Nagel Canada Holding Inc. Toronto CAD 2,910 100 Kuehne & Nagel International Ltd. Toronto CAD 8,022 100 USCO Inc. Montreal CAD – 100 USCO Logistics Services (Canada) Inc. Calgary CAD – 100 Costa Rica Kuehne & Nagel S.A. San Jose CRC 1 100 El Salvador Kuehne & Nagel S.A. de C.V. San Salvador USD 69 100 Guatemala Kuehne & Nagel S.A. Guatemala GTQ 291 100 Mexico Kuehne & Nagel S.A. de C.V. México’ D.F. MXP 24,447 100 Almacenadora Kuehne & Nagel S.A. de C.V. México’ D.F. MXP 35,440 100 Kuehne & Nagel Servicios Administrativos S.A. de C.V. México’ D.F. MXP 50 100 Panama Kuehne & Nagel S.A. Panama USD 1 100 USA Kuehne & Nagel Investment Inc. Jersey City USD 1,400 100 Kuehne & Nagel Inc. Jersey City USD 1,668 100 USCO Distribution Services Naugatuck USD 192 100 KN LeadLogistics Inc. Raleigh USD 1 100 132 Share capital KN share Country Name of the company Location in 1000 in per cent South America Argentina Kuehne & Nagel S.A. Buenos Aires ARS 2,000 100 Kuehne & Nagel (South America) Mgt. S.A. Buenos Aires ARS 12 100 Bolivia Kuehne & Nagel Bolivia Ltda. Santa Cruz BOB 260 100 Brazil KN Servicios de Logistica Ltda. Sao Paulo BRL 8,728 100 Chile Kuehne & Nagel Ltda. Santiago CLP 575,000 100 Colombia Kuehne & Nagel S.A. Bogotá COP 1,200,000 100 KN Colombia Aduana Sia S.A. Bogotá COP 595,000 100 Ecuador Kuehne & Nagel S.A. Quito USD 7 100 Peru Kuehne & Nagel S.A. Lima PEN 481 100 KN Peru Aduanas S.A. Lima PEN 173 100 Uruguay KN Cargo Systems International S.A. Montevideo UYU 3,840 100 Venezuela Kuehne & Nagel S.A. Caracas VEB 1,000,000 100 KN Venezuela Aduanas C.A. Caracas VEB 2,000 100 Asia Pacific Australia Kuehne & Nagel Pty Ltd. Sydney AUD 2,900 100 Bangladesh Kuehne & Nagel Ltd. Dhaka BDT 10,000 100 Cambodia Kuehne & Nagel Ltd. Phnom Penh USD 5 100 China Kuehne & Nagel Ltd. Hong Kong HKD 1,560 100 Kuehne & Nagel (Asia Pacific) Management Ltd. Hong Kong HKD 100 100 Transpac Container System Ltd. Hong Kong HKD 100 100 Kuehne & Nagel Ltd. Macau HKD 971 100 India Kuehne & Nagel Pvt. Ltd. New Delhi INR 40,000 100 Indonesia * PT. KN –Sigma Trans Jakarta IDR 865,000 50 Japan Kuehne & Nagel Ltd. Tokyo JPY 80,000 100 Korea Kuehne & Nagel Ltd. Seoul KRW 500,000 100 Malaysia Kuehne & Nagel Sdn. Bhd. Kuala Lumpur MYR 1,521 100 New Zealand Kuehne & Nagel Ltd. Auckland NZD 201 100 Pakistan Kuehne & Nagel (Pvt) Ltd. Karachi PKR 2,000 100 Philippines Kuehne & Nagel Inc. Manila PHP 2,500 100 Singapore Kuehne & Nagel Pte. Ltd. Singapore SGD 500 100 ST – KN PTE Ltd. Singapore SGD 200 51 Sri Lanka Kuehne & Nagel (Pvt) Ltd. Colombo LKR 2,502 100 Taiwan Kuehne & Nagel Ltd. Taipei TWD 20,000 100 Thailand Kuehne & Nagel Ltd. Bangkok THB 10,000 100 Middle East and Central Asia Bahrain KN Mars W.L.L. Manama BHD 100 100 Egypt Kuehne & Nagel Ltd. Cairo EGP 1,000 100 Israel Amex Ltd. Tel Aviv NIS 2 75 Iran Kala Navgan Shargh Co. Ltd. Teheran IRR 2,000 60 Sahand Tarabar International Transport & Shipping Co. Ltd. Teheran IRR 5,000 54 Jordan Orient Transport Company Ltd. Amman JOD 200 50.25 Lebanon * KN-ITS S.A.L. Beirut LBP 113,000 50 Saudi Arabia * Orient Transport Company Ltd. Jeddah SAR 1,000 50 Turkey Kuehne & Nagel Nakliyat Ltd. Sti. Istanbul TRL 1,445,000,000 100 Kuehne & Nagel Tasimacilik Lojistik ve Tic. Ltd. Sti. Istanbul TRL 5,000,000 100 Ibrakom Deniz ve Tasim. Hizmetl. Ltd./Sti. Istanbul TRL 9,000,000 60 UAE Kuehne & Nagel L.L.C. Dubai AED 1,000 100 Kuehne & Nagel L.L.C.. Abu Dhabi AED 1,000 100 KN Ibrakom FZCo., Jebel Ali Free Zone Dubai USD 273 60 Ibrakom Cargo L.L.C. Dubai USD 82 60 Lloyds Maritime & Trading Ltd. London USD – 60 Ibrakom Logistics Ltd. Isle of Guernsey USD – 60 Consolidated Financial Statements: Investments 133 Share capital KN share Country Name of the company Location in 1000 in per cent Africa Angola Kuehne & Nagel (Angola) Transitarios Lda Luanda AON 1,020 100 Kenya Kuehne & Nagel Ltd. Nairobi KES 63,995 100 Malawi Kuehne & Nagel Ltd. Blantyre MWK 500 100 Mauritius Nakufreight (Mauritius) Ltd. Port Louis MUR 4,000 51 Mozambique Kuehne & Nagel Mocambique Lda. Beira MZM 132,600 100 Namibia Kuehne & Nagel (Pty) Ltd. Windhoek NAD 340 100 South Africa Kuehne & Nagel (Pty) Ltd. Johannesburg ZAR 3,625 100 KN Tsepisa Logistics (Pty) Ltd. Johannesburg ZAR 100 60 Tanzania DAL Forwarding (T) Ltd. Dar es Salaam TZS 25,000 100 Uganda Kuehne & Nagel Ltd. Kampala UGX 418,000 100 Zambia Kuehne & Nagel (Zambia) Ltd. Lusaka ZMK 85,000 100 Zimbabwe Kuehne & Nagel (Zimbabwe) (Pvt) Ltd. Harare ZWD – 100 INSURANCE BROKER Europe Belgium Nacora Insurance Brokers NV Brussels EUR 155 100 France Nacora (France) S.A. Paris EUR 40 100 Germany Nacora Versicherungsmakler GmbH Hamburg EUR 77 100 Gustav F. Hübener GmbH Hamburg EUR 26 100 Netherlands Nacora Assurantiekantoor B.V. Rotterdam EUR 45 100 Spain Nacora Correduria de Seguros SA Barcelona EUR 150 100 Sweden Nacora Assurans Finans Service AB Stockholm SEK 100 100 Switzerland Nacora Insurance Brokers AG Embrach CHF 100 100 United Kingdom Nacora Insurance Brokers Ltd. London GBP 150 100 North America Canada Nacora Insurance Brokers Ltd. Toronto CAD – 100 USA Nacora Insurance Brokers’ Inc. Wilmington USD 25 100 Asia Pacific China Nacora Insurance Brokers Ltd. Hong Kong HKD 500 70 Nacora Insurance Brokers Ltd. Macau HKD 53 51 Malaysia Nacora (Malaysia) Sdn. Bhd. Kuala Lumpur MYR 100 70 Singapore Nacora Insurance Agency Pte. Ltd. Singapore SGD 100 100 Taiwan Nacora Insurance Brokers Ltd. Taipei TWD 2,000 70 Africa South Africa Nacora Insurance Brokers (Pty) Ltd. Johannesburg ZAR 35 100 South America Brazil Nacora Weichert Corretagens de Seguros Ltda. Sao Paulo BRL 344 100 134 Financial Statements: Contents Financial Statements 135 Income Statement 136 Balance Sheet 138 Notes to the Financial Statements Financial Statements: Income Statement 135 Income Statement CHF million Note 2003 2002 Income Income from investments in consolidated companies 1 89.6 81.6 Income from investments in associates and joint ventures 2.5 2.4 Income from investments in affiliated companies 0.8 1.2 Income from marketable securities 7.9 8.2 Income from treasury shares 0.4 – Interest on loans receivable from consolidated companies 2 1.2 17.2 Other interest income 2.2 4.2 Exchange gains 4.7 0.9 Income on sale of consolidated companies 0.1 0.4 Income from recovery of receivables from consolidated companies previously written-down 0.1 1.9 109.5 118.0 Expense Other operating expense (1.7) (2.1) Write-down of investments in consolidated companies 3 (14.1) (22.9) Write-down of goodwill (5.7) (6.0) Interest on liabilities towards consolidated companies (1.6) (2.8) Other interest expense (0.6) (0.6) Exchange losses (5.2) (17.3) (28.9) (51.7) Income before tax 80.6 66.3 Tax income net 4 0.7 2.7 Net earnings for the year 81.3 69.0 136 Balance Sheet CHF million Note 31/12/2003 31/12/2002 ASSETS Non current assets 5 Intangible assets – 5.7 Financial investments – Investments in consolidated companies 6 280.0 142.4 – Loans receivable from consolidated companies 1.4 2.0 281.4 150.1 Current assets Prepayments and deposits 0.3 1.0 Receivables from consolidated companies 66.9 51.4 Other receivables 2.9 3.3 Marketable securities 7 90.6 105.7 Cash 8 365.8 500.7 526.5 662.1 Total Assets 807.9 812.2 Financial Statements: Balance Sheet 137 CHF million Note 31/12/2003 31/12/2002 LIABILITIES Equity Share capital 9 120.0 120.0 Reserves 10 415.0 415.0 Reserve for treasury shares 11 64.4 64.7 Retained earnings brought forward 12 0.6 0.7 Net earnings for the year 13 81.3 69.0 681.3 669.4 Provisions Provision for tax 0.1 0.9 Other provisions and accruals 5.0 1.7 5.1 2.6 Liabilities Liabilities towards consolidated companies 121.5 75.2 Bank liabilities – 65.0 121.5 140.2 Total Liabilities 807.9 812.2 Schindellegi, March 25, 2004 KUEHNE & NAGEL INTERNATIONAL AG Klaus Herms Gerard van Kesteren CEO CFO 138 Notes to the Financial Statements 2003 GENERAL REMARKS Kuehne & Nagel International AG directly or indirectly controls all of the companies which are fully consolidated in the Group financial statements. For financial and economic assess- ment purposes, the Group financial statements are of overriding importance. The financial statements of Kuehne & Nagel International AG included in this part of the annual report were prepared in accordance with the provisions of Swiss commercial law and serve as complementary information to the Group financial statements. FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES OF VALUATION Financial investments – The investments in consolidated companies and associates and joint ventures are recorded in the balance sheet at cost. Write-downs are effected using the maximum depreciation as allowed under Swiss commercial law. Once a write-down has been recorded, it is not reversed, even if the earning power and/or the year-end equity position subsequently improves. – Loans receivable from consolidated companies are translated into CHF at year-end exchange rates. Receivables – From consolidated companies The balances outstanding are recorded at their nominal value at year-end. – Other Other receivables are recorded at their nominal value at year-end. Marketable securities Marketable securities are valued at market value. Unrealised gains and losses are recogni- sed in the income statement. Provision for tax All taxes on income, profit, capital and real estate are provided for. Liabilities – Towards consolidated companies Liabilities due to consolidated companies are recorded at their nominal value at year-end. – Other The other liabilities are recorded at their nominal value at year-end. Financial Statements: Cash Flow Notes 139 NOTES TO THE INCOME STATEMENT 1 Income from investments in The income from investments in consolidated companies mainly consists of dividends consolidated companies received. 2 Interest on loans receivable Interest income on loans receivable from consolidated companies relates to loans from consolidated companies included under financial investments (see note 8) and current accounts with consolidated companies. 3 Write-down of investments The write-down of investments in consolidated companies is shown in the development of in consolidated companies financial investments (note 7). 4 Tax CHF million 2003 2002 Income tax 0.7 2.9 Non recoverable foreign withholding tax – (0.2) Tax income net 0.7 2.7 The company received legally binding tax assessments up to and including the tax year 2002. The provision for tax covers all unpaid income and capital taxes related to the net income, capital, reserve, retained earnings as well as to the reserve for treasury shares for the year 2003 based on the company’s own calculation of the remaining tax liability. NOTES TO THE BALANCE SHEET 5 Non current assets The company’s non current assets consist entirely of financial investments and intangible assets. The analysis of financial investments and their development in 2003 is shown on page 140. Disclosure of significant matters is included in the footnotes on the above mentioned pages. The schedule containing the Group’s major investments with indications of the paid-in share capital and Kuehne & Nagel’s share in the respective equity is shown on pages 130–133 of this annual report. 140 6 Development investments CHF million Additions Adjust- Exchange initial con- ments/ 01/01/03 differences Additions Disposals solidation Transfers 31/12/03 Investments in: – Consolidated companies 361.0 – 151.1 – – – 512.1 – Associates and joint ventures 3.2 – – (0.1) – – 3.1 – Affiliated companies 98.4 – 0.6 – – – 99.0 Total 462.6 – 151.7 (0.1) – – 614.2 – Consolidated companies 218.6 – 13.5 – – – 232.1 – Associates and joint ventures 3.2 – – (0.1) – – 3.1 – Affiliated companies 98.4 – 0.6 – – – 99.0 Accumulated write-downs 320.2 – 14.1 (0.1) – – 334.2 Net book value 142.4 – 137.6 – – – 280.0 7 Marketable securities CHF million 31/12/2003 31/12/2002 Marketable securities are denominated in following currencies: 1 – Swiss Francs 6.5 5.1 – Euro 13.5 35.9 – others 6.2 – Total marketable securities 26.2 41.0 Treasury shares 2 64.4 64.7 90.6 105.7 1 Marketable securities consist of fixed rate interest bearing bonds due from first class debtors in Euro as well as of shares of a major bank in Swiss Francs. The securities are deposited at two Swiss banks and one German bank. 2 In 2003 the company sold under the stock option scheme 46,290 shares at a nominal of CHF 5 each for a total consideration of CHF 3.5 million and adjusted the initial value of the Treasury shares bought in 2000 by CHF 3.2 million. 8 Cash CHF million 31/12/2003 31/12/2002 The deposits are in the following currencies: – Swiss Francs 348.8 373.1 – Euro 16.5 91.2 – US Dollars 0.5 36.4 365.8 500.7 Financial Statements: Notes 141 9 Share capital Registered shares at nominal CHF 5 each Number CHF million Balance 31/12/2003 24,000,000 120 For details refer to note 30 of the consolidated accounts on page 120 of the annual report. 10 Reserves Capital Legal Capital reserve reserve and legal CHF million reserves Balance 31/12/2003 (before appropriation of profits) 355.0 60.0 415.0 11 Reserve for treasury shares CHF million Balance 1/1/2003 854,075 treasury shares 64.7 Subsequent purchase price for own shares 3.2 Disposal of 46,290 shares related to stock option scheme (3.5) Balance 31/12/2003 807,785 treasury shares 64.4 In agreement with the provisions of Swiss commercial law regarding the valuation of treasury shares, the company formed a reserve equivalent to the purchase price of the treasury shares (see note 7). Movements Sale treasury shares Number CHF per share Third quarter 2003 46,290 75.80 142 12 Retained earnings CHF million Balance 1/1/2003 (before income of the previous year) 0.7 Net earnings 2002 69.0 Distribution of earnings 2002 (according to the resolution of the ordinary shareholder’s meeting of 15/5/2003): Reclassification to Reserve for Treasury shares (3.2) Increase due to disposal of 46,290 shares related to stock option scheme 3.5 Distribution to the shareholders (69.4) Balance 1/1/2003 (after appropriation of profits) 0.6 13 Proposal of the Board of CHF million Directors to the Balance 1/1/2003 (before income for the year) 0.6 Annual General Meeting Net earnings 2003 81.3 12/5/2004 re: Available earnings 31/12/2003 81.9 appropriation of the Distribution to the shareholders available earnings 2003 representing a 70 per cent dividend on the share capital of CHF 116.0 million 1 (81.1) Balance 1/1/2004 (after appropriation of available earnings) 0.8 1 Treasury shares with nominal value of CHF 4.0 million bear no dividend rights. OTHER NOTES 14 Personnel The company has no personnel of its own and therefore utilises the central services of Kuehne & Nagel Management AG, Schindellegi, for its administrative requirements. The respective costs are included in other operating expense. 15 Contingent liabilities CHF million 31/12/2003 31/12/2002 As at year end the following contingent liabilities existed: – Guarantees in favour of third parties 0.2 0.2 – Pending claims 36.5 37.2 36.7 37.4 Financial Statements: Report of the statutory auditors 143 Report of the statutory As statutory auditors, we have audited the accounting records and the financial auditors to the Annual General statements (income statement, balance sheet and notes on pages 135 to 142) Meeting of Kuehne & Nagel of Kuehne & Nagel International AG for the year ended December 31, 2003. International AG, Schindellegi, Switzerland These financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence. Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accounting records, financial statements and the proposed appropriation of available earnings comply with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. KPMG Fides Peat Roger Neininger Regula Wallimann Swiss Certified Accountant Swiss Certified Accountant Auditor in Charge Zurich, March 25, 2004 Corporate Timetable 2004 29.03.2004 Press Conference 2003 result Analyst Conference 2003 result 26.04.2004 Announcement Q1 2004 result 12.05.2004 Annual General Meeting 26.07.2004 Announcement Q2 2004 result 26.10.2004 Announcement Q3 2004 result Kuehne & Nagel International AG Kuehne & Nagel House P.O. Box 67 CH-8834 Schindellegi Telephone +41 (44) 786 95 11 Fax +41 (44) 786 95 95 Email: firstname.lastname@example.org www.kuehne-nagel.com
"Annual Report Kuehne Nagel"