Sauer-Danfoss Inc. Annual Report 2020

Plain-text annual report

Annual Report 2020 Contents Financial Statements Statements Management’s Statement Independent Auditor’s Report Group accounts and notes Group accounts Group notes Group companies Parent accounts and notes Management’s Review Parent accounts and notes 51 52 56 62 107 110 111 This Annual Report 2020 is published as an electronic publication only and made available at www.danfoss.com. Danfoss has tailored the annual reporting towards the needs of our various stakeholders with three annual publications: Annual Report 2020, Sustainability Report 2020 and Corporate Governance Report 2020. These publications constitute the total annual reporting of the Danfoss Group and can be read individually or combined, depending on interests. Accelerating energy transition Danfoss technologies that can accelerate the energy transition are already present, proven, and ready to be scaled up. Read more Our strategy Danfoss continues to invest in strengthening the core businesses and building our digital offerings and a leading position within electrification. Read more Follow us here: www.facebook.com/danfoss www.twitter.com/danfoss www.youtube.com/danfossgroup www.linkedin.com/company/danfoss www.instagram.com/danfoss_group Contents Management’s Review Danfoss at a glance CEO letter Danfoss at a glance Financial highlights Sustainability highlights Outlook 2021 Our business Accelerating energy transition Supermarkets turned into heat suppliers Rethinking energy use Machinery turned more sustainable Helping ports to reduce emissions Helping the world move to sustainable transport Our business model Our strategy Financial performance 2020 impacted by COVID-19 Financial highlights Financial review Financial highlights, quarterly Business segments Governance Risk management and compliance Corporate Governance Board of Directors Group Executive Team 3 4 6 7 8 10 12 13 14 15 16 17 18 29 30 31 34 35 42 44 46 49 2/138 Danfoss Annual Report 2020 CEO letter CEO letter Globally leading technology partner Danfoss is more relevant than ever. We see that companies, cities and countries around the world are again starting to plan for the future and are looking for reliable, tried-and-tested technology partners. In 2020, the COVID-19 pandemic had a significant impact, especially during the second quarter. Since day one of the pandemic, our priority has been to keep our people safe, support and service our customers, and then flex our cost to the new reality. Our people have been extraordinarily resilient, adapting to new ways of working, whether at home or at our production sites. With their extraordinary efforts, we have been able to safeguard our strategic initiatives and investments in the future. Despite the volatility and topline impact, we can again deliver a strong financial result. This demonstrates the resilience of our strategy and business model as well as the commitment and determination of the Danfoss team. Together with a record cash generation, a low debt and significant investments in the future, we are standing strong and ready for the future. 2020 was also a very transformational year. We have continued to step up investments to further strengthen our core business, building our digital and software offering, and a leading position in electrification. There were several highlights that I would like to mention. With the agreement to acquire Eaton Hydraulics, we will take a significant step forward and become one of the global leaders in mobile and industrial hydraulics. We look forward to welcoming 10,000 new colleagues to Danfoss. Furthermore, we combined the Heating and Cooling segments into the new and globally leading Climate Solutions segment, providing the broadest and most innovative portfolio of solutions for our customers to enable the green transition. Also, our electrification pipeline continued to grow significantly in 2020. Another important highlight is our momentum in the implementation of our One ERP platform: enabling the best-in- industry Digital Customer Experience going forward. Finally, our investments in R&D increased to 4.6% and we have a historically strong innovation pipeline ready for the future. 3/138 Our customers want their partners to be innovative and need technology that works in the real world. With our new setup and significant investments in the future, Danfoss can be an even better partner to our customers going forward. The new setup also entails an increased focus on developing our regions and localizing further. Across our business, we have a huge potential to contribute to the global and regional climate goals. This is essential to our future success and therefore we also revised our ambitious sustainability targets for Danfoss in 2020. We are committed to decarbonizing our global footprint by 2030 and have set ambitious targets, and actions, to achieve them. We will continue to report on how we continuously improve our climate footprint and will extend our robust approach to include our entire value chain by setting science-based targets during 2021. High-performing diverse teams are our foundation and we are committed to creating an inclusive environment in the company and to continuously improving diversity, defined as various generations, genders, nationalities, backgrounds, and individual characteristics. We have set ambitious targets to improve gender diversity to 30% female leaders in 2025. To conclude 2020, despite the many COVID-19 pandemic challenges, it was a transformational year with significant investments in the future. This will continue in 2021. I would like to sincerely thank our customers and partners for the great cooperation, and the Danfoss team for the engagement, dedication and outstanding teamwork that made everything possible. Kim Fausing President & CEO “We have continued to step up investments to further strengthen our core business.” Danfoss Annual Report 2020Danfoss at a glance Danfoss at a glance Danfoss - a globally leading technology partner in energy efficiency and sustainable solutions Financial highlights Sustainability highlights Outlook 2021 5 6 7 8 4/138 The journey has begun We need to significantly reduce energy consumption and greenhouse-gas emissions. Danfoss is a leading supplier of sustainable energy-saving solutions that play a key role in the green transition towards lower CO2 emissions and more electrification. Danfoss has embarked on an ambitious plan to become carbon neutral in our global operations and to transform our company cars to become all-electric latest by 2030. Danfoss Annual Report 2020World-leading technology partner Danfoss at a glance Our business Financial performance Governance Financial Statements Danfoss - a globally leading technology partner in energy efficiency and sustainable solutions We engineer tomorrow and build a better future 1933 Long track record within innovative engineering 5/138 27,491 employees 3 business segments Danfoss Power Solutions, Danfoss Climate Solutions, Danfoss Drives 71 production sites in 21 countries and R&D sites in 23 countries Worldwide sales in more than 100 countries Danfoss Annual Report 2020Financial highlights Danfoss at a glance Our business Financial performance Governance Financial Statements Financial highlights Sales EURbn 5.8 Earnings (EBITA) EURm 6.1 6.3 5.8 724 771 723 723 2018 2019 2020 2018 2019 2020 Strong recovery back to pre-COVID-19 activity levels in Q4 year-over-year. The pandemic caused a sudden drop in demand in Q2, leading to net sales in 2020 of EUR 5.8bn, 7% below previous year. Growth in power modules for electric vehicles, energy-efficient compressors for cooling, industrial refrigeration, and power conversion for wind energy. Strong profitability within range of guidance. EBITA of EUR 723m, 6% below previous year. We managed to scale our fixed expenses to the lower sales, leading to an EBITA margin of 12.4% against 12.3%. Net profit reached EUR 435m, 13% below the previous year. Strong financial position despite the pandemic Innovation expense EURm Cash flow EURm 255 272 267 267 493 2018 2019 2020 Net interest-bearing debt EURm 463 493 359 2018 2019 2020 537 1,048 962 537 2018 2019 2020 Continued high investments in the future. A high level of investments in R&D was maintained, focusing on digitalizing and electrifying our solutions. Innovation expense amounted to EUR 267m, 2% below previous year, but corresponding to 4.6% of sales against 4.3% last year. Record cash performance. Free operating cash flow after financial items and tax (before M&A) increased 7% to EUR 493m. Our strong cash performance provides room for future growth, strategic growth initiatives and investments in industry-leading technologies to further strengthen our core businesses and ability to win market share. Low debt. Net interest-bearing debt was reduced 49% to EUR 537m, leading to a net interest-bearing debt to EBITDA ratio of 0.6. Our continuous, strong financial performance including a low leverage ratio allows us to continue to expand and develop Danfoss as a global leader within our business areas. 6/138 Danfoss Annual Report 2020Sustainability highlights Danfoss at a glance Our business Financial performance Governance Financial Statements Sustainability highlights CO₂ - neutral global operations Electric company vehicles Double energy productivity -36% CO2 reduction since base year 2007 20% Female leaders - ambitious target of 30% by 2025 7/138 Science Based Targets to be approved in 2021 25% of Danfoss' global electricity consumption to be covered by wind in 2021. +80% Net sales almost doubled per GWh consumed energy since base year 2007 2.0 Lost Time Injury Frequency (LTIF) - targeting 1.6 Danfoss Annual Report 2020Outlook 2021 Danfoss at a glance Our business Financial performance Governance Financial Statements Outlook 2021 Driving future growth and long-term sustainable value creation In 2021, our key focus continues to be on ensuring profitable growth, while maintaining a high level of investments in our core businesses, new digital technologies and electric solutions. our market share, while maintaining or improving the profitability measured as margin versus the 2020 level, following continued investments in the development of new products and solutions. Based on the current market insights, our growth projections for 2021 remain soft. Several markets remain volatile and the visibility for 2021 is low. In particular, the ongoing pandemic with partial lock- downs in many countries and political/ trade conflicts are creating a high level of uncertainty globally, and could have a negative impact on market growth. The impact of the COVID-19 pandemic is difficult to predict. Short-term business growth will be influenced by the time it takes to contain the spread, reboot economies globally and implement the recovery plans with fiscal stimuli from governments to support a green restart. The long-term effects will also be influenced by the successful execution of the green stimuli packages, creating positive momentum. Here, Danfoss is well-positioned with leading positions, application knowhow and innovative solutions. 2021 expectations Despite the current volatility, Danfoss expects to continue to expand or maintain 8/138 The outlook excludes impacts from the acquisition of Eaton’s hydraulics business. Acquisition of Eaton Hydraulics Taking into account the expected additional Eaton Hydraulics sales following the closing of the planned acquisition, Danfoss expects a significant increase in Group sales for the year 2021. We expect that profitability will be impacted by the purchase-price allocation and the depreciation and amortization as well as related integration costs related to the acquisition of Eaton Hydraulics. The acquisition will be fully financed with debt, as described in the Danfoss announcement as of January 21, 2020, and will result in an increase in financial expenses. The transaction is subject to customary closing conditions and regulatory approvals. We are expecting to close end of Q1 or during Q2. Specific key factors Specific key factors, which could affect the Group’s financial performance in 2021: • The Group’s continued strategic initiatives to accelerate profitable growth, organic as well as acquisitive, are expected to generate a positive impact on the market- share development. • Increasing prices on raw materials and freight as well as shortage of components, caused by the pandemic, could have a negative impact on our financial results. • Increasing prices on commodities, such as crops, metals and oil, which are driving demand in the global agriculture, marine and other heavy industry sectors, are associated with considerable volatility, leading to low visibility as well as having a direct impact on our own raw materials. Forward-looking statements This Annual Report includes forward-looking statements on various matters, e.g. expected earnings, future expansion of market share and future profitable growth. Such statements are subject to risks and uncertainties, because various factors, many of which are beyond Danfoss’ control, may cause actual developments and results to differ materially from the expectations set out in the Annual Report. Such factors include, but are not limited to, the geopolitical environment, general economic and business conditions, changes in commodity prices impacting the demand for Danfoss’ solutions and services, competition in the industrial sectors, in which the business segments are operating, fluctuations in foreign exchange rates, interest rates or our own raw material prices, changes in climate policy, legislation, regulation or standards, and uncertainty in connection with acquisitions or potential acquisitions and divestments. Unless required by law, Danfoss is under no duty and undertakes no obligation to update or revise any forward-looking statements after the publication of this Annual Report. Danfoss Annual Report 2020Our Business Danfoss has never been more relevant In the light of the global mega- trends, Danfoss products and solutions have never been more relevant. As an example, Danfoss offers technologies to connect buildings and industry to the local district-heating grid to re-use heating and cooling energy. Our Business Accelerating energy transition Supermarkets turned into heat suppliers Rethinking energy use Machinery turned more sustainable Helping ports to reduce emissions Helping the world move to sustainable transport Our business model Our strategy 10 12 13 14 15 16 17 18 9/138 Danfoss Annual Report 2020Accelerating energy transition Danfoss at a glance Our business Financial performance Governance Financial Statements Accelerating energy transition Together with our customers, Danfoss is engineering solutions that allow the world to use energy in smarter ways. 40% of global energy is used in buildings Buildings and machinery must be digitalized and connected; the transport sector needs to be electrified; and the entire industrial sector is going through a significant energy transformation. Here, energy efficiency is key. Energy efficiency means that we use the energy more efficiently, thereby saving energy and reducing emissions. It is a profound transformation of the way we use energy and not a question of developing new technology – as solutions already exist today and can be deployed immediately. Danfoss offers ready-to-use energy-efficient technologies for many sectors, such as buildings, infrastructure, agriculture, and manufacturing industry. Furthermore, we offer ready- to-use cutting-edge technologies for electrification of off- highway and passenger transportation, such as wheel loaders, excavators, ferries, and cars. All of this means that Danfoss is part of making the cities of tomorrow sustainable and building a better future. This is not a matter of creating a new economy from scratch. Most of the technologies that can accelerate the energy transition over the coming decades are already present, proven, and ready to be scaled up. 10/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements What we do Danfoss solutions enable the green transition and contribute to reaching European and global, climate and energy goals. Danfoss has truly never been more relevant than now. Danfoss’ investments and acquisitions over the past years have made Danfoss a frontrunner on strategic areas, such as complete sustainable solutions for cooling and heating in buildings, food cold chains, district heating and within electrification and digital solutions. Fast track to highly efficient buildings Buildings account for nearly 40% of global energy consumption and about one third of global CO2 emissions. Consequently, buildings represent a huge opportunity for any country or community striving to lower energy expenses and reduce emissions. Intelligent, energy-efficient buildings are expected to be an important part of future energy systems. Buildings must be made smart, more intelligent and more connected to other buildings to use energy in a more efficient and sustainable way. Danfoss offers smart, connected solutions that can significantly reduce energy consumption in buildings. One example is our technology to connect and re-use heating and cooling energy; turning supermarkets into heat suppliers to private homes. In fact, 95% of excess heat in supermarkets can be recycled by the Danfoss green heat-recovery solution. Adding the digital dimension from Danfoss Leanheat® solutions, means that Danfoss is helping to make buildings more sustainable via energy and CO2 savings – which is also leading to lower cost on district energy and electricity. Technology partner in energy transformation The industrial sector is going through a significant energy transformation and accounts for about 20% of total CO2 emissions. One example comes from construction machinery, where Danfoss developed a new climate-friendly technology with a huge potential for fuel savings, reduced CO2 and lower costs – just by reducing the waste heat in, for example, an excavator. Another example is the possibility to save 8% of the total global electricity consumption while cutting industry emissions by up to 40%. This can be achieved by applying intelligent speed controls, such as Danfoss AC drives, to all electric motors. This way they will run at the required speed and will not use excessive energy. Helping the world to become electrified The transport sector needs to be electrified and accounts for more than 24% of global CO2 emissions today. Currently available electrification technologies have the potential to significantly lower CO2 emissions – if all urban areas in Europe, China and the US electrified their private and public transport, they could cover 28% of the emissions reductions needed between today’s total emissions and a 1.50 Celsius scenario. Furthermore, new electric and high-efficiency cars have been identified as a cost-efficient way to reduce emissions. Danfoss contributes to electrification, hybridization and higher efficiency of both land and sea transport. Danfoss entered game-changing partnerships with some of the strongest suppliers in the automotive industry to deliver technology to the millions of hybrid and fully electric cars we will soon see on the roads. Over the past 20 years, Danfoss has delivered technologies for hybrid and electric ferries and work boats, and this has become even more relevant today. You can read more about our impact on the following pages. 11/138 Danfoss Annual Report 202095% of excess heat in supermarkets can be recycled by Danfoss green heat recovery solutions Supermarkets turned into heat suppliers Danfoss at a glance Our business Financial performance Governance Financial Statements Supermarkets turned into heat suppliers Best possible heat-recovery enabling lower emissions Keeping food fresh makes the electricity meters run fast in a supermarket. However, a supermarket close to the Danfoss headquarters in Denmark has cracked the code to considerable energy savings by reusing excess heat that would otherwise be wasted. With Danfoss Climate Solutions’ heat recovery units, 95% of the excess heat from the cooling display cases and freezers is harvested and recycled to heat up the store and the domestic hot water. The refrigeration system utilizes natural refrigerants, providing high efficiency with the lowest environmental impact. Furthermore, the supermarket’s surplus heat is sent out to the local district-heating network to heat up the customers' homes nearby. Since the installation of the green heat- recovery solution from Danfoss, the supermarket has saved around 70% on district- heating costs and 37% on electricity. Moreover, this supermarket has reduced its carbon footprint by 43% covering electricity, water and heating. Imagine if this was done in all supermarkets around the world. 12/138 Play video Watch the video and learn how a supermarket chain in Denmark installed Danfoss heat-recovery units and managed to halve its CO2 footprint in five years: Danfoss Annual Report 202050% energy savings with Danfoss heating solutions Play video This is where a new generation of buildings starts – watch the video and learn how. Rethinking energy use Danfoss at a glance Our business Financial performance Governance Financial Statements Rethinking energy use Smart climate solutions creating remarkable energy savings We spend most of our time in buildings – working, shopping, learning, sleeping. Buildings consume a lot of energy. Today, three out of four buildings are energy inefficient. By applying viable, simple, and reliable solutions, EUR 67bn could be saved in 2030, in the EU alone. It is time to start a fast track to highly efficient, connected buildings. With existing buildings, most of the energy is used to maintain the right temperature and air quality inside the building. Known collectively as “technical building systems”, heating, cooling and ventilation systems are the main factors affecting the building's energy consumption. When these systems are not set up properly or are running efficiently, even more energy is required – leading to higher bills and increased CO2 emissions. The numbers are staggering: • 30% of total EU energy consumption is used to heat and cool our buildings. • 70% of an average household’s energy bill is spent on heating and cooling. • EUR 240bn is spent by EU citizens on space and water heating per year. And still, 1 in 10 people in the EU struggle to heat their homes. 13/138 The best time to start is now There are no significant obstacles preventing us from acting fast. The cost for these technologies is low and they can be easily retrofitted in buildings, while the energy and cost-saving benefits can be remarkable. The huge improvement in energy efficiency can be realized using simple and innovative measures that have a very short payback period. Danfoss offers space heating controls, hot- water balancing solutions, air conditioning and ventilation-control solutions just to mention a few. They are all part of a suite of solutions suitable for residential, commercial, and public buildings. Adding the digital dimension with smart home technology that uses artificial intelligence and sensors, Danfoss can help predict the energy consumption – and lower the supply needed to meet demand. Danfoss Leanheat® software solutions monitor the temperature and humidity of every individual apartment in a residential building, saving an additional 10-20% energy consumption on top of basic solutions. The driving force behind energy-efficiency solutions are all the benefits of rethinking our approach to building efficiency, such as energy and cost savings and lowering CO2 emissions – and these benefits are here to be reaped by everyone: consumers, property owners, engineers and consultants, cities, municipalities, and states. Danfoss Annual Report 2020Machinery turned more sustainable Danfoss at a glance Our business Financial performance Governance Financial Statements Machinery turned more sustainable 50% fuel savings in excavators with Danfoss Digital Displacement technology Leading technology partner in mobile hydraulics An average excavator is burning 30,000 liters of fuel annually equal to the consumption of 20 family cars. With roughly 1 million excavators in operation worldwide, the global impact of reducing fuel consumption in these machines can be enormous. With the recently launched Danfoss Digital Displacement technology, a new solution is born that can dramatically reduce fuel usage - up to 50% on an average excavator. This step change in fuel efficiency has a direct and significant impact reducing harmful emissions. In excavators alone, Digital Displacement solutions can save 40 million tons of CO2 – equal to the energy used by 4.6 million homes in one year. Additionally, unlike most hybrid solutions, Digital Displacement technology can actually improve machine productivity at the same time, eliminating this painful trade-off in conventional technology. A true game changer in the off-highway industry. 14/138 Play video Watch the video and learn more about the Digital Displacement technology: Danfoss Annual Report 2020 Helping ports to reduce emissions Danfoss at a glance Our business Financial performance Governance Financial Statements Helping ports to reduce emissions Leading technology partner in electric shore supply At the port of Scheveningen, Netherlands, the air is cleaner than ever thanks to a shore supply facility built with Danfoss drives. The shore power installation enables ships to shut down their diesel generators while in harbor and instead buy sustainable power using an app. This eliminates air pollution and reduces the noise and vibrations when ship engines are idle; all while helping the port meet the lower emission targets. On average, the more than 7,500 vessels each year in Scheveningen Harbor consume more than 100 MWh per month via the new shore power supply. At an average of one liter per three kWh, this translates to saving more than 33,000 liters of marine diesel per month. This results in substantial reductions in air pollution and CO2. The new shore supply system was the first in the Netherlands on this large scale, and which has this digital technology and convenience for users. The system was built using Danfoss low-harmonic drives to convert the power to the ships’ grids. The system has eight power outlets, each with a communication system allowing the ship's engineer to connect and pay for power using an app. 15/138 33,000 liters of marine diesel saved per month with Danfoss technology, resulting in significantly lower emissions Visit danfoss.com Read more on danfoss.com Danfoss Annual Report 20207% higher efficiency in electric drivetrains with Danfoss technology Helping the world move to sustainable transport Danfoss at a glance Our business Financial performance Governance Financial Statements Helping the world move to sustainable transport Chosen as technology partner by some of the strongest suppliers in global car industry The transport sector is responsible for roughly one quarter of global emissions, and the majority is linked to passenger vehicles in metropolitan areas with heavy traffic. To meet the climate goals set out by the Paris Agreement and curb CO2 emissions by 28%, we need to accelerate the electrification of the global car industry. A core component of an electrified drivetrain is the semiconductor power module. It is considered the heart of the inverter. Its purpose is to convert the AC energy from the electrical grid to DC energy, which is stored in the battery and then again to AC energy in the motor of the car in the most efficient way. With new materials like Silicon Carbide (SiC) from Danfoss Silicon Power, the size of the inverter will shrink, while the efficiency of the power conversion will further improve, and with that extend the range of electric vehicles. Going forward, SiC-based converters will be able to improve the efficiency of electric drivetrains by up to 7%, which results in range extension at equal battery size and thereby increased mileage of the EV at a competitive cost point. Danfoss and ZF Friedrichshafen AG have joined forces to transform the transport sector for a sustainable future. To further enable the large-scale adoption of electric vehicles, consumers need the confidence that the car will provide the necessary range, that it is affordable, and that the right charging infrastructure is in place – preferably from a renewable energy source. For both hybrid electric vehicles and electric vehicles, developments within automotive technology are focusing increasingly on the electrification of the drivetrain. The drivetrain is the part of the vehicle that connects the transmission to the drive axles, making sure the wheels of the car are turning. 16/138 Play video Watch the video and learn how Danfoss and ZF are driving innovation to accelerate electrification and transform the transport sector into a greener, more sustainable future. Danfoss Annual Report 2020Our business model Danfoss at a glance Our business Financial performance Governance Financial Statements Our business model Danfoss’ competitive advantage builds on three core capabilities: Leading positions, Application knowledge and Innovation. These capabilities reflect how we create value for our customers across the business segments. Application knowledge Close to customers Innovation Differentiate through new technology Competitive advantage Leading positions Exploit scale Leading positions In the global manufacturing industry, global reach, size, and scale matter. It is a key element in our business model that the business segments hold leading positions as either number one or two in their industries. Our shared operating model further helps to drive scale advantages, increased customer value and a world-class supply chain, and we share a unique business system with a strong focus on improving safety, quality, delivery, and cost. Application knowledge Understanding customer applications is key to differentiating and creating customer value. We invest in initiatives, which enable our sales and R&D teams to turn their knowhow and application understanding into performance-enhancing advantages for our customers. Innovation Our mechanical, electrical and software engineering enable bold innovation and constant improvement of our technologies, solutions and processes in the core businesses. We innovate to differentiate and create customer value. We invest to take full advantage of innovation and take the lead within IoT, connectivity and electric solutions. 17/138 Danfoss Annual Report 2020Our strategy – A leading technology partner globally Danfoss at a glance Our business Financial performance Governance Financial Statements Our strategy – A globally leading technology partner Megatrends Danfoss technologies and solutions are more relevant than ever. This is where the transformation starts – in the way we heat, cool, connect, and feed a growing population. Together with our customers, we help make a greener and better future a reality. Together, we are engineering tomorrow. Climate change Urbanization Core & Clear – Going Great Our aspiration We engineer tomorrow and build a better future Our strategy Leading Portfolio Customers & Growth Food supply Innovative Solutions Lean & Agile Our foundation High-performing diverse teams Digitalization Electrification Going Great – Our aspiration The center of our Going Great strategy is an ambition to drive long-term value creation for all our stakeholders: customers, employees, shareholders and partners. Global mega-trends are transforming our world, making Danfoss more relevant than ever. We have proven and reliable solutions to meet many of the climate, urbanization, and food challenges. Driven by the power of an electrified society and fueled by the opportunities of going digital, Danfoss is dedicated to engineering solutions that can unleash the potential of tomorrow. This is how we work to meet our aspiration: engineering tomorrow and building a better future. Our strategy has four focus areas: • Leading Portfolio • Customers & Growth • Innovative Solutions • Lean & Agile These focus areas serve as drivers to take Danfoss to a higher performance level and remain a leading technology partner globally, within each of our core businesses. All of this is built on Our Foundation, which is our high- performing, diverse teams that make the strategy come alive. 18/138 Danfoss Annual Report 2020Leading portfolio Danfoss at a glance Our business Financial performance Governance Financial Statements Leading Portfolio To strengthen our leading positions, we continue to invest in the future. acquisition, Danfoss takes a considerable and transformative step towards the creation of a global leader in mobile and industrial hydraulics. We are convinced that our customers will benefit from combining the two businesses into a full-line hydraulics player dedicated to innovation and with a broad offering of products, robust distribution channels, and tremendous geographic reach. Leading Portfolio is about strengthening our leading positions as number one or two globally in the respective industries of our three business segments. This is achieved through organic growth as well as acquisitions of well-performing companies or adding new cutting-edge technologies to the product portfolio. 2020 has been a transformational year for Danfoss, where we further strengthened our core with the agreement to acquire Eaton Hydraulics and by combining the Cooling and Heating segments into the new Climate Solutions segment. Furthermore, we managed to maintain strong momentum in taking the lead in digitalization and building a leading position in electrification. Acquisition of Eaton’s hydraulics business On January 21, 2020, Danfoss announced the agreement to acquire Eaton’s hydraulics business for a cash purchase price of USD 3.3bn (approximately EUR 3.0bn) – the biggest acquisition in the history of Danfoss. With the acquisition of Eaton Hydraulics, Danfoss will grow by a third and add 10,000 new team members to the current 27,491. We will also add approximately EUR 2bn to the existing EUR 5.8bn annual sales. With this 19/138 Urbanization made more sustainable with Danfoss hydraulic solutions Increased urbanization is leading to higher investments in infrastructure to build highways, airports and hotels in cities. Danfoss' energy-efficient hydraulics solutions for off- highway mobile vehicles, such as construction machines, ensure significant fuel savings, while increasing productivity and operator efficiency – and by adding the digital and electric dimensions to our hydraulics solutions, we are part of making the urbanization more sustainable. Visit danfoss.com Have a look at cranes with brains and how Danfoss made it happen Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Based on this, we will continue to focus on building even stronger capabilities within electrification and to unleash the growth potential in all three business segments. In combination with our conventional core technologies, we are well-positioned to serve our customers’ increasing demands within hybrid and electric solutions. Fully electric wheel loader Danfoss delivered the electrification technology to develop this fully battery-operated electric wheel loader. The system includes motor, inverter, battery charger and multi- converter from Danfoss Editron. Danfoss’ legacy in hydraulics goes back to the 1960s. We take this insight into our product development and design products that fit exactly to the requirements of OEMs (Original Equipment Manufacturers). Our Application Development Centers demonstrate our products in real-life applications and benchmark their performance against that of our competitors. Play video Watch the video to get a look at our brand new fully-electric wheel loader system in action New Climate Solutions segment In 2020, Danfoss took another important step in strengthening our leading positions with combining the Danfoss Cooling and Danfoss Heating segments into the new Danfoss Climate Solutions segment. The segment will cover all key applications within heating and cooling. There are significant opportunities on the technology side as well as common key applications, such as heat pumps, datacenters, supermarkets and food-retail solutions. Today, 40% of all energy consumption in cities is used for cooling and heating. With the increasing urbanization and global focus on the green transition, Danfoss Climate Solutions offers a huge potential for enabling a carbon-neutral future and providing the integrated energy-efficient solutions needed to deliver on the targets in the Paris Agreement and in the EU Green Deal. Building a leading position in drives and electrification Building a leading position in drives and electrification is a key strategic priority for Danfoss and is our biggest growth potential. The development of transportation, such as hybrid and electric cars, construction machinery, and marine vessels, is rapidly accelerating to ensure efficiency gains and lower emissions as an essential part of the green transition. 20/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Customers & Growth A leading partner our customers can rely on Danfoss smart refrigeration solutions keep food fresh and energy use at a minimum What do leading food retailers such as Walmart, Tesco, Food City, and Sainsbury's, have in common? Their stores all need to keep food fresh and keep energy use at a minimum. Our Alsense™ cloud-based services with new software solutions optimize food safety and security, while lowering the CO2 footprint. Danfoss’ Alsense™ IoT platform was launched in October 2020 and will accelerate Danfoss’ efforts in providing food-retail professionals with intuitive software tools and data-driven, expert-enabled insights to optimize operational efficiency, refrigeration performance and energy efficiency. The newest addition to the digital service portfolio is predictive maintenance, creating a “to-do” list for where our customers should focus their maintenance efforts. The Alsense™ cloud-based solution also offers great monitoring services, allowing our customers to monitor their cooling systems and get notifications if components fail. Our three business segments have strong representation in all regions – close to our customers. Being close to customers and having a systematic approach to drive customer satisfaction is at the center of our growth agenda. Accelerating growth in Developing Regions We target to accelerate growth in Developing Regions (China, Russia, India, Asia-Pacific, Turkey, Middle East and Africa, and East Europe) within our current regional set-up. A new role in the Group Executive Team was created to facilitate this important growth journey. Our developing regions are driving profitable growth based on deep market understanding, customer proximity, and insights into local delivery models. Being close to customers enable us to react fast and to be flexible in creating and capturing the regional growth opportunities, and at the same time strengthening our efforts in key areas of our customer interaction. Accelerating digital customer experience For the past five years, Danfoss has been on a digital transformation journey, which has proven its importance and relevance during the COVID-19 pandemic. We have been able to stay close to customers, do business and trainings, etc. due to all the digital tools we already use in our daily operations. We know that our digital journey drives decision speed and brings us even closer to our customers. In 2020, we kept a strong momentum in implementing the global product store at our corporate website, www.danfoss.com. Basics in driving customer satisfaction is a strong and consistent performance in quality and delivery. We strive to be recognized as a leader in the industries and by the customers we serve. In 2020, we have launched a focused initiative to ensure significant improvements in our “on-time delivery” performance. 21/138 Danfoss Annual Report 2020Environmentally friendly data center A need to consolidate our own data centers, ensure future capacity and establish a showcase for Danfoss solutions was the trigger for building our own data center. The data center has the capacity and power we need now but is also prepared for the future. It has a modern hybrid infrastructure, is super scalable and its architecture makes it easy to expand when the need arises. combined design targets – and not conflicting like they sometimes are in the traditional IT world. With efficient cooling and heat recovery, we have built something truly different in the industry. It illustrates that a green data center can be built with Danfoss components and that Danfoss is committed to becoming CO2 - neutral by 2030. From the beginning, environment, digitalization and commercial attractiveness were considered Imagine if sustainability was integrated into all data centers in the world. Danfoss at a glance Our business Financial performance Governance Financial Statements Innovative Solutions Danfoss continues high investments in innovation to ensure that we stay at the technology forefront and create even more value for our customers The heart of the value we deliver to our customers is enhanced productivity, higher uptime, lower energy consumption and costs, and in many cases higher comfort and operator safety. As new technology, for instance IoT, becomes pervasive, we create significant opportunities by leveraging the latest technology to create even more value to our customers. In all our business segments, we have been able to protect our key R&D initiatives during 2020, and we are strengthening our innovation pipeline. In Danfoss Power Solutions, one example of a truly innovative solution is the Digital Displacement pump which delivers an unprecedented level of operating efficiency that directly reduces carbon emissions. It is common to see immediate fuel efficiency improvements of 30% or greater in many mobile applications when the full benefits of Digital Displacement are exploited. These benefits are even more impressive in electrified mobile applications. In this case, the game changer efficiency of Digital Displacement combined with the best-in-industry performance of Danfoss Editron electric motors revolutionize the design and cost of battery- powered mobile machines, a key step in accelerating the global adoption of zero-emission vehicles. In Danfoss Climate Solutions, we are constantly developing and maintaining our products in a fast-changing world of refrigerants. One example is our line of Turbocor® compressors. While working on our new, smaller Turbocor® line extension, we have extended our existing products, 22/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements adapting them to new demands. Data centers present the biggest and fastest growing market, calling for smaller cooling adjustments. Danfoss has the right components and intelligent systems, and the market is growing worldwide. In 2020 Danfoss Drives introduced a new series of AC drives to selected customers with demanding applications. The new product series was presented under a new product brand called iC7. These products represent a new generation of AC drives which put intelligence, cyber security, and data analytics in focus. This means that the AC drives now are paving the way for some of the technologies of the future, which we have been waiting for. Such as for example uptake in Industrial Internet of Things, Industry 4.0 and eventually smart cities. In addition, the AC drives are developed for robotic assembly ensuring the highest possible production quality. In our innovation, we also use digital technology to bring speed into R&D, for example by using simulation and 3D printing to reduce the time-to-market of new products. The number of 3D printed parts has increased significantly – from only a few hundred 4 years ago to 125,000 by the end of 2020. In Danfoss, we have now trained more than 500 employees in the use of 3D printing – and an identical number in modelling and simulation. 23/138 Zero emissions and low noise Powered by Danfoss, a new electric ferry will be breaking the waves from September 2021. The new ferry will sail in the UNESCO World Heritage waters between the town of Esbjerg and the Fanoe island in the southern part of the North Sea, Denmark. The ferry will be propelled by two 375kW electric motors from Danfoss Editron; one in the bow and one at the stern. The two propulsion systems run independently and are controlled by AC-drives from Danfoss Drives. The future holds big potential to operate shorter routes by electric ferries. Visit danfoss.com Check out danfoss.com and see how Danfoss will help make it happen Danfoss Annual Report 2020Smart factories across Danfoss Danfoss smart factories use a lot of robots. Human operators are supplied with components by autonomous robot vehicles and use intelligent bluetooth-connected tools, which automatically detect if an assembly process is being incorrectly performed. The outcome is significantly higher productivity and customer satisfaction, and in many cases also improved employee safety. Danfoss at a glance Our business Financial performance Governance Financial Statements Lean & Agile Continuous improvement in supply chain performance – safety, quality, delivery and cost To create increased competitive advantage and operational excellence, we stay focused on being lean and agile – harvesting the potential of digital technologies and fighting unnecessary complexity to be the best in the markets we serve within safety, quality, delivery, and cost. We are building a flexible supply chain that reacts fast to the needs of the customer, leading to higher customer as well as employee satisfaction. Key is a strong IT infrastructure and smart factories across Danfoss. Furthermore, we are improving the digital customer experience with better end-to-end processes between our supply chain and our customers. This is enabled by our new IT platform, One ERP (Enterprise Resource Planning), in combination with the global product store at our corporate website, www.danfoss.com. One ERP is a fundamental part of Danfoss’ digital transformation and is implemented via several releases, each covering a specific part of the Danfoss organization. In 2020, two One ERP releases were finalized, now covering 35% of Group sales. 24/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Our foundation Meet Ina, Gina and Rikke Success is driven by our people. We sharpen our focus to keep momentum, safeguard our employees’ wellbeing, and continuously push the boundaries of people development Our Foundation is our high-performing diverse teams. Furthermore, we strongly believe that taking care of our people and our working environment, where everyone feels engaged, respected, and excited about their work, is essential for Danfoss' growth journey. While growing our business, we want to maintain agility and speed – that is why we have “Our Behaviors”. Our behaviors build on our DNA, our legacy and values, providing clear direction and empowering our team members to make decisions to serve our customers and other stakeholders with speed and quality. In 2020, we announced the acquisition of the Eaton Hydraulics business, which will add approximately 10,000 new team members. We are focused on engaging and motivating people to become part of the Danfoss family and ensure a smooth and successful integration, so we can drive our Going Great strategy together. In 2020, under the special circumstances of COVID-19, we maintained an unwavering commitment for the health and safety of our colleagues and sharpened our focus to keep the growth momentum. The adaptable mindset of our teams as well as their resilience, innovation, and huge engagement show the strong commitment that our employees have to Danfoss. This helped us navigate the COVID-19 situation in a successful way. We thank all our employees for the strong passion they have shown. 25/138 “My interest in working for Danfoss has only increased over the years since I started. It is very clear for me that you have the opportunity to develop yourself and to expand your knowledge,” says Process Deployment Lead Ina Kjær Huntley. Meet her, Senior Director Gina Dyrvig Mentz, and Vice President Rikke Vesterbæk in the video. They all started their careers in Danfoss' Postgraduate Program and have accelerated from there. Play video Watch them explain why in this video Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Ensuring step-change in diversity Danfoss has set a clear target of increasing the share of female leaders from 20% to 30% by 2025. To support our journey, we have introduced a female mentoring program, headed by CEO Kim Fausing, who is also the mentor of several female talents. We also continued to run the “GET to mentor” program, launched in 2019. The top talents partner with our Group Executive Team (GET) to be challenged and empowered in making meaningful cross-business career choices. In addition, Danfoss teamed up with INSEAD Business School to support our top talents. The program focused, among other things, on leadership in times of digitalization and innovation. In 2021, we expect to invite leaders from the top 250 positions at Danfoss to participate in the program. We are committed to fostering an inclusive environment which our high-performing diverse teams can thrive in. In 2020, we introduced the formal role of Head of Diversity and Inclusion with the main task of driving initiatives more cohesively and supporting the organization in identifying barriers to inclusion and recommending actions and processes to help remove them. Read more details about our targets, efforts, and progress in the Sustainability Report 2020 at danfoss.com (https:// files.danfoss.com/download/CorporateCommunication/ Sustainability/Danfoss-Sustainability-Report-2020.pdf ). 26/138 More female leaders Danfoss wants more diversity. A part of this is getting more females into leadership positions. Our target is that 25% of our leaders should be female in 2022 and 30% in 2025. A recent status showed that several of our regions are leading the way, being very close to the target. The gender agenda is not the only area of focus in Danfoss. We are working towards a diverse representation in every team. We define Diversity & Inclusion in terms of five dimensions: generations, gender, nationalities, various backgrounds, and individual characteristics. Payal Shah, Head of Strategic Customer Excellence in Danfoss Drives, says: “It is not about men being better than women or women being better than men. It is about everybody being given a fair chance to reach their full potential.” Play video Meet Payal Shah, one of our female leaders at Danfoss, in this video Danfoss Annual Report 2020 Danfoss at a glance Our business Financial performance Governance Financial Statements 27/138 Danfoss Annual Report 2020Financial performance Financial performance 2020 impacted by COVID-19 Financial highlights Financial review Financial highlights, quarterly Business segments 29 30 31 34 35 28/138 New – ergonomic solution Technology advancements shape the way users expect to interact with machines, including those at a work site. As machines get more complex, their controls must become more intuitive and easier to use. Improving the operator experience is a small step with a big impact. Plus, it is made simple by Danfoss technologies. Danfoss Annual Report 20202020 Impacted by COVID-19 Danfoss at a glance Our business Financial performance Governance Financial Statements 2020 impacted by COVID-19 Steering through the COVID-19 pandemic, Danfoss’ key priorities are to keep our people safe, continue to serve our customers and collaborate closely with our suppliers. Furthermore, we keep our people on board to the extent possible, while flexing our costs to development in the market. Handling COVID-19 During Q1 and especially Q2 in 2020, the COVID-19 pandemic escalated rapidly with the situation varying from country to country, leading to a significant decline in sales. In the second half of 2020, we have seen recovery month by month. Q3 was better than Q2, and Q4 improved even more and was on level with the previous year. We have actively monitored the COVID-19 development and the related risks during the year. Cost flexibility measures to safeguard profitability were implemented. Customers' credit risk as well as trade receivables and inventory development have been monitored. Overall, COVID-19 has not impacted the estimates applied in the annual accounts. Our global operations have been functioning throughout 2020, and we have done our utmost to protect our employees across the world and to maintain world-class service to our customers. Danfoss has set up crisis teams on Group, regional, country and site levels of the organization, tasked with limiting the risk of infection, safeguarding business continuity and ensuring that our business can continue 29/138 to operate. Numerous steps have been taken to address the situation, and multiple precautionary procedures and processes are in place to handle COVID-19, while adhering to guidelines and regulations from local authorities. Staying connected globally The COVID-19 situation with social distancing has shown us that operating digitally is more relevant than ever. We have seen a rapid adoption of digital tools to communicate, coordinate, and serve our customers. As a global company, we operate in many different digitally connected geographical locations, and Danfoss employees are used to working across borders on a daily basis. In 2020, we launched Danfoss’s first-ever fully digital and live event experience, “Cooling United Live”, with the purpose of fostering professional development and relationships. Cooling United Live served both as a learning forum and a technology exhibition, designed specifically for heating, ventilation, air conditioning and refrigeration (HVAC-R) audiences. More than 5,500 cooling professionals signed up, and there was an opportunity to engage in local languages in post-event conversations. Green restart Across the world, governments are working on recovery plans to reboot the economies with green stimulus packages, and Danfoss’ solutions can help in advancing energy- efficiency, electrification and infrastructure investments. Danfoss controls COVID-fighting robot A robot developed by the French company Shark Robotics is now fighting COVID-19. It disinfects areas such as shipping warehouses, food plants, restaurants, and public buildings in France and other European countries. The robot's name is Sanitizing Rhyno Protect. It disinfects up to 20,000 square meters in three hours – faster than a team of human cleaners. The robot is controlled with a wireless Danfoss remote-control solution. We are proud to help Shark Robotics combat COVID-19. Play video Read full story and see the video Danfoss Annual Report 2020Financial highlights s. 30 Danfoss at a glance Our business Financial performance Governance Financial Statements Financial highlights EURm EURm EURm EURm EURm 2020 2018 2016 2019 2017 Profit and loss account Net sales EBITDA before OOI/E EBITDA EBITA before OOI/E EBITA EBIT Financial items, net Profit before tax Net profit Financial ratios Local currency growth (%) EBITDA before OOI/E margin (%) EBITDA margin (%) EBITA before OOI/E margin (%) EBITA margin (%) EBIT margin (%) 5,271 838 811 665 646 572 -44 529 394 4 15.9 15.4 12.6 12.3 10.9 5,827 923 882 758 714 645 -49 596 445 12 15.8 15.1 13.0 12.2 11.1 6,098 929 926 758 724 648 -45 603 463 7 15.2 15.2 12.4 11.9 10.6 6,285 1,028 1,026 778 771 695 -33 662 502 1 16.4 16.3 12.4 12.3 11.1 5,828 1,008 954 742 723 625 -48 577 435 -6 17.3 16.4 12.7 12.4 10.7 DKKm DKKm 2020 2019 46,926 7,673 7,663 5,807 5,757 5,185 -243 4,942 3,746 1 16.4 16.3 12.4 12.3 11.1 43,445 7,516 7,111 5,532 5,394 4,659 -359 4,300 3,243 -6 17.3 16.4 12.7 12.4 10.7 Key figures, financial ratios and below highlighted keyfigures are calculated as defined in Note 27 on page 104. EBIT: Operating profit. EBITA: Operating profit (EBIT) before profit from associates & joint ventures and amortization, gains and losses related to acquisitions and divestments. EBITDA: Operating profit (EBIT) before depreciation, amortization, impairment and profit from associates & joint ventures. OOI/E: Other operating income and expenses. Conversion factor between DKK/EUR: Profit and loss account and cash flow statement: 0.1342 (2019: 0.1339). Balance sheet: 0.1344 (2019: 0.1338). 30/138 Balance sheet Total non-current assets Total assets Total shareholders’ equity Net interest-bearing debt Cash flow statement Cash flow from operating activities Cash flow from investing activities Acquisition of intangible assets Acquisition of/Proceeds from disposal of property, plant and equipment Acquisition of/Proceeds from disposal of subsidiaries and activities Acquisition(-) and sale of other investments, etc. Free operating cash flow Free operating cash flow after financial items and tax Free cash flow Cash flow from financing activities Financial ratios Return on invested capital ROIC (%) Return on invested capital after tax ROIC (%) Return on equity (%) Equity ratio (%) Leverage ratio (%) Net interest-bearing debt to EBITDA ratio Dividend pay-out ratio (%) Dividend per 100 DKK share EURm 2016 EURm 2017 EURm 2018 EURm EURm 2020 2019 DKKm DKKm 2020 2019 3,788 5,457 2,325 1,284 693 -494 -32 3,883 5,583 2,569 1,050 742 -405 -64 3,886 5,760 2,654 962 673 -227 -64 4,217 6,096 2,933 1,048 789 -407 -52 4,106 6,412 3,184 537 800 -242 -44 31,509 45,549 21,917 7,832 30,555 47,714 23,691 3,996 5,891 -3,039 -391 5,967 -1,806 -322 -194 -217 -238 -252 -187 -1,879 -1,395 -251 -103 88 -140 0 -1,045 -3 -17 631 455 196 -175 -21 627 441 334 -373 -13 564 359 443 -424 37 634 463 323 -322 -11 709 493 497 -54 276 4,732 3,455 2,410 -2,408 -86 5,283 3,677 3,705 -406 16.3 17.8 17.9 18.3 16.1 18.3 16.1 12.0 17.2 42.6 55.2 1.6 17.0 6.7 13.0 17.3 46.0 40.9 1.2 18.1 8.1 13.4 17.0 46.1 36.2 1.0 17.4 8.1 13.4 17.0 48.1 35.7 1.0 16.0 8.1 11.9 13.1 49.7 16.9 0.6 - - 13.4 17.0 48.1 35.7 1.0 16.0 60.2 11.9 13.1 49.7 16.9 0.6 - - #Classified as Business #Classified as Business Danfoss Annual Report 2020Financial review Danfoss at a glance Our business Financial performance Governance Financial Statements Financial review Danfoss delivered a significantly better financial performance in 2020 than we expected at the turn of the first half. Sales reached EUR 5,828m, which was 6% below the previous year in local currency. As a result of the lower topline, EBITA was 6% below the prior-year level, but with an EBITA margin of 12.4% versus 12.3%. Danfoss delivered a record cash flow and reached a low level of debt. Green, sustainable technology and solutions that save energy and reduce emissions as well as continued investments in infrastructure have gained momentum, as they translate into the strengthened global focus on climate change and green transition. This, combined with continued momentum in the global megatrends, such as electrification, digitalization and urbanization, contribute to making Danfoss technologies and solutions more relevant than ever – confirming that Danfoss’ flexible business model with a diverse business portfolio shows resilience and remains our strength even in times of uncertainty. In 2020, we have managed to protect our key strategic initiatives. To strengthen our leading positions, we continued to invest in the future, e.g. by preparing the acquisition and integration of Eaton Hydraulics; by merging the Danfoss Cooling and Danfoss Heating segments into the new Climate Solutions segment; and though our targeted efforts to accelerate future growth in our developing markets. Furthermore, we have strong momentum in building our digital offerings and a leading position in electrification. We also continue to develop our people and talent to strengthen our core businesses. Sales Sales were EUR 5,828m (2019: 6,285m), which was 457m below the previous year. The reported growth was -7% after a negative currency impact of -1%. Growth in local currency was -6%. The COVID-19 pandemic created increased uncertainty and continued volatility in our global markets, especially in the first half of 2020. During the second half of the year, Danfoss saw a gradual recovery in sales, resulting in Q4 sales being at level with the previous year. Despite the pandemic, we continued to see good growth opportunities for our technologies and solutions that play a key role in the green transition towards lower CO2 emissions and more electrification. We continue to see growth within electrification of off-highway vehicles, electric-vehicle drivetrains, energy-effcient compressor technologies for cooling, industrial refrigeration, and solutions for renewables, such as wind and solar, for district energy and for buildings, such as floor heating. Danfoss Power Solutions and Danfoss Climate Solutions saw a gradual recovery in the second half of 2020, ending the year with Q4 in positive. Danfoss Drives also saw a growing order intake towards the end of the year. The pandemic was very present across most regions. On the positive side, China grew strongly with record sales. In Q1, China was the first country to be hit by COVID-19 but saw recovery throughout the rest of the year. 31/138 Sales EURbn 7.5 6.0 4.5 3.0 1.5 0.0 2016 2017 2018 2019 2020 Sales split by segments 23% 34% 43% Danfoss Power Solutions Danfoss Climate Solutions Danfoss Drives Sales split by regions 2% 5% 24% 37% 23% 9% Western Europe Eastern Europe North America Asia-Pacific Latin America Africa-Middle East Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements The non-current interest-bearing debt maturing after more than 12 months amounted to EUR 1,103m (2019: 1,093m), corresponding to 94% (2019: 93%) of the total interest- bearing debt. At year-end, the Group had unutilized and long-term committed credit facilities of EUR 1.5bn (2019: 1.1bn) in addition to cash and cash equivalents and ordinary operating credits. At the end of 2020, Danfoss’ credit rating assigned by Standard & Poor’s was “BBB/A2 with a negative outlook”. See Note 11, page 78, for more information. Cash flow Ensuring a strong cash performance remains a key priority for Danfoss to finance our M&A activities, digital transformation and service interest-bearing debt. The free operating cash flow increased 12% to EUR 709m (2019: 634m), driven by a positive operational performance and lower net working capital. Cash flow from investing activities amounted to EUR -242m (2019: -407m), due to reduced M&A activity and lower investments in machinery and equipment. We continued a high level of investments in our digital transformation. The free operating cash flow after financial items and tax (before M&A) increased to EUR 493m (2019: 463m). This is a record cash flow for the Group and it confirms the cash generating capability of our business model. Earnings To counter the lower sales in the first part of the year, Danfoss took fast action to lower the cost base and CAPEX spend. This included reduced discretionary spend, organizational- wide travel restrictions and salary-reduction programs. This demonstrated our flexible operating model. Throughout the year, Danfoss has continued with strategic investments in innovation, digital transformation, and growth initiatives to fuel future growth. EBITA amounted to EUR 723m (2019: 771m), which was 6% below the previous year, mainly due to the lower sales and one-off transaction costs related to the acquisition of Eaton Hydraulics. The EBITA margin increased to 12.4% (2019: 12.3%), mainly driven by procurement savings, continued traction in managing pricing and mix, and productivity improvements in factories. In combination, fixed expenses were adjusted to the lower sales. Profit before tax amounted to EUR 577m (2019: 662m), leading to net profit of EUR 435m (2019: 502m), which is -13% below the previous year. The effective tax rate for 2020 was 24.6% (2019: 24.2%). Assets and liabilities Total assets increased 5% to EUR 6,412m (2019: 6,096m), mainly due to a strong cash position, see page 58 for more information. Equity increased 9% to EUR 3,184m (2019: 2,933m), mainly influenced by the profits of the year. Consequently, the equity ratio, calculated as equity relative to total assets, was 49.7% (2019: 48.1%). The return on equity was 13.1% (2019: 17.0%). Net interest-bearing debt amounted to EUR 537m (2019: 1,048m), leading to a net interest-bearing debt to EBITDA ratio of 0.6 (2019: 1.0). 32/138 EBITA EURm 900 720 540 360 180 0 2016 2017 2018 2019 2020 % 15 12 9 6 3 0 EBITA EBITA margin Net interest-bearing debt (NIBD) EURbn 1.2 0.9 0.6 0.3 0.0 5 4 3 2 1 0 2016 2017 2018 2019 2020 NIBD NIBD ratio Cash flow EURm 750 600 450 300 150 0 2016 2017 2018 2019 2020 Free operating cash flow Free operating cashflow after financial items and tax Free cash flow Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Employees In 2020, the number of employees was 27,491 (2019: 27,871). Events after the balance sheet date On January 14, 2021, Danfoss announced the acquisition of the remaining 25% ownership share in Artemis Intelligent Power Ltd (AIP). AIP is the R&D and engineering company based in Edinburgh, Scotland, specializing in hydraulic system development. On January 27, 2021, Danfoss announced the preparation of a divestment to meet regulatory requirements concerning fair competitive levels in the market. Danfoss is required to create and divest the stand-alone business unit, White Drive Motors & Steering. The new business unit will include operations and products at three Danfoss locations in Hopkinsville, Kentucky, US.; Wroclaw, Poland; and Parchim, Germany; in addition to three product lines from Eaton Hydraulics. All together this includes approximately 800 employees. The divestment is a prerequisite to close the acquisition of Eaton Hydraulics. Acquisition On January 21, 2020, Danfoss announced the agreement to acquire Eaton’s hydraulics business for a cash purchase price of 3.3 billion USD (approximately 3.0 billion EUR). The transaction is subject to customary closing conditions and regulatory approvals. We are expecting to close end of Q1 or during Q2. The acquisition will be fully financed with debt. An acquisition credit facility was established with a group of Danfoss’ core banks and Danfoss intends to refinance a part of this credit facility in the debt-capital markets. Innovation Ensuring a high level of investments in innovation remains a key priority to drive the long-term sustainable growth for Danfoss. The innovation activities were concentrated around digitalizing and electrifying our solutions to create even more value for our customers. The research and development expense amounted to EUR 267m (2019: 272m), corresponding to 4.6% of sales (2019: 4.3%). See Income statement on page 56. During 2020, Danfoss filed 136 (2019: 121) new patent applications. During 2020, 708 (2019: 678) patents were granted to the Group. At year end, Danfoss had a total of 1,567 (2019: 1,558) patent families. Innovation EURm 300 240 180 120 60 0 2016 2017 2018 2019 2020 % 5 4 3 2 1 0 R&D spend R&D spend ratio 33/138 Danfoss Annual Report 2020Financial highlights, quarterly Danfoss at a glance Our business Financial performance Governance Financial Statements Financial highlights, quarterly EURm Profit and loss account Net sales EBITDA before OOI/E EBITDA EBITA before OOI/E EBITA EBIT Financial items, net Profit before tax Net profit Balance sheet Total non-current assets Total assets Total shareholders’ equity Net interest-bearing debt Cash flow statement (YTD) Cash flow from operating activities Cash flow from investing activities Acquisition of intangible assets Acquisition of/Proceeds from disposal of property, plant and equipment Acquisition of/Proceeds from disposal of subsidiaries and activities Acquisition(-) and sale of other investments, etc. Free operating cash flow Free operating cash flow after financial items and tax Free cash flow Cash flow from financing activities Financial ratios Local currency growth (%) EBITDA before OOI/E margin (%) EBITDA margin (%) EBITA before OOI/E margin (%) EBITA margin (%) EBIT margin (%) Equity ratio (%) Leverage ratio (%) Net interest-bearing debt to EBITDA ratio Number of employees The same definitions and explanations apply as stated on page 30. 34/138 Q1 2019 Q2 2019 Q3 2019 Q4 2019 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 2020 1,563 241 240 182 181 160 -8 152 110 4,056 6,181 2,794 1,181 -9 -53 -12 -36 -11 6 1 -65 -75 43 3 15.4 15.3 11.6 11.6 10.3 45.2 42.3 1.3 1,603 266 272 205 203 190 -9 181 132 4,088 6,138 2,764 1,318 115 -157 -24 -91 -45 3 74 -24 -69 24 0 16.6 16.9 12.8 12.6 11.9 45.0 47.7 1.4 1,589 282 282 217 219 198 -10 187 141 4,235 6,299 2,938 1,252 376 -324 -39 -143 -140 -2 284 148 8 -72 2 17.7 17.7 13.7 13.8 12.4 46.6 42.6 1.3 1,530 239 232 174 168 147 -6 142 119 4,217 6,096 2,933 1,048 789 -407 -52 -252 -140 37 634 463 323 -322 -1 15.6 15.2 11.4 11.0 9.6 48.1 35.7 1.0 6,285 1,028 1,026 778 771 695 -33 662 502 4,217 6,096 2,933 1,048 789 -407 -52 -252 -140 37 634 463 323 -322 1 16.4 16.3 12.4 12.3 11.1 48.1 35.7 1.0 1,479 215 201 156 143 117 -20 97 71 4,230 6,227 3,011 1,125 4 -49 -11 -38 0 0 11 -58 -57 -25 -6 14.6 13.6 10.5 9.7 7.9 48.4 37.4 1.1 1,385 242 223 168 166 135 -8 127 93 4,184 6,281 3,124 971 165 -98 -23 -76 0 1 133 33 37 28 -14 17.5 16.1 12.1 12.0 9.8 49.7 31.1 1.0 1,447 279 263 212 209 183 -14 168 123 4,107 6,228 3,136 850 349 -139 -32 -107 0 0 309 161 165 -9 -7 19.3 18.2 14.7 14.4 12.6 50.3 27.1 0.9 1,517 272 267 206 205 190 -6 185 148 4,106 6,412 3,184 537 800 -242 -44 -187 0 -11 709 493 497 -54 2 17.9 17.6 13.6 13.6 12.5 49.7 16.9 0.6 5,828 1,008 954 742 723 625 -48 577 435 4,106 6,412 3,184 537 800 -242 -44 -187 0 -11 709 493 497 -54 -6 17.3 16.4 12.7 12.4 10.7 49.7 16.9 0.6 27,704 27,918 28,130 27,871 27,871 27,792 27,539 27,376 27,491 27,491 #Classified as Business Danfoss Annual Report 2020Power Solutions Danfoss at a glance Our business Financial performance Governance Financial Statements Danfoss Power Solutions Sales EBITA EBITA margin 2.0bn (2019: EUR 2.2bn) 329m (2019: EUR 391) 16.8% (2019: 17.8%)) 35/138 Development in 2020 Danfoss Power Solutions had sales below the previous year due to the pandemic that triggered customer restraint. Despite the pandemic, parts of the business grew strongly, e.g., Editron solutions for electrifying off-highway vehicles and eSteering. Furthermore, China saw strong growth. Overall, sales recovered strongly during the second half of 2020, ending the year in growth in Q4. To counter the lower sales, the segment reacted fast with measures to safeguard the profitability. 7,609 employees worldwide 28 factories in 13 countries 3 Application Development Centers in the USA, China and Denmark 3 top markets: North America, Europe and China Play video Danfoss Power Solutions Segment Danfoss Annual Report 2020Disruptive new technology launched Digital Displacement Danfoss has released the world’s first Digital Displacement product to the market, a key milestone in disrupting how mobile and stationary machines are designed and controlled. The advanced digital control system and novel core pump design deliver a step change in energy savings and controllability relative to conventional products. In mobile construction equipment, for example, these benefits translate directly into new-to-world levels of productivity and fuel savings, up to 50% in some applications. These game changing benefits have quickly been recognized by several of our global OEM customers as truly revolutionary in the field of hydraulics. Danfoss at a glance Our business Financial performance Governance Financial Statements Danfoss Power Solutions Danfoss Power Solutions is a global technology leader in manufacturing and supplying of hydraulic, electronic, and electric components and solutions for on- and off-highway vehicles and equipment. Around the world, mobile-equipment manufacturers rely on our expertise for the most innovative propulsion, control, work-function, steering and electrification solutions. In partnership with our customers, we provide high-performance components and solutions with great value for a broad range of mobile equipment applications in the agriculture, construction and road- building, material handling and specialty markets. These applications include wheel loaders, tractors, harvesters, cranes, electric and hybrid ferries, trucks and buses, and much more. Transformational acquisition The Eaton Hydraulics acquisition is the biggest acquisition in the history of Danfoss. We will merge two of the strongest companies in hydraulics, creating a global leader in the mobile- and industrial hydraulics markets. Together, we will have the broadest offering of products, industry-leading innovation power, robust distribution channels and tremendous geographic reach. 36/138 Products and solutions Engineered hydraulic, electric and electronic components optimized for total machine management: • Hydrostatic pumps and motors • Hydraulic and electro-hydraulic proportional valves • Electronic components and software • Electric motors, converters and energy storage • Orbital motors • Gear pumps and motors • Steering solutions • Autonomous solutions • Position sensors and controls • Remote control solutions • • • • • • Integrated circuit solutions PLUS+1® software platform Digital service tools Electric drivetrains including gear box Fuel-cell compressor systems Digital Displacement pumps Providing power to transform the world in an energy-efficient and sustainable way Our application knowhow together with innovation strength and global footprint create a strong and reliable technology partner for our customers. Through our applications expertise, we enable our customers to improve efficiency and productivity of their machines, increase critical up-time of their equipment, shorten the time-to-market development cycles and therefore enable our customers to better serve their end customers. Danfoss Annual Report 2020Danfoss Climate Solutions Danfoss at a glance Our business Financial performance Governance Financial Statements Danfoss Climate Solutions Sales EBITA EBITA margin 2.5bn (2019: EUR 2.6bn) 410m (2019: EUR 400m) 16.4% (2019: 15.3%) 37/138 Development in 2020 Danfoss Climate Solutions had sales below the previous year, due to different growth dynamics across the business and regions, and customers postponing their purchasing of heating, air conditioning and refrigeration equipment and solutions due to the pandemic. Climate Solutions had a strong Q1 followed by a challenging Q2 and then saw a strong rebound in the second half of 2020 with parts of the business developing against the negative trend. In 2020, sales grew in China, and parts of Europe were back in growth in Q4. Profitability was better than the previous year. 10,530 employees worldwide 34 factories in 15 countries 4 Application Development Centers in USA, China, India and Denmark 3 top markets: Europe, China and North America Play video This is where the transformation of our food supply starts. Danfoss Annual Report 2020A new front runner in smart heating solutions in 2020 Danfoss Ally™ smart home heating Our new Danfoss Ally™ App allows users to control, schedule, and monitor home heating – from anywhere and at any time. The Danfoss Ally™ is cloud based and offers full control of radiator and hydronic floor heating from anywhere. With everything in control, users enjoy secure convenience and a perfect indoor climate. Danfoss at a glance Our business Financial performance Governance Financial Statements Danfoss Climate Solutions Products and solutions • Compressors, including the pioneering oil-free Turbocor® • Condensing units • Valves, controllers, and complete electronic systems • Digital cloud solutions, such as Alsense™, Prosa IoT, Turbocor Cloud Service • Sensor technologies • High-pressure pumps • Heat exchangers • Radiator thermostats & smart heating solutions • Electric heating and hydronic underfloor heating • Hydronic balancing and controls including digital actuators • District-energy controls, heat meters, substations, and sofware services • Burner components We combine heating and cooling applications to ensure excess heat from industry, data centers and supermarkets is recovered to heat buildings to save energy and less investments in new heat generation is needed. We also develop innovative energy storage solutions, such as the connected supermarket and the Danfoss Smart Store. As a market leader within cooling and heating, Danfoss Climate Solutions delivers sustainable and energy-efficient solutions for industry, the built environment, and the entire food chain. Our technologies and solutions support the transition to a decarbonized economy by providing the energy-efficient solutions needed to reduce food loss and make our cities cleaner. We have an unmatched value proposition for our customers and partners: • Strong portfolio with leading positions as number 1 or 2 in the markets for our advanced components, solutions and services Integrated energy-efficient heating and cooling solutions with proven and unmatched experience in climate technologies and a broad product portfolio available today • • Global reach and presence in all relevant distribution channels. Danfoss Cooling and Danfoss Heating have joined forces into one strong segment focusing on the green agenda: Danfoss Climate Solutions. We will continue to develop our technologies to deliver the innovative energy-efficient solutions which are needed to reduce global emissions from buildings and mitigate climate change. 38/138 Danfoss Annual Report 2020 Drives Danfoss at a glance Our business Financial performance Governance Financial Statements Danfoss Drives Sales EBITA EBITA margin 1.4bn (2019: EUR 1.5bn) 186m (2019: EUR 188m) 13.8% (2019: 12.8%) 39/138 Development in 2020 Danfoss Drives had sales below the previous year. Danfoss Drives was driving growth in China and most regions were recovering during the second half of the year. Despite the pandemic, Danfoss Silicon Power grew strongly, driven by strong sales to renewables, such as wind and solar, and the start of module deliveries for electric-vehicle drivetrains. Towards the end of the year, Danfoss Silicon Power even recorded a new all-time sales record. In 2020, profitability was better than the previous year. 4,438 employees worldwide 10 factories in 7 countries 3 Application Development Centers in China, Singapore and the Netherlands 3 top markets: Europe, China and North America Play video We are driven by drives Danfoss Annual Report 2020Chosen technology partner for the world's most climate- friendly ferry in 2020 Best energy efficiency and lowest emissions possible The super-low emissions and noise-free car and passenger ferry, Aurora Botnia, will be completed in spring 2021 to cruise between Vaasa, Finland, and Umeå, Sweden. It will be the world's most climate-friendly ferry in its class. The ferry’s propulsion-control systems as well as the air-conditioning, cooling and pumping systems use iC7 as well as VACON® 100 drives and converters. The drives onboard the vessel will control all electric motors and grid- related functionality. This will provide the best energy efficiency and lowest emissions possible. Danfoss at a glance Our business Financial performance Governance Financial Statements Danfoss Drives Danfoss Drives is a global leader in variable speed control, having the world’s largest installed base of AC drives. Products and solutions AC drives enable optimal speed control and power management: • Low- and medium-voltage AC drives as well as motion drives • Stacks and power modules • Digital tools and services, such as DrivePro® and MyDrive® The solutions are used to provide optimal operation of pumps, fans, chillers, conveyors, electric vehicles, hybrid systems and power conversion. The portfolio of high-quality, application- optimized VACON® and VLT® products maximizes process performance, saves energy and minimizes emissions. Innovating technology, which tackles climate change and helps the world of tomorrow go green and become more sustainable is high on our agenda. With decades of industry-dedicated experience in meeting the customers’ specialized challenges, we create and share solutions, which deliver better process precision and superior energy efficiency for electric-motor operations and power- management solutions. Danfoss Silicon Power – a technology- leader in customized power modules for automotive, solar, wind and industrial applications – is an independent business and part of the Danfoss Drives segment, enabling electrification to change our world. 40/138 Danfoss Annual Report 2020Governance Governance Risk management and compliance 42 Corporate Governance Board of Directors Group Executive Team 44 46 49 41/138 Brand-new moves Narrow spaces are no longer an issue with MultiAxis-Steer™. Unleash the full maneuverability with electrohydraulic all-wheel steering from Danfoss, for increased productivity and improved operator comfort. Danfoss Annual Report 2020Risk management Danfoss at a glance Our business Financial performance Governance Financial Statements Risk management and compliance We manage risks and opportunities effectively to grow and stay profitable in increasingly complex business environments. Danfoss takes a systematic and holistic approach to managing risk. Maintaining efficient risk management is a cornerstone as well as a prerequisite for running a profitable business and acting in a rapid and flexible way when conditions change. Risk governance Overall, the Board of Directors performs risk oversight and the Audit Committee assesses the effectiveness of the Risk management process. The Group Executive Team is responsible for executing risk management, ensuring that policies and processes are effective at all relevant levels. Responsibility for the day-to-day risk management activities lies with the respective business units and Group functions. Compliance We support transparent business practice and recognize our responsibility as a global organization. Working together with governments, NGOs, and other global enterprises, Danfoss actively participates in creating a level and fair playing field. To walk the talk and minimize the risk of non-compliance, we have developed and implemented compliance programs in many areas. Compliance programs Danfoss has compliance programs in the following areas: Anti-Corruption, Business Ethics, Data Privacy, Export Control and Fair Competition. Our systemized compliance programs contain clear ownership, policy setting, operational procedures as well as recurring training and awareness activities. 42/138 Risk management process Risk management takes place at all managerial levels, which includes risk identification, assessment, treatment and monitoring supported by documentation, communication and reporting of risks. Risk identification Risks are identified using Danfoss’ risk-identification and analysis tools on a regular basis. Risk monitoring Risk reviews consider current information about identified risks and measure the performance of the risk- management process. Risk assessment Risks are assessed according to the company- wide risk-assessment guidelines. Risk documentation Standardized documentation in a risk repository ensures an effective risk monitoring. Risk communication Takes place top-down and bottom-up in the organization creating awareness and can trigger a potential escalation. Risk reporting Takes place on an ongoing basis between the various managerial levels, for example at quarterly Business Review Meetings and at quarterly Risk Committee meetings. In addition, the Group Risk Management function annually prepares a report on the most significant risks, which is submitted to the Board of Directors and the Audit Committee. Both these forums provide overall supervision of the risk-management process, and monitor selected group risks and potential new risks.. Risk treatment Based on the result of the risk-assessment process and the corresponding risk acceptance level at Danfoss, risks are either accepted, avoided, mitigated, or transferred. Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements In 2020, Danfoss updated its compliance trainings in the areas of Anti-Corruption, Business Ethics and Fair Competition to reflect recent developments in legislation and best-practice approaches. We maintain a high focus on data-privacy processes and compliance with data privacy regulation. Based on the Danfoss Binding Corporate Rules, approved by the Danish data-protection authorities, we follow a Data Privacy Handbook, conduct and participate in trainings, and follow other requirements of data-privacy legislations. Furthermore, the organization keeps its focus on Export Control including sanctions, countries, business partners and product reviews. Finally, we have defined and implemented rules and guidance to support anti-moneylaundering legislation and trained employees, respectively. legislation. The Ethics Hotline is also serves as channel for data-privacy complaints. In 2020, a total number of 43 reports were managed by the Ethics Hotline. Corrective actions, including disciplinary action, were taken for the allegations, and none of the reports have had a material impact on Danfoss. Risk overview Like its industry peers, Danfoss is exposed to risks. No single risk can threaten the existence of Danfoss – now or in the future – rather, the following external conditions generally apply: • Global market conditions, including a sustained stronger focus on energy efficiency, sustainability and infrastructure • The five global megatrends that affect Danfoss, our technologies and the way we do business Compliance hotlines Our Ethics Hotline is our whistleblower hotline that enables employees and business partners to anonymously report any concern they might have concerning internal standards and • Fair and equal access to markets • Global economic growth Specific risk areas Pandemics Preparation and integration of new acquisitions Risk The risk that a pandemic, such as COVID-19, creates global volatility and uncertainty that could affect Danfoss employees’ health and safety as well as Danfoss’ supply chain and markets. Risks associated with the acquisition of Eaton Hydraulics, including receiving the regulatory approvals as well as the successful integration of the newly acquired business. Danfoss has set up crisis teams on Group, regional, country and site levels of the organization, tasked with limiting the risk of infection, safeguarding business continuity and ensuring that our business can continue to operate. The link to Danfoss regions through our regional presidents ensures that measures taken are in agreement with local health authorities and supporting the safety of Danfoss employees. Continuous meetings ensure learning from each other and adapting to the changing reality, supporting the new normal with homeworking if possible and virtual meetings etc. Segments are in close contact with customers and suppliers. Mitigation 43/138 Danfoss has set up a legal team to prepare the work needed to obtain the regulatory approvals. The subsequent integration of the business is being prepared. We are applying a structured approach to minimize any disruption to the business and our customers. • Developments in key markets and cyclical industries • Customer relations and reputation, including our ability to build business on trust and integrity • Competitive strength and innovation, including the ability to support customers in providing efficient solutions, high product quality and attractive cost levels • Financial sustainability, including our ability to fund new growth and innovation The Group Executive Team has a special focus on two additional risks, which are currently very important due to their nature. These two specific risks are described in the overview below, which does not include financial risks. Financial risks are described in Note 15, page 84-89. For a description of the internal controls and risk-management structure in relation to financial reporting, reference is made to the statutory report on corporate governance, cf. Article 107b of the Danish Financial Statements Act. Danfoss Annual Report 2020 Corporate governance Danfoss at a glance Our business Financial performance Governance Financial Statements Corporate governance This is a summary of Danfoss’ annual statutory report on corporate governance, which serves as our legally required reporting on governance and internal controls, cf. section 107b of the Danish Financial Statements Act. Legislation provides the overall framework for the Group’s governance, but corporate governance determines how the business is managed within this framework. The Group structure supports management values and determines a clear distribution of management responsibilities. These well-defined principles drive the interaction between the Group’s management, the owners, and other stakeholders. The Group’s Articles of Association and a comprehensive set of internal management and control procedures also form part of corporate governance within Danfoss. Management structure Danfoss has a two-tier management system consisting of the Board of Directors and the Group Executive Team, including the CEO and CFO. The Board of Directors sets out the general direction for the company by approving strategies and targets, and the Group Executive Team develops and executes the strategy and handles the day-to-day management. The Board of Directors The Board of Directors consists of eight members and four employee-elected members. Shareholder-elected members of the Board of Directors are elected for the term until 44/138 the following year’s AGM. Pursuant to Danish legislation, employee representatives serve on the Board for four years and may be re-elected. The most recent employee election took place in 2018. The Board of Directors has the overall responsibility for the company’s activities and appoints a Chairman and one or two Vice Chairmen from among its members. The Board of Directors meets at least five times a year and holds extraordinary meetings, when required. All members of the Board of Directors are expected to participate in the meetings. The aggregate competencies of the members of the Board of Directors are regularly assessed to ensure consistency with the Group’s requirements. Audit Committee The entire Board of Directors performs the function of the Audit Committee. The Chairman of the Audit Committee conducts regular meetings with the corporate functions and internal audit outside Board meetings. The committee’s activities and tasks are set out in its rules of procedure. Four meetings were held in 2020. Governance model Shareholders and General meeting Board of Directors Audit Committee Internal Audit Group Executive Team Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Internal audit Danfoss has an internal audit function to carry out independent internal checks. Conclusions are presented directly to the Audit Committee or its Chairman. The internal audit function provides independent and objective audits to ensure: • The Group has a comprehensive set of internal management and control procedures and processes, as well as segregation of duties and functions. This also includes the Group’s IT systems. • The Group follows good administrative practice. The internal audit function performed a series of audits to selected Group companies in 2020. No matters of material importance to the Group’s overall risk management and control management and control environment were detected. Bond program In 2014, Danfoss filed a Euro Medium Term Note Program on the Irish Stock Exchange, and consequently, Danfoss is a Class D company with listed bonds. Danfoss complies with the rules set out in section 107b, subsection 1, no. 6, of the Danish Financial Statements Act applicable to companies with listed bonds, including the exceptions regarding issuers of bonds above EUR 100,000. Shareholders At the end of 2020, Danfoss had 2505 registered shareholders. Approximately three in four shareholders were resident in Denmark. Share capital Danfoss’ share capital amounts to EUR 134m or DKK 997m and is divided into two share classes: Class A shares accounting for EUR 57m or DKK 425m and Class B shares accounting for EUR 78m or DKK 572m. A-shares entitle holders to ten votes for every DKK 100 nominal value of shares held and B-shares entitle holders to one vote for every DKK 100 nominal value of shares held. See more information in Note 11, page 78, and Note 25, page 97. Class A shareholders have a pre-emption right to A-shares in the event of share capital increases. Apart from this, no shares carry special rights. Bitten & Mads Clausen’s Foundation and the Clausen family hold all issued A-shares and several B-shares corresponding to 99.87% of the votes. Share price The price of Danfoss shares is set once a year, based on a valuation prepared by Danske Markets immediately before the AGM is held. The calculation of the share price is based on the financial performance of Danfoss, the Group’s expectations for the upcoming year, its ability to meet expectations, the financial development of several comparable companies and their expectations for the future, as well as general developments in the stock market. In 2020, the price was set at DKK 7,072 per share. Annual General Meeting Danfoss’ Annual General Meeting will be held at the Company’s registered office, on March 26, 2021. The Board of Directors will recommend that no dividend be paid for 2020. Gender composition of the Board of Directors The Danish Financial Statements Act (FSA) requires that corporate entities of a certain size and type report on the gender composition in management. Danfoss aims at a gender composition in the Group's Board of Directors, that reflects that of the rest of the Group, and has a target of having at least one female member of the Board of Directors, who is elected at the Annual General Meeting (AGM). Danfoss met this target in 2020 and is considering the target for 2021 and onwards. In 2020, the Board of Directors had twelve members of which nine were male and three were female, one AGM-elected and two employee-elected. Furthermore, the Board of Directors consists of people with diverse backgrounds, professional skills, nationality, and age. Gender composition targets like that of the Board of Directors have been implemented in the relevant subsidiaries of a certain size and type. Danfoss meets the gender composition target for the Board of Directors of Danfoss Power Solutions ApS, but not of Danfoss Power Electronics A/S (Danfoss Drives), Danfoss International A/S and Sondex A/S, as the composition of the boards did not change during the year. However, Danfoss Power Electronics A/S has a female board member elected by the employees. In these relevant subsidiaries, the gender composition target for the Board of Directors is expected to be met in 2021. Shareholders with more than 5% of share capital Shareholder Bitten & Mads Clausen’s Foundation, Nordborg, Denmark, and its subsidiaries Clausen Controls A/S, Sønderborg, Denmark Henrik Mads Clausen, Lake Forest, USA Shares 48.08% 26.26% 11.04% Votes 86.14% 5.47% 2.31% 45/138 For a detailed description of Danfoss’ position on the recommendations issued by the Committee on Corporate Governance, reference is made to the Statutory Report on Corporate Governance 2020, which is available at danfoss.com > About Danfoss > Corporate governance (https://www.danfoss.com/en/about-danfoss/company/ financials/corporate-governance/) Visit danfoss.com Danfoss Annual Report 2020Board of Directors Danfoss at a glance Our business Financial performance Governance Financial Statements Board of Directors Jørgen M. Clausen Chairman of the Board of Directors Jens Bjerg Sørensen Vice Chairman of the Board of Directors Mads-Peter Clausen Member of the Board of Directors Per Falholt Member of the Board of Directors Born: 1948 Nationality: Danish Appointed: 2009 Born: 1957 Nationality: Danish Appointed: 2020 Considered independent Born: 1976 Nationality: Danish Appointed: 2014 Born: 1958 Nationality: Danish Appointed: 2017 Considered independent Special competencies: Professional experience managing a Danish- based international company and from other board memberships. Other current positions: • Member of the Board of Directors in Fonden Universe Science Park; and miniBOOSTER Hydraulics A/S. • Owner of SaltPower ApS. 46/138 Special competencies: Strong experience within strategy, M&A, portfolio management and business administration. Strong knowledge of management in a global group and the work in a listed company. Special competencies: International experience from executive management positions and strong strategic, organizational and communicative skills. Extensive knowledge of business administration, engineering and board work. Special competencies: Professional experience from Research & Development, product innovation and development of new biotechnologies for products, applications and processes as well as start-up companies. Other current positions: • Senior Director, Oil Free Solutions, Danfoss A/S. Chairman of the Board of miniBOOSTER Hydraulics A/S. • Other current positions: • Chairman of the Board of Directors, Universe Science Park; and DHI Foundation. Board member in Cytovac A/S; Applied Biomemetics; Co-Ro A/S; Lactobio; and LIFE foundation. • • CSO and co-founder of 21stBIO. Other current positions: • • • • Chief Executive Officer (CEO) in the listed company Aktieselskabet Schouw & Co.; Jens Bjerg Sørensen, Datterholding 1 ApS; and Jens Bjerg Sørensen Holding ApS. Chairman of the Board of Directors in Alba Ejendomme A/S; BioMar Group A/S; Borg Automotive A/S F. Salling Holding A/S and F. Salling Invest A/S; GPV International A/S; HydraSpecma A/S; Købmand Herman Sallings Fond; and A. Kirk A/S. Vice Chairman of the Board of Directors in Salling Group A/S; Fibertex Nonwovens A/S and Fibertex Personal Care A/S. Member of the Board of Directors in Per Aarsleff Holding A/S; Købmand Herman Sallings Mindefond; Aida A/S; Ejendomsselskabet FMJ A/S; F.M.J. A/S; and Bitten & Mads Clausens Fond Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Board of Directors Connie Hedegaard Member of the Board of Directors Born: 1960 Nationality: Danish Appointed: 2016 Considered independent Special competencies: Extensive knowledge of climate, environmental and energy challenges on an international level. Expert on global sustainable development and green transition. William Ervin Hoover Jr. Member of the Board of Directors and Chairman of the Audit Committee Born: 1949 Nationality: American Appointed: 2007 Considered independent Special competencies: Professional experience with supply-chain, performance transformation, organizational changes and mergers and acquisitions. Jürgen Reinert Member of the Board of Directors Mika Vehviläinen Member of the Board of Directors Born: 1968 Nationality: German Appointed: 2015 Considered independent Born: 1961 Nationality: Finnish Appointed: 2018 Considered independent Special competencies: International experience with executive management and business administration as well as strong strategic, organizational and communicative skills. Expert within electrical engineering (drives, electric vehicles, renewable energy) and science, and extensive knowledge from other board positions. Special competencies: Professional experience with performance transformation, organizational changes, mergers and acquisitions, and Internet of Things (IoT). Other current positions: • • Chairman of the Board of Directors in ReD Associates Holding A/S. Member of the Board of Directors in Specialist People Foundation and Neopost A/S. Other current positions: • Chief Executive Officer (CEO) in SMA Technology AG. Member of the Board of Kraftelektronik AB. • Other current positions: • President and Chief Executive Officer (CEO) in Cargotec. Other current positions: • Chairman of the Board of Directors in KR Foundation; the green think-tank CONCITO; OECD’s Round Table on Sustainable Development; Berlingske Media (part of de Persgroup); and Aarhus University. Member of the Board of Directors in NORDEX; Cadeler; and Volkswagen’s Sustainability Board. • 47/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Board of Directors Sandra Nørgaard Bertelsen Member of the Board of Directors Marianne Godballe Member of the Board of Directors Lars Grau Member of the Board of Directors Jens Peter Rosendahl Nielsen Member of the Board of Directors Born: 1982 Nationality: Danish Appointed: 2014 Born: 1984 Nationality: Danish Appointed: 2018 Born: 1963 Nationality: Danish Appointed: 2014 Born: 1957 Nationality: Danish Appointed: 2006 Special competencies: Employee-elected member of the Board of Directors. Special competencies: Employee-elected member of the Board of Directors. Special competencies: Employee-elected member of the Board of Directors. Special competencies: Employee-elected member of the Board of Directors. Other current positions: • Senior Design Technician and shop steward, Danfoss A/S, Industrial Automation. Member of the Board of Danfoss Employee Foundation. Chairman of ”TL-klubben”, Danfoss A/S, South Denmark. Secretary General, Junior Chamber International Denmark. • • • Other current positions: • Shop Steward and skilled worker at Danfoss A/S. Member of the Board of Danish El Federal in South Jutland, Denmark. • Other current positions: • Senior Shop Steward and skilled worker at Danfoss Kolding. Chairman of the Board of Danfoss Employee Foundation. Member of the Board of Metal Kolding and LO-Kolding. • • Other current positions: • HR Director, HR Operations North Europe, Danfoss A/S. 48/138 Danfoss Annual Report 2020Group Executive Team Danfoss at a glance Our business Financial performance Governance Financial Statements Group Executive Team Kim Fausing President & CEO Jesper V. Christensen Executive Vice President & CFO Eric Alström Segment President, Danfoss Power Solutions Jürgen Fischer Segment President, Danfoss Climate Solutions Vesa Laisi Segment President, Danfoss Drives Lars Tveen President, Danfoss Developing Regions Born: 1964. Employed at Danfoss since 2007. Born: 1969. Employed at Danfoss since 1993. Born: 1966. Employed at Danfoss since 2012. Born: 1963. Employed at Danfoss since 2008. Born: 1957. Employed at Danfoss since 2014. Born: 1963. Employed at Danfoss since 1989. Registered officer with the Danish Business Authority since 2008. Registered officer with the Danish Business Authority since 2013. Board activities: • Deputy Chairman in the Manufacturing Industry, Denmark. Board member in the Confederation of Danish Industries, Denmark. Board member in Danish Crown A/S, Denmark. • • Board activities: • Deputy Chairman in Hempel A/S, Denmark. Stanford Graduate School of Business, MSx Advisory Board. • Board activities: • Chairman of the Steering Board of EPEE - the European Partnership for Energy and the Environment. TÜV SÜD Germany, Advisory Board. • Board activities: • Board member in Wirepas. Board activities: • Chairman of the Climate Partnership between Government and Industry for the manufacturing industry in Denmark. Deputy Chairman in SMA Solar Technology AG, Germany. Board member in Hilti AG, Liechtenstein; and LafargeHolcim Ltd., Switzerland. • • 49/138 Board activities: • Chairman Project Zero- Foundation, Denmark (local initiative to achieve carbon neutrality by 2029), Denmark. Board member P4G, Partnering for Green Growth and the Global Goals 2030. Board member in SKAKO A/S, Denmark. Board member in The Energy Industry (an association under the Confederation of Danish Industries), Denmark. Board member in Synergi, Denmark. Board member in Green Energy (Grøn Energi), Denmark. • • • • • Danfoss Annual Report 2020Financial Statements Financial Statements Management’s statement Independent Auditor’s Report 51 52 50/138 The world’s largest solar hot water system The solar heating plant in the Danish town Silkeborg is designed to produce 80,000 MWh of heat annually, and at the same time reduce annual CO₂ emissions by 15,700 tonnes. 16 Danfoss VLT®AQUA drives and four Danfoss SONDEX® heat exchangers help ensure that the sun-heat reaches radiators and hot water showers across town – with minimal heat loss. Danfoss Annual Report 2020Management’s statement Danfoss at a glance Our business Financial performance Governance Financial Statements Management’s statement The Board of Directors and the CEO and CFO have today considered and adopted the Annual Report of Danfoss A/S for the financial year January 1 – December 31, 2020. Board of Directors The Annual Report has been prepared in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act. In our opinion, the Consolidated Financial Statements and the Parent Company Financial Statements give a true and fair view of the financial position at December 31, 2020, of the Group and the Parent Company and of the results of the Group and Parent Company operations and cash flows for 2020. In our opinion, the Management’s Review includes a true and fair account of the development in the operations and financial circumstances of the Group and the Parent Company, of the results for the year and of the financial position of the Group and the Parent Company as well as a description of the most significant risks and elements of uncertainty facing the Group and the Parent Company. We recommend that the Annual Report be adopted at the Annual General Meeting. Nordborg, March 4, 2021 CEO and CFO Kim Fausing Jesper V. Christensen 51/138 Jørgen M. Clausen, Chairman Jens Bjerg Sørensen, Vice Chairman Mads-Peter Clausen Per Falholt Connie Hedegaard William Erwin Hoover Jr. Jürgen Reinert Mika Vehviläinen Sandra Nørgaard Bertelsen Marianne Godballe Lars Grau Jens Peter Rosendahl Nielsen Danfoss Annual Report 2020Independent Auditor’s Report Danfoss at a glance Our business Financial performance Governance Financial Statements Independent Auditor’s Report Appointment We were first appointed auditors of Danfoss A/S on April 25, 2014, for the financial year 2014. We have been reappointed annually by shareholder resolution for a total period of uninterrupted engagement of 7 years including the financial year January 1 to December 31, 2020. To the shareholders of Danfoss A/S Our opinion In our opinion, the Consolidated Financial Statements and the Parent Company Financial Statements give a true and fair view of the Group’s and the Parent Company’s financial position at December 31, 2020, and of the results of the Group’s and the Parent Company’s operations and cash flows for the financial year January 1 to December 31, 2020, in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act. Our opinion is consistent with our Auditor's Long-form Report to the Audit Committee and the Board of Directors. What we have audited The Consolidated Financial Statements and Parent Company Financial Statements of Danfoss A/S for the financial year January 1 to December 31, 2020, pp 56-108 and 111-136 comprise income statement, statement of comprehensive income, statement of financial position, statement of cash flows, statement of changes in equity and notes, including basis for preparation and accounting policies for the Group as well as general accounting policies for the Parent Company. Collectively referred to as the “Financial Statements”. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and the additional requirements applicable in Denmark. Our responsibilities under those standards and requirements are further described in the Auditor’s responsibilities for the audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and the additional requirements applicable in Denmark. We have also fulfilled our other ethical responsibilities in accordance with the IESBA Code. To the best of our knowledge and belief, prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No 537/2014 were not provided. 52/138 Danfoss Annual Report 2020Key audit matters Danfoss at a glance Our business Financial performance Governance Financial Statements Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial Statements for 2020. These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Impairment of intangible assets Intangible assets might be impaired due to changes in the global economic situation, including impact from COVID-19, and changes in the Group’s strategy. We focused on this area, as the determination of whether or not an impairment charge for intangible assets is necessary, involves significant estimates and judgments made by Management, including especially: • estimation of future cash flows and the key assumptions underlying Management’s expectations; • long-term growth rates; and • discount rates applied in discounting future cash flows. Refer to Notes 7, 20 and 28 in the Consolidated Financial Statements We inspected the process of identifying impairment indicators and the process for impairment testing at the cash-generating unit level. We assessed the methodology, data and assumptions used in the Group’s impairment model. In addition, we obtained impairment tests prepared by Management and evaluated the reasonableness of estimates and judgments made by Management in preparing these. Special focus was given to the key assumption driving the future cash flows, including net revenue growth, cost development, efficiency improvements, capital expenditure and working capital as well as the discount rates and long-term growth rates applied also taking into account COVID-19. Uncertain tax positions The Group operates in a complex multinational tax environment where transfer pricing methods can be challenged by the tax authorities in the different countries. As a result, the Group is engaged in tax disputes with domestic and foreign tax authorities on an ongoing basis. We focused on this area as the valuation of tax assets and liabilities is associated with judgment and significant estimation uncertainty. Refer to Notes 6, 13, 16 and 28 in the Consolidated Financial Statements. We evaluated relevant controls regarding completeness of records of uncertain tax positions and Management’s procedure for estimating the valuation of tax assets and liabilities relating to tax disputes. In understanding and evaluating Management’s judgments, we considered the status of recent and current tax authority audits and enquiries, the outcome of previous claims, judgmental positions taken in tax returns, and current estimates and developments in the tax environment. We evaluated the Group’s model, data and assumptions used for valuation of tax assets and liabilities. Statement on Management’s Review Management is responsible for Management’s Review, pp 3-49 and 110. Our opinion on the Financial Statements does not cover Management’s Review, and we do not express any form of assurance conclusion thereon. In connection with our audit of the Financial Statements, our responsibility is to read Management’s Review and, in doing so, consider whether Management’s Review is materially inconsistent with the Financial Statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Moreover, we considered whether Management’s Review includes the disclosures required by the Danish Financial Statements Act. Based on the work we have performed, in our view, Management’s Review is in accordance with the Consolidated Financial Statements and the Parent Company Financial Statements and has been prepared in accordance with the requirements of the Danish Financial Statements Act. We did not identify any material misstatement in Management’s Review. Management’s responsibilities for the Financial Statements Management is responsible for the preparation of consolidated Financial Statements and Parent Company Financial Statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act, and for such internal control as Management determines is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error. In preparing the Financial Statements, Management is responsible for assessing the Group’s and the Parent Company’s ability to continue as a going-concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Group or the Parent Company or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditor’s Report that includes our opinion. Reasonable 53/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Financial Statements. As part of an audit in accordance with ISAs and the additional requirements applicable in Denmark, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not 54/138 for the purpose of expressing an opinion on the effectiveness of the Group’s and the Parent Company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. • Conclude on the appropriateness of Management’s use of the going-concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s and the Parent Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the Financial Statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our Auditor’s Report. However, future events or conditions may cause the Group or the Parent Company to cease to continue as a going concern. and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the Consolidated Financial Statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance, regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to have a bearing on our independence, and where applicable, related safeguards. • Evaluate the overall presentation, structure and content of the Financial Statements, including the disclosures, and whether the Financial Statements represent the underlying transactions From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the Financial Statements of the current period and are therefore the key audit matters. We describe these matters in our Auditor’s Report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public-interest benefits of such communication. Aarhus, March 4, 2021 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR no 3377 1231 Claus Lindholm Jacobsen State Authorised Public Accountant mne23328 Mads Melgaard State Authorised Public Accountant mne34354 Danfoss Annual Report 2020Group accounts and notes Group accounts and notes Group accounts Group notes Group companies 56 62 107 The future is electric Danfoss solutions accelerate electrification of transportation, making hybrid and purely electric vehicles a natural and sustainable choice for everyone. 55/138 Danfoss Annual Report 2020Income statement Danfoss at a glance Our business Financial performance Governance Financial Statements Income statement January 1 to December 31 EURm Net sales Cost of sales GROSS PROFIT Research and development costs Selling and distribution costs Administrative expenses OPERATING PROFIT EXCLUDING OTHER OPERATING INCOME AND EXPENSES Other operating income and expenses Share of profit from associates and joint ventures after tax OPERATING PROFIT (EBIT) Financial income Financial expenses PROFIT BEFORE TAX Tax on profit NET PROFIT Attributable to: Shareholders in Danfoss A/S Minority interests 56/138 e t o N 1 2 2 2 2 2 3 4 5 6 2019 6,285 -4,173 2,112 2020 5,828 -3,845 1,983 -272 -864 -275 701 -2 -4 695 4 -37 662 -160 502 455 47 502 -267 -773 -270 673 -54 6 625 2 -50 577 -142 435 389 46 435 Danfoss Annual Report 2020Statement of comprehensive incom Danfoss at a glance Our business Financial performance Governance Financial Statements Statement of comprehensive income January 1 to December 31 EURm NET PROFIT OTHER COMPREHENSIVE INCOME Actuarial gain/loss (-) on pension and healthcare plans Tax on actuarial gain/loss on pension and healthcare plans Items that cannot be reclassified to income statement Foreign exchange adjustments on translation of foreign currency into EUR Fair value adjustment of hedging instruments: Hedging of net investments in subsidiaries Hedging of future cash flows Hedging transfered to inventory Tax on hedging instruments Items that can be reclassified to income statement OTHER COMPREHENSIVE INCOME AFTER TAX TOTAL COMPREHENSIVE INCOME Attributable to: Shareholders of Danfoss A/S Minority interests 57/138 e t o N 14 13 2019 502 -39 8 -31 29 13 -10 -1 31 0 502 453 49 502 2020 435 -14 4 -10 -156 3 -56 1 4 -204 -214 221 181 40 221 Danfoss Annual Report 2020Statement of financial position Danfoss at a glance Our business Financial performance Governance Financial Statements Statement of financial position As of December 31 EURm ASSETS NON-CURRENT ASSETS INTANGIBLE ASSETS PROPERTY, PLANT AND EQUIPMENT Investments in associates and joint ventures Pension benefit plan assets Non-current receivables Deferred tax assets OTHER NON-CURRENT ASSETS TOTAL NON-CURRENT ASSETS CURRENT ASSETS INVENTORIES Trade receivables Receivable corporation tax Other receivables RECEIVABLES CASH AND CASH EQUIVALENTS TOTAL CURRENT ASSETS TOTAL ASSETS 58/138 e t o N 7 8 3 14 13 9 10 16 15 2019 2020 2,426 1,409 283 11 7 81 382 2,313 1,404 283 4 10 92 389 4,217 4,106 742 893 30 104 1,027 110 1,879 6,096 703 863 23 106 992 611 2,306 6,412 Danfoss Annual Report 2020Statement of financial position 2 Danfoss at a glance Our business Financial performance Governance Financial Statements Statement of financial position As of December 31 EURm LIABILITIES AND SHAREHOLDERS’ EQUITY SHAREHOLDERS’ EQUITY Equity, shareholders in Danfoss A/S Minority interests TOTAL SHAREHOLDERS’ EQUITY LIABILITIES Provisions Deferred tax liabilities Pension and healthcare benefit plan obligations Borrowings Derivative financial instruments (negative fair value) Other non-current debt NON-CURRENT LIABILITIES Provisions Borrowings Trade payables Debt to associates and joint ventures Corporation tax Derivative financial instruments (negative fair value) Other debt CURRENT LIABILITIES TOTAL LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 59/138 e t o N 11 12 13 14 15 16 12 15 16 15 17 2019 2020 2,835 98 2,933 112 225 155 1,093 53 1,638 46 76 820 3 68 3 509 1,525 3,163 6,096 3,084 100 3,184 113 199 153 1,103 1 98 1,667 52 68 774 4 61 61 541 1,561 3,228 6,412 Danfoss Annual Report 2020Statement of cash flows Danfoss at a glance Our business Financial performance Governance Financial Statements Statement of cash flows January 1 to December 31 EURm Profit before tax Adjustments for non-cash transactions Change in working capital Interest received Interest paid Dividends received Paid tax CASH FLOW FROM OPERATING ACTIVITIES Acquisition of intangible assets Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Acquisition of subsidiaries Change in financial receivables Proceeds from sale of other investments CASH FLOW FROM INVESTING ACTIVITIES Cash repayment of interest-bearing debt Cash proceeds from interest-bearing debt Purchase of treasury shares Sale of treasury shares Proceeds from minority interests Dividends to shareholders in Danfoss A/S Dividends to minority interests CASH FLOW FROM FINANCING ACTIVITIES NET CHANGE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents as of January 1 Foreign exchange adjustment of cash and cash equivalents CASH AND CASH EQUIVALENTS AS OF DECEMBER 31 60/138 e t o N 18 19 16 20 21 21 22 22 2019 662 334 -43 4 -29 1 -140 789 -52 -258 6 -140 37 -407 -1,086 984 -60 1 -78 -83 -322 60 50 110 2020 577 372 52 2 -34 -169 800 -44 -201 14 -15 4 -242 -92 8 -2 70 -38 -54 504 110 -3 611 Danfoss Annual Report 2020Statements of changes in equity Danfoss at a glance Our business Financial performance Governance Financial Statements Statement of changes in equity EURm BALANCE AS OF JANUARY 1, 2019 Net profit Foreign exchange adjustments of foreign companies Fair value adjustment of hedging instruments Actuarial gain/loss (-) on pension and healthcare plans Tax on other comprehensive income Total other comprehensive income Total comprehensive income for the period Dividends to shareholders Additions through acquisition of subsidiaries Purchase of treasury shares Capital increase Total transactions with owners BALANCE AS OF DECEMBER 31, 2019 Net profit Foreign exchange adjustments of foreign companies Fair value adjustment of hedging instruments Actuarial gain/loss (-) on pension and healthcare plans Tax on other comprehensive income Total other comprehensive income Total comprehensive income for the period Dividends to shareholders Purchase of treasury shares Sale of treasury shares Total transactions with owners BALANCE AS OF DECEMBER 31, 2020 l a t i p a c e r a h S 134 e r a h S i m u m e r p 10 y c n e r r u C i g n g d e H s e v r e s e r -4 3 -1 2 2 n o i t a l s n a r t 15 27 27 27 134 10 -2 42 -150 -150 -150 -52 4 -48 -48 134 10 -50 -108 s e r a h s n w o -317 e v r e s e R -60 -60 -377 -2 70 68 -309 s e v r e s e r r e h t O 2,602 375 -39 8 -31 344 2 s e v r e s e R 2,296 375 27 3 -39 7 -2 373 2 -60 2 2,948 -58 2,611 389 389 -150 -52 -14 8 -208 181 80 -2 70 148 2,940 -14 4 -10 379 80 80 3,407 d e s o p o r P s d n e d i v i d 80 80 80 -80 -80 80 -80 -80 S / A s s o f n a D n i l s r e d o h e r a h s 2,520 , y t i u q E 455 27 3 -39 7 -2 453 -78 -60 -138 2,835 389 -150 -52 -14 8 -208 181 -2 70 68 3,084 y t i r o n M i t s e r e t n i 129 47 2 2 49 -83 2 1 -80 98 46 -6 -6 40 -38 -38 100 y t l a i u t q o T e 2,649 502 29 3 -39 7 0 502 -161 2 -60 1 -218 2,933 435 -156 -52 -14 8 -214 221 -38 -2 70 30 3,184 The Bitten & Mads Clausen's Foundation has agreed to use its first right to buy back Danfoss A/S shares from certain minority shareholders in Danfoss A/S. The agreement has no impact on the Group’s equity as the contribution from the Foundation offset a similar liability. Further information can be found in note 25 Related Parties. 61/138 Danfoss Annual Report 2020 Notes contents Danfoss at a glance Our business Financial performance Governance Financial Statements Notes Note 1 Segment reporting Note 2 Expenses and other operating income Note 3 Investments in associates and joint ventures Note 4 Financial income Note 5 Financial expenses Note 6 Tax on profit Note 7 Intangible assets Note 8 Property, plant and equipment Note 9 Inventories Note 10 Trade receivables Note 11 Share capital Note 12 Provisions Note 13 Deferred tax Note 14 Pension and healthcare obligations Note 15 Financial risks and instruments Note 16 Corporation tax Note 17 Other debt Note 18 Adjustment for non-cash transactions Note 19 Change in working capital Note 20 Acquisition and sale of subsidiaries and activities Note 21 Acquisition/sale of other investments Note 22 Change in liabilities arising from financing activities Note 23 Contingent liabilities, assets and security Note 24 Leases Note 25 Related parties Note 26 Events after the balance sheet date Note 27 Basis for preparation and accounting policies Note 28 Critical accounting estimates Note 29 Group companies 62/138 Danfoss Annual Report 2020Note 1 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 1 Segment reporting EURm BUSINESS SEGMENTS INCOME STATEMENT Net sales Depreciation/amortization/impairment EBITA Acquisition-related amortization Share of profit from associates and joint ventures after tax Operating profit (EBIT) Financial Items Profit before tax STATEMENT OF FINANCIAL POSITION Total assets *) Net investments, excluding M&A Total liabilities *) OTHER INFORMATION Number of employees r e w o P s s o f n a D s n o i t u o S l 2,197 52 391 48 e t a m i l C s s o f n a D s n o i t u o S l s e v i r D s s o f n a D 2,611 46 400 10 1,456 25 188 21 s a e r a r e h t O 21 126 -208 1,481 101 274 1,664 67 318 1,699 38 212 1,252 98 2,359 2019 P U O R G 6,285 249 771 79 -4 695 -33 662 6,096 304 3,163 r e w o P s s o f n a D s n o i t u o S l 1,956 60 329 41 e t a m i l C s s o f n a D s n o i t u o S l s e v i r D s s o f n a D 2,491 53 410 8 1,352 25 186 21 s a e r a r e h t O 29 132 -202 1,362 59 262 1,616 65 332 1,666 34 186 1,768 73 2,448 2020 P U O R G 5,828 270 723 70 6 625 -48 577 6,412 231 3,228 7,826 10,792 4,504 4,749 27,871 7,609 10,530 4,438 4,914 27,491 In 2020, Danfoss combined the Danfoss Cooling and Danfoss Heating segments into the new Danfoss Climate Solutions segment. The segment information for 2019 has been restated to reflect this change. For further information on the business segments see page 20 and 35-40. GEOGRAPHICAL SEGMENTS Net sales Total non-current assets **) e p o r u E n r e t s e W e p o r u E n r e t s a E c i f i c a P a i s A a c i r e m A h t r o N a c i r e m A n i t a L 2,326 2,767 523 144 1,406 320 1,573 855 302 29 2019 P U O R G e p o r u E n r e t s e W e p o r u E n r e t s a E c i f i c a P a i s A a c i r e m A h t r o N a c i r e m A n i t a L 6,285 4,136 2,166 2,783 516 140 1,403 298 1,332 747 267 26 t s a E e d d M l i - a c i r f A 155 21 Sales in Denmark amounts to EUR 248m (2019: 232m) and non-current assets amount to EUR 1,004m (2019: 943m). Sales in North America mainly relate to the US and represent EUR 1,256m (2019: 1,481m) and non-current assets amount to EUR 747m (2019: 855m). China is part of the Asia Pacific region and sales amount to EUR 871m (2019: 803m) and non-current assets amount to EUR 231m (2019: 243m). *) Central functions' assets and liabilities, cash and cash equivalents, interest-bearing debt and deferred tax liabilities/assets have been included in the column "Other areas". **) Deferred tax assets are not included. 63/138 2020 P U O R G 5,828 4,014 t s a E e d d M l i - a c i r f A 144 20 Danfoss Annual Report 2020 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 1 Segment reporting (continued) EURm SPECIFICATION OF OTHER AREAS - EBITA Corporate and shared functions and projects, not allocated *) Other EBITA SPECIFICATION OF OTHER AREAS - ASSETS Cash, current & non-current tax receivables Other receivables Corporate and shared functions, not allocated tangible, and intangible fixed assets Corporate and shared functions and projects, not allocated *) Other Total assets SPECIFICATION OF OTHER AREAS - LIABILITIES Interest-bearing debt, current & non-current tax liabilities Other debt Pension and healthcare plans Corporate and shared functions and projects, not allocated *) Other Total liabilities *) Corporate and shared functions and projects, not allocated, are primarily corporate projects, administrative expenses, and assets and liabilities in central or shared functions. 2019 -193 -15 -208 2019 221 93 896 30 12 1,252 2019 1,463 560 155 173 8 2,359 2020 -184 -18 -202 2020 726 82 909 44 7 1,768 2020 1,432 665 153 195 3 2,448 64/138 Danfoss Annual Report 2020Note 2 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 2 Expenses and other operating income EURm A. PERSONNEL EXPENSES Salaries and wages Severance payments Social security Pension cost - defined contribution plans Pension cost - defined benefit plans excluding gains from reductions and redemptions *) Gains from reductions and redemptions Average number of employees Total number of employees as of end of the year *) Expenses for defined benefit plans are described in Note 14 Pension and healthcare obligations. Remuneration to the Group Executive Team and the Board of Directors: Salaries Pension costs Bonuses Group Executive Team Board of Directors' fee Total remuneration Bonuses are influenced by results of 2020 as well as results of prior years. Total remuneration for registered members of the Group Executive Team amounts to EUR 12m (2019: 10m). A presentation of the Group Executive Team is available on page 49. 2019 1,424 13 126 85 3 -1 1,650 27,905 27,871 2020 1,379 28 132 76 4 1,619 27,539 27,491 2019 2020 5 1 10 16 1 17 5 2 13 20 1 21 65/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 2 Expenses and other operating income (continued) EURm B. DEPRECIATION/AMORTIZATION AND IMPAIRMENT LOSSES Classification by nature: Amortization of intangible assets Depreciation of property, plant and equipment Impairment on tangible assets Depreciation/amortization and impairment losses Classification of amortization/impairment of intangible assets by functions: Cost of sales Selling and distribution costs Administrative expenses Classification of depreciation/impairment of property, plant and equipment assets by functions: Cost of sales Selling and distribution costs Administrative expenses Property, plant and equipment C. OTHER OPERATING INCOME AND EXPENSES Gain from value adjustment on step-acquisition of company Gain from disposal of property, plant and equipment Government grants Reversal of restructuring costs Other Other operating income Loss on disposal of property, plant and equipment Restructuring costs Other Other operating expenses Other operating income and expenses 2019 2020 109 218 1 328 72 31 6 109 174 31 14 219 106 227 2 335 79 22 5 106 186 28 15 229 2019 2020 9 2 10 1 9 31 -1 -14 -18 -33 -2 2 9 13 24 -6 -28 -44 -78 -54 Restructuring costs in both years mainly relate to terminations in Denmark, Germany and USA. Other include EUR 37m one-off transaction costs related to the acquisition of Eaton Hydraulics. The Group has received government grants of EUR 35m (2019: 10m) in total. This is among other items, related to investment incentives, support to research and development programs and COVID-19 compensation. The government grants are mainly deducted from the related expenses in the functions; Cost of sales, Selling and distribution costs, and Administrative expenses. 66/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 2 Expenses and other operating income (continued) EURm D. FEES TO AUDITORS APPOINTED AT THE ANNUAL GENERAL MEETING Audit fee Other assurance engagements fee Tax and VAT advice Other fees Total fee to Group Auditor 2019 2020 3 0 1 1 5 3 0 0 1 4 Fees for services other than the statutory audit of the Financial Statements provided by PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab (PricewaterhouseCoopers Denmark) amounted to EUR 1.0 m (2019: 1.0m). Services other than the statutory audit of the Financial Statements comprise services relating to due diligence and agreed-upon procedures, transfer pricing, tax audits as well as accounting advice. 67/138 Danfoss Annual Report 2020Note 3 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 3 Investments in associates and joint ventures EURm Cost as of January 1 Additions Disposals Cost as of December 31 Adjustments as of January 1 Foreign exchange adjustments in foreign companies Net profit/value adjustment Dividends Disposal / Transfer Adjustments as of December 31 Carrying amount as of December 31 Investments in associates and joint ventures Other investments 353 -4 349 -64 1 -4 -1 -1 -69 280 19 19 -16 -16 3 2019 TOTAL 372 -4 368 -80 1 -4 -1 -1 -85 283 Investments in associates and joint ventures Other investments 349 -24 325 -69 -2 6 19 -46 279 19 2 -1 20 -16 -16 4 2020 TOTAL 368 2 -25 345 -85 -2 6 19 -62 283 Where indicators for impairment were present at the end of 2020, impairment tests were performed on the carrying amount of "Investments in associates and joint ventures". Main indicators are loss-giving activities, or if the carrying amount is higher than the equity in the local accounts or, where relevant, higher than valuation using a listed share price. When performing the impairment test, the present value of cash flows from associates and joint ventures is compared with their carrying amount. The principles are unchanged compared to the impairment tests performed in 2019. Further information on associates and joint ventures is provided in Note 15 Financial risks and instruments and Note 25 Related parties. 68/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 3 Investments in associates and joint ventures (continued) EURm MATERIAL ASSOCIATES AND JOINT VENTURES Summarized information for associates and joint ventures, which are material to Danfoss, has been amended to reflect adjustments made for differences in the accounting policy. The financial information is stated below at full value, not according to Danfoss' proportionate ownership interests. As SMA Solar Technology AG is a listed company, the stated financial information below is based on publicly available information. Place of business Share of ownership SUMMARIZED PROFIT AND LOSS STATEMENT (PROVISIONAL NUMBERS FOR 2020 AND 2019) Revenue EBIT Net income SUMMARIZED BALANCE SHEET (Q3 NUMBERS) Non-current assets Current assets Non-current liabilities Current liabilities Equity OTHER INFORMATION Group share of equity as of December 31 On the basis of the stock exchange quotation, the fair value of SMA Solar Technology AG as of December 31, 2020, was EUR 1,900m (2019: 1,200m). IMMATERIAL ASSOCIATES AND JOINT VENTURES In addition to the interests in associates and joint ventures disclosed above, Danfoss also has interests in a number of individually immaterial associates and joint ventures. Danfoss' proportionate share of: Profit or loss from continuing operations Total comprehensive income Carrying amount as of December 31 RECONCILIATION OF CARRYING AMOUNT Group share of equity of material associates and joint ventures Goodwill concerning material associates and joint ventures Carrying amount of immaterial associates and joint ventures Total carrying amount as of December 31 of associates and joint ventures For further information on associates and joint ventures, please see Note 29 Group companies. 69/138 Associates Joint Ventures 1 1 14 Associates Joint Ventures 79 187 266 14 14 2019 TOTAL 1 1 14 2019 TOTAL 79 187 14 280 Associates Joint Ventures 2 2 10 Associates Joint Ventures 83 187 270 10 10 SMA Solar Technology AG 2019 Germany 20% 2020 Germany 20% 915 -11 -8 296 719 257 347 411 79 1,027 28 28 307 679 259 305 422 83 2020 TOTAL 2 2 10 2020 TOTAL 83 187 10 280 Danfoss Annual Report 2020Note 4-5 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 4 Financial income EURm Interest from banks, etc. Financial income Interest on financial assets measured at amortized cost. Note 5 Financial expenses EURm Interest to banks etc. Calculated interest on defined benefit plans Interest expense for leasing arrangements Foreign exchange losses, net Financial expenses Interest on financial liabilities measured at amortized cost. A fair-value hedge impact of EUR 14m (2019: 7m) is included in Foreign exchange losses, net. Further information on leases is provided in Note 24 Leases. 70/138 2019 2020 4 4 4 2 2 2 2019 2020 -22 -3 -8 -4 -37 -30 -27 -2 -8 -13 -50 -35 Danfoss Annual Report 2020Note 6 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 6 Tax on profit EURm Current tax expense Change in deferred tax Adjustments concerning previous years Tax on profit is defined as: Tax on profit before tax Adjustment of tax in foreign subsidiaries calculated at 22.0% Tax exempt income/non-deductible expenses Income from associates and joint ventures after tax Adjustment of net tax assets Other taxes Adjustments concerning previous years Effective tax rate Tax on profit (income statement) Tax on fair-value adjustment of hedging instruments (other comprehensive income) Tax on actuarial gain/loss on pension and healthcare plans (other comprehensive income) Total taxes 71/138 2019 -163 7 -4 -160 22.0% 1.8% -1.6% 0.1% 0.5% 0.9% 0.5% 24.2% 2019 -160 -1 8 -153 2020 -175 30 3 -142 22.0% 1.7% -1.0% -0.2% 0.7% 1.9% -0.5% 24.6% 2020 -142 4 4 -134 Danfoss Annual Report 2020Note 7 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 7 Intangible assets EURm Cost as of January 1, 2019 Foreign exchange adjustments in foreign companies Additions through acquisition of subsidiaries Transfers Additions Disposals Cost as of December 31, 2019 Amortization and impairment losses as of January 1 Foreign exchange adjustments in foreign companies Transfers Amortization Disposals Amortization and impairment losses as of December 31, 2019 Carrying amount as of December 31, 2019 Cost as of January 1, 2020 Foreign exchange adjustments in foreign companies Additions through acquisition of subsidiaries Transfers Additions Disposals Cost as of December 31, 2020 Amortization and impairment losses as of January 1, 2020 Foreign exchange adjustments in foreign companies Amortization Disposals Amortization and impairment losses as of December 31, 2020 Carrying amount as of December 31, 2020 Internally developed software Goodwill Brand Technology Customer relations Patents, trademarks and other rights Development costs Total Other TOTAL 1,718 9 103 1,830 152 2 154 1,676 1,830 -42 -2 1,786 154 -7 147 1,639 300 1 1 36 51 389 145 1 23 26 195 194 389 -4 2 44 -39 392 195 -2 34 -39 188 204 150 1 151 11 2 13 138 151 -7 144 13 -1 3 15 129 662 4 39 705 377 3 46 426 279 705 -24 6 687 426 -19 47 454 233 382 3 18 403 253 1 31 285 118 403 -14 -6 383 285 -12 19 292 91 95 1 -36 1 -2 59 59 1 -23 3 -2 38 21 59 -1 -1 -9 48 38 -1 3 -9 31 17 66 1 -15 52 65 1 1 -15 52 52 -2 50 52 -2 50 1,655 11 58 52 -17 1,759 910 7 109 -17 1,009 750 1,759 -50 1 44 -50 1,704 1,009 -35 106 -50 1,030 674 3,373 20 161 52 -17 3,589 1,062 9 109 -17 1,163 2,426 3,589 -92 -2 1 44 -50 3,490 1,163 -42 106 -50 1,177 2,313 Of the "Internally developed software" approximately 50% relates to the One ERP program described in the Management's Review, page 24. Additions/disposals through acquisitions/sales of subsidiaries are further described in Note 20 Acquisition and sales of subsidiaries and activities. 72/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 7 Intangible assets (continued) EURm IMPAIRMENT TESTS At the end of 2020, impairment tests were performed on the carrying amount of goodwill and brand (assets with indefinite useful lives). The impairment tests were performed on business segments representing the base level of cash generating units (CGUs), to which the carrying amount of goodwill and brand can be allocated with reasonable accuracy. The basis for determining the recoverable amount is value-in-use for all cash-generating units. Acquired activities and companies are integrated as quickly as possible into the respective business segments for optimum synergy. One consequence, is that soon after, it will not be possible to allocate the carrying amount of goodwill to the acquired companies and activities with reasonable accuracy, and thus it will no longer be possible to perform impairment tests on these individual acquisitions. As part of the impairment test, the net present value of the estimated net cash flow from the CGUs is compared to the carrying amount of the net assets. As acquisitions in Danfoss are made on the basis of 10-year projections, the expected cash flow is calculated on the basis of estimates for the years 2021-2030. The estimates are prepared and approved by the Management in the respective CGUs and Group Management. The primary variables are sales, EBITA, working capital and investments. The most significant goodwill allocations have been described below. Goodwill as of December 31 Brand with indefinite useful life as of December 31 Danfoss Power Solutions Danfoss Climate Solutions Danfoss Drives 339 132 565 770 2019 Other 2 Danfoss Power Solutions 323 126 Danfoss Climate Solutions Danfoss Drives 544 770 2020 Other 2 The Danfoss Power Solutions brand with a carrying amount EUR 126m (2019: 132m) is not amoritized, but is tested annually for impairment. Global megatrends and industry recognition as one of the market leaders support that the brand will generate cash inflow for the Group for an indefinite period. In 2020, the Danfoss Cooling and Danfoss Heating segments were combined into the Danfoss Climate Solutions segment. The goodwill for the new Danfoss Climate Solutions segment is an aggregation of the goodwill in the Danfoss Cooling and Danfoss Heating segments. The weighted average growth rate until 2030 is based on past performance/Management expectation of market development etc. and is estimated to be 3-6% (2019: 2-6%) for the business segments, which is at or above the general market development. The growth in net sales is driven by continuous high investments in innovation and market development. The expected average EBITA margins used in the impairment tests are in general kept at a stable level, taking past performance and initiatives in the business segments into consideration. The EBITA and working capital as a percentage of sales are expected to remain unchanged during the terminal period. Investments are assumed to be at the same level as the depreciations. These assumptions are unchanged compared to the impairment tests performed in 2019. The net cash flow during the terminal period from 2030 and onwards is estimated at a 2% annual growth, which is assumed to be at or below the expected growth in the markets addressed by Danfoss. The discount rates are set under consideration of a market-based cost of equity and cost of debt, and are 10-11% (2019: 10-11%) before tax for all segments. Management does not assess that a reasonable change in the fundamental assumptions used in the impairment tests will result in recoverable amounts lower than the carrying amounts. The same conclusion was made for 2019. 73/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 7 Intangible assets (continued) Danfoss Power Solutions The goodwill allocated to Danfoss Power Solutions derives primarly from the Danfoss Group's acquisition of the additional 38.2% of the share capital in Sauer-Danfoss Inc. (USA) in 2008, Visedo Oy (Finland) in 2017, UQM Technologies Inc. (USA) in 2019. At the end of 2020, the carrying amount of Brand, Technology and Customer relations acquired in connection with business combinations amounts to EUR 262m (2019: 315m), or approximately 58% (2019: 59%) of the corresponding Group carrying amount . The carrying amount of Technology and Customer relations is amortized until 2032. Danfoss Climate Solutions The goodwill allocated to Danfoss Climate Solutions derives primarily from the acquisitions of DEVI Group (Denmark) in 2003, Scroll Technologies (USA) in 2006, Danfoss Turbocor Compressors (USA) in 2012, and Sondex Holding A/S (Denmark) in 2016. At the end of 2020, the carrying amount of Technology and Customer relations acquired in connection with business combinations amounts to EUR 63m (2019: 71m), or approximately 14% (2019: 13%) of the corresponding Group carrying amount. The carrying amount of Technology and Customer relations is amortized until 2032 and 2030, respectively. Danfoss Drives The goodwill allocated to Danfoss Drives segment derives primarily from the acquisition of Vacon (Finland) in December 2014. At the end of 2020, the carrying amount of Technology and Customer relations acquired in connection with business combinations amounts to EUR 128m (2019: 148m), or approximately 28% (2019: 28%) of the corresponding Group carrying amount. The carrying amount of Technology and Customer relations is amortized until 2026 and 2029, respectively. Other intangible assets At the end of 2020, Danfoss had software in progress amounting to EUR 49m (2019: 36m) and EUR 0m (2019: 0m) capitalized development expenditure in progress. Capitalized software in progress is mainly developed internally. In 2020, the Group performed impairment tests on the carrying amount of software in progress. The actual expenses and achieved milestones have been evaluated according to the approved project and business plans. This led to no impairment of current software assets (2019: 0m). 74/138 Danfoss Annual Report 2020Note 8 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 8 Property, plant and equipment EURm Cost as of January 1, 2019 Accounting policy change Foreign exchange adjustments in foreign companies Additions through acquisition of subsidiaries Transfers Additions Disposals Cost as of December 31, 2019 Depreciation and impairment losses as of January 1, 2019 Foreign exchange adjustments in foreign companies Transfers Depreciation Impairment Disposals Depreciation and impairment losses as of December 31, 2019 Carrying amount as of December 31, 2019 Cost as of January 1, 2020 Foreign exchange adjustments in foreign companies Transfers Additions Disposals Cost as of December 31, 2020 Depreciation and impairment losses as of January 1, 2020 Foreign exchange adjustments in foreign companies Transfers Depreciation Impairment Disposals Depreciation and impairment losses as of December 31, 2020 Carrying amount as of December 31, 2020 Land and buildings Plant and machinery Equipment Assets under construction TOTAL 925 107 6 8 16 56 -12 1,106 421 2 1 71 1 -11 485 621 1,106 -34 29 79 -22 1,158 485 -12 1 69 2 -7 538 620 1,548 1 9 1 98 63 -17 1,703 1,161 6 1 106 -14 1,260 443 1,703 -43 101 48 -54 1,755 1,260 -26 -5 116 -50 1,295 460 258 27 1 1 5 35 -18 309 159 1 -2 41 -17 182 127 309 -6 11 36 -43 307 182 -5 4 42 -40 183 124 179 1 -119 157 218 218 218 -5 -142 129 200 200 2,910 135 17 10 311 -47 3,336 1,741 9 218 1 -42 1,927 1,409 3,336 -88 -1 292 -119 3,420 1,927 -43 227 2 -97 2,016 1,404 Additions/disposals through acquisitions/sales of subsidiaries are further described in Note 20 Acquisition and sale of subsidiaries and activities. 75/138 Danfoss Annual Report 2020Note 9 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 8 Property, plant and equipment (continued) EURm The right-of use assets included in property, plant and equipment are presented below. Carrying amount related to right-of-use assets as of January 1, 2019 Accounting policy change Foreign exchange adjustments in foreign companies Acquisitions of subsidiaries Additions Depreciation Carrying amount related to right-of-use assets as of December 31, 2019 Carrying amount related to right-of-use assets as of January 1, 2020 Foreign exchange adjustments in foreign companies Additions Depreciation Disposals Carrying amount related to right-of-use assets as of December 31, 2020 Further information on leases is provided in Note 24 Leases. Note 9 Inventories EURm Raw materials and consumables Work in progress Finished goods and goods for resale Inventories Write-downs of inventories Carrying amount of write-down inventories stated at net realizable value Expensed adjustment of inventories to net realizable value included in cost of sales Cost of goods sold included in cost of sales 76/138 Land and buildings Plant and machinery Equipment TOTAL 36 107 1 4 32 -38 142 142 -3 61 -33 -3 164 1 1 2 -1 3 3 2 -2 3 16 27 19 -23 39 39 28 -25 -1 41 2019 345 79 318 742 62 52 9 3,214 53 135 1 4 53 -62 184 184 -3 91 -60 -4 208 2020 337 75 291 703 66 35 13 2,894 Danfoss Annual Report 2020Note 10 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 10 Trade receivables EURm Trade receivables before provision for bad debts Provision for bad debts Trade receivables Receivables from associates and joint ventures Total trade receivables Hereof trade receivables due after 1 year Provision for bad debts as of January 1 Foreign exchange adjustments in foreign companies Accrual of new provisions Reversal of provisions accrued Realized loss Provision for bad debts as of December 31 77/138 2019 910 -25 885 8 893 1 -25 -1 -6 3 4 -25 2020 875 -21 854 9 863 -25 2 -3 3 2 -21 Danfoss Annual Report 2020Note 11 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 11 Share capital SHAREHOLDERS HOLDING MORE THAN 5% OF THE SHARES OR 5% OF THE VOTES The Bitten & Mads Clausen's Foundation, Nordborg, Denmark Clausen Controls A/S, Sønderborg, Denmark Henrik Mads Clausen, Lake Forest, USA DISTRIBUTION OF SHARES Balance as of January 1, 2019 Balance as of December 31, 2019 Balance as of December 31, 2020 SHARES 48.08% 26.26% 11.04% A shares B shares Total Number 4,250,000 4,250,000 4,250,000 DKKm 425.0 425.0 425.0 Number 5,719,625 5,719,625 5,719,625 DKKm 572.0 572.0 572.0 Number 9,969,625 9,969,625 9,969,625 VOTES 86.14% 5.47% 2.31% DKKm 997.0 997.0 997.0 Class A shares entitle the holder to ten votes for each share, while Class B shares entitle the holder to one vote for each share. The holders of Class A shares also have pre-emptive rights to Class A shares in the event of any increases in share capital. Otherwise, no shares have special rights. Resolutions regarding amendments to the Articles of Association or Danfoss A/S’ dissolution require at least two-thirds of the votes cast as well as two-thirds of the voting share capital represented at the Annual General Meeting to be adopted. The share capital is fully paid in. All shares have a nominal value of DKK 100. DIVIDEND PER SHARE Proposed dividend per 100 DKK share Dividend from last year paid per 100 DKK share Dividend payment to shareholders has no tax consequences for Danfoss A/S. No dividend was paid for 2019 and the Board of Directors recommends that no dividend is to be paid for 2020. DEVELOPMENT IN THE GROUP'S HOLDING OF TREASURY SHARES (NO. OF B-SHARES OF 100 DKK) Holding as of January 1 Acquired in the year Acquired from The Bitten & Mads Clausen's Foundation Sold to The Bitten & Mads Clausen's Foundation Holding as of December 31 DKK 60.2 60.2 2019 EUR 8.1 8.1 DKK 2020 EUR 2019 350,698 1,924 59,500 412,122 2020 412,122 2,512 -74,236 340,398 The shareholders' meeting of Danfoss A/S has authorized Danfoss A/S to buy back up to 10% of Danfoss A/S’ share capital. The total cost in 2020 for acquiring own shares amounts to EUR 2m (2019: 60m). The total selling price in 2020 for selling own shares amounts to EUR 70m (2019: 0m). The Group's holding of of treasury shares represents 3.4% (2019: 4.1%) of the Group's share capital. CAPITAL STRUCTURE The capital structure of Danfoss is intended to ensure sufficient financial flexibility and stability over the cycle for the company to reach its strategic goals. It is the policy of the Group to have a “BBB credit rating”, and the Group aims for financial metrics that are commensurate with such credit rating over the cycle. Danfoss is currently rated “BBB with a negative outlook" by Standard and Poor’s. End of 2020 the net-interest-bearing debt to EBITDA ratio was 0.6 (2019: 1.0) on a reported basis. Danfoss aims to use the free operating cash flow after financial items and tax for debt servicing and business development. 78/138 Danfoss Annual Report 2020Note 12 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 12 Provisions EURm Provisions for warranty comprise expected costs arising during the warranty period of the Group's products. Contingent consideration consists of earn-out relating to acquisitions. Employee-related provisions mainly consist of certain employee expenses, including jubilee costs. Other mainly comprises expenses for restucturing and severance payments. Provisions have been discounted to net present value, if the values are significant. Warranty Contingent consideration Employee- related 2020 Other TOTAL 40 -2 -20 -2 29 45 51 -3 48 36 -1 -2 10 43 31 -1 -7 -4 10 29 158 -4 -29 -9 49 165 2020 Warranty Contingent consideration Employee- related Other TOTAL 31 14 45 6 37 5 48 5 14 24 43 10 16 3 29 52 81 32 165 Provisions as of January 1 Foreign exchange adjustments in foreign companies Provisions used Reversal of unused provisions Additional provisions recognized Provisions as of December 31 Estimated maturity of above provisions: Within 1 year Between 1 and 5 years After more than 5 years Provisions as of December 31 79/138 Danfoss Annual Report 2020Note 13 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 13 Deferred tax EURm CHANGES IN DEFERRED TAXES Deferred taxes as of January 1 (net) *) Adjustment from the adoption of IFRS 16 Foreign exchange adjustment in foreign companies Additions through acquisition of subsidiaries Adjustments concerning previous years Deferred tax recognized in the income statement Deferred tax recognized in other comprehensive income Deferred taxes as of December 31 (net) *) *) Liability (-) SPECIFICATION OF DEFERRED TAXES Intangible assets Property, plant and equipment and financial assets Current assets Debt and provisions Tax loss carry-forwards Non-capitalized tax assets regarding tax losses Set-off within the same legal entities and jurisdiction Deferred tax assets Intangible assets Property, plant and equipment and financial assets Current assets Debt and provisions Deferred tax regarding Danish joint taxation Set-off within the same legal entities and jurisdiction Deferred tax liabilities 2019 -140 2 -5 -16 7 8 -144 2020 -144 1 2 30 4 -107 2019 Deferred tax asset 2020 Deferred tax asset 4 49 18 127 40 -34 204 -123 81 4 48 22 156 41 -36 235 -143 92 Deferred tax liability Deferred tax liability 142 129 10 62 5 348 -123 225 131 123 10 73 5 342 -143 199 The tax asset related to tax-loss carry-forwards of EUR 5m net (2019: 6m) is largely related to companies that have suffered tax losses within the last three financial years. Based on business plans and expected future taxable income in the respective companies, it is the Management’s opinion that the net tax-loss carry-forwards will be utilized in the future. Of the tax-loss carry-forwards recognized, 100% (2019: 100%) can still be utilized after 3 years or later. The tax value of unrecognized tax assets related to tax-loss carry-forwards amounts to EUR 36m (2019: 34m). The amount is not recognized as an asset, as the tax losses carried forward are not expected to be utilized. 2% of the amount (2019: 19%) has a remaining period of 3 years or less, whereas the share with a remaining period of 10 years or more totals 83% (2019: 70%). Of the deferred tax liability of EUR 199m (2019: 225m), EUR 5m (2019: 5m) can be attributed to taxes relating to joint taxation with foreign subsidiaries in previous years. The Group has deferred tax liabilities concerning temporary differences in foreign subsidiaries, associates and joint ventures of EUR 8m (2019: 15m). The liabilities are not recognized, because the Group decides on their utilization and it is likely that the liabilities will not be recognized in the foreseeable future. 80/138 Danfoss Annual Report 2020Note 14 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 14 Pension and healthcare obligations EURm In most countries, Danfoss offers defined contribution plans, which are fully funded. However, a few of the foreign subsidiaries have obligations concerning defined-benefit plans which are unfunded or only partly funded. It is the Group’s policy that pension and healthcare plans within the Group should, generally, be arranged as defined-contribution plans. However, in countries like the USA, the UK and Germany, there is a tradition for defined-benefit plans. The geographical split of defined-benefit plans is as follows: Germany USA UK Other Total 2019 Gross liability Net Liability 2020 Gross liability Net Liability 25% 38% 33% 4% 100% 67% 29% -7% 11% 100% 26% 38% 33% 3% 100% 65% 26% -3% 12% 100% The pension plans are based on the individual employee´s salary and years of service in the company. The plans have varying requirements for risk diversification and for matching assets strategies. The majority of the liabilities are either due to deferred members and pensioners, or they are linked to minimum-return guarantees. However, some of the defined-benefit plans in the UK and the USA are still linked to final salary for a closed, limited group of less than 200 (2019: 200 ) active employees. Danfoss is working on minimizing the defined-benefit risk by integrated risk management and by changing the nature of existing plans. All material defined-benefit plans have been computed by independent actuaries. THE GROUP'S DEFINED-BENEFIT PLAN OBLIGATIONS Present value of defined-benefit plan obligations Fair value of plan assets Defined-benefit plan obligations are presented in the statement of financial position as follows: Pension benefit plan assets Pension and healthcare plan obligations Plans with a surplus have been recognized on the basis that future economic benefits are available to the Group in the form of a reduction in future contributions or a cash refund. DEVELOPMENT IN THE PRESENT VALUE OF DEFINED-BENEFIT PLAN OBLIGATIONS Provision as of January 1 Foreign exchange adjustments in foreign companies Pension costs for the year Calculated interest on plan liabilities Actuarial gains(-)/losses from changes in demographic assumptions Actuarial gains(-)/losses from changes in financial assumptions Gains from reductions and redemptions Plan participants' contribution liabilities Disbursed benefits from the Group Disbursed benefits from plan assets Provision as of December 31 81/138 2019 2020 550 -406 144 11 155 144 559 -410 149 4 153 149 2019 2020 479 12 3 15 -3 66 -1 2 -5 -18 550 550 -29 4 11 -2 48 1 -5 -19 559 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 14 Pension and healthcare obligations (continued) EURm DEVELOPMENT IN THE FAIR VALUE OF PLAN ASSETS Plan assets as of January 1 Foreign exchange adjustments in foreign companies Calculated interest on plan assets Plan participants' contribution asset Return for the year on plan assets, excluding calculated interest Payments by the Group Disbursed benefits Plan assets as of December 31 2019 2020 365 11 12 2 25 9 -18 406 406 -26 9 1 32 7 -19 410 A few countries may require that the liability is funded, but this is not the case in most countries. Defined-benefit plans that are unfunded are mainly related to pension plans in some of the German subsidiaries and the healthcare plan in the USA. Unfunded plans amount to approximately EUR 72m (2019: 72m). EXPENSES RELATING TO PENSION AND HEALTHCARE OBLIGATIONS Pension costs for the year Calculated interest on liabilities Calculated interest on assets Gains from reductions and redemptions Expensed in the income statement Pension cost stated under cost of sales Pension cost stated under administrative expenses Other operating income and expenses Interest concerning pension and healthcare obligations posted under financial items ESTIMATED MATURITY OF PROVISIONS Within 1 year Between 1 and 5 years After more than 5 years 82/138 2019 2020 3 15 -12 -1 5 1 2 -1 3 5 4 11 -9 6 1 3 2 6 2019 2020 24 93 433 550 25 100 434 559 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 14 Pension and healthcare obligations (continued) EURm PENSION PLAN ASSETS ARE SPECIFIED AS FOLLOWS: Shares and similar securities Listed corporate bonds Bonds Other 2019 33% 34% 18% 15% 100% 132 136 71 67 406 2020 34% 34% 16% 16% 100% 140 138 65 67 410 Plans in which the pension funds are invested in financial instruments are exposed to risk. 34% (2019: 33%) of the funds are invested in shares, which have historically been subject to value fluctuations. SIGNIFICANT ASSUMPTIONS FOR CALCULATION OF PENSION AND HEALTHCARE OBLIGATIONS AND RELATED COSTS Discount rate Estimated future salary increase Life expectancy for a pensioner retiring at the end of the reporting period Life expectancy for a pensioner retiring 20 years after the end of the reporting period 2019 Weighted average 2.2% 3.5% 2019 Female Range 87-88 88-90 Range 0.1-3.2% 1.5-4.2% Male Range 85-87 86-90 2020 Weighted average 1.7% 3.5% 2020 Female Range 86-89 88-90 Range -0.3-2.3% 1.2-4.3% Male Range 84-87 86-90 The estimated return on defined-benefit plan assets is based on external actuarial calculations and determined according to the composition of the assets and considering the general expectations with regard to economic developments. The Group expects to pay in EUR 10m to defined-benefit plans in 2021 (2020: 13m). SENSITIVITY ANALYSIS Reported defined-benefit plan obligations Increase in discount rate of a 0.5 percentage point affects the defined-benefit plan obligations by Decrease in discount rate of a 0.5 percentage point affects the defined-benefit plan obligations by Increase in future salary increase of a 0.5 percentage point affects the defined-benefit plan obligations by Decrease in future salary increase of a 0.5 percentage point affects the defined-benefit plan obligations by Increase in average life expectancy of 1 year affects the defined-benefit plan obligations by Decrease in average life expectancy of 1 year affects the defined-benefit plan obligations by 83/138 2019 550 2020 559 -40 +44 +2 -2 +20 -19 -42 +47 +3 -3 +21 -21 Danfoss Annual Report 2020Note 15 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 15 Financial risks and instruments EURm FINANCIAL RISKS Danfoss's profitability, cash flow and balance sheet are exposed to financial market risk as a consequence of the Group's multinational business profile. The risk factors include currency, commodity, credit, interest rate and liquidity risks. The Group's risk-management activities focus on risk mitigation, with particular emphasis on protecting the Group's cash flows and profitability in local currency. The risk-management activity of the Group is governed by the Treasury Policy, which is approved and reviewed annually by the Board of Directors. Group Treasury is the function responsible for executing the Treasury Policy and managing the Group's financial market risks in accordance with it. In general, the aim of Group Treasury’s risk-management activities is to mitigate risk and reduce the volatility of the Group's cash flows and earnings in local and not to engage in speculative transactions that increases the financial risk of the Group. For a description of accounting policies and procedures such as applied recognition criteria and basis of measurement, please see the disclosure under Note 27 Basis for preparation and accounting policies. CURRENCY EXPOSURE Currency exposure consists of three elements: 1. Transaction risk: This covers both the balance sheet risk, i.e. the risk related to assets and liabilities denominated in foreign currency, and the risk related to future cash flows in foreign currency. Both risk types have direct cash flow and earnings impact and therefore are the primary focus of Danfoss’ currency-hedging strategy. The hedging policy is to cover all balance sheet risk and all significant future cash-flow risk for a 12-month period on a rolling and layered basis. The policy for future cash-flow hedge for 2020 follow a Cash Flow at Risk approach in combination with the hedge ratios below Cash-flow risk, five largest exposures: Minimum hedge 60% Other significant cash-flow exposures: Minimum hedge 30% The policy for balance sheet risk has been unchanged and the hedge ratio was 100% in both 2020 and 2019. 2. Translation risk: This is the risk that the P&L and Equity of Danfoss are impacted adversely by currency movements when consolidating the ﬁnancial statements of subsidiaries. Translation risk (Reporting risk) is generally not hedged. However, it is partly mitigated by keeping an appropriate capital structure in the subsidiaries of the Group in terms of equity and debt in local currency, and by drawing the Group's financing facilities in foreign currency to match the assets of the Group. 3. Economic/structural risk (strategic risk): This risk is not in scope for financial risk management. Economic/structural currency risk is dealt with strategically by keeping an appropriate balance between the geographical footprint of end markets and sourcing markets. NOMINAL POSITION OF SIGNIFICANT CURRENCIES Receivables and payables Cash and loans 1) Derivative financial instruments for hedging of fair value 2) Derivative financial instruments for hedging of future cash flow 3) EUR -101 37 66 -412 USD -25 -75 101 -120 GBP 5 -3 -3 -38 2019 Total -121 -41 164 -570 EUR -117 89 31 -1,136 USD 15 -142 124 747 GBP -6 6 -27 2020 Total -108 -53 161 -416 1) Besides the loans included, loans of EUR 614m (2019: 627m) are used for hedging of net investments (equity hedge). The impact on the Group's equity is EUR 2.6m (2019: -0.4m). 2) Financial instrument for hedging of fair value also includes the exposure related to inventories in countries applying foreign currency price lists. 3) Includes the cash-flow hedge related to the expected acquisition of Eaton Hydraulics, USD/EUR 1.000m. SENSITIVITY Probable increase in exchange rate Hypothetical impact on profit and loss for the year Hypothetical impact on equity 1% 0 -10 10% 0 -12 10% 0 -4 0 -26 1% 0 -17 10% 0 75 10% 0 -3 0 55 A decrease in exchange rates as stated would have had the opposite effect on the profit and equity. The sensitivities are based on recognized financial assets and liabilities at December 31 and include impact from derivatives. 84/138 # Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 15 Financial risks and instruments (continued) EURm COMMODITY RISK Movements in commodity prices can affect the Group's earnings and cash flow. It is Danfoss’ policy to ensure that significant risk related to raw materials are reduced through a combination of fixed price agreements with suppliers, active price adjustment and in some cases financial hedging. If commodity exposure is considered material, the price should be fixed for a period of between 3 months and 12 months. Danfoss has not undertaken financial hedging of commodities in 2020 or 2019. CREDIT RISK The Group’s credit risks primarily apply to trade receivables and bank deposits (the so-called counterparty risk). It is Danfoss' policy to minimize the risk of losses from credit risk. The counterparty risks towards banks and towards other financial partners are managed by only using solid regional and global financial partners with a credit rating of minimum "A-" or better, according to Standard & Poor’s credit rating metric. The Group applies the simplified approach to provide for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit-risk characteristics and the days past due. The expected credit losses also incorporate forward-looking information. Out of the EUR 21m write-down, EUR 18m relates to receivables, which are more than 180 days overdue. Trade receivables are distributed on a large number of customers and geographical areas. The geographical distribution does not differ significantly from the split of net sales according to Note 1 Segment reporting. Historically, the Group has only had limited losses on bad debts. Ageing of trade receivables as of December 31: Overdue less than 30 days Overdue from 30 to 90 days Overdue more than 90 days Neither impaired nor overdue at the reporting date Total gross carrying amount Provision for bad debts as of December 31 Net carrying amount 2019 2020 41 16 33 828 918 25 893 13 15 20 836 884 21 863 The carrying amount of trade receivables is estimated to represent their fair value as well as the maximum credit risk. INTEREST-RATE RISK The Group’s interest-rate risk derives primarily from interest-bearing debt, cash funds and pension obligations. The Group makes use of both fixed and floating-rate loans, as well as interest-rate derivatives to manage this risk. As per Danfoss’ Treasury Policy, the interest-rate risk on its debt portfolio should not exceed a maximum of 0.1% of Group annual revenue in case of a one-percentage-point parallel shift in interest rates across the interest-rate curve. All things being equal, an increase in the interest rate of one percentage-point compared to the interest-rate level on the balance sheet date, would not have any material impact on the profit for the year, while equity would be impacted by a gain of EUR 45m, mainly related to USD interest rate hedge. A significant part of the financing of the Eaton Hydraulic acquisition is expected to be structured as synthetic USD financing and end of 2020 a part of the interest rate exposure have been fixed for the expected duration via interest-rate swaps. 85/138 # Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 15 Financial risks and instruments (continued) EURm LIQUIDITY RISK It is Danfoss' policy to maintain a robust capital structure and to aim for a capital and financing structure that is compatible with a BBB credit rating, a liquidity reserve of minimum EUR 0.4bn, in terms of accessible cash, and non-terminable credit facilities with an average maturity profile of at least 3 years. At the end of 2020, Danfoss' credit rating from Standard and Poor’s was "BBB with a negative outlook" and the liquidity reserve equaled EUR 2.1bn (2019: 1.1bn). In addition to this, Danfoss had cash and significant amounts of short-term credit lines. The Group considers the liquidity reserve to be adequate in relation to current plans and the market conditions in general. The average maturity profile on non-terminable credit facilities was above 2 years at the end of 2020. The Danfoss Group's loan agreements contain no financial covenants. The major part of the Group's cash, and cash equivalents, of EUR 611m (2019: 110m) is placed on short-term deposits and short-term flex bonds (Danish) with a maturity on April 1, 2021. A significant part of the Group's cash equivalents is expected to be used in the Eaton Hydraulic acquisition. THE GROUP'S DEBT CATEGORIES AND MATURITIES Bank debt and corporate bond Mortgage debt Lease liabilities Trade payables Debt to associates and joint ventures Derivative financial liabilities *) Maturity is evenly spread over the period. Further information on lease is provided in Note 24 Leases. i g n y r r a C t n u o m a 906 69 194 820 3 3 1,995 l a u t c a r t n o C w o l f h s a c 941 74 219 820 3 3 2,060 2019 Maturity ) * s r a e y 5 - 1 5 r e v O s r a e y 650 1 124 252 73 40 775 365 r a e y 1 - 0 39 55 820 3 3 920 i g n y r r a C t n u o m a 883 69 219 774 4 62 2,011 l a u t c a r t n o C w o l f h s a c 906 74 247 774 4 62 2,067 2020 Maturity ) * s r a e y 5 - 1 5 r e v O s r a e y 626 1 139 766 250 73 52 1 376 r a e y 1 - 0 30 56 774 4 61 925 The maturity analysis is based on all non-discounted cash flows, including estimated interest payments. Interest payments are estimated according to existing market conditions. The non-discounted cash flows from derivative financial instruments are presented in gross amounts, unless the parties have a contractual right or obligation to make net settlements. The Group generally accepts that vendors sell off their receivables arising from the sales to the Group to a third party. Danfoss has established a supply-chain financing program where vendors can sell off their receivables from Danfoss at attractive terms, but at the bank's sole discretion. Danfoss is not directly or indirectly a party to these agreements. End of December, the Group is aware of EUR 37m (2019: 45m) of trade payables that are part of such agreements. THE ABOVE DEBT IS RECORDED AS FOLLOWS: Non-current liabilities Current liabilities 86/138 # 2019 2020 1,093 902 1,995 1,104 907 2,011 Danfoss Annual Report 2020 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 15 Financial risks and instruments (continued) EURm FINANCIAL INSTRUMENTS BY CATEGORY FINANCIAL ASSETS: Other investments Financial assets measured at fair value via the income statement Trade receivables Other receivables Cash and cash equivalents Loans, receivables, cash and cash equivalents measured at amortized cost FINANCIAL LIABILITIES: Contingent consideration measured at fair value via the income statement Interest-bearing debt Trade payables and other debt Financial liabilities measured at amortized cost Derivative financial instruments for the hedging of the fair value of recognized assets and liabilities Derivative financial instruments for the hedging of future cash flows Financial liabilites used as hedging instruments 2019 Fair value 3 3 893 104 110 1,107 Carrying amount 3 3 893 104 110 1,107 2020 Fair value 4 4 863 106 611 1,580 Carrying amount 4 4 863 106 611 1,580 51 51 48 48 1,169 1,385 2,554 1,197 1,385 2,582 1 2 3 1 2 3 1,171 1,417 2,588 1,193 1,417 2,610 4 58 62 4 58 62 The value of derivative financial instruments is measured according to generally accepted valuation techniques based on relevant observable swap curves and exchange rates. The market value of the interest-bearing debt is recognized as the present value of expected future instalment and interest payments. The discount rate applied is the Group's current borrowing rate on loans for corresponding terms. The short-term, floating-rate debt at banks is stated at par value. The fair value of trade receivables and trade payables with short credit terms is estimated to be equal to the carrying amount. The methods applied remain unchanged compared to 2019. 87/138 # Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 15 Financial risks and instruments (continued) EURm FAIR VALUE HIERARCHY AS OF DECEMBER 31 FOR THE GROUP FINANCIAL ASSETS: Other investments Total financial assets FINANCIAL LIABILITIES: Derivative financial instruments for the hedging of the fair value of recognized assets and liabilities Derivative financial instruments for the hedging of future cash flows Contingent consideration Interest-bearing debt Total financial liabilities FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE BASED ON LEVEL 3 Carrying amount as of January 1, assets/liabilities (-) Disposals/Reversals Purchase Carrying amount as of December 31, assets/liabilities (-) Fair value of the majority of the financial instruments is determined using discounted cash-flow analysis. 88/138 # 2019 2020 s e c i r p d e t o u Q t u p n i l e b a v r e s b O t u p n i l e b a v r e s b o - n o N Level 1 Level 2 Level 3 3 3 51 51 1 2 1,197 1,200 l a t o T 3 3 1 2 51 1,197 1,251 s e c i r p d e t o u Q t u p n i l e b a v r e s b O t u p n i l e b a v r e s b o - n o N Level 1 Level 2 Level 3 4 4 48 48 4 58 1,193 1,255 l a t o T 4 4 4 58 48 1,193 1,303 2019 2020 -50 2 -48 -48 2 2 -44 Danfoss Annual Report 2020 Note 16-17 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 15 Financial risks and instruments (continued) EURm DERIVATIVES AS OF DECEMBER 31 FOR THE GROUP t c a r t n o c t a t n u o m A l i a p c n i r p / e c i r p USD EUR Other currencies Forward exchange contracts Interest swaps Other derivatives Derivatives end of year -99 -232 -117 n o ) - ( s s o l / n a G i t n e m j t s u d a e u a v l t e k r a m -2 -1 -3 -3 d e z i n g o c e r ) - ( s s o l / n a G i t n e m e t a t s e m o c n i n i -1 -1 -1 r a e y 1 n a h t s s e l e u D -1 -1 -2 -2 2019 2020 s r a e y 5 d n a 1 n e e w t e b e u D t c a r t n o c t a t n u o m A s r a e y 5 r e t f a e u D l i a p c n i r p / e c i r p 857 -27 144 877 n o ) - ( s s o l / n a G i t n e m j t s u d a e u a v l t e k r a m -59 -1 -60 -1 -1 -62 d e z i n g o c e r ) - ( s s o l / n a G i t n e m e t a t s e m o c n i n i -2 -2 -4 -1 -5 r a e y 1 n a h t s s e l e u D -58 2 -56 -56 s r a e y 5 d n a 1 n e e w t e b e u D s r a e y 5 r e t f a e u D -1 -1 At the end of 2020, unrealized gain/loss(-) on derivatives on hedging of foreign currency risk recognized in equity amounted to EUR -57m (2019: -2m). The main reason for the 2020 impact is the hedging of part of the expected acquisition price of Eaton Hydraulics. The interest-rate swap is related to the expected financing of the Eaton Hydraulic acquisition. The maturity of the swaps is from 5 to 7 years. The swap sets a fixed USD market interest rate at levels seen during the last half of December 2020. For the open foreign exchange contracts, used for USD cash-flow hedges, at the end of 2020, the weighted average hedge rate for USD/DKK is 6.4793 (2019: 6.5276). 89/138 # Danfoss Annual Report 2020 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 16 Corporation tax EURm Corporation tax payable/receivable (-) as of January 1 Foreign exchange adjustment in foreign companies Paid during the year Adjustments concerning previous years Current tax expenses in income statement Current tax expenses in other comprehensive income Corporation tax payable/receivable (-) as of December 31 The above corporation tax is recorded as follows: Assets Liabilities Note 17 Other debt EURm Accrued salaries and wages Accrued expenses Other debt 90/138 2019 26 -140 -12 163 1 38 30 68 38 2019 312 197 509 2020 38 -1 -169 -1 175 -4 38 23 61 38 2020 319 222 541 Danfoss Annual Report 2020Note 19 Note 20 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 18 Adjustment for non-cash transactions EURm Depreciation/amortization and impairment Gain(-)/loss on disposal of tangible assets and business activities Gain(-)/loss from step-acquisitions Share of profit from associates and joint ventures after tax Financial income Financial expenses Other Adjustment for non-cash transactions 2019 2020 328 -1 -9 4 -4 37 -21 334 335 4 -6 -2 50 -9 372 2020 -7 -13 72 52 Depreciation/amortization and impairment includes depreciation on leased right-of-use assets. Further information on depreciation charge and lease payment is provided in Note 8 Property, plant and equipment and Note 22. Change in liabilities arising from financing activities. The Group's other adjustments for non-cash transactions mainly consist of provisions, derivatives and defined-benefit plans. Note 19 Change in working capital EURm Change in inventories Change in receivables Change in trade payables and other debt Change in working capital 2019 30 14 -87 -43 91/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 20 Acquisition and sale of subsidiaries and activities EURm Company/activity: Artemis Intelligent Power Ltd. (AIP) Leanheat Oy Hydraulik Nord Fluidtechnik GmbH & Co. KG UQM Technologies Inc. Acquisition Acquisition Acquisition Acquisition *) Net sales in the financial year prior to the acquisition or sale. ** According to non-disclosure obligations, purchase Country UK Finland Germany US Consolidated from/until Holding acquired/sold Net sales per year *) February May April August 75% 100% 100% 100% 3 2 21 13 2019 No. of employees Consideration paid 53 50 170 85 ** ** ** 94 2020 acquisitions and disposals: The Group neither acquired nor sold any subsidiaries or activities in 2020. Revaluation of Purchase Price Allocation for previous year has been done and is included in the statement below. 2019 acquisitions and disposals: The largest acquisition in 2019 was the purchase of UQM Technologies Inc., which was acquired on July 31. UQM is a developer and manufacturer of power-dense, high-efficiency electric motors, generators, power electronic controllers and fuel-cell compressors for the commercial truck, bus, automotive, marine and industrial markets. Its sales activities are mainly in US and its production and R&D centers are located in Colorado, US. UQM has been aquired into the Power Solutions segment. Likewise in the Power Solutions segment, Danfoss acquired 75% of Artemis Intelligent Power, a Scottish R&D and engineering company, as well as German-based Hydraulic Nord Fluidtechnik, a supplier of hydraulic steering. In 2019, Danfoss also acquired the remaining shares of Leanheat Oy, a Finnish system-provider of turnkey IoT solutions, upgrading and building HVAC systems for the digital age. Leanheat is a separate business within the Climate Solutions segment. For accounting purposes, the acquisition is treated as a step-acquisition, which means that a gain of EUR 9m is recorded in other operating income. The net sales included in the consolidated income statement of the acquired companies in 2019 is less than EUR 25m and impact on profit before tax is around EUR -10m, which includes Purchase Price Allocation amortizations. In the preliminary Purchase Price Allocation, a total goodwill of EUR 103m was calculated. Goodwill arising from the acquisitions is attributable to the value of staff, know-how and synergies expected from combining the operations of the Danfoss Group and the acquired businesses. A part of the goodwill recognized is expected to be deductible for income-tax purposes. The final calculation will take place within 12 months from the acquisition date, but no material changes in the allocation of the purchase prices are expected. Revaluation done for previous year, related to Purchase Price Allocation, is included in the statement below. 92/138 Danfoss Annual Report 2020Note 21 Note 22 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 20 Acquisition and sale of subsidiaries and activities (continued) EURm The following table summarizes the consideration paid/received for acquired/sold companies, and the fair value of assets and liabilities at the closing date. Intangible assets, except goodwill Property, plant and equipment Other non-current assets, including deferred tax assets Inventories Receivables *) Cash and cash equivalents Interest-bearing debts Provisions, including deferred tax liabilities Trade and other payables Net assets acquired Goodwill/profit on disposal Net assets, including goodwill(-)/profit on disposal Cash and cash equivalents Consideration, net of cash Change in short-term payables/receivables/provisions Previously acquired shares (associated) Adjustment related to step-acquisition Minority interests Net cash paid(-)/received *) receivables in acquisitions includes provision for bad debt of EUR 0m (2019: 0.2m) Note 21 Acquisition / Sale of other investments EURm Sale of shares and other securities Purchase of shares and other securities Increase/decrease in lending 93/138 2019 Acquisitions 2020 Acquisitions 2019 Disposals 2020 Disposals -2 -2 2 -58 -10 -2 -8 -11 -7 14 8 13 -61 -103 -164 7 -157 1 5 9 2 -140 2019 37 37 2020 5 -1 -15 -11 Danfoss Annual Report 2020Note 23 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 22 Change in liabilities arising from financing activities EURm Carrying amount as of January 1, 2019 Adoption of IFRS 16 Restated balance as of Janaury 1, 2019 Cash flows: Cash repayment Lease payments Cash proceeds Non-cash transactions: Acquisitions of subsidiaries Acquisitions and disposal of lease liabilities Reclassification Other Carrying amount as of December 31, 2019 Cash flows: Cash repayment Lease payments Cash proceeds Non-cash transactions: Acquisitions and disposal of lease liabilities Reclassification Other Carrying amount as of December 31, 2020 Short-term borrowings 56 52 108 Long-term borrowings 1,007 90 1,097 -423 -59 383 10 28 30 -1 76 -26 -61 8 23 50 -2 68 -604 601 4 25 -30 1,093 -5 64 -50 1 1,103 TOTAL 1,063 142 1,205 -1,027 -59 984 14 53 -1 1,169 -31 -61 8 87 -1 1,171 Lease payments are the principal portion of lease liabilities and are presented under cash flows from financing activities in the Statement of Cash Flows. The Group's other change in liabilities arising from financing activities in 2020 mainly consists of foreign exchange adjustments and short-term and long-term borrowings, reclassification. Further information on lease is provided in Note 24 Leases. 94/138 Danfoss Annual Report 2020Note 24 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 23 Contingent liabilities, assets and security EURm SECURITY Carrying amount of land and buildings pledged as security for bank loans and mortgages Leasing assets pledged as security for leasing commitments Carrying amount of interest-bearing liabilities with security in assets 2019 140 184 265 2020 126 208 289 In connection with disposal of subsidiaries, ordinary guarantees and warranties have been issued. These guarantees and warranties are considered to have no impact on the Group's financial position beyond what has been stated in the Annual Report. CONTINGENT LIABILITIES The Danfoss Group is party to a small number of disputes, lawsuits and legal actions, including tax disputes. It is the view of the Management that the outcome of these legal actions will have no other significant impact on the Danfoss Group financial position beyond what has been recognized and stated in the Annual Report. CONTRACTUAL OBLIGATIONS Service contract commitment other than leases Inventories Property, plant and equipment Purchase commitments 2019 85 166 37 288 2020 72 144 48 264 95/138 Danfoss Annual Report 2020Note 25 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 24 Leases EURm LESSEE Lease liabilities are presented in borrowings of the Statement of Financial Position as follows: Current Non-current 2019 48 146 2020 49 170 The Group mainly leases buildings and cars. Lease payments are generally fixed. With the exception of short-term leases and leases of low-value underlying assets, each lease is reflected in the Statement of Financial Position as a right-of-use asset and a lease liability. The Group classifies its right-of-use assets in a consistent manner to property, plant and equipment, see Note 8 Property, plant and equipment. Each lease contract generally restricts the use of the right-of-use assets to the Group. Some lease contracts contain an option to extend the lease period or terminate the lease before the lease term. Management assesses weather or not it is reasonably certain that the option will be exercised after considering all relevant facts and circumstances. The Group has decided not to recognize a lease liability for short-term leases (leases with an expected term of 12 months or less) or for leases of low-value assets. Payments made under such leases are expensed on a straight-line basis. The expenses related to payments not included in the measurement of the lease liability are below EUR 8m (2019: 8m). At December 31, 2020, the Group had committed to leases not yet commenced. The total future cash outflows for leases that had not yet commenced are EUR 57m (2019: 64m), which are mainly for buildings. Total cash outflow for leases for the financial year ended December 31, 2020, was EUR 65m (2019: 66m). The amount recognised as profit or loss for the reporting period to reflect changes in lease payments arising from rent concessions to which the Group has applied the practical expedient for COVID-19-related rent concessions, is below EUR 1m. Further information on lease payment, interest expense on lease liabilities, additions, depreciation charge, carrying amount of right-of-use assets and maturity analysis of lease liabilities, is provided in Note 22 Change in liabilities arising from financing activities, Note 5 Financial expenses, Note 8 Property, plant and equipment and Note 15 Financial risks and instruments. 96/138 Danfoss Annual Report 2020Note 26 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 25 Related parties EURm Danfoss A/S’ related parties comprise the Bitten & Mads Clausen's Foundation and other shareholders with significant ownership interests, cf. Note 11 Share capital, as well as subsidiaries, associates, joint ventures, the Board of Directors and the Group Executive Team. Further, related parties comprise companies, in which the above-mentioned persons have controlling interest, joint controlling interests, or significant influence. BITTEN & MADS CLAUSEN's FOUNDATION, OTHER SHAREHOLDERS AND OTHER RELATED COMPANIES The Bitten & Mads Clausen's Foundation, which holds 48.08% of the shares in Danfoss A/S and controls 86.14% of the voting power, has the controlling influence. In the financial year, a limited number of transactions have taken place between the Bitten & Mads Clausen's Foundation, its other subsidiaries and certain shareholders of the Clausen family. The transactions comprise service and financial transactions, and they have been made according to the arm's length principle, or on a cost-covering basis. The total payment to the Danfoss Group does not exceed EUR 3.3m (2019: 3.3m). In the financial year, the Bitten & Mads Clausen's Foundation purchased shares in Danfoss A/S at a value of EUR 70m from to the company (2019: -58m). The Bitten & Mads Clausen's Foundation has agreed to utilize its first right to buy back the Danfoss A/S shares that relates to employee share programs, when these shares will be offered for sale. The agreement effectively transfers the liability from Danfoss A/S to the Bitten & Mads Clausen's Foundation. End of December 2020, these shares constitute less than 1% of the share capital in Danfoss A/S. BOARD OF DIRECTORS AND GROUP EXECUTIVE TEAM In the financial year, no transactions took place with the Board of Directors and Group Executive Team other than the transactions as a result of conditions of employment, except for the following: The Group has a rental agreement for a property in Italy with Chairman of the Board Jørgen M. Clausen. The rental agreement expired at the end of 2020. The rent payment amounted to EUR 0.3m in 2020 (2019: 0.3m). Besides that, companies in which Mads-Peter Clausen and Jørgen M. Clausen have significant ownership interests, have sold goods and services of less than EUR 0.7m (2019: 0.7m) to the Danfoss Group. All transactions were performed on an arm's length basis. For further information about the salaries of the Board and Group Executive Team, see Note 2 Expenses and other operating income, section A. Personnel expenses. TRANSACTIONS WITH ASSOCIATES AND JOINT VENTURES Sales of goods and services Purchases of goods and services 2019 40 16 2020 40 16 Transactions besides the above transactions with joint ventures and associates are described in Note 3 Investments, Note 4 Financial income, Note 5 Financial expenses, and Note 15 Financial risks and instruments. 97/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 26 Events after the balance sheet date Subsequent to December 31, 2020, on January 14, 2021, Danfoss announced the acquisition of the remaining 25% ownership share in Artemis Intelligent Power Ltd (AIP). AIP is the R&D and engineering company based in Edinburgh, Scotland specializing in hydraulic system development. On January 27, 2021, Danfoss announced the preparation of a divestment to meet regulatory requirements concerning fair competitive levels in the market. Danfoss is required to create and and divest the stand-alone business unit, White Drive Motors & Steering. The new business unit will include operations and products at three Danfoss locations in Hopkinsville, Kentucky, US; Wroclaw, Poland; and Parchim, Germany; in addition to three product lines from Eaton Hydraulics. Altogether, this includes approximately 800 employees. The divestment is a pre-requisite to close the acquisition of Eaton Hydraulics. 98/138 Danfoss Annual Report 2020Note 27 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 27 Basis for preparation and accounting policies Danfoss A/S is a company domiciled in Denmark. The Annual Report for the period January 1 - December 31, 2020, comprises the Consolidated Financial Statements of Danfoss A/S and its subsidiaries (the Group). The Consolidated Financial Statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and further requirements in the Danish Financial Statements Act for Class D companies. The Annual Report is presented in EUR, rounded to nearest million unless otherwise indicated. The functional currency of the Parent Company is DKK. The Annual Report has been prepared on the basis of the historical-cost convention except for the following assets and liabilities, which are measured at fair value: financial instruments measured at fair value, derivatives, contingent considerations from business combinations as well as pension and healthcare obligations. Non-current assets and disposal groups held for sale are measured at the lower carrying amount before the reclassification and fair value less costs to sell. Changes in accounting policies Danfoss A/S has implemented the standards and interpretations that have taken effect for 2020. None of those standards and interpretations have material effect on recognition and measurement in 2020, nor are they expected to have a material effect on Danfoss A/S in the future. New financial reporting regulations - Amendment to IFRS 16 COVID-19-Related Rent Concessions The Group has early adopted COVID-19-Related Rent Concessions – Amendment to IFRS 16 issued on May 28, 2020. The amendment introduces an optional practical expedient for leases in which the Group is 99/138 a lessee – i.e. for leases to which the Group applies the practical expedient, the Group is not required to assess whether eligible rent concessions that are a direct consequence of the COVID-19 coronavirus pandemic are lease modifications. The amendment has no impact on retained earnings at January 1, 2020. Other standards and amendments that are effective for 2020 are not relevant to the Group. A number of issued, but not yet effective, standards and interpretations have been published, which have not been adopted early by Danfoss A/S in the preparation of the 2020 Annual Report. The Group has assessed these standards and interpretations and conclude they are not expected to have a material impact on the Group. - Amendments to IAS 1 Classification of Liabilities as Current or Non-current - Amendments to IAS 16 Property, Plant and Equipment: Proceeds before Intended Use - Amendments to IAS 37 Onerous contracts - Cost of Fulfilling a Contract - Amendments to IFRS 3 Reference to Conceptual Framework - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform - Phase 2 Accounting policies The accounting policies set out below have been consistently applied in respect of the financial year and the comparative figures. Consolidated Financial Statements The Consolidated Financial Statements comprise the Parent Company, Danfoss A/S and subsidiaries, in which Danfoss A/S directly or indirectly holds more than 50% of the voting rights, or otherwise controls the company’s financial and operating policies with a view to obtaining a yield or other benefits from its activities. Companies in which the Group has between 20% and 50% of the voting rights and exercises a significant influence, but does not control, are considered associates or joint ventures when the joint-venture conditions of IFRS 11 are met. When assessing whether Danfoss A/S exercises control or significant influence or joint control, potential voting rights, which can be utilized at the balance sheet date, are taken into account. The Consolidated Financial Statements are prepared by aggregating the Financial Statements of the Parent Company and the individual subsidiaries, which have all been prepared in accordance with the accounting policies of Danfoss A/S. Investments in subsidiaries are set off against the proportionate share of the subsidiaries’ fair value of the identifiable net assets and recognized contingent liabilities at the acquisition date. On consolidation, intragroup income and expenses, shareholdings, intra-group balances and dividends, and realized, and unrealized, profits and losses on transactions between the consolidated companies are eliminated. Unrealized losses are eliminated in the same way as unrealized profits, provided that no impairment has occurred. In the Consolidated Financial Statements, the items of subsidiaries are recognized in full. The minority interests’ proportionate share of the profit/loss for the year is recognized as part of the Group’s profit/ loss for the year and as a separate share of the Group’s equity. The companies included in the Group are disclosed in the section “Group Companies”. acquired companies. Unless divested companies are classified as discontinued operations, comparative figures are not restated. When the Danfoss Group takes over control of acquired companies, the purchase method is applied. This means that the identifiable assets and liabilities, including contingent liabilities, of the acquired companies are stated at fair value at the acquisition date. Identifiable intangible assets are recognized if they can be separated, or arise, from a contractual right. The tax effect of revaluations is recognized. The time of takeover is the day when the Danfoss Group de facto obtains control of the acquired company. The consideration for a business comprises the fair value of the consideration agreed upon, in the form of assets transferred, liabilities assumed, and equity instruments issued. If part of the consideration is contingent on future events or in compliance with agreed conditions, that part of the consideration is recognized at fair value at the acquisition date. Costs attributable to business combinations are recognized directly in the income statement when incurred. When a business is taken over in more than one transaction (step acquisition), previously acquired investments are revalued at fair value at the acquisition date, and value adjustments are recognized in the income statement under other operating income or other operating expenses. Management estimates the fair value of the total investment acquired immediately on completion of the step acquisition. Fair value is measured at the cost of the total investment acquired. Business combinations Newly acquired or established companies are recognized in the Consolidated Financial Statements from the acquisition date, and divested companies are recognized in the consolidated income statement until the time of divestment. Comparative figures are not restated for newly If uncertainty exists at the acquisition date concerning the identification or measurement of acquired assets, liabilities or contingent liabilities, initial recognition is made at provisional fair values. If it subsequently becomes apparent that the fair value of identifiable assets and liabilities, including contingent liabilities, differs from the assumed Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 27 Basis for preparation and accounting policies (continued) fair value at the acquisition date, the calculation is adjusted retroactively, including goodwill, until 12 months following the acquisition. The effect of the adjustments is recognized in the opening equity and comparative figures are restated, if material. Subsequently, goodwill is not adjusted. Changes in estimates of contingent consideration are recognized directly in the income statement. Any excess of the cost over the fair value of the identifiable assets and liabilities, including contingent liabilities, is recognized as goodwill under intangible assets. Goodwill is not amortized but is subject to annual impairment tests. The initial impairment test is carried out before the end of the acquisition year. Upon acquisition, goodwill is allocated to the cash-generating units, which form the basis for subsequent impairment tests. Identification of cash-generating units is based on the Group’s cash flow, in accordance with the structure in the internal financial reporting. Such cash flow does not always follow the legal structure of the Group. Goodwill and fair value adjustments related to the acquisition of a foreign unit with a functional currency other than the Danfoss Group’s presentation currency are treated as assets and liabilities belonging to the foreign unit and converted to the functional currency of the foreign unit at the exchange rate on the transaction day. Gain or loss on disposal of subsidiaries, associates or joint ventures, are stated as the difference between the sales amount or the disposal amount and the carrying amount of net assets, including goodwill at the date of disposal, less disposal costs. Minority interests On initial recognition, minority interests are measured either at fair value or at their proportionate share of the fair value of the acquired company’s identifiable assets, liabilities and contingent liabilities. In the case of the 100/138 former, goodwill is recognized in respect of the minority interests’ ownership share in the acquired company, whereas in the latter case, goodwill is not recognized as a part of minority interests. The measurement of minority interests is determined for each transaction and stated in the notes under the description of acquired companies. Foreign currency translation For each of the reporting enterprises in the Group, a functional currency is determined. The functional currency is the currency used in the primary financial environment in which the reporting enterprise operates. Transactions denominated in currencies other than the functional currency are considered transactions denominated in foreign currencies. On initial recognition, transactions denominated in foreign currencies are translated to the functional currency at the exchange rates at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates at the balance sheet date. Currency gains and losses arising on translation are recognized in the income statement under financial items. Non-monetary assets and liabilities denominated in foreign currencies are recognized at the foreign exchange rates at the transaction date. On recognition in the Consolidated Financial Statements of companies with a functional currency other than EUR, the income statements are translated at the exchange rates at the transaction date, and the balance sheet items are translated at the exchange rates at the balance sheet date. An average exchange rate for each month is used as the exchange rate at the transaction date to the extent that this does not significantly distort the presentation of the underlying transactions. Foreign exchange differences arising on translation of the opening balance of equity of such enterprises at the exchange rates at the balance sheet date and on translation of the income statements from the exchange rates at the transaction date to the exchange rates at the balance sheet date, are recognized directly in equity under a separate translation reserve. The foreign exchange adjustment is allocated between the equity of the Parent Company and of the minority shareholders. Foreign exchange adjustments of balances, which are considered part of the total net investment in companies with a different functional currency than EUR, are recognized directly in the equity under a separate reserve for foreign exchange adjustments. Likewise, foreign exchange gains or losses are recognized in the Consolidated Financial Statements (directly in the equity under a separate reserve for foreign exchange adjustments) concerning the part of loans and derivative financial instruments, which has been allocated for currency hedging of net investments made in these companies, and which effectively protects against similar currency rate gains or losses on net investments in the company. On disposal of wholly owned foreign units, the foreign exchange adjustments, which have been accumulated in equity via other comprehensive income, and which can be ascribed to the unit, are reclassified from “Translation reserve” to the income statement, together with any gains or losses from the disposal. On disposal of partially owned foreign subsidiaries, the part of the translation reserve related to minority interests is not recognized in the income statement. Repayments of balances, which are considered part of the net investment, are not considered a partial disposal of the subsidiary. Income Statement Net sales from contracts with customers The Group is selling products and services in areas such as refrigeration, air conditioning, heating, motor control, and off-highway machinery. Net sales of products for resale and finished goods are recognized in the income statement when control of the products has been transferred to the customer. Control is transferred when the products are delivered, which occurs when the Group has objective evidence that all criteria for transfer of risk has been satisfied. Sales are only recognized to the extent that it is highly probable that a significant reversal will not occur. Products are often sold with retrospective volume discounts. Net sales are measured at the fair value of the consideration agreed, excluding VAT, duties and discounts in relation to the sale. Accumulated experience is used to estimate variable considerations (expected value method). The validity of assumptions and estimates are reassessed at each reporting date. Because of historical accurate estimates, it is highly probable that a significant reversal in the cumulative revenue recognized will not occur. Related service income is recognized in the income statement as the services are rendered. Accordingly, the recognized sale corresponds to the sales value of the work performed during the year. This is determined based on the actual costs incurred relative to the total expected costs. The sale of services is recognized in the income statement when the aggregated income and expenses of the service contract can be reliably measured, and it is probable that the Group will receive the financial benefits, including payments. The Group’s standard payment terms is 30 days, net from the date of invoice or current month +15 days. However, there may be country-specific deviations from the standard payment terms. The Group does not expect to have any contracts where the period between the transfer of the promised products Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 27 Basis for preparation and accounting policies (continued) or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust any of the transaction prices for the time value of money. A receivable is recognized when the products are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. The Group’s obligation to repair or replace faulty products under the standard warranty terms is recognized as a provision. Cost of sales Cost of sales comprises costs incurred in generating the year’s net sales. Such costs include cost of sales or manufacturing costs, including direct and indirect costs for raw materials and consumables, wages and salaries, rent and leases, and depreciation. Research and development cost Research and development costs include costs that do not qualify for capitalization, including costs like wages and salaries and consumables. Selling and distribution costs Selling and distribution costs comprise costs related to distribution of products sold during the year and sales staff, advertising and exhibition expenses etc., including depreciation. Furthermore, provisions for bad debt are included. Administrative expenses Administrative expenses comprise expenses in relation to administrative staff, management, office premises, office expenses etc., including depreciation. Other operating income and expenses Other operating income and expenses comprise items secondary to the principal activities of the companies, including gains/losses on disposal of non-current assets and companies, impairment losses, employee-termination expenses and 101/138 government grants. Government grants related to income are recognized at their fair value where there is a reasonable assurance that the grant will be received, and the Group will comply with all attached conditions. Government grants that compensate the Group for expenses incurred, are deducted at related expenses. Government grants related to purchase of property, plant and equipment are deducted at the carrying amount of the asset. Share of profit from investments in associates and joint ventures The proportionate share of the results of associates and joint ventures after tax is recognized in the consolidated income statement after elimination of the proportionate share of intra-group profits/losses and less goodwill impairment. Financial income and expenses Financial income and expenses comprise interest income and expenses, realized and unrealized gains and losses on securities that are valued through the income statement, debt and transactions denominated in foreign currencies, amortization of financial assets and liabilities and surcharges and refunds under the Tax Prepayment Scheme etc. Also included is the interest element of leases and gains and losses on derivative financial instruments, which are not designated as hedging arrangements. Borrowing costs incurred in relation to general borrowing activities or loans, which relate directly to the purchase, construction or development of qualifying assets, are allocated to the cost of such assets. Balance sheet Intangible assets Goodwill Goodwill is initially recognized in the balance sheet at cost and allocated to cash-generating units as described under “Business combinations”. Subsequently, goodwill is measured at cost less accumulated impairment losses. Goodwill is not amortized. Development projects, software, patents and licenses Development projects that are clearly defined and identifiable, where the technical feasibility, sufficient resources and a potential future market or utilization opportunity within the company is demonstrated, and where the company intends to produce, market or use the project, are recognized as intangible assets provided that the cost can be measured reliably and that there is sufficient assurance that future earnings or the net selling price can cover cost of sales, selling and distribution costs and administrative expenses and development costs. Other development costs are recognized in the income statement when incurred. Recognized development projects are measured at cost less accumulated amortization and impairment. Cost includes direct and indirect expenses, including salaries and borrowing costs incurred from specific and general borrowing directly pertaining to the development of development projects. Completed development projects, including software, are generally amortized on a straight-line basis over 4 to 8 years. Development projects in progress are not amortized, but annually tested for impairment. Patents and licenses are measured at cost less accumulated amortization and impairment. Patents are amortized on a straight-line basis over the patent period and licenses are amortized over the shorter of the contract period and the useful life. Patent and contract periods are normally 5-10 years. Other intangible assets Other intangible assets, including intangible assets acquired in a business combination, which typically comprise technology and customer relations, are amortized on a straight-line basis over the expected useful life, which is typically a period of 10 to 20 years. Intangible assets, including trademarks, with indefinite useful lives are not amortized, but are tested annually for impairment. Gains and losses on the disposal of intangible assets are determined as the difference between the selling price less costs to sell and the carrying amount at the selling date. Gains or losses are recognized in the income statement under “Other operating income and expenses”. Property, plant and equipment Land and buildings, plant and machinery and equipment are measured at cost less accumulated depreciation and impairment losses. Cost comprises the purchase price, expenses for materials, components, sub-suppliers, direct salary expenses, borrowing costs incurred from specific and general borrowing, which directly pertain to the construction of the individual asset and for self-produced assets as well as indirect construction costs. Where individual components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items, and depreciated separately. Subsequent costs, e.g. in connection with replacement of components of property, plant and equipment, are recognized in the carrying amount of the asset, if it is probable that the costs will result Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 27 Basis for preparation and accounting policies (continued) in future economic benefits. All costs incurred for ordinary repairs and maintenance are recognized in the income statement as incurred. Depreciation is provided on a straight-line basis over the expected useful lives, which are as follows: Buildings and building components Plant and machinery Equipment 10-30 years 4-8 years 2-6 years The depreciable amount of an asset is determined based on the residual value of the asset less any impairment charges. The residual value is determined at the acquisition date and reassessed annually. If the residual value exceeds the carrying amount of the asset, depreciation is discontinued. When changing the depreciation period or the residual value, the effect on the depreciation is recognized prospectively as a change in accounting estimates. Depreciation is recognized in the income statement under “Costs of sale”, “Selling and distribution costs” or “Administrative expenses”. Gains and losses on disposal of property, plant and equipment are determined as the difference between the selling price less costs to sell and the carrying amount at the selling date. Gains or losses are recognized in the income statement under ‘Other operating income and expenses’. The cost of leased assets capitalized is recognized at the lease commencement date at the present value of the future lease payments. For the calculation of the net present value, the incremental borrowing rate is used as discount rate. They are depreciated and amortized like other property, plant and equipment. Leased assets with low value or lease term less than 12 months are expensed over the lease period on a straight-line basis. 102/138 Impairment of non-current assets Goodwill and intangible assets with indefinite useful lives are tested annually for impairment, initially before the end of the acquisition year. Similarly, development projects in progress are subject to an annual impairment test. Deferred tax assets are subject to annual impairment tests and are recognized only to the extent that it is probable that the assets will be utilized. The carrying amount of other non-current assets is tested annually for evidence of impairment. When there is evidence that assets may be impaired, an impairment test is made. Impairment is tested by calculating the recoverable amount. The recoverable amount is the higher of an asset’s fair value less expected costs to sell and its value in use. The value in use is determined as the present value of expected future cash flows from the asset or the cash-generating unit (CGU). If the fair value or value in use cannot be determined on individual assets, the recoverable amount is determined as the fair value of expected future cash flows from activities or the cash-generating unit (CGU) to which the asset belongs. Impairment losses are recognized in the income statement if the carrying amount of an asset or a cash-generating unit exceeds the recoverable amount. Impairment of assets is reversed to the extent of changes in the assumptions and estimates underlying the impairment calculation. Impairment is only reversed to the extent that the asset’s new carrying amount does not exceed the carrying amount of the asset after depreciation or amortization, had the asset not been impaired. However, impairment of goodwill is never reversed. Financial assets Investments in associates and joint ventures are measured in the Consolidated Financial Statements according to the equity method at the proportionate share of the enterprises including additional value from acquisitions, goodwill and deduction or addition of proportionate shares of unrealized intra-group profits and losses. Investments in associates and joint ventures are tested for impairment, when evidence of impairment exists. Securities are measured at fair value through the income statement. Inventories Inventories are measured at cost. Where the estimated selling price less any costs of completion and selling (net realizable value) is lower than cost, inventories are written down to this lower value. Cost is calculated on the basis of the weighted average method or the FIFO method. The cost of work in progress and finished goods comprises the cost of raw materials and consumables, conversion costs and other costs directly or indirectly attributable to the goods. Indirect production overheads comprise maintenance and depreciation of production facilities and plant as well as administration and management of factories. Receivables Receivables are measured at amortized cost. Receivables are written down for bad-debt losses based on the simplified approach to providing for expected credit losses, which requires expected lifetime losses to be recognized from initial recognition of receivables. Impairment losses are calculated as the difference between the carrying amount and present value of expected cash flows, including the expected realizable value of any collateral provided. The discount rate is the effective interest rate used at the time of initial recognition of the receivable. Equity subscription for shares. Share capital can only be released according to the rules relating to capital reduction. Share premium Share premium comprises amounts not included in the nominal share capital, which have been paid by the shareholders in connection with capital increases, and gains and losses from the sale of treasury shares. The reserve is part of the company’s free reserves. Reserve for proposed dividends Dividends are recognized as a liability at the date when they are adopted at the Annual General Meeting. Proposed dividends for the financial year are included in equity under proposed dividends. Hedging reserve In connection with hedging of future sales and purchase transactions (cash flows), changes in the fair value of instruments qualifying for hedge accounting (documentation etc.) are recognized in the statement of comprehensive income under hedging reserve, until the hedged transaction is transferred to inventories. The recognized changes in the fair value are recognized in the hedging reserve under equity. Currency translation reserve Foreign exchange differences arising on the translation of the opening balance of equity of foreign companies at the exchange rates at the balance sheet date, and on translation of income statements from the exchange rates at the transaction date to the exchange rates at the balance sheet date are recognized directly in a separate translation reserve in the statement of comprehensive income under the item “Foreign exchange adjustments of foreign companies”. Share capital The share capital comprises the nominal portion of the amounts paid in accordance with the Foreign exchange adjustments of non-current balances with foreign subsidiaries and associates, which are considered additions to or deductions Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 27 Basis for preparation and accounting policies (continued) from the subsidiaries’ equity as well as foreign exchange adjustments of hedging transactions for the purpose of hedging the Group’s net investments in subsidiaries, are also recognized directly in the consolidated statement of comprehensive income. The translation reserve in the equity comprises the Parent Company shareholders’ share of the foreign exchange adjustments. On complete or partial disposal of a foreign entity or on repayment of balances, which constitute part of the net investment in the foreign entity, the share of the cumulative amount of the exchange differences recognized in other comprehensive income relating to that foreign entity is recognized in the income statement when the gain or loss on disposal is recognized. Reserve for own shares The reserve for own shares comprises the acquisition cost for the company’s portfolio of treasury shares. The dividend from treasury shares is recognized directly in the retained earnings in equity. Gains and losses from the sale of treasury shares are recognized in share premium. Provisions A provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a result of a past event in the financial year or previous years, and it is probable that the settlement of the obligation may lead to an outflow of the Group’s financial resources, which can be reliably measured at the balance sheet date. The amount recognized as a provision is Management’s best estimate of the expenses required to settle the obligation. In measuring provisions, the costs required to settle the liability are discounted if the effect is material to the measurement of the liability. For the measurement, a pre-tax discount factor is used, which reflects the current market interest rate level and the specific risks related to the liability. Changes in present values for the financial year are recognized under financial expenses. 103/138 Warranty provisions are recognized as the underlying goods and services are sold based on warranty costs incurred in the financial year and in previous years. Provisions for restructuring and employee- termination costs are made when the Group has agreed on a detailed and formal plan, and the Group has started implementing the plan or has announced the plan to the persons affected. Restructuring provisions do not include costs for the ongoing operations during the restructuring phase. Pension obligations and defined benefit healthcare plans The Group has entered into pension schemes and similar arrangements with the majority of the Group’s employees. In addition, the Group has healthcare plans contributing with payment for medical expenses for certain employee groups in the USA after their retirement. Contributions to defined-contribution plans, where the Group currently pays fixed pension payments to independent pension funds, are recognized in the income statement in the period to which they relate, and any contributions outstanding are recognized in the balance sheet as other debt. For defined-benefit pension and healthcare plans, the Group is under an obligation to pay a specific benefit upon retirement (e.g. a fixed amount or a percentage of the exit salary). For these plans, an annual actuarial calculation (Projected Unit Credit method) is made of the present value of future benefits under the defined-benefit plan. The present value is determined on the basis of assumptions about the future development in variables, such as salary levels, interest rates, inflation and mortality. The present value is determined only for benefits earned by employees from their employment with the Group. The actuarial present value less the fair value of any plan assets is recognized in the balance sheet under pension and healthcare obligations. Pension and healthcare costs for the year are recognized in the income statement based on actuarial estimates and financial expectations at the beginning of the year. Any difference between the expected development in assets and liabilities, and realized amounts determined at year-end constitutes actuarial gains or losses and is recognized directly in other comprehensive income. If changes in benefits relating to services rendered by employees in previous years result in changes in the actuarial present value, the changes are recognized as past service costs. Past service costs are recognized immediately, provided that the benefits have already vested. If the benefits have not vested, the past service costs are expensed in the income statement over the period in which the changed benefits vest. If a pension or healthcare plan constitutes a net asset, the asset is only recognized if it offsets future refunds from the plan or will lead to reduced future payments to the plan. Other long-term employee benefits Similarly, other long-term employee benefits are recognized based on an actuarial calculation. However, actuarial gains and losses are recognized in the income statement immediately. Other long- term employee benefits include jubilee benefits. Financial liabilities, other than derivatives Financial liabilities are initially recognized at fair value less transaction costs. Subsequently, they are measured at amortized cost. Amortized cost implies the recognition of a constant effective interest rate to maturity. Amortized cost is calculated as initial cost less any principal repayments and plus or minus the cumulative amortization of any difference between cost and nominal amount. Any capitalized residual obligation on leases is recognized in the balance sheet as a liability. The interest element of the lease payment is expensed in the income statement under financial items. Derivative financial instruments Derivative financial instruments, such as forward exchange contracts or options and commodity contracts, are recognized and measured at fair value. Positive and negative fair values of derivative financial instruments are shown as separate items in the balance sheet. Set-off of positive and negative values is only made when the Company has the right and the intention to settle several financial instruments net. Provided that the documentation requirements etc. are met, hedge accounting is applied to the instruments. In connection with hedging of future sales and purchase transactions (cash flows), changes in the fair value of instruments qualifying for hedge accounting are recognized in the statement of comprehensive income under the hedging reserve until the hedged transaction is occurs in the balance sheet. At this point, gains or losses relating to such hedging transactions are transferred from the statement of comprehensive income and are recognized in the same item as the hedged transaction. If the instruments do not qualify for hedge accounting, changes in market value are recognized directly in the income statement under financial items. Corporation tax and deferred tax Companies belonging to Danfoss A/S are generally liable to pay tax in the countries where they are domiciled. The current tax includes both Danish and foreign income taxes. Income statement The current and deferred taxes for the year are recognized in the income statement, except for tax related to transactions recognized in the statement of comprehensive income or directly in equity. Danfoss Annual Report 2020Definition of the financial ratios Danfoss at a glance Our business Financial performance Governance Financial Statements Note 27 Basis for preparation and accounting policies (continued) Surcharges, premiums and refunds relating to tax payments are recognized in financial income and expenses. Balance sheet Current tax payable and receivable are recognized in the balance sheet as tax computed on the taxable income for the year, adjusted for tax paid under the tax prepayment scheme. In the course of conducting business globally, transfer pricing disputes with tax authorities may occur and management judgment is applied to assess the possible outcome of such disputes. The most probable outcome is used as measurement method. Deferred tax liabilities and deferred tax assets are measured according to the balance-sheet liability method, which means that all temporary differences between the carrying amount and the tax base of assets and liabilities are recognized in the balance sheet as deferred tax liabilities and deferred tax assets, respectively. Exceptions are any tax incurred by selling shares in subsidiaries and which the Group can identify as being a tax liability and tax relating to goodwill, which is not deductible for tax purposes. Deferred tax assets are recognized at the expected value of their utilization; either as a set-off against tax on future income or as a set-off against deferred tax liabilities in the same legal tax entity and jurisdiction. Adjustment is made for deferred tax resulting from elimination of unrealized intra- Group profits and losses. Deferred tax is measured according to the tax rules and at the tax rates applicable in the respective countries at the balance sheet date when the deferred tax is expected to be crystallized as current tax. Cash flows relating to acquired companies are recognized in the statement of cash flows at the acquisition date, and cash flows relating to divested companies are included until the disposal date. Cash flows from operating activities Cash flows from operating activities are calculated according to the indirect method on the basis of profit before tax/profit before tax from continuing operations and adjusted for non-cash operating items, changes in working capital, paid financial items, received dividend and paid corporation taxes. Cash flows from investing activities Cash flows from investing activities comprise payment in connection with the acquisition and disposal of companies and activities, intangible assets and property, plant and equipment as well as securities classified as investing activities. Acquisitions of assets under leases capitalized are treated as non-cash transactions. Cash flows from financing activities Cash flows from financing activities comprise changes in the size or composition of the share capital, the raising and repayment of long-term and short-term bank debt, lease payment, acquisition of minority interests, acquisition and disposal of treasury shares and payment of dividends to shareholders. Cash and cash equivalents Cash and cash equivalents comprise bank account deposits, cash balances and highly liquid investments with short-term maturity and which are exposed to insignificant risk of change in value. Statement of cash flows The statement of cash flows shows the cash flows from operating, investing and financing activities for the year, and cash equivalents at the beginning and the end of the year. The cash-flow effect of acquisitions and disposals of companies is shown separately under cash flows from investing activities. Segment information The segment information applies to the internal management reporting and is prepared according to the Group’s accounting policies. Segment performance is primarily measured by EBITA. Segment income, expenses, assets and liabilities comprise those items, which can be allocated on 104/138 a reliable basis. Items, which are not allocated, primarily include income and expenses incurred by corporate functions, deferred tax (assets and liabilities), receivable and payable tax, other receivables and payables, cash and interest-bearing liabilities. Non-current segment assets are those non- current assets, which are used directly for segment operations, including intangible assets and property, plant and equipment as well as investments in associates and joint ventures. The majority of the Group’s buildings are recognized under Other areas in the segment reporting, as buildings are managed and operated by a real-estate unit. The segments are instead charged with rent/lease expenses for the use of these assets. Current assets are those current assets which are used directly for segment operations, including inventories and trade receivables. Segment liabilities comprise both non-current and current liabilities derived from segment operations, including trade payables and warranty obligations as well as other provisions. Lease payments are recognized under segment expenses. Capitalized lease assets and lease liabilities, and related depreciations and interest are recognized in Other areas. Relevant adjustments are made in Other areas to eliminate for lease payments in segments. Trade between segments takes place on market terms or on a cost-recovery basis. Financial measures In the Annual Report, Danfoss presents certain financial measures of the Group’s financial performance, financial position and cash flows that are not defined according to IFRS. These non- IFRS financial measures may not be defined and calculated by other companies using the same method and may not be comparable. The non-IFRS financial measures are calculated in the following manner: Local currency growth Sales growth adjusted for exchange rate translation effects EBITA Profit before interest, taxes, profit from associates & joint ventures and amortization, gains and losses related to acquisitions and divestments The following tables shows the reconciliation of EBITA with operating profit (EBIT), the most direct comparable IFRS financial measure: EBITA EURm 2018 EURm 2019 EURm 2020 Operating profit (EBIT) 648 695 625 Share of profit from associates and joint ventures Amortizations: Brand Technology Customer relations Gains/losses related to acquisitions and divestments EBITA 33 3 43 28 4 3 46 30 -6 3 47 19 -31 724 -7 771 35 723 Danfoss Annual Report 2020 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 27 Basis for preparation and accounting policies (continued) EBITDA margin Operating profit (EBIT) before depreciation, amortization, impairment and profit from associates & joint ventures /net sales EBITDA margin excluding other operating income, etc. Operating profit (EBIT) before depreciation, amortization, impairment and other operating income and expenses, and profit from associates & joint ventures /net sales EBITA margin excluding other operating income, etc. Operating profit (EBIT) before acquisition-related amortization, other operating income and expenses, and profit from associates & joint ventures /net sales EBITA margin EBITA /net sales EBIT margin Operating profit (EBIT)/net sales Return on Invested Capital (ROIC) Operating profit (EBIT)/average invested capital Invested Capital Net interest-bearing debt added to shareholders’ equity Return on Invested Capital (ROIC) after tax EBIT after tax/average invested capital excluding tax Invested capital excluding tax Net interest-bearing debt and tax balance sheet items (net) added to shareholders’ equity EBIT after tax Operating profit (EBIT) reduced with tax on profit 105/138 Return on equity Net profit after minority interests’ share/average equity excluding minority interests Equity ratio Equity/total assets Leverage ratio Interest bearing debt/equity at year-end Net interest-bearing debt to EBITDA ratio Interest-bearing debt less interest-bearing assets/ EBITDA Dividend pay-out ratio Total dividends distributed to shareholders/net profit Dividend ratio per share Total dividends distributed to shareholders/total shares Free operating cash flow Cash flow from operating and investing activities before acquisition of subsidiaries, proceeds from disposal of subsidiaries and acquisitions/sales of other investments, financial items, taxes, but including lease payments (IFRS16). Free operating cash flow after financial items and tax Cash flow from operating and investing activities before acquisition of subsidiaries, proceeds from disposal of subsidiaries and acquisitions/sales of other investments but including lease payments (IFRS16). The following tables shows the reconciliation of free operating cash flow after financial items and tax with cash generated from operating activities, the most direct comparable IFRS financial measure: Free operating cash flow after financial items and tax EURm EURm 2019 2018 EURm 2020 673 789 800 -227 -407 -242 41 140 -129 4 Cash flow from operating activities Cash flow from investing activities Acquisition of subsidiaries Proceeds from sales of subsidiaries Acquisition of other investments Proceeds from sale of other investments -4 -61 Lease payments -3 -59 Free operating cash flow after financial items and tax 359 463 493 Free cash flow Cash flow from operating and investing activities including lease payments (IFRS16). Danfoss Annual Report 2020 Note 28 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 28 Critical accounting estimates As a consequence of the accounting policies, determining the carrying amount of certain assets and liabilities requires estimates of how future events will affect the value of these assets and liabilities at the balance sheet date. The volatility of the global economy and the financial markets has made it more difficult to forecast the development of some future key assumptions – such as liquidity risk, credit risk, interest level and capital management etc. Therefore, Danfoss provides additional information about items in the Consolidated Financial Statements the carrying amount of which is at risk of being adjusted considerably over the next few years. Estimates, which are significant for the preparation of the Financial Statements, include goodwill, investments in associates and joint ventures, assessment of depreciation, amortization and impairment of non-current assets, measurement of deferred tax assets and measurement of pension and healthcare obligations. The estimates used are based on Management assumptions, which are assessed to be reliable, but which are inherently subject to uncertainty. Accordingly, Danfoss is subject to risks and uncertainties, which may cause actual results to differ from these estimates. For the Group, the measurement of intangible assets could be materially affected by significant changes in estimates and assumptions on which the measurement is based. Impact of COVID-19 Danfoss has actively monitored the COVID-19 development and the related risks during the year. Cost flexibility measures to safeguard profitability were implemented. Credit risk of customers, trade receivables and inventory development have been monitored. 106/138 Overall, COVID-19 has not impacted the critical accounting estimates and risks applied in the annual accounts. Management will continue to monitor and assess the ongoing development and respond accordingly. Impairment of goodwill In performing the annual impairment test of goodwill, an assessment is made as to whether the individual units of the enterprise (cash-generating units) to which goodwill relates, will be able to generate sufficient positive, net cash flows to support the value of goodwill and other net assets of the unit. Due to the nature of the Group’s operations, estimates have to be made of expected cash flows many years into the future, which will be subject to some degree of uncertainty due to changes in the global economic situation and changes in the strategy of the Group. This uncertainty is reflected in the chosen discount rate. The impairment test of goodwill and the particularly sensitive parts of the test are described in detail in Note 7 Intangible assets. Impairment of associates and joint ventures Danfoss performs impairment tests concerning investments in associates and joint ventures whenever indicators for impairment are present. Due to the nature of the operations of the investments, estimates have to be made of expected cash flows many years into the future, which will be subject to some degree of uncertainty. The investments in associates and joint ventures are described in more detail in Note 3 Investments in associates and joint ventures. Useful life and residual value of non-current assets Non-current assets are measured at cost less accumulated amortization, depreciation and impairment. Amortization and depreciation is made on a straight-line basis over the useful lives of the assets, taking into account the asset’s residual value. Expected useful lives and residual values are determined based on historical experience and expectations of the future use of the non-current assets. The expectations for future use and residual values may not be met, which may lead to a future reassessment of useful lives and residual values and a need for impairment write-downs or the incurrence of gain or losses on the disposal of the non-current assets. The amortization and depreciation periods used are described in the accounting policies in Note 27, and the value of non-current assets is disclosed in Note 7 Intangible assets and Note 8 Property, plant and equipment. Measurement of recognized tax assets and liabilities Deferred taxes, including the tax value of tax-loss carryforwards, are recognized at their expected value. The assessment of deferred tax assets regarding tax-loss carryforwards is based on the expected future taxable income of the respective units and the expiration date of the losses. Please see Note 13 Deferred tax for unrecognized, deferred tax assets. In the course of conducting business globally, transfer-pricing disputes with tax authorities may occur and Management judgment is applied to assess the possible outcome of such disputes. The most probable outcome is used as the measurement method, and Management believes that the provision made for uncertain tax positions, not yet settled with local authorities, is adequate. However, the actual obligation may deviate and is dependent on the results of the litigation and settlement with the relevant tax authorities. Corporation tax is disclosed in Note 16 Corporation tax. Uncertain tax positions are recognized if it is probable that the uncertain tax position will affect the enterprise’s future tax payments or refunds. Uncertain tax positions are measured so as to better reflect the receivable/liability and the related uncertainty. Defined-benefit plans and healthcare obligations The Group has established defined-benefit plans with certain employees at some of the Group’s foreign companies. The plans place the Group under an obligation to pay a certain benefit in connection with retirement (e.g. in the form of a fixed amount at retirement or a share of the employee’s exit salary). The pension obligations are determined by discounting the pension obligations at the present value. The present value is determined on the basis of assumptions about the future development in economic variables such as interest rates, inflation, mortality and disability probabilities, which are subject to some degree of uncertainty. External actuaries are used for the measurement of all significant defined-benefit plans. The assumptions used are disclosed in Note 14 Pension plans and healthcare obligations. Danfoss Annual Report 2020Note 29 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 29 Group companies As of December 31, 2020 The companies are owned 100% by Danfoss unless otherwise stated after the company name. Danfoss A/S, Nordborg, Denmark (Parent Company) • Subsidiary • Associate or joint venture EUROPE Austria • Danfoss Gesellschaft m.b.H. Belgium • Danfoss N.V./S.A. • Danfoss Power Solutions BVBA • Hydro-Gear Europe BVBA Bulgaria • Danfoss EOOD Croatia • Danfoss d.o.o. Czech Republic • Danfoss s.r.o. • Danfoss Power Solutions II s.r.o. Denmark • BetterHome ApS– 33% • Danfoss Compressors Holding A/S • Danfoss Distribution Services A/S • Danfoss Distribution II A/S • Danfoss Fire Safety A/S • Danfoss International A/S • Danfoss IXA A/S – 73% • Danfoss Power Electronics A/S • Danfoss Power Solutions ApS • Danfoss Power Solutions Holding ApS 107/138 • Danfoss Power Solutions Holding II ApS • Danfoss Power Solutions II Technology A/S • Danfoss Redan A/S • Gemina Termix Production A/S • Issab Holding ApS • Sondex A/S • Sondex Holding A/S Estonia • Danfoss AS Finland • Danfoss Editron Oy • Danfoss Power Solutions Oy Ab • Leanheat Oy • Oy Danfoss Ab • Sondex Tapiro Oy Ab • Vacon Oy France • Danfoss Commercial Compressors S.A. • Danfoss Power Solutions S.AS. • Danfoss Power Solutions II S.A.S. • Danfoss S.a.r.l. Germany • Danfoss Esslingen GmbH • Danfoss GmbH • Danfoss Power Solutions GmbH & Co. OHG • Danfoss Power Solutions Holding GmbH • Danfoss Power Solutions Informatic GmbH • Danfoss Power Solutions Parchim GmbH • Danfoss Power Solutions II GmbH • Danfoss Sensors GmbH • Danfoss Silicon Power GmbH • Danfoss Werk Offenbach GmbH • SMA Solar Technology AG -20% • Sondex Deutschland GmbH Great Britain • Artemis Intelligent Power Ltd. – 75% • Danfoss Limited • Danfoss Power Solutions Ltd. • Danfoss Power Solutions II Ltd. • Danfoss Scotland Limited • Senstronics Holding Ltd.– 50% (joint venture) • Senstronics Limited • Sondex (UK) Limited – in liquidation Hungary • Danfoss Kft. Iceland • Danfoss hf. Italy • Danfoss Distribution Services S.r.l • Danfoss Power Solutions S.r.l. • Danfoss S.r.l. Kazakhstan • Danfoss LLP Latvia • Danfoss SIA Lithuania • Danfoss UAB The Netherlands • Advitronic Engineering B.V. • Danfoss B.V. • Danfoss Editron B.V. • Danfoss Power Solutions B.V. • Danfoss Power Solutions II B.V. • Sondex B.V. • Sondex Holding Netherlands B.V. Norway • Danfoss AS • Danfoss Power Solutions AS Poland • Danfoss Poland Sp. z.o.o. • Danfoss Power Solutions Sp .z.o.o. • Danfoss Saginomiya Sp. z.o.o. – 50% (joint venture) • Elektronica S.A. – 50% (joint venture) • Sondex Braze Sp. z.o.o. • Sondex Poland Sp. z.o.o. • Sondex Polska Sp. z.o.o. • Sondex Sp. z.o.o. Romania • Danfoss District Heating S.R.L. • Danfoss S.R.L. • S.C. Sondex Production S.R.L. Russia • AO Ridan • Danfoss LLC • Danfoss Power Solutions LLC Serbia • Danfoss d.o.o. Slovakia • Danfoss Power Solutions a.s. • Danfoss spol. s.r.o. Slovenia • Danfoss Trata d.o.o. Danfoss Annual Report 2020 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 29 Group companies (continued) Spain • Danfoss Power Solutions S.A. • Danfoss Power Solutions Telecontrol, S.L.U. • Danfoss S.A. Sweden • Danfoss AB • Danfoss Power Solutions AB • EP Technology AB Switzerland • Danfoss AG Ukraine • Danfoss T.o.v. AFRICA – MIDDLE EAST South Africa • Sondex South Africa Pty. Ltd. – 80% • Danfoss (Pty) Ltd. Turkey • DAF Enerji Sanayi Ve Ticaret Anonim Sirketi • Danfoss Otomasyon ve Urunleri Tic Ltd. United Arab Emirates • Danfoss FZCO – 95% • Gulf Sondex FZCO NORTH AMERICA Canada • Danfoss Inc. USA • Daikin-Sauer-Danfoss America LLC – 45% • Danfoss LLC • Danfoss Power Solutions II, LLC • Danfoss Power Solutions Inc. • Danfoss Power Solutions (US) Company 108/138 • Danfoss Power Solutions Work Function, LLC • Danfoss Silicon Power LLC • Hydro-Gear Inc. – 60% • Hydro-Gear of Indiana, LLC • Hydro-Gear Limited Partnership– 60% • Sondex Equipment Holding Co., LLC • Sondex Properties, Inc. • White Hydraulics, Inc. LATIN AMERICA Argentina • Danfoss S.A. Brazil • Danfoss do Brasil Indústria e Comércio Ltda. . • Danfoss Power Solutions Indústria e Comércio Electrohidráulica Ltda. Chile • Danfoss Industrias Ltda. • Danfoss Power Solutions II SpA Colombia • Danfoss S.A. Mexico • Danfoss Industries S.A. de C.V. • Danfoss Power Solutions II S.A. de C.V. • Danfoss Power Solutions III S.A. de C.V. • Danfoss Power Solutions IV S.A. de C.V. ASIA-PACIFIC Australia • Danfoss (Australia) Pty. Ltd. • Danfoss Power Solutions Pty. Ltd. • Danfoss Power Solutions II Pty. Ltd. • Sondex Australia Pty. Ltd. • Sondex Engineering Pty. Ltd. Japan • Daikin-Sauer-Danfoss Ltd. - 45% • Danfoss Power Solutions Ltd. Malaysia • Danfoss Malaysia Sdn. Bhd. • Danfoss Power Solutions II SDN. Bhd. • Sondex Heat Exchangers Malaysia Sdn. Bhd. Philippines • Danfoss Philippines, Inc. Singapore • Danfoss Power Solutions Pte. Ltd. • Danfoss Power Solutions II Pte. Ltd. • Danfoss Singapore Pte. Ltd. South Korea • Danfoss Korea Ltd. • Danfoss Power Solutions Ltd. • Danfoss Power Solutions 2 Ltd. Taiwan • Danfoss Co. Ltd. Thailand • Danfoss (Thailand) Co. Ltd. New Zealand • Danfoss (New Zealand) Ltd. • Danfoss Power Solutions II Ltd. P. R. of China • Danfoss (Anshan) Controls Co. Ltd. • Danfoss (Tianjin) Fire Safety Co., Ltd. • Danfoss Industries Limited • Danfoss (Tianjin) Limited • Danfoss Micro Channel Heat Exchanger (Jiaxing) Co., Ltd. • Danfoss (Jiaxing) Plate Heat Exchanger Co., Ltd. • Danfoss Power Solutions (Jiangsu) Co., Ltd. • Danfoss Power Solutions (Jining) Co., Ltd. • Danfoss Power Solutions (Nanjing) Co., Ltd. • Danfoss Power Solutions (Zhejiang) Co., Ltd. • Danfoss Power Solutions Trading (Shanghai) Co., Ltd. • Danfoss Shanghai Hydrostatic Transmission Co. Ltd.–60% • Danfoss (Shanghai) Investment Co., Ltd. • Sondex Plate Heat Exchanger (Ningbo) Co., Ltd. • Sondex Plate Heat Exchanger (Taicang) Co. Ltd. • UQM Technologies Asia Ltd. • UQM Technologies (Shanghai) Co., Ltd. • Vacon (China) Drives Co. Ltd. • Visedo (Asia) Ltd. • Zheijang Holip Electronic Technology Co. Ltd India • Danfoss Fluid Power Pvt. Ltd. • Danfoss Industries Pvt. Ltd. • Danfoss Power Solutions India Pvt. Ltd. • Danfoss Technologies Pvt. Ltd. • Sondex Heat Exchangers India Pvt. Ltd. Indonesia • PT Danfoss Indonesia • PT Sondex Indonesia Iran • Danfoss Pars Private Joint Stock Company - in liquidation Danfoss Annual Report 2020Parent accounts and notes Parent accounts and notes Management’s Review Parent accounts and notes 110 111 Check into sustainability The climate-friendly Alsik hotel, situated close to the Danfoss headquarter, is today 76% CO2- neutral. A main contributor is the Danfoss Turbocor® oil-free chillers. 109/138 Danfoss Annual Report 2020Management’s Review for Danfoss A/S Danfoss at a glance Our business Financial performance Governance Financial Statements Management’s Review for Danfoss A/S (Part of Management’s Review) Danfoss A/S is the Parent Company of the Danfoss Group. In addition to holding the shares of most of the other Danfoss Group companies, an important function of the company is to fund the Group’s activities. The Company also constitutes the corporate framework for many of the Danfoss’ Danish activities and therefore includes a number of Danfoss’ Danish factories and Group functions. Danfoss A/S had 2,752 employees at the end of 2020. The profit before other operating income and expenses was EUR 101m against EUR 78m in 2019. The Company’s operating profit was EUR 86m against EUR 68m the previous year. Financial income and expenses decreased from a net expense of EUR 15m against a net income of EUR 93m in 2019, mainly due to a decrease in received dividends, impact of foreign-exchange contracts and increased impairment of subsidiaries. The profit after tax in 2020 was EUR 53m against EUR 149m the previous year. Equity was EUR 3,030m at the end of 2020 against EUR 2,896m at the end of 2019. The increase was mainly attributable to recognition of the profit for the year. Danfoss A/S expects net sales for 2021 to be on a level with the 2020 figures, and the company expects to report a profit in 2021. 110/138 Danfoss Annual Report 2020Incom statement parent Parent account and notes Danfoss at a glance Our business Financial performance Governance Financial Statements Income statement January 1 to December 31 EURm Net sales Cost of sales GROSS PROFIT Research and development costs Selling and distribution costs Administrative expenses OPERATING PROFIT EXCLUDING OTHER OPERATING INCOME AND EXPENSES Other operating income and expenses OPERATING PROFIT (EBIT) Financial income Financial expenses PROFIT BEFORE TAX Tax on profit NET PROFIT Attributable to: Proposed dividends reserve Other reserves 111/138 e t o N 1 1 1 1 1 1 2 3 4 2019 1,283 -1,016 267 -35 -94 -60 78 -10 68 148 -55 161 -12 149 80 69 149 2020 1,224 -952 272 -37 -83 -51 101 -15 86 127 -142 71 -18 53 53 53 Danfoss Annual Report 2020Statement of comprehensive income M Danfoss at a glance Our business Financial performance Governance Financial Statements Statement of comprehensive income January 1 to December 31 EURm NET PROFIT OTHER COMPREHENSIVE INCOME Foreign exchange adjustments on translation of DKK into EUR Items that can be reclassified to profit or loss OTHER COMPREHENSIVE INCOME AFTER TAX TOTAL COMPREHENSIVE INCOME 2019 149 -1 -1 -1 148 2020 53 13 13 13 66 112/138 Danfoss Annual Report 2020Statement of financial positiont M Danfoss at a glance Our business Financial performance Governance Financial Statements Statement of financial position As of December 31 EURm ASSETS NON-CURRENT ASSETS INTANGIBLE ASSETS PROPERTY, PLANT AND EQUIPMENT Investments OTHER NON-CURRENT ASSETS TOTAL NON-CURRENT ASSETS CURRENT ASSETS INVENTORIES Trade receivables external Trade receivables from subsidiaries Short-term loans to subsidiaries Receivable corporation tax Other receivables RECEIVABLES CASH AND CASH EQUIVALENTS TOTAL CURRENT ASSETS TOTAL ASSETS 113/138 e t o N 5 6 7 10 9 2019 2020 240 277 3,281 3,281 3,798 104 36 90 878 19 1,023 83 1,210 5,008 249 286 3,840 3,840 4,375 100 38 90 275 5 17 425 554 1,079 5,454 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Statement of financial position As of December 31 EURm LIABILITIES AND SHAREHOLDERS’ EQUITY SHAREHOLDERS’ EQUITY LIABILITIES Provisions Deferred tax liabilities Pension and healthcare benefit plan obligations Borrowings Borrowings from subsidiaries Other non-current debt NON-CURRENT LIABILITIES Provisions Borrowings Trade payables Trade payables to subsidiaries Borrowings from subsidiaries Debt to associates and joint ventures Corporation tax Derivative financial instruments (negative fair value) Other debt CURRENT LIABILITIES TOTAL LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 114/138 e t o N 9 8 9 9 10 9 2019 2,896 46 38 2 959 21 1,066 9 16 163 41 709 3 2 2 101 1,046 2,112 5,008 2020 3,030 41 37 2 946 102 39 1,167 23 16 153 13 880 4 60 108 1,257 2,424 5,454 Danfoss Annual Report 2020Statement of cash flows M Danfoss at a glance Our business Financial performance Governance Financial Statements Statement of cash flows January 1 to December 31 EURm Profit before tax Adjustments for non-cash transactions Change in working capital Interest received Interest paid Dividends received Paid tax CASH FLOW FROM OPERATING ACTIVITIES Acquisition of intangible assets Acquisition of property, plant and equipment Acquisition of subsidiaries Proceeds from disposal of subsidiaries Cash repayment of (-)/cash proceeds from loans to subsidiaries CASH FLOW FROM INVESTING ACTIVITIES Cash repayment of interest-bearing debt Cash proceeds from interest-bearing debt Cash repayment of (-)/cash proceeds from borrowings from subsidiaries Purchase of treasury shares Sale of treasury shares Dividends paid to shareholders in the Parent Company CASH FLOW FROM FINANCING ACTIVITIES NET CHANGE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents as of January 1 Foreign exchange adjustment of cash and cash equivalents CASH AND CASH EQUIVALENTS AS OF DECEMBER 31 115/138 e t o N 11 10 12 12 2019 2020 161 -49 18 18 -13 124 -13 246 -42 -43 -35 -13 -133 -985 974 94 -60 -78 -55 58 25 83 - 71 101 -7 26 -21 92 -26 236 -37 -37 -34 2 26 -80 -24 270 -2 70 314 470 83 1 554 Danfoss Annual Report 2020Statement of changes in equity M Danfoss at a glance Our business Financial performance Governance Financial Statements Statement of changes in equity EURm BALANCE AS OF JANUARY 1, 2019 Net profit Software-development costs Currency-translation adjustments Total other comprehensive income Total comprehensive income for the period Dividends to shareholders Purchase of treasury shares Total transactions with owners BALANCE AS OF DECEMBER 31, 2019 134 10 Net profit Software-development costs Currency-translation adjustments Total other comprehensive income Total comprehensive income for the period Dividends to shareholders Purchase of treasury shares Sale of treasury shares Total transactions with owners l a t i p a c e r a h S 134 e r a h S i m u m e r p 10 i g n g d e H s e v r e s e r t n e m p o l e v e d r o f e v r e s e R d e z i l a t i p a c n w o e v r e s e R s e r a h s -316 s t c e j o r p 93 37 37 s e v r e s e r r e h t O s e v r e s e R 2,885 2,662 69 -37 -1 -1 31 2 2 130 2,918 7 1 1 8 53 -7 13 13 59 80 80 69 -1 -1 68 2 -60 -58 2,672 53 13 13 66 80 -2 70 148 d e s o p o r P s d n e d i v i d 80 80 80 -80 -80 80 -80 -80 y t i u q e l a t o T 2,886 149 -1 -1 148 -78 -60 -138 2,896 53 13 13 66 -2 70 68 -60 -60 -376 -1 -1 -1 -2 70 68 BALANCE AS OF DECEMBER 31, 2020 134 10 -309 138 3,057 2,886 3,030 For further information on Equity and Share capital, see Statement of changes in equity and Note 11 Share capital, in Group section. 116/138 Danfoss Annual Report 2020 Notes content M Danfoss at a glance Our business Financial performance Governance Financial Statements Notes Note 1 Net sales, expenses and other operating income Note 2 Financial income Note 3 Financial expenses Note 4 Tax on profit Note 5 Intangible assets Note 6 Property, plant and equipment Note 7 Investments Note 8 Deferred tax Note 9 Financial risks and instruments Note 10 Corporation tax Note 11 Adjustment for non-cash transactions Note 12 Change in liabilities arising from financing activities Note 13 Contingent liabilities, assets and security Note 14 Leases Note 15 Related parties Note 16 Events after the balance sheet date Note 17 General accounting policies for Danfoss A/S Note 18 Significant accounting estimates for Danfoss A/S 117/138 Danfoss Annual Report 2020Note 1 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 1 Net Sales, expenses and other operating income EURm A. NET SALES Sale of goods Sale of services to Group members Sales of services to Group members mainly includes services sold in relation to Group functions. B. PERSONNEL EXPENSES Salaries and wages Severance payments Social security Pension cost - defined contribution plans Average number of employees Total number of employees as of end of the year Remuneration to Group Executive Team and Board of Directors: Salaries Pension costs Bonuses Group Executive Team Board of Director's fee Total Bonuses are influenced by results of 2020 as well as results of prior years. Total remuneration for registered members of Executive Management amounts to EUR 12m (2019: 10m). 118/138 2019 1,046 237 1,283 2019 256 1 2 21 280 2,863 2,869 2020 1,047 177 1,224 2020 238 9 8 20 275 2,810 2,752 2019 2020 4 1 8 13 1 14 4 1 11 16 1 17 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 1 Net Sales, expenses and other operating income EURm C. DEPRECIATION/AMORTIZATION AND IMPAIRMENT LOSSES Classification by nature: Amortization of intangible assets Depreciation of property, plant and equipment Depreciation/amortization and impairment losses Classification of amortization/impairment of intangible assets by functions: Cost of sales Selling and distribution costs Other operating expenses D. OTHER OPERATING INCOME AND EXPENSES Other gains related to acquisitions/disposals Other Other operating income Loss on disp. of property, plant and equipment Restructuring costs Other Other operating expenses Other operating income and expenses 2019 2020 23 37 60 21 2 23 29 39 68 27 2 29 2019 2020 1 1 -1 -10 -11 -10 5 4 9 -1 -9 -14 -24 -15 Danfoss A/S has received government grants of EUR 13m (2019: 0m) in total, which is related to COVID-19 compensation. The governments grants are deducted from the related expenses in the functions; Cost of sales, Selling and distribution costs and Administrative expenses. E. FEES TO AUDITORS APPOINTED AT THE ANNUAL GENERAL MEETING Audit fee Other assurance engagements fee Tax and VAT advice Other fees Total fee to Group Auditor 2019 2020 1 0 0 1 2 1 0 0 1 2 Fees for services other than the statutory audit of the Financial Statements provided by PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab (PricewaterhouseCoopers Denmark) amounted to EUR 0.9m (2019: 0.9m). Services other than the statutory audit of the Financial Statements comprise services relating to transfer pricing, tax audits, due diligence and agreed-upon procedures, as well as accounting advice. 119/138 Danfoss Annual Report 2020Note 2-3 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 2 Financial income EURm Dividend from subsidiaries and associates/joint ventures Interest from subsidiaries Reversal of impairment/gain on disposal of subsidiaries and associates/joint ventures Interest from banks, etc. Financial income Interest on financial assets measured at amortized cost Note 3 Financial expenses EURm Interest to banks, etc. Foreign exchange losses, net Impairment/loss on disposal of subsidiaries and associates/joint ventures Interest to subsidiaries Impairment/loss on loans Interest expense for leasing arrangements Financial expenses Interest on financial liabilities measured at amortized cost The impact of derivatives/foreign exchange contracts of EUR -65m (2019: 4m) is included in Foreign exchange losses, net. Further information on leases is provided in Note 14 Leases. 120/138 2019 2020 124 22 1 1 148 23 92 32 1 2 127 34 2019 2020 -12 -7 -17 -6 -12 -1 -55 -18 -22 -45 -65 -6 -3 -1 -142 -28 Danfoss Annual Report 2020Note 4 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 4 Tax on profit EURm Current tax expense Change in deferred tax Adjustments concerning previous years Tax on profit is defined as: Tax on profit before tax Tax-exempt income/non-deductible expenses Dividends exempt of tax Other taxes Adjustments concerning previous years Effective tax rate Tax on profit (income statement) Total taxes 121/138 2019 -15 -2 5 -12 22.0% 4.1% -16.8% 1.6% -3.1% 7.8% 2019 -12 -12 2020 -17 -1 -18 22.0% 29.0% -28.7% 2.0% 0.4% 24.7% 2020 -18 -18 Danfoss Annual Report 2020Note 5 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 5 Intangible assets EURm Cost as of January 1, 2019 Addition through merger with subsidiaries Transfers Additions Disposals Cost as of December 31, 2019 Amortization and impairment losses as of January 1, 2019 Transfers Amortization Disposals Amortization and impairment losses as of December 31, 2019 Carrying amount as of December 31, 2019 Cost as of January 1, 2020 Foreign exchange adjustments Additions Disposals Cost as of December 31, 2020 Amortization and impairment losses as of January 1, 2020 Amortization Disposals Amortization and impairment losses as of December 31, 2020 Carrying amount as of December 31, 2020 Internally developed software Patents, trademarks and other rights Development costs Goodwill 64 3 67 67 67 67 67 186 35 42 -2 261 53 22 21 -2 94 167 261 1 37 -15 284 94 28 -15 107 177 67 -35 32 46 -22 2 26 6 32 -6 26 26 1 -6 21 5 11 11 11 11 11 -1 10 11 -1 10 Total Other 264 42 -2 304 110 23 -2 131 173 304 1 37 -22 320 131 29 -22 138 182 TOTAL 328 3 42 -2 371 110 23 -2 131 240 371 1 37 -22 387 131 29 -22 138 249 Of the "internally developed software" approximately 60% relates to the One ERP Program described in the Management's Review for Group, page 24. IMPAIRMENT TESTS Goodwill in Danfoss A/S of EUR 67m (2019: 67m) is mainly a consequence of Danfoss A/S having merged with other Danish subsidiaries, in particular the merger with DEVI A/S in 2010. At the end of 2020, impairment tests have been performed on the carrying amount of goodwill (assets with indefinite useful lives). The impairment tests were perfomed on Danfoss A/S representing the base level of cash-generating units (CGUs), to which the carrying amount of goodwill can be allocated with reasonable accuracy. The impairment test method is similar to the impairment test performed at Group level described in Note 7 Intangible assets in the Danfoss Group accounts. Management does not assess that a reasonable change in the fundamental assumptions used in the impairment tests will result in a recoverable amount lower than the carrying amount. The same conclusion was made for 2019. 122/138 Danfoss Annual Report 2020Note 6 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 6 Property, plant and equipment EURm Cost as of January 1, 2019 Accounting policy change Transfers Additions Disposals Cost as of December 31, 2019 Depreciation and impairment losses as of January 1, 2019 Depreciation Disposals Depreciation and impairment losses as of December 31, 2019 Carrying amount as of December 31, 2019 Cost as of January 1, 2020 Foreign exchange adjustments Transfers Additions Disposals Cost as of December 31, 2020 Depreciation and impairment losses as of January 1, 2020 Foreign exchange adjustments Depreciation Disposals Depreciation and impairment losses as of December 31, 2020 Carrying amount as of December 31, 2020 123/138 Land and buildings Plant and machinery Equipment Assets under construction TOTAL 281 7 4 8 -6 294 179 8 -6 181 113 294 1 12 4 -3 308 181 12 -2 191 117 312 7 8 -8 319 269 13 -8 274 45 319 1 8 3 -5 326 274 1 11 -5 281 45 116 6 13 -8 127 43 16 -7 52 75 127 1 3 12 -25 118 52 16 -25 43 75 33 -11 22 44 44 44 -23 28 49 49 742 13 51 -22 784 491 37 -21 507 277 784 3 47 -33 801 507 1 39 -32 515 286 Danfoss Annual Report 2020Note 7 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 6 Property, plant and equipment (continued) EURm The right-of-use assets included in property, plant and equipment are presented below. Carrying amount related to right-of-use assets as of January 1, 2019 Accounting policy change Additions Depreciation Carrying amount related to right-of-use assets as of December 31, 2019 Carrying amount related to right-of-use assets as of January 1, 2020 Additions Depreciation Carrying amount related to right-of-use assets as of December 31, 2020 Further information on leases is provided in Note 14 Leases. Land and buildings Equipment TOTAL 7 -1 6 6 -1 5 16 6 7 -9 20 20 9 -10 19 16 13 7 -10 26 26 9 -11 24 124/138 Danfoss Annual Report 2020Note 8 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 7 Investments EURm Costs as of January 1 Foreign exchange adjustments, etc. Additions Disposals Costs as of December 31 Adjustments as of January 1 Reversed impairment Impairment for the year Disposal Adjustments as of December 31 n i s t n e m t s e v n I i s e i r a d i s b u s 2,646 -2 35 -2 2,677 -61 -17 -78 m o r f l s e b a v e c e R i n i s t n e m t s e v n I d n a s e t a c o s s a i i s e i r a d i s b u s s e r u t n e v t n o i j 934 314 -565 369 314 -5 1 -4 Carrying amount as of December 31 2,599 369 310 s t n e m t s e v n i 19 r e h t O 19 -16 -16 3 2019 L A T O T 3,913 -2 35 -567 3,379 -82 1 -17 -98 n i s t n e m t s e v n I i s e i r a d i s b u s 2,677 10 34 -11 2,710 -78 -65 10 -133 m o r f l s e b a v e c e R i n i s t n e m t s e v n I d n a s e t a c o s s a i i s e i r a d i s b u s s e r u t n e v t n o i j 369 578 947 314 1 315 -4 1 -3 3,281 2,577 947 312 2020 L A T O T 3,379 11 614 -12 3,992 -98 1 -65 10 -152 3,840 r e h t O s t n e m t s e v n i 19 2 -1 20 -16 -16 4 Where indicators for impairment were present at the end of 2020, impairment tests were performed on the carrying amount of "Investments in subsidiaries, associates and joint ventures". Main indicators are loss-giving activities, or if the carrying amount is higher than the equity in the local accounts or, where relevant, higher than valuation using a listed share price. When performing the impairment test, the valuation of the subsidiaries, associates and joint ven- tures is compared with their carrying amount. The principles are unchanged compared to the impairment tests performed in 2019. Additions for the year to "Investments in subsidiaries" is mainly related to capital injection in Danfoss (Shanghai) Investment Co., Ltd. Impairment losses for the year on "Investments in subsidiaries" of EUR 65m mainly relates to Sondex Holding A/S and Danfoss District Heating SRL. For Sondex Holding A/S the impairment is caused by a lower valuation of the entity due to large dividend payments in recent years. Danfoss District Heating SRL is under liquidation. Impairment losses/reversed impairment are reported as financial expenses/financial income. Additions for 2019 to "Investments in subsidiaries" is mainly related to the acquisition of Danfoss Scotland Limited. Impairment losses for 2019 on "Investments in subsidiaries" of EUR 17m mainly relates to Sondex Holding A/S. The impairment was caused by a lower valuation of the entity due to large dividend payments in recent years. Impairment losses/reversed impairment are reported as financial expenses/financial income. Further information on subsidiaries, associates and joint ventures is provided in Note 2 Financial income, Note 3 Financial expenses, Note 9 Financial risks and instruments, and Note 15 Related parties. 125/138 Danfoss Annual Report 2020 Note 9 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 8 Deferred tax EURm CHANGES IN DEFERRED TAXES Deferred taxes as of January 1 (net) *) Adjustments concerning previous years Deferred tax recognized in the income statement Deferred taxes as of December 31 (net) *) *) Liability (-) SPECIFICATION OF DEFERRED TAXES Property, plant and equipment and financial assets Current assets Liabilities Set-off within the same legal entities and jurisdiction Deferred tax assets Intangible assets Property, plant and equipment and financial assets Current assets Liabilities Deferred tax regarding Danish joint taxation Set-off within the same legal entities and jurisdiction Deferred tax liabilities 2019 -31 -5 -2 -38 2020 -38 2 -1 -37 2019 Deferred tax asset 2020 Deferred tax asset 12 15 -27 0 10 1 16 -27 0 Deferred tax liability Deferred tax liability 32 13 2 13 5 65 -27 38 31 13 15 5 64 -27 37 Of the deferred tax liability of EUR 37m (2019: 38m), EUR 5m (2019: 5m) can be attributed to tax relating to joint taxation with foreign subsidiaries in previous years. Danfoss A/S has deferred tax liabilities concerning temporary differences in foreign subsidiaries and associates and joint ventures of EUR 6m (2019: 5m). The liabilities are not recognized, because Danfoss A/S decides on their utilization and it is likely that the liabilities will not be recognized in the forseeable future. 126/138 Danfoss Annual Report 2020Note 9 Finansiel risks and statement M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 9 Financial risks and instruments EURm FINANCIAL INSTRUMENTS Below are relevant financial instrument specifications regarding Danfoss A/S. A description of financial risks can be found in the Group section see Note 15 Financial risks and instruments, to which reference is made. DANFOSS A/S' DEBT CATEGORIES AND MATURITIES Bank debt and corporate bond Mortgage debt Borrowings from subsidiaries Finance lease liabilities Trade payables Trade payables to subsidiaries Debt to associates and joint ventures Derivative financial liabilities *) Maturity is evenly spread over the period. Further information on leases is provided in Note 14 Leases. i g n y r r a C t n u o m a l a u t c a r t n o C w o l f h s a c 882 69 709 24 163 41 3 2 1,893 917 74 709 25 163 41 3 1,932 2019 5 r e v O s r a e y 251 73 Maturity ) * s r a e y 5 - 1 648 1 14 663 324 r a e y 1 - 0 18 709 11 163 41 3 945 i g n y r r a C t n u o m a l a u t c a r t n o C w o l f h s a c 893 74 982 25 153 13 4 869 69 982 24 153 13 4 60 2,174 2020 5 r e v O s r a e y 250 73 Maturity ) * s r a e y 5 - 1 626 1 102 15 r a e y 1 - 0 17 880 10 153 13 4 2,144 1,077 744 323 The maturity analysis is based on all non-discounted cash flow, including estimated interest payments. Interest payments are estimated according to existing market conditions. The non-discounted cash flow from derivative financial instruments is presented in gross amounts, unless the parties have a contractual right or obligation to make net settlements. THE ABOVE DEBT IS RECORDED AS FOLLOWS: Non-current liabilities Current liabilities 127/138 2019 959 934 1,893 2020 1,048 1,126 2,174 Danfoss Annual Report 2020 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 9 Financial risks and instruments (continued) EURm FINANCIAL INSTRUMENTS BY CATEGORY FINANCIAL ASSETS: Other investment Financial assets measured at fair value in the income statement Trade receivables Trade receivables from subsidiaries Short-term loans to subsidiaries Other receivables Cash and cash equivalents Loans, receivables, cash and cash equivalents measured at amortized cost FINANCIAL LIABILITIES: Contingent consideration measured at fair value via the income statement Interest-bearing debt Debt to subsidiaries Borrowing from subsidiaries Trade payables and other debt Financial liabilities measured at amortized cost Derivative financial instruments for the hedging of the fair value of recognized assets and liabilities Financial liabilities measured at fair value in the income statement Carrying amount 3 3 36 90 878 19 83 1,106 37 975 41 709 288 2,013 2 2 2019 Fair value 3 3 36 90 878 19 83 1,106 37 1,002 41 709 288 2,040 2 2 Carrying amount 4 4 38 90 275 17 554 974 2020 Fair value 4 4 38 90 275 17 554 974 34 34 962 13 982 304 2,261 60 60 984 13 982 304 2,283 60 60 The value of derivative financial instruments is measured according to generally accepted valuation techniques based on relevant observable swap prices and exchange rates. The market value of the interest-bearing debt is recognized at the present value of expected future instalment and interest payments. The discount rate applied was the Group's current borrowing rate on loans for corresponding terms. The short-term floating-rate bank debt is stated at the par value. The fair value of trade receivables and trade payables with short credit terms is estimated to be equal to the carrying amount. The methods applied remain unchanged compared to 2019. 128/138 Danfoss Annual Report 2020Danfoss at a glance Our business Financial performance Governance Financial Statements Note 9 Financial risks and instruments (continued) EURm FAIR VALUE HIERARCHY AS OF DECEMBER 31 FOR DANFOSS A/S FINANCIAL ASSETS: Other investments Total financial assets FINANCIAL LIABILITIES: Derivative financial instruments for the hedging of the fair value of recognized assets and liabilities Contingent consideration Interest-bearing debt Total financial liabilities FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE BASED ON LEVEL 3 Carrying amount as of January 1, assets/liabilities (-) Disposals/Reversals Carrying amount as of December 31 2019 2020 s e c i r p d e t o u Q t u p n i l e b a v r e s b O t u p n i l e b a v r e s b o - n o N Level 1 Level 2 Level 3 3 3 37 37 2 1002 1,004 l a t o T 3 3 2 37 1,002 1,041 s e c i r p d e t o u Q t u p n i l e b a v r e s b O t u p n i l e b a v r e s b o - n o N Level 1 Level 2 Level 3 4 4 34 34 60 984 1,044 l a t o T 4 4 60 34 984 1,078 2019 2020 -37 3 -34 -34 4 -30 Gain/loss (-) in the income statement is recognized under other operating income and expenses, and financial income and expenses. Fair value of the majority of the the financial instruments is determined using discounted cash-flow analysis. 129/138 Danfoss Annual Report 2020 Danfoss at a glance Our business Financial performance Governance Financial Statements Note 9 Financial risks and instruments (continued) EURm DERIVATIVES AS OF DECEMBER 31 FOR DANFOSS A/S n o ) - ( s s o l / n a G i t n e m j t s u d a e u a v l t e k r a m -2 -1 1 -2 -2 d e z i n g o c e r ) - ( s s o l / n a G i t n e m e t a t s e m o c n i n i -2 -1 1 -2 -2 2019 s r a e y 5 r e t f a e u D s r a e y 5 d n a 1 n e e w t e b e u D t c a r t n o c t a t n u o m A r a e y 1 n a h t s s e l e u D l i a p c n i r p / e c i r p 898 -27 144 2020 s r a e y 5 r e t f a e u D s r a e y 5 d n a 1 n e e w t e b e u D r a e y 1 n a h t s s e l e u D d e z i n g o c e r ) - ( s s o l / n a G i t n e m e t a t s e m o c n i n i -59 -1 -60 -60 n o ) - ( s s o l / n a G i t n e m j t s u d a e u a v l t e k r a m -59 -1 -60 -60 t c a r t n o c t a t n u o m A l i a p c n i r p / e c i r p USD EUR Other currencies Forward exchange contracts Derivatives end of year -56 -214 -117 130/138 Danfoss Annual Report 2020 Note 10-11 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 10 Corporation tax EURm Corporation tax payable/receivable (-) as of January 1 Paid during the year Adjustments concerning previous years Current tax expenses in income statement Corporation tax payable/receivable (-) as of December 31 The above corporation tax is recorded as follows: Assets Liabilities Note 11 Adjustment for non-cash transactions EURm Depreciation/amortization and impairment Financial income Financial expenses Other, including provisions Adjustment for non-cash transactions 2019 2020 10 -13 -10 15 2 2 2 2019 60 -148 55 -16 -49 2 -26 2 17 -5 5 -5 2020 68 -127 142 18 101 Depreciation/amortization and impairment includes depreciation on leased right-of-use assets. Further information on depreciation charge and lease payments is provided in Note 6 Property, plant and equipment and Note 12 Change in liabilities arising from financing activities. 131/138 Danfoss Annual Report 2020Note 12 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 12 Change in liabilities arising from financing activities EURm Carrying amount as of January 1, 2019 Adoption of IFRS 16 Restated balance as of Janaury 1, 2019 Cash flows: Cash repayment Lease payments Cash proceeds Non-cash transactions: Acquisitions and disposal of lease liabilities Reclassification Other Carrying amount as of December 31, 2019 Cash flows: Cash repayment Lease payments Non-cash transactions: Acquisitions and disposal of lease liabilities Reclassification Other Carrying amount as of December 31, 2020 Lease payments are the principal portion of lease liabilities and are presented under cash flows from financing activities in the Statement of Cash Flow. Further information on leases is provided in Note 14 Leases. 132/138 Short-term borrowings Long-term borrowings TOTAL 11 6 17 -386 -7 373 -5 12 12 16 -17 -7 4 20 16 951 8 959 -592 601 -2 -12 5 959 6 -20 1 946 962 14 976 -978 -7 974 -7 17 975 -17 -7 10 1 962 Danfoss Annual Report 2020Note 13 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 13 Contingent liabilities, assets and security EURm SECURITY Carrying amount of land and buildings pledged as security for bank loans and mortgages Leasing assets pledged as security for leasing commitments Carrying amount of interest-bearing liabilities with security in assets 2019 118 26 93 2020 111 24 93 In connection with disposal of subsidiaries, ordinary guarantees and warranties have been issued. These guarantees and warranties are considered to have no impact on Danfoss A/S' financial position beyond what has been stated in the Annual Report. CONTINGENT LIABILITIES Danfoss A/S is party to a small number of disputes, lawsuits and legal actions, including tax disputes. It is the view of the Management that the outcome of these legal actions will have no other significant impact on Danfoss A/S' financial position beyond what has been recognized and stated in the Annual Report. CONTRACTUAL OBLIGATIONS Service contract commitment other than leases Inventories Property, plant and equipment Hereof commitments relating to succeeding year 2019 2020 75 48 5 87 61 32 27 88 133/138 Danfoss Annual Report 2020Note 14-15 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 14 Leases EURm LESSEE Lease liabilities are included as borrowings in the Statement of Financial Position as follows: Current Non-current 2019 9 16 2020 9 15 Danfoss A/S mainly leases buildings and cars. Lease payments are generally fixed. With the exception of short-term leases and leases of low-value underlying assets, each lease is reflected in the Statement of Financial Position as a right-of-use asset and a lease liability. Danfoss A/S classifies its right-of-use assets in a consistent manner to property, plant and equipment, see Note 6. Each lease contract generally restricts the use of the right-of-use asset to Danfoss A/S. Some lease contracts contain an option to extend the lease period or terminate the lease before the lease term. Management assesses whether or not it is reasonably certain that the option will be exercised after considering all relevant facts and circumstances. Danfoss A/S has decided not to recognize a lease liability for short-term leases (leases with an expected term of 12 months or less) or for leases of low-value assets. Payments made under such leases are expensed on a straight-line basis. The expenses related to payments, not included in the measurement of the lease liability are below EUR 5m. Total cash outflow for leases for the financial year ending December 31, 2020, was EUR 11m (2019: 14m). Further information on lease payments, interest expense on lease liabilities, additions, depreciation charge, carrying amount of right-of-use assets and maturity analysis of lease liabilities, is provided in Note 3 Financial expenses, Note 6 Property, plant and equipment, Note 9 Financial risks and instruments and Note 12 Change in liabilities arising from financing activities Note 15 Related parties For more information about related parties, see Note 25 Related parties, in Group section. EURm TRANSACTIONS WITH ASSOCIATES AND JOINT VENTURES Purchases of goods and services 2019 19 Transactions besides the above transactions with joint ventures and associates are described in Note 2 Financial income, Note 3 Financial expenses, Note 7 Investments and Note 9 Financial risks and instruments. TRANSACTIONS BETWEEN DANFOSS A/S AND THE SUBSIDIARIES Sales of goods and services Purchases of goods and services 2019 1,179 440 Transactions besides the above transactions between Danfoss A/S and subsidiaries are described in Note 2 Financial income, Note 3 Financial expenses, Note 7 Investments, and Note 9 Financial risks and instruments. 134/138 2020 19 2020 1,196 452 Danfoss Annual Report 2020Note 16-17 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 16 Events after the balance sheet date Subsequent to December 31, 2020, on January 27, 2021, Danfoss announced the preparation of a divestment to meet regulatory requirements concerning fair competitive levels in the market. For further information refer to Note 26 in the Group section. Note 17 General accounting policies for Danfoss A/S Danfoss A/S is a public limited company domiciled in Denmark. The Annual Report for the period January 1 to December 31, 2020, comprises the Financial Statements of Danfoss A/S. The Financial Statements of Danfoss A/S have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU and Danish disclosure requirements for listed companies. Unless otherwise indicated, the Annual Report is presented in EUR rounded to the nearest million. The Board of Directors and the Group Executive Team reviewed and approved the Annual Report 2020 on March 4, 2021, and it will be presented for approval at the Annual General Meeting to be held on March 26, 2021. The Annual General Meeting has the power to amend and reissue the Financial Statements. Besides the following section, the accounting policies for Danfoss A/S are the same as for the Danfoss Group. Please refer to Note 27 in the Consolidated Financial Statements for the Danfoss Group. The impact of new accounting standards, as described in Note 27 in the Consolidated Financial Statements for the Danfoss Group is also assessed as immaterial to Danfoss A/S. INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES In Danfoss A/S’ Financial Statements, investments in subsidiaries, associates and joint ventures are measured at cost. In case of indication of impairment, an impairment test is made. If the recoverable amount is lower than cost, investments are written down to this lower value. Impairments are recognized in Danfoss A/S’ income statement under financial expenses. Reversal of impairments are recognized under financial income. Dividends from investments in subsidiaries, associates and joint ventures are recognized in Danfoss A/S’ income statement under financial income in the year, when the dividends are declared. DEFERRED TAX Danfoss A/S is jointly taxed with its Danish subsidiaries and sister companies. Current tax and deferred tax is allocated between the jointly taxed companies. The jointly taxed companies are taxed under the tax prepayment scheme. DEVELOPMENT PROJECTS Danfoss A/S has established a non-distributable reserve in equity regarding capitalized development projects. This reserve will be reversed as the development projects have effect on the income statements. The amount is presented net of deferred tax. 135/138 Danfoss Annual Report 2020Note 18 M Danfoss at a glance Our business Financial performance Governance Financial Statements Note 18 Significant accounting estimates for Danfoss A/S Significant accounting estimates for Danfoss A/S concern investments in subsidiaries, associates and joint ventures. In Danfoss A/S’ Financial Statements, investments in subsidiaries, associates and joint ventures are measured at cost. In case of indication of impairment, an impairment test is made. If the recoverable amount is lower than cost, investments are written down to this lower value. Due to the nature of the operations of the investments, estimates of expected cash flows have to be made many years into the future, which will be subject to some degree of uncertainty. The investments in subsidiaries, associates and joint ventures are described in more detail in Note 7 Investments. 136/138 Danfoss Annual Report 2020Further information available on Danfoss’ website: www.danfoss.com Date of publication: March 4, 2021 Contact address: Danfoss A/S Nordborgvej 81 6430 Nordborg Denmark Tel.: +45 7488 2222 CVR no. 20165715 (registration number with the Danish Business Authority) Email: danfoss@danfoss.com

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