Financial overview (consolidated)

Business overview by segment
Despite production downsizing by several customers based in North America and a further contraction in European demand for cylinder-head gaskets used in petrol engines, the Cylinder-Head Gaskets division managed to increase sales revenues over the course of the 2006 financial year. Cylinder-head gaskets for car and commercial vehicle diesel engines produced solid growth. The ramp-up of the new generation of cylinder-head gaskets with coined meander or honey comb stoppers proved successful. The new coined segment stopper is recognized as a highly innovative technology for cylinder-head gaskets. ElringKlinger predicts that 80 to 90% of next-generation engines will be equipped with these new types of gaskets. In 2006, the Cylinder-Head Gaskets division was commissioned to carry out more than 150 new product developments by customers around the globe.

The Specialty Gaskets division also achieved solid revenue growth. Within this area, product ramp-ups proved particularly advantageous. ElringKlinger’s automatic transmission control plate also produced its first positive contribution. An additional order was secured for this product. In parallel, demand for specialty gaskets used in the exhaust tract and transmission applications was more buoyant. In response to the ever-increasing complexity of the exhaust tract in passenger and commercial diesel vehicles, customer demand for exhaust system gaskets capable of withstanding extremely high temperatures grew palpably.

Operating within a highly competitive market, the Elastomer Technology/Modules division also managed to grow sales revenues. This was driven mainly by cam covers used in passenger vehicles as well as higher volumes of metal-elastomer cylinder-head gaskets for commercial vehicle engines. Metal-elastomer gaskets for oil pans and control housings also contributed to growth.

The Shielding Technology division achieved above-average revenue growth. It benefited from increased customer demand for complex heat shields. Within this context, customers were particularly impressed by the concept of equipping heat shields with addon features such as integrated air extraction in catalytic converters or integral exhaust system gaskets. This resulted in additional orders. ElringKlinger has increasingly developed and shipped thermal shielding parts for the exhaust system, e.g. for oxidation catalytic converters and diesel particulate filters. Alongside product ramp-ups, orders for specialty parts produced in smaller quantities contributed to revenue growth.

Contract
-In August 2006, the Company announced that its products including the cam cover modules and comprehensive gasket package will be supplied to one of the largest US truck and engine manufacturers as a series supplier. ElringKlinger will manufacture cylinder-head gaskets, as well as the oil pan gasket and gaskets for the exhaust tract, for a newly developed V6 diesel engine for the North American market. Deliveries will start at the end of 2007. ElringKlinger projects annual sales volumes of US$ 4 to 5 million from 2008.

R&D Expenditure

-During the 2006 business year, 229 employees were directly involved in research and development work within the Company. This corresponds to 7.0% of entire workforce within the Company.
-Most of the Company's research and development work is carried out in Germany.

New product development

New generation of cylinder-head gaskets
In the Cylinder-Head Gaskets division, introduction of the segment stopper has allowed the company to develop a new technology to improve the performance of coined cylinder-head gaskets. The new stopper technologies were used in almost 90% of over 150 development projects for new engines.

New applications in shielding technology
The current trend in the development of vehicle motors towards the use of space-saving, higher performance encapsulated engines together with lighter but at the same time more heat-conductive materials such as magnesium and aluminum has led to a significant increase in demand for shielding parts for the new generation of engines. One of the main focuses of the Company's development activities in the field of shielding technology was on complex heat shields with add-on functions. Increasingly, ElringKlinger is developing thermal shields for the exhaust tract where operating temperatures in some parts can reach up to 1,000 degrees Celsius.

Exhaust tract core issue for specialty gaskets
The Specialty Gaskets division developed new varieties of ElringKlinger's hydraulic control plate for vehicles with automatic transmission. It also worked on high-temperature gaskets for the increasingly complex exhaust tract in diesel vehicles. The division developed a connecting module for diesel particulate filters with two integrated high temperature gaskets.

Elastomer technology/modules
The Elastomer Technology/Modules division developed an integrated oil trap for plastic cam covers. These parts had previously been bought in. The Group's development competence in this field was further enhanced by the purchase of cutting-edge inspection and testing equipment. A plastic bearing plate cover with an integrated elastomer gasket was designed for vehicle manual transmissions and will be launched in 2007.

Bipolar plates and fuel cell stacks
ElringKlinger has been working for several years on the development of fuel cell components, drawing on its core expertise in the field of pressing and stamping technology. The New Business division is developing bipolar plates for fuel cells but also produces complete fuel cell stacks for SOFC (solid oxide fuel cell) applications. Other promising applications of fuel cell technology lie in the field of combined power and heat generation in the home.

New diesel particulate filter at the design stage
In 2006, the New Business division worked on an innovative type of particulate filter design for diesel vehicles. The company invested in a suitable small-batch production system at the beginning of 2007 in order to manufacture samples and small-batch parts for engine and vehicle testing. The basic trial period should be completed by fall 2007.

In the Cylinder-Head Gaskets division the Company purchased equipment in the form of e.g. a 1500-metricton press for the production of cylinder-head gaskets with coined stoppers. The press will also be used to manufacture newly developed products such as metal transmission housing modules and bipolar plates for fuel cells.

The Shielding Technology division increased its capacity for production of thermal shielding parts at the Langenzenn factory. This involved the acquisition of automatic laser cutting equipment and welding machines.

The Specialty Gaskets division installed an eccentric press for manufacture of specialty gaskets. The Dettingen/Erms site installed an assembly line for manifold gaskets and a final assembly line for an injection module for exhaust systems (AdBlue module).

The Elastomer Technology/Modules division began operating an automation cell and a pressing system in the Dettingen/Erms factory to manufacture metal-elastomer cylinder head gaskets for commercial vehicles. Other machines and equipment were purchased for the production of plastic cam covers.

Tool production facilities were enhanced by the purchase of a precision erosion center.
The Company invested around EUR 1 million in its New Business division, most of which was spent on measuring and testing instrumentation and laboratory equipment for fuel cell component production and the early development of a new particulate filter design for diesel engines.

Plan for FY2007 (P72)
The Company plans to make investments of around 11% of consolidated sales revenues in 2007. An amount of approximately EUR 32 million (excl. tooling) is to be invested at ElringKlinger AG. The company will purchase new plant and machines to allow it to expand capacity in the Cylinder-Head Gaskets and Specialty Gaskets divisions.

As a result of new orders received by the Elastomer Technology/Modules division, Elring- Klinger is now constructing an additional production facility for plastic cam covers at its factory in Dettingen/Erms.

A new production facility is under construction at the Langenzenn site to boost capacity in the Shielding Technology division.

The Company’s New Business division purchased a small-batch production system for diesel particulate filters at the beginning of 2007. Other investments include plant and testing systems for the Fuel Cell Components division.

Capital expenditure planned for subsidiaries and affiliated companies amounts to more than EUR 30 million.

Capacity levels are to be expanded significantly at the sites in Changchun, China, and Changwon, Korea. Committed to expansion in Asia, ElringKlinger will also be establishing a new site in Ranjangaon, India, the focus being on a plant for cylinder-head gaskets and specialty gaskets.

Another focal point is Mexico. The local facility will install an additional facility for the manufacture of plastic cam covers supplied to a US customer.

The ElringKlinger Group anticipates that capital expenditure on intangible assets, property, plant and equipment as well as investment property will return to approximately 9% of sales revenues in 2008.