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PORSCHE EXPOSED
BMW says that its decisions on where it locates production are driven by market needs, not
currency considerations. Yet it has created natural hedges for itself by producing cars in America
and Britain. By incurring costs in these markets, it greatly reduces the currency translation
problem. Rival Porsche makes most of its cars in Germany, so its costs are mostly in euros. Yet a
large chunk of its revenues come from sales of its sports cars in America. Lacking BMW's natu-
ral hedge, Porsche uses financial hedging to minimise the short-term impact of currency swings.
“Grappling with the Strong Euro,” The Economist, June 5, 2003, p. 53.

The USA represents approximately 50 percent of our total business. There are a few other
countries that also use US dollars. This situation will not change much in [the] future. That is
why we are hedged against currency fluctuation for the next three to four years. In our books the
dollar and the yen are above the actual rates. That allows us time to react to any currency
movement.
“Porsche Roars Past Sales Targets,” Automotive News Europe,
September 22, 2003, p. 20.

It was January 2004 and Porsche—the legendary manufacturer of performance sports cars—wished to
reevaluate its exchange rate strategy. Porsche's management had always been unconcerned about the
opinions of the equity markets, but its currency hedging strategy was becoming something of a light-
ning rod for criticism. Although the currency hedging results had been positive, many experts believed
that Porsche had simply been “more lucky than good.” There was growing concern among analysts that
the company was actually speculating on currency movements. Analysts estimated that more than 40%
of earnings were to come from currency hedging in the coming year. Porsche's President and Chief
Executive Officer (CEO), Dr. Wendelin Wiedeking, now wished to revisit the company's exposure
management strategy.

Porsche AG
Porsche was a publicly traded, closely held, German-based auto manufacturer. Dr. Wiedeking had
returned the company to both status and profitability since taking over the company in 1993. Porsche
had closed the 2002/03 fiscal year with €5.582 billion in sales and €565 million in profit, after-tax (see
Appendix 1). Wiedeking and his team were credited with the wholesale turnaround of the specialty
manufacturer. Strategically, the leadership team had now expanded the company's business line to re-
duce its dependence on the luxury sports car market, historically an extremely cyclical business line.

Although Porsche was traded on the Frankfurt Stock Exchange (and associated German exchanges),
control of the company remained firmly in the hands of the founding families, the Porsche and Piéch
families. Porsche had two classes of shares, ordinary and preference. The two families held all 8.75 mil-
lion ordinary shares. Ordinary shares held all voting rights. The second class of share, preference shares,
participated only in profits. All 8.75 million preference shares were publicly traded. Approximately
50% of all preference shares were held by large institutional investors in the United States, Germany,

Copyright © 2004 Thunderbird, The Garvin School of International Management. All rights reserved. This case was
prepared by Professors Michael H. Moffett and Barbara S. Petitt for the purpose of classroom discussion only, and not to
indicate either effective or ineffective management.

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and the United Kingdom, 14% were held by the Porsche and Piéch families, and 36% were held by
small private investors. As noted by the Chief Financial Officer, Holger Härter, “As long as the two
families hold onto their stock portfolios, there won't be any external influence on company-related
decisions. I have no doubt that the families will hang on to their shares.”

Porsche was somewhat infamous for its independent thought and occasional stubbornness when
it came to disclosure and compliance with reporting requirements. In 2002 the company had chosen
not to list on the New York Stock Exchange after the passage of the Sarbanes-Oxley Act. The company
pointed to the specific requirement of Sarbanes-Oxley that senior management sign off on the financial
results of the company personally as inconsistent with German law (which it largely was) and illogical
for management to accept.

Management had also long been critical of the practice of quarterly reporting, and had, in fact,
been removed from the Frankfurt exchange's stock index in September 2002 because of its refusal to
report quarterly financial results (it still only reports operating and financial results semi-annually).
Porsche's public response to its removal from the MDAX was unapologetic as usual: “Of far more
importance, from the investors’ standpoint, than a continued presence in the internationally insignifi-
cant MDAX is the inclusion of Porsche's stock from the end of November 2001 in the Morgan Stanley
Capital International index.” Porsche's management continued to argue that the company believed
itself to be quite seasonal in its operations, and did not wish to report quarterly. It also believed that
quarterly reporting only added to short-term investor perspectives, a fire which Porsche felt no need
to fuel. Porsche's brief press release announcing its decision not to list in New York is shown in
Appendix 4.

Porsche also continued to report only under German accounting standards. German standards
were often criticized for their lack of transparency, and allowed companies like Porsche to mix operating
results with financial results, including foreign exchange operations. Many of its rivals, even German-
based companies, were now reporting in accordance with either International Accounting Standards
(IAS) or U.S. Generally Accepted Accounting Principles (GAAP). The refusal to expand reporting was
seen as one more indicator of the company's stubbornness, particularly since all EU-listed companies
were required to report in accordance with IAS beginning in 2005.

But, after all was said and done, the company had just reported record profits for the ninth
consecutive year. Returns were so good, and had grown so quickly in the past two years, that the
company had paid out a special dividend of €14 per share in 2002. That was in addition to increasing
the size of the common regular dividend. The company's critics, of course, had argued that this was
simply another way in which the controlling families drained profits from the company.
“With net cash of €1.1 billion at the end of 2002 and our forecast of strong cash flow genera-
tion, we believe that Porsche is unlikely to need to do a rights issue for some years, although it
may choose to have one in order to fund a 4th or even a 5th model series—that is, unless there is
a major liability or a severe and sustained weakening of the U.S. dollar. As a result, we think
there is the potential risk that management may not rate shareholders’ interests very highly.” 1
The compensation packages of Porsche's senior management team were nearly exclusively focused
on current-year profitability (83% of executive board compensation was based on performance-related
pay), with no management incentives or stock option awards related to the company's share price.
Porsche's leadership, however, had clearly built value for all shareholders in recent years. As illustrated in
Exhibit 1, the current management team's tenure (beginning late 1993) had resulted in a significant
increase over time in the share price, although the recent three-year period had been characterized by
extreme volatility. Still, performance was nothing short of remarkable, particularly following the post-
9/11 share price fall (2001) and the fact that it was a German-based company currently held captive by
a strengthening euro (2003).

1
“Porsche: Worth the Risk,” UBS Investment Research, September 1, 2003, p. 54.

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Exhibit 1 Porsche’s Share Price, 1994–2003 (monthly average)

€ 500

€ 400

€ 300

€ 200

€ 100

€0
94

94

94

95

95

95

96

96

96

97

97

97

98

98

98

99

99

99

00

00

00

01

01

02

02

03

03
1

3
/0

/0

/0
3/

2/

1/

2/

2/

1/

2/

2/

2/

2/

2/

1/

2/

4/

1/

4/

3/

1/

3/

2/

1/

2/

2/

1/

1/

3/

1/
/2

/1

/3
1/

5/

9/

1/

5/

9/

1/

5/

9/

1/

5/

9/

1/

5/

9/

1/

5/

9/

1/

5/

9/

1/

5/

3/

7/

3/

7/
11

11

11
Porsche's Changing Portfolio
Porsche's product portfolio had undergone significant change as CEO Wiedeking pursued his promise
to shareholders that he would grow the firm. The company had three major vehicle platforms: the
premier luxury sports car, the 911; the competitively priced Boxster roadster; and the recently intro-
duced off-road sport utility vehicle, the Cayenne.

The 911 series was still the focal point of the Porsche brand, but many believed that it was grow-
ing old and due for replacement. Sales had seemingly peaked in 2001/02, and fallen back more than
15% in 2002/03. The 911 was a highly developed series with more than 14 current models carrying the
911 tag. The 911 had always enjoyed, and probably still did, nearly exclusive ownership of its market
segment. Although its sales had been historically cyclical, 911 demand was not price-elastic. Manage-
ment would not comment on rumors, but it was widely believed that the 911 series would be supple-
mented by a fourth platform in 2005.

The Boxster roadster had been introduced in 1996 as Porsche's entry into the lower price end of
the sports car market, and had been by all measures a very big success. The Boxster was also considered
an anticyclical move because the traditional 911 was so high-priced, its sales were heavily dependent on
the disposable income of buyers in its major markets (Europe, the United States, and the United King-
dom). The Boxster's lower price made it affordable and less sensitive to the business cycle. It did,
however, compete in an increasingly competitive market segment. Although the Boxster had competed
head-to-head with the BMW Z3 since its introduction in 1996, the introduction of the Z4 in 2003 had
drastically cut into Boxster sales. Volume sales were now only two-thirds of their peak 2000/01 levels.

The third major platform innovation was Porsche's entry into the sports utility vehicle (SUV)
segment, the Cayenne. Clearly at the top end of the market (2002/03 Cayenne sales averaged more than
$70,000 each), the Cayenne had been a very quick success, especially in the SUV-crazed American
market. The Cayenne introduction had been hailed by many in the auto industry as one of the most
successful new product launches in history, and had single-handedly floated Porsche sales numbers in
this most recent fiscal year.

The Cayenne's success had been even more dramatic given much prelaunch criticism that the
market would not support such a high-priced SUV, particularly one which shared a strong bloodline
with the Volkswagen (VW) Touareg. The Porsche Cayenne and VW Touareg had been jointly devel-
oped by the two companies. The two vehicles shared a common chassis and, in fact, were both manu-
factured at the same factory in Bratislava, Slovakia. To preserve its unique identity, however, Porsche
shipped the Cayenne chassis 17 hours by rail to its facility in Leipzig, Germany, where the engine,
drivetrain and interior were combined in final assembly.2 A new six-cylinder version was slated for
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introduction in 2004 and was expected to buoy Cayenne sales after the initial boom of the introduction
year.3 As illustrated by Exhibit 2, Porsche's platform innovations had been extremely successful in grow-
ing the firm's unit sales since 1995.

Exhibit 2 Porsche’s Expanding Platforms and Growing Sales

70,000

911 Boxster Cayenne

60,000

50,000

40,000

30,000

20,000

10,000

0
1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03

Financial Health
Porsche's financial performance and health was, by all European auto manufacturer standards, excel-
lent. It was clearly the smallest of the major European-based manufacturers with total sales of €5.6
billion in 2002. But, as illustrated in Exhibit 3, Porsche was outstanding by nearly every other financial
performance metric: the highest revenue per vehicle, the highest operating margins (EBIT margin of
16.4%), the highest price-earnings ratio (16.5), the highest net operating profit after tax margin (NOPAT
of 8.9%), and the highest return on invested capital (ROIC of 20.5%). The only category which was
generally average by industry standards was invested capital turnover (2.3).
The company's low debt level was particularly notable, as Porsche had the second-lowest total
debt-to-asset ratio. The company's superior operating cash flows had proven more than adequate to
internally finance an aggressive capital expenditure and expansion program in recent years. In fact,
Porsche's cash balances had reached a record level of €1.766 billion at the end of 2002/03.
Porsche’s view on debt was rather extreme compared to that held by most of the other major
European-based automobile manufacturers. To quote CFO Härter: “We learnt the hard way that banks
are there for you when you don’t need them, and when you do need them, they’re nowhere to be seen.”4
This antidebt philosophy was also consistent with the emphasis placed by Porsche on both cash flow
and cash balances. Again, in the words of CFO Härter: “We need to optimize all of the cash we generate
so that we’re able to continue to finance our growth ourselves, and have the confidence that if anything
happens in the future that is beyond our control, we’ll always be able to survive. That’s absolutely
essential.” Although long-term debt was readily available to a company of Porsche’s financial health,
debt was clearly anathema to current management.

2
The engine was in fact the only part of the Cayenne which was actually manufactured by Porsche itself. All
other components of the vehicle were either outsourced or built in conjunction with other manufacturers.
3
The six-cylinder engine, however, was actually a Volkswagen engine which had been reconfigured. This led
to significant debate, as Porsche was criticized for degrading the Porsche brand.
4
Kersnar, Janet, “Hot Wheels,” CFO Europe.com, November 2002.

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Exhibit 3 Porsche’s Competitive Positioning, 2002

Invested
European Sales Revenue EBIT PE NOPAT Debt Moody’s Capital
Automaker (billions) per Vehicle Margin Ratio Margin to Assets Rating Turnover ROIC
Audi €22.6 €27,000 6.6% na na 0.2% na na na
BMW 42.3 32,221 8.0% 12.1 4.9% 47.5% A1 2.3 11.3%
Fiat €58.2 €25,829 1.6% nm -1.0% 31.3% Ba3 2.9 -2.9%
Mercedes Benz €50.2 €39,000 6.4% na na na na na na
Peugeot (PSA) €54.4 €16,192 5.3% 5.9 3.5% 42.9% A2 3.0 10.5%
Porsche €5.6 €72,589 16.4% 16.5 8.9% 6.4% na 2.3 20.5%
Renault €36.3 €14,250 4.1% 7.5 2.2% 47.6% Baa2 1.7 3.7%
Volkswagen €86.9 €13,583 5.2% 6.4 3.4% 42.4% A1 2.0 6.8%

Source: CreditSuisse/First Boston, December 16, 2003, p. 7; Commerzbank Securities, December 2003, company reports.
For 2002, the two major U.S.-based auto manufacturers, GM and Ford, had EBIT margins of 0.1% each. EBIT = earnings
before interest and tax; NOPAT = net operating profit after-tax; PE = share price/earnings per share; Debt to Assets = (short-
term + long-term debt)/total assets; ROIC = return on invested capital. DaimlerChrysler does not report detailed financial
results for Mercedes Benz. Audi and Porsche are not currently rated by either Moody’s or Standard & Poor’s; Mercedes Benz
is not separately rated from DaimlerChrysler.

Foreign Currency Exposure

“Even if we sell a few or no cars at all in the U.S. we make money .... because we bought dollars
cheap which we now sell expensively. Our hedging is extremely good; we are calculating with
levels which are significantly below current levels, and today I know what I will get for the
dollar in 2006. I am very relaxed.”
Dr. Wiedeking in Capital, 2nd quarter, 2003.

“Porsche has the heaviest U.S. exposure (and this is increasing), yet it has the lowest level of
natural hedging in the sector. Porsche’s earnings will have a 43% contribution from hedging
contracts in 2003/04E, the highest in the sector....”
Porsche, Citigroup Smith Barney, September 24, 2003, p. 5.

Among European-based automakers, BMW, Mercedes, Porsche, and VW were clearly the most exposed
to exchange rate changes (primarily the dollar/euro). As illustrated by Exhibit 4, Porsche possessed the
largest mismatch between where their automobiles were produced and where they were sold. With 42%
of global sales in North American markets, and an additional 11% in the United Kingdom, Porsche
possessed no manufacturing or assembly cost-bases in the countries of more than 50% of global sales.

Exhibit 4 United Kingdom and North American Sales and Production of

Selected European Automakers as a Percent of Global Results, 2002

United Kingdom North American

Automaker Sales Production Sales Production
BMW 11% 15% 26% 11%
Fiat 6% 0% 0% 0%
Mercedes 9% 0% 19% 7%
Peugeot 12% 6% 0% 0%
Porsche 11% 0% 42% 0%
Renault 9% 0% 1% 1%
Volkswagen 7% 0% 13% 7%

Source: Company reports, authors’ estimates.

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All the European automakers, however, were cognizant and concerned over corporate currency
exposures. BMW and Mercedes had announced plans to increase the amount of what analysts were
calling natural hedging (the matching of dollar revenues with dollar costs). BMW planned to double the
capacity of its Spartanburg, South Carolina manufacturing facility. Mercedes had similarly announced
a capacity expansion for its Alabama manufacturing facility, while considering the downsizing of its
Magna Steyr, Germany, operations. VW’s continuing strategy to hedge its U.S. dollar exposure was a bit
different. VW believed that if it increased its operating cost base in Brazil, it would be uniquely posi-
tioned to manage its U.S. dollar risks. In that pursuit, VW had announced it would be assembling all of
its Bora line and the Fox small car in Brazil or Mexico, roughly 4% of VW’s group output.

Porsche’s exposure was clear—it was a global brand with a single-currency cost-base. The com-
pany produced in only two countries, Germany and Finland (the Boxster was assembled under a licens-
ing agreement with Valmet of Finland). Both were euro-denominated economies. Porsche believed that
the quality of its engineering and manufacturing were at the core of its brand, and leadership had not
been willing to move production beyond the existing European footprint.

Porsche’s sales by currency in 2002/03 were estimated as: European euro (€) 45%; U.S. dollar ($)
40%, British pound sterling (£) 10%, Japanese yen (¥) 3%, and Swiss franc (Sfr.) 2%. As illustrated in
Exhibit 5, Porsche’s non-euro sales were only expected to increase in the coming years.

Exhibit 5 Porsche’s Sales by Geographic Segment, 1991–2003 (million €)

6,000

5,000

4,000 Rest of
World

3,000

2,000
United States

1,000
Germany

0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Worldscope (1991-2001) and Hoover’s (2002-2003).

Pricing Pressures
Exchange rate pass-through, the process of passing through all or part of exchange rate changes to the
final customer in price, was probably very product-specific for Porsche. The 911 series was largely
considered price-inelastic, and could probably accommodate additional local currency (primarily U.S.
dollar) price increases and maintain sales volumes. The Boxster, competing in a very price-intensive
market segment, probably could not. And although the Cayenne had debuted at a very high level,
Porsche was moving quickly to introduce the lower-powered, lower-priced version immediately, fearing
the higher price segment of the market was not a growth segment. As illustrated in Appendix 5, all three

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vehicle platforms enjoyed at least attractive EBIT margins—some excessive compared to that of nearly
every other auto manufacturer in the world. This portfolio could probably absorb some continued
currency-induced pricing pressures in North America, but not the magnitudes some were forecasting
for the euro’s change against the dollar. Clearly, if the euro continued to rise, Porsche would be unable
to absorb all of its movement in prices—margins would have to fall in North America.

The latest addition to the stable of 911 thoroughbreds, the 911 Carrera 4S Cabriolet, was sym-
bolic of Porsche’s growing pricing dilemma. A 320 horsepower, 3.6 liter six-cylinder engine convertible,
the new Cabriolet had a top speed of 280 kilometers per hour and could go from zero-to-100 km/hr in
5.3 seconds. It was priced at a €85,900 in Continental Europe, not including value-added tax (VAT) or
other country-specific taxes. Simultaneously, Porsche introduced the new Cabriolet in North American
in July 2003 at $93,200. The price/exchange-rate relationship was then:

Price$ = Price€ x Spot rate$/€

This implied an exchange rate of $1.0850/€ when solving the relationship for the implied effec-
tive exchange rate:
Price$ $93,200
Spot rate$/€ = = = $1.0850/€
Price€ €85,900
This was a considerably stronger dollar than what was available on the open market at that time;
the July 2003 monthly average was $1.1362/€. If the margins on the new Cabriolet were to be close to
the similarly priced 911 Targa, which was currently averaging a 10.1% EBIT margin (see Appendix 5),
these exchange rate changes and differentials from market could be quickly eliminated if not passed
through to the dollar price. With the euro expected to rise to anywhere between $1.25/€ and $1.35/€ by
July of 2004, Wiedeking and his staff did not believe even the 911 could absorb those currency price
pressures that quickly.

In fact, Porsche’s current belief was not to attempt to compete on price, but on quality and quan-
tity. Porsche did not wish to let price clear the market. Its current contingency plans included produc-
tion stops and production shifting. CEO Wiedeking was quite open about Porsche’s ability to stop the
Boxster production line within five hours of a simple phone call, under the production agreement with
Valmet. Over the longer run, Porsche was considering shifting a large proportion of Boxster production
from Valmet in Finland to Porsche’s own Stuttgart facilities, shifting 911 production over to Boxster as
911 sales dropped. This would allow the company to sustain its operating margins under shifting
product demand changes.

Current Hedging Strategy

Porsche, like some of its European counterparts, suffered the rather whimsical swings in the value of the
dollar over the years. The company’s aversion to dollar exposures was founded in the reality of the losses
suffered in 1992 and 1993, when the combined global recession and weak dollar had caused Porsche’s
sales to drop 38% in one year. The memory of the resulting losses was a lasting one. Since that time,
with new leadership and new business and financial aggressiveness, Porsche had centralized treasury
functions and implemented a corporate-level currency hedging program.

Porsche’s leadership had taken a very aggressive currency hedging strategy beginning in 2001
when the euro was at a record low against the U.S. dollar (see Appendix 8). With 45% of all sales in
North America, and that percentage expected to climb with the growth of the Cayenne, the company
was long-term long dollars. The 2003/04 year ended with $1.836 billion in gross dollar revenues, auto,
financing, and engineering services combined, up from $1.60 billion in 2001/02 and $1.75 billion in
2002/03. Because the company incurred some local expenses in U.S. dollars, the net dollar exposure
varied between 70% and 72% of the gross dollar amount.

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Porsche began purchasing a series of put options on the U.S. dollar in 2000. These options would
allow Porsche, if it desired, to exchange the U.S. dollars generated through North American sales into
euros at specific exchange rates in the future. Described as a medium-term strategy, the company con-
tinued to increase its put option hedge purchases throughout 2002 and early 2003 so that it was 100%
hedged for sales through the 2006 model year. To actually execute the strategy, Porsche created a three-
year rolling portfolio of put options. Hedging net dollar exposures out three years required the com-
pany not to only forecast sales and subsequent exposures out three years, but to continually carry op-
tions possessing notional principals of a full three years of net exposure. Many analysts were highly
critical of the cost of such a strategy.

Porsche had expected the dollar to fall in value (euro to rise). It therefore purchased put options
with strike prices beginning at $0.90/€, and rising in subsequent years to $1.00/€. Only time would tell
whether the put option strike rates chosen would provide significant profitability and protection. By
locking in put option strike rates at the time of the euro’s historical weakness, Porsche had acquired
affordable protection against a strengthening euro for years to come—which was what Porsche both
expected and feared. The gains from the hedging strategy were already materializing in 2002/03, and
were expected to be even more substantial in the coming year. As illustrated in Exhibit 6, the impact of
hedging activities on the basic earnings of the firm (EBIT margins) had not always been this successful.

Exhibit 6 Impact of Porsche’s Treasury Profits on EBIT Margins

20%

Underlying EBIT Treasury profit

15%

10%

5%

0%

-5%
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04E

Source: CreditSuisse/First Boston, December 13, 2003, p. 47, p. 70. Values for 2003/04 are
estimates.

Wiedeking and Härter did not make a practice of concerning themselves with the opinions or
speculations of analysts. But many analysts were now separating Porsche’s results into underlying versus
treasury. For example, one investment banking firm had recently decomposed Porsche’s forward-look-
ing PE ratio into 18 underlying and 14 treasury, rather than crediting the firm with an aggregate PE of
32. Wiedeking and Härter wished to reconsider their current strategy. Was there a better long-term
currency exposure management strategy out there for Porsche?

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Appendix 1 Porsche’s Consolidated Statement of Income (millions of euros)

Income items 1998/99 1999/00 2000/01 2001/02 2002/03

Net sales € 3,161 € 3,648 € 4,441 € 4,857 € 5,582

Less cost of materials (1,558) (1,972) (2,384) (2,236) (2,281)
Less personnel costs (575) (631) (710) (799) (850)
Gross profit € 1,028 € 1,045 € 1,347 € 1,822 € 2,451
Gross margin (%) 32.5% 28.6% 30.3% 37.5% 43.9%

Other income 65 199 122 165 28

Less selling, G&A and other (568) (621) (789) (910) (1,182)
EBITDA € 525 € 623 € 680 € 1,077 € 1,297
EBITDA margin (%) 16.6% 17.1% 15.3% 22.2% 23.2%

Less depreciation & amortization (184) (197) (133) (279) (392)

Operating profit or income € 341 € 426 € 547 € 798 € 905
Operating margin (%) 10.8% 11.7% 12.3% 16.4% 16.2%

Income from investments (2) (23) (7) (3) (2)

Interest income (expense), net 18 31 53 35 30
EBT € 357 € 434 € 593 € 830 € 933

Less corporate income taxes (166) (224) (322) (367) (368)

Net income € 191 € 210 € 271 € 463 € 565

Return on sales (%) 6.1% 5.8% 6.1% 9.5% 10.1%

Effective tax rate (%) 46.5% 51.6% 54.3% 44.2% 39.4%

Shares (common & preferred) 17.5 17.5 17.5 17.5 17.5

Earnings per share € 10.93 € 12.02 € 15.51 € 26.47 € 32.29
EPS growth rate 34.9% 10.0% 29.0% 70.7% 22.0%

Dividends per share (common) € 1.48 € 2.54 € 2.94 € 3.34

Extraordinary dividend € 14.00
Dividends per share (preferred) € 1.53 € 2.60 € 3.00 € 3.40

Source: Porsche AG, Morgan Stanley, December 8, 2003, p. 9.

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Appendix 2 Porsche’s Consolidated Balance Sheet (millions of euros)

1998/99 1999/00 2000/01 2001/02 2002/03

Assets
Cash & cash equivalents € 730 € 823 € 1,121 € 1,683 € 1,766
Accounts receivable 148 204 248 171 211
Inventories 293 239 267 291 468
Prepaid expenses & other 72 67 81 50 42
Total current assets 1,243 1,332 1,717 2,195 2,487

Intangibles 16 76 108 214 346

Property, plant, and equipment 501 487 561 731 901
Leased vehicles 0 0 0 1,224 1,375
Financial assets 9 14 38 39 42
Other assets 149 295 443 1,006 1,163

Total Assets € 1,918 € 2,204 € 2,867 € 5,409 € 6,314

Liabilities & Equity

Short-term borrowings € 54 € 18 € 159 € 137 € 88
Accounts payable 193 240 236 303 337
Total current liablities 247 258 395 440 425

Long-term debt 102 102 0 317 317

Other liabilities 124 111 132 1,469 1,729
Provision for risks and charges 856 951 1,312 1,716 2,088
Total long-term liabilities 1,082 1,164 1,444 3,502 4,134

Total liabilities 1,329 1,422 1,839 3,942 4,559

Stockholders’ equity 589 782 1,028 1,467 1,755

Total liabilities & equity € 1,918 € 2,204 € 2,867 € 5,409 € 6,314

Source: Porsche AG, Morgan Stanley, December 8, 2003, p. 9.

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Appendix 3 Porsche’s Consolidated Statement of Cash Flow

(millions of euros) 1998/99 1999/00 2000/01 2001/02 2002/03

Operating Activities
Income before extraordinary items € 191 € 210 € 270 € 462 € 565
Depreciation, depletion, & amortization 184 197 133 138 196
Non-cash provisioning (excld pensions) 176 75 346 286 382
Change in net working capital (76) 44 (76) 119 (183)
Cash flow from operating activities € 475 € 526 € 673 € 1,005 € 960

Investing Activities
Capital expenditure (153) (257) (294) (410) (591)
Cash flow from investing activities (€ 153) (€ 257) (€ 294) (€ 410) (€ 591)

Financing Activities
Change in short-term debt 0 0 37 339 (49)
Change in long-term debt 28 (36) 0 (102) 0
Payment of dividends (22) (22) (26) (45) (297)
Cash flows from financing activities €6 (€ 58) € 11 € 192 (€ 346)

Exchange rate effect 1 4 2 (5) 0

Net change in cash € 329 € 215 € 392 € 782 € 23

Source: Porsche AG, Morgan Stanley, December 8, 2003, p. 9.

Appendix 4 Porsche Dispenses with Listing in New York

Stuttgart. The preferred stock of Dr. Ing. h.c. F. Porsche AG, Stuttgart, will continue to be listed exclusively on
German stock exchanges. All considerations about gaining an additional listing in the U.S.A. have been laid
aside by the Porsche Board of Management. The sports car manufacturer had been invited to join the New York
Stock Exchange at the beginning of the year.
The Chairman of the Board of Management at Porsche, Dr. Wendelin Wiedeking, explained the decision:
“The idea was certainly attractive for us. But we came to the conclusion that a listing in New York would hardly
have brought any benefits for us and our shareholders and, on the other hand, would have led to considerable
extra costs for the company.” The crucial factor in Porsche’s decision was ultimately the law passed by the U.S.
government this summer (the “Sarbanes-Oxley Act”), whereby the CEO and the Director of Finance of a public
limited company listed on a stock exchange in the U.S.A. have to swear that every balance sheet is correct and,
in the case of incorrect specifications, are personally liable for high financial penalties and even up to 20 years in
prison.
In Porsche’s view, this new American ruling does not match the legal position in Germany. In Germany, the
annual financial statement is passed by the entire Board of Management and is then presented to the Supervi-
sory Board, after being audited and certified by chartered accountants. The chartered accountants are commis-
sioned by the general meeting of shareholders and they are obliged both to report and to submit the annual
financial statement to the Supervisory Board. The annual financial statement is only passed after it is approved
by the Supervisory Board. Therefore, there is an overall responsibility covering several different committees and,
as a rule, involving over 20 persons, including the chartered accountants. The Porsche Director of Finance,
Holger P. Härter, made the following comments: “Nowadays in Germany, the deliberate falsification of balance
sheets is already punished according to the relevant regulations in the Commercial Code (HGB) and the Com-
pany Act (Aktiengesetz). Any special treatment of the Chairman of the Board of Management or the Director
of Finance would be illogical because of the intricate network within the decision-making process; it would also
be irreconcilable with current German law.”

Source: Porsche, News Release of October 16, 2002.

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Appendix 5 The Porsche Platforms and Margins, 2002/03

Boxster Roadster Boxster Boxster S Total Boxster

Units sold 10,157 8,254 18,411
Average price € 41,380 € 48,910 € 44,756

Revenue (million) € 420.3 € 403.7 € 824.0

Less variable cost (273.2) (262.4) (535.6)
Gross margin 147.1 141.3 288.4
Less fixed charges (124.1) (100.9) (225.0)
EBIT € 23.0 € 40.4 € 63.4
EBIT margin 5.5% 10.0% 7.7%

911 Sports Car* C2 Cabrio Targa 911 Turbo Total 911

Units sold 6,500 2,300 5,200 27,789
Average price € 82,877 € 80,696 € 124,038 € 92,821

Revenue (million) € 538.7 € 185.6 € 645.0 € 2,579.4

Less variable cost (250.3) (86.2) (299.6) (1,198.4)
Gross margin 288.4 99.4 345.4 1,381.0
Less fixed charges (228.1) (80.7) (182.4) (975.0)
EBIT € 60.3 € 18.7 € 163.0 € 406.0
EBIT margin 11.2% 10.1% 25.3% 15.7%

Cayenne SUV Cayenne S Cayenne Turbo Total Cayenne

Units sold 15,859 4,744 20,603
Average price € 59,165 € 98,145 € 68,145

Revenue (million) € 938.3 € 465.6 € 1,404.0

Less variable cost (703.7) (349.2) (1,053.0)
Gross margin 234.6 116.4 351.0
Less fixed charges (161.6) (48.4) (210.0)
EBIT € 73.0 € 68.0 € 141.0
EBIT margin 7.8% 14.6% 10.0%

*The 911 possesses 11 other models in addition to the three shown here.

Source: Citigroup Smith Barney, September 24, 2003, p.12.

Appendix 6 Currency Exposure Covered by Derivatives

Automaker 2003E 2004E 2005E

BMW 90% 70% 35%
Mercedes 90% 60% 30%
Porsche 100% 100% 100%
Volkswagen 40% 70% 30%
E = estimate. Porsche’s fiscal year ends in July while all others end in December.
Source: “European Autos Quarterly,” Commerzbank Securities, January 7, 2004,
p. 11.

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Appendix 7 The U.S. Dollar/Euro Spot Rate, 1999-2003

(monthly average)
US$/€
1.25

1.20

1.15

1.10

1.05

1.00

0.95

0.90

0.85

0.80
Nov

Nov

Nov

Nov

Nov
May

May

May

May

May
Mar

Mar

Mar

Mar

Mar
Sep

Sep

Sep

Sep

Sep
Jan-99

Jan-00

Jan-01

Jan-02

Jan-03
Jul

Jul

Jul

Jul

Jul
Appendix 8 The U.S. Dollar/Euro Exchange Rate and Selected Interest Rates and
Volatilities, 1999-2003 (monthly)

Eurodollar LIBOR Rates by Maturity Euro-LIBOR Rates by Maturity

Spot Rate 3-Month 6-Month 12-Month 3-Month 6-Month 12-Month
Month/Year (US$/€) (percent) (percent) (percent) (percent) (percent) (percent)
July-99 1.0371 5.310 5.610 5.771 2.676 2.897 3.031
July-00 0.9386 6.732 6.919 7.089 4.580 4.835 5.104
July-01 0.8616 3.751 3.791 4.001 4.467 4.386 4.310
July-02 0.9931 1.848 1.905 2.143 3.407 3.481 3.643
July-03 1.1362 1.110 1.123 1.201 2.127 2.090 2.077

US$/€ Volatility by Maturity

Spot Rate One-Year Two-Year Three-Year
Month/Year (US$/€) (percent) (percent) (percent)
July-99 1.0371 9.01 12.95 14.80
July-00 0.9386 10.62 13.92 16.75
July-01 0.8616 11.55 15.68 18.08
July-02 0.9931 9.75 15.12 18.49
July-03 1.1362 9.44 14.13 17.83

Option volatilities are the mean for the 1-year, 2-year, or 3-year period ending with the listed date.
For example, July 1999 one-year volatility is the mean of the August 1998–July 1999 period.

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