PUBLIC RECORD VERSION

UNITED STATES OF AMERICA

BEFÖRE FEDERAL TRADE COMMISSION

COMMISSIONERS: Deborah Platt Majoras, Chairman

Pamela Jones Harbour

Jon Leibowitz

Wiliam E. Kovacic

J. Thomas Rosch

)

)

)

THE PROCTER & GAMBLE COMPANY, ) a corporation; )

)

)

)

)

)

)

)

In the Matter of

and

Docket No. C-4151

File No. 051-0115

THE GILLETTE COMPANY,

a corporation.,

PETITION OF THE PROCTER & GAMBLE COMPANY

FOR APPROVAL OF PROPOSED DIVESTITURE

Pursuant to Section 2.41(f) of the Federal Trade Commission ("Commission" or "FTC")

Rules of Practice and Procedure, 16 CF.R. § 2.41(f) (2005), and Paragraph II.A. of the final

Decision and Order approved by the Commission in the above-captioned matter, The Procter &

Gamble Company ("P&G") hereby fies this Petition for Approval of Proposed Divestitue

("Petition") requesting the Commission's approval of the divestitue of the APDO business,

including Right Guard, Soft & Dri, Dry Idea, Natrel Plus, and Balance ("the APDO Assets") of

The Gilette Company ("Gilette"), to The Dial Corporation ("Dial"), a subsidiar of Henkel

KGaA ("Henkel").
.~ PUBLIC RECORD VERSION

I. INTRODUCTION

On September 23,2005, P&G and the Commission entered into an Agreement

Containing Consent Orders, including an initial Decision and Order and an Order to Maintain

Assets. On October 1,2005, pursuant to an Agreement and Plan of Merger between P&G and

Gilette dated Januar 27, 2005, P&G completed its acquisition of Gilette. After a period of

public comment, on December 15, 2005, the Commission issued its final Decision and Order

, ("Order") (with minor changes) and Order to Maintain Assets (without changes) (collectively,

the "Consent Agreement"). At the same time it reissued its Complaint (also without changes).

Paragraph V.19 of the Commission's Complaint alleges that the acquisition by P&G of

the APDO Assets would substantially lessen competition in the United States market for men's

antiperspirants/deodorants because the acquisition would significantly increase the concentration

level in the market, leaving P&G as the leading supplier. Paragraph IV;A. of the Order requires

P&G to divest the APDO.Assets within 120 days from the date the Order becomes final to a

buyer approved by the Commission.

On Februar 20,2006, Gilette and Dial executed an Asset Sale and Purchase Agreement

(including attachments, exhibits, anexes, and schedules) (collectively, the "Agreement") for the

sale of the APDO Assets. As par of the transactions contemplated by the Agreement, P&G and

Dial wil execute a Transitional Supply Agreement and a Transitional Services Agreement

(collectively, the "TSSA") for provision of transitional supply and services by P&G to DiaL. A

copy of the Agreement is attached hereto as Confidential Exhibit A.

P&G desires to complete the proposed divestiture of the APDO Assets as soon as

possible following Commission approval. Prompt consummation will fuher the puroses of the

Decision and Order and is in the interests of the Commission, the public, P&G, Dial, and Henkel

because it wil allow Dial and Henkel to move forward with their plans for the competitive

2
PUBLIC RECORD VERSION

operation of the divested business, and it will allow P&G to fulfill its obligations under the

Consent Agreement. P&G accordingly requests that the Commission promptly commence the

period of public comment pursuant to Section 2.41 (f)(2) of the Commission's Rules of Practice

and Procedure, 16 C.F.R. § 2.41 (f)(2), limit the public comment period to the customar thirtyday period, and grant this Petition by approving the divestitue of the APDO Assets to Dial

pursuant to the proposed agreement as soon as practicable after the close of the public comment

period.

This Petition describes the principal terms of the Agreement by whichP&G proposes to

divest the APDO Assets to Dial and explains why the Agreement satisfies the objectives and

requirements of the Consent Agreement by establishing a strong and effective competitor in the

sale of men's antiperspirants/deodorants in the United States.

II. REQUEST FOR CONFIDENTIAL TREATMENT

Because this Petition and its attachments contain confidential and competitively sensitive

business information relating to the divestitue of the APDO Assets, P&G has redacted such

confidential information from the public version of this Petition and its attachments. i The public

disclosure of this information would prejudice P&G, Dial, and Henkel, could cause harm to the

ongoing competitiveness of the APDO Assets, and could impair P&G's ability to comply with its

obligations under the Consent Agreement.

Pursuant to Sections 2.4 1 (f)(4) and 4.9(c) of the Commission's Rules of Practice and

Procedure, 16 C.F.R. §§ 2.41 (f)(4), 4.9(c), P&G requests, on its own behalf and on behalf of Dial

and Henkel, that the confidential version of this Petition and its attachments and the information

i For the convenience of maintaining the public record, P&G is submitting two versions of this Petition: a

confidential version that contains confidential and proprietary information and documents necessary for the

Commission to assess this Petition, and a redacted version that excludes confidential and proprietary information for

placement on the public record.

3
... PUBLIC RECORD VERSION

contained therein be accorded confidential treatment under 5 U.S.C. § 552 (2000) and Section

4.l0(a)(2) of the Commission's Rules of Practice and Procedure, 16 C.F.R. § 4.iO(a)(2). The

confidential version of this Petition is also exempt from disclosure under Exemptions 4, 7(A),

7(B), and 7(C) of the Freedom ofInformation Act, 5 U.S.C. §§ 552(b)(4), (b)(7)(A)-(C), and the

Har-Scott-Rodino Antitrust Improvements Act of 1976, as amended, 15 U.S.C. § l8a(h) (2000).

III. THE PROPOSED ACQUIRER

Paragraph IV.A of the Order requires P&G to divest the APDO Assets within 120 days

from the date the Order becömes finaL. Pursuant to this requirement, P&G has dilgently sought

an acquirer that would be acceptable to the Commission, and, in its compliance reports

previously fied with the Commission on November 8, 2005, Decèmber 7,2005, and Januar 6,

2006, P&G has provided a full description of its efforts to divest the APDO Assets.

According to the 2003 Statement of the Federal Trade Commission's Bureau of

Competiton on Negotiating Merger Remedies (the Merger Remedies Statement), to be an

acceptable buyer, a divestiture acquirer must be financially and competitively viable. The

acquirer must be able-with the package of assets to be divested-to maintain or restore

competition in the relevant market. Key factors to consider in this analysis are whether the

proposed acquirer has (1) the financial capacity and incentives to acquire and operate the

package of assets, and (2) the competitive abilty to maintain or restore competition in the

marketplace.

As discussed in more detail below, Henkel and Dial have both the financial capacity and

the incentives to acquire and operate the APDO Assets and also the competitive ability to

maintain or restore competition with respect to APDO sales in the United States. Henkel's and

Dial's satisfaction of these key factors demonstrates that they are an acceptable acquirer suitable

for approval by the Commission.

4
PUBLIC RECORD VERSION

A. Henkel and Dial Have the Financial Abilty To Successfully Complete the

Transaction and Invest in the APDO Assets on a Going-Forward Basis

Henkel is raned #470 in the 2005 Forte Global 500 list of the world's largest

corporations,2 with global revenues for fiscal 2005 of 11,974 milion euros (more than $14

bilion). It has the financial capacity, resources, and incentives to acquire the APDO Assets and

ensure their continued operation as a viable, ongoing business. Henkel has operations in 125

countries and employs around 50,000 people. According to its 2005 Anual Report, the

company has access to substantial assets including liquid fuds and marketable securities valued

at over $1.2 bilion.3 Henkel's curent financial condition provides great flexibilty in making

additional investments in the business, as such investments may become necessar or propitious

in the futue.

Henkel is an established company with significant experience in the personal care

category with its hair care, skin care, oral care, bath and shower, soap, deodorant, and fragrance

products. And, the profitability of the APDO Assets-(CONFIDENTIAL MATERIAL

REDACTED)-wil provide even greater flexibilty for Henkel and Dial to invest in and expand

the men's antiperspirants/deodorants business in the United States.

B. Henkel and Dial Have and Wil Acquire the Necessary Industry Experience,

Customer Relationships, and Knowledge of the Divestiture Assets To

Operate the Business Successfully, as Henkel and Dial Are Established and

Integrated Producers and Marketers of Personal Care Products

The Bureau of Competition's 1999 Study of the Commission's Divestiture Process (the

Divestiture Study) discusses several factors that help to identify an acceptable divestiture buyer.

Specifically, the Divestiture Study cites the buyer's experience in the relevant industr and

knowledge of the assets to be purchased as key to a successful, divestiture.

2 Henkel's corporate headquarters is located in DUsseldorf, Germany.

3 A copy of Henkel's 2005 Annual Report, issued February 14,2006, is attached as Exhibit B to this

Petition. Henkel's quarterly and annual reports are available online at htt://financialreports.henkel.com.

5
'... PUBLIC RECORD VERSION

Henkel has been committed to the personal care business since its founding in 1876 by

Fritz Henkel in Düsseldorf, Germany. Henkel is one of the top-ten producers worldwide in

cosmetics and toiletries with such brands as Fa, Vision, Diadermine, Taft, Schwarzkopf, and

Dep, and holds the number three market position worldwide in the detergents and household

cleaners market, with brands such as Persil, Dixan, Vernel, and Bref.

On March 29, 2004, Dial became a wholly owned subsidiar of the Henkel Group. Dial

is organized into four core business units: Personal Care, Laundry Care, Home Care, and Food

Products. Dialif soap, the company's namesake product, is America's number one antibacterial

soap, with nearly 1 milion bars sold a day. Other brands under the Dial baner include Coastif,

Toneif, Pure & Natualif, Purexif laundry detergent (the number two sellng detergent in the

United States), and Renuzitif (one of the leading U.S. air fresheners). Henkel also acquired the

got2Bif line of hair care, bath and body products from Amitee Cosmetics Inc., complementing its

long-standing Schwarzkopf & Henkel brands including L.A. LOOKSif and Depif. Together with

Henkel's consumer adhesives portfolio (with leading brands like Loctiteif, Duck Tapeif, and

LePage~, North America now represents nearly one-fourth of Henkel's sales.

A key element in Dial's future growth is the development of innovative new products.

Durng the past few years, Dial has launched new Dial Completeif Antibacterial Foaming Hand

Wash, Dialif 2 in 1 Body Wash & Shave Cream and Dialif Daily Care Body Washes and Liquid

Hand Soaps. Toneif introduced Toneif Lotion and Body Butter. Renuzitif has introduced Super

Odor Neutralizerif, Roller Scentsif, a long lasting bathroom deodorizer, and Airletsif, a long

lasting and discreet air freshener that plugs into electrical outlets. Dial's Purexif brand has

introduced Zoutif Laundry Stain Remover liquid and spray.

The APDO Assets strongly complement Henkel's and Dial's existing consumer products

business in the North America. Right Guard antiperspirants and deodorants wil prove a natural

6
PUBLIC RECORD VERSION

addition to Henkel's strong portfolio of personal care consumer brands like Dialif. The APDO

business wil be able immediately to take advantage of Henkel's and Dial's distribution structue,

customer relationships, and marketing and advertising infrastructue.

The APDO Assets also should benefit from Henkel's expertise in research, development,

and marketing of antiperspirants and deodorants outside the United States. Since about 1970,

Henkel has successfully expanded its European toiletry brand Faif from soaps to include lines of

deodorants, shower gels, and bubble baths. Henkel holds leading positions in the European

personal cleansing and deodorant markets through its international brand Faif and a strong

portfolio oflocal brands such as LaTojaif, bacif, and Neutromedif.

C. Henkel Has The Competitive Abilty To Maintain Or Restore Competition In

The Marketplace

The Merger Remedies Statement suggests that the proposed acquirer have an "economic

incentive to maintain or restore competition in the relevant market." The Divestiture Study

emphasizes the importance of the buyer's commitment (i. e., substatial investment in the

relevant business). Given Henkel's relevant experience in personal care products, Henkel is

fully qualified to operate the APDO Assets in a manner that will maintain or restore competition

in the marketplace. The Henkel management and employees are experienced in the production

and marketing of personal care products, including deodorants. Furthermore, all of the assets

needed to operate the APDO Assets competitively will be included as par of the sale to DiaL. As

such, it is not anticipated that this acquisition wil generate a need for substantial capital to

develop the APDO Assets in the near term.

In parallel with its acquisition of Dial, Henkel explicitly stated its intention of

strengthening its portfolio of brand-name consumer products in North America. The addition of

Right Guard, one of the leading North American brands of men's antiperspirant and deodorant

7
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PUBLIC RECORD VERSION

products, is a natual next step. It provides an excellent fit with Henkel's strategic plans for

growth into further segments of the personal care business and for a more balanced regional

presence. Henkel's long history and extensive experience with similar products in Europe,

coupled with the Dial infrastructue and expertise in North America, provide Henkel the perfect

platform for expansion. Henkel is well positioned to maintain and expand the APDO Assets'

customer relationships as a strong competitor in the marketplace immediately. Throughout the

years of constant growth and expansion, Henkel has proven that, with the necessary intellectual

property and innovation, it is capable of successfully entering into new businesses.

iv. THE APDO ASSETS

Dial will be acquiring an established business with a proven record of innovative

development and application as a supplier of antiperspirants and deodorants.

, The APDO Assets include the leading men's antiperspirant and deodorant brand, Right

Guard, along with women's brands Soft & Dri, Dry Idea, and non-U.S. brands Balance

(Columbia) and Natrel Plus (UK). Right Guard commands the second largest share in the male

U.S. antiperspirant/deodorant category in 2004 and has been a major contributor to the

development of the category over time. With widespread distribution in the United States, United

Kingdom, and Canada, Right Guard has solid chanel distribution and strong brand equity,

providing significant opportnities for future growth.

In a category in which brand name is very important in the consumer's purchase decision,

Right Guard's brand equity is extremely powerfuL. Right Guard's technological strength,

combined with superior product performance, has generated impressive brand equity that is

augmented by ongoing investment in world-class advertising. Within the men's

antiperspirants/deodorants category, Right Guard is one of the most recognized brands today.

Right Guard product offerings cover most significant product forms, including gels, roll-ons,

8
PUBLIC RECORD VERSION

sticks/solids and aerosols. The brand competes at a range of price points and is strongly

positioned to effectively paricipate in the premium-priced segment, the fastest-growing segment

within the category. Right Guard has some of the most clinically effcacious products in the male

antiperspirants/deodorants category and is sold in all major trade chanels. The premium-priced

. Xtreme sub-brand and the mid-priced Sport sub-brand leverage the equity of the overall Right

Guard umbrella and differentiate themselves via distinctive technology.

The Soft & Driand Dry Idea female brands enjoy high levels of consumer awareness and

strong distribution in the United States, Canada, and select Latin American countries. Both

. brands utilize several of the formulations and innovations featued in Right Guard and serve as

female complements to Right Guard in merchandising and promotional activities. Given their

abilty to add manufactuing and promotional scale, and the limited investment required to

support the brands, Soft & Dri and Dry Idea are effcient contributors to the portfolio's top- and

bottom-lines.

Antiperspirants and deodorants are considered necessar personal care purchases by

92 percent of teenagers and adults in North America and the United Kingdom. Driven by this

near-universal penetration in developed regions, the category delivers stable and predictable unit

growth. Globally, sales of antiperspirants and deodorants are estimated at $10.5 bilion and are

projected to grow at an annual rate of3.1 percent over the next five years, driven primarily by

increased product use in various developing locales and by changing consumer demand. In

paricular, increased consumer wilingness to pay more for new products that deliver valueadded benefits (such as fragrance or innovative packaging) has led to recent dollar value growth

in the premium-priced segment of the category. Success in this increasingly important segment is

driven by three main factors: brand strength, clinically tested and/or perceived product effcacy

and overall consumer satisfaction.

9
...

PUBLIC RECORD VERSION

Given its strong brand presence and loyal customer base, Right Guard is well positioned

to capitalize on this category growth. Right Guard was the second-most widely used APDO

brand marketed towards males in North America on a value basis in 2004, with an approximate

18 percent share. It benefits from strong brand equity, a meanngful asset given the importce

that brand name plays in the consumer's antiperspirant/deodorant purchase decision. For over

fort years, the distinctive Right Guard logo has been a valuable branding mechanism in the

personal care aisles of retailers, mass merchandisers, and drug stores. Right Guard was one of

the first deodorant brands and, as such, has helped shape the development of the category over

the last four decades. A very impressive history of innovation, best in class technology and a

long-standing investment in world-class advertising have helped to further build Right Guard's

equity.

The APDO Assets maintain healthy distribution levels with key national and regional

retailers. Right Guard is distrbuted by the nation's top retailers including Wal-Mar, Kmar,

Target, CVS, Walgreens, Rite Aid, Brooks, Longs, Safeway, Kroger, and Sam's Club. The

brand's vast distribution network, strong history of innovation and effective marketing provide it

with strong product placement, shelf-space, and merchandising opportnities. Right'Guard

products are usually placed at eye-level and benefit from significant shelf facings. Soft & Dri

and Dry Idea products are likewise widely distributed in the United States and Canada. Similar

to their male counterpars in the portfolio, retailers reward both female brands' strong equity

with prominent shelf-positioning.

The APDO Assets have achieved gross margins of (CONFIDENTIAL MATERIAL

REDACTED) in recent years. For 2004, gross profits were (CONFIDENTIAL MATERIAL

REDACTED) on worldwide net sales of (CONFIDENTIAL MATERIAL REDACTED).

Overall, the APDO Assets experienced (CONFIDENTIAL MATERIAL REDACTED) anual

10
PUBLIC RECORD VERSION

net sales growth from 2002 to 2004. Growth is expected to continue, powered by the

repositioning of the Right Guard brand, which is already in its final stages and ready for the

purchaser to reap the full benefit.

The APDO Assets include the equipment necessar for the production of Right Guard,

Soft & Dri, and Dry Idea, from the manufactung facility in Andover, Massachusetts as well as

molds located at third-part contract manufacturers (collectively, the "Equipment"). P&G wil

also provide transition services to faciltate the removal and transfer of the Equipment to Dial's

facilty without disruption to the business, including the transfer of the line that manufactues the

Power Stripe products, which require a unique, specially designed fillng process.

Pursuant to paragraph III of the Order to Maintain Assets, P&G has retained an Interim

Monitor to supervise P&G and Gilette's compliance with the divestitue and asset maintenance

obligations and related requirements. The Interim Monitor, Mr. Edward A. Gold of

PricewaterhouseCoopers LLP, was vested with all powers and authorities required to oversee

P&G's maintenance of the APDO Assets.

v. THE AGREEMENT

11
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PUBLIC RECORD VERSION

interest to the APDO Assets for the purchase price of (CONFIDENTIAL MATERIAL

REDACTED).

As set forth in more detail in the Agreement, the key acquired assets and rights include

(as these terms are defined in the Agreement): (i) the Books and Records; (ii) any Contract and

Supply Contract; (iii) the APDO Manufactuing Equipment; (iv) the Product Intellectual

Property, except the Product Licensed Intellectual Propert; (v) a non-exclusive, perpetual,

irrevocable, fully paid-up and royalty free licensees) with rights to sublicense to all Product

Licensed Intellectual Propert; and (vi) any goodwill primarly related to the Business. The raw

materials and inventories of the curent APDO products wil be sold at the end of the TSSA.

These assets, including product supply and services that P&G will provide to Dial pursuant to the

TSSA, constitute all the assets and services that are necessar for Dial to conduct the APDO

business immediately following the closing in all material respects in the same maner as it is

curently conducted by Gilette.

The TSSA and the Agreement between P&G and Dial provide, as required by Paragraph

II of the Order, that:

o P&G wil provide Dial with the opportity to enter into employment contracts

with the APDO Core Employees during the Access Period, will not interfere with

the hiring or employing by Dial of any such employees, and will remove any

impediments within the control ofP&G that may deter these employees;

o P&G will provide written notification of the restrictions on the use by P&G's

personnel of the Confidential Business Information related to the APDO Products;

o Upon reasonable notice and request by Dial, P&G wil make available to Dial, at

no greater than Direct Cost, such additional personnel, assistance and training as

Dial might reasonably need for the complete transfer of the APDO Assets;

o Upon reasonable notice and request from Dial, P&G shall provide, in a timely

maner, at no greater than Direct Cost, assistance of knowledgeable employees of

P&G to assist Dial to defend against, respond to, or otherwise paricipate in any

litigation related to the Intellectual Property.

12
PUBLIC RECORD VERSION

Thus, the Agreement fully complies with and satisfies the puroses of the Consent

Agreement.

VI. CONCLUSION

The proposed divestitue of the APDO Assets to Dial and Henkel wil accomplish fully

the puroses of the Consent Agreement and remedy any alleged increase of concentration in the

sale of men's antiperspirant/deodorant products in the United States as a result ofP&G's

acquisition of Gilette.

Dial and Henkel wil be a strong and effective competitor with the financial abilty to

successfully complete the transaction and invest in the antiperspirant/deodorant business on a

going-forward basis. As established aÌd integrated producers and marketers of personal care

products, Dial and Henkel have the necessary industry experience, customer relationships, and

knowledge of the APDO business to operate the U.S. operations successfully. Furermore, Dial

wil be acquiring an established business requiring no additional management expertise. Finally,

as a leading company in the manufactue and sale of personal care products, Dial and Henkel

have the competitive ability to maintain or restore competition in the marketplace. Accordingly,

P&G respectfully requests that the Commission approve the proposed divestitue as soon as

possible.

13
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Dated: Februar 24, 2006

PUBLIC RECORD VERSION

Respectfully submitted, BY'~

'JoeSms ' '

Montgomery Kosma

Jones Day

51 Louisiana Avenue, N.W.

Washington, DC 20001-2113

Telephone: (202) 879-3939

Facsimile: (202) 626-1700

Counsel for The Procter & Gamble Company

14
Docket No. C-4151

File No. 051-0115

Exhibit A

Exhibit B

EXHIBITS ENCLOSED

PUBLIC RECORD VERSION

Asset Sale and Purchase Agreement Between The Gilette Company and

The Dial Corporation

(CONFIDENTIAL MATERIAL REDACTED)

Henkel KGaA Anual Report 2005
PUBLIC RECORD VERSION

FTC Docket No. C-4151

File No. 051-0115

CONFIDENTIAL EXHIBIT A

Asset Sale and Purchase Agreeinent Between The Gilette Company And

The Dial Corporation

(Accorded confidential treatment under 5 u.s.e. § 552 (2000) and Section 4.10(a)(2) of the

FederalTrade Commission's Rules of Practice and Procedure, 16 e.FR. § 4.10(a)(2) (2005))

W AI-2204044v)
...

PUBLICRECORD VERSION

(CONFIDENTIAL INFORMATION REDACTED)

WAI-2204044vl
FTC Docket No. C-4151

File No. 051-0115

EXHIBIT B

Henkel KGaA Annual Report 2005

WAI-2204044vl

PUBLIC RECORD VERSION
'-:-:A~¡;l;år:R:eport2ÒÔ5 -.---- . - . I /

A World of Innovation

~n~ J

-l~iihk~
2005 sales by business sector 2005 EBIT by business sector')

Laundry &

Home Care 34 %

Laundry &

Home Care 34 %

2005 sales by reion 2005 EBIT by reion')

Europe! Afrca!

Middle East 62 %

Europe! Afrca

Middle East 67 %
, Business Setor

Business Sectors at a Glance
;'.;;.:, ':",' ~~ '.; '",-

:::".""é"...:"fi(,t~::4~n~ng~~~!,.grn~~¡;
Contents

Innovation happens as we turn our thoughts ie the unknev/rL H h ". b' t' t' . .¡ ., . i :ence 'vve i iave maGS it oür 0 lec ive 0 imagine tne vvisnes arlG

desires 0' c:¡y custorr18rs even before they thernSFives 2V'~=:

a\t.¡are c¡f tI~'Ierr~~ \!Je hS.\/t-: tr-~le creativity and eX8c-utj()ri e)~Cene~lca

to trans¡ate these predictive insights into innovativE' products, " , O¡lrç; ic. ;: '.!i'~,r1r'¡ nr ¡r'nn-'J;;.l:¡IÎ~-i, a '''0;1,'0' rlesì.g'I'1C,,-¡ ti'j ¡p;;ka Tì~n;)-li¡:iS "- - .'-" ~"-~.- -'.: '--,~-~.., "_. -=t~~.. ...... a~... ~ vv t _.¡ !~ 'v\". ~~.. !.l~~l.\... t-'~~/i'.. '-

~i\/es \s.e¡:3i::~ ... . - ~. - ,", '-"'~: ,'", ." '''-'' ,.~ ""au "U' "1~'! ::i~ i~.._~ ~ ¡ ;"..)¡'-"= LJt; . ~I L~! ctil , , t'" i '¡

liess se:=~T(jr;~; \--';- ,-' ¡ . e Quality from Henkel.

Contents

01 The Company 38 Sustainability

02 Preface 40 Laundry & Home Care

06 Report of the Supervisory Board 44 CosmeticsfToiletries

08 Management Board 48 Consumer and Craftsmen

10 Product portfolio Adhesives

12 Innovations 2005 52 Henkel Technologies

14 Shares 56 Opportunity and risk report

17 Corporate Governance 59 Outlook for the Henkel Group

Group Management Report 59 Underlying conditions

19 Operational activities 59 Sales and profits

forecast for 2006 22 Business performance

59 Post-closure report 28 Assets and financial analysis

60 Consolidated Financial Statements 32 Remuneration report

60 Consolidated statement 32 Remuneration of the of income Management Board

61 Consolidated balance sheet 33 Remuneration of the Supervisory

Board and the Shareholders' 62 Consolidated

Committee cash flow statement

34 Employees 63 Statement of recognized

35 Procurement and production income and expense

63 Notes to the Consolidated

35 Research and development Financial Statements

37 Marketing and distribution 63 Statement of changes in equity

19

ic;r1::)~ ~r~ ad rJ~iS~-

64 Group segment information

66 Changes in intangible assets,

property, plant and equipment

and financial assets

70 Notes to the consolidated

statement of income

76 Notes to the consolidated

balance sheet

98 Supplementary information on

the statement of income/balance

sheet

108 Recommendation for approval

of the annual financial statements and appropriation of the

profit of Henkel KGaA

109 Annual financial statements of

Henkel KGaA

11 0 Statement by the Management

Board

111 Auditors' report

112 Corporate management

116 Further Information

118 Financial highlights by quarter

Ten-year summary

Credits/Calendar

Henkel Annual Report 2005 1

'"i:

coc.

E

oü

'"~i-

Preface

~ ct ci L. tr1 ~ r: I

We are pleased to inform you that 2005 was a successful year for HenkeL. We generated profitable

growth and significantly expanded our market positions. Our businesses performed well in a world

exhibiting widely differing regional developments. Sluggish economic recovery in Western Europe

contrasted with the economic growth in North America. Latin America and the Asia-Pacific region.

And increasing energy and raw material prices brought added burdens.

The key facts and figures for our 2005 financial year can be summarized as follows:

o Sales rose by 13.0 percent to 11.974 milion euros with all our business sectors and

regions contributing to the increase.

o Organic sales (i.e. the figure after adjusting for foreign exchange and acquisitions/divestments) grew by 3.5 percent.

o Operating profit (EBIT) increased by 16.7 percent to 1.162 milion euros.

o Return on capital employed improved slightly by 0.3 percentage points to 13.3 percent.

o Comparable earnings per preferred share increased to 5.31 euros from 5.24 euros in the

previous year.

o The Management Board. the Shareholders' Committee and the Supervisory Board will

propose at the Annual General Meeting a dividend payout of 1.36 euros per preferred

share and 1.30 euros per ordinary share.

,.0: '"c.

E

ou

Q) .iIThese facts and figures reflect our unerring vision and determination to achieve leading positions

in our markets with brands and technologies that make people's lives easier, better and more

beautifuL.

Our success in this regard is primarily rooted in our employees' commitment and performance and we thank them for their contribution to our fiscal 2005 achievements. We intend to

further invest in their development with the knowledge that we can rely on their motivation,

their commitment, their flexibility and their talents. At this time we would also particularly

like to express our gratitude once more to the three Executive Vice Presidents who retired

from the Management Board in 2005 - Dr. Klaus Morwind. Professor Dr. Uwe Specht and Knut

Weinke. The drive and commitment to success that they have shown over these many years is

truly exemplary.

Significant progress in the integration of our major acquisitions in the USA - The Dial

Corporation, ARL (Advanced Research Laboratories) and Sovereign - was key to expanding

our market positions in 2005. We have achieved our target synergies with these acquisitions,

which continue to offer new potential. For the first time in our history, the USA has become

the Henkel Group's biggest country in terms of sales revenue.

Henkel Annual Report 2005 3
PrefaGe

We also succeeded in defending our home market in Western Europe against tough competition.

We have further increased our cost effectiveness and performance levels by implementing our efficiency-enhancement program on schedule. Despite the increase in the capital base arising from

our acquisitions, we also succeeded in slightly improving return on capital employed.

Our four business sectors operating in the three strategic areas of competence - Home Care.

Personal Care, and Adhesives, Sealants & Surface Treatment - all contributed to the increase

in sales and improvement in earnings in 2005. not least because they were able to expand

their positions in the growth regions of Eastern Europe, MricalMiddle East, Asia-Pacific and

Latin America. Our corporate acquisitions and the businesses taken over as part of the Clorox

exchange deal have been major contributors in this regard.

You may remember we set the goal for fiscal 2005 of improving Henkel's ability to grow

from within. Our organic sales growth offers proof positive of our success. We also gave ourselves the task of integrating the acquired companies quickly and smoothly, utilizing all the

potential synergies arising from this process while improving our cost structures and margins.

We have also attained these targets.

Our ability to forge the future, to respond pro-actively to the constantly changing world,

wil be crucial to further expanding our market positions. Innovations with our brands and

processes are the most important prerequisite for our market success going forward. We intend

"to further increase our efforts on this front and have therefore declared fiscal 2006 our "Year

ofInnovation". We expect all our employees to become more involved than ever in our search

for new - ideally market changing - products and processes. Innovations are vital to securing

our lead in the markets and to strengthening our product brands in the face of increasingly

tough competition.

In order to be successful in our innovation efforts, we need to focus particularly closely on

our customers. We need to understand their requirements with a high degree of accuracy and.

ideally, exceed their current expectations with our brands and technologies. In order to achieve

this goal. our vision needs to extend into the unknown, beyond our corporate comfort zone.

In our strategic research and development work, we utilize a worldwide network comprising

over 250 university-based partners. We also invest specifically in start-ups and venture capital

funds. Our aim is to make new discoveries, not as an end in themselves but rather as a means

of effectively contributing to Henkel's success. We are constantly shortening the process from

product idea to market launch through efficiency improvements. Already today, around one

quarter of our annual sales are generated by new, innovative products introduced during the

preceding three years. Our intention is to increase this proportion to 30 percent.

4 Henkel Annual Report 2005
Fiscal 2006 wil see a continuation of our efforts to further globalize the Henkel Group, with the

Asia-Pacific region expected to play an important role. And. as has previously been the case. we intend

to supplement our organic growth with selected acquisitions.

Our results for 2005 show we are well on our way to achieving our financial targets for

2008. Our intention for 2006 is to generate organic sales growth of3 to 4 percent, to increase

operating profit by around 10 percent after adjusting for foreign exchange and likewise to

achieve an increase in earnings per preferred share of about 10 percent.

We thank our corporate bodies and committees for their advice, guidance and constructive

criticism. and we thank you, our shareholders. for your continuing confidence and support.

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.cfSincerely yours,

~

Dipl.-Ing. Albrecht Woeste

iu.~

Chairman of the Shareholders'

Committee and of the

Supervisory Board

Prof. Dr. Ulrich Lehner

Chairman of the Management Board

of Henkel KGaA

Düsseldorf. February 14, 2006

Henkel Annual Report 2005 5
Report of the Supervisory Board

Dear Shareholders,

As required by law and the Company's Articles of Association, the Supervsory Board carefully and regularly

monitored the Management Board during the course of

fiscal 2005, at the same time advising on the strategic

development of the Company and on major business

activities undertaken.

To this end. we were informed regularly and comprehensively by the Management Board on relevant

matters during Supervsory Board meetings and were

provided with additional written and verbal reports on

the business situation, the development of the Company, business policy. profitability and short-term and

long-term corporate and financial planning. In the

course of the quarterly reports, details were provided

of the sales and profits of the Henkel Group both as

a whole and with further analysis by business sector

and geographic region. In addition, the Chairman of

the Supervisory Board remained in regular contact

with the Chairman of the Management Board outside

Supervsory Board meetings, receiving information

on current business developments and consulting on

important questions of Company policy and business

performance.

In the year under review, the Supervisory Board had

four meetings at which the reports ofthe Management

Board were discussed in detail and joint deliberations

were conducted with the Management Board on strategic issues and major projects and activities.

Main areas of Supervisory Board deliberation

In our discussions on corporate strategy, we dealt specifically with business developments and differences

in the individual regions. The focus here was on the

business sectors Consumer and Craftsmen Adhesives

and Cosmeticsrroiletries, and specifically their future

direction. We also dealt in detail with developments

in North America, particularly the integration of Dial

and the ensuing US structure/organization. Our business performance and market potential in Russia and

the CIS states were also considered.

6 Henkel Annual Report 2005

Further points of emphasis included implementation

of our Advanced Restructuring measures. the development of raw material prices and the organization of

our procurement activities.

In discussing the budget for the Henkel Group, we

looked particularly carefully into the plans submitted by the individual business sectors, their respective

product innovations and strategies. and issues relating,

to research and development.

Corporate governance

Again in 2005, the Supervsory Board examined the

issue of corporate governance. Using the results of a

comprehensive survey undertaken, we discussed in detail in our meeting of February 14, 2006. the effciency

with which we carried out our own work. There were

no concerns raised with respect to the Supervisory

Board's independence or the manner in which it performs its tasks.

Also at this meeting, proposals for resolution by the

Annual General Meeting and the joint Declaration of

Compliance of the Management Board, Shareholders'

Committee and the Supervisory Board with the German

Corporate Governance Code for 2006 were discussed,

approved and ratified. The full wording of the current

and also previous declarations of compliance can be

found on the Company's website.

Annual and consolidated financial statements and

auditing matters

The annual financial statements of Henkel KGaA for

the year ended December 31, 2005 and the consolidated

financial statements and management reports. including the accounting records from which they were prepared, have been examined by the auditors appointed

at the last Annual General Meeting, KPMG Deutsche

Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft ("KPMG"), Berlin and Frankfrt am

Main, and issued with an unqualified opinion.

KPMG reports that the annual financial statements

give a true and fair view of the net assets, financial
position and results of operations of Henkel KGaA in

accordance with German generally accepted accounting

principles, and that the consolidated financial statements give a true and fair view of the net assets. financial position and results of operations of the Group and

of its cash flows for the year under review, in compliance with International Financial Reporting Standards.

KPMG further confirms that the consolidated financial

statements and Group management report for the year

under review meet the requirements of Paragraph 315a

(1) HGB (German Commercial Code).

All the financial statements and associated documentation including the audit reports of KPMG, and

the recommendation by the personally liable managing

partners for the appropriation of profit, have been laid

before the Supervisory Board. They have been examined

by the Supervisory Board and were discussed at the

meeting of February 14. 2006. This was held in the presence of the auditors. who reported on their main audit

findings. The occasion was also used to discuss Henkel's

risk management system including the quantification

by the Management Board of major individual risks.

It was concluded that the risk management system

satisfies the associated statutory requirements; there

was no evidence of any risks that could endanger the

continued existence of the Group as a going concern.

We concur with the auditors' findings and. having

concluded our own examination. see no reason for

reservation or objection, At the meeting of February

14, 2006, we endorsed the annual financial statements,

the consolidated financial statements and the management reports prepared by the personally liable managing partners in consultation with the other members

of the Management Board, and we also approved the

recommendation by the personally liable managing

partners for the appropriation of profit.

-:- ~'__;:'7'~'_'

Membership of the Supervisory Board

and Management Board

On February 28, 2005, Mrs. Brigitte Weber, the longest-servng member of the Works Council of Henkel

KGaA sadly passed away. Mr. Engelbert Bäßler has taken her place on the Supervsory Board. Effective the

end of the Annual General Meeting of April 18. 2005.

Dr. Simone Bagel-Trah resigned her seat as member

of the Supervsory Board and joined the Shareholders' Committee. Dr. Friderike Bagel was elected by

the Annual General Meeting to take her place on the

Supervsory Board.

The Management Board, whose members are appointed by the Shareholders' Committee in accordance

with the Company's Articles of Association, also underwent a number of changes. Effective March 31, 2005.

Knut Weinke. and effective June 30, 2005, Prof. Dr. Uwe

Specht and Dr. Klaus Moiwnd all took retirement. Their

replacements as members of the Management Board

are, effective April 1, 2005. Kasper Rorsted, Executive

Vice President Human Resources/Purchasing/Information Technologies/Infrastructure Servces, and effective

JulY 1, 2005, Hans Van Bylen, Executive Vice President

Cosmeticsrroiletries, and Dr. Friedrich Stara, Executive

Vice President Laundry & Home Care.

The Supervisory Board thanks the Management

Board and all Henkel employees for their hard work

and commitment in 2005.

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Düsseldorf, February 14, 2006

The Supervsory Board

~

DipL.-Ing. Albrecht Woeste

(Chairman)

Henkel Annual Report 2005 7

Management Board

Henkel is a leader \Nith brands and

tf:~Ghnc¡c:i~;:~¡e.3 that

eas~er~ ~"'=::' ".',~-. ":.~_ "'~c' ~,~~. L¡~ .t" l . r-_~ _.~~ -. ~ ~:. .5 ~~~ \:!

. ! t.

r-r~~ ::1 tOo: ~:~ r) .:. ~=) r..:- ~ t: E~ ~ ~ \.. e ~::~

tl-~ ~:) rE~ l¡ E3 ~3lj t i 'f iJ i ~

Prof. Dr. Ulrich Lehner')

Chairman of the Management Board of Henkel

KGaA, born May 1, 1946 in Düsseldorf/Gennany;

with Henkel since 1981 including an interim break of

three years.

Dr. Lothar Steinebach .

Executive Vice President Finance, born January

25, 1948 in Wiesbaden/Germany; with Henkel since

1980.

Kasper Rorsted

Executive Vice President Human Resources/

Purchasing/Information Technologies/Infrastructure Services, born February 24, 1962 in Aarhus/

Denmark; with Henkel since April 2005.

" Personaie¡ liable managing partner

Dr. Friedrich Stara'

Executive Vice President Laundry & Home Care,

born March 3,1949 in Amstetten/Austria; with

Henkel since 1976.

Hans Van Bylen"

Executive Vice President Cosmetics/Toiletries,

born April 26, 1961 in Berchem/Belgium; with

Henkel since 1984.

Alois Linder, .

Executive Vice President Consumer and Craftsmen Adhesives, born August 4,1947 in Spittal/

Austria; with Henkel since 1979.

Dr. Jochen Krautter')

Executive Vice President Henkel Technologies,

born October 24, 1942 in StuttgartGermany;

with Henkel since 1973.

Henkel Annual Report 2005 9

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Prouct Portolio

Our Products

10 Henkel Annua Report 2005
ProduGt Portloi;G

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'"""IHenkel Annual Report 200 11
Brei fviulti-uegreaser

The cleaner that removes grease. oil, burnt-in stains

and soot easily and quickly throughout the home.

Persd Fr~s'sJir~ess. by' SH2~r-1

Offering a new dimension in laundry performance

- Persil cleanliness combined with the freshness of

Silan.

Prii f':CiV\/'::?-Y" " .

.'

The cleaning spray for pretreating baked-in or dred-on

food residues prior to dishwashing.

Ç; ¡! l-)' v, ;:; c,,;: ø ,.. ,¡- ,,~, '-.1 ~_ /...~ t "..l i..,,-i..t. "-_

The high-performance stain remover for a wide spectrum of stubborn stains; highly effective thanks to

its special dual chamber technology.

VvC i-' ,'_. L -, , \ r Vi Q.... ~-~ ~'''~..-:'-~' r) ''-..:, ~ ;:.,-;'O~

~. ~ iv\"..~! ~ t \...:J; _ ;,.,,,~_~~ ! ~...J

The WC FreshSurfer offers optimum cleanliness and

a fresh fragrance incorporated within an exceptional

design by Alessi; marketed internationally under the

Brefbrand.

. \: I ":7 à '~ii ',' i' sa- . ". - -

lJad I

Be Bonacure haitiherapy

The first hair therapy for profound, long-lasting hair

beauty engendered by hair-like amino acids.

U...l,-Q;".Ar'~";ne 'r";¡"'nl'l': C''-;'''Pj'''' :,,~n a ... ! l 31 \i ã: i¥ ii.i.:v Lr..t....~,. i ...¡io

The anti-wrkle cream that promotes build-up of the

tissue supportng the skin: deep wrines are visibly

reduced in three diensions.

Fa YOGurt '"

The fit shower gel with yogurt proteins for a pampering and fresh shower exprience.

got2b

The styling brand with true "street credo from the

USA - now taking Europe by storm.

Poly Color Retoucher

The first retouching pen for treating roots between

colorations.

Ta..t ¡ VeRA'" i ~ L ¿, '.. Fie.)-~

The first hair styling product with LYCRA (! flex effect

for a perfect hold plus 60 percent more flexibilty.

Theíamed Perfect

V\fi'..¡tpninn Pi,:i) V'~ i,.._...JII~."- 1 '-~~ ~.

The convenient tooth-whitening pen that produces

significant brightening after just two weeks of

regular use.

,., -'\":;:~..r"rò"f(f

. '._~_2_~.;_ ._~.

. # - -~ ii' :.~

II! . , .... ..

,~.,.= .I~.-¡

II

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~~~i at,
Ceresit eN 75 EasyPlan

The selfsmoothing floor levelig compound with "Ea

technology - it weighs less and covers more.

P -tt ~,~ ~1 ~ ~'-'Ci ;"") , /;"1 ;---! ~=i t."1, "'.. "_r: i~n ~.~ ¡- \ . :, ct-..ii\,.I"\ fi._.,.li\.....!"-..._I!..... 1I1,.:~e~i iiJ Y

Adhesive

The removable multi-purpose, multi-material assembly

adhesive that can be removed without causing surface

damage.

Pct~ L"'t, v Cter-,;:1;;- ;,:: "',~':~ ¡F~~' C: ~ t tç /'.. i ~ t-" ......l; L_"'_~-'o r..) 1 \;...J.v

"I\il ('\ ii..)ri n ~è. . i i.~. ~... "'... ..__ ',_' ......

The portion packs that enable fast application in line

with requirements. This two-omponent adhesive putt

repairs, bonds and fills many materials.

P r; -1'.. c: a ~\f c: .; r) .,-, i'. ,-- ¡---'" S.' I- , ; r. ì,"a l"'" ;~ !:"t. L- ",:\i -",,,'.lü1;' 1. ~l-\~..J'j ~G', "VC LJ'V .,

The premium adhesive tape with the integrated

start and tear aid is available in "Crystal Clear" and

"Invisible" grades.

Pr~tt C(j~lifc.~ ~~Cf((fj ~C~~r~ Rc)¡~er

The correction roller that is easy to use and offers outstanding results thanks to its sideways action; recipient

of the "red dot" design award.

Thornsit F be::) S,Cu¡e r.,:ia:;;t

Universal

The adhesive for solid and preformed parquet flooring. Based

on SiCure technology, it protects the underlying surface from

shear stress and provides a permanently flexible bond.

,

Multicore LF:318 Lead-Ftee

Solder Paste

The lead-free solder paste for use in modern electronics

components. It is environmentally compatible, can be

economically metered and is moisture-resistant.

PLirmplt uri.ü- al ('. we ..i.. i v~..c..~

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final strength in just three minutes under UV

radiation, resultig in faster customer production

processes.

Terokal 50'? Lf. (~;rasJ'l F~f:~S_~~;t¿l~lt

Structural Adhesives

The strctural adhesive based on epoxy resins that

offers the dual benefits of high strength and high

flexibilty. Used primarily in automobiles to enhance

crash safety.

Terophon 820D senes

Moldings that serve to dampen vibrations in vehicles

and reduce noise in the passenger compartment.

'I Purmelt ~.
, Shares

Shares

Signifcant share price increase

DAX and consumer goods index

outperformed

Higher liquidity levels

International shareholder structure

2005 was an excellent year for Henkel shareholders.

Compared with the closing price in 2004. the preferred

share rose 32.8 percent to 85.00 euros, outperforming

the German DAX stock index by around 6 percentage

points (DAX +27.1 percent). The ordinary share price

rose 29.0 percent to 78.54 euros.

Henkel's shares also performed extremely well compared with the Dow Jones Euro Stoxx Consumer Goods

index, which registered a gain of22.7 percent compared

with the 2004 figure.

Henkel preferred shares steadily grew in value during the year. They quickly recovered from minor dips

in May and October, finishing 2005 close to their year

high. The ordinary shares followed the same pattern.

Investors were obviously encouraged by our accelerating organic sales growth and the improved profitability

achieved in spite of increases in raw material prices.

The rise in the market prices of Henkel's shares was

accompanied by an increase in their liquidity, with an

average of383,000 preferred shares changing hands per

trading day (previous year: 348,000). The average for our

ordinary shares was 50.000 per trading day, 17,000 more

than in the previous year. The market capitalization of

our ordinary and preferred shares increased from 9.1

bilion euros to 11.8 bilion euros.

This means that in the course of 2005 we again remained true to one of our corporate objectives, namely

to continue increasing the value of the Company over

the long term to the benefit of our investors. Since the

issue of Henkels preferred shares in 1985, sharehold- ,

ers who re-invested their dividends in further share

purchases would, by the end of2005. have enjoyed an

average annual yield (before tax) of 9.7 percent. Over

the same period, DAX tracking would have provided

an annual yield of 8.0 percent.

Henkel shares listed in all major indexes

Henkel shares are predominantly traded on the Xetra

electronic market of the Frankfurt Stock Exchange.

Henkel is also represented on the floor of this and the

other regional stock exchanges in Germany. In the USA,

investors are able to acquire Henkel preferred and ordinary shares by way of stock ownership certificates

obtained through the Sponsored Level I ADR (American Depositary Receipt) program. The number of such

certificates issued in 2005 increased substantially over

the figure for the previous year.

The international significance of Henkel preferred

shares is also indicated by their inclusion in major

international indexes. These include the MSCI Europe,

the Dow Jones Stoxx 600, the FTSE World Europe. and

Relative performance 2005 in euros

December 30

85,00 euros

June 30

74,02 euros

September 30

75.67 euros

March 31

69,75 euros

Henkel preferred share

January 2005

-.....~.~- '.--_.._~-_.."._~._. ._, _..~;~-_. -.-----.~ - ..-",..._._.-._~-~...._~.~-_.__.~-~-~~-,. ._~"'_.______-e~. OJ Euro Stoxx Consumer Goods (indexed)

December 2005

14 Henkel Annual Report 2005
sustainability indexes such as the Dow Jones Stoxx

Sustain ability. These indexes are used as indicators

for the capital markets and as benchmarks for fund

managers.

Henkel as a DAX stock counts among the 30 most

important listed corporations in Germany. At the end

of2005. the market capitalization of the DAX-relevant

preferred shares was about 5.0 bilion euros, putting

Henkel at number 26 in the DAX rankings with a

weighting of 0.9 percent.

Share data

Preferred Ordinary

604840

DE0006048408

HEN.ETR

86,598,625

Security Code No.

-- ------- - - - ---

ISIN Code

Stock Exch. Symbol ___ __ 0- ____~._..,.____.

Number of Shares

604843

DE0006048432

HEN3.ETR

59,387.625

;:. ,,~~.¿ ~

International shareholder structure

Our preferred shares - the more liquid class - are widely

owned internationally. the majority being held by investors in the USA, Germany. the UK and Switzerland.

Around 2.5 milion preferred shares have been repurchased by Henkel KGaA in the past for the company's

Stock Incentive Plan. As of December 31, 2005, treasury

stock amounted to 2.4 milion preferred shares. Oftbe

ordinary shares, 51.5 percent are owned by parties to

the Henkel family's share-pooling agreement.

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'".rIEmployee shares in high demand

Since 2001, Henkel has been operating a share ownership program for all employees worldwide. For each

euro invested by an employee (limited to a maximum

of 4 percent of salary), Henkel added an additional

33 cents in 2005. By December 31, 2005, a total of

13,209 employees from almost 50 countries together

held 1.1 millon shares within the ESP (Employee Share

Key data on Henkel shares 201 to 2005 in euros

Earnings per share in accordance with IFRS')

------------------- -- -_.- - -. -. _.. -- -_.__.__._~_._--

Ordinary shares

--..,--- -_.._.._. ----

Preferred shares

Share price at year-encf -- - .. -

Ordinary shares

Preferred shares

High for the year'

- _u_. _ .______ _ .

Ordinary shares

-_._--------~--

Preferred shares

Low for the year'

- - ---- ---- -- ....-

Ordinary shares

-_._-----,--~ ,..._._- ---

Preferred shares

2001 2002 2003 2004 20

____n_____.

4.27 3.97 4.28 5.18

..._..

4.32 ._--4.03

--

--"_._- 4.34

----

----

._m__~

5.24 '"~

IlJE

57.30

--.---

52.25 58.29 60.89

---_. _.~i'~' --'

63.50 ____M___ 60.55

------,- 62.00 ----- 64.00 il - --_._.- ---- .. -_._-

68.47

__un_on.

69.69 60.90

.___n_ .-..-~68.00-

74.93 ----7720 --64.35 ,--73.58

-

56.04 50.60 43.88 52.51

-_._---_._-- - ._.---. -- -_._.~- ------

Dividends

---61.20 -----

59.18 ----- 49.56 --56.00

-

Ordinary shares 1.06 1.06 1.14 1.24

P~~fe~;~ s~~~;. _________________ ____--~ ____~ ___~~ __~ ~.- Market capitalization in billon euros 8.7 8.1 8.7 9.1 ~ ._~_~___~_.~,~_--~,____.._T______._._____ P_____..._______~___~__...___,.._____"'_.___!:~

" comparable, 2004 restated and comparable

" Xetra closing prices

I! proposed

Henkel Annual Report 2005 15
Shares

Program), or around 1.9 percent of Henkel's preferred

shares. The vesting period for newly acquired shares

is three years.

Committed to capital market communication

Henkel places great importance on meaningful dialog

with both shareholders and financial analysts. During

29 capital market conferences and road shows held in

Europe and the USA, institutional investors and financial analysts were afforded the possibility of talking

directly to Henkel's top management. In addition, there

were numerous telephone conferences and individual

meetings held at our Düsseldorf headquarters - totaling

more than 400 events in all.

Private investors are able to obtain all the information they need through telephone inquiry or the

constantly updated Investor Relations website available

at ww.ir.henkeLcom.This also serves as the medium

for the live broadcast of telephone and analysts' conferences. The Annual General Meeting constitutes a

further forum at which comprehensive information

can be obtained from Henkel management.

The quality with which capital market communications are conducted is evaluated by independent

rankings. In the Investor Relations Awards conferred

by the magazine "Capital", Henkel garnered the runner-up position for DAX companies. And in a survey

undertaken by the Saarbrücken Institute of Auditing in

collaboration with the business newspaper "Handelsblatt" and management consultants Mercer Management, Henkel's annual report for 2004 likewise took a

commendable second place.

You wil find a calendar with all our important

dates on the last page of this report.

16 Henkel Annual Report 2005

Good credit ratings retained

Our creditworthiness is regularly checked by independent rating agencies. Henkel has set itself the goal of

maintaining its ratings in the A range.

Standard & Poor's and Moody's both confirmed their

good credit ratings for Henkel in 2005. On January 12,

2006, Moody's upgraded its outlook for Henkel from

"negative" to "stable", due primarily to the improve- ,

ment in our key financial ratios.

Credit ratings')

Standard &

Poor's Moody's

A2 (negative)

P1 (negative)

Long-term (outlook) --~~---- ------._-"-

Short-term (outlook)

A- (stable)

A2 (stable)

') at December 31, 2005

New hybrid bond

Henkel issued a hybrid bond in the amount of 1.3 billion euros for the purpose of financing a major portion

of our pension obligations in Germany. The proceeds

of the bond were allocated to a special-purpose ClA

(Contractual Trust Arrangement), Henkel Trust e.Y. The

bond was eagerly awaited by investors, as reflected by

its four-fold over-subscription. This measure enhances

Henkel's financial scope while also further safeguarding the pensions of our employees and retirees.

Henkel shares monitored by numerous financial

analysts

Henkel is tracked by a number of financial analysts,

primarily in Germany, the UK and the USA. Over 25

analysts regularly publish studies and commentaries

on current developments at the Group. and issue their

recommendations accordingly.
Corporate Governance

Henkel committed to value-based

management

Active and open information policy

Compliance with the German Corporate

Governance Code

For HenkeL, good corporate governance means responsible, transparent management and control aligned to

the long-term generation of shareholder value. Within

this context. the Management Board. Shareholders'

Committee and Supervisory Board have committed

themselves to the following maxims:

o Value creation as the foundation of our managerial approach

o Sustainabilty as a criterion for responsible

management

o Transparency underpinned by an active and open

information policy.

Henkel is a "Kommanditgesellschaft auf Aktien" (KGaA),

i.e. a partnership limited by shares and incorporated

under German law. This corporate form and our Articles of Association give rise to certain differences with

respect to a German stock corporation (AG). which we

would like to explain in the following:

A KGaA is a company with its own legal personality

(i.e. it is a legal person) in which at least one partner has

unlimited liability with respect to the company's creditors ("personally liable partner"). The other partners

participate in the common stock, which is split into

shares. Beyond these contributions they are not personally liable for the company's debts ("limited partners").

Hence a KGaA is a hybrid of a stock corporation and a

limited commercial partnership. It is predominantly

governed by corporation law.

At Henkel KGaA, the duties of the board of directors of a German stock corporation are performed by

the Management Board, This comprises the personally

liable managing partners plus other duly appointed

members.

In accordance with Germany's Codetermination Law of

1976. we also have a Supeivsory Board with 16 members

made up of an equal number of shareholder and employee representatives. The purpose of the Supeivsory

Board is to regularly advise and to monitor the Management Board in its stewardship of the company.

According to our Articles of Association, in addition

to the statutory Supeivsory Board, Henkel also has,a

standing Shareholders' Committee which is responsible

for appointing the members of the Management Board,

issuing the internal rules of procedure guiding the actions of the Management Board. and stipulating classes

of business transaction that require approvaL. Acting

on behalf of the General Meeting. it is also involved in

the management of the businesses.

The Shareholders' Committee has established a

Finance and also a Human Resources subcommittee

drawn from among its members. The Finance Committee deals principally with financial matters. accounting

issues including the statutory year-end audit, taxation

and accounting policy. internal audit and corporate

risk management. The Human Resources Committee

deals principally with personnel matters relating to the

Management Board, issues of human resources strategy.

and remuneration.

The Management Board, the Shareholders' Committee and the Supervisory Board work closely together

for the good of the Company. The Management Board

discusses the strategic direction of the Company with

the Shareholders' Committee and the two bodies

regularly consult on the progress being made in its

implementation.

The General Meeting of Henkel KGaA essentially

has the same rights as the Shareholders' Meeting of

a German stock corporation (AG). In addition, it also

votes on the adoption of the annual financial statements ofthe Company and the appointment ofmembers of the Shareholders' Committee and ratifies their

actions. Numerous resolutions passed by the General

Meeting. such as the adoption of the annual financial statements, require the approval of the personally

liable managing partners.

,.

c: '"0.

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Q) .sfHenkel Annual Report 2005 17
Corporate Governanc;e

Management structure of Henkel KGaA

",(t::G~IM~ting; '., -,-'~:,:,'"

86.S~8.625 or~i'1arsh~~;:~9..a8z.C)~~~~,~fe~f1,ii~"(110n-v.0ting)-

Elects 8 shareholder

representatives

--." ""'"'-.,:'.:"-,.,:

Supervsory Board

16 members

Monitoring duties

Elects members

;-;"d;';'-'d~-i"'i'-d)id~~~~~~'commítée '.' ,'.,

Upt() 10rnmber;!-iR~ubcommitee. financesu~mitee

Appointment of Board members,

- - involvement in operating business

,". ",-.,..", .,~.- ~;.,:: ,-,~'/' "'-.' - '_-'T-7:':-.':7~';~'f" ;~j_'''.~.::'.:'''' .

I

German Corporate Governance Code

Notwthstanding the above-mentioned special aspects,

Henkel KGaA complies with the main recommendations ("shaW provisions) of the German Corporate

Governance Code, with two exceptions:

The remuneration of the members of the corporate

bodies is disclosed as a total amount with breakdown

according to fixed salary, performance-related emoluments and components with a long-term incentive

effect. The ratio of the individual components with

respect to one another is also indicated. More details

are provided in the remuneration report on page 32.

Unless required by law and in order to protect the

legitimate interests and private spheres of the members of the corporate bodies who are also members of

the Henkel family, individual shareholdings are not

disclosed where they exceed 1 percent of the shares

issued by the Company.

Henkel complies with the discretionary provisions

("should/may" suggestions) of the Code. The relevant

declarations of compliance have been posted on our

Investor Relations website at ww.ir.henke1.com.

In accordance with the Declaration of Compliance,

the following details are disclosed in relation to notifiable shareholdings: The aggregate shares held by

the members of the Supervisory Board and the Shareholders' Committee exceed in both cases more than 1

18 Henkel Annual Report 2005

percent of the shares issued by the Company. The aggregate shareholding of the members of the Management

Board is less than 1 percent of the shares issued by the

Company. As disclosed in the notifications published in

accordance with § 15a WpHG (Securities Trading Law.

"Directors' Dealings"), in fiscal 2005 members of the

Management Board purchased a total of 1,800 preferred

shares and sold 3.060 preferred shares; members of

the Supervisory Board/Shareholders' Committee sold a

total of382,000 ordinary shares and purchased 52,628

preferred shares. Persons closely related to members

of the Management Board. the Supervisory Board or

the Shareholders' Committee sold a total of 10,000

preferred shares.

For further details in this regard and also in relation to corporate governance in general. please log on

to our website at ww.ir.henke1.com.
Group Management Report

Group Management Report for Fiscal 2005

Operational activities

Overview

Founded in 1876. Henkel completed its 129th year of

corporate activity in 2005. Today, the Henkel Group

boasts a global workforce of more than 50,000 employees, and day in, day out, people in more than 125 countries put their trust in our brands and technologies.

Organization and business sectors

Henkel KGaA is operationally active as well as being

the parent company of the Henkel Group. In this latter

role. it is responsible for defining the Group's corporate objectives and for the management. control and

stewardship of Group-wide activities. including risk

management and the distribution of resources. Henkel

KGaA performs its tasks within the legal scope afforded

to it as part of the Henkel Group. with the affiiated

companies otherwise operating as legally independent

entities. Operational control of the Group is incumbent

upon the Management Board. which in turn is supported by the Corporate Center.

Henkel is organized into four business sectors:

a Laundry & Home Care

a Cosmeticsrroiletries

a Consumer and Craftsmen Adhesives

a Henkel Technologies.

The product range of the Laundry & Home Care business sector comprises heavy-duty detergents, special

detergents and cleaners. The portfolio of the Cosmeticsj

Toiletries business sector encompasses hair cosmetics,

products for body. skin and oral care, and products and

servces for the professional salon segment. The Consumer and Craftsmen Adhesives business sector offers

home decoration products. adhesives and correction

products for the home and offce, and also building

adhesives. Our industrial and structural adhesives,

sealants and surface treatment products fall within

the Henkel Technologies portfolio.

The four business sectors are managed as globally operational strategic business units. They are supported by

the central functions of Henkel KGaA in order to ensure

optimum utilization of Group synergies. Implementation of the strategies at a local level is the responsibilty

ofthe affliated companies operating in the field. The

executive bodies of these companies manage their businesses in line with the relevant statutory regulations,

supplemented by their own articles of association and

internal procedural regulations.

Strategy and 2008 financial targets

In order to achieve our strategic objective of profitable growth. we have fixed our focus on three areas

of competence:

a Home Care

a Personal Care

a Adhesives, Sealants & Surface Treatment.

Our four business sectors operating in these three core

areas already boast leading market positions, and we

intend to further expand these on a global basis. Our

approach here wil be one of driving organic sales

growth complemented by growth derived from selected

acquisitions.

A further important element of our long-term strategy is that of concentrated regional expansion in the

profitable North American market accompanied by a

strong focus on the growth markets of Eastern Europe,

AficajMiddle East, Asia-Pacific and Latin America. This

is not to say. however. that we will be neglecting Western

Europe. We have succeeded in increasing the share of

sales attributable to North America to 23 percent - due

particularly to the acquisitions DiaL, AR, Sovereign and

Orbseal made in 2004. Now our attention is being directed particularly to further expansion of the revenues

generated in the rapidly developing growth markets.

Henkel Annual Report 2005 19

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Group Management Report

Henkel Group: 2008 financial targets

Organic sales growth p.a.

______ ._ _"_d__._ _ __

2008 EBIT margin

2008 RaCE

EPS growth p.a.

Our target is to increase share of sales attributable to

these markets to at least 30 percent by 2008. The emphasis will be on organic sales growth supplemented

by selected acquisitions. especially in those markets in

which we are either not yet represented or are currently

under-represented.

Our strong brands and successful technologies are

expected to playa decisive role in the attainment of

these objectives. We are represented by our brands in

both the premium and value-for-money segments. Our

portfolio comprises a balanced mix of international,

regional and local brands. We support these through

the development of high-quality, innovative products

and appropriate advertising and other promotional

measures. These investments serve to enhance the value

of our brands and ensure that they remain attractive

in the marketplace.

Our product development activities are constantly

being realigned to the requirements and needs of customers and consumers. Instead of developing products exclusively "for" customers and consumers, we

are conducting these activities more and more "with"

both groupings on a collaborative basis. We are also

constantly striving to improve our innovation processes,

The period from product idea to market launch is being

steadily shortened through the introduction ofincreasingly effcient procedures, and through this we are continuously improving the deployment of our financial resources. We have set ourselves the goal of increasing the

share of sales attributable to new, innovative products

in any three year period from 25 percent to 30 percent.

Our financial targets for 2008 envision not only

organic growth in sales but also above-average increases

20 Henkel Annual Repon 2005

in both operating profit and earnings per share. We also

intend to further increase return on capital employed

(ROCE). To achieve these objectives. we wil be concentrating even more on products offering higher contributions

while also targeting further improvements in the operating margins of our growth markets. We likewise aim

to become more effcient along our entire value chain.

Value-based management and control

To make achievement of our growth targets measurable.

we have adopted a modern system ofmetrics allowing

us to calculate value-increase and return ratios in line

with capital market practice.

We use economic value added (EVA1))lJ as a central

performance management parameter and to assess our

growth to date and future plans.

EVA 1) is a measure of the financial added value

created by a company in a given reporting period. A

company creates economic value added if its operating

profit exceeds its cost of capital. being the return on

capital expected by the capital market.

Operational business performance is measured on

the basis of operating profit (EBIT). The capital employed figure is calculated from the assets side of the

balance sheet. A reconciliation of the year-end figures in

the balance sheet to the average values used in calculating capital employed can be found on page 102.

The cost of capital employed is calculated as a

weighted average of the cost of equity and debt (WACC).

In fiscal 2005. we applied a WACC after tax of7 percent.

Before tax. the figure was 11 percent. We regularly

review our cost of capital in order to reflect changing

market conditions such as the decline in interest rate

levels. The beta factor for Henkel has increased because

our preferred shares have recently closely tracked the

positive developments of the stock market as a whole.

From fiscal 2006, we wil be adopting a WACC before

tax of 10 percent. At HenkeL. EVA i, is calculated as

follows:

EVA1) = EBIT - (Capital Employed x WACC)

" 81A" is a registered trademark of Stern Stewart & Co,
Weighted average cost of capital in percent

up to 20

(inclusive) frm 20

Risk-fre interest rate

Market risk premium

Beta factor

Cost of equity afer ta

Cost of debt capital before tax - ......_-----_."------_..__...--.. ----- .-. ..- --"

Tax shield (35 percent/3D percent

from 2006)

Cost of debt capital after tax l-~

_________W__",___._. If~

,____~~mMæL~ ~~~.

~~~1f~ ~

Share of equity') - ---"- ------_.._-

Share of debt capital')

WACC after tax

Tax rate

WACC before tax

'J at market values

EVA\! is also applied worldwide as a component in calculating our performance-related management compensation. This serves to promote value-adding decisions and

profitable growth in all our business sectors. Businesses

exhibiting consistently negative value contributions

with no prospect of positive EVA~ values in the future

are divested or otherwise discontinued.

In order to be better able to compare business units

of varying size, we additionally apply a return indicator derived from the EVAC! concept: return on capital

employed (ROCE), which is calculated as follows:

ROCE = EBIT/Capital Employed

ROCE thus represents the average return on capital

employed. We create value where the return on capital employed exceeds the cost of capitaL. A breakdown

of our latest EVA (i, and ROCE figures can be found on

page 27.

':irOL,c. i\:i::i-'.3~e",-,~'~" R-:Õ-..:"

Statutory and regulatory situation

Our business is governed by national rules and regulations and - within the European Union - increasingly

also by pan-European harmonized laws. In certain segments, the granting of approvals, permits and licenses

is subject to our ability to meet specific requirements.

Our production sites must also be operated in line with

environmental regulations.

The product-specific regulations affecting us relate

primarily to ingredients and input materials, safety of

manufacture and the handling, packaging and marketing of the finished article. The regulatory instruments

involved range from material-related laws, usage prohibitions and restrictions and procedural requirements

(test and inspection, marking. provision of warning

labels, etc.) to product liability law. In Germany, the

following regulations are particularly important for

our operations:

o Chemicals law and hazardous substances/dangerous

goods regulations

o Food and commodities law'l

o Cosmetics regulations

o Laundry and cleaning detergents law'¡

o Biocides law

o Machinery, equipment and product safety law.

In the member states of the European Union, compliance is also required with the following directives, most

of which have been transformed into national law:

Aerosols and Biocides Directives; Material, Preparation

and Safety Data Sheets Directives; Cosmetics Directive:

Product Safety Directive.

National supervsory bodies monitor compliance

with these rules and regulations. Where non-compliance is identified. the authorities are quick to intervene

with a range of measures inc1udingjudicial orders/

injunctions forbidding the sale or circulation of the

products concerned. We are also required to comply

'J from September 7, 2005: Food and Feedstuffs Code

" from October 8, 2005: Detergents Regulations

Henkel Annual Report 2005 21

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Group p..1anagement RêPcd

with various manufacturing regulations in relation

to the following:

o The use. storage. handling and transportation of

certain substances

o Emissions, wastewater, residues and waste

materials

o The construction and operation of industrial

facilities.

The prime objective of our internal standards is to

ensure compliance with statutory regulations and

guarantee the safety of our production facilities for

our employees, neighbors and the environment. The

associated requirements have been incorporated in our

internal safety, health and environment (SHE) management systems. which in turn are subjected to a regular

audit and review regime. We also endeavor to ensure

that relevant legal requirements and statutory changes

are quickly identified and properly monitored and

assessed.

Business performance

World economy

World economic activity in 2005 was robust. The US

economy was healthy as was the economy in Asia with

China performing particularly well and Japan emerging from its economic doldrums. Although the rate

of growth in Latin America eased somewhat. business

activity remained at a high leveL. Eastern Europe once

again underwent strong expansion, contrasted by

rather sluggish growth in Western Europe. Overall,

this meant that Europe once again trailed the rest of

the world. Despite some revival in the course of the

year, Germany's growth put it close to the bottom of

the European league.

Developments by sector

Private consumption was once again weak in many

countries of Western Europe. with levels stagnating

in Germany.

22 Henkel Annual Report 2005

Consumer spending underwent an appreciable increase

in the USA, Latin America and Eastern Europe, while

in Asia the consumer sector lagged behind economic

development as a whole.

Worldwide automobile production increased further, although output in Western Europe remained

at the level of the previous year and there was only a

small increase in North America. In contrast, Asia and

Latin America achieved high growth rates.

The electrical engineering and electronics sector

exhibited further growth in 2005.

The metalworking and the paper and packaging

industries were only able to achieve a small degree of

expansion worldwide.

There was a slight increase in construction activity in Europe, progress being hampered primarily by

a further decline in building investment in Germany.

Meanwhile, construction activity in North America and

also in many countries of South East Asia remained

solid.

Sales and profits

Sales at the Henkel Group in fiscal 2005 amounted

to 11,974 milion euros. 13.0 percent above the figure

for the previous year. Acquisitions/divestments - and

particularly the acquisition of DiaL. the Clorox businesses and Sovereign - contributed to this rise with 8.5

percentage points, while foreign exchange accounted

for 1.0 percentage points. At 3.5 percent, organic sales

growth (sales adjusted for foreign exchange and acquisitions/divestments) was well within the 3-4 percent

corridor that we announced at the beginning of the

year, despite a weak start in the first quarter.

All our business sectors increased sales in organic

terms as well as through the effects of the predominantly North American acquisitions. Laundry & Home

Care benefited from the Clorox businesses and from the

Dial acquisition, the latter also contributing to growth

at CosmeticslToiletries. The acquisition of Sovereign led

to additional sales at our business sectors Consumer

and Craftsmen Adhesives and Henkel Technologies. The
Sales in millon euros

11,974

10,592

~l 9,41 0 9;!~~6 9,436 ~

R-~~t ~?3~' ~~~? l;i

~~,J,. ~~ t,~,t,~,i'!ø ~~ ~L~ gt~~. ,: ':~ ~E:'

,._~,--_._--_~~__.._~~_,___~~___.i__

2001 2002 2003 2004 20

2005 sales by business sector in million euras

3,26

2.791

2::12.629

.---_. -,"'-' ~t; 1'~611'742

~~. ~;0:; ~"r,~ W,",,'., r. ,~_, ,¡".

.~ .__.._-~, .", - ,_,~,_",,,,,",,..- - -- §;~'~'-' t'';;;

iZ~t~_.-,

i~?:

~.~:~~:~ " i"-'~'

~:~L

IT' 261 249

._....~,-::.: _.._wt:;~,._...

2004 20

Laundry

& Home

Care

2004 20

Cosmetics

Toiletries

2004 20 2004 20 2004 20

Consumer Henkel Corprate

and Craftsmen Technologies

Adhesves

organic growth rates ranged from 1.3 percent at Cosmeticsrroiletries to 5.5 percent at Henkel Technologies.

Sales of the Corporate segment once again declined,

mainly because Henkel provided fewer services to Cognis. our former chemicals business that was sold at the

end of November 2001.

In the regional breakdown, Europe/Afica/Middle

East exhibited significant growth. Sales there rose by

5.7 percent to 7,490 milion euros, with all the business sectors contributing. Growth adjusted for foreign

exchange amounted to 5.0 percent, Germany registered

an encouraging plus in revenues. The share of sales

attributable to the Europe/Afica/Middle East region

fell from 67 percent to 62 percent.

Due primarily to the acquisitions mentioned, sales

in North America rose by 36.6 percent to 2.733 million

euros. All our business sectors benefited with doubledigit growth rates. The increase in sales after adjusting

for foreign exchange amounted to 36.2 percent. The

'..:-~~,~~ ,,' 'I~_~-

Sales development')

20

Change versus previous year ----------lig:

F~~i~_~~~~~~~~~~~~_-_-- - . 1_

Adjusted for foreign exchange ~~ n____..n______._..__.__.________. _______ ~

~~Cl~i~~ti()ns/Divestments ¡gJi~ Organic , ~Mí:3.' :'.' ~:E~e.d

_".. :~.,:t

OJ calculated on the basis of unITS of 1,000 euros

200 sales by re9ion in million euros

7,49 7;:~.

~ 2,733

~r

i~b~

~~ ~~,;,".~

i i.;'

~' ~l,;,~.:,.~,;,.,';,.,

fl-'; ~ _~l¿;; Jb.li

200 20 2004 20

EuropeAfrca North

Middle Ea Amerca

775931

471 571 ~:(I

Jf~..____MfiL "'__;,~_

2004 20 2004 20 2004 20

Latin Asa- Corrae

Amerca Pacific

share of sales of this region thus also rose. from 19 to

23 percent.

Thanks mainly to good organic growth, Latin America registered a 21.1 percent increase in sales to 571

milion euros. Again, all our business sectors contributed with double-igit growth rates. Mter adjusting

for foreign exchange. sales in the region increased by

13.6 percent. The share of sales attributable to Latin

America was 5 percent.

Business in Asia-Pacific was similarly encouraging.

Sales grew by 20.2 percent to 931 milion euros, or

by 17.4 percent after adjusting for foreign exchange.

In particular our business sectors Laundry & Home

Care, Consumer and Craftsmen Adhesives and Henkel

Technologies were able to benefit from the accelerated growth exhibited by the region. The insecticides

business acquired from Clorox in South Korea further

boosted results at Laundry & Home Care. The share of

sales generated by the Asia-Pacific region increased to

8 percent.

Henkel Annual Repon 2005 23

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Group Man~9E¡1~Ç.:I-¡~ Re¡')~:~il

EBIT') in millon euros

1,162

9962)

I.'~~

~%1

774 f~ if I

íl: ~tf:~ lt~ I~'. ~ t.~'" ?;;.'- 1". 9"-"

__"_~"_"~'__' n, .__n-..__G;~L__~~ ~_~f~~~'_'A___ ._ßt~L.._~t;~:-~

2001 2002 2003 2004 2005

'J comparable

" restated and comparable

2005 EBIT') by region in million euros

857

~8~,.

~;.'h~Ö;

347

29 40 51

._,~,-~.Il___.J£-2.__

2004 20 2004 20

Latin AsiaAmerca Pacmc

2004 20 2004 20

Europe! Afrca! North

Middle East Amerca

OJ 2004 restated and comparable

Henkel Group EBIT

in million euros 2004') 200

"";-:1õ7-mli

_____.. ~~o. -111 ~l~

99 IJml

EBIT from business sectors/regions

- -.--- ... -------. _.

EBIT from Corporate

EBIT

" restated and comparable

Operating profit (EBIT) rose to 1.162 milion euros.

16.7 percent above the comparable and restated!1 figure of 996 milion euros for the previous year. After

adjusting for foreign exchange. the improvement was

15.3 percent.

All our business sectors contributed to this positive

profit performance. The EBIT figure for the Corporate

segment further declined to -122 million euros.

During 2005. our businesses were confronted with.

in some cases. quite significant increases in raw material prices. We were able to offset these to some extent

" see explanation on front flap

24 Henkel Annual Report 2005

2005 EBIT'J by business sector in million euros

43

34

?afl

I~. "S:.';;; ~

1:i~,1185 ~l

",+:" F"'"

I ~~l , ~ _ __,.J~___

2004 20

Lauriiy

& Home

Care

2004 20

Cosmetics

Toiletries

200 20 200 20

Consmer Henkel

and Craftsmen Technologies

Adheses

" 2004 restated and comparable

by optimizing our product formulations. In addition.

our business sectors Consumer and Craftsmen Adhesives and Henkel Technologies also succeeded in passing on some of the cost increases to the market. The

above-average rise in operating profit. accompanied by

an increase in return on sales (EBIT). was also due to the

success of our restructuring measures initiated at the

end of2004. These have led to sustained cost reductions

in production. distribution and administration.

Our regional developments were also encouraging.

with double-igit percentage increases in EBIT (related

to the comparable figure for the previous year) very

much the norm. The sole exception was Europe/Africa/

Middle East where operating profit grew by 6.2 percent (5.4 percent after adjusting for foreign exchange).

This was because increases in the raw material costs

could only be partially passed on to our customers.

The growth in profit in North America of 43.5 percent

(43.0 percent after adjusting for foreign exchange) is

mainly due to the EBIT contribution from Dial and the

Clorox businesses at Laundry & Home Care and Cosmeticsrroiletries. Consumer and Craftsmen Adhesives and

also Henkel Technologies benefited primarily from the

acquisition of Sovereign.

With the base stil relatively low. operating profit in

Latin America rose by 61.6 percent (45.3 percent after

adjusting for foreign exchange). All our business sectors contributed to this growth. Henkel Technologies

in particular. The Asia-Pacific region also succeeded in
posting a further increase in profitabilty: here EBIT

grew by 26.4 percent (19.7 percent after adjusting for

foreign exchange). In this region, too. Henkel Technologies reported significant profit growth. Further details

relating to the performance of the individual business

sectors can be found from page 40 forward.

CTA created to safeguard pension obligations

in Germany

For some years now. we have been pursuing a global

policy of changing over from defined-benefit to definedcontribution pension plans with a view to reducing the

financial and biometric risks arising from the former.

In 2004. we introduced our so-alled Pensions 2004 plan

for Germany. based on the accumulation of a mix of

annuity and endowment units. Following on from this,

the financial risks arising from existing defined-benefit

pension entitlements in Germany were further limited

in 2005 by switching from provisions-based financing

to a capital-cover approach. Large portions of the obligations in Germany have now been ring-fenced in a

Contractual Trust Arrangement (CTA) managed by the

newly established Henkel Trust e.Y. A major portion

of the necessary capital was raised by Henkel KGaA

through the issue ofa subordinated hybrid bond with

a volume of around 1.3 bilion euros. Further non-operating assets amounting to 121 milion euros were also

transferred to Henkel Trust eV

Cost items

The cost of sales rose by 16.3 percent to 6,533 millon

euros in the year under review. This disproportionately

high figure relative to sales is due primarily to the

heavy price increases incurred for raw materials and

packaging.

Gross profit improved by 9.4 percent to 5,441 million euros, although gross margin fell by 1.6 percentage

points to 45.4 percent due to the substantial rise in

costs. Expenses incurred for marketing, sales, distribution. customer support, advertising and sales promotion, at 3,409 milion euros, were 8.0 percent above the

figure of 3.157 milion euros for the previous year.

\.::~;:;'¡_:~- '" ~~:J2

At 324 milion euros, expenditures on research and

development were 52 millon euros higher than in the

previous year. The R&D ratio, i.e. research and development expenses expressed as a proportion of sales, rose

by 0.1 ofa percentage point to 2.7 percent. Administrative expenses increased by 9.8 percent to 627 milion

euros. This relatively low rise is mainly due to the success of our Advanced Restructuring measures initiated

in 2004. At 24 milion euros. current restructuring

charges only slightly exceeded the 2004 figure of22 million euros.

The cost items for the previous year have been

restated to allow for the effects of recognizing sharebased payments in the income statement as required by

IFRS 2 (for further details on the associated effects,

please refer to Notes 2, 3 and 5 to the Financial

Statements).

With IFRS 3 - Business Combinations - coming into

force on March 31, 2004, scheduled goodwil amortization ceased to be applied effective 2005. the requirement now being for an annual goodwil impairment

test. There were no goodwill impairment losses in fiscal 2005. The figures for 2004 have been adjusted for

comparison purposes.

Other operating charges and income

At 78 milion euros, other operating charges were below

the level of the previous year. Included under this heading in 2004 were non-capitalized incidental expenses

arising from the Dial and AR acquisitions and from

the exchange of our strategic investment in Clorox.

Major individual items falling under "Other operating

charges" include foreign exchange losses from our operating businesses, and write-downs on miscellaneous

assets. Other operating income amounted to 183 million euros, representing a substantial increase over

the previous year. As well as higher foreign currency

gains from our operating businesses. more operational

provisions were released and certain fixed assets were

written up.

Henkel Annual Report 2005 25

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Group Management Report

Financial items

The financial items total fell by 131 milion euros to

-120 millon euros, the prime causes being lower income from investments and an increase in net interest expense. The exchange of our investment in CIarox meant the loss of the associated income which,

in 2004, amounted to 100 milion euros. Meanwhile.

income from our Ecolab investment increased by

7 milion euros to 72 milion euros thanks to positive

business developments at that associate. Ecolab Inc.

applied the new US-AA regulations. requiring the

recognition of share-based payments in profit or loss.

for the first time in its 2005 financial statements. As

a result, income from associates fell by 6 milion euros (the comparable adjustment for the previous year

was likewise -6 milion euros). The income from this

investment in the previous year has also been adjusted for the goodwill amortization recognized in 2004

(+9 milion euros). Our financial investment in the

Lion Corporation, Tokyo, Japan. performed very well

with an increase in value of22 milion euros over the

comparable figure for the previous year.

Net interest expense excluding the interest element

of pension provisions increased by 61 milion euros,

due primarily to the significant increase in US dollar

interest rates. The negative comparison was further

exacerbated by the absence of interest income of 10 million euros from the Cognis vendor note redeemed in

May 2004. The interest element pertaining to pension

provisions improved by 7 milion euros due to higherthan-expected income from plan assets offset against

interest expense.

Net earnings

Earnings before tax increased by 3.5 percent. from 1.007

milion euros (2004: restated and comparable) to 1,042

million euros. Taxes on income amounted to 272 million euros. The tax rate was 26.1 percent. just above

the comparable level of the previous year.

26 Henkel Annual Report 2005

Net earnings before and after goodwil amortization

in milion euros

748 no

659

,1æ 571

629 20

125

ii II i'.£ I~ æ", qr

-.--.,.----__ì_.._l.._t~~_J!t.__.,__.

2001 2002 2003 2004 205

Goodwill amortization

ii. Net earnings

1) w~h Cognis and Henkel-Ecolab; 541 million euros incl. exceptional ~ems

21 530 millon euros incl. exceptional ~ems

A restated and comparable; 1,738 million euros incl. exceptional ITems

Net earnings increased by 22 milion euros. from 748

milion euros (2004: restated and comparable) to 770

milion euros. With minority interests amounting to

13 milion euros, earnings after minorities totaled 757

milion euros (2004: 747 millon euros).

The annual financial statements of Henkel KGaA

are summarized on page 109.

Dividends and distribution policy

In view of the positive earnings performance on the

operating business side coupled with an encouraging

cash flow. the proposal to be put to the Annual General

Meeting will be for a 6 eurocent increase in dividends

payable on both classes of shares. Amounts of1.36 euros

per preferred share and 1.30 euros per ordinary share

wil yield a payout ratio of25.5 percent.

The payout ratio is calculated on the basis of earnings after minority interests. The level of dividend

payout is primarily aligned to profit developments,

and should be around 25 percent of Henkel Group

earnings after minority interests and adjustment for

exceptional items.
Preferred share dividends in euros

1.20

1.30

~fl

I

i

fW~

___I _i_l

2001 2002 2003 2004

ii proposed

1.36')

200

Earnings per share (EPS)

Basic earnings per share are calculated by dividing earnings after minority interests by the weighted average

number of shares outstanding during the reporting

period. Earnings per preferred share rose from 5.24

euros in 2004 (restated and comparable) to 5.31 euros,

and earnings per ordinary share grew from 5.18 euros

in 2004 to 5.25 euros.

The Stock Incentive Plan introduced in 2000 resulted in dilution of earnings per preferred share as at

December 31. 2005. as the options from all five tranches

were "in the money". This effect derives from 270,170

preferred shares that could potentially flow back into

the market. The resultant dilution in EPS amounts to

3 eurocents.

Group !\an.:g-2:Y,-=~: '. "-k~"~~":

Earnings per preferred share before and after

goodwil amortization in euros

5.24 5.31

4.32 1.39

4.03 4.34

127 0.87

~ ~ ~i

~ ~~ .~~

,. ~1 I

IJ rt(' t1=

".J~"___"l~_____,~~___ __

I,

lìiio' :'

"

_..."----------- ._,r~_.

2001 2002 2003 2004 2005

Goodwill amortization

1'. Earnings per preferred share

" with Cognis and Henkel-Ecolab; 4.77 euros incL exceptional items

'i 4,52 euros incL exceptional items

31 restated and comparable; 12.14 euros incL exceptional items

EVA" and ROCE

In fiscal 2005, the Henkel Group achieved a positive EVA (!

amounting to 201 milion euros, clearly exceeding the

comparable figure of 156 milion euros generated in

2004. We also slightly improved our RaCE from 13.0

percent to 13.3 percent. despite significant capital expenditures. These metrcs show that the Henkel Group is well

positioned for ongoing profitable growth: Henkel generates value added. As in the previous year. all our business

sectors achieved a positive EVA0 outcome in fiscal 2005.

For explanations of EVA'" and RaCE. see page 20 f.

EVAe and ROCE by business sector" in million euros

Laundry &

Home Care

EBIT 433

__.. u_._ _________.

3,184

350

..._--_.-

83

90

Capital employed

------- ---------~. -_.

WACC (11 %) -_._----._---~--

EVAe 205

EVA'" 2004 p-----+-_.~------_._.

ROCE 2005 (in %)

ROCE 2004 (in %)

13.6

14.8 -----.,-.._.._.,_~_~._..-.,"_..~.~~._....__.A...~~A___'~__________~____.

'! 2004 restated and comparable

Cosmetics/

Toiletries

321

2,184

240

Consumer &

Craftsmen

Adhesives

Henkel

Technologies

345

2,350

259

Corporate

-122

-167

--~---18

-104

-118

185

1,186

130

81

63

55

72

86

49

_._-------

14.7

13.2

14.7

14.0

15.6

19.3

Henkel Annual Report 2005 27

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Assets and financial analysis

Acquisitions and divestments

In order to expand its market position in heavy-duty

detergents, Laundry & Home Care acquired the Biopon brand in Hungary. representing an annual sales

volume of around 10 milion euros. In all. the business

sector invested 14 milion euros in acquisitions in the

year under review.

Consumer and Cratsmen Adhesives expanded its

building adhesives business in particular through the

following three acquisitions:

o Purchase of 73 percent of the voting shares in Chemofast ramcord GmbH, Wilich, Germany, active in

the supply of chemical fixing and anchorage systems;

this extends the business sector's product portfolio

for technically demanding applications. In 2004,

Chemofast generated sales of14 milion euros.

o Acquisition of 49 percent of the shares and the management rights with respect to Polybit Industries

Ltd., Sharjah. United Arab Emirates, a company in

the business of making and selling waterproofing

sealant products for buildings. This provides a good

platform for supplying the rapidly growing construction industry in the region around the Arabian

Gulf. In 2004. Polybit Industries realized sales in the

region of 25 milion euros.

o Purchase of the DIY and craftsmen sealing compounds business of Rhodia, France: this strengthens

our position in the consumer and professional trade

markets. In 2004, Rhodia generated sales of around

50 milion euros with these products.

In all, our expenditure on acquisitions at Consumer and

Craftsmen Adhesives amounted to 45 million euros.

By acquiring 76 percent of the shares in Converter

Adhesives and Chemicals Pv. Ltd. (CAe). Mumbai, India,

Henkel Technologies has laid a good foundation for

expanding our laminating adhesives business in the

Sou th East Asia region. In 2004, CAC achieved sales of 11

milion euros. Acquisition of a majority holding in Huawei Electronics, Lianyungang. China. a manufacturer of

28 Henkel Annual Report 2005

epoxy sealing resins for semiconductors. safeguards our

competitiveness as suppliers to those manufacturers

of electronic components that are increasingly moving into China. Sales generated by Huawei Electronics

in 2004 amounted to 18 milion euros. In all, Henkel

Technologies spent 24 milion euros on acquisitions

in the year under review.

Capital expenditures

Capital expenditures (excluding financial assets) in

2005 totaled 1,097 milion euros.

2005 capital expenditures in milion euros

Continuing

operations Acquisitions Total

Property, plant and

equipment 393 97

Intangible assets 43 564

li-t-' '-'-''''-'--- -'--"43'-"'''''--'''--66'-1- ~;~~~ "~_""_""""_'~__"_~__,,,_...._.~~_._.~.n ___..,,,__.,~"'.~,,,"__""L;_:'~-'":¡')'¡o''f.:._. o a š_~ifJ~;=-!.W!;;¡

Investments within our continuing operations in property, plant and equipment amounted to 393 milion

euros, 49 millon euros more than in 2004. A major

slice of this spend went into structural improvements

such as merging our administrative. development and

production operations and the standardization of in formation systems. A further portion was used to develop

and expand production capacities. The major individual

projects implemented in 2005 were as follows:

o Commissioning of an additional filing plant for

Bref Power Cleaner in Düsseldorf. Germany (Laundry & Home Care)

o Commissioning of the second phase of our factory

for manufacturing knifing cement compounds and

tile adhesives in Bucharest, Romania (Consumer

and Craftsmen Adhesives)

o Merging of the two major development centers in

Madison Heights, USA (Henkel Technologies)

o Merging of three development and administrative operations in Hemel Hempstead. UK (Henkel

Technologies ).
Investments in intangible assets within our continuing

operations amounted to 43 milion euros. 17 milion

euros more than in the previous year.

Expenditure on property. plant and equipment in

businesses acquired in 2005 totaled 97 milion euros.

Investments in acquired intangible assets amounted

to 564 milion euros. largely due to the first-time

consolidation of Sovereign, Of this overall amount.

goodwil accounted for 284 million euros. with the

remaining 280 milion euros being used primarily to

acquire trademark rights. customer relationships and

pa ten tsltechnologies.

In the regional breakdown. our expenditure emphasis in 2005 lay in Europe and North America. The

Sovereign and Orbseal acquisitions led to a further

increase in the proportion of capital expenditures attributable to North America. Asia also saw a further

expansion in its regional share of our investments in

property. plant and equipment.

In 2006. the focus is likely to be on expenditures

for property. plant and equipment in Europe. We wilL

also be investing in North America and Asia.

Important projects in the Laundry & Home Care

business sector wil involve investment in production

facilities for the manufacture of new. innovative products, At Consumer and Craftsmen Adhesives. we intend

to construct a further building adhesives plant in Eastern Europe. Henkel Technologies expects investments

to be geared primarily to expanding capacities in Asia

and the USA.

Balance sheet structure

The balance sheet structure has been reclassified in

accordance with the requirements of !AS 1 from .its

former liquidity-aligned structure to one separating

current and non-current assets and liabilities. The

structure for the previous year has been adapted accordingly (for further details on the effects of restatements on the balance sheet items. see page 69

and also Notes 16. 27 and 28 to the Financial Statements). In fiscal 2005. total assets rose by 657 million euros to 13.944 milion euros,

The increase in total assets resulted from the rise of

intangible assets of1.106 milion euros - predominantly

due to the first-time consolidation of Sovereign and

positive currency translation effects. Property. plant

and equipment increased by 237 milion euros as a

result of acquisitions and investments in continuing

operations. the latter amounting to 393 million euros.

thus exceeding scheduled depreciation by 114 milion

euros. Financial assets decreased significantly by 357

milion euros. This was primarily due to the first-time

Balance sheet structure in million euros

Shareholders' Equity and Liabilities

13.287 13,944 13,94 13.287 of which in %

II ;,æ.".~:' Shareholders' equity

II r17 Pension provisions

- I l)~' Long-term borrowings ;A 1- .. .,..9 Other non-current liabilities

i27 II '13 Short-term borrowings

!)~ m I, tfl___~t~e!current liabilities

20041) 20 200 2004'1

Assets

of which in %

Property. plant and equipment/Intangible assets

Financial assets

Other non-current assets

Current assets'l

Liquid funds/Marketable securities

" restated

¿, including assets held for sale

Henkel Annual Report 2005 29

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consolidation of Sovereign and to the allocation of the

claim against Cognis, with respect to indemnification

of pension obligations, to the trust assets of the new

CfA. Current assets decreased by 419 millon euros.

Compared to the growth in sales, inventories and trade

accounts receivable underwent only a minor increase,

coming in just slightly above the level of the previous

year. Liquid funds and marketable securities declined

by 483 milion euros, largely due to dept repayments.

Assets held for sale (142 milion euros) were separately

recognized for the first time in 2005, in accordance

with the requirements of IFRS 5. This item largely relates to the held-for-sale assets of the Dial food business

(primarily intangible assets, property, plant and equipment. inventories and goodwil).

Shareholders' equity increased substantially, from

4,346 millon euros to 5,399 millon euros. The addition

resulted primarily from net earnings of 770 milion

euros (of which 13 milion euros as minority interests)

and positive currency translation effects amounting to

602 million euros. Our dividend payments of 190 million euros and the actuarial gains/losses of140 milion

euros (after tax). set off against reserves for the first

time this year, reduced equity significantly. A total of

564 million euros was transferred from net earnings

to revenue reserves. The equity ratio rose from 32.7

percent to 38.7 percent. Under non-current liabilities,

pension provisions fell by 1.157 milion euros. while

long-term borrowings rose by 1,015 million euros. This

exchange of liabilities is the result of the ring-fencing

of our pension obligations in Germany. A hybrid bond

amounting to 1.3 bilion euros was issued in November in order to finance the plan assets covering theSe

obligations. The bond is recognized under long-term

borrowings. The proceeds have been allocated to the

Contractual Trust Arrangement. thus reducing the pension obligations. In all. non-current liabilties fell by 354

millon euros. Current liabilities fell by 42 milion euros.

The decrease in short-term borrowings of 384 milion

euros was largely offset by an increase in other current

liabilities and provisions (+108 milion euros) and in

trade accounts payable (+234 milion euros).

The complete consolidated balance sheet of the

Henkel Group can be found on page 61.

Cash flow statement

At 1.254 milion euros, cash flow from operating activities was 309 million euros above the comparable

prior-year figure. A major cause for this significant rise

was the 180 milion euro increase in earnings before

Cash flow statement (summarized) in million euros

restated and

restated comparable 2004 2004 205

1 ,916----'996l~tt(~lK!11~~

-276 -276 i~.:Gl;:~i;rL6K

851 320 f2;;;~~~j -1,785 -15 ~J~i'l~ 217 -80 ~f;;¥rl~~

~:: :: el;È!¿Y~1 -344 -344 t';:'t:t;t;fl~l:

2,2821\ ~¿:i~~~~.:~~~;k~~tg:i

481') 68 r':.',,~~~.';,XX~

-92 -92 ~'j~ii~~¥t~:;fffrr

3,224,._ 0'0'_' .~~._Jf:&)l,Yt~:;12!!;

Operating profit (EBIT)

Income taxes paid

Amortization/depreciation/write-ups of non-current assets (excl. financial assets)

Net gains/losses on disposal of non-current assets (excl. financial assets)

Change in net working capital __"__~'_,_. _u ___....

Cash flow from operating activities

Capital expenditures on intangible assets

Capital expenditures on property, plant and equipment

Proceeds on disposal of subsidiaries and business entities

Proceeds on disposal of other non-current assets

Dividends received/Net interest

Free cash flow

" exchange of strategic investment in Clorox

" includes 413 million euros from redemption by Cognis of vendor note

. ..""..'._'.~-- '~'. . ,~ '._,,".' - -

30 Henkel Annual Report 2005
interest, tax, depreciation and amortization (EBITA).

The change in net working capital yielded a positive

effect ofl09 million euros, due mainly to a substantial

decrease in trade accounts receivable and an increase

in trade accounts payable. There was also a reduction

in inventories.

Cash flow from investing/acquisition activities

amounted to -478 milion euros, around half the figure

for the previous year due to acquisition activities being

at a much lower leveL. At 436 million euros. investments

in continuing operations were 66 million euros above

the prior-year leveL. Of this amount, Laundry & Home

Care accounted for 138 milion euros, Cosmeticsrroiletries for 51 millon euros, Consumer and Craftsmen

Adhesives for 54 million euros, Henkel Technologies

for 156 milion euros, and Corporate for 37 milion

euros.

Cash flow from financing activities was -1,468

millon euros compared with a net inflow of 739 million euros in the previous year. The main cause for

the change was the reduction in borrowings achieved

in 2005. This was implemented through a decrease

in liquid funds and utilization of the free cash flow

generated in the course of the year. Also reflected in

the change in borrowings is the hybrid bond, which

added approximately 1.3 bilion euros. compensated by

the allocation to the Contractual Trust Arrangement.

In the previous year, borrowings were increased by

around 1 bilion euros as a result of the funds used to

finance the acquisitions made.

Free cash flow, shown before capital expenditures

on financial assets/acquisitions and before dividends

paid. amounted to 684 milion euros, 133 millon euros

higher than in the previous year. Mter adjusting for the

utilization of provisions for our Advanced Restructuring measures and effects arising from the refinancing

arrangements undertaken with respect to Dial and Sovereign, free cash flow increased by 313 milion euros.

from 551 milion euros to 864 milion euros.

The detailed cash flow statement can be found on

page 62.

Key financial ratios

Over all. our key financial ratios developed very well

in 2005, reflecting our strengths in terms of both

earning power and net assets. The debt coverage ratio

additionally benefited from the equity-like features

of the hybrid bond. Only the interest cover ratio fell

compared with the previous year, due to an increase

in interest expense.

Key financial ratios

Interest coverage ratio

(EBITDA .; net interest expense including interest element of pension provisions)

Debt coverage ratio in %

(net earnings before minority interests + amortization and depreciation +

interest element of penSion provisions.; net borrowings and pension provisions)')

Equity ratio in %

(equity.; total assets)

Gearing

(net borrowings and pension provisions .; equity)

"hybrid bond included on 50 % equity basis

restated and

comparable

2004 20

8.4

31.6%

32.7 %

0.85

Henkel Annual Report 2005 31

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The remuneration report provides an outline of the

compensation system for the Management Board, the

Supeivisory Board and the Shareholders' Committee.

Remuneration of the Management Board

Regulation

The remuneration of the members of the Management

Board is regulated by the Human Resources subcommittee of the Shareholders' Committee. which regularly

reviews the compensation system in terms of structure

and amounts involved.

Structure and amounts

The remuneration of the Management Board is made

up of three components: a fixed salary, a variable shortterm earnings-related incentive in the form of a cash

payment, and a variable performance related long-term

incentive in the form of share options or, effective 2005,

a share-based cash payment.

In keeping with the objective of achieving a sustainable increase in shareholder value, the remuneration

model for the Management Board exhibits a significant

performance-related component. This is reflected in

the relationship between variable remuneration and

fixed salary. If all performance targets are achieved.

total remuneration is made up, on average, of around

26 percent in fixed salary. 67 percent in short-term

incentive and 7 percent in long-term incentive. The

details:

Fixed salary

The amount of fixed salary is determined on the basis

of the functions and responsibilities of the post and

prevailing market conditions.

Additional non-cash and secondary benefits provided largely relate to insurance and the provision of

a company car.

3 2 Henkel Annual Report 2005

Short-term incentive

The performance criteria governing the short-term

incentive are primarily return on capital employed

(ROCE) and earnings per share (EPS) plus. to a lesser

extent, business unit performance. Payment is made

in arrears on an annual basis as a function of the performance achieved over the financial year.

Long-term incentive

Up to 2004. in addition to the above remuneration

components. members of the Management Board also

received option rights in accordance with the Stock

Incentive Plan introduced in 2000. The Stock Incentive

Plan was replaced in 2005 by a new arrangement. Under

this arrangement, every eligible member of the Management Board receives the cash value equivalent to a

total of up to 3,600 shares per financial year (= tranche)

depending on the absolute rise in the quoted market

price of the Henkel preferred share and the increase

in earnings per Henkel preferred share (EPS) over a

period of three years (performance period). For further

details, see explanation of share-based remuneration

components in the Notes to the Financial Statements

on page 98 ff.

Pension benefits

The retirement pension for members of the Management Board appointed before January 1, 2005 is determined on the basis ofa certain percentage of the final

fixed salary amount. The same maximun; percentage

applies for all Management Board members, and this

corresponds to market-related fixed salary percentages

for directors' pensions paid by DAX-listed corporations.

The actual percentage individually assigned to each offi~er is made up of two components: the so-called base

percentage, which is derived from the vested pension

rights accrued within the Company up to appointment

to the Management Board. and the annual percentage

increase in the base percentage rate over the period of

service of the officer as a member of the Management
Board. As a rule, the maximum pension entitlement

is achieved by the time the candidate reaches regular

retirement age.

Effective January 1, 2005, the pension arrangements for new Management Board members have

been changed to a unit-based system. These officers

receive unit-based benefits in the form of an annuity

and an endowment component. The amount of benefits are aligned to the start-up unit derived from the

vested pension rights accrued prior to the officer joining the Management Board, and the individual annual

contributions. The annual contribution is calculated

for both the annuity and the endowment components

as a certain percentage of the fixed salary, which is

the same for all members of the Management Board,

plus a certain percentage of the short-term incentive.

This ensures that the superannuation package is also

performance-related.

Remuneration of the Supervisory Board and

of the Shareholders' Committee

Regulation

The currently applicable remuneration rules for the

Supervisory Board and the Shareholders' Committee

were approved by the Annual General Meeting of May

8. 2000 and, in relation to the long-term incentive, by

the Annual General Meeting of April 18, 2005. They

are contained in articles 17 and 33 of the Articles of

Association.

Structure and amount

The structure and amount of the remuneration are

commensurate with the size of the Company and the

functions performed by the Supervisory Board and

Shareholders' Committee respectively.

The remuneration is made up of three components,

a fixed fee, a variable, dividend-related bonus and a

variable long-term performance-related incentive. The

details:

Fixed fee

Each member ofthe Supervsory Board and ofthe Shareholders' Committee receives a fixed fee of20,OOO euros

and 50,000 euros per year respectively. The higher fixed

fee payable to members ofthe Shareholders' Committee

as compared with members of the Supervsory Board

is due to the fact that, as required by the Articles.of

Association, the Shareholders' Committee is involved

in business management activities.

In addition, each member of the Supervisory Board

also receives a meeting attendance fee of 500 euros.

Dividend bonus

Each member of the Supervisory Board and of the

Shareholders' Committee further receives an annual

bonus of2,OOO euros for every 0.05 euros the dividend

paid out for the prior year is higher than 0.75 euros.

Long-term incentive

As a long-term incentive, each member of the Supervisory Board and of the Shareholders' Committee is

entitled each year to an additional cash payment, the

amount of which depends on the increase in earnings

per preferred share over a three-year reference period.

The earnings per preferred share of the financial year

preceding the payment-related year is compared with

the earnings per preferred share of the second financial

year following the payment-related year. If the increase

is at least 15 percent, an amount of 600 euros is paid

for each full percentage point of the total achieved increase. If the increase reaches a minimum of21 percent,

the amount paid per percentage point is 700 euros, and

if the increase is a minimum of30 percent, the amount

paid per percentage point is 800 euros,

The total of the dividend bonus and the long-term

incentive is, however, limited to 50,000 euros.

Henkel Annual Report 2005 33

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Groiip ~,¡lJ.lÎ.Jr:ie',~e:-it Reoer:

Remuneration for chairpersons/vice-chairpersons!

subcommittee members

The Chairperson of the Supervsory Board and the

Chairperson of the Shareholders' Committee each receives double the amount, and the Vice-hairperson

in each case one-and-a-halftimes the amount accruing

to an ordinary member. Members of the Shareholders' Committee who are also members of one or more

subcommittees of the Shareholders' Committee each

additionally receive remuneration equivalent to the

amount accruing to a member of the Shareholders'

Committee; if they are the chairperson of one or more

subcommittees, they receive double.

Employees

The number of people employed by the Henkel Group

at the end of the year under review was 52,565.

Workforce numbers increased by around 2,450 in

2005 as a result of the acquisitions. The largest increases

came from the acquisitions Huawei Electronics and

Polybit Industries, and from the first-time consolidation

of Sovereign. Excluding Sovereign and the acquisitions,

employee numbers would have decreased by 2.2 percent

to around 50,100. The average number of employees at

the Henkel Group in the year under review was 51,724.

The proportion of employees outside Germany increased

to around 80 percent.

Per capita sales increased by 9.2 percent to 231,500

euros, and Henkel Group payroll costs increased by 259

milion euros to 2,273 milion euros. The payroll cost

ratio - this describes the relationship between payroll

costs and sales - held steady at 19.0 percent.

Again in 2005, we trained more young people than were

actually needed by the Company. At the end of the year.

we had 464 trainees and apprentices under contract in

Germany. Henkel also supports school-Ieavers as they

make the transition into professional life - we were

involved, for example. in preparing the "Business Requirements Catalog" that provides high-school students

with information on what kind of candidates prospec-,

tive employers are looking for. We also participated in

the youth project "MedienBox STEP 21" that encourages

young people to take a more pro-active approach to

their own future and that of society as a whole.

In order to provide a capital base as cover for the

main portion of our pension obligations in Germany,

Henkel borrowed 1.3 bilion euros from the capital

market through the issue of a hybrid bond (mixed

instrument comprising debt and equity capital). The

money thus raised was allocated to a Contractual Trust

Arrangement (CIA). The pension assets have thus been

ring-fenced from the Company's assets, enabling them

to be administered as a special-purpose fund. This step

serves both to strengthen our own financial position

and to further safeguard the pensions of our employees

and retirees in Germany.

In the wake of the ongoing globalization of the

Group, we have adapted our personnel policies to add

greater emphasis to aspects such as diversity and talent management. Henkel is committed to embracing

diversity and to utilizing the opportunities arising

from the differences between our employees to their

benefit and to the benefit of the Company. The "Triple

2" personnel development concept is also being used

to drive forward the process of internationalization

within the Group. Through this scheme, managers

Employees (as of December 31)

% 205 %

~I~I

!I3i~~s.~:~"tlQ

.I~~~:dd1.~;~

Europe/Africa/Middle East

North America

Latin America

Asia-Pacific

2001 % -- -- -_.-

32,030 68.7

4,675 10.0

2,870 6.2

7,048 15.1

46,623 100,0

2002

34,736

4,474

3,042

6,386

Total 48,638

34 Henkel Annual Report 2005

-- --------

2003 % --_._--._.~---

2004 %

34,189 70.3 33.692 65.8

4,181 8.6 6,772 13,2

3,946 8.1 4,325 8.5

6,312 13.0 6,411 12.5

_____._.__n__ "_. --- -- n__

48,628 100.0 51,20 100.0 ._-----, -'- -_.-."~.~-----~-"--_.. ."-" _._~-""_.._"- -_.._~.

71.5

9,2

6.2

13.1

100,0
are able to gain experience in two different business

sectors, two different countries and two different functions, fostering their adaptability to foreign cultures

and increasing their functional flexibility, reach and

expertise.

As a permanent feature of our employee support

program, we offer a range of servces geared toward

reconciling the demands of work and family life. In

2005, Henkel was recognized for our exemplary approach in this regard, garnering the title - conferred

by the Federal Ministry for Family Afairs and presented

by the Federal Chancellor - of Germany's most familyfriendly large company.

Procurement and production

Fiscal 2005 was characterized by a significant increase

in the market prices for our raw materials and packaging. With certain long-term purchase contracts stil

in force in 2004, we were able in part to avoid or at

least delay price rises in response to the upward cost

spiral that began in the second half of the year. In 2005,

however, we were no longer able to escape these effects, due in part to the sharp rise in the cost of oiL.

Other reasons for the price increases can be found in

structural scarcity in relevant processing capacities,

further consolidation in the chemicals industry and

the persistently high demand for commodities being

generated by Asia's burgeoning industrial activity. Natural disasters - specifically the hurricanes in the USA

- further exacerbated the capacity and price situation,

With increasing scarcity in the markets, some suppliers had to invoke "force majeure" and withdraw from

their supply obligations. In this situation. Henkel's

sourcing policy of entering into strategic cooperation

agreements with preferred vendors proved invaluable.

Indeed, the Company remained virtually unaffected by

the "force majeure" factor.

Due primarily to the increase in raw material prices,

but also partly as a result of acquisitions, the cost of

raw materials, supplies, packaging, merchandise and

outside servces increased to 5.0 bilion euros (2004:

Purchase volumes: Raw materials, packaging

and merchandise by business sector

TechnOIOgie~:k0t'y~ b~'~;"".;+,:,,'d,.,

,'0";;;,, Laundry &

~:ì'~'!~~

,;"~ Home Care 38 %

~ ß~1í'

con~;:;~:~ ~IJdt' .

Adhesives 15 % Cosmeticsrroiletries 19 %

4.4 bilion euros). Past analyses have shown that the

five most important commodities account for around

15 percent and the five most important suppliers for

about 11 percent of the procurement volume. Henkel

is thus extensively independent of individual raw materials and vendors.

We have instigated a raft of measures to combat

unfavorable material price developments. In addition

to projects to reduce manufacturing cost and extend

our vendor portfolio, we have expanded our sourcing

activities within Eastern Europe and Asia. We have also

succeeded in making substantial savings in the area

of auxiliary materials and seivices. The continuing

expansion in our use of e-business instruments and

supply process improvements likewise contribute to

cost optimization.

Henkel has production sites in 52 countries around

the world. Our largest facility is in Düsseldorf, where we

manufacture not only detergents and cleaning products

but also adhesives for the DIY and craftsmen segment

and products for our industrial customers.

Research and development

Expenditure on research and development at the Henkel

Group amounted to 324 million euros. compared with

272 milion euros in the previous year. In 2005 this

corresponds to a share of sales of 2.7 percent (2004:

2.6 percent). Of the total. 38 milion euros went into

central research, while 286 milion euros was allocated

to the product and process development activities of the

Henkel Annual Report 2005 3 5

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324

255 259

272 257 ~

~~~;~

I

. .L~:':..__..

2001 2002 2003 2004 2005

R&D ratio1l 2.7 % 2.7 % 2.7 % 2.6 % 2.7 %

(research expenditures as a proportion of sales)

" comparable

R&D expenditures by business sector

Corporate 12 %

~jtr~íl;0l¡;!~;;,\ Laundry &

Home Care 27 %

business sectors, Expenditure on technical servces for

our customers amounted to an additional 103 milion

euros. The average number of employees working in

research, product development and applications engineering was approximately 2,700 (2004: 2,800), with

the majority operating in Germany, France. Ireland,

Japan and the USA.

We utilize all the resources ofR&D information

available to us from around the world in our endeavor

to secure the sustainable success of our Company, deploying both internal and external expertise for the

purpose of strengthening our product portfolio and

developing new markets. Through their work. our scientists and engineers lay the basis for our business success

of tomorrow, safeguarding the innovation capabilities

and earning power of Henkel over the long term.

36 Henkel Annual Report 2005

One of the main areas offocus for the Central Research

unit as well as the operational research and development departments in 2005 was that of improving the

innovation process. Initiatives were introduced and

implemented in order to optimize the individual process stages - from idea definition and feasibility studies

to specific research and development projects for the

market. The innovation process is supported by an ef-,

ficient project management regime.

With Central Research being more aligned to the

long term, our scientists there are engaged in investigating specific areas of competence in biology, chemistry

and technology for the purpose of developing innovative

concepts for new products and production processes.

The findings of Central Research are then transferred

to the business sectors where they are utilized with a

view to expanding our product portfolio.

The following are among the projects currently

being pursued at Central Research:

o Achievement of superior bleaching and cleaning

performance for our leading brands

o Investigation into the cellular regulation of hair

and skin in order to identity potential actives for

hair and skin cosmetics

o Development of nature-imitating, highly effective,

nanotechnological actives for toothpastes capable

of effectively repairing sensitive teeth

o Fatigue-resistant high-performance adhesives and

innovative composites for employment in the automotive and aerospace industries

o Modeling, simulation and optimization of product

properties and processes with advanced computeraided techniques.

Again in 2005, our Central Research unit produced

outstanding results. And for the second year since 2004,

we have selected a number of exemplary achievements

for our "Researchrrechnology Invention Award". Each

of the prize-winning projects provides Henkel with

future potential for business development or cost

reduction:
o High-performance composite systems for improved

long-term bonding of aluminum with polyurethane

adhesives

o Automated process for the rapid detection of germs

in fiterable raw materials and products

o Innovative production technology for the manufacture of nanomaterials

o Rapid screening for hair care actives using a Henkeldeveloped hair follcle model

o Adhesives and sealants for the reliable and environmentally compatible prevention offungal mold

attack in the household.

The research and developmen t units of our four operational business sectors are very closely aligned to the

requirements of our markets and customers.

At Laundry & Home Care, for example, sCHalled

InnoPower teams have been created for each product

category with the specific task of creating tomorrow's

innovations. Multifunctional, interdisciplinary and

international in their composition, these teams investigate how we can solve today the consumer's problems

of tomorrow. In the "Best Innovator 2005" competition

organized by A.T. Kearney and the German business

magazine "Wirtschaftswoche", the Laundry & Home

Care business sector took first prize in the "Innovation

Strategy" category.

You can find out more about the InnoPower initiative of Laundry & Home Care by viewing a short film

available at ww.henkel-detergents.com.

As in previous years, we selected a number of exemplary research and development projects for the "Fritz

Henkel Award for Innovation". In 2005, the plaudits

went to four interdisciplinary project teams in recognition of their efforts in the realization and commercialization of the following concepts:

o WC FreshSurfer designed by Alessi: Superior, patented dua1-hamber technology for dispensing the

active substance, incorporated in an originaL. highquality Alessi design

o Fa Yogurt Shower Care: Innovative shower product

with yogurt protein to simultaneously clean and

refresh the skin

o Flextec: A highly versatile, flexible bonding technology with unique advantages for sealants and

assembly adhesives

o Purmelt MicroEmission: Innovation in polyurethane

hotmelts that significantly raises technical standards in occupational safety and environmental

protection in industrial production.

We protect our technologies around the world with

more than 7,000 patents. There are also over 5.200 patent applications pending and we own more than 2,000

registered designs as a means of protecting our intellectual property. Further information on our research

and development activities can be found on our website

ww.Innovation.henkel.com.

Marketing and distribution

The marketing and distribution activities of our business sectors are aligned to the specific requirements

of our various customer groupings.

At Laundry & Home Care. marketing is largely managed on a global basis, while distribution is regionally controlled. Our direct customers are the grocery

retail trade with distribution channels in the form of

supermarkets, mass merchandisersjhypermarkets and

discount stores. In Western Europe. drug stores are also

extremely important, while in the markets outside Europe and North America there is stil a large proportion

of sales channeled via wholesalers and distributors.

Although the trade provides our main customers in

distribution terms, marketing is focused on the consumer. Market research and analysis work is carried out

accordingly, with the appropriate advertising strategies

and innovation activities being developed on the basis

of the ensuing findings.

Henkel Annual Report 2005 3 7

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At Cosmeticsrroiletries, our marketing strategies are centrally planned and globally implemented with respect

both to our consumer brands and the salon business:

Our distribution activities, on the other hand, are

managed according to national criteria. Consumers

are primarily addressed through media advertising

and point-of-sale activities. Consumers purchase our

products via the retail trade. The main distribution

channels are specialist drug stores, the grocery trade

and department stores. Our customers in the salon

business are seived by a dedicated field sales force on

the basis of product demonstrations and the provision

of technical advice. We further offer specialist seminars

and training courses at our 43 Schwarzkopf Academies

around the world.

Our Consumer and Craftsmen Adhesives business sector

selVes a wide range of customer groupings, and these

have to be individually addressed through a properly

differentiated distribution structure. Users of our

products are not supplied directly but rather via the

trade. While supermarkets, DIY stores and specialist

retailers are essential to the private user, professional

craftsmen tend to purchase from various tyes of specialist wholesalers. For Henkel as a supplier ofleading

brand products, communication with end users is also

of critical importance. For the private consumer, we

primarily use media advertising with complementary

point-of-sale activities. As high-volume users. professional craftsmen are seived and supported directly

by our field sales organization with technical advice,

product demonstrations and training courses.

The marketing activities of Henkel Technologies are

managed on a global scale. Our customers in the form

of industrial users and manufacturers are supplied both

directly and also via an extensive distributor network.

Our main aim is to provide our customers with comprehensive advice, solutions to their problems and the

consistent quality they require. In the industrial maintenance, repair and overhaul segment, we supply our

end users and processors via an established system of

38 Henkel Annual Report 2005

engineering wholesalers who exert a considerable influence over what their customers in both the industrial

and the automotive repair and servcing sectors buy.

Sustainability

Henkel is dedicated to sustainability and corporate social responsibilty, as is clearly stated in our corporate,

values. We are convinced that effective environmental

protection and good corporate citizenship are essential

to our entrepreneurial success.

Henkel joined the Global Compact of the United

Nations in JulY 2003, making a public commitment

to uphold human rights, including the basic rights of

employees, to promote environmental protection and to

oppose all forms of corruption. Our .Code of Corporate

Sustainability" and our .Code of Conduct" together

with our related internal standards governing safety,

health, environmental protection and corporate citizenship both regulate and tyifY our approach to social

responsibility. We have embedded the corresponding

stipulations relating to our business processes within

our integrated management systems. Adherence to

these Group-wide requirements is critically examined

on a regular basis by internal audits.

Day in, day out. people put their trust in Henkel

brands and technologies in more than 125 countries

around the world. First-class quality means not only

ease of application, convenience and high product

performance but also comprehensive product safety

and environmental compatibility. Consequently, right

from the initial research and product development

stages, we ensure that when used as intended our

products and technologies are safe for health and the

environment.

Henkel thus also supports the basic objective underlying the widely publicized legislative initiative of the

European Commission, known by the acronym REACH,

to register, evaluate and authorize all chemicals and to

limit their application as appropriate. The proposal of
the EU commission for implementing this basic concept

as a regulatory instrument must, however, be improved.

Henkel is actively involved in the ongoing evaluation

process. The formulated rules for assessing product

ingredients can - as far as is currently known - be

integrated within our existing processes.

For many years, Henkel has been using ingredients

based on renewable raw materials, with a view to generally optimizing product characteristics where feasible,

under ecologicaL. economic and social criteria. One

example ofthis can be found in surfactants - the washactive substances we use in detergents and shower gels.

Renewable raw materials also provide the basis of key

components in our glue sticks, wallpaper pastes and

packaging adhesives. In the case of the Pritt Stick, for

example, such substances make up 90 percent of the

dry mass.

Thanks to our extensive commitment to sustainable

development, Henkel was once again represented in

various international sustain ability indexes in 2005,

including the Dow Jones Stoxx Sustainabilty and

FTSE4Good. Scoring high in the categories "Customers and Quality", "Environment" and "Social Involvement", Henkel headed the league ofDAX corporations

as ranked by the sustainabilty investment research

agency Scoris.

Henkel is not an energy-intensive company. Hence

only our power station in Düsseldorf-Holthausen is

included in the emissions trading system of the European Union. Thanks to particularly efficient cogeneration technology implemented in the Henkel power

plant, we have been allocated emission certificates

commensurate with expected demand levels. Charges

for trading and monitoring. and also any additional

emission certificates that may prove necessary in the

event that those allocated are insuffcient. are unlikely

to significantly impact production costs.

Once again in 2005 we were able to improve on

significant indicators that characterize our sustainability performance. Worthy of particular mention is

the drop in occupational accidents by 21 percent compared with the previous year, evidencing the effcacy

of our health and safety programs. Thanks to further

optimization of our production processes, we were

also able to reduce energy consumption by 6 percent

relative to production volumes.

As a responsible corporate member of society, we provide financial and material support for social projeçts,

the environment, education, science, health, sport, art

and culture. These contributions emanate from central

sources within the Henkel Group, from our local sites

and also from our brands and technologies.

Since 1998, we have also been active in supporting

the voluntary work performed by our employees and

retirees. In 2005. under our worldwide MIT initiative

(= Make an Impact on Tomorrow), Henkel supported a

total of966 non-profit-making projects, of which 245

were children's projects.

We also feel that it is important from the perspective of our social involvement to convey to high-school

and university students our understanding of and commitment to the concept of responsible corporate management. We have, for some years now, been supporting

SIFE (Students In Free Enterprise), an international

organization committed to social responsibility. entrepreneurship and helping people to help themselves.

In 2005, Henkel received an award for its activities on

behalf of SIFE and its ideals.

Since 1992, we have published an annual Environment Report, replaced in 2001 by our annual Sustainabilty Report. This publication documents the high

priority assigned to sustainability by our Company

and at the same time satisfies our reporting obligations with respect to the Global Compact. Further background information and the latest news on sustainable

development at Henkel can be found on our website

ww.sd.henkeL.com.

Henkel Annual Report 2005 39

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Group Management Report: Laundry & Home Care

Laundry & Home Care

Key financials'l

Sales in million euros in million euros 2004" 205 Change

4,08 Sales -----------------------;,617 ... ~i~~r;l~-- '- 13.0 %

3,617 Proportion of Group sales 34 % ~ll!~ii.~i. 0 pp

3,131 In ()peratin~profi_t(~E3I1) 350 !~il~~. 23.7 %

-_I1J~I_ __ê~~~~æi~______ ,::~:__~; 2001 2002 2003 2004 20 pp '= percentage points

" calculated on the basis of unrts of 1,000 euros

'ì restated and comparable

I

Significant increase in share of sales

outside Western Europe

Organic sales growth of 3.0 percent

Operating profit (EBIT) up 23.7 percent

ROCE at 13.6 percent

Economic environment and market position

Following the decline of2004, the world laundry and

home care market bounced back in 2005 with growth

of around 2 percent. In countries outside Western

Europe and the USA, this improvement was driven

not only by good volume growth but also by price

increases and growing demand for higher-quality

products. The markets of Eastern Europe developed

particularly well, with Russia ahead of the field. In

Western Europe and the USA, on the other hand, the

trend continued to be slightly downward. While the

markets for household cleaners grew to a degree, the

laundry product markets continued to suffer from

pricing pressures. In a highly competitive environment, most market participants endeavored to defend

or expand their market shares by stepping up their

promotional activities and absorbing cost increases.

In the markets of relevance to us. our Laundry &

Home Care business sector enjoys leading positions on

a worldwide scale.

40 Henkel Annual Report 2005

Strategy

We operate in the laundry care and household cleaner

segments. Our laundry products comprise heavy-duty

detergents and also special detergents, which were

brought together under one organizational roof in the

year under review. We are steadily expanding our global

market platform on the basis of our leading position

in Europe, with regional growth taking priority over

the development of additional product categories. Recently, the USA has taken over as the country in which

we generate our highest sales worldwide. There, too,

is potential to further expand our position. The food

business included in the Dial acquisition does not constitute one of our strategic core competences.

In the next few years, the emphasis will be on driving organic growth in sales. Our objective is to grow

faster than the market in every country. This will enable us to further improve our profitability.

Sales development

2005

Change versus previous year

Foreign exchange

Adjusted for foreign exchange

Acquisitions/Divestments

Organic

.. --F:'-~U:;::';;!~:_~~'~::

,,'.' ",13.Q;%

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~~~~:ìl
We expect to achieve growth through innovations and

the expansion of our product portfolio, particularly in

the countries outside Europe. Our investments in the

household cleaner markets here offer great potential

for HenkeL.

Sales and profits

With the market picking up, we were able to achieve

above-average increases in sales and gain further market shares. At 4,088 milion euros, sales were 13.0 percent above previous year. Organic growth amounted

to 3.0 percent. The prime regional driver of organic

growth was once again Eastern Europe, and particularly Russia where we were able to significantly further expand our strong number 2 position. We also

achieved substantial sales increases in Turkey as well

as in China, India and Mexico. The encouraging sales

performance reported in these countries resulted from

a combination of good volume growth, successful new

product launches and selected price increases.

In Western Europe, we succeeded in gaining further

market share. Despite a downturn in the markets, we

were able to increase sales. In North America, too, the

laundry and home care markets underwent a slight decline, yet we were again able to grow our market shares

to a degree. The insecticides and household cleaner

businesses acquired from Clorox performed welL.

Operating profit (EBIT) rose to 433 milion euros.

Compared with the previous year. this represents an

increase of23.7 percent, attributable primarily to the

acquisition of Dial and the businesses taken over from

Clorox. Our results in 2005 were dampened somewhat

by the significant rise in raw material prices, as the

degree to which these could be passed on to our largest markets was limited. Nevertheless, we were able to

absorb large portions of these cost increases through

effciency improvements in our formulations and production activities, combined with strict cost discipline

"... ~i-=i.: -: ¡ .,". -:: :'.. .

in our marketing. distribution and administrative operations. We also profited from the savings arising from

the restructuring measures initiated. Return on sales

increased appreciably, by 0.9 of a percentage point to

10.6 percent.

Despite the substantial improvement in operating

profit, return on capital employed (ROCE) declined

slightly to 13.6 percent. The reason for this was t.he

increased capital base arising from the acquired

businesses.

Market segments

The growth achieved in the laundry segment, particularly in the largest category - heavy-duty detergents - is

mainly due to promotional activities. Growth of our special detergents was generated by stronger penetration

in the markets of Eastern Europe and Latin America.

In Western Europe, on the other hand, our detergent

sales stagnated, with increases in market share being

canceled out by pricing factors. In this segment, our

innovation activities focused on revising fragrances,

expanding our portfolio to include dermatologically

compatible "sensitive" products, and combination products comprising heavy-duty detergents and softeners.

The home care segment performed very welL. with

most of the categories here proving to be less price-sensitive and more innovation-driven. The share of sales

accounted for by countries outside Europe underwent

a further increase thanks to both good organic growth

and the acquisition of the Clorox businesses. In Europe, we were able to generate encouraging volume

and value growth with a number of successful innovations. such as our Pril Power Spray, our WC cleaner in

the "Alessi" design and further product variants of our

highly successful Bref Power household cleaner. All

these new products offer particularly good margins.

Henkel Annual Report 2005 41

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Capital expenditures

During the year under review, we invested in a number of sites designated to receive production volumes

transferred from plants in France and Germany. In

Düsseldorf-Holthausen, an additional fillng operation

for Bref Power cleaner came on stream. In Europe, we

expanded the capacities for our rapidly growing specialty cleaning products, and in the USA we invested

in production of the household cleaners acquired from

Clorox. Total 2005 capital expenditures in property,

plant and equipment amounted to 132 millon euros,

following 137 milion euros in 2004.

Outlook

We expect the markets of relevance to us to expand by

around 2 percent in 2006. We will exploit to the full any

scope that we have for increasing our product prices.

We expect the rate of raw material price increases

to ease and have initiated measures in order to significantly increase our innovation capabilities and

effciency.

We expect organic sales growth in 2006 to be above

the market average, accompanied by a further increase

in operating profit.

.Inriovation means satisfying

customer needs:

17 consumer insight studiesiriiti

3 Alessi designer teams '...

85 % of first-time buyers want to
. .J " "_! ~ I;, ~ ~ ,~', ~, .

We see particular opportunities arising from the market dynamism being exhibited in Eastern Europe, especially in Russia, and in the Middle East. With our strong

market positions, we are likely to benefit significantly

from the rapid growth of these regions. In global terms,

we expect price increases to become more acceptable to

the market, enabling us to more easily offset the rises

in material and energy costs. The primary risks affecting our businesses lie in the possibility of a further

substantial increase in these costs.

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Group Management Report: CosmeticsfToiletries

Cosmetics/Toi letries

Key financials')

Sales in millon euros in million euros 20

2,629

20042) Change

6.2%

-1 pp

10.5 %

0.5 pp

Sales

Proportion of Group sales

Operating profit (EBID --- --_.__.._-----

Return on sales (EBID

2,477

23%

290

11.7 %

~lt~ri~~~~:-- -

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employed (ROC E) 14.0 % 0.7 pp

.. ~~~"---,--~---.----__,______.~_Jf~li,~~t 29.1 %

pp = percentage points

2,477

2;;5 2 ~ 6 2 ~.:;.6 ~:,:.,~:_.r,~.,-,:','~:,,:~,,:,'..,',';..'l.',,:...,::.,,:.

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" calculated on the basis of unITS of 1 ,000 euros

" restated and comparable

European market share expanded

Organic sales growth of 1.3 percent

Operating profit (EBIT) up 10.5 percent

ROCE increased to 14.7 percent

I

Economic environment and market position

At less than 2 percent in fiscal 2005, growth in the

world cosmetics markets of relevance to Henkel remained below our expectations. The highly competitive Western European consumer brands market was

in particularly poor shape due to a decline in the hair

cosmetics and body care segments. We were nevertheless able within this environment to consolidate

our market positions and gain further market shares.

Eastern Europe, Asia.Pacific and Latin America exhib.

ited stronger market growth. Following a phase of

stagnation, the North American market also slightly

improved.

The world salon market underwent encouraging

growth with again Eastern Europe, Asia-Pacific and

Latin America as the regional drivers. As a globally

aligned, innovative professional hair care specialist,

Schwarzkopf Professional benefited from these developments with above-average improvements in business

volumes.

44 Henkel Annual Report 2005

Cosmeticsrroiletries occupies leading global positions

in the markets of relevance to us.

Strategy

The Cosmeticsrroiletries business sector manufactures,

markets and sells branded consumer goods in the hair

cosmetics, body care, skin care and oral care segments

and in the hair salon business. Our aim is to expand

our consumer products business with a regional focus.

Our emphasis is on extending our strong market positions in Europe, intensifying our market development

activities in North America and focusing on carefully

selected activities in Asia. We intend to continue driving

forward our globalization strategy with respect to the

salon business. We want to achieve growth primarily

through organic expansion, and above all through

the development and rapid commercialization of innovative products. Specific acquisitions to speed up

business development and augment organic growth

wil be targeted.

Sales development

Change versus previous year

Foreign exchange

Adjusted for foreign exchange

Acquisitions/Divestments

Organic

2005

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On the consumer brands side, we are continuing to

concentrate on the international expansion of our core

activities in hair cosmetics and body care. The strategy

in the case of the former is to focus on further growing

our leading umbrella brand Schwarzkopf and on our

core competences in colorants and styling. In the body

care segment we intend to continue our recent market

successes in Europe with an innovation offensive under

the Fa brand. In North America, the focus wil be on

the Dial brand. We will be concentrating on Europe in

our efforts to expand the skin care brand Diadermine

and also in the further development of our oral care

products. We intend to strengthen our hair salon business, currently number 3 in the world, through product

innovations and to develop new regional markets for

this segment.

Our aim is to continuously improve our profitabilty

through a strategy of expanding and further strengthening our core businesses and key competences.

Sales and profits

Sales increased by 6.2 percent to 2,629 million euros, with

organic growth coming in at 1.3 percent in the year under

review. Western Europe profited from strong growth in

our German branded consumer goods business, and we

continued our rapid expansion in Eastern Europe with

double-igit percentage growth rates. We were also able

to improve in the Middle East and Latin America. Sales

in North America reflected, in particular, a significant

expansion of our Dial business. The salon business also

exhibited growth rates far above the market average.

At 321 milion euros, operating profit (EBIT) was

10.5 percent above the comparable prior-year figure.

This high rise relative .to sales is due primarily to cost

savings in production and administration achieved

through our restructuring measures. We were able

to largely offset the slight increase in raw material

prices by optimizing our formulations and packaging

systems. Return on sales thus underwent a measurable

improvement. rising 0.5 of a percentage point to 12.2

percent.

- :., 0-, ~_ '". .., ~~7;:'.~:~

Return on capital employed (RaCE) climbed to 14.7 percent with a substantial improvement in operating profit

against only a slight increase in the capital base.

Market segments

We were successful in further developing our hair cosmetics business. Our colorants portfolio was strengthened through the introduction of Poly Color Revital

Farbcreme, a new product specifically aligned to the

requirements of older hair. The retoucher from Poly

Color offers a fast and problem-free solution to recoloring roots. Our new colorant Poly Color Natural & Easy

offers intensive hair colors with a scintillating shine. In

the styling market, we supplemented our international

brand Taft through the introduction ofTaft LYCRA'"

Flex and Taft Compact. The launch of the styling series

got2b in Europe continued to progress successfully, with

the line also being complemented by a hair care series.

On the hair care side, we concentrated on developing

our top brand Gliss Kur. New offerings such as our Asia

Beauty Line, Gliss Kur Satin Brown and Gliss Kur Pearl

Repair treatments also generated further growth.

In the body care segment. we undertook a comprehensive relaunch of our Fa brand in Europe. The introduction of the Fa Yogurt line with new shower gels and bath

creams was very successfuL. The Fa deodorant range was

also completely revamped and expanded through the

inclusion of a new line in fragrances. In North America,

we further expanded the Dial range of shower gels in

line with evolving consumer requirements.

Our skin care business continued to grow in Europe,

due primarily to the success of our international brand

Diadermine. Increases in sales were achieved in particular as a result of the launch of the care line Wrinkle

Expert and the facial care series Lift+New Skin. The new

Diadermine Professional Kit offers effective anti-aging

care for the home user.

Our oral care segment underwent a moderate degree of growth, In particular, our international brand

Theramed was able to profit from continuing demand

for 2in1 and tooth whitening products in Germany.

Henkel Annual Report 2005 45

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Group Managenieilt Report: Cosmetics/Toiletries

We have further strengthened our position in this segment through the introduction of the Theramed Perfect

Whitening Pen. We also expanded our portfolio oflocal

oral care brands in Europe.

In the hair salon business, our colorants provided the

focal point of our activities. With 19ora Duality, we

introduced an innovative two-phase coloration product for intensive colors and lasting shine. The styling

series Silhouette was revised and our care brand SEA

was expanded through the introduction of a line for

demanding hair. Our hair care series BC Bonacure, offering an intensive therapy treatment for long-lasting

hair beauty, was extensively revamped. The basis of

the product is provided by an innovative formulation

derived from natural hair substances. The lndola range

was completely revised and extended by several new

lines; the most important activity. being the relaunch

of the lndola colorant line Profession.

Capital expenditures

The investment focus in 2005 was on optimizing our

structures and processes. Major projects were initiated,

as we reorganized our production activities in Asia. Our

production structures in Russia underwent further

development. Capital expenditures in property, plant

and equipment for the year amounted to 45 milion

euros compared with 46 million euros in 2004.
Outlook

We expect the world cosmetics market to expand

by around 2 percent in 2006. Eastern Europe, North

America and Asia are likely to be the regional growth

drivers for our business. In Western Europe we foresee

stagnating markets with tougher competition.

We expect organic sales growth in 2006 to be above

the market average, accompanied by a further increase

in operating profit.

We see opportunities particularly in developing

our markets in Asia-Pacific and North America. in the

introduction of product innovations, in further reducing costs in production, in our supply chain and in our

C:-':~~jL~ i'J;?i:l-'I.J'?:'-¡t'!~~ p.. ,~'_.

administrative activities. The risks lie in increasing competition in what are already highly competitive markets. and further raw material cost increases against

only limited scope for increasing our own prices.

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Group Management Report: Consumer and Craftsmen Adhesives

Consumer and Craftsmen Adhesives

Key financials'l

Sales in million euros in milion euros 205

1 ,446

1,275 1:,~17 1,313 ~t,il

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2001 2002 2003 2004

Return on capital

employed (ROC E)

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200421 Change

20,5 %

1 pp

9,7%

Proportion of Group sales

m _-:~:-~-=~--1':446--1i!Il;ti:- 14 % iI~iÆ

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Operating profit (EBID --_.~-~-~---- -_._---------_.-.

Return on sales (EBID

20

" calculated on the basis of unrrs of 1,000 euros

'; restated and comparable

Leading world market position

strengthened

Organic sales growth of 5.0 percent

Operating profit (EBIT) up 9.7 percent

ROCE at 15.6 percent

,1

Economic environment and market position

The markets served by our Consumer and Craftsmen Adhesives business sector maintained the dynamics observed

in recent years, exhibiting a growth rate of more than 2

percent in 2005. While the stagnation tendencies in our

traditional European core markets persisted, the markets

of, in particular, Eastern Europe and Asia were strong.

Similar to the situation in the previous year, the highest

rate of market growth occurred in sealants, assembly

adhesives and certain building adhesive segments.

2005 was characterized by significant increases in

the cost of raw materials and packaging that went beyond our expectations.

The competitive environment traditionally exhibits

a preponderance ofrelatively small suppliers oflocal

or regional significance. The process of consolidation

among our competitors accelerated in 2005, however.

with international adhesives suppliers and financial

investors stepping up their corporate acquisition

activities.

48 Henkel Annual Report 2005

19.3%

72

-3.7 pp

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pp ~ percentage points

Consumer and Craftsmen Adhesives occu pies a leading

position in its market worldwide.

Strategy

The business sector focuses on two market segments:

adhesives and adhesive tapes for home, school and office; and adhesives and sealants for construction, DIY

and craftsmen, with our building adhesives business

now having been integrated in the latter.

Adhesives and adhesive tapes for home, school and

offce constitute a traditional core business which we

serve with our international brands Pritt (bonding and

correcting) and Loctite (cyanoacrylates). Our focus for

achieving further growth will, as in the recent past, be

fixed mainly on expanding our organic business.

Our activities in respect of adhesives and sealants for

construction, DIY and craftsmen are aligned primarily

to the professional trade. Having achieved above-average

growth rates, our product groups comprising sealants

and advanced, high-performance solutions for chemical

fixing and bonding, such as our assembly adhesives,

will be expanded further.

Sales development

Change versus previous year

Foreign exchange

Adjusted for foreign exchange

Acquisitions/Divestments

Organic ___.'_"__'_._ n"." _' ..._. ._.____.~._,_____,_~~

2005

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The encouraging growth of our tile adhesives business

has in the past been based primarily on our successes in

developing the Eastern European market. We are using

this strong platform in tile adhesives to successfully

develop allied applications, including those for waterproofing products. We are also targeting investments

toward further growth regions exhibiting strong building construction activity. Our acquisition of Poly bit, a

leading supplier of relevant products in the United Arab

Emirates, constitutes a step in this direction.

We intend to continue pursuing our successful dual

strategy of recent years, combining organic growth

through product innovation and regional expansion on

the one hand, with selective acquisitions on the other.

Within this context, the development of new products

is conducted in many cases jointly with manufacturers

of our raw materials and packaging.

We intend to further expand our businesses in the

growth regions outside Western Europe, with the emphasis on Eastern Europe, Asia, Latin America and the

Middle East.

Sales and profits

Sales underwent a solid 20.5 percent increase to 1,742

milion euros in the year under review. A large proportion of this growth is attributable to our acquisitions

and the first-ime consolidation of Sovereign. However.

our continuing operations also performed very well,

with organic growth, at 5.0 percent, again well above

the market average.

Due to prevailing conditions, our businesses in the

traditional European core markets performed less welL.

Our operation in the UK was particularly hard hit by a

substantial decline in local DIY activity. The OSI assembly

adhesives and sealants business acquired as part of So vereign in North America exhibited significant growth,

thus further boosting the positive results for the region

as a whole. Growth in Latin America and Asia-Pacific

was also very strong,

:_"1 r-~:: _: ;-.' ~. ~,"::

Operating profit (EBIT) increased to 185 million

euros. a rise of9.7 percent over the comparable figure

for the previous year. Confronted by huge increases in

raw material and packaging costs, we were only able

to respond with partiaL. delayed price increases of our

own. With the strong expansion rates achieved partly in

regions stil exhibiting lower margins, return on sales

fell from 11.7 percent to 10.6 percent. Due to a higber

capital base resulting from our acquisitions, return on

capital employed (RaCE) declined to 15.6 percent.

Market segments

One of the main activities undertaken in the segment

adhesives and adhesive tapes for home, school and office was

the international launch of an adhesive tape series

comprising several innovative products. Henkel's new,

user-friendly Easy Start line, for example, has been very

well received in various national markets. The rate

of expansion of our cyanoacrylates business eased

somewhat in 2005. One of our objectives for 2006 is

therefore to revive growth in this line. We intend to

relaunch the entire product range worldwide with

significantly improved formulations and specific advertising activities.

Within the segment adhesives and stalantsfor construction, DIY and craftsmen, the successful integration of the

North American OSI business has considerably strengthened our position in relation to assembly adhesives.

OSI products and formulations are already being used

and marketed in other regions. Conversely, OSI is also

marketing products from the existing Henkel range,

targeting the professional trades in the USA. Our sealants

operation continued to exhibit dynamic growth. Having acquired the sealants business of Rhodia at the end

of 2005, we can look forward not just to strengthening

our position in the core markets of Europe, but also to

further growth opportunities in other regional markets

arising from access to Rhodia's technologies.

Henkel Annual Report 2005 49

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Our tile adhesives business once again performed very

well, especially in Eastern Europe. An additional production facility was opened in Romania. The waterproofing

product group was further expanded. With the acquisition of Polybit, Henkel has further strengthened its

technology portfolio and aims to continue to promote

worldwide growth in this field. In 2005, Ceresit, our

international brand for tile adhesives. waterproofing

products and thermal insulation products, celebrated

its 100th anniversary. We again confirmed our leading

position in this sector with our flooring adhesive products, which we market under the Thomsit brand.

Capital expenditures

Our capital expenditures focused on adapting production capacities to increasing demand and improving the

competitiveness of our existing sites. Total investments

in property, plant and equipment amounted to 50 million euros compared with 53 milion euros in 2004.

Outlook

We expect a market growth rate in excess of 2 percent

in 2006. The economic climate affecting our traditional

European core markets is likely to remain diffcult.
Costs for raw materials and packaging are expected

to undergo smaller increases than in 2005. We will

respond to such developments with further price increases of our own.

We expect organic sales growth in 2006 to be above

the market average, accompanied by a further increase

in operating profit.

The business dynamics of the growth regions, our

new product launches planned for 2006 and potential

complementary acquisitions represent opportunities

for further development. In addition to rising raw material costs, the risks we face include, in particular,

GrO~jr: :';;::1'L1Cl?;-~:~'~~' .....~" ,,--. _, ,_ ¡ ,~.;,;' ."' P', . ~ _"" -: '-: 1"'-.-

increasing competitive activity plus the possibility of

product forgeries entering the market in some countries outside Europe.

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Group Management Report: Henkel Technologies

Henkel Technologies

Key financials"

Sales in millon euros in million euros 205

3,26

2004') Change

17.0 %

1 pp

15.9 %

...1 pp

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Sales 2,791

Proportion of Group sales 26 %

Operating profit (EBIT) 298 - - - . . -_._..- ----- ---

Return on sales (EBIT) 10.7 %

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pp = percentage points

2:,~~B 2,763 2,791

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Return on capital

employed (ROCE)

"calculated on the basis of unrts of 1,000 euros

" restated and comparable

World market leadership extended

Organic sales growth of 5.5 percent

Operating profit (EBIT) up 15.9 percent

ROCE increased to 14.7 percent

I

Economic environment and market position

The Henkel Technologies business sector supplies adhesives, sealants and surface treatment products for

industrial applications. We offer tailored solutions to

a wide range of sectors and industries and for specific

applications. With this product mix, we are often able

to balance out the different growth cycles that occur

in the various sectors and regions.

All our markets developed encouragingly in 2005,

contributing to a global growth rate of around 3 percent. Worldwide automotive production increased and

the electrical engineering and electronics industries

underwent substantial expansion. The steel and metals

sector, and also the paper and packaging industries

showed only a slight degree of growth worldwide. The

increase in manufacturing output in machine construction was somewhat more pronounced. Ongoing

improvements in the performance of adhesive-bonding

and sealing technologies consolidated the trend toward

the replacement of mechanical fixings and conventional joining processes with such systems.

52 Henkel Annual Report 2005

13.2 % 1.5 pp

Henkel Technologies is the world leader in its market. This position was further consolidated in 2005

through above-average organic growth supplemented

by acquisitions.

Strategy

Henkel Technologies offers an integrated range of advanced technical solutions to its customers. We harness

the business potential available in our markets for the

generation of organic growth and regional expansion

- particularly in Asia and Eastern Europe - augmented

and supported by appropriate acquisitions. Our leading

market positions and our global presence provide the

platform required for efficiently supplying our globally active customers and engaging them in enduring

relationships. We generate customer loyalty not least by

ensuring above-average performance in all our operating functions, particularly research and development,

production and process technology, supply chain management, and marketing, sales and distribution.

Sales development

Change versus previous year

Foreign exchange

Adjusted for foreign exchange

Acquisitions/Divestments

Organic

2005

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Sales and profits

At 3.266 milion euros, sales of the Henkel Technologies

business sector exceeded the prior-year figure by 17.0

percent. Organic sales rose by 5.5 percent, with doubledigit percentage increases in all regions apart from

Western Europe. The low level of growth in Western

Europe is primarily attributable to a regional downturn

in activity in the automotive and electronics sectors and

the persistent weakness of the façade and construction

components segment. Related to the comparable figure

for the previous year, operating profit (EBIT) rose by

15.9 percent to 345 million euros, mainly due to the

encouraging increase in organic sales and the successful integration of our acquisitions. We were able to pass

on to our customers a significant portion of the rise in

raw material costs, enabling the decrease in return on

sales to be restricted to just 0.1 of a percentage point

to 10.6 percent. Return on capital employed (RaCE)

increased by 1.5 points to 14.7 percent.

Market segments

We were once again able to substantially expand our

business in the aerospace industry. We registered increasing demand for composite adhesives, particularly in

the form of high-strength epoxy resin products. Our

adhesives and sealants for this segment passed a major

challenge with the inaugural flght of the Airbus A380,

the largest passenger airliner in the world. Our activities serving the automotive industry profited from the

fact that more and more prefabricated components and

foam products are being used in order to improve vehicle acoustics. Products offering enhanced coating and

processing capabilities also strengthened our position

in this segment. Thanks to the acquisition of Orbseal

and the development of various new applications, our

North American business was boosted to the extent

that. despite the weakness of the Western European

market, we were able to achieve double-igit percentage

growth in the automotive sector worldwide.

Following the highly encouraging performance of

the previous year. our operations servng the electronics industry underwent further expansion in the year

under review, due largely to the successful introduction

of our lead-free solder pastes and important first-time

approvals from globally active customers interested

in their use.

Our businesses serving the steel industry experienced further expansion following similar developments in the previous year. The introduction of, among

other things, a range of innovative surface protection

products enabled us to extend our scope of applications in the European and American markets, as well

as in Asia. We likewise succeeded in increasing our

market share in relation to consumer durables, thanks

in particular to innovations in air and water filtering technology, and the successful market launch of

Bonderite NT, our new product for metal pretreatment

applications. The market for consumer goods developed

well, especially in the packaging industry, leading to

strong organic growth in this segment. Our film laminating adhesives business was boosted by increasing

volume shares in respect of major customers. All our

regions contributed to the growth achieved, with increased market share in North America ensuing from

the Sovereign acquisition, and the acquisition ofCAC

strengthening our business in India. Our activities in

the field of industrial maintenance, repair and overhaul

continued to develop welL. Major contributory factors

in this regard include a significant expansion in our

market activities in relation to engineering adhesives

and our increased involvement in the renewable energies sector.

Henkel Annual Report 2005 53

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Capital expenditures

Our investments are geared primarily to improving

the productivity of our manufacturing processes. We

made substantial progress in reducing costs thanks

to a number of individual projects. In view of the

significant increase in raw material costs, this was

key to securing our profitability.

We extended our local competences in the various

markets with investments - e.g. in China - designed to

increase our competitiveness. Total capital expenditures

in property, plant and equipment amounted to 140

milion euros following 86 millon euros in 2004.

Outlook

We expect our markets to undergo growth of around

3 percent in 2006. We anticipate an increase in worldwide manufacturing output in the automotive industry similar to that encountered in the year under

review. Ongoing global growth in the electrical engineering and electronics industries is again expected

to boost our industrial business in the coming year.,

Growth in the steel and metals industry is likely to

accelerate slightly.

We expect raw material prices to remain high, but

with smaller increases than in 2005. Nevertheless, this

Innovatiol1comÖi er

costs with higher quality:

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will necessitate further price increases for our products

and servces and also contiual optization and adaptation of our formulations to new raw materials as these

become available.

We expect organic sales growth in 2006 to be above

the market average. accompanied by a further increase

in operating profit.

We see opportunities in the further substitution of

existing joining technologies by adhesive bonding, and

in continuing high rates of market growth in Asia and

Eastern Europe. The risks affecting us relate to possible

adverse developments in raw material prices. t:oCL'"

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Opportunity and risk report

Integrated opportunity and risk management system and risk control

By applying unified corporate standards, we systematically incorporate opportunities and risks in our planning and decision-making processes. In this way, we

are able both to minimize potential exposure at an

early stage and to specifically target and effectively

exploit identified opportunities. Our risk management

system is an integral component of the comprehensive planning. control and reporting regime that we

have implemented in the individual companies. in our

business sectors and at corporate leveL. The principles,

processes and responsibilities relating to risk management are defined in a Corporate Standard that is binding throughout the Group. Within the framework of

the 2005 financial audit, the auditors examined the

structure and function of our opportunity and risk

management system, confirming its adequacy and

regulatory compliance.

An important basis of our global risk control capabilty is provided by periodically instigated risk inventories, within the framework of which opportunities

are also systematically identified. documented and

evaluated. Involvement of the regional managers in

the reporting process ensures that risks in our international organization are comprehensively monitored

and recorded. Within the framework of a risk inventory, managerial staff are required to identify risks on

the basis of checklists using predefined operating and

functional risk categories, and to evaluate the results in

terms of occurrence likelihood and potential loss.

The development of inventoried risks and the efficiency of the risk management measures are additionally analyzed on a regular basis in a separate risk

control exercise implemented at both a centralized and

decentralized leveL. All the subprocesses incorporated

within the opportunity and risk management system

and the risk control process are supported by an intranet-based database that ensures transparent communication of the relevant information throughout

the Henkel Group.

56 Henkel Annual Report 2005

Operating risk structure

Risks in the field of production are minimized by a

high level of manufacturing site flexibility in terms of

production mix. plus clearly defined safety standards,

the high qualification of our employees and regular

maintenance of facilities. The negative effects of possible production failures are covered by insurance policies to the extent that this is economically feasible.

We minimize research and technology risks by operating a system ofin-house fundamental research

augmented by extensive information interchange

with universities and research institutions. Detailed

analytical methods and a strict product release procedure are applied in order to ensure defect-free product

composition. The high quality of our products is also

underpinned by our uniform worldwide safety and

environmental standards.

In anticipation of the redrafting of the new European legislation regarding the registration, evaluation and

authorization of chemicals (REACH), we have already

aligned our existing processes to future requirements

- as far as currently known - in order to minimize the

ensuing costs.

Innovative products constitute an important factor governing the success of our Company. We accept

within the bounds of business prudence that the introduction of innovations gives rise to both risks and

opportunities. Through comprehensive marketing

analyses and modern methods of innovation management, we ensure that the chances of a successful

product launch are maximized and the corresponding

risks, for example those relating to product liability, are

minimized. The major instruments that we deploy in

this regard include a professional ideas management

system, carefully conducted laboratory tests and, in

particular, a pro-active approach to satisfying customer

requirements.

Capital expenditures are analyzed on the basis of

a detailed risk appraisaL. Careful advance analysis and

feasibility studies to determine the viability of investment projects provide the basis for successful project

management and an effective risk reduction capability.
Investment decisions are aligned to defined, differentiated responsibility matrixes and approval procedures

that incorporate all the relevant specialist functions.

Acquisition decisions are likewise taken on the basis

of a thorough risk analysis. In complex transactions.

risks can arise due to laws and statutory instruments

relating, for example, to tax, competition, monopolies

and the environment. To combat these, we base our

decisions on a comprehensive process of due diligence

backed up by legal advice provided both by our own

experts and by external specialists. Acquisition decisions are conducted in accordance with the procedures

specified in our Corporate Standards.

In the procurement market, pro-active control of

our vendor portfolio and ongoing worldwide expansion

of our purchasing management capability contribute

considerably to reducing risk. We strive to remain independent of individual suppliers in order to better

secure the availability of the goods and servces that

we require. We enter into strategic partnerships with

suppliers of important and price-sensitive raw materials

so as to minimize the concomitant price risks. We also

put considerable effort into devising alternative formulations and developing different forms of packaging in

order to be able to respond to unforeseen fluctuations

in the associated raw material prices.

Functional risk structure

In November 2005, Henkel KGaA restructured the method of financing pension obligations with respect to our

employees and retirees in Germany. As explained on

page 25, large portions of these pension obligations

have been ring-fenced within a Contractual Trust Arrangement (CTA). This step serves to strengthen our

financial flexibilty while also enabling better management of existing refinancing risks arising from our

pension obligations.

Operating on a pro-active basis governed by corporate-wide standards, the Corporate Treasury department centrally manages interest-rate. currency and

liquidity risks likely to affect the Group. Derivative

financial instruments are utilized exclusively for

.- ~ r:--; '. ~ :-

hedging purposes. Henkel uses currency derivatives

in particular to hedge transaction risks. These arise

from exchange rate fluctuations causing changes in

the value of short-term foreign currency cash flows in

relation to individual company financial statements.

Currency translation risks from net investments in

foreign entities are hedged on a case to case basis. Such

risks derive from the possibility of an accounting loss

on the translation of the equity ofa subsidiary arising

from movements in foreign exchange rates, The effects

of the translation risk become apparent when the individual financial statements offoreign subsidiaries are

translated into Group currency.

Prudent management of interest rate exposure constitutes an important objective of our financial policy.

To this end, the maturity structure of our interest-bearing finanCial positions is managed on two levels: first,

by selecting equivalent fixed-interest periods for the

original financial assets and financial liabilities affecting liquidity: and second, by using interest rate derivatives, predominantly interest rate swaps. The interest

rate both on the bond for 1 bilion euros issued by

Henkel KGaA in June 2003 and the hybrid bond for 1.3

billon euros issued by Henkel KGaA in November 2005

were converted from fixed to floating using interest

rate swaps - in the case of the 2003 bond, conversion

was 100 percent, and in the case of the 2005 bond, conversion was 50 percent. As the bonds and interest rate

swaps are in a formally documented hedge accounting

relationship, the measurement of the bonds and the

measurement of the interest rate swaps match exactly

in practical terms.

Clearly formulated regulations governing our response to financial risk form an essential component of

the financial strategy in place at HenkeL. Our objective

is to reconcile as far as possible the competing requirements of profitability, liquidity, security and financial

independence. The underlying Treasury Standards and

the systems applied in risk management and control are

explained in the Notes to the Financial Statements.

Standardized procedures, a pro-active approach

to receivables management and a detailed system for

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Henkel Annual Report 2005 57
Gr,:)uc. rv~:-!lì:iû'~:',!~i1~ F~eC/f'

monitoring customer relationships minimize the occurrence of bad debts.

We employ advanced technologies in order to avoid

risks in the field of electronic data processing. Unauthorized access to data and systems, and major data losses.

are extensively precluded by continuous monitoring

of the efficiency, availability and reliability of our IT

facilities, and by a detailed emergency response plan

integrated within our security concept.

There are currently no risks arising from litigations

either pending or threatened that could have a material

influence on our financial position. We address litigation risk by maintaining constant contacts between

the corporate legal department and local attorneys,

and also through our reporting system, which serves

to monitor and control current legal proceedings and

to assess potential risks. We have concluded worldwide

insurance policies in order to cover any remaining liabilty risks and potential losses that could affect the

Company.

The future economic development of Henkel is essentially secured by the commitment and capabilities

of our employees. We combat the increasing competition for well-qualified technical and managerial staff

by maintaining close contacts with selected universities

and implementing special recruitment programs. Attractive qualification and further-training opportunities combined with performance-related compensation

plans form the basis of our personnel development

system.

Overall risk

The risk management regime described ensures that

all the relevant price-fluctuation, production-failure

and liquidity risks, and risks arising from cash-flow

fluctuations are effectively controlled. As in the previous year, there are no identifiable risks relating to

future developments that could endanger the existence

either of the holding company or of the Group as a go58 Henkel Annual Report 2005

ing concern. Our risk analysis indicates that the net

assets. financial position and results of operations of

the holding company and of the Group as a whole are

not currently endangered either by individual risks

or by the aggregated exposure arising from all risks

combined.

Major opportunities

As indicated in the description of our opportunity and

risk management system, identification of major opportunities constitutes an integral component of our

planning and decision-making processes. and is also

incorporated as part of the risk inventory procedure.

As opportunities and risks essentially constitute the

two faces of the same entrepreneurial coin, potential

opportunities generally arise from a complementary

approach to all categories of operating and functional

risks described. The risk of possible losses in production

that comes with increasing centralization of our manufacturing effort is thus accompanied by significant potential cost savings. In particular, the opportunities of

generating future profitable growth are carefully taken

into account in decisions concerning potential capital

expenditures and acquisitions. The primary operating

opportunities of our businesses arising, for example,

through product innovations in their sales markets,

are described in detail in the individual business sector reports included in the Group management report.

Further opportunities for increasing the effciency

of the Henkel Group can be found in the consistent

utilzation of potential synergies, for example in the

area of supply chain management, standardization

and the pooling of resources within regional shared

service centers.
Underlying conditions

World economy

Worldwide growth is likely to remain at the level of the

previous year. There are stil global economic risks arising from the possibility of further increases in oil and

raw material prices. We expect the raw material and

packaging prices relevant to our businesses to undergo

a slight rise. We intend to respond to such developments with price increases of our own.

We anticipate appreciable growth in the overall

economy of the USA. We again expect high growth

rates in Asia, Latin America and Eastern Europe. Growth

rates in Western Europe.should improve slightly. While

we expect the US dollar to remain at roughly the same

average value as in the previous year, interest rates are

likely to rise slightly.

Sector developments

We expect private consumption in Western Europe to

undergo a slight upturn, and consumers in the USA

to continue to spend reasonably freely.

World automotive output is expected to increase

with, in our estimation, lower-than-average growth in

the USA. The European automotive industry is likely to

return to growth and we foresee above-average increases

in production levels in Asia and Latin America.

The global growth undergone by the electrical engineering and electronics industries wil continue to

benefit our industrial businesses in the coming year.

We expect the steel and metals industry to further

expand at a somewhat accelerated rate.

The outlook for the construction industry in Europe indicates a degree of improvement with a slight

increase in building investment. Our expectation for

German construction is that it will register just a small

minus, In the USA, the signs point to a moderate acceleration in growth.

Sales and profits forecast for 2006

The underlying conditions are expected to undergo

a slight improvement in 2006. Our intention is once

again to grow faster than our markets.

The Henkel Group expects to achieve organic sales

growth (i.e. after adjusting for foreign exchange and

acquisitions/divestments) of3 to 4 percent in 2006.

We expect operating profit (EBIT) to grow by around

10 percent after adjusting for foreign exchange.

We likewise expect an increase of around 10 percent

in earnings per preferred share (EPS).

L-- .~ - ~": . , ..:..~ ~ ~:: i ¡:- ~~_ ,'_ '-' " .. '- . ~

On January 12, 2006, the rating agency Moody's raised

its outlook for the Henkel Group from negative to stable,

due primarily to a significant improvement in our key

financial ratios and good cash flow developments.

Further major events occurring between the balance sheet date (December 31. 2005) and the preparation date Oanuary 30, 2006) are described in Note 52

to the Consolidated Financial Statements.

Henkel Annual Report 2005 59

to0. '"

a:

c: '"

E

'"

g-~

~~
Consolidated Financial Statements

Consolidated Statement of Income

in millon euros

restated and

restated comparable

2004') 20042) 200

10,592--.-10,592-~_a¡'"

"=-5,617 ... . -5,617 fiits:

'!~?~ ~!l7'5 ~~~1' -3.157 -3,157 _ '=272 -=272 _

~~71 =571 _;"

146 146

-103 -103

-200

-22 ---~----

796

-408

1,770

-242 ._.h__ _..______.______

1,916

162

2

58

-214

8

Sales

Cost of sales ------,-

Gross profit

~.~rk~tin~,¡;e"ing and distribution costs

Research and development costs -'- --...-. --

Administrative expenses

Other operating income

()t~er.()perati n~ char~es

Scheduled amortization of goodwil

n._.m...______ _..._

Current restructuring costs __._________ --_.-.."__0.__---._.

Operating profit (EBIT) before exceptional items

. .~~van~ElRestructurin~ costs

Gain arising on the i:xchange of the inv~tment in Clorox

_1~pairri~I~~e~. on goi:~~I'-,_n..'_____ .. ,.___._

Operating profit (EBIT) after exceptional items

~~t inc.()me from associated companies

Net result from other investments

Interest income

Interes~~!,i;~~_n

Financial items

-------------.---- .-._-

~_i!~!n!!~~E!fi:i: !B_x.

Taxes on income

Note

1

2

3

4

5

6

7

8

10

1,924 _'_m.__.______.

-186

Net earnings

Minori~.i~te!.~~~¡;

~l'.!ing~~!l"!r!"ii.~i!!, ~riter,i:~~~. ._.______

1,738

11

-22 --------

99

_ir7~;

~TI'j~~3

99

165

2

58

-214

11

1,007 _._----------

-259 -------_._.-

748

Earnings per share (basic) in euros

restated

Note 2004'1

Orc:inaiy sh~res

!:_i:n:~()!i.n~_~~~~~:!El.~h.~!.~~. .'.

45 12.08

45 12.14

restated and

comparable

.--.----m-1t;,,~~1.'''r%5'"~. 200421 200

5.18 ~.i~l.hJ".""

'h'hh..,~~___~~g¡m~lJ

Earnings per share (diluted) in euros

Note

restated

2004'1

Ordinary shares

No~~votin!lP!.~!=rr~?~n-i:e.:' h

45 12.08

45 12.11

restated and

comparable

20042) 200

.- -~__-.~;:~~__i~~JjH

"application of IAS 19,93 A (discontinuation of amortization of actuarial gains/losses. net of tax, 5 million euros) and IFRS 2

(recognition in the statement of income of share. based payments. net of tax, -3 million euros). see page 69,

" adjusted for exceptional items (exchange of investment in Clorox. goodwill impairment losses and Advanced Restructuring costs) and adjusted for

scheduled amortization of goodwill in EBIT (200 million euros) and in financial items (9 million euros) and the effects of SFAS 123 (R) on our associated

company Ecolab Inc, (-6 million euros), see page 70,

I

60 Henkel Annual Report 2005
Consolidated Balance Sheet

Assets in million euros

Intan~ible Cissets

Property, plant and equipment ..__.__. . - -

Shares in associated companies

n..n.________ _ __ _ ~ ____. n. _ _______n _

Other investments and long-term loans

Financial assets

Other non-current assets

Deferred tax

Non-current assets

Inventories

Trade accounts receivable

Other current receivables and miscellaneous assets

Current tax assets _. -.-

~iquid funds/Mar_k¡¡table securities

Assets held for sale

Current assets -_._-_._-----..-

Total assets

Note

restated

2004')

4,554

1.808

463

575

1,038

113

476

20

~t.:.~~tl~Xb~;:s~~

~Et~~l~~_' li-J:fi; "-;;,.,~:~"""''''"'' ~ilfi~~Ùi!i- ~;¡~

12

13

14

15

16 U___."___u__

t~','"'I~¡t~~,' ,., 7,989 ~¿¡i~)ti';

1 ,196 rf~l1~~

1 ,743 ~~~gliiø ¡tv,t,",~I"g~~"""~~~,.o;

557 ~~~lit~:fâiYí

107 ~,""~~ i,"' -,..., ~~ 20 1,695 ~r~_

.-. _~_____.___.__ ._...__.___..__ .._______. 1Ìig,~j~~,,~1 21 Wra~;';JBq;~~

"" ==~~~--~-==.===---=~-=-----~-=-=~::~~=

17

18

19

Shareholders' Equity and Liabilities in million euros

Subscribed capital __.._.u... .____.. ...

Capital reserve __ H" _

Revenue reserves

~~i~~_~~~~E!~!ecognizl:i:_in- ~~i!

Equity exclu~iiig minority interests

Mincir~t!,n!e!E!s!~__ _

Equity including minority interests ._-- - _. - -

Pensions and similar obligations

Other lon~-term provisions

Long-term borrowings ____u_ __ _.

Other non-current liabilities

__ U'_'_ ____

Deferred tax

Non-current liabilties

Short-term provisions

~h()rt -term b()rrowing~_

Trade accounts payable

Other current liabilities

-_.._----_._-----_..-- -.

Current liabilities

----_.~~-_._.__.__._---------~.------.

Total equity and liabilities ..---_.,". '.~-~--_. -", -~ - "~_._"- ----,...__..

restated

2004') 20

,-.----- 374--~~ 652 ~~

4,286 f~!gJ~a

- ~:L~t~~\E '9"8'2 ¡;;;O;¡~tWl~

4,33 ~I~:~;llb~1I

16 ~~2~j~1m

4,34 r\t~;_ri;i¡&r-~

2,218 ~~it¿lri~i~

599

1,385

117

455

4,774

918

1,789

1.099

361

Note

22

23

24

25

26

27

28

29

30

31

32

33

34

35

4,167 .~-~-

13,287 ._._.._....-_.. _"._~_, "_~4~~...~,

~~~:B~§l

~~iJi~~

f!ti?~'m

tE~Y.:;0t~~~~~~

F~¡!fJ~~E m~j;~~

~if~~;~i1i~

~£~l~lE:l;lli

r;lIlliE~~;;!æ

'J application of IAS 19,93 A (recognition of actuarial gains/losses and deferred tax thereon in equity) and IFRS 2 (recognition of share-based payments in the

statement of income). see page 69,

Henkel Annual Report 2005 61

i!

c: '"

E

'"

~~"'-

i: '"

g'~

25.S: Uu.
Cons.:)i¡da¡:;:o' F¡:-¡.¿j;-i',:-¡:;! 3:~::S~~-i2~~:..3

Consolidated Cash Flow Statement

See Note 45

in millon euros

restated and

restated comparable

_.~_._--~_.~--------_.~-------------,------------------_.- 2004'1 2004'1 Operating profit (EBIT) after exceptional items 1,916 99 - --- - - -- - Income taxes paid -276 -276 -_..._--.__._---~----._- . _._._._._--~- --...._._--..--~-

Amortization/depreciation/write-ups of non-current assets

(excluding financial assets) - - - _._--.-

Net gainsllosses on disposal of non-current assets

(~x~l~ding fi~an~ial assets)

c;ha,nge i~_ i~~Elntories

Cha,nçle in recElivables and mis~t:"ane_()us assets

~~~.!~_El~.i!~_~~e~~d p~()~isio~,_____________ _n_ ____________

Cash f~~ rr()m_o~El~a.tin!: activities

~~rchase of intangible assets

~~!Chi3~Elof Jlro.iert, Jllant and equipment

Purchase of financial assets/acquisitions

---- -- --- ... ._------ ._~--

Pr()c~dson ~E~a.1 of su~~i~iariEls a.!,!biJ~i~El~~ iJnits _

Proceeds on disposal of other non-current assets

Cash flow from investing activities/acquisitions

- .n...._ '_.- u,__,._ '_n__._ _..._

Henkel KGaA dividends

Subsidiary company dividends (to other shareholders)

Interest received - - _. .- ---

Dividends received

Interest paid

Dividends and interest paid and received

c;hange in borrowings

Allocation to Contractual TrustArrangement (CTA) Other financing transactions -7 -7 _n.u_____ _~____U_'_'~_'_'_' ______....___. __,__.__._._____ _ .. __ _ .__._______.___. ____

~a.!;~ !1()\'_fi:~~!i~_n~~~.!a.c:tivit!E!;__,_ _ ____ _,____ ___________ _ _ ___761_ __ _______ 739 FJ~ltl¿,'tii CI1~~El_i.i.c:a.s_~ ê)ndca.sh ec¡ui..alen!5.__ 657 657 ~SI~N'i1~

Effect of exchange rate ch_a.nge~~ cash_a.~~~~~lJi~i3~~~~ __,______ ____=-~~~ __n_____~E. f.~'t~'2

Change in liquid funds and marketable securities 507 507 !;~,~~iæ

L¡q~id-f~nds-a-;i:¡~~rketabie s~~ritÌ~s at Janua~ 1- - 1,188 1,188 rE:?l~lW4fi;

Liquid funds a~d r:_~ke!a~~~~!es at Ò~ber ~,~___,_~_._____________._,._1,695 ___M______~~_l~§f6T~

851

-1,785 --_._---

1

-50

266

---_._-_..__.

923

-26

-344

-3,420

2,282

481

-1,027

-167

-12

49

74

-215

-271

1,039

-15

1

-28

-53 --.'---_._---

94

-26

-344

-3,420

2,282

481 --_._~--

-1,027

-167

-12

49

74

-215

-271

1,017

20

k~i~f¡lJ~

~~~~

320

rIft~~

ll:l=

i.~ilf~w t'.:Æi.~ l~~

~1i~~~1

~~

~l:~è:~

~'_?æ:~;1",JJi:lf;a£.~

Ef";;'~-'.;,~~. Ii,;¡'~'i¡';; , ...:~~;ar~~,' '""

~~~~ It~~Ci..''ít.1'~~.3_!'~.'';! .,..~..',.~_(._,j"_Æ~,;.e~~ ~ .t~.!-g.a-~!t4i.: . .

~~~~tli~ì1

~j~0i'jlB~~tj1f

Computation of free cash flow in million euros

restated and

restated comparable

2004'1 2004'1 200

923---'---945 T,&l;;2~~(;'~;~l~:

-;:: -;:: ~lii~=

2,::~ 6;:: h-~i:~l~~rl

..-_.~'.~~-,.~~._~~ ,'-- -_..~-- .,_:~,~~~..._~_=~~.__'_~;~___fr;l;i~ilil¡t,

Cash flow from operating activities

Purchase of intangible assets

Purchase of property. plant and equipment

Proceeds on disposal of subsidiaries and business units

Proceeds on disposal of other non-current assets

Dividends receivedNet interest

-- -.._--..----..__....__._.._----_....- - -..._-_. .~-

Free cash flow

I

"application of IAS 19.93 A and IFRS 2

" cash flow from operating activities before exceptional items

" adjusted for proceeds on the exchange of the strategic investment in Glorox and repayment of the vendor note (loan to Gognis)

62 Henkel Annual Report 2005
CC"iS,~irj2.t~cj FI",act.:'" S'3'"""'c"-", Notes to the Consolidated Financial Statements

Statement of Recognized Income and Expense

in million euros

restated

2004 20

-- 1,738 -~1~m:

..---~324 ~~~l9d 10~B: -72 i~~~: "'",~r:'$t"ti~.

_____ -25 i~~

___.,._ -411 t~~ir~ 1,327 ~~~ -47 ~~'t - Equity holders of Henkel KGaA 1,374 Ûii~l11J);~~~l'1!l iJ~~~~w;

§~~t.~~ ~ha~§!~~~~~C?~~r:~g P~~9~e.:___~...._,_._..__..__-=____,_~____~:___.,___.___,__ -70 .J1~~¡"iB

Net earnings .--.-- _. _.

Foreign exchange effects

Derivative financial instruments - ---- - - - -

Actuarial gains/losses

OthElr.Éa~: and los~~"~~og~ized ~ equi~_____.

~~~n~a_~~~~es recogniz!d directly ~ equ~~_________"_

Total earnings for the period ____ __ __ _._n

- Minority shareholders

Notes to the Consolidated Financial Statements:

Statement of Changes in Equity

See notes 22 to 26

in million eures

Ordinary Preferred

shares shares

Gains and losses

recognized in equity .___....."_ n..____ __ "___....

Derivative

financial

instru- Minority

ments interests Total

--------:.73'- ---3-"---75---fu~R

----~.-------_. ------. ft~fl 3 75 ~~îJ

-12 mlm

- EìWljJ. 1~~i

-2 ~~t~~

!.¥.4J~Jm

-~~F,~'t~

Capital

reserve

Revenue

reserves

Translation differences

At January 1, 20 as reported -----.- - ._--" -." - ...._'- ---"_.-._----.

Restatement

222 152 652 2,955

-188 _._-------- .._.----

222 152 652 2,767

-167

1,737

-72

21

222 152 652 4,286

-181

8

757

13

-46

--_._--16 ¡,~ ~~ln¡;

-9 ~f:§l~ - ~i13 ~tì~~yA~

3 ~r~z:~

!'$.m~~h' - r~~~7fj

- ~lKl\lm

At January 1, 20 restated

Distributions

Sale of treasury shares

- -- ------- . ...... .... .

Net earnings

Foreign exchange effects

-- --- ,,- - --- --

Derivative financial instruments

Actuarial gains (+) and losses H

Other gains and losses

ri:.ogn~zed i~~El~~t~"~______. _.___""___

At December 31, 20/January 1, 2005

Distributions

Sale of treasury shares

Net earnings

Foreign exchange effects

Derivative financial instruments

Actuarial gains (+) and losses H

Other gains and losses

recognized in equity

-,.- -----_. - _. -.._.

At December 31, 2005

-673

-322

10

-995

599

-36

-140

34 5

222 152 652 4,7~_. .~ __:=,-~~2i_==~=~~J:~:~J

Henkel Annual Report 2005 63

"C'"

1;

~ 2l

ii ¡¡ c: E 8.æ'" .s

:5 en

.s~

~~o c: z~
Note:; te Hi:: CCPSGiidZltec.i F!;'I'~L¡Çi:Ji St3t¿:r,:¡er,ls

Group Segment Information1)

by Business Sector

See Note 43

in millon euros

Business sectors

Sales 20

Change from previous year

Proportion of Group sales

.. - _._- --_._- ._-

Sales 2004

EBITDA 20

EBITDA 2004')

Change from previous year

Return on sales (EBITDA) 20

Return on sales (EBITDA) 2004')

Amortzation and depreciation of trademark rights,

other rights and propert, plant & equipment 2005

Amortization and depreciation of trademark rights,

other rights and propert, plant & equipment 2004

~uro~ ~m~&

& Home Cosmetics! Craften

Car Toiletries Adheves

1,742

20.5%

15 %

1,446 ""--_.

224

208

4,08 2,629

13.0 % 6.2%

34% 22%

---3,617 2,477

55 371

--- ~ -

476 347

15.5 % 6.6%

13.5% 14.1 %

8.2%

12.9%

--13.2 % 14.0% 14.3 % ---.- ------

117 50 39

---126 ---57 --,39

43 321 185

--. ~._-- -- -----

350 290 169

EBIT 2005

EBIT 2004')

Change from previous year 23.7 % 10.5 % 9.7 %

-_.- -..- ---- - ... _..._- -- .- Return on sales (EBIT) 205 10.6 % 12.2 % 10.6 %

Return on sales (EBIl) 2004')

.~--'-'---------~ ._---- ._-~._---_.__._--_.- ,.-._------

Capital employed 20053)

Capital employed 20042)3)

Change from previous year

Henkel

Technologies Corporate

3,266

17.0 %

27 %

2,791

_._---- -_._-~-

452

382

18.3 %

13.8%

13.7 %

107

84

34

298

15.9%

10.6 %

9.7% 11.7 % 11.7 % 10.7 % -,._-- -----,--.

3,184 2,184 1,186 2,350

2,363 2,071 876 2,265

_..._---

34.8% .----_._---

5.4 % 35.4 % 3.8% --_.. ------

13.6% 14.7 % 15,6% 14.7%

14.8% 14.0% 19.3 % 13.2 % -_._-.__._-

158 53 356 493

2,609 1.365 114 179

........_.__... ._-._------- --~-

4,403 2,715 1,471 2,80 .._----

1,036 710 351 745

3,367 2,005 1,120 2,06 ------- -- , ____no ._--,---------

3.204 2,415 1,064 2,489

897 656 294 627

2,307 1,759 770 1,862

-..- - -------_.-

88 48 27 123

2.2% 1.8% 1.5 % 3,8%

74 42 21 101

2.1 % 1.7% 1.5 % 3.6%

Return on capital employed (ROCE) 2005

Return on capital employed (ROC E) 2004'1

----- ------- -_. - _. --.- ----_._._-

Capital expenditures (excl. financial assets) 2005

Capital expenditures (excl. financial assets) 2004 ~-'-------'---- --------------------..-._--

Operating assets 20054)

Operating liabilities 200

Net operating assets employed 20054)

--_._~---------~_._------------------

Operating assets 20044)

Operating liabilities 2004')

Net operating assets employed 2004'14) -~_._--- ------ -----'-----. ----------._-'------,

Research and development costs (R&D) 205

R&D as % of sales 205

Research and development costs (R&D) 2004

R&D as % of sales 2004

Group

24~ ~ -i~11

2 % ~i~~¡;

_~_ 261 mig~.

-~:; l~f,

______=_ tkJ~

= i§~

21

14

-122 ~¡¡~ ~'/'¡!l'J~

--_:_~: = ll:~~r=~¡

________ ~o!!I = ~~~~

-167 ~~

63

- ~;iiD~

- E,;I1,arq~i

~~l1;ig~

r~~r~~?98\

~ìí~

~?Æfi

37

31

---~-_._.

307

474

-167

355 ú'4-;î~f;'

292 f,~:n~;~76 'f..~..~~,

63 t~lrl~m:~

38 !~0M~æii

- ~rlti~1i/

34 i~ngJjÆg~

- f-focfifg~

" calculated on the basis of unrts.of 1 ,000 euros " restated and comparable

" including goodwill at acquisition cost '. including goodwill at net book values

5, reported in 2004: 1,010 million euros, including the gain on the exchange of the strategic investment in Clorox of 1,770 million euros, Advanced Restructuring costs of 408 million euros (Laundry & Home Care 128 million euros, CosmeticsfToiletries 83 million euros. Consumer and Craftsmen Adhesives

46 million euros, Henkel Technologies 114 million euros and Corporate 37 million euros). goodwill impairment losses of 242 millon euros (Laundry & Home

Care 58 million euros, CosmeticsfToiletries 31 millon euros, Consumer and Craftsmen Adhesives 5 millon euros. Henkel Technologies 148 million euros);

restated in accordance with IFRS 2 (recognition of share-based payments in the statement of income): Corporate 1 million euros,

64 Henkel Annual Report 2005
Group Segment Information1)

by Region

r~0:e:: ;~:.

See Note 43

in millon euros

Regions

-_._------------_._--------_.._---

Sales by location of company 200

Change from previous year

Proportion of Group sales

Sales by location of company 2004 _.___~._____________._.__._ _"n _____.__..__..______

Sales by location of customer 2005

Change from previous year

Proportion of Group sales

Sales by location of customer 2004

EBITDA 205

EBITDA 2004')

Change from previous year

______.n_________ .__ ___.._.__ ____

Return on sales (EBITDA) 205

_ _____ __ .__n_.____.. _._.n

Return on sales (EBITDA) 20042)

Amortzation and depreciation of trademark rights,

other rights and propert, plant and equipment 2005

Amortization and depreciation of trademark rights,

other rights and property, plant and equipment 2004

EBIT 2005

EBIT 2004"

Change from previous year

Return on sales (EBIT) 2005

Return on sales (EBIT) 2004"

Capital employed 2053)

Capital employed 20042) 3)

Change from previous year

Return on capital employed (ROCE) 205

Return on capital employed (ROCE) 20042) --_.-____0-__.'-_._---------,._----_...

Capital expenditures (exel. financial assets) 2005

Capital expenditures (excl. financial assets) 2004 --"---._--._._----------. -- --._-_.. -_.------ ."------

Operating assets 20541

Operating liabilities 20

Net operating assets employed 20054) - --------- _. ._._-._---_..__.,----------.~-- .-.- -----_..-._"---------.

Operating assets 20044)

Operating liabiliies 2004"

Net operating assets employed 2004" ')

Europe North

Africa America

Middle (USA

East Canada)

7,490 2,733

-

5.7% 36.6%

62 % 23%

7,085 2,000 ---_.. ----_._._"-

7,43 2,721

5.9% 38.7 %

Latin

America

AsiaPacific Corprate Group

571

21.1 %

931

20.2 %

5% 8%

471

58

20.2 %

5 %

13.6 %

62% 23% 8%

489

46

32

68

54

26.5 %

775

249 1JI:mì

- ~~!~~QI~

____~; il~l

249 WErl1i14 lv"~~",,s~-=

~\ë7:~O'~'" ,.

- &:~~~Zl

,____ ~; ie

-101 )11';7::. L~f.~;l¡'-'-_. .;. -9: i~~

-~flJirtil:l

-~

lL~~_

7,013

1,04

1,017

1,961 '---._--

43

310

._._-- 3.0% --- 40.4 % 44.0%

.._-----

14.0% ---- ----_..

15.9% -.- --------

8,0%

-----" 14.4 % ---------

15.5 % --6.7%

191 88 17

98

868

17

7,3%

7.0%

210 ~_._-68 14 14 ----~-.-

857 347 29 51 -----

807 242 18 40

6.2% 43.5 % 61.6% 26.4 % -~_..,.-._~_._- --"_._---

11,4 % 12,7% 5.1 % 5.5%

----- 11.4 % 12.1 % 3.8% 5.2 % -_._--_.~ --.._-,

3,36 4,487 431 623

3,470 3.241 384 480

--_.~- -3.1 % --38.5 % --- 12.2 % 29.8 % _.._--~--

25.5% 7.7% 6.8% 8.2%

23.2 % 7.5%

.--~._~- ---------

353 626

369 3.682 ----_. ---"----

4,827 5,226

1,978 517

2,849 4,709

----_.

4.676 3.386

1,799 358

2,877 3.026

4.7 % 8.4 %

15 66

47 169

501 84

88 259

413 584

445 665

78 239

367 426

21

14

-122

-111')

- f:01EI~

:'~;',',~~~~.-~'

- tt!!ik1J

-167 £(;'K'~ 63 ~t_ ~'"~~ - å\t~

- ~ifi.t

_______=. tfi~~J!Z! ~3':Qm

37 rl1ii~

!01&'~¡'-'~ 31 rhfL'~~..

307 Flty,B

474 ~~'1"'.i~ ~.~~,~ .,.-ÌV~

.~___-:_~~!_ L~ll

355 f!J\S;g§~¡

292 E;;~:ì:l

_____,_~EJ1Lmn

" calculated on the basis of umts of 1.000 euros ' restated and comparable

" including goodwill at acquisition cost '. including goodwill at net book values

;. reported in 2004: 1.010 million euros, including gain on the exchange of the strategic investment in Clorox of 1,770 million euros, Advanced Restructuring

costs of 408 million euros (Europe/Africa/Middle East 282 milion euros. North America 60 million euros, Latin America 7 million euros, Asia-Pacific

22 millon euros. Corporate 37 million euros), goodwill impairment losses of 242 million euros (Europe/Africa/Middle East 79 million euros, North America

115 million euros, Latin America 2 million euros and Asia-Pacific 46 million euros); restated in accordance with IFRS 2 (recognition of share-based payments in the statement of income): Corporate 1 million euros,

Henke) Annual Report 2005 65

'C

~'"

:Q zi

šj :¡ c: E 8$CD .s

:5 VJ

oS :s

! ~ o c: z¡¡
t-~'::t¿-s ~.~~ th2 C\:.¡ _., . ',!: ~j. t.:.'_~ Fin': ~~::ie~;":er¡:s

Changes in Intangible Assets,

Property, Plant and Equipment and Financial Assets

Cost in millon euros

Intangible Propert, plant

--.'________________'____u____ assets __,u and equ~IT~~___,___ , _ 2,887 _~~

3,726 187

.. -- .--_._-~.--- _._-_._-------- 26 344

-43 -210 2 -2

-387 -103

At Januill) ~, 2(

S:h~n~es in the Group/acquisitions

Additions

~isE'()sils

Reclassifications

--.. . .-._-_.--

Translation differences ---------- '-'..- -~-_._--.._--_.._--_._-_. --_. -----

~I_~e~ti!! ~1,_~

~£'S ~/IA~_~~ccording ~~~~~~r!c_~~~______

~tJ~nuai_ 1, 200

C;han¡j_es in the Group/acquisitions

Additions

Disposals!)

Reclassifications

Translation differences -----_._----_. At December 31, 2005 6,08

~~~!_i.~.?ssi:!~ ~_~~~,f~~,~!!l__.uv___ ...._-_"___,~_o____.______....

~,~!!

-1,304

4,907

564

43

-82

26

631

. 4,~

4,~

100

393

-244

-26

207

5,_~8l_

-80

Financial assets Total 1~!~ -¡==;

461 l~'\~§

'-----=06- lt~';_!

_______-- lïil~~~~ ~t~f~~

1,061 .litU'

1,061 ~~l~~.Øizf

-316

78

-139

-----~----~ == 699 ~~~~~ii

u--~Il'.~lI~'

Accumulated amortization/depreciation in million euros

~t__January 1, 200

C;_nan~es in the GrolJP/acqui.iitions

\¡rite-ups

Scheduled amortization/depreciation

~rnpairment losses

()isposals

Reclassifications

Translation differences

--_._-- .-_._-.__.. - _. ._- ---

At December 31, 2004 - . - - -

!.RS 3/1~~~ acc9!dinfj !orecJ~_s~if!~~~()ri___ ___

At January 1, 2005

C;~a_n~es in the Group/acquisitions

Write-ups

Sch~duled amortization/depreciation

Impairment losses

()isposaii!)

Reclassifications

Translation differences

- .-~ --_.- ---._. - --------._-- -. -_.- .__.-

At December 31, 205

11 of which assets held for sale

Intangible

assets

1,246

268

242

-43

1

-57

1,657

-1,304 - ._--"' -----_.-

353

49

9

-10

-2

30 "..- ---,-----_._-

429

Property, plant

and equipment

2,956

-13

-3

252

92

-176

-1

-80

3,~7

3,047

3

-7

279

4

-171

2

83

3,240

-19

Financial assets Total 26 ~4ï

Bi~~

2 ìlfl= -5 ri~~:~~

~llir~~I~

23 U,¿:;:g;;:'lí¡;;

~i?LI~;~õ4:~

23 i0~:t:0~'i:E1r~~

4 ~?7"~~~~~t~il'~: =-

-1 0 iÆi£j~ti~~¿~trli1~~

tlK(i~'~~~ltg

~~t~~~i!~~~2.~i~W; _ __, __. ____ ~;__,~.oJ.J'.~...-ë~.~~j!l'

18 ~t":llË~ælÆ

. "_ .. h_ h __:_.l',:;,\";;l~?f1lr!;ill

Net book value in million euros

At Qec~mber :31 ~ ~005

~t~l:c:em~er 31,,2004

Intangible

assets

5,660

. ',,-,,~~,-,.~-,-,-,",.,.. 4,55

66 Henkel Annual Report 2005

Property, plant

~n~eguiJmEmt

~!Q~

._!.'~

Financial

assets Total

681 i\",,~.,,-::Ll,~,

_ __~~3ã ___ t:T?d:5~*;f~
General information

The consolidated financial statements of Henkel KGaA have been prepared in accordance with International Financial

Reporting Standards (IFRS).

The individual financial statements are drawn up on the same accounting date as those of Henkel KGaA.

The financial statements of companies included in the consolidation have been audited by members of the KPMG

organization or by other independent firms of auditors instructed accordingly, On january 30,2006, the personally liable

managing partners of Henkel KGaA approved the release of the consolidated financial statements to the Supervsory

Board. The Supervsory Board is responsible for reviewing the consolidated financial statements and declaring whether

it approves them.

The consolidated financial statements have been prepared under the historical cost convention, with the exception

that certain financial instruments are stated at their fair values. The Group currency is the euro. Unless otherwise

indicated, all amounts are shown in milion euros. In order to improve the clarity and informative value ofthe consolidated financial statements, certain items are combined in the balance sheet and in the statement of income and shown

separately in the Notes. The following items are shown separately in the statement of income:

o Research and development costs

o Current restructuring costs.

This gives a better overall picture of the net assets, financial position and results of operations of the Group.

Composition of the Group

In addition to Henkel KGaA. the consolidated financial statements at December 31. 2005 include 21 German and 216

foreign companies in which Henkel KGaA has the power to govern the financial and operating policies, based on the

concept of control. This is generally the case where Henkel KGaA holds, directly or indirectly, a majority of the voting

rights. A total of32 dormant companies or companies with insignificant operations have been excluded from the consolidated financial statements. as they are immaterial, individually and in total. to the net assets, financial position and

results of operations of the Group. Companies in which not more than half the shares are held are fully consolidated if

Henkel holds a majority of the voting rights.

The composition of the Group has changed in the course of 2005 compared with the previous year. 26 companies

have been included in the consolidated Group figures for the first time, 21 companies were merged and 9 companies

are no longer consolidated. The investment in Ecolab Inc., St, Paul, Minnesota. USA, is accounted for using the equity

method, because the Henkel Group holds more than 20 percent of the voting rights and has significant influence on

the financial and operating policies ofthe company.

Principal acquisitions by business sector in millon euros

Holding

in%

Financial First

commitment') consolidated

~ E?J~if¡GI 19 (~.3.:rQ(;

7 C~;s:'L~Q9~

41 ?x"dj':::c;-SŠ'",'0~

_. ~~ J~m~t~~

Consumer and Craftsmen Adhesives

Chemofast, Gennany

Polybit Industries. Sha~ah (UAE)

Sealant compounds business. Rhodia, France --", - ._--,~_.- - "'-. .--_. ...,_._- -, ."---- -_..-

Henkel Technologies

Converter Adhesives & Chemicals, India

Huawei Electronics, China ..-."._,- -'--~'~'- - ~---~---.-.-

73

49

100

76

71

'i purchase price (52 million euros) plus debts assumed less cash and cash equivalents assumed (25 million euras)

Henke) Annual Report 2005 67

'CQ)

1;

;g £l

5l i5 c: E

o Q) u_Q) .l

:5 '"

.s 12

! ~ o c:

:z ¡¡
r'~OU=S t:.: t!"'e ':..C,:~Cii(.J:!.¿.~; F;!-:;yi'~ .~¡: S~::Te:~õen~_

Consolidation principles

The purchase method is used for the consolidation of capitaL. This method stipulates that for business combinations

all hidden reserves and hidden charges in the company acquired are fully reflected at fair value and all identifiable intangible assets are separately disclosed. Any difference arising between the fair value of the net assets and the purchase

price is recognized as goodwill. Companies acquired are included in the consolidation for the first time by eliminating

the carrying amount of the parent company's investment in the subsidiary companies against their assets, deferred

charges, liabilities and deferred income. In subsequent years, the carrying amount of the parent company's investment

in the subsidiary companies is eliminated against the current equity ofthe subsidiary companies.

The investment in Ecolab Inc.. St. Pau\' Minnesota, USA, is accounted for using the equity method.

AIl receivables and liabilities, sales, income and expenses, as well as intercompany profits on non-current assets or

inventories supplied by other companies in the Group, are eliminated on consolidation. Intra-Group supplies are transacted

on the basis of market or transfer prices.

Currency translation

The financial statements of companies included in the consolidation, including the hidden reserves and hidden charges

of Group companies reflected under the purchase method, and also goodwil arising on consolidation, are translated

into euros using the functional currency method outlined in IAS 21. The functional currency is the main currency in

which the foreign company generates funds and makes payments. As the functional currency for the companies included

in the consolidation is always the local currency of the company concerned, assets and liabilities are translated at the

mid rates ruling on the balance sheet date, while income and expenses are translated at average rates for the year. The

differences arising from using average rather than year-€nd rates are taken to equity and shown as "Gains and losses

recognized in equity" without affecting earnings. In Turkey, the financial statements have been prepared in euros for

the last time.

Foreign currency accounts receivable and payable are translated at year-€nd rates of exchange. For the main currencies in the Group, the following exchange rates have been used for one euro:

Currency

British pounds

Swiss francs

Japanese yen

US dollars

Averaç¡e exchange rate Year-end exchange rate

ISO code 2004 205 2004 2005

...., .._. GBP'-."'._" 0.66 --t~;gt1lffp~~: .,. .Ò.70šO' "~:TSJS;::lia~fm;

CHF 1.54 ~l.~q;\~~~1~JJJ.isS: 1.5429 ~;krl~i~i~ìj

_..~;__..,.., ..__.__ _1,~::: _.._~:~r\~~~~~gÆ~.,.._ ____....~_3;~;~~_J:~I2,tiìl

Accounting estimates and assumptions

The preparation of the consolidated financial statements is based on a number of accounting estimates and assumptions.

These have an impact on the reported amounts of assets. liabilities and contingent liabilities at the balance sheet date and

the disclosure of income and expenses for the reporting period. The actual amounts may differ from these estimates.

68 Henkel Annual Report 2005
h,::",--: .

Changes in accounting policies

There have been the following changes in accounting policies in fiscal 2005:

1. All the changes to existing Accounting Standards agreed by the IASB in the course of its Improvements Project which

are relevant to Henkel have been applied in the 2005 financial statements. In particular. we have revised our balance

sheet classifications so as to disclose current and non-current items in accordance with the requirements of IAS 1.

2. Actuarial gains and losses are recognized in full in accordance with IAS 19.93 A (Employee Benefits) and offset against

revenue reserves. The corridor approach is no longer used (see Note 27).

As a result of the transition from the corrdor approach used in 2004 to the full recognition of actuarial gains

and losses in the balance sheet, the comparative figures for 2004 have been restated in accordance with IAS 8. This

restatement increased the pension provisions at January 1.2004 by 295 milion euros to a total ofl.937 milion euros.

The amortization before tax of actuarial losses of 7 milion euros disclosed in fiscal 2004 and previously unrecognized

actuarial losses of 108 milion euros were also restated. This has led to an increase in provisions for pensions as well

as in financial items, net earnings and earnings per share for 2004.

3. Effective January 1, 2005, share-based payment transactions have been reported in accordance with the provisions

of IFRS 2 (Share-based Payment) (see Note 40).

As a result of the switch to recognizing share-based payments in the income statement. the comparative figures

for 2004 have been restated in accordance with IAS 8. This restatement reduced operating profit by 4 milion euros.

Mter deducting the relevant taxes, the effect of the restatement was to reduce equity by 3 milion euros, increase the

deferred tax assets by 1 milion euros and increase other long-term provisions by 4 milion euros.

4. Effective January 1. 2005, in accordance with the provisions of IFRS 3 (Business Combinations) and the revised IAS

36 (Impairment of Assets) goodwill and other intangible assets with indefinite useful lives aquired prior to March

31. 2004 are no longer amortized (see Note 12).

5. Given the forthcoming sale of our food business in The Dial Corporation, Scottsdale. Arizona, USA. we have applied

the provisions ofIFRS 5 (Non-current Assets Held for Sale and Discontinued Operations) for the first time in these

consolidated financial statements (see Note 21).

The restatement of the figures for fiscal 2004 in accordance with IAS 8 had the following impact on the equity of the

Henkel Group:

in million euras

Equity at December 31, 200 as reported ._---- ,- _. --- ._------

Recognition of share-based payments as an expense (i FRS 2)

Offset of actuarial gains/losses against revenue reserves (IAS 19.93 A) - .. .

Increase in deferred tax assets (IAS 19.93 A and IFRS 2) _.._-._---_. _.------.- ._-,_. --------, ,._---_._-----..- ------- _. -. "-"---'--"._-

~~~!~ a~_J_a~_~~_ry1~~~r~_tii~~_..,._ '0,_

4,604

-4

-403

149

4,34

Henkel Annual Report 2005 69

"C'"

1i

;g .l

5l :¡ co E 0", u_

:5~

oS :5

~ ~ o co z~
f";otes to t:-i~: ::'Y~2:J:¡O~!e,=¡ Fi¡ ;:~!K:;cl S~3t~!;ì-;~~~S

The impact on net earnings for 2004 was as follows:

in millon euros

Net eiimini;s ~ as reported 1,736

0i¡¡n~~in ~periiting profit due to application (jf IF~R~ 2 -4 ~hangEl i~ finiin.cial iterns duel t~ i.p'plicati()~()flA.~ ~9.93 /4 7

Change in taxes on~~me .as a result of restatement ~._,_._, ,,___._.___,__,____u," -1 ~et !~!!!!~ 20 r~~l!~"_..__.__._,,...____..___,_________~~,__,_._,~,__ _'__ ._'__h_..__,_..___...___!!?~.

2004 net earnings restated and comparable

To increase transparency, the statement of income figures for 2004 have been made comparable to those for 2005 by

adjusting certain items, with the adjusted figures being shown in the "restated and comparable" column.

As a result of the discontinuation of the scheduled amortization of goodwil in 2005, the comparable figure for

EBIT in 2004 is 200 milion euros higher. In respect of Ecolab Inc., which is accounted for using the equity method, an

adjustment was also made for the amortization of goodwill (2004: 9 milion euros), resulting in an improvement in the

figure for financial items.

On January 9, 2006, Ecolab Inc. announced that it would apply the new SFAS 123 (R) for the first time in its consoli.

dated financial statements at December 31, 2005 and recognize share-based payments as an expense. The prior.year

figure for financial items has been shown on a comparable basis (-6 milion euros).

in million euros

~~ E!arl1in!!~ 20 re~~tat.e

Gain on exchange of investment in Clorox

Advanced Restructuring costs

Goodwill impairment losses

Adjustmentfor exceptional items

Change in taxes on income on exceptional items

Discontinuation of amortization of goodwill (EBIl)

~~scontinuation of am0rtizi.tion of go_odwill(financ;ial items)

Change in financial items due to application of SFAS 123 (R) in Ecolab Inc.

~hange !n tax~s on inc(jme due. to c(j!!par_able llr~~~_ri!i.tion.~_f~l1ancial ite~~____n_

~,l!~~¡¡r.I1~~~ ~~ res~t~,_III1~~()!!P_a-ilIl?!~._

1,738

-1,770

408

242

-1,120

-72

200

9

-B

-1 _.. .._.._ ___.___.__.__u___.__.____ _____~_,_. _~__

748

Notes to the Consolidated Statement of Income

(0) Effect of significant acquisitions

Effect of significant acquisitions and first-time consolidations on the statement of income in the year 2005 in million euros

Other

acquisitions

(post- Total

acquisition) 2005

- --------1l_~ -lt~~~.~~%,~:)i:~~í£:,~~

6 FT:,,"'~o7:lf

Sovereign

('lho!e ye.lIr)

347

18

Other

acquiSitions

(wh()l~ Xi:i.r!

203

13

Total

2005

L"t;;dt~;¡-L§§9-

'''~';;~'Y;l"c''31

Sovereign

(post-

.i.c;9~~i!°~L.

347

18

Sales

Net Eliirnings

70 Henkel Annual Report 2005
;.. ~ :':' -= : .:~ tì'e.

(1) Sales

Sales comprise sales of goods and servces less sales deductions. Sales are recognized once physical delivery or servce

performance has been effected. In the case of goods, this coincides with the transfer of risk. it must also be probable that

the economic benefits associated with the transaction will flow to the company and the costs incurred in respect of the

transaction can be measured reliably. Servces are generally provided in conjunction with the sale of goods.

An analysis of sales by business sector and geographical region is shown in the segment information on pages 64

and 65.

(2) Cost of sales

Cost of sales comprises the cost of products and servces sold and the purchase cost of merchandise sold. It consists of the

directly attributable cost of materials and primary production cost, as well as indirect production overheads including the

appropriate amount of wear and tear on non-current assets. The effect of the restatement as a result oflFRS 2 (Sharebased Payment) was 2 milion euros in fiscal 2004.

(3) Marketing, sellng and distribution costs

In addition to marketing organization and distribution costs. this item comprises mainly advertising, sales promotion

and market research costs. Also included here are the costs of technical advisory servces for customers and amounts

written off accounts receivable of 22 milion euros in 2005 (2004: 20 milion euros). The effect of the restatement as a

result of IFRS 2 (Share-based Payment) was 1 milion euros in fiscal 2004.

(4) Research and development costs

Research costs may not be recognized as an asset. Development costs are recognized as an asset if all the criteria for

recognition are met, the research phase can be clearly distinguished from the development phase and the expenditure

can be attributed to distinct individual project phases. Currently, the criteria set out in IAS 38 for recognizing development costs have not all been met due to a high level of interdependence within the development projects and the

uncertainty as to which products wil eventually be marketable.

(5) Administrative expenses

Administrative expenses include personnel and non-personnel costs of Group management. and of the personneL. purchasing, accounts and information technology departments. The effect of the restatement as a result oflFRS 2 (Share-based

Payment) was 1 milion euros in fiscal 2004.

(6) Other operating income

Other operating income in million euros

Gains on disposal of non-current assets

Income from release of provisions

Income from release of valuation allowances for doubtful debts

Write-ups of non-current assets

Foreign exchange gains on operating activities

~!~~r()perati~grevemue

Total

restated

2004 2005

~¡ .~li

2~ ~~1~ì~m¡

86 ~;;d:~':"'3,;;S"f~

. _~.~.~~.~. _.tÙ£;t¥E~~~Is

Henkel Annual Report 2005 71

"C'"'l

"C '"

5l~c: E 0", u_"'S :5 (/ -S$ '" to

oS æ o c: :z ü:
NGÎ::'.~:': u--.~ ',. _, .,--,:ò.¡ i,',:,::.".: ',; ~;~J.~-=!1~..:r-~::~

Other operating revenue includes income not related to the period under review. insurance compensation amounting

to 3 milion euros (2004: 3 milion euros) and refunds of2 milion euros (2004: 2 milion euros).

(7) Other operating charges

Other operating charges in million euros

restated

2004 20

Write-downs on miscellaneous assets

.-.---".-.-------.---~~'-¡fa~1,- 3 ~~~.l¿¡ ~t?;~;:~~ 61 êDt~l§

..', --~'.~-=~~=-=~=_~~~==~_=~===__=='-'=~_~_~.~===~03' _;~;rJ~~1!

Foreign exchange losses on operating activities --- - - - _. ------ .- --- --- ..

~ther _~!:e!.~~i!l~E:xE~S.,E:S..._

Losses on disposal of non-current assets - - ,-

Total

(8) Current restructuring costs

This heading includes severance pay as well as current annual payments for early retirement schemes and similar

schemes arising from operational changes.

(9) Financial items

Financial items in millon euros

Income from associated companies

Net result from other investments

Net interest

Total

restated and

restated comparable

.. ... .u.---...----..-.---.--.-----M1~-'-. -------16rlllìll~ 2004 2004 2005

._____ ...._.__ -156 -156 r::;~;0;l~fl~

_.._.____~~,_._.....~.~~.e._'~_~M~-~ ...~-.~.~~_~~~~~~_~...~~~~~.~_~ _..EIl~t1f~a-!!'

Our associated company Ecolab lnc. no longer amortizes goodwil systematically in accordance with US accounting

regulations. Effective fiscal 2005, similar rules apply for companies which comply with IFRS. We therefore no longer

deduct scheduled goodwil amortization in arriving at the at-equity income from Ecolab Inc. The income for 2004 has

been stated on a comparable basis (+9 milion euros). For fiscal 2005. Ecolab Inc. is applying the new SFAS 123 (R) stan.

dard. which requires the recognition of share-based payments as an expense. We have adjusted the at-equity income for

the prior year so that it is comparable (-6 milion euros).

From 2005. net interest no longer includes amortization of actuarial gains/losses as these are offset against revenue

reserves. Net interest for the prior year has therefore been restated (+7 milion euros).

The significant increase in the net result from other investments in 2005 is due to the appreciation of our investment

in the Lion Corporation. Japan, This investment has been reported at fair value in accordance with IAS 39. The increase

in fair value recognized in income was 22 milion euros.

72 Henkel Annual Report 2005
''¡'.''

Net result from other investments in millon euros

restated 2004 20

Income from othe¡p~rtk:ip~ti~~; -------------------------------- ---- ------1 -tt!~;:W(~i:;B~mr

Inccirne fr()m profit and loss transfer agrements 1 ~l~Zßlig;lh¡~1i

~~()me fr0-i the remeas~rement cif finan~i¡¡1 asset~~tfair v~lue 0 ~~~~ik~gg: ~~::~:~::::lh::~~~;::lli:::t:n:n:t~;r~:~::n~:~~::n marketable securities _~ ¡I.

Losses on disposal of financial assets 0 ~¡~~

~~,,--=-==-.~=,.-~~.==-~==~=~=~==~~=~-=~-=~==::-===:.~:.'.==~_.- =.=~===.=_.=.~~_..~ffg11~~f~

Net interest in million euros

restated

2004 .--------

17

20

21 ~~f~~~ ~~Q~~~ -1: ¡t__ _71) ~~~

.____~9~ ~;;i~K.l -214 ~~itl~l~~

-------".-.--~"~-.---~,~-.=~~_~~~~,-~.".... --.. -~56 ~ïli£2i

20

~~t!:r~~~f.iCl,J.()n31-~ri lo~n~

Interest and similar income from third parties

Other financial income --_._._----~_._.- "----_. - ....---- -_.__._-

Total interest income _,,__._ ..n _u __

Int¡¡rElst chargespa~atile to thirdp¡¡rties

?th~r financial cha~es

InterEl~~pe~~f~E.Eln~~_" pro."i~i()_"~~~.Expec!~~.!c:()rne fro-i..lan~sset~_______..

Total int!,~!!:xPE!!1~~__ _. _____...___". ______._______,_

Total

') restated to take account of actuarial gains/losses of 7 million euros

(10) Taxes on income

Earnings before taxes on income and analysis of taxes in million euros

Earnings before tax

Current taxes

Deferred taxes

restated 2004 20

1,924 '!Cg!t¥~~~~

280 "'il~;W~Er;g§E

-94 ~t~~01iti~

.~.._~"~.._,.~."~~.~i~_"Æ~~~~ Taxes on income

Principal components of tax expense and income in million euros

Current tax expense/income in the reporting year

Current tax adjustments for prior years

Deferred tax expense/income from temporary differences

Deferred tax expense/income from changes in tax rates

____u ___ _

Increase in valuation allowances on deferred tax assets

restated

2004

280

o

-118

8

26

205

( ~;:;l(tJilf:~~\~~i~

~~3~lll

j~il1j!î!æ

Henkel Annual Report 2005 73

't

oSel

32 .æ

ši ái '" E 0", u_"'S

:5 u:

.s~

.æ ~ 0'" :z ü:
Notes !C t!12 Con::Oi¡C1Z1te...i Fi' ,:~. S:::t:~:~',~"';r-3

Allocation of deferred taxes in millon euros

Intangible assets

"'()P13r1,plant il_n.~ equipment

Financial assets

Inventories

Other receivables and miscellaneous assets

~pecial tax-allowable items

Provisions

Liabilities

_._~__ __n.

Tax credits

Los~~~I'~!~""~ds__,._.

Deferred tax assets

restated

Dec. 31, 2004

132

50

28 !ii~

22 ~~

123

11

421

42

_.n. .._____.._

19

30 -_._----~-

878

-356

-----_. -46

476

Deferred tax liabilities

restated

Dec. 31, 20 Dec. 31. 2004 Dec.31,20

~-------'-3:~ -l~tt.

37 §~~§r~~s§l

15 ~jf,i

78 rÎ~~I~~l§;

122 ~~~!ltt~r~11~r

59 ~ir0i£1lri¡fi

12 i:~rt~~~,' ~ ~.:~§;æ~g~

~~~Mlllft¡~

tI~~il~iW~if~~

'----:~ BI~

45 j~\iif.

~rAmounts netted

Valuation allowances ----------------

~~!_a.nce shee.t fi~~r~_._

~.~. -~

==

Deferred tax assets and liabilities are accounted for with respect to temporary differences between the balance sheet

valuation of an asset or liabilty and its tax base, and with respect to tax loss carry-forwards and consolidation procedures

affecting earnings. Amounts netted represent tax assets and liabilities relating to the same tax authority.

The deferred tax balances recognized by German and foreign companies with respect to temporary differences on

provisions relate mainly to pensions and similar obligations. The increase in deferred tax assets under the heading

"Provisions" is due to the remeasurement of the pension obligations. Deferred tax assets at December 31,2004 increased

by 149 milion euros as a result ofthe restatement. At the same time, there was an increase in the tax expense of 1 million euros.

Of the increase in deferred tax liabilities under the heading "Intangible assets" 99 milion euros is due to the consolidation of two US companies for the first time.

German companies have recognized deferred tax balances in respect of special tax-allowable items relating to property, plant and equipment and to reinvestment reserves.

Whether deferred tax assets can be recognized depends on the probability that the deferred tax assets can actually

be realized in the future. The level of probability must be more than 50 percent and must be supported by appropriate

business plans. From 2004, German tax loss carry-forwards can be fully offset up to a maximum amount of 1 milion

euros, and thereafter up to a limit of60 percent (minimum taxation). Included under the heading "Loss carry-forwards"

are deferred tax assets of 35 milion euros in respect ofloss carry-forwards from 2004 in Germany, which are expected

to be utilized by the end of 2007.

The valuation allowances on deferred tax assets of 62 million euros (2004: 46 milion euros) are in respect of temporary differences between the balance sheet valuation of an asset or liability and its tax base. and also tax loss carryforwards. and are based on a reassessment of the likelihood that they wil be utilized in the future, Of the total amount,

37 million euros relates to loss carry-forwards and 25 milion euros to temporary differences associated with property,

plant and equipment.

Deferred taxes have not been recognized with respect to tax loss carry-forwards of 513 milion euros (2004: 419 million euros). Deferred taxes of 12 milion euros have been recognized with respect to tax credits.

74 Henkel Annual Report 2005
~'~:J:.;:; :~

Expiry dates of unused tax loss carry-forwards and tax credits

~_.._--.----_._~." . ------- --- __..._u -----..-.- ___, -"'-':b' _- _ .,_0 Must be utilized within: l~~Jl:~l~' 1 year 57 ~l7f;li!i!~ilf;' 3 years 55 ~~ ~~'l~~: 2l~ars 54 If;:~~~g~-~

.morethan 

Carryforwardwithoutrestriction" " '" , ,,216 m~, ,27 ~~~

3 years , , 186 ~ ~~~

!~~I---- m_.~~~-== ~-~.~,=~-==.,-'~~~~:~i~~~~~~~_~~~~~~=~~~.:~_~==~-=~~ 56 1~TI1t11m!~_ _~~~~=,~~~~=-27 ~_l~I~ifii~

Unused tax losses

Dec. 31, 2004

Tax credits

Dec. 31, 20

This table includes loss carry-forwards arising from the disposal of assets of35 milion euros (of which 13 milion euros

must be utilized within one year and 22 milion euros may be carried forward without restriction). In many countries.

different tax rates apply to losses on the disposal of assets and to operating profits. and in some cases losses on the

disposal of assets may only be offset against profits on the disposal of assets. Deferred taxes have not been recognized

with respect to unused loss carry-forwards arising from the disposal of assets.

Deferred tax liabilities have not been recognized on the retained profits of foreign subsidiaries. The retained profits

are available to the subsidiaries for further investment. The individual company reconciliations - prepared on the basis

ofthe tax rates applicable in each country and taking into account consolidation procedures - have been summarized

in the reconciliation below. The estimated tax charge, based on the tax rate applicable to Henkel KGaA of 40 percent, is

reconciled to the effective tax charge disclosed.

Calculation of the effective tax rate in millon euros

restated 2004 20

._-- 1 ,924 --l~~jtil~

40.Ö % r22:,W~:~

770 flf;l¡~€~flt'l

Earnin2sbElfore taxes on income

~x_r~~_(inc~Uljin~_~~~i:ip~1 trade tax) c:n ini:om~c:f H~~kEl!_~~~__,__

Estimated tax charge

Tax reductions due to differences between local tax rates

and the hypothetical tax rate

Tax reductions for prior years

Tax increases due to non-deductible amortization of goodwil - --

Effects of different tax rates on net result from investments

(at-equity investments)

Tax reductions due to tax-free income and other items

Tax increases due to non-deductible expenses and other items

comp~ising

- ---

Non-deductible expenses

Municipal trade tax additions and effects of tax audits

.__ N0'2~clecl~cti~IEl witlili()I~ilt¡¡)(. ." . ,. ___

Total tax charge

_______.___"". ____.'u. __ _

Effective tax rate

128

-59

-809')

239

126

103

10

186

9.67%

" including tax-free income arising from the exchange of the investment in Clorox

-83

~r~~. ö"..~ f¡~~ i:;,,¡:.,,~~ ~'\,-ai!J~~

~ti-~tt¡~.

r:::fBI~Lfi

Jfflf:~ji1r~

Henkel Annual Report 2005 75

't

.s'"~.i

ii :¡ c: E o Q) u_Q) l!

:5 en

.s~'" to

.æ æ o c: Zï:
N,jli:S to ti:i: "~":Jr':.sc-'!¡:J,:t,:"":-j r: 'Y'".:'ia- S;2t~:T':-:8:',:'3

German corporation tax legislation stipulates a statutory rate of25.0 percent plus the solidarity surcharge of5.5 percent.

After taking into account municipal trade tax, this gives an expected tax rate of 40.0 percent for 2005.

Effective 2005, goodwill is no longer amortized.

The decrease in "Tax reductions due to tax-free income" to -107 milion euros (2004: -809 millon euros) is due mainly

to the tax-free income recognized in 2004 as a result of the exchange of the investment in Clorox.

The deferred tax assets charged to equity amount to 133 milion euros (2004 restated: 37 milion euros). The increase

is due mainly to the revaluation of the pension obligations.

(11) Minori interests

The amount shown here represents the share ofprofits and losses attributable to other shareholders.

The share of profits amounted to 19 milion euros (2004: 14 milion euros) and that oflosses to 6 milion euros (2004:

13 milion euros).

Notes to the Consolidated Balance Sheet

The accounting policies for balance sheet items are described in the relevant Note.

Effect of significant acquisitions

Effect on balance sheet headings of significant acquisitions on first-time consolidation in 2005 in million euros

Intangible assets/Property, plant and equipment

Financial assets

Other non-current assets

Deferred tax assets

Current assets

Non-current liabilities

Current liabilities

Sovereign"

- ---_._- --

512

Other

acquisitions

89

41

74

102

201

2

76

2

44

"fully consolidated from January 1, 2005

Non-current assets

All non.çurrent assets with finite lives are amortized or depreciated using the straight-line method on the basis of estimated useful lives standardized throughout the Group, with impairment losses being recognized when required.

76 Henkel Annual Report 2005
Î -J ,r) ~.¿_:: : =. r'

The following standard useful lives continue to be used as the basis for calculating amortization and depreciation:

Useful life in years

Intanç¡i?l~ assets

Residential buildings

Offce buildings

Rese~r~~ and factory buildinç¡s, workshops, stores and staff buildini:s

Production facilities

Machinery

Offce equipment

Vehicles

~~?.!(:~l-~n~_ rese~r~~,eg~p~e-r.t___ _

8 to 20

50

33 to 40

25 to 33

20 to ,25

7 to 10

10

5

5

Goodwil and intangible assets with indefinite useful lives are not subject to scheduled amortization.

(12) Intangible assets

Cost in million euros

T~~~~ni~~~~~t~_and ot~er_riç¡ht~

Assets with Assets with

indefinite finite useful

useful lives lives Goodwil Total

_._-_._---, --"'''''-

2,280 .

2,583

At January 1, 20 ._.__U_n_ _ __ _, .. .

Changes in the Group/acquisitions

Additions

Disposals

Reclassifications

Translation differences

87

607

1,056

26

-43

2

-112

~~~~çr;?~I~~

-275 EdXi~i:iš,mfl

At December 31 , 200

IFRS 3/IAS 38 according to reclassification _'_.,__,..._ n_ u_.,_u_ .____u _._ ..._ n. _...__..___ __.~,

At January 1, 2005 __ . ____nn __ _ _. "

c;hanges in the Group/acquisitions

Additions

Disposals!)

Reclassifications

Translation differences

87

929

At December 31 , 2005

!)of which assets held for sale

1,536 4,58

-929 -1.304

:~ 3,~: ~~~iir1

~.rr'i~::'~::!~~1'7~ 43 L:'~~;:~X~~;1kh:t

-13 -25 w7~~~~~~~ 29 -3 ~,;fk.;~~~ 114 76 441 0d:'ictt~È'3£lJ

1,097 1,011 3,981 rhIB~1tliP

."..,,~. ._. _'...'~a_.___I,~~~.,_.__...~._=~..._c .____~. .._..._...~_~!_~___. ~~,~r-~~~~;~ft

1,016

11

-4

Henkel Annual Report 2005 77

'CS'"

;g S o c: en '" c: E 0", u_",.l

:5 en

oS 12

en '-

.s æo c: zü:
r,~r.':~_, ~,,_, (I';~- - ~.-, :_'- ':'.~ -. i ;.r- n i.~

Accumulated amortization in million euros

! ra~~rnark ri~hts and other rights

Assets with Assets with indefinite finite

useful lives useful lives

68

Goodwill Total ......89.

~~~ ~%=I

f~I=lj

-33 €i:~:m(f~~~~J

1 ,30 S:?i1;~J~it!;.~~tc

- . ~~:f~:t;tlj~ 1 304 ""';'~'''''~~''..'t1'

~~ti¥.~i5¿

At January 1, 200 ---_. -., -, - - - .

Changes in the Group/acquisitions

Write-ups

Scheduled amortization

Impairment losses

Disposals

Reclassifications

Translation differences

351

At December 31, 200

~_R~a/I~~,~.~c:c:O!~~~_~r.~I~~~!i~~~~

At January 1, 200 - -- - - -- -

Changes in the Group/acquisitions

Write-ups

Scheduled amortization

Impairment losses

Disposals

Reclassifications

Translation differences

-43

1

-24

35

35

At December 31, 2005

-'~.-~._--'-"--~'-~~'-~-~" ~~..,-~-----

49

5

-10

-230 F "n''"'"''ílP'' ' - !;:"'~~em"~' is:~¿~~-''-.'- i

----.~.~- --~-~~~-=~=-~~~='~=~-~~~~__~~~___~'_~_ _~ ,-l~1:~lfI~~

4

Net book value in million euros

As at December 31, 2005 _.'_., ._______h_____.__ __ .___

As at December 31, 2004

Trademark rillhts and other rights

Assets with Assets with indefinite finite

useful lives useful lives Goodwill Total ---1,Õ93-' 58 ---3,981- --Z,%::f!';tE'i;~~

,,_ __~~-~=_=--~~_ --~~~~.__~.._'d~~~~~,__;~:gLJ!ji~iE

Intangible assets acquired for valuable consideration are stated initially at acquisition cost; internally generated software

is stated at production cost. Thereafter goodwil and trademark rights and other rights with indefinite useful lives are

subject to an impairment test at least once a year.

In the course of our annual impairment test, we reviewed the carrying values of goodwil and trademark rights and

other rights with indefinite useful lives.

The following table shows the cash-generating units together with the associated goodwill. trademark rights and

other rights with indefinite useful lives at book value at the balance sheet date.

78 Henkel Annual Report 2005
Book values in million euros

De. 31, 2004

---,---.. -

Trademark

rights and

other rights

with indefinite

useful lives Goodwill

Dec. 31, 20

Trademark

rights and

other rights

with indefinite

._P._______.... ._."n____ --------.------------. -~.----------.-~lf~n:;~~i~~~~; useful lives Goodwill

599 It1ff~~~~~¡s~

h-------:i~48 f?;B~~:~illl.~ 8~~ ~~tlltl:

902 fl~'t~"t~,

34 f~j;¡i17dit!~l~:mIt

936 f~Sj~(;i;;f~l:

89 tlË'§~l~~

149 r~;ll;"¡:~F:.i;

23 ~~~~l~~:1ll

~~~ il¡.

.----~~-~-~.-"-- =~--.-.~==, .--=-==~,_~~~_J1\;'t;r~r'N~ JÆ~~~l

Cash-gel1erating units

Heavy-duty detergents

Special detergents

Household cleaners

_______._n__. .

Total Laundry & Home Care _. - __ - B._ _ .. ..

Retail products

Hair salon products ..______.h_._ .... _ .__._.____ ..

Total CosmeticslToiletries

Adhesives and sealants for construction, craftsmen and DIY

._. _.- -_.-

~~~i:~~vi;~ an~~~_hesiv~ ta~:s for home,_~cho?1 andoffi.ce

Total Consumer and Craftsmen Adhesives

Transport and electronics

u ___ .. ____

Industrial adhesives

__________..________.______._ u_

!:i!~I':~nkE!I_T~~,I1liI~~~i:~._

1:11.

~~~t~~¡~i~1~~,~

~á~t1~iT~t:

~l1;lttf:f~ ~iwifi~ !lfu~~J

~f,~~ ==

~Wj~~11ll&

87 ---._---." ._.__._--

87

The assessment for goodwill impairment was based on future estimated cash flows, which were obtained from corporate

budgets with a three-year financial forecasting horizon. For the period after that, an average growth rate of 1 percent

in the cash flows was assumed for the purpose of the impairment test. The euro to US dollar exchange rate applied was

1.30. The cash flows in all cash-generating units were discounted at a uniform Group-wide rate Jor the cost of capital

of 10 percent before tax, Due to the fall in interest rates, our weighted average cost of capital before tax has decreased

from the year 2006 from 11 percent to 10 percent. We continue to expect the post-tax figure to be 7 percent (for the calculation of the cost of capital see page 20 in the Group Management Report. "Value-based management and control").

The use ofthe same figure throughout the Group for weighted average cost of capital complies with the internal management approach for the operations of the Henkel Group.

No goodwil impairment losses were recognized as a result of the impairment test,

In the Laundry & Home Care business sector, we have assumed an average increase in sales during the three-year budget

period of2 to 3 percent per annum with a constant share of the world market.

Average sales growth in the Cosmeticslfoiletries business sector over the three-year forecasting horizon is budgeted at

2 to 3 percent per annum. With the worldwide cosmetics market expected to grow at an annual rate of 2 percent, this

would mean a slight increase in market share.

In the Consumer and Craftsmen Adhesives business sector, average sales growth over the three-year forecasting horizon

is budgeted at 5 to 6 percent per annum. General market growth is expected to be at around 2.5 percent per annum, so

we forecast an increase in market share.

Average sales growth of 5 to 6 percent per annum is budgeted in the Henkel Technologies business sector. while growth

in the relevant markets is expected to be around 2 to 3 percent per annum. We expect to further expand our market

share, especially in the growth regions in Asia.

Henkel Annual Repon 2005 79

'C'"

10

;g ~

5l '" c: E 0", u_",.i

:5 on

.s~

! ~ o c: zu:
i'Qtf;~ to 1.12 c.:);-¡:;,-~ ,;!d:j!.,~:i .-, ',-"

In all the business sectors, we have assumed that any rise in the price of raw materials will be offset to a large exten t by increases in the prices charged to customers, Together with further cost~tting measures, this will result in stable gross margins in

the Consumer and Craftsmen Adhesives and Henkel Technologies business sectors. In the Laundry & Horne Care and

Cosmeticsrroiletries business sectors we are expecting gross margins to increase. Isolated negative budget variances

would not necessarily lead to impairment losses.

The trademark rights and other rights with an indefinite useful life (mainly purchased trademark rights from the

acquisition of Dial and from the purchase of businesses in connection with the exchange ofthe Clorox investment) are

established in their markets and wil continue to be promoted in the future.

In the impairment tests for trademark rights and other rights with an indefinite useful life of 1,093 milion euros, the

assumptions underlying the respective purchase price allocations at the time of acquisitions were updated. The impairment tests resulted in the recognition of an impairment loss of 4 milion euros in Henkel Technologies in the USA.

(13) Propert, plant and equipment

Cost in million euros

At Jan. 1, 20

Changes in the Group/acquisitions

Additions

Disposals

Reclassifications

Translation differences

Land, land

rights and

buildings , _..._-_.~------_._"--~..

1,513

25,

48

-26

29

-34

At Dec, 31, 20/Jan, 1, 2005

Changes in the Group/acquisitions

Additions

Disposals')

Reclassifications

Translation differences

1,55

38

49

-ß9

25

19

1,617

-38

At Dec. 31, 205

I) of which assets held for sale

80 Henkel Annual Report 2005

Plant and

machinery

2,247

119

127

-106

53

-46

2,394

56

131

-100

41

147

2,669

-18

Payments

on account

Factory and and assets

offce in course of

equipment construction Total

------ 773-------106 '-EgAG3JI1~:

17 26 G~tl!~~ 74 95 ~Çf1Ž~~~

-~~ -~; r¿~~ill~ -16 n'n' ._n_. -7 ;;:~;0s~i~rii:

790 116 ;:;;,ti~rYr1~~

4 2 '0 ,--:"JbZJ.QO _~~ 1~: lU;~::XtA~~;1

20 -112 rj~š!J,ri~li:f~j

37 4 iJ~~:itli¥~¡~j£

8~~ 1~~ ~~~;~~~.
Accumulated depreciation in million euros

1,681

3

-5 -2

-35 -72 -63 -1 ~ 46 178 55 ~~.. 4 ~lDi-

~~,-""~;'"

=~ -;~ ~~ ~~iltt

.__~~~_=~_~_~~._~~----~'~- _~~==.~2~__=.~-~~~_..~Jl_

At Jan, 1, 20

c:han¡¡es in the Group/acquisitions

Write-ups

Scheduled depreciation - ..- ---- - - - - .

Impairment losses

Disposals

Reclassifications

Translation differences

Land,land

rights and

buildings

-------,--_.----

736

-5

Payments

on account

Factory and and assets

offce in course of

- -----------~-_.._------- equipment construction 58 2

Plant and

machinery

--_._--_._----

1,63

-8

-3

126

60

-96

1

-29

43

16

-12

-1

-18

759

83

15

-66

-1

-13

At Dee, 31, 2oo4/Jan. 1, 205 60

Changes in the Group/acquisitions

Write-ups

Scheduled depreciation

Impairment losses

- n_____ _n ___

Disposals')

Reclassifications

Translation differences

At Dee, 31, 2005

'I of which assets held for sale

1

-2

Total

.~ri!f.

.

~.~¡=

t:l~t;~t:Z7tJ ~~1~

Net book value in milion euros

At December 31, 2005 ____~_.____ .__ .0_'_"_-

At December 31, 2004

Land, land

rights and Plant and

_ -i~ildi~!;~ _ .~~~'n~_ll

___ ,._.._.__.__ _____ --.'_.__._0_- 85 814

796 713

Payments

on account

and assets

in course of

construction

Factory and

offce

equipment Total

246 ------129-- ~i:~;0¡ii~&.~

_,_1_~ _ =-~~:_~~:_~~__!F~~'!.

Additions are stated at purchase or manufacturing cost. The latter includes direct costs and appropriate proportions of

overheads; interest charges on borrowings and selling and distribution costs are not included. Cost figures are shown

net of investment grants and allowances. There were liabilities secured by mortgages at December 31,2005 of33 milion

euros (2004: 23 milion euros), Real estate held as investment property is immateriaL. The periods over which the assets

are depreciated are based on their estimated useful lives as set out on page 77. Scheduled depreciation and impairment

losses recognized are disclosed in the statement of income according to the functions for which the assets are used.

Non-current assets do not generally comprise individual components which are significant in relation to the total

acquisition and manufacturing cost (component approach). For this reason. they have not been recorded and depreciated

separately.

Henkel Annual Report 2005 81

'C$to

;g .e

5l :¡ 0", '" E u_",.l :5 (I

.s :§

S ~ 0'" zu:
N0tes tc t!~¿. :;C'¡3..J¡¡jur~l"'j Fi::¿-, ~:r3 t er~"~¡, rs

(14) Financial assets

Shares in affliated companies and other investments disclosed in financial assets are measured initially at cost and

subsequently at their fair values. Other investments for which the fair value cannot be reliably determined or which

are held-to-maturity are measured subsequently at amortized cost.

The shares in the associated company Ecolab Inc. are accounted for using the equity method at the appropriate

proportion of its net assets (see Notes 9 and 50. pages 72 and 107). The percentage holding is calculated on the basis of

shares outstanding. The updated net asset figure is translated at the mid rate of exchange on the balance sheet date.

The shares in the other investment in Lion Corporation. Japan. are reported at their fair value. The value of this,

investment has risen by 22 milion euros since the previous year.

Cost in millon euros

Shares in

Affiliated associated Other

companies companies investments ....-.~---_._--_. --_._--_..._---------.

At Jan. 1, 20

Changes in the Group/acquisitions

Additions

Disposals

Reclassifications

Translation differences

55

-28

326

-5

716 115

-3

120 5

-385') -1

Long-term loans Total

-- 539-1?:f'f;'tEtf~~1

- iltiS%~~v~~í~ 10 ~~~~~r~ "~":,';0~ -415 1i~~1l~

~~K?fl~~~

134 ffi;!tlif~

~~t~ii~i~~~~

-1272) ~lIWl.

f~~~..

7 ...._~l~~-:¡t%:i;t1L~f!!;

At Dec. 31, 2O/Jan.1, 2005

C:~~nç¡es in the Group/acquisitions

Additions

Disposals

Reclassifications

Translation differences

12

----- ---_._._._.._,---_. 348 463 116

-316~ ~154 24

At Dec. 31, 205 ._._ ._"'._~U__ ._ _ _.___u ._._ ,,_

2 13 33 53 129

" disposal of Clorox at book value

"disposal of claim against Cognis for indemnification of penSion obligations, through allocation to CTA pension trust (121 million euros)

82 Henkel Annual Report 2005
Accumulated write-downs in million euros

Shares in

Affliated associated Other

companies companies investments .---_._-~._-------_._-------~-~-------

Long-term

loans Total

-t:~!~lÆ1J?0~t~?l ,

lt);~~H~)i;~~~.;~!4~-

IAf:l

~j;~~~i7&t~4~~o'

!ft~f:-1~~~~tf!i~;;:~

~.~YJjgi~Ê~~~íiI'.2a:

At Jan. 1, 20

C?~!3nf!s in the Group/a?9':i_siti~ns

Write-ups

Write-downs

Disposals

Reclassifications

Translation differences

7 18

-4

2

-1

At Dec. 31, 200/Jan.1, 20

Changes in the Group/acquisitions

Write-ups

Write-downs

Disposals

Reclassifications

Translation differences

3 19

, - - __, '. .' ",_"., _',_'0 ,", :_.".~

4 ~~~ttt~i1

-10

At Dec. 31, 2005

_~___~..~ ~"--_'.__""_ __.~__~y,.~ _'_'_~'_ '.~__. . "~~_"_"_'~"."m¿

u____.,__ ____.___. ______.._____.__. __.__ ______..._.,___ _n._..___......_.._._ __.

. M'__"'-A_-ft_~.~~"'~'_4~'~~____-=~~'.'_~'_"__~____""..~__~.~.~.~~...,_~~~~,.t~1~~lil!

Net book value in million euros

Affiliated

companies

Shares in

associated

companies Total

Other

investments

Long-term

loans

At December 31 , 2005

__~_.____ _______ ._.___n__._

At December 31, 200 ----...,,~- '''-~',-~',._._'. .'---"."- -'-~"'- -.~..~-~..~.~._.

.--_n'--29-~~~=-_~-_53- -----1-16-. -.-,-----,- 6--~~1~!f~~lû

_~___".____,_.__~~____..___ ,_~?_____=-=__ ___ 133_Ji:tllti~1;~

(15) Other non-current assets

These include non-current receivables and miscellaneous assets, which are stated at their face value or at fair values.

Income tax assets amounted to 5 milion euros (2004: 16 milion euros). As soon as risks are identified in other non-current assets, valuation allowances are set up.

(16) Deferred tax

Deferred taxes result from the following factors:

o timing differences between the balance sheet valuation of an asset or liability and its tax base

o tax losses carried forward which are expected to be utilized

o consolidation procedures at Group leveL.

The allocation of deferred tax assets to the various balance sheet headings is shown in Note 10 (Taxes on income,

page 73).

The deferred tax assets relating to the prior year increased as a result of the restatement in accordance with \AS 19

(recognition of actuarial gains/losses in equity) and with IFRS 2 (Share-based Payment) by a total amount of 149 milion

euros,

Henkel Annual Report 2005 83

-c'"'l

~.æo c: '" '" c: E

8.æad!!

:5 en

.s~

~ ~

~æ
~~i:.t,-:: ; ì th:: '__ .-. S'c'T'-:,-'~'?:r:~~:

(17) Inventories

Inventories are stated at purchase or manufacturing cost. In the Henkel Technologies business sector, we switched during the reporting year to full absorption costing. The effect of the change in measurement was an increase of 5 milion

euros. Inventories are measured using the FIFO and the weighted average method as appropriate.

Manufacturing cost includes - in addition to direct costs - appropriate proportions of necessary overheads (e.g. the

goods inward department, raw materials store, filling and other costs prior to the finished products store), as well as

production-related administrative expenses and pension costs for employees engaged in the production process, and

production-related depreciation charges. Interest charges incurred during the period of manufacture are however not

included.

Inventories are written down to their net realizable value if. on the basis oflower quoted or market prices, this

is lower than cost at the balance sheet date. The write-down, based on the gross value, was 32 millon euros (2004:

14 milion euros).

As a result ofthe planned disposal of the food business of DiaL. an amount of29 milion euros has been transferred

from inventories to assets held for sale.

Analysis of inventories in millon euros

Raw materials and supplies

Work in process

Finished products and merchandise

~~,~nts ?~ ~c~ou_nt forri~~~~~_n~~e__

Total

Dec. 31, 2004 Dec. 31, 20

....~------------------~ II

8 F~';~';',k-'" - ',,~ ',' ;~~G".tJ--~.... ~::;,;~V: :.~,~~..~!,;'" .~~~.

~ ._'~'~-=~~=.~~~~~'-=~=-~~~~~~~~-.=.'~~~.~..".-==~.~.~~.~.~~.~_.~~~ISl

(18) Trade accounts receivable

Trade accounts receivable are due within one year. Specific risks are covered by appropriate valuation allowances. A total

of 22 milion euros (2004: 20 milion euros) has been provided in the form of valuation allowances.

(19) Other current receivables and miscellaneous assets

Other current receivables and miscellaneous assets in million euros

Amounts receivable from non-consolidated affiliated companies

Amounts receivable from companies in which an investment is held

Derivatives with positive fair values

Miscellaneous assets

~e!~re-rchar~es

Total

Dec, 31. 2004 Dee, 31, 205 ------ ----- nn ----- 22--¥?"ß;~'t1t¥%tj'

-'-. " ",",',-,'-:.-:

7 t~-~\~~d~Dr~~~.ifl~:~.;

124 ~~~~~f~k~?r~~f

368 ~j?~L.~~1f~~

36 f-01~\~i~;;~~:

557d:d;r'11l~i1!

Other current receivables and miscellaneous assets are shown at face value or at their fair values. Any risks associated

with them are covered by valuation allowances.

84 Henkel Annual Report 2005
Miscellaneous assets include the following:

a financial receivables from third parties: 53 milion euros (2004: 57 milion euros)

a amounts due from employees: 13 milion euros (2004: 13 milion euros)

a amounts due from suppliers: 27 milion euros (2004: 17 milion euros)

a insurance claims: 2 milion euros (2004: 6 milion euros)

a payments made on account: 13 milion euros (2004: 15 milion euros).

(20) Liquid funds and marketable securities

Liquid funds and marketable securities in million euros

Liquid funds

Marketable securities

Dec. 31. 2004

137

".0- __ ___.._______________..._______ _ _ . _._ _ ..________ __ __. ,__._.__~ _______._____.__ _ _. ______ 1,558

,,- .~- .-_..... ._--~'--.__.,,--~.~.._-,~-_..,-"-,...£--.--._~.,~..-..----"~_.--.'¿.._-----_. .~..-._¿-- -_.,. .~-..~-_._~~...--~.--.~~-~-....". 1,695

..f~;j~!r~~r~~

h:i~1i~~~

JI~W~~~(ì!1l:

Dec. 31, 20

Total

Marketable securities are stated at their fair values at the balance sheet date. They comprise mainly fixed-interest bonds.

Price movements are recognized in the statement of income under financial items,

(21) Assets held for sale

The amounts included under the heading "Assets held for sale" relate principally to assets which are expected to be

disposed of under an asset deal when the food business (Armour) of The Dial Corporation, USA is sold. The food business

is not a significant line or core business within the Henkel Group.

The measurement of the assets held for sale at the lower of their carrying amount and fair val ue less costs to sell

did not lead to the recognition of any impairment losses. Amortization and depreciation have not been charged since

October 1, 2005, The assets held for sale comprise mainly trademark rights, property, plant and equipment, inventories

and goodwilL. The business which is to be sold is included in the Laundry & Home Care business sector.

(22) Subscribed capital

Subscribed capital in million euros

()rdinary bearer shares

N,~n_-.~.?~in.i?re!erre9_beoiElr ~~arEls... .

Capital stock

~oi:Eri~i~!; ~~,~~8,625 0rcin~ry .sh~~El~..':~~ 59.3~r ,~_~~,~o~~~~!i:i.§.Pr:!El!!~:hare.s

Dec. 31, 2004 Dee, 31, 205

_._--,,- --222--R:~~S;~

152'c;'i:iff~~;t~i;

374 ¡4:0:;KJ~¿~jí¡:

~,._ Jr:~~~~:t~~S1~~1l

At the Annual General Meeting of Henkel KGaA held on April 30, 2001, the personally liable managing partners were

authorized - with the approval of the Shareholders' Committee and of the Supervisory Board - to increase the capital

of the Company in one or more installments at any time up to May 1, 2006. up to a total of 25,600,000 euros by issuing

new non-voting preferred shares to be paid up in cash (authorized capital). The personally liable managing partners were

authorized - with the approval of the Shareholders' Committee and of the Supervisory Board - to exclude the statutory

pre-emptive rights of existing shareholders. Pre-emptive rights may only be excluded. however. for fractional entitlements

or on condition that the issue price for the new shares is not significantly less than the quoted market price of shares

of the same category at the time the issue price is finally fixed.

Henkel Annual Report 2005 85

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At the Annual General Meeting of Henkel KGaA on April 19, 2004, the personally liable managing partners were authorized to purchase ordinary or preferred shares in the Company not exceeding 10 percent ofthe capital stock, i.e. up to

14,598,625 shares, at any time up to October 18,2005. This authorization was renewed for the period until October 17.

2006 at the Annual General Meeting on April 18, 2005. and at the same time the authorization granted in the previous

year was withdrawn.

The personally liable managing partners were authorized - with the approval of the Shareholders' Committee and

of the Supervsory Board - to dispose of treasury shares acquired, without first offering them to existing shareholders,

by:

o offering and transferring them to members of the Management Board and certain executive management personnel

of Henkel KGaA and to members ofthe management boards and certain executive management personnel of certain

affiiated companies in Germany and abroad under the terms of the Stock Incentive Plan of the Henkel Group, or

o sellng them to third parties or transferring them in other ways for the purpose of acquiring businesses, parts of

businesses or investments in businesses or for forming business combinations, or

o selling them for cash in a way other than on the stock market or via an offer addressed to all the shareholders, provided that the selling price of the shares is not significantly lower than the quoted market price at the time of the

sale. In this case, the number of shares sold, together with the new shares issued out of authorized capital while

excluding the pre-mptive rights of existing shareholders, must not exceed 10 percent of the existing capital stock

when the shares are issued or sold.

Insofar as members of the Management Board of the Company are among those eligible to participate in the Stock

Incentive Plan, the Shareholders' Committee is authorized - with the approval of the Supervisory Board - to offer and

transfer the shares.

The personally liable managing partners were also authorized - with the approval of the Shareholders' Committee

and of the Supervsory Board - to cancel the treasury stock without any further resolution in General Meeting being

required.

Treasury stock held by the Company at December 31,2005 amounted to 2,374.580 preferred shares. This represents

1.63 percent of the capital stock and a proportional nominal value of 6.07 milion euros. 992,680 of these shares were

originally bought back in 2000, 808,120 in 2001 and 694,900 in 2002 (2,495,700 shares in total). In 2004, options were

exercised under the Stock Incentive Plan for the first time, leading to a reduction of 3.565 in treasury stock held with

a proportional nominal value of 9,126.40 euros (0.0024 percent of the capital stock). In 2005, there was a reduction of

117,555 in treasury stock due to the exercise of options, The proportional nominal value of the capital stock amounted

to 300.94 thousand euros (0.08 percent). The gain on disposal was measured on the basis of the market prices prevailing

at the time of disposaL. and amounted to 8 milion euros.

(23) Capital reserve

The capital reserve comprises the amounts received in previous years in excess of the nominal value of preferred shares

and convertible warrant bonds issued by Henkel KGaA.

86 Henkel Annual Report 2005
(24) Revenue reserves

The revenue reserves include the following:

o amounts allocated in the financial statements of Henkel KGaA in previous years

o amounts allocated from consolidated net earnings of the Group less minority interests

o buy-back oftreasury stock by Henkel KGaA at cost

o the effects of the restatement in accordance with IAS 19.93 A and IFRS 2.

Revenue reserves also include changes in the equity valuation of our investment in Ecolab Ine. reflected directly in equity.

These result mainly from movements in foreign exchange rates and from share repurchase schemes in Ecolab Inc.

(25) Gains and losses recognized in equity

The items under this heading represent the differences on translation of the annual financial statements of foreign

subsidiary companies and the effects of the revaluation of financial instruments recognized in equity.

Due to the increase in the value of the dollar against the euro, the negative translation difference at December 31,

2005 was down by 599 milion euros compared with December 31, 2004 (2004: negative amount increased by -322 million euros compared with the end of the previous year).

(26) Minority interests

The minority interests comprise the shares of third parties in the equity of a number of companies included in the

consolidation, primarily in Asia.

(27) Pensions and similar obligations

Employees of companies included in the consolidation have entitlements under company pension plans which are

either defined-contribution or defined-benefit plans. These take different forms depending on the legal, financial and

tax regime in each country. The level of benefits provided is based, as a rule, on the length of service and earnings of

the person entitled.

The defined-contribution plans are structured in such a way that the Company pays contributions to public or private

sector institutions on the basis of statutory or contractual terms or on a voluntary basis and has no further obligation

regarding the payment of benefits to the employee.

In defined-benefit plans, the liability for pensions and other post-employment benefits is calculated at the present

value of the future obligations (the projected unit credit method). This actuarial method of calculation takes future

trends in wages, salaries and retirement benefits into account.

Effective January 1, 2004, most of the defined-benefit plans in Germany were harmonized on the basis of a unit-based

plan (Pensions 2004).

In 2005, Henkel issued a 1.3 bilion euro bond, the proceeds of which wil be used to cover pension obligations. To

provide protection under civil law of the pension entitlements of future and current pensioners against insolvency,

the proceeds of the bond issue and certain other assets were allocated to Henkel Trust e.v The trustee invests the cash

with which it has been entrusted on the capital market in accordance with investment policies laid down in the trust

agreement.

Henkel Annual Report 2005 87

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t-''¡012S to t!ì-:' CC,,1::\)jìd¿-!Í::-r~ t- . : '.- ~:: r -? ;¡ r: '1 . :;

Trends in wages, salaries and retirement benefits in percent

Germany USA Rest of world" _.._--- -_...~ 2004 20 2004 20 2004 20

Disco~~t f~~;~; - n - - .h_.h,_. -. - h .------.-¡-~-ti--~~5Jl ' " .." ". Income trend 3.0 ~ . 4.0 - 4.3 ~~~til!f ~:~ = ::~ ~ffll!~

Retirement benefit trend 1.0 - 1.25 ~i1 ~~i£ 0-2.5 ~i,iJl~j

Expected return on plan assets 5.5 7.0 - 8.0 l~~4lìif 2.0 - 7.0 ~;jfJ.;~;r::Q

~o~p~~~~~;~;~~:~~s..__.____._._~_._.,_,_____. "10.0 :~~,. "__.~_~~,~:~__ol~(~l~~;

"for the eurozone, a discount factor of 4,3 percent is used (2004: 4,8 percent)

The expected return on plan assets is derived from asset/liability studies for all major pension schemes.

Pensions and similar obligations at December 31, 204 in million euros

--------------.-.__ __ _____ ._m____ ,,__ __ . .._.____ __ __ ___~______._ _. .... __.___ __. Germany USA

At ~anu~!!.1, 200____________n___...___...___,___,_._.__o_ _0_'_ 1,64 ._.__!~. ~_____!.~

Chan~es i~~~~,~!~!Ji:f!~.~~a!i~~~.!.r!.n::~h_,___,____.______ ___,_~ _____ 167 2 ~ctlJari~I.~!~ns/lo:;~es 94 2 19 Current service cost 34 21 30 Amortization of past service cost 1 1 - __-. ___u. __ _ ._. _..._ Gains/losses arising from the termination and curtailment of plans 3 1 Interest expense 84 39 21 _._-,,--~- ----_. ---- Allocated 122 33 37 Expected return on plan assets -27 -16 --_._--~---- ._.._- -_._....-.-- -------_._- ----------

Employer's contributions to pension funds -3 -26 -18

~~~I?xi:r's'par"!~ntsf?r?~nsio~~and s~~~r o~I~~ti?"-~ ._on ~.q~ -18 -17 Released -7 -7 Utilized -106 -4 -3 --,.- -_._- --------_._------ ----_. ._'_._- -_.~..._,--_.-

~E.~,?~m~r 31.!~~~ . _, __.~..~ 277 183

Analysis of provisions for pensions and other

post-employment benefits:

Present value of unfunded obligations

P!~.s~n! valu~ of funded obligations

Fair value of plan assets

~nre~o.~n~.:~~_p~.s~_s_e.rv~~, c_o~t

Total

Rest of

world Total

g;:t;~~0:t~l~ií;

~~~

~~r~

!c..'- -

~I.

~~~1lm

~j~~I~~

~r~tl

~~~~~~m8;fli

;'d:TD~,~'.f~l¡

~t;;YxS~;

~:.

-273 tf.':;r\~~ad

1 E;'1~it~;~tS:: i.~

'. ,____ __~~~~~,~_,~~_-~~:=~~~.=~:~__~~_ ,1_!~5ã __:.~.,.... :f!!_..__,__.._..1 ~., tf~~~E~.!,

1,731

61

-34

258

435

-416

88 Henkel Annual Report 2005
" ,- l

Fair value of plan assets at December 31, 2004 in millon euros

Rest of Germany USA world Total

At.Î;n~~~-1:20mH __m__n_ -- H --------------33------20- 248 ;)~;_;i:jl

Changes in the GroupfTranslation differences 168 -1 J:.i,ITt:'J§7 ~m"ployer's contributi()ns !() r.ension f~n~s 3 26 18 ~~øÆtEJt,

§mployees' contributions to pension funds 1 K:rJ~~'ji;r:';ii ::~::n:e~:~::~ ~:i~ :s~e~: plan assets -3 -~~ ~ ik?~1i;;

~c:~~~I~~~~s£+Xlos~_e.sJ~~ . _ _____________________ 1 13 -3 *~:;§

~~~~r;;e_;_~~j:;;~ets_._,_._____..~____. .._. .,'_"______..__,_____.___~~____. 4:~.,__,__._."'__~~___~IÌi..

Pensions and similar obligations at December 31, 2005 in million euros

~t J~~~~'Y1,_~_ ______ ,___

C?ha!1ge~i,"-~~ Groupl!~nsl~!~~d..ffer~_c:i:~_._

~~tuarial gains/loli!õl!s

Current service cost

Germany ""-'~"'''-''''-----

1,758

Amortization of past service cost

Gains/losses arising from the termination and curtailment of plans

i nterest expense

--- ._-- --_.-..

Expected reti:,n on plan as~ets_

Allocated

3

85

-9 --------

130

-1 ,421

-105

-1,526

§mployer's contributions to pension funds

§mEI.9y~r'sp~ymen_ts for PEliisions~ii~~i~il~ .9.l~§1~!i0n~

Utilized -~-----~._~-----_._- .'--

Released

At December 31, 2005

--_._.._----~._.. ~- --.,...--._.

Analysis of provisions for pensions and other

post-employment benefits: __ .. __ _ u.

Present value of unfunded obligations

Present value of funded obligations

Fair value of plan assets .. _dud ._

~nr~oSln~~e.d past service,cost

Total

165

1,841

-1,457

187

51

USA

277 _ uu __~__,,__,

40 ------_.-

16

24

Rest of

world

183

4

- ._--.-------

20

24

2

Total

- r;jÆ~mi

f~t'~lrfjl':~ ~l~

~.~~ .i~':~!!~

549

45

-32 "-------

37

-17

-20

-37 .. - . -- ~_._---,._.-

-21

312

. ,

~~it~~~ ~""'~, ' ~:'.,-: '

t~1t~~ØJ

~%~~t2~~ h:...~i:~l:J: gl~~

f;:0I:ta

K¿~J1ßr~~~~

L:~t~~11mi

23

-18 ---~..-

31

-19

-13

-32

-6

200

254

560

-502

1 00 i~';:ì;~i¡~ill

434 lt:i~~~~

-335 ~Js~

1 ~;~~;;~~,j2ê:i

,____~~ j¿~A:ftæ; 549 312

Fair value of plan assets at December 31, 2005 in million euros

At January 1, 2005

Changes in the GroupfTranslation differences

Employer's contributions to pension funds

Employees' contributions to pension funds

Retirement benefits paid out of plan assets - ,

Expected return on plan assets

~!~~rial!:~n~ S:lYI~ssesH

At December 31, 2005

Actual return on plan assets --'---'-.'_.'~"" ~.'-- ,-.-- .'-'--. -- -

Germany

34

1

1,421

1,457

9

-8

9

Reslof

world Total

273 t;r)Xx~Ç:!foijl

6 f;'~:)10!:¥!~

19 ¡_,,~;t!st

1 f.:dC'd0~r~r

-11 r~~~j~á&~~

18 tnJ~lÆ~

29 ~,~:f;t\~~~

502 33 ~:'f:~,g,~;

._~.2_._ ____,_._~~_HJt;f¡jl:.

USA

416

67

17

-30

32

Henkel Annual Report 2005 89

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Actarial gains and losses are recognized in the year in which they arise as part of the pension provision and included in the

"Statement of recognized income and expense" in accordance with IA 19.938. Due to the change from the corrdor approach,

which was used until 2004, to the full disclosure of the actuarial gains and losses in the balance sheet, the comparatives for

2004 have been restated in accordance with \AS 8. This restatement increased the provision for pensions at January 1. 2004

by 295 milion euros to a total ofl,937 milion euros. Mter taking into account actuarial gains/losses that arose in fiscal 2004

of 115 milion euros and fiscal 2005 of 223 milion euros, accumulated actarial gains and losses of 633 milion euros were

offset against revenue reserves at December 31, 2005.

Of the amounts allocated to the provision in 2005. 104 milion euros (2004: 91 milion euros) is included in operat.

ing profit (pension costs as part of personnel costs, page 98) and 94 milion euros (2004: 101 milion euros) in financial

items (page 72). The expenses shown in operating profit and all the releases from provisions are allocated by function

depending on the sphere of activity of the employee.

Analysis of plan assets in million euros

December 31, 2004 --------_.- -

Fair value

Shares

Bonds

Other assets

Cash

___._._ n______

Total

475

220

25

--------3

723

December 31, 20 --- --

in % Fair value in %

"--'---,-. 65 ¡;i¡l:é'~~f~q" 'ft,-~t~.~',tM" ,,'0' . 7 ~"~'~';A:"",:7!j?:;,t~~.~ ,.7;:. ~.':,,.I.~,:'T _õI~:". .' ~Q;i0..~=-,..~;.. ...~ """'~~-'.¡¿"'......"" ----"'304 ~~~~: ""~~¡ . ii~~~'~ ~ - -; m~,:~~~ '" .J .... ~~=~" . 0;"'" ¡¡~~l. 3.5 \'i;~o,:,.,-~.._~,;g;~~ ~ ¡g",~n_, ~,. " ',' ,"'....,..._0..,-.... ""'S .- .''' " 0'.4 ~~~~ioî~; ~i~

----1O ~l~~~I~li~~l:oõ

At the end of 2005, other assets include commercial paper of 299 milion euros and fixed-term deposits of 250 millon

euros. Also shown here is a claim against Cognis for indemnification of pension obligations in the amount of 121 million euros.

(28) Other long-term provisions

Changes in 200 in million euros

'jax provisions

Sundry long-term provisions

Stron¡: for the Future/Extended Restructuring

~~~~n,ce~ £3E3str~ct~r~n¡:

Total

Balance SpeCial

Jan. 1, circum-

-.------

2004 stances Utilized Released ..._--._----_..- -- ._--~.----,-_.

188 -8 20

189 7') 143 38

19 -19

. '_"'~-.' .._..._.._._,~.___".n...,. . 396 -20 163 38 ., '-'-.'-"-~ .,,~.,---

" includes effects of restatement in accordance wrth IFRS 2 (Share-based Payment) of 4 millon euros

Restated

balance

Dec. 31,

Allocated 200

.-::!i

~_",_~~_rBilCSit

Changes in 2005 in million euros

Tax provisions

Sundry long-term provisions

~~~i3n_c~,R.estructuring

Total

Balance

Jan. 1,

2005

221

224

154

599 224

Special

circumstances

-8

-10

-111

-129

Utiiized

103

121

Released

2

7

2

11

90 Henkel Annual Report 2005

Allocated

79

113

Balance

Dec. 31,

2005

'~:',;.;,L.is7.,

~j(:Ii':),~m

¡:/~S!f:~ii:;

192 , "4tl
The amounts recognized as other long-term provisions are the best estimates of the expenditure required to settle the

present obligations at the balance sheet date. Provisions which include significant interest elements are discounted to

the balance sheet date.

Special circumstances include changes in the Group/acquisitions, movements in exchange rates and adjustments to

reflect changes in maturity as time passes.

The tax provisions comprise accrued tax liabilities and amounts set aside for the outcome of external tax audits and

legal proceedings.

The sundry long-term provisions pertain to identifiable obligations toward third parties, which are costed in fulL.

The restructuring provisions comprise amounts relating to measures which have not been completed by the 2006

year-end.

Analysis of sundry long-term provisions by function in millon euros

Dec. 31, 2004 Dee, 31, 20

Sales

Personnel

Production and en!;ineerin!;

Administration

¥..----......---"------ -----~.-_._...---1-0.- æ~~l~¡~~

:~ ~ïii-l

1 09 f~1~10tll

,~~~~~~~~:=,--~=.~~~~=----=~=~~--- --~=,~~-.~ --, -'-._..- -~~~~.-,~lß'iJl

Total

(29) long-term borrowings

Long-term borrowings comprise all long-term interest-bearing obligations outstanding at the balance sheet date. Maturities

oflong-term obligations at December 31,2004:

Analysis in million euros

Bonds

(ofi¡hich amounts secured)

Loans from employee welfare funds of the Henkel Group

- ,-- _.- . (of which amounts secured)

Bank loans and overdrafts

.. (of :-ii!::!2.'!C!'-ts s~LJ~'! . _,,_ '_______ _ _ __ ____,

Total

Residual term

more than between 1

u5 1~~~ and 5 ye~rs

1,012 339

Dec. 31, 20

Total

9

5 20

1,017 36

The bonds at December 31,2004 included the following:

Bonds in million euros

Issued by

Henkel KGaA

Dial Corporation

Dial Corporation

.. '. -,-,..

Type

Bond

USD bond

USD bond

Nominal value

1,000

184

147

Interest rate

4.2500

7.0000

6.5000

Interest fixed

see')

until 2006

see')

'i fixed-rate interest of bond coupon: 4.25 percent. converted using interest rate swaps into a floating interest rate (2,5751 percent at Dee. 31, 2004)

2, fixed-rate interest of bond coupon: 6,5 percent, converted using interest rate swaps into a floating interest rate (4,84 percent at Dee, 31. 2004)

Henkel Annual Report 2005 91

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~J8ti=:: ~O t:-2 ':_-C::.:Di!c.L:~~( F:r1:", -,¡~: ~;3r~: ~7.~':'

Maturities oflong-term obligations at December 31.2005:

Analysis in million euros

Residual term

more than between 1 Dec. 31, 200

5 years and 5 years Total

B~;~:~::h-a~~unt:secured)-------' .,. -'--'-------------- 2,332--'-------- -.---~-- ~~~il~fll

LO;o~S~~~: ::~~; s:~~:;unds of the Henkel Group') 8 17 rtÒ\~!~mr~I;

~a(~~ ~~~~~~~:;~~:r~)_ ... '.._._____~______~_.__.__._____.. ~_.__ ___...._____.: J,,;f~~~~i~~1

!~~~J_________ .,.__ ,______ '___,.,.._'_'v.___..__,,_,____..._..__~_,___.___, 2,~_.._~_.__, 60 J&~~~TI:~~~

" obligations WITh floating interest rates, or interest rates pegged" 1 year

The bonds at December 31,2005 included the following:

Bonds in million euros

Iss'!~~__________, .

Henkel KGaA

Henkel KGaA

'.. .. _ '.__,__ __ '. . __ _____ _____~:...__N.?~~nal v~~.:___~n_~~est ~!:. ___I,l2t~::_~xed Bond 1,000 4.2500 see')

"'_ _ ,____,.__________,__,_"_.'__ ____""__~._,__ Hybrid bond ...~,__,__.__.._._~:~!_~~____,,___, ___~,

') fIXed-rate interest of bond coupon: 4.25 pecent, convered using interest rate swaps into a floating interest rate (2.8571 pecent at Dee, 31, 2005)

"fixed-rate interest of bond coupon: 5,375 percent, 50 percent converted using interest rate swaps into a floating interest rate (4,835 pecent at Dee, 31. 2005)

The bond issued by Henkel KGaA for 1 bilion euros in 2003 with a coupon of 4.25 percent matures in June 2013.

With the acquisition of The Dial Corporation on March 29, 2004, Henkel assumed a bond for 250 million US dollars

with a coupon of 7.00 percent, maturing in August 2006, and a second bond for 200 million US dollars with a coupon

of6.50 percent, maturing in September 2008. Henkel canceled and redeemed both US dollar bonds in the first quarter

of 2005 in accordance with their terms and conditions.

The 1.3 billion euro subordinated hybrid bond issued by Henkel KGaA in November 2005 to finance a large part of

the pension obligations in Germany matures in 99 years in 2104. Under the terms of the bond, the coupon for the first

ten years is 5.375 percent. After that period, from November 25, 2015. it wil be possible to redeem the bond. Ifit is not

redeemed. the bond interest will be based on the 3-month Euribor interest rate plus a premium of 2.85 percent. The

bond terms also stipulate that if there is a "cash flow event", Henkel KGaA has the option or the obligation to defer

the interest payments. A cash flow event is deemed to have occurred if the adjusted cash flow from operating activities

is below a certain percentage of the net liabilities (20 percent for optional interest deferraL. 15 percent for mandatory

interest deferral); see §3(4) of the bond terms and conditions for the definition, On the basis of the cash flow calculated

at December 31, 2005 the percentage was 40.81 percent (+20.81 percent).

(30) Other non-current liabilities

Other non-current liabilities relate largely to amounts due to employees.

92 Henkel Annual Report 2005
.. ::: ~ - C'

(31) Deferred tax

The provisions for deferred tax relate to differences between the accounting base in the consolidated balance sheet and the

tax base used by the individual companies included in the consolidation to calculate their taxable profits (page 74).

(32) Short-term provisions

Changes in 2004 in million euros

Tax provisions

~undry short-term provisions

Strong for the Future/Extended Restructuring

Advanced Restructuring

__'__'~__... U',"__m___ _"__

Total

Jan. 1, circum- Dec. 31,

2004 stances Utilized Released Allocated 20

M ~~ M

-----84 _u_ 33-----89 5 - - - ,u-62--~I¡1S1~l~i~ 510 222 564 2 498 EZ!i!¥m,

==-~==;. ~2:_-=~-=~_-=_ ;~.

Changes in 2005 in millon euros

Tax provisions

Sundry short-term provisions -- ..-

Stron!;for t~e Future/Extended Restructuring

~~~n~.9_R!:~ruc~r~~

Total

At Special At Jan. 1, circum- Dec. 31,

2005 stances Utilized Released Allocated 20 85 7-70---3-u-95~~~ 664 40 520 51 574 ~~S

150 111 148 2 ~ 19 19 lr~

_~.-_~_=~=~.!!_-=~_==~~~_~_~~- 7.57___-=_ 56 __~_~~=669_~JI

The amounts recognized as short-term provisions are the best estimates of the expenditure required to settle the present

obligations at the balance sheet date, The restructuring provisions consist of amounts for those measures which wil

be completed by December 31, 2006.

Analysis by function in million euros

Sales

Personnel

Production and engineering

Administration

Total

Dec. 31, 2004 Dee, 31, 2005 , ---"' _.. --, --,---,-- --, ,u___ ---178---"T'?;;Y!~'0;.~

i'j~g_~t~i'~~i~~

213 ~~SjÆ11~fDl

42 k::~~¡~::

231 l¿;~~~ùJ

.,..".__~__:u~u.=~__J!fl:~~!~X~

Henkel Annual Repw 2005 93

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~~()t¿.s tc t::.: (.:.,I::,~~¡:r_Lì~~-~ ! ;:t-~-~'ì:;::::: ,'Ji:~~e:~l':;i ,_

(33) Short-term borrowings

Short-term borrowings in million euros

Dec. 31, 2004 Dec. 31, 200 Bonds 27 -..---------______ .__.___..____ n_____._____.____. Total Total Commercialeaper 1,070 ~o~ns froniempl()yee welfare funds of the Henkel Gro_up 4 Bank loans and overdrafts 313 (of which amounts secured) (142)

Other financial liabilities 375 g§t'jKt~?~:;S5S6t

~~~~=,-~~~=~~~-~~, ~-=-~~-'~'=-,~,==~=~==,=~===::----'=--=-==~=-_~:,====_~2~ _._~£0nl,i~J~~__

'I from the US dollar Commercial Paper Program (total amount: 2 billion US dollars)

Other financial liabilities include interest-bearing loans from third parties and finance bils.

(34) Trade accounts payable

Trade accounts payable include invoices received and accruals for invoices outstanding in respect of goods and services

received.

(35) Other current liabilties

Other current liabilties in million euros

Amounts due to non-consolidated affilated com¡:anies

Amounts due to other companies in which investments are held

Liabilities in respect of social security

Income tax liabilities

Other tax liabilities

¡)erivatives with ne¡ative fair values

Sundry current liabilities including deferred income

_ JE!!"IiJc!2am!!'ls~IfY-r~C!_____

Total

Dec. 31,2004 Dec. 31,200

Total Total

--"._-'-_._---1'5'_.~~~~~,!*~~t~~~

3 Ú;Lii¿~;;~F~ll:

~~ t;::~:;-~~~~~'~~l

58 E~:~~"tLt,7?f~.~j~a~

1 0 E;;1~2:~È~j~'

170

(1)

_.~~:=::==-: _:,:__-~==.:__-:=_-__.,.=:_:.::=_=,_36~_.., jj.;:.:.,~:~ji~~:~:

Sundry current liabilities include:

a amounts due to customers of 20 milion euros (2004: 14 milion euros)

a commission payable of 5 milion euros (2004: 4 milion euros)

a amounts due to employees of 81 milion euros (2004: 128 milion euros)

a advance payments received of 4 milion euros (2004: 4 milion euros),

(36) Contingent liabilities

Contingent liabilties in million euros

Bills and notes discounted

~i_~bili!iE'_~. ~_n~er guar~~tee .~_nd w~rr¡¡nty agreements

Dec. 31,2004

6

20

Dec. 31, 2005

~\_-. :. ~ i'_ ~~Sr,~,;.~~,:,d,~,-~.";.;~20l~~

f"',: "

94 Henkel Annual Report 2005
(37) Other financial commitments

The amounts shown are the nominal values.

Payment obligations under rent, leasehold and lease agreements are shown at the total amounts payable up to the

earliest date when they can be terminated. At December 31, 2005. they were due for payment as follows:

Rent, leasehold and lease commitments in million euros

DUfjin the following year

()ue within 1 to 5 years

~~fJ~~f!fJ~.5 Y.fJ~r~.

Total

Dec. 31, 2004 Dec. 31, 20 n__n"__'"___ ..-2i----~~~šltil11~l~;

65 ti~ff~;~~¥3~rcí~.

31 ¡i;fH";~;l1~firrl

~..~~~~,w~__,,~___,,___~-, ~. . ..'L._~' ._..,__~~,~.. ~_.__. .."~?~._ ._'''__.-._.....__~__.. ...'"'~_...,"~._.....~__.~.~_..,__~_~_~.__ "__,_~~.__. ~.,~._~."._, ..._.~.__~~ r';.~7.:D~!~Ktij:

The order commitments for property, plant and equipment amounted to 36 milion euros at the end of 2005 (2004:

27 milion euros); the purchase commitments from toll manufacturing contracts amounted to 47 milion euros (2004:

63 milion euros).

Payment commitments under the terms of agreements for capital increases and share purchases signed prior to

December 31. 2005 amounted to 26 millon euros (2004: 22 milion euros).

(38) Derivatives and other financial instruments

Treasury standards and systems

The Corporate Treasury department manages currency exposure and interest rates centrally for the Group and therefore

all transactions with financial derivatives and other financial instruments. Trading, treasury control and settlement

(front, middle and back offces) are separated both physically and in terms of organization. The parties to the contracts

are German and international banks which Henkel monitors regularly. in accordance with Group Treasury standards,

for creditworthiness and the quality of their quotations. Financial derivatives are used to manage currency exposure

and interest rate risks in connection with operating activities and the resultant financing requirements in accordance

with the Treasury standards. Financial derivatives are entered into exclusively for hedging purposes.

The currency and interest rate risk management of the Group is supported by an integrated Treasury system, which

is used to identity. measure and analyze the Group's currency exposure and interest rate risks. In this context, integrated

means that the entire process from the initial recording of financial transactions to their entry in the accounts is covered.

Much of the currency trading takes place on intranet~based multi-bank dealing platforms. These foreign currency transactions are a,utomatically transferred into the Treasury system. The currency exposure and interest rate risks reported

by all subsidiaries under standardized reporting procedures are integrated into the Treasury system by data transfer.

As a result, it is possible to retrieve and measure at any time all currency and interest rate risks across the Group and

all derivatives entered into to hedge the exposure to these risks. The Treasury system supports the use of various risk

concepts. For example, the risk positions and the success of the risk management in each company, country and group

of countries can be determined on a mark-to-market basis at any time and compared to a benchmark.

Recognition and measurement of financial instruments

Financial assets are measured initially at cost. Securities for which the fair value can be reliably determined and other

investments which are quoted on the stock exchange are categorized and recognized at fair value through profit or

loss in accordance with IAS 39. Subsequent measurement at amortized cost applies only to those other investments

in companies disclosed under non-current assets and to those securities held as current assets for which the fair value

Henkel Annual Report 2005 95

'tQ)

-¡

;g l!

ii :¡ c: E

8.æ

Q) .æ £'"

.s 12

~ ~ o c:

:z ¡¡
r'~c,t~:; :ç... t,':,:

cannot be reliably determined or which are held-ta-maturity investments. Changes in the fair value of all securities and

inverstments in companies are recognized immediately in the statement of income under financial items. Long-term

loans are accounted for at amortized cost.

Specific financial instruments by category in million euros

De. 31, 2004 Dec, 31, 20

--~ --'-'-'~' ------- ------.--~.~~. -'-*~~J§i~Jrsi~

f!~~liQ~~1l

1,558 i¡,~~~rgllr

442 i)~iil.

56 t::~:E;;~~Ef;JlfZE;&ff

--------------.~~~1~;tØik

Securities

- at fair vallJe through profit or loss

- available-far-sale

Other investments/Shares in affiliated companies

- at fair value through profit or loss . - -----

- available-far-sale

- at amortized cost

Until December 31, 2004, available-for-sale financial instruments were recognized at their fair value through the income

statement. From January I, 2005, these financial instruments were re-ategorized as "at fair value through profit or

loss".

Financial liabilities with a fixed maturity are measured at amortized cost using the effective interest method. Financial liabilities in respect of which a hedging transaction has been entered into, and which meet the conditions set out

in lAS 39 regarding a hedging relationship, are measured under hedge accounting rules.

All derivative financial instruments entered into by the Group are measured initially at cost and subsequently at

their fair values on the balance sheet date. The accounting treatment of gains and losses on remeasurement to fair value

depends on whether the conditions set out in lAS 39 with respect to hedge accounting have been met.

Hedge accounting is not used for the majority of derivative financial instruments. The changes in the fair value of

those derivatives which, from an economic point of view. represent effective hedges in line with the Group strategy,

are recognized in profi t or loss. These are virtually matched by changes in the fair value of the hedged underlying

transactions.

Under hedge accounting, a derivative financial instrument is identified as a hedge of the exposure to changes in the

fair value of an asset or a liability (fair value hedge), as a hedge of the exposure to variability in future cash flows (cash

flow hedge) or as a hedge ofa net investment in a foreign entity.

Fair value hedges: The gain or loss from remeasuring derivatives used to hedge the exposure to changes in fair value is

recognized in financial items in the statement of income together with the gain or loss on the hedged item. The interest rate

derivatives entered into qualifY as fair value hedges. The gain or loss on remeasuring the derivatives (2005: 26 milion euros,

2004: 56 million euros) and the gain or loss on the hedged bonds (2005: -26 milion euros, 2004: -54 million euros) have both

been included in financial items in the statement ofincome.

Cash flow hedges: Changes in the fair value of derivatives used to hedge the exposure to variability in cash flows

are recognized directly in equity. The portion of the gain or loss on the derivative that is determined to be ineffective

in respect of the risk being hedged is reported directly in the statement of income. If the firm commitment or an expected or highly probable future transaction results in the recognition of an asset or a liability. the accumulated gains

or losses on the hedging instrument that were recognized directly in equity are included in the initial measurement of

the asset or liability. Otherwise, the amounts recognized directly in equity are included in the statement of income in

those reporting periods in which the hedged transaction impacts the statement of income.

96 Henkel Annual Report 2005
Hedge of a net investment in a foreign entity: Hedges of net investments in foreign entities are accounted for similarly

to cash flow hedges. This is the case with forward exchange contracts that are used to hedge the exposure to currency

translation risks in foreign entities. As a result of the formally documented hedge accounting relationship, -23 milion

euros was recorded in equity at December 31. 2005 (2004: 13 milion euros). The changes in fair value during fiscal 2005

were taken directly to gains and losses recognized in equity after taking account of deferred taxes (2005: -36 milion

euros, 2004: 10 million euros).

Fair values of derivative financial instruments

The fair values of forward exchange contracts are calculated on the basis of current European Central Bank reference

prices taking account offorward premiums and discounts. Currency options are measured using market quotations or

recognized option pricing models. The fair values of interest rate hedging instruments are determined on the basis of

discounted future expected cash flows using the ruling market interest rates over the remaining terms of the derivatives. These are shown in the table below for the four most important currencies. In each case these are the interest rates

quoted on the inter-bank market at December 31.

Interest rates in percent per annum at December 31

Maturities

3 months

6 months

1 year

2 years

5 years

~~.¥:.~!_s. ..._ .

EUR

2004 2005

'2~;¡' fll1?J4i.

2.22 ~;rf

2~41 ~ii;

2:63 lû~Q!

3:17 ~~li

....._._h_._.~.~!~,_f,;l:3~~

';:L""j~~ ~

IDm

r~l1~

~~~56'

.-ll~~

USD

n-2~56'T":l~c 2004 20

~:~~ fgfl

3:20 K'!if~

_."._..;~~---~r~~~~

JPY

2004 2005

'~.02 n lX6.!!r

~:~: Ì;!.~~

~:~: F;fll

1 :~~._nJ::1.~

GBP

_ __~____ _no 2004 20

4.81

4.78

4.79

4,84

4.86

4.86

Derivative financial instruments with a positive fair value at the balance sheet date are included in miscellaneous assets

and those with a negative fair value included in other liabilities.

The following positions were held at the balance sheet date:

Derivative financial instruments at December 31 in million euros

Nominal value

2004 2005

2,969 ¡\:.1,1,Q!

;;:t:,:~Tr7:~j

Positive fair value Negative fair value

2004 205 ~ -- . ..~,_ "',"', :-,0'-"

-10 i;,";',j;::lQ§J

::,;,':'--.- :'~",':'1:''''?tj.

(-5) ~i':;:"tiJl

P;:;t7Z~~~jlr€~

~~:_~--~~S:.~q::;--%:

2004 2005

110

(84)

12

2

124

Forward exchange contracts')

(of which for hedging

loans within the Group)

Currency options')

Interest rate swaps')

Cross currency swaps" ---.. .. ------,- "-' -.---- --"-

Total derivative financial instruments

(2,207),tjs3

E¡~l,:;:'G::.~

1 , 1 ~ ~ ~i;~tli~~~l

. ~...1,~!._.,,",.... .~~ ... ,_,__ .::~~._ j;L~1L::j!!:

" maturit period" 1 year ,. maturity period" 1 year

Most of the forward exchange contracts and currency options hedge risks arising from trade accounts receivable and

Group financing in US dollars.

Henkel Annual Report 2005 97

'C'"

õíB£l

g ái c: E 0", u_",S :5 (/

.s~'" u

.æ æ o c: z¡¡
Note,; tc t:-:¿. C():'l.~;¡i::l.'~~.; _ 1-,,",;1 .,. ¡,_" 0".,'--

Supplementary Information on the

Statement of Income/Balance Sheet

(39) Cost of materials

Cost of materials in million euros

restated

2004 200

~E:~~;~~~"d_=~~:___~_--_ ...._~=-=;;;~-~-~=-=;~¡1i!

(40) Payroll costs

Payroll costs in million euros

Waç¡es ¡¡Il~~alaries

Social security contributions and staff welfare costs

Pension costs

restated

2004 200

--:¡ ,598Sif,~~§t';!lJ!

3Ô9 :rJ~~tt~~~~Yi2~~:

1 07 f~';i'~Kl~g".:fl;

..~,~~==~~~_~~tL~t~fff;,;J~~

Total --_.,. ~.,......-.._-_.~-_.._--_.. ._.__.---~.-...-..~.. L~'-'..,._--p'_,..-.~~~~..-...~.,.,..~..~.~",~--_._-~..,---"....-._,,-~------_.,,~....~~_..-

Share-based payment plans

The objective of the Henkel Stock Incentive Plan introduced in 2000 is to provide additional motivation for about 700

senior executive personnel around the world. Participants in the plan are granted option rights to subscribe for Henkel

preferred shares, which maybe exercised, once a vesting period of three years has elapsed, within a period not exceeding

five years. Under the plan, rights were issued annually on a revolving basis, the relevant terms being revised each year

by the Management Board and Shareholders' Committee. In 2004, options were issued for the last time, in this case to

the members of the Management Board,

Each option granted carries the right to acquire up to eight Henkel preferred shares. The exact number of shares

that can be bought per option at a specific price depends on whether and to what extent the performance targets are

met. One target is based on absolute performance - the performance of the Henkel preferred share price. The other

takes into account relative performance, comparing the movement in value of Henkel preferred shares with that of the

Dow Jones Euro Stoxx 600 index. For both performance targets, the average market price of Henkel preferred shares at

the date of issue is compared with the average market price three years later. The average market price is calculated in

each case on the basis of 20 stock exchange trading days after the Annual General Meeting. For options issued prior to

2002. a period of60 trading days is applied. The calculation of relative performance takes dividend payments and other

rights and benefits into account as well as movements in the share price (total shareholder return). The subscription

rights attached to an option are split into two categories. Up to five subscription rights can be exercised by reference to

the absolute performance and up to three subscription rights by reference to the relative performance.

Option rights are granted to members of the Management Board and heads of divisions, and to managers of comparable status within German and foreign affiiated companies, on condition that they make a direct investment of one

preferred share for each option.

On February 19. 2004, IFRS 2 (Share-based Payment) was issued. We have applied this Standard effective January 1,

2005. As a result, the total value of stock options granted to senior executive personnel at the grant date is determined

using an option pricing modeL. The total value of the stock options calculated in this way is treated as a payroll cost

98 Henkel Annual Repon 2005
spread over the period in which the Company receives the service of the employee. For fiscal years from 2005 onward,

this cost in respect of the option rights granted in 2003 and 2004 is required to be expensed.

The table shows the number of option rights granted per tranche and the number of shares in the various tranches

for which the vesting period has expired. It also shows the expense for the period resulting from the valuation of each

tranche issued.

For the fourth tranche, management availed itself in 2004 of the right to pay in cash the gain arising on the exercise

of the options to the employees participating in the plan. The other tranches are to be paid in shares.

Options/subscribable shares in number of shares/options

1st tranche') 2nd trache"

At January 1, 20

expressed in shares

Options granted

expressec in shares

Options exercised"

expressed in shares

Options forfeited

i:xpre~ed i'!~~rfJ~_____.

At December 31, 2005

expressed in shares

of which held by the

... - -- Management Board

expressed in shares

of which held by other

senior executives

expressed in shares

Payroll costs 2005 (millon euros)

Restated payroll costs 2004

(million euras) based on position

at Dec. 31, 2004

75,607

226,821

665

1,995

19,437

58,311

665

1,995

56,170

168,510

n,46

232,380

630

1,890

10.168

30,504

1,645

4,935 ---.._--

66,277

198,831

2.190

6,570

3,777

11,331

53,980

161,940

62.500

187,500

') number of exercisable options " average price at exercise date; 80,30 euras

3rd tranche')

114,58

343,740

1,515

4,545

10,000

30,000

18,830

---- 56,490

87,265

261,795

4th trache 5th tranche Total

-----119, 100------'-12,60 --~i~Æ ---- H - t;!r'~19m

l~~~flJ ~~;W

~.f.lr~~ ~'i£;~,U~81:i; 3,240 ¡j~im

_.._u._______ _____.______n. fi~

115,950 12,600 ~jji~

~~rS§

10,650

31,950

10,800 12,600

76,615

229,845

105,150

12.9 0.3

The costs are calculated on the basis of the Black-Scholes option pricing model, modified to reflect the special features

of the Stock Incentive Plan. The cost calculation was based on the following factors:

Black-Scholes option pricing model

_.__ .__4.._._____._____".-~_. -_._". - _._-~- 1st tranche 2nd tranche 3rd tranche 4th tranche 5th tranche ..._---"._------,. . -----_.-.----_._---_.. n~ .______ .".----------

Exercise price (in euras) 63.13 71.23 74.67 57.66 71.28 ,,- ----

Expected volatility of the share price (%) _.. . 35.0 33.1 32.4 25.4 26.6 n, -

Expected volatility of the index (%) 19.7 20.7 22.4 18.2 18.6

Expected lapse rate (%) , , , 3 3 3 3

Risk-free interest rate (%) 5.19 4.18 4.78 3.12 3.96 "'--'._~._~

The performance period relating to the first tranche ended on July 10, 2003, that of the second tranche on July 12. 2004

and that of the third tranche on May 16, 2005. Hereafter, at any time during a five-year period, the option holders in all

three tranches may exercise their right to acquire three Henkel preferred shares. The allocation of three shares per option

was made solely as a result of the Henkel preferred share outperforming the comparative index (relative performance).

Henkel Annual Report 2005 99

'0Q) 'l~j! o c: U) Q) c: E

o Q) u_Q) .l

:5 u: oëi

i"g _el

o c: zü:
Notes to U-IÇ C::n::'-;'n::!~~:"~~ ¡:!,'~'i: ~'''_' S:::77':':-'~? ,~

The absolute performance targets were not met. The options may be exercised at any time. except during blocked periods

which cover the four weeks prior to the reporting dates ofthe Company.

Global Cash Performance Units (CPU Plan)

Since the end of the Stock Incentive Plan in 2004, those eligible for that plan, the senior executive personnel of the

Henkel Group (excluding members of the Management Board) have been part ofthe Global CPU Plan, which enables them

to participate in any increase in price of Henkel preferred shares. If certain set targets are achieved, Cash Performance

Units (CPUs) are granted, which give the member of the CPU Plan the right to receive a cash payment at a fixed point in

time. The CPUs are granted on the condition that the member of the plan is employed for three years by Henkel KGaA or

one of its subsidiaries in a position senior enough to qualify to take part. This minimum period of employment pertains

to the calendar year in which the CPUs are granted and the two subsequent calendar years.

The number ofCPUs granted depends not only on the seniority of the position of the executive, but also on achieving

set target figures for operating profit (EBIT and net earnings after minority interests. The value of a CPU in each case is

the average price of the Henkel preferred share 20 stock exchange trading days after the Annual General Meeting following the performance period. In the case of exceptional increases in the share price, there is an upper limit or cap.

The total value ofCPUs granted to senior executive personnel is remeasured at each balance sheet date and treated

as a payroll cost over the period in which the plan member provides his or her servces to HenkeL. Across the world, at

December 31,2005, the CPU plan comprised 127,000 CPUs issued in the first tranche in 2004 (expense: 4.6 milion euros)

and 118,000 CPUs from the second tranche issued in 2005 (expense: 3.2 milion euros). The corresponding provision

amounts to 10.3 milion euros.

Cash Performance Units Program

For members of the Management Board, the Stock Incentive Plan was superseded in 2005 by a new program. Under

this, each eligible member of the Management Board is entitled to the monetary value of a total of up to 3.600 Henkel

preferred shares for each fiscal year or tranche, depending on the increase in share price over a period of three years (the

performance period) and the increase in earnings per preferred share. At the end of the performance period, the actual

number and value of the shares is determined and the resulting tranche income paid net and in cash. Each member of

the Management Board participating in the tranche must personally invest in Henkel preferred shares to the value of

25 percent of the tranche income and place these in a blocked custody account with a five-year drawing restriction.

Ifthere is an absolute increase in share price during the performance period of at least 15 percent, 21 percent or 30

percent, each participant in the plan receives the monetary value equivalent to 600, 1,200 or 1,800 shares respectively.

To calculate the increase in the share price, the average price in January of the year of issue of a tranche is compared

with the average price in January of the third fiscal year following the year of issue (reference price). If the earnings per

preferred share increase by at least 15 percent, 21 percent or 30 percent during the performance period, each participant

receives the monetary value equivalent to 600, 1.200 or 1,800 shares respectively. To calculate the increase in earnings

per preferred share, the earnings per preferred share of the fiscal year prior to the year of issue is compared with the

earnings per preferred share of the second fiscal year after the year of issue. The amounts included in the calculation

of the increase are in each case the earnings per preferred share as disclosed in the consolidated financial statements

of the relevant fiscal years, adjusted for exceptional items. The financial statements must have been approved and an

unqualified auditors' opinion issued thereon. The monetary value of a share is equivalent to the reference price of the

Henkel preferred share, In the case of exceptional increases in the share price, there is an upper limit or cap. We have

100 Henkel Annual Report 2005
based the measurement of the provision for this program on achieving intermediate targets. This led to an expense of

1 milion euros in the fiscal year. The provision at December 31, 2005 was for 1 milion euros.

(41) Employee numbers

Annual average excluding apprentices and trainees, work experience students and interns. based on quarterly figures.

Employee numbers

Production and en~ineerin!;

Marketing, sales and distribution

Research, development and applications engineenng

Administration

2004 20

.. 2'3-;38 ~:lii~itl:~?;~'i5"

14,660 Ng::èo!E;;;~,rt1§r.

2,84 K~.~4~~ttrkgi~

........ .,.._ 9.205 g/fj~~lt~ti:r~;

..__~_._,__..______~!~.~f;,.;;,~;'~L§1;ljL Total

(42) Value added statement

Value added statement in milion euros

restated

2004 in % 20 in %

---.----100.0 ---£:~~~tri~i--f~tm!B

.- ;Zf1 ~ ~~l34.7 ~.t~,r,:.,~._:;..'..~,",,~..' '. ~

"'~~

6. 7 ~~f~~2ìi~;;jr~:~ ~~~;t~1ItJ

__ ...3~~ gi;Ll~~~ì. EfÆf?'2ãi

32.7 ltllZIaJíf

~;~~,t'l~'Çf:f.0'

Total sales/income

Other charges

Cost of materials

Amortization/depreciation of non-current assets

Other expenses

._-_._-_._-----

Value added

Paid to

employees

central and local government

Providers of capital

interest expense

shareholders

_J1n.~ri!ys~ar~.h~I~i:rs_ .

~.!.~.~~~!~~.in t~.~~~~~E,.,._...._,_.__.u

12,83

4,450

853

3,328 _._.________n.____..._._._._..__._ ____

4,199

2,014

233

48.0 tNf?~ii gliJ~y~~

5.5 ~.'.~. :',:~:18 t,',~",~./l.:,:..~,~,i_~,f_.~r.~,k!j

c:;....;~_.....i..;_i'-,"-;:.~::/: - '-" Y"-"'~

5.1 f~~~~?!~..- fit:¡~~k~

4.4 i;:('J~~71l1, ",. ~

Lu';r~j.l~ ~~it~~

".",..~'''~~_J~¡lEL~,,,,,t'fR~lliYJ

(43) Segment information

The primary format for reporting the activities of the Henkel Group by segment is by business sector and the secondary format is by geographical region. This classification is linked to the Group's internal management systems for its

operating business.

The activities of the Henkel Group are analyzed between the following segments: Laundry & Home Care, Cosmeticsl

Toiletries. Consumer and Craftsmen Adhesives, Henkel Technologies and Corporate.

Laundry & Home Care

This business sector produces and sells detergents, laundry care products, dishwashing and cleaning products and

insecticides. It is planned to dispose ofthe food business.

Henkel Annual Report 2005 101

'0'"

1õ

;g .æ o c: en '" c: E 0", '--

'" .æ

;¡ CJ

.s~

! ~ o c: zü:
rJ ;:i:.:: . -, \h-., .-. .. - ~.. .',-. ~ ',:"-' -.,

CosmeticsfToiletries

The product range of this business sector comprises hair cosmetics, body care, skin care and oral care products. and

hair salon products.

Consumer and Craftsmen Adhesives

This business sector produces and sells cyanoacrlates, offce products for gluing and correcting applications, adhesive

tapes, high-strength contact adhesives, and adhesives for home decoration, building and DIY applications.

Henkel Technologies

This sector produces and supplies adhesives, sealants and products for surface treatment.

Corporate

Group overheads and Central Research costs are incorporated into this segment, together with income and expenses

that cannot be allocated to individual business sectors.

Reconcilation between net operating assets/capital employed and balance sheet figures in million euros

Net operatingassets Balance sheet

Annual

.. - n....n...~n___ _.. ,. '3,792 ---~-"--~¿i~_1 'l~§~'1l~'~~;;d~ill at-~~k'~~~~- __.n'__ average') 2005 Dec. 31, 2005 Dec. 31, 20

Other intangible assets and property,

plant and equipment (total)

Financial assets

.__ _.__u. _. ~______

Deferred tax assets

Inventories

Trade accounts receivable

from third parties

Goodwill at book value

Other intangible assets and property,

plant and equipment (total)

Inventories

Trade accounts receivable

from third parties

Intra-Group trade

accounts receivable

Other receivables and

miscellaneous assets')

Operating assets (gross)

- Operating liabilities

of which

Trade accounts payable

to third parties

Intra-Group trade

accounts payable

Other provisions and

other liabilties')

Net operating assets

- Goodwill at book value

+ Goodwill at cost

C~~ital,~mpl~¥~d.

3,542

1,355

1,973

655 770

387 371

11,704 11,872

3,316 3,432

1,220 1.333

654 769

1 ,442 1,330

8,388 8,440

3,792

4,141

~,7~! _

3,724

1,232

~f~~m;~j;'

~W~~1'

~¿~;t:;:~t~?

1,794

"the annual average is calculated on the basis of the twelve monthly figures

" only amounts relating to operating activities are taken into account in calculating net operating assets

102 Henke) Annual Report 2005

Other receivables and

miscellaneous assets - -~---- _. - -

~iquid funds/Marketable securities

Assets held for sale --~---------_.-

Total assets

Trade accounts payable

to third parties

Other provisions and

other liabilities
(44) Information on earnings per share

The Stock Incentive Plan (Note 40, page 98) currently results in a dilution of earnings per share of 3 eurocents.

Earnings per share in million euros

restated and

restated comparable

2004') 20042) 20

N;i~a";in~; ;f~~-~¡~~riÏy int;r;~;------- -----------------------~7------- -----i47---TfBir~i~fm

~:::::~:: :~:~:~r:s:::~:s 1~: 1~: ~~,~1~~IriI T~tal dividends 181 181 K'tSi¡'f:1WJffti~

Retained profit per ordinary share 939 341 f~.Tg,'N!l1~;Z%1~:

~etained P~~~i::r.£:.~~rr:c~hare _________ _ 617 225 ¡;,;:;;l~:¡t Retained profit 1,555) 565) i~tYi~

'),'.'i,~'-r':~..:~~~~, liil !?j(r¿;,~--:

~_~5l

Number of ordinary shares

Dividend per ordinary share

Retained profit per ordinary share

86,598,625

1.24

10.84

86,598,625

1.24

3.94

EPS per ordinary share in euros

Number of outstanding preferred shares')

Dividend per preferred share

- .. - - --. -

Retained profit per preferred share

-----_._-_._---_.._----.._~--_. ....~ ---- -. ~. _.._._---~----~---.-----_.__._----_._---

EPS per preferred share in euros

Number of potential outstanding preferred shares') -, -

Dividend per preferred share

Retained profit per preferred share _ _ ___'..n

Diluted EPS per preferred share in euros

12.08

56,894,420

1.30

_._---- 10.84

12.14

57,005,603

1.30

10.81

5,18

56,894,420

1.30

3.94 k~~æiì1Di

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5.24

57.005,603

1.30

3.93

12.11 5,23

"application of IAS 19,93 A (discontinuation of amortization of actuarial gains/losses, including tax: 5 million euras)

and IFRS 2 (recognition in the statement of income including tax: -3 millon euras)

" adjusted for exceptional items (exchange of investment in Clorox, goodwill impairment losses, Advanced Restructuring costs) and for scheduled

amortization of goodwill in EBIT (200 million euros) and financial rtems (9 million euras) and the effects of SFAS 123 (R) on our associated company Ecolab

Inc, (-6 millon euras)

" weighted annual average of preferred shares (Henkel buy-back program)

" weighted annual average of preferred shares adjusted for the potential number of shares arising fram the Stock Incentive Plan

" including earnings attributable to treasury stock

(45) Information on the cash flow statement

To improve clarity in the cash flow statement for fiscal 2005. translation differences arising from the financing of the

Group and changes in the fair value of derivatives were transferred from "Cash flow from operating activities" ("Change

in receivables and miscellaneous assets") to "Cash flow from financing activities" ("Change in borrowings"), Cash flow

from operating activities rose by 81 milion euros as a result of the reclassification. The comparative figures for 2004

were also adjusted - here, the effect was 22 milion euros. The prior-year restatement due to actuarial gains and losses

being offset against revenue reserves had no impact on the cash flow statement. The restatement in accordance with

IFRS 2 reduced operating profit (EBlT) by 4 milion euros. The "Change in liabilities and provisions" rose by the same

amount, so that cash flow from operating activities remained unchanged. In the restated and comparable column, the

exceptional items included in the prior-year cash flow from operating activities have been eliminated. These consisted

of the gain arising on the exchange of the strategic investment in Clorox of 1,770 million euros (included in EBIT and in

"Net gains/losses on disposal of non-current assets"). goodwil impairment losses of242 milion euros and impairment

Henkel Annual Report 2005 103

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losses relating to property. plant and equipment of89 milion euros (included in EBrT and in "Amortization/depreciation/

write-ups of non -current assets"), and Advanced Restructuring costs of 408 milion euros (included in EBrT and 319 million

euros of which is included in "Changes in liabilties and provisions").

Cash flow from investing activities/acquisitions includes under the heading "Purchase of financial assets/acquisitions"

the funds used to make acquisitions in order to expand the operations of the business sectors of85 milion euros (2004:

3,418 million euros). Of this amount, 14 milion euros related to the Laundry & Home Care business sector (2004: 1,927

milion euros), 2 milion euros to Cosmeticsrroiletries (2004: 997 milion euros), 45 milion euros to Consumer and

Craftsmen Adhesives (2004: 129 milion euros) and 24 milion euros to Henkel Technologies (2004: 365 milion euros).

The cash flow from investing activities/acquisitions in the prior year included under the heading "Proceeds on disposal

of non-current assets" the cash inflow from the Clorox exchange deal of 2,282 milion euros and the funds from the

repaid Cognis loan of 413 milion èuros. Both these items have been eliminated in the comparable computation of free

cash flow.

The proceeds of the hybrid bond of1,297 milion euros, which were allocated to the Contractual Trust Arrangement,

are shown in the cash flow from financing activities. Long-term borrowings have increased as a result. The heading

"Dividends and interest paid and received" includes dividends from Ecolab Inc. of 17 millon euros (2004: 19 milion

euros). There were also no dividends from Clorox in 2005 (2004: 53 milion euros).

(46) Related part transactions

Information required by § 160 (1) No.8 of the German Corporation Law (AktG):

The Company has been notified that since July 8, 2004, a total of 44.583, 767 votes, representing in total 51.48 percent

of the voting rights in Henkel KGaA, are held by:

o 62 members of the families of the descendants of Fritz Henkel, the Company's founder

o two foundations set up by members of those families

o one civil-law partnership set up by members of those families

o 14 private limited companies set up by members of those families and one limited partnership with a limited company as general partner under the terms of a share-pooling agreement (agreement restricting the transfer of shares)

as envisaged in § 22 (2) of the German Securities Trading Law (WpHG), whereby the shares held by the 14 private

limited companies and by the limited partnership representing 17.74 percent are attributed (as envisaged in § 22 (1)

NO.1 of the WpHG) to the family members who control those companies.

Jahr Vermögensverwaltung GmbH & Co. KG has informed us that it holds 5,290,000 ordinary shares in Henkel KGaA (6.11

percent of the voting capital of Henkel KGaA), thereby exceeding the threshold of 5 percent ofthe total voting rights in

Henkel KGaA. Jahr Vermögensverwaltung GmbH & Co. KG has undertaken, under the terms of an agreement concluded

with the parties to the Henkel share-pooling agreement, to exercise its voting rights at the Annual General Meeting of

Henkel KGaA in concert with the parties to the Henkel share-pooling agreement whenever the latter have decided to

cast all their votes in the same way. Under § 22 (2) WpHG. this agreement means that the voting rights in Henkel KGaA

held by the parties to the Henkel share-pooling agreement and by Jahr Vermögensverwaltung GmbH & Co. KG (which

together represent 57.59 percent of the total voting rights) are attributable to each other.

As in the case of Jahr Vermögensverwaltung GmbH & Co. KG. the 5 percent threshold of voting rights in Henkel

KGaA is exceeded by Mr. Christoph Henkel with voting rights attached to 5,044,139 ordinary shares in Henkel KGaA

104 Henkel Annual Report 2005
(representing a rounded percentage of 5.825 percent). No other party to the share-pooling agreement has 5 percent or

more of the total voting rights in Henkel KGaA. even after adding voting rights expressly granted under the terms of

usufruct agreements.

Mr. Albrecht Woeste. Düsseldorf, is the authorized representative of the parties to the Henkel share-pooling

agreement.

Members of the families of the descendants of Fritz Henkel. the Company's founder, who hold shares in Henkel KGaA.

and members of the Shareholders' Committee advanced funds on loan to the Henkel Group in the year under review, on

which interest has been payable at an average rate of2.3125 percent (2004: 2.375 percent). The average total amount of

capital advanced to the Henkel Group in fiscal 2005 was 377 milion euros (2004: 380 milion euros), while the balance

at December 31,2005 was 376 milion euros (December 31. 2004: 368 milion euros). Members of the Supervsory Board

who are not also members of the Shareholders' Committee advanced funds on loan to the Henkel Group in the year

under review averaging 6 milion euros (2004: 13 milion euros). while the balance at December 31. 2005 was 4 milion

euros (December 31. 2004: 13 milion euros) at an average interest rate of 2.3125 percent (2004: 2.375 percent).

At December 31. 2005, a loan to a member of the Management Board for 401 thousand euros was included in miscellaneous assets. The loan is secured by a real estate mortgage and has a residual term of 4 years. During the fiscal year.

mortgage repayments totaling 100 thousand euros were made in respect of this loan. The loan is subject to interest at

the German Federal Bank base rate up to a maximum of5 percent.

In addition to the above. some companies in the Henkel Group and the associated company Ecolab Inc. have supplied

goods and servces to each other on prevailing market terms during the course of normal business activities.

(47) Emoluments of the corporate bodies

The total cash emoluments (fixed fees, attendance fees and dividend bonus) for members of the Supervsory Board in

the year under review amounted to 922 thousand euros including value added tax (2004: 882 thousand euros). Of these.

403 thousand euros related to fixed fees and 36 thousand euros to attendance fees. An amount of 483 thousand euros

related to the dividend bonus. based on a dividend ofl.36 euros per preferred share.

The total notional value of the Long Term Incentive (LTI), which wil first become payable in 2008. is 455 thousand

euros as of December 31,2005. The total emoluments (fixed fees, attendance fees. dividend bonus and LTI 2005) of the

members of the Supervsory Board for the year 2005 were 1.377 thousand euros (2004: 882 thousand euros).

The total cash emoluments (fixed fees and dividend bonus) of the members of the Shareholders' Committee in the

year under review amounted to 1,741 thousand euros (2004: 1,670 thousand euros). Of these. 1,179 thousand euros related

to fixed fees and 562 thousand euros to the dividend bonus. based on a dividend of 1.36 euros per preferred share. At

December 31. 2005. the notional value of the new Long Term Incentive (LTI) was 609 thousand euros. The total emoluments (fixed fees, dividend bonus and LTI 2005) ofthe members ofthe Shareholders' Committee for the year 2005 was

2,350 thousand euros (2004: 1.670 thousand euros).

The total remuneration paid to members of the Management Board for the performance of their duties at Henkel

KGaA and at subsidiaries in the fiscal year was 14,153 thousand euros (2004: 13,513 thousand euros). Total emoluments

include Cash Performance Units. for which the payments are dependent on set targets being achieved in 2008 (Long Term

Incentive, see the section on the Cash Performance Units Program on page 100 of this report). which have a notional

value of 1.049 thousand euros.

Henkel Annual Report 2005 105

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An analysis of total emoluments is given in the table below.

Total emoluments in thousand euros

Fixed fees

Performance-related pay (Short Term Incentive) , , , Other emoluments

Total cash remuneration

Long Term Incentive

2005: Cash Performance Units granted

~~_~Opti9n ri~h_~~_\lr~ri~~__

Total emoluments

2004 .__.___ __m_'....._____.__._____

3,335

9,162

350 ..----

12,847

% %

¡;BJ~~§'dG:?¡

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67.8

2.6

666 4.9 ---_.~..__._--

'..-._-- .~.~._,.."-,.-.--~-~..~_.""----.._---'-_.~-_... 13,513 100.0

During 2005, members of the Management Board exercised stock options to the value of 22 thousand euros.

Options exercised by former members of the Management Board had a value of 166 thousand euros.

According to the recent ruling of the German Supreme Tax Court, the emoluments of the personally liable managing partners are subject to VAT, which represents deductible input tax for Henkel KGaA. We are applying this ruling

retroactively from January 1, 2004. As there is no negative impact on Henkel KGaA, these tax amounts have not been

included in the information set out above.

A total of62,041 thousand euros (2004: 45,437 thousand euros) has been provided for pension obligations to former

members of the Management Board of Henkel KGaA and the former managing directors of its legal predecessor, and

their survving dependents. Amounts paid during the year under review totaled 7,891 thousand euros (2004: 3,700

thousand euros)_ In both cases, the increase is due to one-time effects relating to the retirement of three members of

the Management Board.

(48) Declaration of compliance with the German Corporate Governance Code

In February 2005. the Management Board, Supervsory Board and Shareholders' Committee approved a joint declaration of compliance with the recommendations of the German Corporate Governance Code in accordance with § 161

of the German Corporation Law (AktG). The declaration has been made permanently available to shareholders on the

Company website (ww.ir.henkel.com).

(49) Principal subsidiary companies and groups of companies

A list of the investments held by Henkel KGaA and the Henkel Group is fied with the Commercial Register at the

Municipal Court in Düsseldorf under number B 4724 and is also available for inspection at the Annual General

Meeting.

106 Henkel Annual Report 2005
(50) Associated company

Ecolab Inc., St. Paul, Minnesota, USA

Product groups: Products and servces for industrial and institutional hygiene. textile hygiene, vehicle cleaning and

automotive care, water treatment, pest control, commercial kitchen servce.

o Henkel owns 72.7 milion shares in Ecolab Inc., which represents an interest of 28.6 percent

o We expect an 8 percent increase in sales to 4.5 bilion US dollars in fiscal 2005

o The share price of Ecolab Inc. rose by 3.2 percent in 2005. The market value of our investment at December 31. 2005

was 2,637 milion US dollars (2004: 2.544 milion US dollars). This is equivalent to 2,235 milion euros (2004: 1,867

million euros).

(51) Auditors' fees and services

The fees charged for the services of the auditors KPMG in the 2004 and 2005 fiscal years were as follows:

Type of fees in million euros

Audit (includin!; outlays)

Audit-related services

Tax advisory services

Other services __n___

Total

2004 20

7.6 ~~I.~!

0.3 ~l~~~~21t(J:aê

0.2 U1~~-:Ir~~jl~lM11

0.3 &t.c~:;;E?~;z~¡i

'T.__~'.-~~..-~~.~~~._.~t~f~~ttf~!~~

Audit fees comprise the total fees including outlays paid or payable to the KPMG organization in respect of the audit

of the group accounts and reporting thereon and the audit of the individual company financial statements of Henkel

KGaA and its affiiated companies as required by law.

Fees for audit-related servces comprise fees for the audit of purchase price allocations, audits in connection with

information risk management and of compliance with contractual regulations.

Tax advisory servces include fees for tax advice relating to employees of Henkel KGaA who live outside Germany

and for employees of Henkel sent from Germany to work in Group companies outside Germany (International Executive

Servces).

Other servces fees comprise agreed-upon procedures and support for process improvement activities.

(52) Events after the balance sheet date

On January 17, 2006, we entered into an exclusivity agreement with a potential acquirer ofDials food business. At this

stage, it is not possible to make a valid assessment as to the final conclusion of the contract.

Henkel Annual Report 2005 107

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Recommendation for Approval of the Annual Financial

Statements and Appropriation of the Profit of Henkel KGaA

It is proposed that the annual financial statements of Henkel KGaA be approved as presented and that the unappropriated profit of 193,345,382.50 euros for the year ended December 31. 2005 be applied as follows:

a) Payment of a dividend of 1.30 euros per ordinary share on 86,598.625 shares 112,578,212.50 euros

b) Payment of a dividend of 1.36 euros per preferred share on 59,387,625 shares 80,767,170.00 euros

193,345,382.50 euros

Treasury stocks are not entitled to dividend. The amount in unappropriated profit which relates to the treasury shares

held by the Company at the date ofthe Annual General Meeting is transferred to other revenue reserves.

Düsseldorf, January 30, 2006

The personally liable managing

partners of Henkel KGaA

Prof. Dr. Ulrich Lehner (Chairman of the Management Board)

Dr. Jochen Krautter

108 Henkel Annual Report 2005
Annual Financial Statements of Henkel KGaA

(summarized1))

Statement of Income in millon euros

20

E1\;~it;f.i~1~

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.- -.-----,--.._..__.~__.____~_ ______..___u . .....____ ~__. _______ __.~______~u_.__~_! ~:.r~~~~td

íli~lJl; ~~

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f~~~git~ti'i~

"u__=,_~~=~__._"__ ... ~-_~=~~_.____ u,u..__ "'" _" ~~,i~_l~JJil'~l1

Sales

Cost of sales

Gross profit

Sellng, research and administrative expenses

Other income (net of other expenses)

Exceptional items:

Extended/Advanced Restructuring costs . ._-_._-~ . -.-." -_.-

Operating profit

Financial items

-1,000

144

-52

_u._~____..__.__

258

Profit on ordinary activities 20

Remeasurement of pension provisions

Change in special accounts with reserve element

._-_..._-----..._-- -_._. - -.~..__.

Earnings before tax

Taxes on income

Net earnings/loss

Allocation to revenue reserves

Transfer from other revenue reserves

Unappropriated profit21

2004

2,66 ~,

-1,774

89

-86

22

-36

187

-2

2005

Balance Sheet in million euros

Property, plant & equipment and intangible assets

Financial assets

Non-current assets

Inventories

Receivables and miscellaneous assets/

Deferred charges

Marketable securities

Liquid funds

Current assets 4,158

10,029

4,051

236

1.721

4,021

10,029

Total assets

Shareholders' equity

Special accounts with reserve element

Provisions

Liabilities

Total equity and liabilities

2004

595

5,276

5,871

174

--~;~tt.j¡~~:%f1:~~~

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3,793

158

33

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" The full financial statements of Henkel KGaA wrth the audrtors' unqualified opinion are published in the Bundesanzeiger (German Federal Gazette) and filed

with the Commercial Register in Düsseldorf; copies can be obtained from Henkel KGaA on request.

1 Statement of income figures are rounded; unappropriated profit 184,586,207,50 euros for 2004 and 193,345,382,50 euros for 2005,

Henkel Annual Report 2005 109

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Statement by the Management Board

The personally liable managing partners of Henkel KGaA are responsible for the preparation of the annual financial

statements and the consolidated financial statements and the management reports of Henkel KGaA and the Group. The

annual financial statements, the consolidated financial statements and the management reports have been unanimously

approved by the members ofthe Management Board.

The consolidated financial statements have been prepared on the basis of International Financial Reporting Standards (IFRS).

The Management Board has taken steps to ensure the integrity of the reporting process and compliance with the

relevant legal regulations by establishing effective internal control systems at the companies which are included in the.

consolidated financial statements. Appropriate training is provided to make sure that the employees responsible are

suitably qualified to meet the required standards. Staff training is centered around the Company's mission statement,

corporate principles and strategies. Compliance with these principles is continually monitored by the Management

Board. Compliance with standards and the reliabilty and functional effciency of the control systems are kept under

constant review across the Group by the Internal Audit department.

These measures, coupled with reporting procedures based on uniform standards guidelines throughout the Group,

ensure that the financial records properly reflect all business transactions. They also enable the Management Board to

recognize changes in business circumstances and the ensuing risks to assets and financial arrangements as they

occur.

The risk management systems in place for Henkel KGaA and the Henkel Group ensure, in accordance with the requirements of company law, that any developments which could endanger the future of Henkel KGaA or of the Henkel

Group are recognized in good time and that appropriate measures can be taken where necessary. They also provide the

foundation for the accuracy of information disclosed in the consolidated financial statements and Group management

report and in the individual company financial statements incorporated therein.

The Management Board is committed to delivering a steady increase in shareholder value. The Group is managed on

principles of sustainable development in the interests of shareholders and in full awareness of its responsibility toward

employees, society and the environment in every country in which Henkel operates.

As required by § 161 ofthe German Corporation Law (AktG). the Management Board. the Supervisory Board and the

Shareholders' Committee have approved a joint declaration of compliance with the recommendations of the German

Corporate Governance Code.

KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, in accordance with a

resolution adopted by shareholders at the Annual General Meeting and as instructed by the Supervsory Board. has audited

the annual financial statements. the consolidated financial statements and the related management reports. The auditors' report on the consolidated financial statements and the Group management report is reproduced on page 11 L The

annual financial statements, the consolidated financial statements, the management reports for Henkel KGaA and the

Group and the audit report have been discussed in detail, with the auditors present, at a meeting of the Supervsory

Board held for that purpose.

Düsseldorf, January 30, 2006

The Management Board of Henkel KGaA

110 Henkel Annual Report 2005
Auditors' Report

We have audited the consolidated financial statements prepared by Henkel Kommanditgesellschaft auf Aktien, comprising the balance sheet and the related statements of income, recognized income and expense and cash flows, and

the notes to the consolidated financial statements, together with the Group management report for the business year

from January 1, 2005 to December 31,2005. The preparation of the consolidated financial statements and the Group

management report in accordance with International Financial Reporting Standards (IFRS) as adopted by the European

Union, and the additional requirements of German commercial law pursuant to § 315a (1) HGB (German Commercial

Code) are the responsibility of the legal representatives of the Company. Our responsibilty is to express an opinion on

the consolidated financial statements and on the Group management report based on our audit. In addition we have

been instructed to express an opinion as to whether the consolidated financial statements comply with full IFRS.

We conducted our audit of the consolidated financial statements in accordance with § 317 HGB and German generally

accepted standards for the audit offinancial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) and in

supplementary compliance with International Standards on Auditing (ISA). Those standards require that we plan and

perform the audit such that misstatements materially affecting the presentation of the net assets, financial position

and results of operations in the consolidated financial statements prepared in accordance with the applicable financial

reporting framework, and in the Group management report are detected with reasonable assurance. Knowledge of the

business activities and of the economic and legal environment in which the Henkel Group operates and expectation

as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness ofthe

accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial

statements and Group management report are examined primarily on a test basis within the framework of the audit.

The audit includes assessing the annual financial statements of those entities included in the consolidated financial

statements, the determination of entities to be included in consolidation, the accounting and consolidation principles

used and significant estimates made by the Company's legal representatives, as well as evaluating the overall presentation of the consolidated financial statements and Group management report. We believe that our audit provides a

reasonable basis for our opinion.

Our audit has not led to any reservations.

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

Financial Reporting Standards as adopted by the European Union, the additional requirements of German commercial

law pursuant to § 315a (1) HGB and with full IFRS and give a true and fair view of the net assets, financial position and

results of operations ofthe Group in accordance with these requirements. The Group management report is consistent

with the consolidated financial statements, and as a whole provides a suitable view ofthe Group's position and suitably

presents the opportunities and risks associated with Group's future development.

Düsseldorf, January 30.2006

KPMG Deutsche Treuhand-Gesellschaft

Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft

Rüdiger Reinke

Wirtschaftsprüfer

Günter Nunnenkamp

Wirtschaftsprüfer

Henkel Annual Report 2005 111

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Corporate Management of Henkel KGaA

Boards/memberships as defined by § 125 (1), sentence 3, German Corporation Law (AktG) as at January 2006

Supervisory Board

Dipl.-Ing. Albrecht Woeste

Chairman,

Private Investor, Düsseldorf

Born 1935

Member from June 27,1988

Winfred Zander

Vice-Chairman,

Chairman of the Works Council of Henkel

KGaA, Düsseldorf

Born 1954

Member from May 17. 1993

Dr. Simone Bagel- Trah

(until April 18, 2005)

Private Investor, Düsseldorf

Born 1969

Member from April 30, 2001

Dr. Friderike Bagel

(from April 18, 2005)

LawyerfTax Adviser, Cologne

Born 1971

Member from April 18, 2005

Engelbert Bäßler

(from March 1, 2005)

Member of the Works Council of

Henkel KGaA, Düsseldorf

Born 1951

Member from March 1, 2005

Hans Dietrichs

Chairman of the Works Council of

Henkel Genthin GmbH, Genthin

Born 1943

Member from May 4, 1998

Benedikt-Joachim Freiherr von Herman

Forester, Wain

Born 1941

Member from December 3. 1990

Bernd Hinz

Vice-Chairman of the Works Council of

Henkel KGaA, Düsseldorf

Born 1951

Member from May 4.1998

Prof, Dr. Dr. h,c. mult. Heribert Meffert

Former director of the Institute of

Marketing, University of Münster;

Chairman of the Executive Board of the

Bertelsmann Foundation. Münster

Born 1937

Member from May 4. 1998

112 Henkel Annual Report 2005

Memberhip of statuory

supervisory boards

Membersip of comparable

supervisory bodies

A1lianz Lebensvers.-AG,

Deutsche Bank AG

R. Woeste & Co. GmbH & Co. KG

Holzhof Oberschwaben eG

BASF Coatings AG,

Kaufhof Warenhaus AG

UNIPLAN International GmbH & Co. KG
Supervisory Board (continued)

Andrea Pichottka

Secretariat of the General Executive of

IG Bergbau, Chemie, Energie, responsible

for research/technology, women/equal

opportunities, employees, advertising

Hannover

Born 1959

Member from October 26, 2004

Prof. Dr. Dr. h.c. mulL.

Heinz Riesenhuber

Former Federal Minister for Research

and Technology. Frankfurt am Main

Born 1935

Member from May 4,1998

Heinrich Thorbecke

Private investor. St. Gallen, Switzerland

Born 1 936

Member from May 4, 1998

Michael Vassiliadis

Member of the Executive Committee of

IG Bergbau, Chemie, Energie, Hannover

Born 1964

Member from May 4, 1998

Bernhard Walter

Former Chairman of

Dresdner Bank AG, Frankfurt am Main

Born 1942

Member from May 4,1998

Brigitte Weber

(died on February 28, 2005)

Member of the Works Council of

Henkel KGaA, Düsseldorf

Born 1950

Member from January 1, 2000

Werner Wenning

Chairman of the Executive Board of

Bayer AG, Leverkusen

Born 1946

Member from April 14, 2003

Dr. Anneliese Wilsch-Irrgang

Chemist. Düsseldorf

Representative of the Senior Staff of

Henkel KGaA

Born 1958

Member from May 4, 1998

Rolf Zimmermann

Member of the Works Council of

Henkel KGaA, Düsseldorf

Born 1953

Member from October 9, 2002

Membersip of statutory

supervisory boards

__, - ______. n___..____.______.____

Siltronic AG

Alana AG,

Evotec AG (Chairman),

Kabel Deutschland GmbH (Chairman),

VfW AG (Vce-Chairman),

Vodafone Deutschland GmbH

BASF AG,

K + SAG (Vice-Chairman),

K + S Kali GmbH (Vice-Chairman),

STEAG AG

Bilfinger Berger AG,

DaimlerChrysler AG.

Deutsche Telekom AG,

Staatliche Porzellan-Manufaktur

Meissen GmbH.

Wintershall AG (Vce-Chairman)

Gerling-Konzern VersicherungsBeteiligungs AG

Membersip of comparable

supervsory boies

HBM BioVentures AG, Switzerland,

Heidelberg Innovation BioScience,

Venture II GmbH & Co. KG

In Gassen Immobilien AG, Switzerland,

Intervalor Holding AG, Switzerland,

Kursana AG, Switzerland

KG Allgemeine Leasing GmbH & Co,

(Chairman of Executive Committee)

Henkel Annual Report 2005 113

"C'"

õí

;g £l 0'" en OJ

o OJ '" E u_OJ .s

:5 u:

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en '"

.s æ0'"

:z ¡¡
r, ,;'2c, : r "

Shareholders' Committee

Dipl.-Ing. Albrecht Woeste

Chairman,

Private Investor, Düsseldorf

Born 1935

Member from June 14, 1976

Stefan Hamelmann

Vice-Chairman

Private Investor, Düsseldorf

Born 1963

Member from May 3, 1999

Chnstoph Henkel

Vice-Chairman

Managing Partner Canyon

Equity LLC, San Francisco

Born 1958

Member from May 27, 1991

Dr. Paul Achleitner

Member of the Board of Allianz AG,

Munich

Born 1956

Member from April 30, 2001

Dr. Simone Bagel- Trah

(from April 18, 2005)

Private Investor, Düsseldorf

Born 1969

Member from April 18, 2005

Dr. h.c. Ulnch Hartmann

Former Chairman of the Board

of E.ON AG. Düsseldorf

Born 1938

Member from May 4. 1998

Burkhard Schmidt

Managing Director of

Jahr Vermögensverwaltung

GmbH & Co. KG, Hamburg

Born 1960

Member from June 23,1999

Konstantin von Unger

Partner. Blue Corporate Finance, London

Born 1966

Member from April 14, 2003

Karel Vuursteen

Former Chairman of the Executive Board

of Heineken N.Y. Amsterdam

Born 1941

Member from May 6, 2002

114 Henkel Annual Report 2005

Membership of statutory

supervisory boards _._------------_.---------.- - - .--.-' ."--...-

AJlianz Lebensvers.-AG,

Deutsche Bank AG

Bayer AG,

RWE AG

Group mandate:

Allanz Global Investors AG,

Allianz Immobilien GmbH (Chairman)

Deutsche Bank AG,

Deutsche Lufthansa AG,

E.ON AG (Chairman),

Hochtief AG,

IKB Deutsche Industriebank AG (Chairman),

Münchener RückversicherungsGesellschaft AG

Druck- und Verlagshaus

Gruner + Jahr AG

Membership of comparable

supeisory boies

R. Woeste & Co. GmbH & Co, KG

Ecolab Inc., USA

Henkel Corp., USA,

SulphCo, Inc., USA

ARCELOR SA, Luxembourg

Jahr Top Special Verlag

GmbH & Co. KG (Chairman)

Ten Lifestyle Management Ltd., UK

AB Electrolux, Sweden,

Akzo Nobel nv, Netherlands,

Heineken Holding N.V., Netherlands,

ING Groep nv. Netherlands.

Petroplus bv. Netherlands
Shareholders' Committee (continued)

Dr. Hans-Dietrich Winkhaus

Former President and

Chief Executive Officer of Henkel KGaA

Düsseldorf

Born 1937

Member from May 8, 2000

Membersip of statutory

supervisory boards

BMW AG,

Deussa AG,

Deutsche Lufthansa AG,

Ergo Versicherungsgruppe AG,

Schwarz-Phanna AG (Chairman)

Membership of comparable

supervsory bodies

'''__J__._~_~~_._.___________..__ __._ .______._...._~____._~_.~_,~___._.. '__0

Subcommittees of the Shareholders' Committee

Functions Members

Finance Committee

Human Resources Committee

The Finance Committee deals principally

with financial matters, accounting issues

including the statutory year-end audit,

taxation and accounting policy, internal

audit and corporate risk management.

The Human Resources Committee deals

principally with personnel matters for

members of the Management Board,

issues relating to human resources

strategy, and remuneration.

Christoph Henkel, Chairman

Stefan Hamelmann, Vice-Chairman

Dr. Paul Achleitner

Burkhard Schmidt

Dr. Hans-Dietrich Winkhaus

Dipl.-Ing. Albrecht Woeste, Chairman

Konstantin von Unger, Vice-Chairman

Dr. Simone Bagel- Trah

Dr. h.c. Ulrich Hartmann

Karel Vuursteen

Management Board

--'-"-"'-~__'-""""¥____r..._....._.,__~~~_______"_....__...,....._.-'-__~~_¥_._.___._.~.___

Prof, Dr. Ulrich Lehner 1)

Chairman

Born 1946

Member from April 1, 1995

Dr. Jochen Krautter 'i

Henkel Technologies

Born 1942

Member from June 15, 1992

Alois Linder

Consumer and Craftsmen Adhesives

Born 1947

Member from January 1, 2002

Dr. Klaus Morwind 1)

(until June 30, 2005)

Laundry & Home Care

Born 1943

Member from January 1, 1991

Kasper Rorsted

Human Resources/Purchasing!

Information Technologies/

I nfrastructure Services

Born 1962

Member from April 1 , 2005

" Personally liable managing partner

Membership of statutory

supervisory boards

E.ON AG,

HSBC Trinkaus & Burkhardt KGaA

BASF Coatings AG

Membership of comparable

supervisory bodies

Ecolab Inc., USA,

Novartis AG, Switzerland,

The Dial Corp., USA (Chairman)

Henkel Corp., USA (Chairman)

Henkel Consumer Adhesives Inc.. USA

(Chairman).

Henkel Corp., USA

Henkel Central Eastern Europe GmbH,

Austria,

Henkellbérica SA, Spain

Cable & Wireless, Pic.. UK,

Ecolab Inc., USA,

Henkel of America Inc., USA,

Henkel Central Eastern Europe GmbH,

Austria,

Henkel Belgium N.V., Belgium,

Henkel France S.A., France.

Henkel Norden AB, Sweden

Henkel Annual Repnrt 2005 115

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10

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.s :s

; ~ a c: Z¡,
f"JOiE;:; tc U:e c: '~)' .::,)' ~.J.l

Management Board (continued)

Prof, Dr. Uwe Specht 'I

(until June 30, 2005)

CosmeticsfToiletries

Born 1943

Member from May 6, 1985

Dr. Friedrich 81ara

Laundry & Home Care

Born 1949

Member from July 1, 2005

Dr. Lothar Steinebach

Finance

Born 1948

Member from July 1, 2003

Further Information

Membership of statuory

supervisory boards

Hans Van Bylen

CosmeticsfToiletries

Born 1961

Member from July 1, 2005

Knut Weinke

(until March 31, 2005)

Human Resources/Logistics/Information

Technologies/Infrastructure Services

Born 1943

Member from January 1, 2002 ., .-, ,. 'r_ _, . .~_..

" Personally liable managing partner

Membersip of comparable

supeisory boies _._- -- ---~---'-----.._--

Henkel & Cie AG, Switzerland

The Dial Corp.. USA,

Wiener Städtische Allgemeine

Versicherung AG, Austria

Ashwa Technologies Ltd., Saudi Arabia,

Henkel Adhesives Middle East E.C.. Bahrain,

Henkel (China) Investment Co. Ltd., China,

Henkel & Cie AG, Switzerland,

Henkel Consumer Goods Inc" USA

(Chairman),

Henkel Ltd.. UK,

Henkel of America Inc., USA (Chairman),

Henkel Technologies Egypt SAE, Egypt,

Saudi Arabian Adhesives Factory Co.,

Saudi Arabia

Henkel Belgium N.V., Belgium,

Henkel Nederland B.V.. Netherlands,

The Dial Corp., USA

cc-Hubwoo.com SA. France,

Henkel Belgium N.V., Belgium,

Henkel France S.A., France.

Henkel Nederland B.V., Netherlands,

Henkel Norden AB, Sweden

Operating Management

Dr. Ramón Bacardit

Research & Development,

Technologies

Alain Bauwens

Home Care/MENAI

Asia Pacific/

Central America,

Laundry & Home Care

Pietro Beccari

Hair Carel

Cosmetics, Central Europe

Wolfgang Beynio

Finance/Controlling

116 Henkel Annual Report 2005

Dr. Andreas Bruns

Infrastructure Services

Pierre Brusselmans

Corporate Development

Jean Fayolle

Industry, Technologies

Dr. Attilio Gatti

Automotive. Technologies

Dr. Wolfgang Gawrisch

ResearchfTechnology

Heinrich Grün

Electronics & Metal

Division, Technologies

Dr, Peter Hinzmann

Information Technologies

Dirk-Stephan Koedijk

Human Resources

Libor Kotlik

Operations & Supply Chain,

Technologies

Andreas Lange

Laundry & Home Care,

Western Europe

Dr, Thomas

Müller-Kirschbaum

R&DfTechnology/Supply

Chain, Laundry & Home Care

Dr, Angela Paciello

Skin Care/Oral Carel

Cosmetics Overseas/

Russia/CIS

Peter Ruiner

Adhesives for Professionals

and DIY

Stefan Sudhoff

Body Care/Fragrances/

Cosmetics, SouthWest Europe/MENA

Christian-André Weinberger

Laundry Care

As at January 1, 2006
Management Circle I Worldwide

Giacomo Archi

Faruk Arig

Jan-Dirk Auris

Georg Baratta-Dragono

Michael Beard

Harald Bellm

Francisco Beltran

Marc Benoit

Kan Bethell

Dr. Joachim Bolz

Willem Boomsluiter

Robert Bossuyt

Hanno Brenningmeyer

Daniel Brogan

Eberhard Buse

Brad Casper

Marco Cassoli

Dundar Ciftcioglu

Michael James Clarkson

Julian Colquitt

Bertrand Conqueret

Jürgen Convent

Francisco Cornellana

Jesus Cuadrado

Keith Davis

Paul de Bruecker

Hermann Deitzer

Serge Delobel

Dr. Alexander Ditze

Peter Dowling

Eric Dumez

Wolfgang Eichstaedt

Dr. Horst Eierdanz

Ashraf EI Afifi

Stephen J. Ellis

Mohamed Elmasry

Chanes Evans

Thomas Feldbrügge

Dr. Peter Florenz

Dr. Thomas Foerster

Holger Gerdes

Roberto Gianetti

Pierre Gibaud

Dr. Kan W. Gladt

Ralf Grauel

Bartholomew Griffin

Peter Günther

Rainer M. Haertel

Ferdinand Harrer

Dr. Hubert Harth

Elizabeth Harvey

Ludger Hazelaar

Fridtjof Helemann

Michael Hillman

Georg Hoebenstreit

Dr. Alois Hoeger

Enric Holzbacher

Dr. Stefan Huchler

Dr. Hans-Georg Hundeck

Dr. Jochen Jacobs

Dr. Joachim Jäckle

Theo Janschuk

John Kahl

Patrick Kaminski

Peter Kardorf

Dr. Klaus Kirchmayr

Dr. Wolfgang Klauck

Carsten Knobel

John Knudson

Nurierdem Kocak

Dr. Harald Köster

Peter Kohl

Gerald Kohlsmith

Norbert Koll

Dr. Werner Krieger

Thomas-Gerd Kühn

Dr. Marcus Kuhnert

Luis Canos Lacorte

Christopher Littlefield

Peter Longo

Sammy Loutf

Oliver Luckenbach

Dr. Cano Mackrodt

Dr. Klaus Marten

Lutz Mehlhom

Joris Merckx

David Minshaw

Dr. Clemens Mittelviefhaus

Eric Moley

Juan Morcego

Georg Müller

Dr. Heinrich Müller

Tina Müller

Rolf Münch

Julio Munoz-Kampff

Liam Murphy

Christoph Neufeldt

Helmut Nuhn

Michael Ogrinz

Carlos Eduardo Orozco

Campbell Peacock

Norbert Pestka

Bruno Piacenza

Jeffrey Piccolomini

Arnd Picker

Kenneth Pina

Michael Prange

Dr. Wolfgang Preuß

Ernst Primosch

Dr. Volker Puchta

Wiliam Read

Dr. Michael Reuter

Robert Risse

Jean Baptiste Santoul

Anavangot Satishkumar

Wolfgang Schäufele

Wolfgang Scheiter

Gerhard Schlosser

Rolf Schlue

Aloys Schmeken

Dr. Matthias Schmidt

Dr. Hans-Willi Schroiff

Jens-Martin Schwaerzler

Dr. Johann Seif

Brian Shook

Dr. Simone Siebeke

Andrew Smith

Bart Steenken

Dr, Walter Sterzel

Dr. Boris Tasche

Richard Theiler

Günter Thumser

John Tierney

Mitchell Tinnan

Greg Tipsord

Thomas Tönnesmann

Patrick Trippel

Rainer Tschersig

Robert Uytdewillegen

Tracy Van Bibber

Dr. Vincenzo Vitelli

Ramon Viver

Dr. Rainer Vogel

Dr. Dirk Vollmerhaus

Kim Walker

Bernd Wasserrab

Claus Weigandt

Gabriele Weiler

Andreas Welsch

Thomas Wetherell

Klaus-Dieter Weyers

Dr. Jürgen Wichelhaus

Dr. Winfried Wichelhaus

Dr. Hans-Christof Wilk

Dr. Rudolf Wittgen

At January 1, 2006

Henkel Annual Report 2005 117

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F.i,;th8~ Inf~rn!¿¡t¡'~;,-.

Financial Highlights by Quarter

in million euros

1 st quarter

restated 2004 20

Sales

Laundry & Home Care

CosmeticsfToiletries

Consumer and

Craftsmen Adhesives

Henkel Technologies

Corporate

'--------~::-ill503 ~m1

343

681

66

~i~t~fS

~1!ll~

g~tf~m~~

::.

Henkel Group

EBIT

Laundry & Home Care

CosmeticsfToiletries

Consumer and

Craftsmen Adhesives

Henkel Technologies

Corporate

._._____,_.. ._..__n

Henkel Group

2,34

41

71

-28

20

216

159

Earnings before tax

.n n.._____u__. _ ___.~..__.._.__ .___

Net earnings for the quarter

-------_._---------. '---_..- '---"--'--'--'.-

Earnings per

preferred share in euros 1.10

118 Henkel Annual Report 2005

2 nd quarter

restated

2004 205

3rd quarter

restated

2004 205

938

661 .-- ::e

365

728

64

.- ~",.,-, 'Y'O',,"

:i~ '\:;,." ...:'~:'è ~ .,_'

:,'.._',:.:.~~~

98 t.;~f~tl'i;

88 F'~g(~(~!:

50 37 ;

~ 85 ~.~ 69 ~~~m.~: 73 ~l1ii~

~f~~fl __-=34 r~if~ -30 f~~l~~; -19 rt1j~~~ ;::""'~":"~~;':'~'~':-"""~':""~~'~'-~'" --_.

t~~!i§~ 262 ~'fø!. -;i ~?~- 277 tt'S~í

Wi2~~~ _____.____ 26~ ~rl~2f ---- 250 fgi:i~f!!i: 272 !~TI:ilf

tf~f~li¡r: ___._,_199 mlm __185_ ~H~rti~' ___ 205 fil1!~i

. "'~~~'~~l~'__'M' ~.:37.l~a~~__~..~3!...Ú~t?j~-.__.___~~~ J,::i,~",:_.

æ111~:~

ifi~ll

ft~l!iÆ

88 &II;

82 ~~~1i:i

2,756

395

695

63

-,--_..._.

2,772

ft~~i~g

f~l~~~~~

~¡~¡¡~~j~;

94

69 ~f~0~!9~

4th quarter

restated

2004 200 """",~~."",""I c_ --t:_

959

664

r'~~r,;::,__.'\';:-s:L;:

h~;¡-t~,

r5d~"t::~1i

V~;~.'::011;~!fF.~

F;;~)di~:

f~lIt,it~~j

343

687

68

2,721 ¡:~(~:
Ten-Year Summary

in milion euros

2004201 2005

11,974

1,162

1,042

f10

Sales

Operating profit (EBIT)

Earnings before tax

Net earnings

Earnings after minority

interests

Earnings per preferred

share (EPS)

Total assets

Non-current assets

Current assets

(including deferred

tax assets)

Debt

Shareholders' equity"

as % of total assets

Net return on sales (%)"

Return on equity (%)')

Dividend per ordinary

share in euros

Dividend per

preferred share in euros

Total dividends

Capital expenditures

(including financial

assets)

Investment ratio as %

of sales

Research and development costs

Number of employees

(annual average)

Germany

Abroad

Total

1.4

7,311

4,012

3,299

4,786

2,525

34.5

3.4

12.5

15,473

30,904

46,377

1996

8,335

517

454

284

1997

10,259

702

1,001

320"

1998

1 0,909

791

64

372

287

3,966

6,301

2,829

31.0

3.4

13.1

0.69

0.74

104

20.7

238

15,257

41,034

56,291

1999

11,361

857

692

404

336

2.33

9,130

5,164

2.53

9,856

5,504

2000

12,779

950

816

505

364

3.25

11,382

6,295

5,087

7,882

3,500

30.8

4.0

15.6

0.87

0.93

131

746 1,359

2001

9,41 on

6027)

468

3.50'~

9,365

5,490

3,875

5,761

3,604

38.5

3.6'~

13.69'

1.06

1.12

157

10.6

320

11,121 n

36,2417)

47,362"

7349'

476~

2002

9,656

666

664

431

435

3.6515)

9,362

4,723

4,639

5,976

3,386

36.2

15.8'7)

1.06

1.12

156

484 580'"

2003

9,436

706

768

2004

10,592

80019)

808'9)

551'9)

55019)

1.24

1.30

185

43.7

272

1 0,488

39,459

49,947

10.592

996

1.007

748

" ':" ,~:;_:

248 751

3,765)

8,905

5,040

3,865

6,061

2,844

31.9

5.6

13.1~

0.61

0.66

93

833 2,127

4,352

6,618

3,238

32.9

3.6

14.3

0.79

0,84

119

979

9.0

250

15.065

41 ,555

56,620

6.6

279

15,408

45,067

60,475

437~

3.06

8,513

4,927

3.586

5,150

3,363

39.5

4.5

12.0

1.06

1.12

156

6647)

5.3

2557)

10.944

36,259

47,203

5.1

259

10,767

37,561

48,328

530131

51914)

3.88'~

13,138

7,400

5,738

8,937

4,201

32.0

5,6'61 5.129)

16.119'

747

5.24

13,287

7.989

5.31

13.~~

9,08

10.0

197

15,138

38,615

53,753

1.14

1.20

167

4,628

6,1

257

10,488

39,459

49,947

5,248

8,941

4,346

32.7

7.06

17.2

~'~-' ;. '-; - ,-: ~:_'-: r- ""'--~",,.'~"-'

:4,811l- ",,,~-,._~.:,.,j. ,

r8.~

¡,'~;~~

¡~tL~&¡i~

Ff'?i:'4" ". c., _ ~:-. ."_ ,:::¡'.:..

,',~~ d 171

r~-_-:::-'":,~,....:":;

1.24

.. c". ;,:-:.~J;F;~'

E.1á9~2,

t;~~.~~;;~~~

!1.~~fl:

~~f:~~:

. .;~ ;:~:':

1.30

185

4,678

- .~:-:.:(.'..'

1,;W

43.7 i_L,~~~;

~\'~..lìl~

i_:,'..~. ;c "- ;: /:::(~..

272

~~;-:~ \:-,;;:/J~Ei

'.10,264

:41A~

L~1j7~1

I, including participating certificates and participating loans up to 1996 " net earnings ~ sales " net earnings.; average equity (from 1997 equity at be.

ginning of year) " 576 million euros including gain from sale of GFC shareholding (Degussa) Si excluding gain from sale of GFC shareholding. preferred

share: 1,99 euros ,. excluding gain from sale of GFC shareholding (Degussa) "continuing businesses "541 million euros including net gain from

exceptional rtems' before exceptional rtems 10, after the sale of Cognis and Henkel-Ecolab: 3,05 euros Iii proposed "" net earnings ~ sales of

13.060 million euros i;, net earnings excluding Clorox share buy-back: 500 million euros "i earnings after minority interests excluding Clorox share buyback: 489 million euros O;~ before exceptional items in 2003 - sale of participation in Wella. Extended Restructuring measures and Clorox share buy-back:

3.47 euros tò, net return on sales excluding Clorox share buy-back: 5,3 percent ,- return on equity excluding Clorox share buy-back: 14,9 percent

Ie, excluding Wella proceeds of 280 million euros i;, before exceptional items OI, restated and comparable
Published by

Henkel KGaA

40191 Düsseldorf, Germany

Phone: +49 (0)211/7 97-0

~ 2006 Henkel KGaA

Edited by:

Corporate Communications, Investor Relations

English translation by: Jeanette jennings,

Paul Knighton

Coordination: Rolfjuesten, Oliver Luckenbach,

Dirk Neubauer

Concept and Design: KirchhoffConsultAG, Hamburg

Photographs: HenkeL, Andreas Fechner. Wilfried

Wolter, Philipp Hympendahl, Fabrizio Bergamo for

II Bagno Alessi, lnda. Laufen, Gras

Produced by: Schotte. Krefeld

Corporate Communications

Phone: +49 (0)211 797-3533

Fax: +49 (0)211 798-2484

E-mail: ernst.primoschiQhenkel.com

Investor Relations

Phone: +49 (0)211 797-3937

Fax: +49 (0)211 798-2863

E-mail: oliver.luckenbachiQhenkel.com

PR No.: 206 20_000 L.:'J

ISSN: 07244738 , r

ISBN: 3-923324-07-3 Responsible Care'

t"" )

__ l _":.1

~-,_J

J1H II~H"_\l

"':I,!lYll'.\Ci

Calendar

Annual General Meeting of Henkel KGaA 2006:

Monday, April 1 0, 2006

Publication of Report

for the First Quarter 2006:

Wednesday, May 3, 2006

Publication of Report

for the Second Quarter 2006:

Wednesday, August 2, 2006

Publication of Report

for the Third Quarter 2006:

Wednesday, November 8, 2006

Fall Press and Analysts' Conference 2006:

Wednesday, November 8, 2006

Press Conference for Fiscal 2006

and Analysts' Conference 2007:

Tuesday, February 27,2007

Annual General Meeting of Henkel KGaA 2007:

Monday, April 16, 2007

Up-to-ate facts and figures on Henkel also

available on the Internet: ww.henkel.com

The publication was printed on paper from pulp bleached without chlorine and bound with Purmelt MicroEmission

from Henkel for the highest standards in occupational health and safety. The glossy cover was produced using

water-based Liofol laminating adhesives from HenkeL. All product names are registered trademarks of Henkel

KGaA. Düsseldorf. its affiliated companies or co-operation partners.

This document contains forward-looking statements which are based on the current estimates and assumptions made by the corporate management

of Henkel KGaA. Forward-looking statements are characterized by the use of words such as expect. intend. plan, predict. assume, believe, estimate,

anticipate and similar formulations. Such statements are not to be understood as in any way guaranteeing that those expectations will turn out to

be accurate, Future performance and the results actually achieved by Henkel KGaA and its affliated companies depend o~a.nulJb!r.ofris,ks. ar'.d

uncertainties and may therefore differ materially from the forward-looking statements, Many of these factors are outsi~e He~ki¡'s,:'r~n~,I¡,~~~ ~ ~'. '

cannot be accurately estimated in advance. such as the future economic environment and the actions of competitors and others1nvolved:'¡rt-the';. l -', ;. ""-~ '*

marketplace, Henkel neither plans nor undertakes to update any forward-looking statements,

ì ~n~ J

-J~iihk~

L"...~,~:,.:_;",,:,.,,';.:::: " ,