Financial Position

The Salzgitter Group carries out cash and foreign currency management on a centralized basis for Group companies. Joint venture companies are not included. As part of the reorganization of the Group structure, SMG, a wholly-owned subsidiary of SZAG, assumed this function as of December 1, 2005.

The task of back office operations is in particular to grant Group credit lines in the context of Group financial transactions or, in individual cases, loan guarantee commitments. To cover the financial requirements of foreign Group companies, SZAG also makes selective use of local lending and capital markets. The surplus liquidity of individual Group companies is also used for financing purposes. Supplies and services within the Group are settled via internal accounts. Central finance management enables capital to be borrowed at favorable conditions, as well as exercising a positive effect on net interest income by reducing the volume of external borrowing and optimizing cash investments. Group liquidity requirements are determined not only by financial planning that incorporates a multi-year planning horizon but also on the basis of a monthly rolling four-month planning process. Liquidity requirements are ensured through available cash investments as well as through having sufficient bank credit lines.

Our international business activities also generate cash flows in a number of currencies. In order to secure against the resulting currency risk, Group guidelines oblige Salzgitter Group companies to hedge foreign currency positions at the time when they arise. Regular checks are made by the Group internal audit department to monitor compliance with these regulations. Currency transactions in US dollars, which make up a significant share of our foreign currency transactions, are initially covered within the Group by netting off sales and purchase items, and then hedging any amounts left over through forward exchange transactions and options.

Pension provisions still play a significant role in corporate financing. After recording further actuarial losses (€ 117 million), in particular in the wake of adjusting the actuarial interest rate from 5% to 4.25%, they amounted to € 1,725 million.

Cash Flow Statement

The cash flow statement (detailed disclosure in the consolidated financial statements) shows the source and application of funds. The cash and cash equivalents referred to in the cash flow statement correspond to the balance sheet item ”Cash and Cash Equivalents”.

The Group again generated a significantly improved cash flow of € 468 million from operating activities, primarily due to higher earnings.

This was offset by an increase in working capital requirements.

Cash and Cash Equivalents

in € mil.	FY 2005	FY 2004
Inflow of funds from current business activities	468.0	352.4
Inflow/outflow of funds from investment activities	385.6	−175.3
Outflow of funds from financing activities	−214.5	−71.2
Change in cash and cash equivalents	639.1	105.9
Cash and cash equivalents on the reporting date	884.9	245.8

A positive cash flow from investments of € 386 million resulted from cash flows accruing from the disposal of the participation in V&M, as well as the sale of shares in Vallourec. We spent € 228 million on investments in tangible and intangible fixed assets. These investments are above the level of the previous year (€ 218 million) and exceed depreciation. Acquisitions included, in particular, the participation in the capital increase at Vallourec S.A., the purchase of a further 10% stake in HKM and the takeover of the outstanding 50% stake in RGF. This position includes payments for short-term money market deposits of € 115.5 million which, in accounting terms, are attributable to cash and cash equivalents.

In 2005, cash flow from financing activities stood at − € 215 million. We spent a total of € 152 million on buying back 5.4 million shares at an average price of € 28.33 per share. We paid out € 25 million or € 0.40 per share to the shareholders of Salzgitter AG for the financial year 2004.

Despite the increase in the funding of working capital, the outstanding earnings trend and the sale of the stake in V&M and shares in Vallourec resulted in the net cash position − which was € 71 million held at banks on the reporting date of 2004 − soaring to € 822 million in 2005. Cash investments, including securities and structured investments, of € 1,000 million as of the end of 2005 were offset, due to reporting date factors, by marginally higher liabilities owed to banks of € 178 million (2004: € 175 million).

Five-year Overview of the Financial Position

	FY 2005	FY 2004	FY 2003	FY 2002	FY 2001
Solvency I (%)1)	150	100	91	97	116
Solvency II (%)2)	253	187	187	185	210
Dynamic debt burden (%)3)	41.3	20.2	12.5	8.3	6.8
Gearing (€ mil.)4)	169.1	278.0	268.7	261.4	244.3
Cash flow (€ mil.)	468	352	223	157	117
Net debts to banks (€ mil.)5)	−822	−71	56	66	−49

Liquidity and debt ratios improved considerably in 2005.