2006 - Valeo · 2019-05-14 · VALEO REFERENCE DOCUMENT 2006 Reference document 2006 43, rue Bayen...

VALE

O R

EFER

ENCE

DO

CUM

ENT

2006

Reference document

2006

43, rue Bayen - 75848 Paris cedex 17, FranceTél. : 33 (0)1 40 55 20 20 - Fax : 33 (0)1 40 55 21 71Valeo French ”Société Anonyme” with a capital of 232,741,851 euros - 552 030 967 RCS ParisValeo.com

VAL004_DRF06_VA_COUV_PLANCHE.ind1 1 19/04/07 20:13:13

Key figures p. 2

The English language version of this report is a free translation from the original, which was prepared in French. All possible care has

been taken to ensure that the translation is an accurate presentation of the original. However, in all matters of interpretation, views or

opinions expressed in the original language version of the document in French take precedence over the translation.

1 ACTiViTy p. 7

History p.8

TheGroup p.10

Geographicalpresence p.25

Competitivecontext p.26

Keyeventsin2006 p.26

Recenteventsandoutlook p.31

2 MANAgEMENT REpORT p. 33

Accountingmethods p.34

Statementofincome p.34

Maininvestmentsoverthepastthreeyears p.36

Changeinstockholders’equity p.37

provisions p.38

Cashflowsanddebt p.39

Commitments p.39

Remunerationofcorporateofficersanddirectors p.39

Risksanduncertainties p.41

Informationlikelytobeimpactedbyapublictenderoffer p.43

Claimsandlitigation p.44

Outlook p.44

Subsequentevents p.45

parentcompanyfinancialstatements p.45

EnvironmentalIndicators p.45

SocialIndicators p.55

3 CONsOLiDATED FiNANCiAL sTATEMENTs 2006 p. 69

Consolidatedstatementsofincome p.71

Consolidatedbalancesheets p.72

Consolidatedstatementsofcahflows p.73

Statementsofrecognizedincomeandexpenses p.74

Statementofchangesinstockholders’equity p.75

Notestoconsolidatedfinancialstatements p.76

StatutoryAuditors’reportonthe2006IFRSconsolidatedfinancialstatements p.127

4 CORpORATE gOVERNANCE p. 129

RapportoftheChairmanoftheBoardofDirectorsrelatingtotheconditionsofpreparationandorganizationoftheBoard’swork,thepossiblelimitationstothepowersoftheChiefExecutiveOfficerandtheinternalcontrolproceduresputinplacebytheValeoGroup p.130

CompositionoftheBoardofDirectorsatDecember31,2006 p.139

StatutoryAuditors’ReportonthereportoftheChairmanoftheBoardofDirectors p.142

5 iNFORMATiON ON ThE COMpANy AND iTs CApiTAL p. 145

Generalinformationabouttheissuer p.146

FeespaidbythegrouptotheAuditorsandmembersoftheirnetworks p.166

GeneralinformationabouttheCompany’scapital p.167

Currentownershipstructure p.172

MarketfortheCompany’ssecurities p.176

Investorrelations p.178

Informationonsubsidiariesandaffiliates p.181

personresponsiblefortheregistrationdocument p.184


2006 Reference document - VALEO �

2006 Reference document

Group profileFully focused on the design, production and sale of components, systems and modules for automobiles and trucks, both on the original equipment market and the aftermarket Valeo is an independent and international industrial group.

It is one of the world’s leading automotive suppliers.

The Group employs 69,800 people representing 91 nationalities in 129 production sites, 68 Research & Development centers and 9 distribution platforms in 29 countries.Valeo applies its profitable growth strategy in line with a policy of sustainable development.

This “document de référence” was filed with the Autorité des Marchés Financiers (AMF) on March 29, 2007 , pursuant to article 212-13 of the AMF’s General Regulations. It may only be used in connection with a financial transaction if it is accompanied by a memorandum approved by the AMF.

In accordance with article 28 of European Regulation No. 809/2004 dated April 29, 2004, the reader is asked to refer to previous “documents de référence” containing the following specific information:

1. The management report, consolidated financial statements, parent company financial statements, Statutory Auditors’ reports on the consolidated financial statements and parent company financial statements for the year ended December 31, 2005, and the Statutory Auditors’ special report on regulated agreements relating to 2005, included in the “document de référence” filed with the Autorité des Marchés Financiers on April 3, 2006 under No. D. 06-0209.

2. The management report, consolidated financial statements, parent company financial statements, Statutory Auditors’ reports on the consolidated financial statements and parent company financial statements for the year ended December 31, 2004, and the Statutory Auditors’ special report on regulated agreements relating to 2004, included in the “document de référence” filed with the Autorité des Marchés Financiers on March 29, 2005 under No. D. 05-0290.

2006 Reference document - VALEO2

Key figures

Key figures

SaleS by region

In million euros and in % of sales

South AmericaAsia and othersNorth AmericaEurope

20062005*2004*

3%10%

16%

71%

5%12%

14%

69%

5%13%

13%

69%

9,018 9,736 9,970

* In accordance with IFRS, all 2004 and 2005 figures are restated mainly to account for non strategic activities

SaleS by market (2006)

In % of sales

82%

OEM

18%

Aftermarket


Key figures

20062005*2004*

17.2%16.0% 15.4%


17.3% 17.1% 16.3% 15.8% 15.9%14.9%

S2-2006S1-2006S2-2005*S1-2005*S2-2004*S1-2004*


operating income

In % of total operating revenues

groSS margin

In % of sales

S2-06S1-06S2-05*S1-05*S2-04*S1-04*

4.4%

2.7%3.2% 3.3% 3.2%

2.1%


20062005*2004*

3.5% 3.3%2.7%


2006 Reference document - VALEO�

Key figures

reSearch and development

In % of total operating revenues

20062005*2004*

6.4% 6.5% 6.6%


net income

In million euros and in % of total operating revenues

baSic earningS per Share

In euros

20062005*2004*

240**

142161

2.6% 1.4% 1.6%


** Including an exceptional tax gain of 83 million euros

20062005*2004*

2.92

1.802.10



Key figures

net financial debt

In million euros and in % of equity

12/31/200612/31/200501/01/2005

497

1,080968

27% 63% 55%


Key figures


1Activity

History P. 8

The Group P. 10

1. Description and organization ......................................................................................................................... 10

2. Domains and Product Families ...................................................................................................................... 11

3. Aftermarket products and services .............................................................................................................. 15

4. Functions ............................................................................................................................................................... 17

Geographical presence P. 25

Competitive context P. 26

Key events in 2006 P. 26

1. Commercial success ........................................................................................................................................... 26

2. Technological innovations ............................................................................................................................... 27

3. Strategic operations .......................................................................................................................................... 29

4. Operational excellence ..................................................................................................................................... 29

Recent events and outlook P. 31

2006 Reference document - VALEO�

ACTiviTy1 History

History

The Group’s origins date back to the creation, in 1923, of Société

Anonyme Française du Ferodo (SAFF), which operated out of a

workshop in Saint-Ouen near Paris. SAFF started by distributing,

then manufacturing, brake linings and clutch facings under the

Ferodo license. In 1932, SAFF was listed on the Paris Bourse.

For SAFF, the 1960s and 1970s were a time of development,

both through diversification into new sectors (brake systems in

1961, thermal systems in 1962, lighting systems in 1970 and

electrical systems in 1978) and through international growth

(Spain in 1963, Italy in 1964 and Brazil in 1974). On May 28, 1980,

at its Annual General Meeting of Shareholders, SAFF adopted the

name Valeo, a Latin word meaning “I am well”.

By the 1980s, Valeo had become a global Group, developing

through acquisitions around the world:

1987Acquisition of Neiman (security systems) and its Paul Journée

subsidiary (wiper systems).

Acquisition of Chausson’s heat exchanger business.

1988Acquisition of Clausor and Tibbe (security systems in Spain and

Germany).

Creation of Valeo Pyeong Hwa (clutches and ring gears in

Korea), Valeo Transtürk (clutches in Turkey), and Valeo Eaton

(clutches for heavy-duty trucks in the United States).

Creation of the Valeo/Acustar Thermal Systems Inc. joint

venture (climate control, United States).

1989Acquisition of Delanair (climate control in the UK).

Acquisition of Blackstone (engine cooling in the United States

with businesses in Mexico, Canada, Sweden, Italy and Spain).

This drive for growth was accompanied by the refocusing of the

Group’s activities around a number of core businesses, and the

sale of non-strategic activities (brake linings, ignition, horns) in

1990.

•

•

•

•

•

•

•

Throughout the 1990sThe Group implemented a powerful strategy based on:

A new industrial culture: the Group adopted its “5 Axes”

methodology in 1991 (see paragraph 4.3, Industrial Functions,

“The Group”);

A sustained Research & Development drive: in 1992, the

Group set up an electronics research center in Créteil (France)

and an electronic module production site at Meung-sur-Loire

(France). In 1993, Valeo opened R&D centers for lighting

systems in Bobigny and for clutches in Saint-Ouen (France);

increasing international growth: the first production sites in

Mexico and Wales (climate control) and Italy (lighting systems)

opened in 1993, and in 1994 the first joint ventures in China

were created for wiper systems, climate control, lighting

systems and electrical systems.

The Group’s external growth continued throughout the

decade:

1995Acquisition of Siemens’ thermal business in Germany.

1996Acquisition of a stake in Mirgor (thermal systems in

Argentina.

Acquisition of Fist Spa and a division of Ymos AG (security

systems in Italy and Germany).

Acquisition of Klimatizacni Systemy Automobilu (thermal

systems in the Czech Republic).

1997Creation of clutches joint ventures in India and China and a

friction materials joint venture in India.

Acquisition of Univel (security systems in Brazil).

Acquisition of the Osram Sylvania’s automobile business to

create Valeo Sylvania (lighting systems) in the United States.

1998Acquisition of the Electrical Systems activity of ITT Industries.

•

•

•

•

•

•

•

•

•

•

•


ACTiviTy 1History

1999Acquisition of a division of Mando (electrical systems in South

Korea).

2000Creation of a joint venture with Unisia Jecs (transmissions in

Japan).

Acquisition of a stake in Zexel (thermal systems).

Strategic alliance with Ichikoh (lighting systems in Japan).

Acquisition of Labinal’s automotive business (Argentina, Eastern

Europe, France, India, Italy, North Africa, Portugal, Spain).

The first years of the new millenniumIn March 2001, Thierry Morin was appointed Chairman of the Board

of Directors of Valeo. The Group launched a program to streamline

its business and give itself greater room for maneuver:

industrial rationalization with production reorganized across

fewer sites, and a greater portion of sites in low-cost regions;

selective disposals of non-strategic businesses;

accelerated integration of recently acquired businesses, notably

the redeployment of the US facility at Rochester acquired from

ITT;

partnership approach with a select number of suppliers;

intensification of R&D efforts coupled with improved

productivity;

a revitalized marketing approach based on the concept of

Domains, which facilitate transversal synergies;

creation of technological partnerships with experts in various

fields, including International Rectifier, Iteris, Raytheon and

Ricardo, to introduce new technologies into the automotive

industry and accelerate the development of new products.

This program resulted in the gradual improvement of Valeo’s

margins between 2001 and 2003, and boosted confidence among

the Group’s customers.

in 2004Following this rationalization campaign, Valeo embarked on a new

phase of development as part of “Valeo 2010”, its strategic project.

The Group is establishing a platform from which to emerge as a

global leader in its businesses according to future developments

in the automotive equipment industry.

The first lever of development is the expansion of its

technological offering in order to provide solutions that

incorporate systems and services from three Domains: Driving

Assistance, Powertrain Efficiency and Comfort Enhancement.

Further synergies have been generated between product

•

•

•

•

•

•

•

•

•

•

•

•

•

families in terms of R&D and the marketing of innovative new

products.

The second lever of development is in terms of marketing,

both through regional growth and through boosting the Group’s

presence in the aftermarket.

In geographical terms, the Group will increase its presence in

North America and Asia: close relations with all manufacturers

and the development of world platforms are strategic

advantages.

With the creation of Valeo Service, the Group now benefits from

an effective organizational structure that will enable it to win

a greater share of the aftermarket worldwide

The third lever of development is the enhancement of

operational excellence through the optimization of production

facilities and the supply chain. The objective is to offer total

quality to all customers on all markets.

The fourth lever of development is organizational.

in 2005Guided by its strategic objectives and its financial position, Valeo

has implemented a policy of targeted acquisitions designed

to reinforce its three Domains and increase its organic growth

potential.

The Group significantly developed its structure, notably by

increasing the role of the three innovation Domains, grouping

together the product families into one operational structure,

and strengthening functional teams, particularly the Technical

Department

Valeo acquired the Engine Electronics division of Johnson

Controls (JCEED), which designs and produces complete engine

management systems, electronic control units and electronic

motor drives as well as engine components.

2005 also saw a number of other deals which increased the

Group’s presence in Asia, especially China:

Acquisition of shares held by Bosch in the Group’s Climate

Control businesses in Asia (Zexel Valeo Climate Control and

Valeo Zexel China Climate Control). This gave Valeo control of all

the share capital of its climate control activities and compressor

production.

Following this transaction, Valeo increased its holding in two

Thai companies - Siam Zexel Co. Ltd. and Zexel Sales Thailand

Co. Ltd. – by 35.9% and 14.3% respectively, giving Valeo 74.9%

ownership of each of these two companies specializing in

automotive climate control.

In April, Valeo concluded a new joint venture with FAWER, the

automotive supply branch of FAW, one of the main Chinese

automakers. The new entity, 60% owned by Valeo, develops

and manufactures compressors for climate control systems

aimed at the Chinese market and at export. Its plant is located

in Changchun in the north east of China.

•

•

•

•

•

•

•

•


ACTiviTy1 History

Valeo announced the creation of a joint venture with Hangshen

Electronics, a Chinese Tier One automotive supplier, for the

production of ultrasonic park assist systems. Valeo owns a 75%

share in this joint venture.

Valeo increased its stake in Ichikoh—the Japanese manufacturer

of automotive lighting systems and mirrors—from 22.7% to

28.2%.

•

•

in 2006Valeo pursued its strategy to rationalize its portfolio, resulting

in the sale of its Electric Motors & Actuators business to the

Japanese Group Nidec, the sale of the bluetooth specialist

Parrot, and the sale of Logitec, a logistics business in Japan.

Valeo also acquired a 50% share in Threestar, one of the leading

radiator manufacturers in South Korea. This new entity, of which

the other 50% is held by Samsung Climate Control Group, is

called Valeo Samsung Thermal Systems.

•

•

The Group

1. Description and organization

Valeo is an industrial group fully focused on the design, production

and sale of components, systems and modules for automobiles

and trucks, both on the original equipment and the aftermarket.

The Group’s sole sector of activity is “Automotive Supply”.

On 31.12.06, the Group employed 69,800 people, of 91 different

nationalities at 129 production sites, 68 Research & Development

centers and nine distribution platforms.

1.1. Organization: Original Equipment

The Group is organized into one hundred or so decentralized and

autonomous Divisions, and it is at Division level that resources

are allocated and performance is evaluated. The Divisions enjoy

the backing of Valeo’s functional networks and Branches, which

oversee the coherence of the Group’s Product Families; they

also exploit synergies with the Innovation Domains, and are

coordinated by National Directorates.

Valeo’s Industrial Divisions are responsible for running business

relating to OE production and sales from the various Product

Families for specific geographical areas.

1.2. Organization: Aftermarket

The industrial Divisions are also responsible for the production and

part of the distribution of Aftermarket products on behalf of the

Valeo Service structure, which handles the sale of products and

services relating to the aftermarket. Valeo Service comprises two

activities, one for each major distribution channel: automakers and

their networks, and independent distributors (including trading

groups). Valeo Service provides shared marketing and logistics

services for both activities.

1.3. Domains

Since the Valeo 2010 strategic plan was launched in 2004, the

Group has adopted a transversal approach to develop new

solutions. It promotes innovations involving several Product

Families. The Domains are responsible for the Research &

Development and Marketing of innovations. Their work centers

around three strategic areas, in line with customers’ fundamental

requirements: respecting the environment (Powertrain Efficiency

Domain), safety (Driving Assistance Domain) and comfort (Comfort

Enhancement Domain). Each Domain is in charge of its own

budget. When the innovations designed and developed by the

Domains reach the marketing stage, they are transferred to one

or several Divisions which take charge of commercial negotiations,

final development and production.

1.4. Product Families

Valeo has eleven product families which are, in alphabetical

order:

Climate Control;

Compressors;

Electrical Systems;

Electronics & Connective Systems;

•

•

•

•

2006 Reference document - VALEO 11

ACTiviTy 1The Group

Engine Cooling;

Engine Management Systems;

Lighting Systems;

Security Systems;

Switches & Detection Systems;

Transmissions;

Wiper Systems.

Since May 2005, product families have been overseen by a single

Department: the Operations Department. This Department was

created to accelerate the deployment of best practices and

the implementation of synergies between Product Families. It

carries out operational control of the performance of individual

Divisions.

1.5. Functional networks

The main functional networks are as follows:

technical networks, under the responsibility of the Group’s

Technical Director since May 2005: Quality, Purchasing, Industrial,

Programs and Projects, Logistics, Information Systems, Real

Estate, and “5 Axes” – Valeo’s deployment and audit system;

International Affairs, structured according to customer business,

with a Client Director dedicated to each major automaker, and

•

•

•

•

•

•

•

•

•

according to geographic region, with a Country Director for each

major region (North America, Japan-Korea-South Asia, China,

Brazil, Germany, Spain-Portugal, Italy);

Research and Development, under the functional responsibility

of the Product Family R&D centers and the operational

responsibility of Domains and Product Marketing;

Human Resources, also in charge of Ethics within the Group;

Risks, Insurance, Environment, Health and Safety, which co-

ordinates all actions in its domains;

all Finance, Legal and Strategic operations:the Financial Control network guarantees the reliability of financial reporting and certain physical indicators. Along with the teams in the Operations Department, it oversees the implementation of action plans,

the central Accounts teams define and apply rules relating to the risk management of external financing and of market risks relating to changes in interest rates, currency values and raw material costs,

decisions regarding transfers, acquisitions and the creation of joint ventures are coordinated centrally by a specialized team, supported, where necessary, by expertise from individual Product Families and Divisions,

Financial Communications;

the centralized Communication function defines communication

plans and coordinates internal and external communication

networks within the Product Families and Divisions.

•

•

•

•−

−

−

−

•

2. Domains and Product Families

The purpose of the Domains is to foster innovation in order to

offer the market comprehensive solutions relating to the issues of

safety, the environment and comfort (see paragraph 1.3 above).

The Domains work in synergy with the various Product Families

in order to offer innovative solutions bringing together the Group’s

different fields of expertise.

2.1. Driving Assistance

The Driving Assistance Domain designs and produces solutions

for monitoring the vehicle perimeter, providing the driver and

other road users with information about the vehicle’s immediate

environment and initiating necessary corrective actions. Three

Product Families contribute in particular to developing innovations

for this Domain: Switches & Detection Systems, Lighting Systems

and Wiper Systems.

2.1.1. Switches and Detection Systems

The Switches & Detection Systems Product Family designs and

manufactures products to improve the driver’s control of the

vehicle’s immediate environment. Notable for their efficiency

and ease of use, the technologies and systems developed allow

drivers to “keep their eyes on the road and their hands on the

wheel”, for maximum safety and driving comfort.

In 2006, contributions from the Switches and Detection Systems

Product Family in the Driving Assistance Domain particularly

focused on:

Ultrasonic Park Assist Systems which facilitate parking

maneuvers;

the Park4UTM park assist system, which enables drivers to

park a car semi-automatically in under 15 seconds. Based on

ultrasound technology, the system scans both sides of the

road for parking spaces, which it calculates according to the

vehicle length. Once a slot has been identified, the driver stops

and puts the car in reverse. The system then calculates the

trajectory and controls the vehicle steering. The driver, aided by

ultrasound sensors on the front and rear of the car, controls the

acceleration and braking during the maneuver. The maneuver

can be interrupted at any time by braking or simply taking over

the steering wheel;

•

•


ACTiviTy1 The Group

the lane departure warning system, LanevueTM, which alerts

the driver of unintentional lane departures via an audible or

vibrating signal;

blind spot radar detection systems, enabling drivers to detect

the presence of vehicle in their rearward blind spots;

the front and rear OptiveoTM system: at the front of the vehicle,

a state-of-the-art, highly sensitive compact camera positioned

behind the rearview mirror provides a permanent view of

the road and fulfils several functions, notably the automatic

switching between full-beam and dipped headlamps, the

lane departure warning system, infrared night vision and the

automatic detection of speed restrictions, which recognizes

all speed restriction signs and informs the driver of current

speed limits via an eye-level display. At the rear, the camera

is integrated into the tailgate handle and provides wide-angle

images of the area behind the vehicle. The camera, combined

with park assist sensors, enables the system to display distances

between the vehicle and any obstacles. The system is equipped

with an integrated heating and cleaning module and operates

under all weather conditions.

Switches & Detection Systems develop and manufacture the

following product ranges:

Detection systems:

ultrasound sensors;

radars;

cameras positioned at the front or rear of the vehicle.

Switches:

window-lift and seat adjustment controls and console

switches;

top column modules.

Engine sensors:

temperature sensors (coolant or gearbox);

engine and transmission position sensor;

oil management sensors.

Steering and top column sensors:

angle sensors;

torque sensors.

2.1.2. Lighting Systems

The role of the Lighting Systems Product Family is to improve

driver visibility and clearly indicate vehicle position and changes

in vehicle direction or speed, in all weather conditions. Headlamps

and rear lamps are also key design features, playing an increasingly

important role in automakers’ efforts to differentiate the styling

of their new models.

In 2006, Lighting Systems contributed the following innovative

systems to the Driving Assistance Domain:

directional lighting, which greatly improves visibility in bends

by adjusting the headlamp beam (fixed or moving);

•

•

•

•

•

•

•

•

•

•

•

•

•

•

the night vision system, Xtravue™, which offers drivers

three times the level of standard visibility without a dazzling

effect, using infrared technology; this infrared active night

vision system enables drivers to drive using dipped headlamps

while enjoying visibility equivalent to driving with full-beam

headlamps;

LED front and rear lighting and signaling technologies,

which offer high-performance solutions and innovative designs

at the front and rear of the vehicle;

XLEDTM adaptive headlamps: xenon directional lighting

associated with LED modules featuring directional lighting

functions and automatic additional lighting on highways, to

offer optimal visibility (up to 90% better than halogen lamps)

depending on driving conditions. As well as their low energy

consumption and record lifespan, LEDs contribute to innovative

vehicle design;

Adaptive rear lights with MicroOpticsTM technology: the

uniform light surfaces achieved using this LED technology

offers not only optimal visibility but also a wide range of design

options. The warning signals for each situation (fog, sudden

braking, reversing, oncoming vehicles, opening doors) inform

drivers in following vehicles and help prevent accidents.

The Lighting Systems range also covers:

main headlamps (halogen, xenon and LED);

foglights;

DRL daytime lamps;

leveling devices and lamp wipers;

rear lighting including LED rear lamps and center high-mounted

stop lamps;

cigar lighters.

2.1.3. Wiper Systems

As a contributor to the Driving Assistance Domain, the Wiper

Systems Product Family offers windshield and rear window

wiping solutions to give the driver perfect visibility in all weather

conditions, for both the original equipment sector and the

aftermarket. These solutions combine the latest innovations in

terms of technology and design.

In 2006, Valeo Wiper Systems continued to develop new products

including:

front and rear ultra-flat wipers: the ultra-flat wiper systems

combine elegance and exceptional performance. Their unique

design, optimal aerodynamic form and light weight are a tried-

and-tested combination that is greatly in demand;

a new generation of XL ultra-flat blades, which provide excellent

wiping quality on large windshields and are increasingly fitted

on MPVs, was launched during the year;

these wipers, using electronic front motors, are simple to fit

and allow great freedom of design for automakers;

•

•

•

•

•

•

•

•

•

•

•

•

•


ACTiviTy 1The Group

a new rear motor using a technology that reduces mass,

improves acoustic performance and reduces costs, was also

developed in 2006;

heated wash systems.

The Wiper Systems Product Family includes:

arms;

blades;

linkages;

motors;

washing systems;

front and rear wiping systems integrating other functions such

as stop lights and latches.

2.2. Powertrain Efficiency

This Domain devises systems for enhancing vehicle performance

and driving pleasure while minimizing fuel consumption

and pollutant emissions. Five Product Families contribute in

particular to developments in this Domain: Engine Management

Systems, Electrical Systems, Engine Cooling, Compressors and

Transmissions.

2.2.1. Engine Management Systems

This Product Family was created following Valeo’s takeover of

the Johnson Controls’ Engine Electronics Division (JCEED) in

March 2005.

By improving the specific performances of the engine, electronic

management systems reduce the environmental impact of

vehicles while enhancing the driving experiencing and enriching

the Powertrain Efficiency Domain offering.

Valeo Engine Management Systems focused particularly on the

following areas in 2006:

in the emissions control domain, a compact exhaust gas

recirculation system, integrated at the intake stage, for Euro

6 gasoline and diesel engines, is currently being developed

using an innovative architecture. This system reduces fuel

consumption in turbo gasoline engines and very significantly

reduces the emission of pollutant gases by diesel engines;

the development of Smart valve Actuation technology, also

known as the “Camless engine”, which was pursued and

supported by several major automakers. The technology used

in this system represents a considerable advance in gasoline

engines as it reduces consumption by 15-20% in mixed driving

cycles, and also reduces pollutant emissions. The system also

offers users an improved performance and a more comfortable

driving experience.

Other key products in the Engine Management Systems Product

Family are as follows:

complete engine management systems for gasoline and diesel

engines;

•

•

•

•

•

•

•

•

•

•

•

engine control units;

electric motor drives;

emission control systems and components;

ignition components;

injectors;

sensors.

2.2.2. Electrical Systems

The role of the Electrical Systems Product Family involves the

generation and management of electrical energy, from starting

the engine to vehicle powertrain, for enhanced comfort, reduced

fuel consumption and pollutant emissions.

In 2004, it launched the StARS micro-hybrid system on the

market; this system stops the engine when the vehicle comes

to a halt and restarts it immediately and silently when the

driver releases the brake, giving fuel savings of up to 20%

in urban situations. This system was later developed further,

notably with the addition of the function to recover kinetic

energy during braking, which improves fuel savings by a further

5-10%.

Other products in the Electrical Systems Family include:

starters;

alternators;

electrical energy management systems;

renovated alternators, starters, and compressors for the

aftermarket;

electromagnetic retarders for trucks and buses.

2.2.3. Engine Cooling

This Product Family develops and manufactures components

and modules for a full range of engine and transmission cooling

functions, with a view to reducing pollution and fuel consumption,

and enhancing passenger comfort.

In 2006, the Engine Cooling team focused on the following

innovations in particular:

the UltimateCoolingTM concept, based on the principle of a

single coolant system instead of running all fluids to exchangers

at the front end of the vehicle, which both improves engine

performance and reduces fuel consumption. Valeo has

undertaken several development projets on this architecture

in partnership with vehicle manufacturers in Europe, the United

States and Japan;

in the run-up to phase 2 of the “pedestrian protection”

regulation in Europe, due to come into force in 2010, specific

solutions have been developed in terms of impact and energy

absorption. Combined with UltimateCoolingTM, these enable

automakers to adapt to the new regulations without needing

to change the vehicle style;

with regard to the new European regulation prohibiting the use

of the refrigerant gas R134A on vehicles entering production

as of 2011, a new range of exchangers compatible with

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•


ACTiviTy1 The Group

the new CO2 refrigerant fluid (replacing R134A) has been

developed. In addition, Valeo is assessing alternative refrigerants

and their impact on current systems;

ThemisTM, the electronic engine cooling system, is in

development for the first mass production applications, with

the expansion of the valve range to cover all engine types. The

advantages of this system in terms of reduced consumption and

improved comfort have been recognized by manufacturers;

the development of engine intake modules integrating turbo

exchangers, now water cooled, directly into the engine intake

collectors, with the benefit of improved acceleration and engine

performance.

Further Engine Cooling products include:

thermal management systems for powertrains;

cooling modules;

condensors;

evaporators;

heater cores;

charge air coolers;

fuel coolers;

exchangers of oil;

fan/motor systems;

charge air cooler modules;

front end modules.

2.2.4. Compressors

The role of this Product Family, developed in 2005 following

the purchase by Valeo of the remaining 50% share in the Zexel

Valeo Climate Control joint venture, is to develop and produce

compressors for domestic air-conditioning systems.

The R744 Compressor is a key component in the next

generation of air-conditioning systems which will use the

natural and environmentally-friendly CO2 coolant.

This Product Family also develops and produces the following

products:

pallet compressors;

fixed-cylinder compressors;

variable-cylinder compressors.

2.2.5. Transmissions

This Product Family works on behalf of the Powertrain Efficiency

Domain to develop and produce systems that transfer engine

power to the transmissions of passenger cars and industrial

vehicles. The solutions it offers incorporate innovative systems

that dampen noise, vibrations and harshness. This Product Family

is present in all major markets in both the original equipment and

aftermarket segments.

The Transmissions Product Family contributes to the Powertrain

Efficiency Domain through innovations such as:

the dual mass flywheel, which improves driving comfort and

minimizes nuisance caused by sound and vibrations created

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

when using the clutch and which make changing gear tiresome;

in 2006, Valeo Transmissions worked towards developing a

system that could also be made available to the aftermarket.

G5 clutch facings, the first range of “green” clutch facings,

which anticipate developments to European environmental

legislation and enable Valeo production sites to considerably

reduce atmospheric emissions and improve working

conditions.

Other products produced by the Transmissions Family include:

cover assemblies;

discs;

clutch facings;

release bearings;

hydraulic clutch actuators;

flexible flywheels;

systems for automated manual transmissions;

torque converters;

lock-up range.

2.3. Comfort Enhancement

The Comfort Enhancement Domain aims to facilitate vehicle use

and improve vehicle comfort. This covers all phases of vehicle

use: approach, access, ignition, driving and exiting. The four

Product Families which work in synergy to develop solutions for

this Domain are Security Systems, Switches & Detection Systems,

Climate Control, and Electronics & Connective Systems.

2.3.1. Security Systems

This Product Family develops and manufactures systems that

guarantee authorized, secure and comfortable access to vehicles

in all circumstances, while ensuring maximum protection

against theft. It also offers ergonomic solutions for the Comfort

Enhancement Domain.

During 2006, Security Systems launched:

the Smart Car Key, a new generation of hands-free card.

This intelligent and interactive identifier offers drivers greater

comfort, with totally new features. In addition to keyless locking,

the user can now view real-time vehicle data (e.g. fuel level,

tire pressure, cabin temperature, headlamp status) on an LCD

or organic LED screen, and can also remotely activate the cabin

ventilation system, automatically transfer useful data such as

destination details and MP3 files from a home computer to the

vehicle, and memorize and activate personal settings such as

driving seat and rearview mirror positions;

the 'Tuning' business developed with handles and matching

keys enables the user to personalize their vehicle in a

completely new way, in terms of patterns and colors, without

altering shapes or original materials

•

•

•

•

•

•

•

•

•

•

•

•


ACTiviTy 1The Group

Security Systems also develops and produces the following

ranges:

keyless entry and start system;

powered opening/closure systems (for sliding doors and

liftgates);

radio-frequency remote controls and receivers;

transponder-based immobilizer systems;

steering column locks (mechanical and electrical);

handles;

keys and locks;

latch sets.

2.3.2. Switches & Detection Systems

This Product Family, which contributes to the Driving Assistance

Domain (see paragraph 2.1.1), also develops solutions for Comfort

Enhancement:

e-media is a multifunctional control interface that reduces

the number of switches on the center console and improves

ergonomics for the driver;

“Fixed cushion” steering wheel controls is a system which

brings all controls for comfort enhancement and driving

assistance within easy reach, on the edge of a fixed central

cushion, thus improving cockpit ergonomics and reinforcing

the effectiveness of the driver airbag.

2.3.3. Climate Control

This Product Family offers intelligent heating, ventilation and air

conditioning (HVAC) systems that enhance individual comfort for

vehicle occupants, in all circumstances, while limiting energy

consumption.

In 2006, Climate Control developments were particularly focused

on the following systems and technologies:

by replacing the refrigerant HFC134a with a natural gas called

R744, the new climate control systems developed by Valeo are

kinder to the environment and anticipate European regulations

due to come into force in 2011, which will impose the use of

environmentally-friendly refrigerants for all new vehicle types.

With a much lower impact on global warming than systems

using HFC134a, the new solutions represent a significant

technological advance. The system using R744 also offers the

•

•

•

•

•

•

•

•

•

•

•

major advantage of eliminating the recycling of the fluid at the

end of the vehicle’s lifetime;

the Thermeo thermal comfort module for rear passengers

integrates thermo-electric technology to provide air conditioning

and heating to the rear seats. The installation of this module,

located in the overhead light, is simple, and can be done by

local dealers because there are no refrigerant pipes to be

installed;

low consumption air conditioning system, software

module for optimizing the performance of new generation

air-conditioning systems and reducing energy consumption;

Valeo Climate Control developed a whole new range of air

quality products for the OEM and the aftermarket, aimed at

protecting passengers notably from ultrafine diesel particles,

and improving their wellbeing with, for example, the anti-

allergen filter, the vitamin C filter and products to eliminate bad

odors associated with air conditioning. Valeo also developed

cabin purification modules based on ionization technology.

The Climate Control Product Family comprises around four product

lines:

HVAC systems and modules;

cabin comfort controls (control panels);

decentralized interior comfort modules (rear air-conditioning

device, booster, additional comfort modules);

air quality products (air filtration and purification systems).

2.3.4. Electronics & Connective Systems

This Product Family contributes to the Comfort Enhancement Domain

by developing and producing electrical and electronic distribution

systems and related components. Innovations developed include

solutions for optimizing battery management, including

compact current sensors or power switches.

The range covered by this Product Family includes:

wiring harnesses for power and data transmission;

body controllers;

electric distribution controllers under the engine cover;

electric distribution boxes;

electrical energy management components.

This Product Family also provides support for the Driving Assistance

and Powertrain Efficiency Domains.

•

•

•

•

•

•

•

•

•

•

•

•

3. Aftermarket products and services

Valeo Service consists of two activities whose roles are to

supply original equipment spares to automakers and universal

market spares to the independent aftermarket (see paragraph

1.2 Organization: Aftermarket). It offers Aftermarket customers

a wide range of products and services designed to increase

the effectiveness of repair specialists. The offering responds to

increased customer demands, going beyond simply supplying

parts, to include ever more comprehensive and optimized services

and technical skills (catalogues, training, diagnostic and sales

tools).


ACTiviTy1 The Group

In 2006 Valeo Service focused its efforts on improving customer

satisfaction through the following objectives:

the organization of valeo Service into 5 transversal markets,

each covering a different area of expertise to better reflect

customer business: repair, maintenance, crash, post-equipment,

and heavy duty;

logistics excellence through improved service levels:

working in partnership with customers allows proximity stocks

in each country and improved stock coverage using flexible

delivery methods.

the total quality of products and services: with its valeorigin

label, Valeo Service guarantees the quality and origin of original

equipment spares, thanks to the expertise and know-how of

Valeo in the OEM. Total quality also relates to services: great

flexibility in order taking to reflect customer needs, telephone

technical support, comprehensive training programs and

computerized sales tools.

Valeo Service extended and expanded its range of products and

services in 2006 through:

the launch of more than 2,500 new product references,

increasing the coverage for all product lines, with a particular

emphasis on condensers and radiators;

doubling the number of references for the 4-part clutch kit;

the geographic extension of the wiper blade range under the

Michelin license to six additional European countries;

reinforcement of the diagnostic tool range (Climtest 2, Airtest,

Clim On Line);

the speeding up of product availability for the OEM to make

them more rapidly available on the original equipment spares

market;

optimization of the support service for the Valeo Clim Service

network;

continual updating of paper (more than 20 new editions in

2006), multimedia and online catalogues;

the development of Internet services to improve customer

service (downloadable price lists, customer Extranet) and the

launch of a new website in Eastern Europe, Russia and Portugal

in local languages;

geographical expansion of the eXponentia training program,

which keeps repair professionals continually up-to-date with

ever more numerous and complex developments in current

vehicle technologies;

improved sales efficiency: the French and Spanish Divisions

have introduced a Sales Force Automation service that tracks

sales in real time and accelerates the launch of promotional

drives;

•

•

•

•

•

•

•

•

•

•

•

•

•

Valeo Service also updated its packaging in 2006. In addition to

the new design, this packaging offers innovative functions to

fight counterfeiting and incorporates indelible ink. The Valeorigin

quality label appears on all boxes. They are easier to use, and

feature standardized labels with an easier to read reference

number and clearer diagrams.

Valeo Service offers 176 product ranges covering 12 product

functions for light, commercial and industrial vehicles and trucks.

It is organized as follows:

wiper systems: blades, arms, linkages and front and rear wiper

motors, positioned according to brand (Valeo Marchal, PJ, SWF,

Cibié, MDD, …);

transmissions: traditional 2 and 3 piece kits, four-piece kits

with rigid flywheel, hydraulic components (three-piece kit with

hydraulic release bearings as well as hydraulic release bearings

available separately); dual mass flywheel, flexible flywheel;

lighting and signaling: main headlamps, Xenon headlamps,

auxiliary headlamps, (including Xenon long-range and fog

lamps), daytime running lights, rear direction indicators, lamps,

work lamps;

climate control: products belonging to the Air Quality range

(cabin filters Clim Filter, ClimPur), compressors, condensers, filter

driers, heaters and blowers, diagnostic and maintenance tools,

Climtest 2 diagnostic and maintenance tools, AirTest, CLIMFILL,

regulation parts;

engine cooling: heat exchangers, water pumps,

thermocontacts, thermostats, EGR valves, cooling fluids, particle

filter exchangers;

electrical systems: starters and alternators (new and

renovated), a wide range of spare parts;

retrofit lighting: park assist systems (beep&park), lighting

tuning (laser engraved motifs for front and rear lights,

headlamps with color masks, phosphorescent masks, LED rear

lights), fuel caps;

electrical accessories: window lifts, comfort and pre-heating

timers, relays, cigar lights and multifunctional sockets;

security systems: steering column locks, keys, locks, and fuel

caps;

switches & detection systems: steering column controls and

switches, door handles, actuators;

brake products: brake pads, discs and shoes, rear brake kits,

hydraulic components, brake fluid;

ignition: pencil ignition coils, ignition rails, integrated ignition

modules, spark and glow plugs and a wide range of spare parts

for ignition systems.

•

•

•

•

•

•

•

•

•

•

•

•

•

2006 Reference document - VALEO 1�

ACTiviTy 1The Group

4. Functions

4.1. Human Resources function

The Valeo HR function adopts a proactive approach to

accompany the Group’s global growth, by developing

universal guidelines which take into account specific local

features and the market context.

With an overall HR policy based on empowering its 69,800

employees in the Group (at December 31, 2006) working in

26 different countries, the Group strives to provide all staff with

the same learning opportunities so that they can enhance their

efficiency, operational performance and development potential.

Valeo is evolving in a particularly competitive market: involving

all employees and updating and developing their skills are

essential to the Group’s progress. Valeo is particularly attentive to

all factors that contribute to motivating employees in their work

and sustaining dynamic collaboration between the teams.

The Group offers each of its employees genuine career prospects.

Internal mobility is a key factor in developing Valeo’s own top

quality future leaders.

In 2006, Valeo recruited 15,674 employees throughout the world,

including 2,129 engineers and managers, bringing new skills to

the Group.

4.1.1. Management development

The skills management system is a comprehensive range of

procedures and tools available to managers to drive the effective

development of Valeo employees. These systems are used to

recruit, develop and motivate the necessary human resources,

not just in their day-to-day work but also to achieve the Group’s

strategic objectives.

The three major constituents of the management development

strategy are external recruitment, which also includes relations

with educational establishments, internal mobility and personal

development, and lastly, remuneration and benefits.

4.1.1.1. Recruitment and relations with schools and

universities

Recruiting the best talent is a key factor of Valeo’s success.

Qualified teams ensure Valeo can offer its customers around the

world value-added services in terms of innovation, total quality

and competitive solutions and services.

To ensure that recruitment, both internal and external, is managed

coherently and professionally, all managers are trained using a

recruitment kit made available to them. This kit, created in 2006,

brings together in a single document all the existing tools, such

as the Employer Brand, developed in 2002, the Internal Mobility

Charter and the Valeo Competences system, launch in 2004. A

Recruitment Guide explaining the Group’s operating culture and

the key messages to communicate to applicants, is the main

element of the recruitment kit. By offering a standard recruitment

policy based on objective selection criteria, the Recruitment Guide

helps to promote diversity at Valeo and to eliminate all forms of

discrimination.

Valeo has also continued and strengthened its relations with higher

education institutes, in particular by developing partnerships with

foreign universities and schools recognized at an international

level. In 2006, the Group took part in many events to make contact

with future graduates of these establishments, for example the

ATUGE forum in France and Tunisia, the Franco-German forum

in Strasbourg, the Best forum in Krakow (Poland), “Careers in

Europe” in Berlin (Germany), Yes-Expo in Detroit (United States),

the ATHENS forum in Paris (France) and special day events

organized with universities in Wuhan, Nanjing and Changchun

(China).

In France, Valeo has intensified relations with a number of

partner schools and universities, such as the Ecole Centrale de

Paris, Supélec, Université de Technologie de Compiègne (UTC),

Ecoles des Mines de Douai, ENSIETA in Brest and ECE, and has

concluded a framework agreement with ESIGELEC. In addition,

Valeo sponsors the “Elles Bougent” association which promotes

transport careers for female secondary school students.

Finally, in 2006 Valeo sponsored the UTC promotion and helped

create a postgraduate DESS degree in logistics at IHEC Tunis

(Tunisia).

4.1.1.2. internal mobility and personal development

To offer attractive career prospects to the 12,000 engineers and

managers employed by Valeo, the Group’s policy demands that

at least 3 out of 4 positions are filled internally. These career

prospects are formalized through the creation, each year, of a

Succession & Development Plan to identify the next stages in

the career development of each engineer and manager. The

plan is implemented via a review committee responsible for

making decisions regarding internal job applications. In order to

prepare employees for success in the next stage of their career,

Valeo standardized in 2006 an “individual development plan”

format comparing skills acquired with skills required for the next

stage, allowing very detailed individual development plans to be

drawn up. The plan is based on the “3 E” approach, which favors

structured experience and first-hand knowledge in addition to

more traditional training and education. Using these tools, more

than 2,000 engineers and managers benefited from career

development actions in 2006.

To encourage the spread of policies, cultures and methodologies,

and to offer international opportunities, the Group must be able

to expatriate around 100 experienced managers every year. In

order to be effective, Valeo’s international policy must be both

2006 Reference document - VALEO1�

ACTiviTy1 The Group

competitive on the employment market and must also contribute

to cutting costs. In 2006, following research on the best practice

on the market, Valeo’s policy was completely overhauled in order

to meet the needs of employees and their families and in the

general context of cost cutting.

4.1.1.3. Remuneration and benefits

The Group constantly monitors the employment market in order

to remain competitive so that it can motivate and retain its talent

and adapt its practices as required. With its global presence, which

is constantly evolving and encompassing new territories, such

as Russia and Iran, Valeo needs to understand the relevant local

practices rapidly and propose the appropriate remuneration in

order to build up local teams. In 2006, for example, the Group

introduced a long-term reward system to retain its key managers

and engineers in China. A rigorous method to ensure that the

Group remains competitive on the volatile employment market

in Mexico, Poland, the Czech Republic and Thailand, was also

rolled out in 2006.

4.1.2. Training

Training plays a major role in the successful integration of new

entities and organizational changes. It enables individuals to

acquire the fundamental principles of Valeo culture: in-house

terminology, working methods and shared working tools.

Moreover, in the spirit of the recent training reforms in France,

Valeo encourages each employee to take a proactive role in

developing their professional skills. During a career appraisal

(compulsory in France and extended to all countries in which the

Group operates), each employee is given an opportunity for a

valuable discussion with their line manager. Above and beyond

essential training activity for their current position, the objective

is to gain a long-term vision, clarify the employee’s career goals

and their potential to satisfy Group requirements. This exchange

allows us to define the steps and resources for implementation,

including the French individual training entitlement (DIF, or Droit

Individuel à la Formation). In 2006, 13% (2,184) of employees

with the right to DIF applied for the scheme, and were accepted.

2% of demands (53 employees) were refused or had to re-apply

in 2007.

To provide a more effective and personalized solution, Valeo

prioritizes training which combines different learning methods:

conventional class-based training, skills appraisals, coaching, role

play and computer-assisted self-training. For the latter category,

ValeoC@mpus, the Group’s online university, is open to all staff.

Employees are able to access training at their own pace, with

assistance from HR staff or tutors. Training covers a wide variety

of areas including languages, office systems, management, and

personal efficiency, as well as the Valeo culture, products and

technical processes. In 2006, 14,700 employees (compared to

13,000 in 2005) received around 68,600 hours of online training

(compared to 60,000 in 2005). Several functional departments

have adopted this training method and are developing their

own modules. The Programs and Projects, R&D and Intellectual

Property departments have all created online courses, which

can be accessed at any time by any member of their networks,

irrespective of the country in which they work. A growing number

of versions of these basic training modules (e.g. 5 Axes, Valeo

Project Management Basics) have been developed, in German,

Chinese, Japanese, Polish and Portuguese.

The Training Department has software that enables it to rapidly

produce content in-house.

4.1.3. Code of Ethics

Valeo joined the UN Global Compact Program in 2003 and fully

supports its principles of social and corporate responsibility. In

2006, Valeo continued its efforts in this area, by further reinforcing

its Code of Ethics. Regulations included in the Code must be

followed by all Group employees, even where commitments

exceed the requirements of local legislation in certain areas, e.g.

child labor.

The Code of Ethics has been translated into the 19 languages used

by the Group and can be accessed by all individuals working at

Valeo, whether Group employees or not, who are required to

follow all the regulations, without exception.

The new Code of Ethics underlines the respect for fundamental

rights, covering issues such as child labor, disabled workers,

discrimination, harassment and health and safety in the workplace.

It also demonstrates the Group’s commitment to sustainable

development: the environment, human resources, social

dialogue and freedom of expression, as well as each employee’s

individual development. It covers the Group’s commitments

to society (professional training, new employment assistance,

reindustrialization), business conduct and professional conduct.

Finally, the Code states that Valeo service-providers, consultants

and subcontractors are obliged to act in accordance with the

ethical rules outlined by the Group.

4.1.4. Industrial Relations

Valeo is firmly committed to a forward-looking employment and

skills management policy.

In view of the ongoing necessity to rationalize its industrial base,

the Group actively seeks solutions which will provide alternative

jobs for employees affected: transfers within the Group, individual

and collective external redeployment, new employers to take

over sites in question, the reindustrialization of employment

regions and local economic development initiatives.

Employee representatives are regularly informed and consulted

on these operations.

The Group’s social indicators can be consulted in the “Social

indicators” section in Chapter 2 of the Management Report.


ACTiviTy 1The Group

4.2. Risk Management, insurance, Environment, Health and Safety

4.2.1. Risk management and Insurance

Valeo’s risk management policy is founded on the basis of

rigorous procedures and management systems for improving

performance.

The Valeo approach, applied systematically at all Valeo sites,

can be summarized as follows: respecting obligations imposed

by national legislation as well as those defined by Group policy

(which exceed the requirements of national regulations in many

areas), as well as identifying risks, evaluating their impacts, setting

objectives and implementing action plans to reduce – or where

possible to eliminate – risks.

All procedures regarding health and safety, building security, the

environment and the protection of knowledge and expertise are

detailed in the Risk Management Manual, which is updated on

a regular basis. The Group also produces an Insurance Manual,

updated on an annual basis, providing comprehensive information

on risk coverage and managing insurance programs.

Clearly identified risks for each site. To achieve its objectives

and bring risk levels down to zero, Valeo requires continuous

visibility. Each site is subject to a full audit every three years

at most, covering the environment, health, safety at work

and the protection and security of buildings. This audit is

carried out by external consultants, in accordance with local

obligations, Group policy and good practice. It provides useful,

detailed information—especially with regard to environmental

concerns—on site activity, the surrounding area and the natural

environment: geology, seismic risks, flood plains, etc. Actions to

be implemented and associated action plans are established on

the basis of these audits.

Site action plans are communicated twice yearly at the Group

level, providing the Risk, Insurance and Environment Department

with precise and comprehensive information for evaluating the

performance of individual sites. Each site is graded on an annual

basis, based on factual criteria.

4.2.2. Environment

Environmental protection demands a number of initiatives which

are, by definition, long-term. Valeo has been applying such

initiatives for more than 15 years.

The objective is of course to prevent environmental pollution,

but also to protect the environment by reducing consumption

of energy and raw materials, reducing or even eliminating the

consumption of dangerous products, reducing waste and achieving

maximum recyclability of all products, and offering an industrial

environment that is both safe and pleasant to work in.

Valeo innovations systematically incorporate an environmental

dimension into their design. This applies to a product throughout

its lifetime: from design to production and use, right up to the

•

management of the product at the end of its life. Since 1998,

a group of experts in environmental matters and research and

development from different Valeo Product Families have been

working together to reduce the environmental impacts of

processes and products over their entire lifecycle. This research

group meets regularly to discuss specific topics such as the

elimination of banned and restricted substances or the use of

recycled plastic, for example. At the end of 2006, and to be

pursued in 2007, this working group initiated a process aimed

at coming into line with the 2006 deadlines set by REACH

(Registration Evaluation and Authorization of Chemicals), which

requires manufacturers and importers to produce and offer

to the market substances with no harmful effects on human

health or the environment.

Valeo has also created a reference database of substances

that are banned or restricted in the automotive industry.

Updated again in 2006, this database details the regulations

applicable in the different countries where Valeo operates

and the requirements of its automaker customers concerning

over 600 substances used in the composition of parts and in

manufacturing and repair processes.

To fulfill its progress objectives, Valeo bases its environmental

policy on performance as well as the implementation of a

management system which leads to regularly renewed

certification. This is the case with iSO 14001 certification, the

international standard in terms of environmental management

systems. At the end of 2006, 127 of the Group’s sites had

iSO 14001 certification, compared to 117 at the end of

2005 and 106 at the end of 2004. The aim is for all Valeo sites

to be certified. Newly acquired sites are immediately integrated

into this certification system.

The Generic plant is also a concept developed by Valeo, based

on the work of the HQE (High Quality Environment) association,

the US Green Building and World Bank recommendations. All

new plant construction and refurbishment projects are carried

out according to very detailed specifications. These cover

site selection, plant architecture and construction, employee

working conditions, plant operation, application of regulations,

Valeo risk prevention standards, optimized energy consumption,

and the reduction of emissions and waste. All building and

renovation specifications involving safety, security, health and

the environment are outlined in the Valeo Factory Design

Guide.

4.2.3. Health and Safety

As regards health and safety in the workplace, Valeo has begun

a process for obtaining certification in accordance with the

OHSAS 18001 international standard. Launched in mid-May 2005,

the project aims to obtain certification for all Group sites and in

2006 was a key project for the Group in this domain. At the end

of 2006, 72 sites were certified, compared to 18 at the end

of 2005 and three at the end of 2004. Like the ISO system, this

•

•

•


ACTiviTy1 The Group

health and safety management system is based on continuous

improvement.

The Group’s environmental indicators can be consulted in

the “Environmental Indicators” section in Chapter 2 of the

Management Report.

4.3. industrial Functions

Operational excellence is of critical importance to Valeo. The

controlled expansion of the Group’s business requires the daily

implementation of a basic principle: obtaining cost-effective total

quality first-time, whether this involves methods, manufacture,

projects or purchasing.

The new Technical Department, which brings together the Quality,

Purchasing, Industrial, Projects, Logistics, Information Systems and

Real Estate Departments was set up in 2005 to assist the Group

in pursuing its plan of reducing costs and optimizing quality, as

well as fostering cooperation between these seven functions. Its

objective is to ensure that the 5 Axes are applied in a strict and

disciplined manner.

The 5 Axes methodology is applied around the world, by all

Group employees, in order to deliver “zero defects” to the

customer. The 5 Axes are:

involvement of Personnel: this implies recognizing skills,

enhancing them through training and giving people the means

to carry out their responsibilities. Employees are particularly

encouraged to make suggestions for improvement and participate

actively in the work of autonomous teams.

valeo Production System (vPS): the VPS is designed to improve

the productivity and quality of products and systems. It is a

“pullflow” system based on the flexibility of production resources,

the elimination of all non-productive operations and stopping

production at the first non-quality incident.

Constant innovation: to design innovative, easy-to-manufacture,

high-quality and cost-effective products while reducing

development time, Valeo has set up an organization based on

project teams and the simultaneous engineering of products and

processes.

Supplier integration: allows Valeo to take advantage of suppliers’

ability to innovate and develop productivity plans with them to

improve quality. Valeo sets up close and mutually-beneficial

relationships with a limited number of world-class suppliers and

sustains these relationships in the long term.

Total Quality: in order to meet customer demands in terms of

product and service quality, Total Quality is required throughout

the Group and from its suppliers.

THE 5 AXES

Total Quality

Constant Innovation Supplier Integration

Involvement of Personnel

Production System

FOR CUSTOMER SATISFACTION

The 5 Axes were revised in 2005 and several additions were made

to the previous version, which dated back to 2000. Tools were

devised by the networks in the interim, which have now been

included in the 5 Axes, in particular:

the Quick Response Quality Control (QRQC) approach: any

problem which arises is immediately identified and analyzed

on the spot by the parties involved. Corrective action is defined

and implemented within 24 hours. This approach applies to

all domains: production, quality, purchasing, logistics and risk

management. The latest strategy, launched in 2005, is to apply

the QRQC approach to projects. The idea is to detect potential

problems before projects have even been launched;

the “pull-flow” industrial method allows Valeo to reduce stocks,

improve the productivity of the direct workforce and optimize

deployment of resources and investments, in accordance with

actual customer demand;

the notion of “Kosu”: Kosu is a measure of the resources

required to manufacture a part, which can can be used to

indicate cost performance and for schedule monitoring.

•

•

•


ACTiviTy 1The Group

For the past ten years internal audits have been used to evaluate

the results of the 5 Axes approach and Valeo has developed its

own standards to analyze and improve the application of each

of the 5 Axes. In 2005, a new set of reference standards,

the v 5000, was launched and deployed at all Valeo sites from

the start of 2006. The standards include in particular a list of ten

obligatory requirements. The standards should ensure that all

Valeo sites focus on the same key priorities.

4.3.1. Purchasing

The role of Valeo’s Purchasing team is to reduce supply costs

through increased sourcing in competitive-cost countries,

implement rigorous selection processes for new suppliers,

apply the total quality and innovation approach to suppliers

and sub-contractors and establish close partnerships with

the most innovative and best performing suppliers. The

Group’s goal is to use its purchasing strategy to gain

competitive edge.

The Purchasing network covers all activities linked to supplier

integration. Suppliers are divided into purchase families

for products and services from raw materials to electronic,

mechanical and plastic components, etc. The eleven Valeo

Product Families each have their own purchasing networks and

there is a separate purchasing team for every Valeo site. The

different Product Families are coordinated by Group Lead Buyers

(based at the sites, these buyers coordinate and harmonize the

purchasing policies of the different Valeo Divisions for which

a given supplier works) and Group Commodity Leaders, lead

buyers who are responsible for strategy, as well as a panel of

suppliers for each purchase family.

Valeo deploys resources to help its suppliers improve their own

quality processes. The Group’s QRQC approach continues to be

implemented to assist suppliers in achieving zero defects. In

2006, 524 suppliers were thus trained in this method.

“Supplier Relationship Management” (SRM) is an essential

tool in the relationship between Valeo and its suppliers. SRM

is a secure extranet resource. Modules such as the incident

Management System and Supplier QCD (reporting back to

suppliers on their performance in terms of quality, cost and

delivery) can be accessed on the extranet, enabling Valeo and

its suppliers to work closely together and share standardized

processes, for example, in order to identify and process quality

incidents rapidly.

By working with fewer suppliers, Valeo is better able to

support them in their quality strategies. The Group has thus

retained the best suppliers in terms of quality, technology and

productivity. Despite the addition of suppliers due to the change

in consolidation scope in 2006 (see Highlights – Strategic

Operations section), the Group optimized the number of its

suppliers by 277 in 2006.

In 2006 Valeo pressed ahead with Convergence, a program

designed to engineer a dramatic cost reduction while

•

•

•

•

•

improving the quality of products produced by our suppliers.

The system uses a specific monitoring tool, the Scorecard which

provides a visual indication of quality performance and cost

reductions implemented. It also provides three-year visibility

of developments and areas of potential productivity, as well as

indicating where such areas have not yet been identified. Each

supplier Scorecard is monitored by a Group Lead Buyer (see

above). In 2006, the Convergence program involved 276 Valeo

suppliers, representing 58% of Group purchasing. The program

is complementary to the VIP program launched in 1999.

Valeo Integrated Partners (VIP) program, covered 98 suppliers

in 2006, including suppliers from competitive-cost countries.

All of the Group’s VIP suppliers were brought together during

a special convention held in Paris in January 2006 to present

the strategies, new products and technologies, business

opportunities and the objectives and priorities for 2006.

In exchange for an undertaking from its suppliers to continuously

improve operational performance, Valeo offers these partners

greater volumes and business opportunities. With the

launch of its new Code of Ethics, Valeo further tightened the

requirements imposed on its suppliers in terms of labor rights

and environmental protection.

Innovating and designing products using different materials and

new architectures can also help reduce costs. Presentations to

identify supplier innovations are organized on a regular basis.

In 2006, contracts relating to innovation and development were

signed with key suppliers.

valeo increased purchasing in low-cost countries. These

purchases represented 33% of total production purchases in

2006 (compared to 26% in 2005). This result was achieved

with the contribution of all Valeo teams as well as those of

Valeo’s APO (Asian Purchasing Office) in Shanghai, which

was significantly strengthened in 2006.

4.3.2. The Valeo Production System and logistics

The role of the Valeo Production System (VPS) is to improve

product quality while at the same time reducing production

costs and long-term assets. At the heart of this strategy

lie the optimization of the industrial footprint and the

deployment of a Total Quality Culture.

In 2006, Valeo continued to implement both its plan to

standardize processes and equipment, using the Kosu approach

to measure the resources required to manufacture a part, and

also its investment optimization strategies. These operational

standards make it possible to capitalize on experience, cut

product development lead times, stabilize new production

lines quickly while avoiding start-up problems, and cut costs

at every stage of the process. All activities are now carried out

using standards that supervisors must ensure are respected and

improved. On the shop floor, performance is monitored in real

time through a concrete analysis of what really happens on the

production line. Problems are identified, immediately processed

and turned into opportunities for improvement. Each operation

•

•

•

•

•


ACTiviTy1 The Group

is assessed for its contribution to the added-value of products,

and operations lacking in this respect are eliminated.

The involvement of employees in the process of optimizing

investments was also crucial this year. This approach has

enabled the Group to define new standards, while emphasizing

flexibility and versatility.

The ergonomic design of workstations continued to be improved.

Each workstation is organized around the needs of operators,

who have made significant contributions to improving their

comfort and safety at work. This approach is part of Valeo’s

Occupational Health and Safety policy (see also paragraph 4.2.3

Health & Safety) and helps reduce the number of accidents at

the Group’s production sites.

The specific features of the aftermarket are also taken into

account at Valeo. This market imposes certain limitations on

industrial operations. Products are mainly manufactured using

the same production machines as for original equipment parts.

If necessary, simplified lines designed for small volumes with

low levels of automation can meet the requirements of this

market. Servicing and maintenance of these specific machines

are already in place.

In order to optimize logistics, each Valeo plant is organized

according to product flow. Responsiveness and flexibility

with regard to customers’ requirements are fundamental. In

particular, Valeo employs pull-flow methods to reduce stocks

and simultaneously improve customer service levels. The daily

measuring of service levels is a rule which, little by little, is

extending to our suppliers.

4.3.3. Quality

Quality is a key demand from consumers and automakers.

The cornerstone of Valeo’s 5 Axes methodology, it is an

integral part of the Group’s culture.

Total Quality is not just a question of methodology; it is above all a

state of mind. It therefore it requires the involvement of everyone

at all times and in all circumstances. At Valeo, this approach is the

responsibility of all 69,800 Group employees.

The role of the Quality network is to ensure that everyone is

aware of and understands their individual responsibilities. It

also consists of evaluating problems and requirements in terms

of training support, and of training, supporting and validating

lessons to be retained and shared to avoid any recurrence.

The Valeo Quality network functions on the basis of a

decentralized network and involves each of the 5 Axes. the Quality System Manager validates internal procedures, checks that they are applied properly, and updates them to ensure that they are in line with both internal and external quality standards;

the Project Quality Manager ensures that the quality methodology is duly applied to projects and checks that projects are covered for their entire duration, in accordance with Valeo standards;

the Supplier Quality Manager manages the quality of components delivered, from the project phase right through the product’s lifecycle and assists supplier progress through the implementation of improvement plans;

•

•

•

•

•

•

−

−

−

the Production Quality Manager ensures that quality-specific tools are properly implemented within the manufacture process and coordinates the deployment of control plans as well as instructions for work. He/she also acts as the “voice of the customer” for all quality incidents to ensure the customer’s total satisfaction.

Valeo has also implemented a program of resident engineers,

to provide optimal customer support. Engineers are no longer

simply assigned to a given customer; they actually go and work

at the customer’s premises. As soon as a problem is detected,

the engineer communicates it to the appropriate people at

Valeo, so that actions can be defined immediately to protect

the customer. At the end of 2006, the Group had 56 resident

engineers; 39 in Europe, 10 in North America, 3 in South

America and 4 in Asia. Among these 56 people, a program of

warranty resident engineers was also deployed, whereby 10

resident engineers joined the customer teams, either at the

head offices or in their warranty management centers.

Reinforcing the Valeo culture involves the mobilization of all

employees, at all levels and is based on:

the San Gen Shugi approach, inspired by Japanese best practices

and based on a concrete analysis of what actually happens

on the shop floor. San Gen Shugi is based on reality: Gen-

ba (where and when a problem arises) Gen-butsu (using the

actual parts involved, whether above or below standard), Gen-

jitsu (with measurable facts). This attitude is founded on both

individual responsibility and teamwork;

the QRQC approach (Quick Response Quality Control) is also

essential. When a problem occurs it is immediately identified

and analyzed by the parties involved. Corrective action is

defined immediately and implemented within 24 hours. In the

event of a quality incident, meetings are held on the spot, to

identify the root cause of the incident and eliminate it for good.

These meetings involve employees from various functions as

required: production, logistics, maintenance, etc.;

in the automotive industry, non-quality of products is expressed

in ppm (the number of defective parts per million parts

produced). In five years, Valeo has reduced the number of

defective parts by a factor of 9. In 2006, non-quality of products

improved by 53% compared to 2005, to reach 15 ppm at the

end of 2006 (compared to 32 at the end of 2005). 63 Valeo

sites (compared to 48 at the end of 2005) were already below

10 ppm at the end of 2006.

4.3.4. Projects

Valeo set up a Projects Department towards the end of 2005 in

order to promote good project management practices, allowing

for the launch of reliable products, free of quality problems and

with guaranteed lifetimes. The role of this function is therefore to

ensure that all Group projects are launched successfully, in terms

of quality, deadlines and cost by implementing rigorous methods

and applying them to the Group’s entire Project network.

−

•

•

•

•


ACTiviTy 1The Group

The Project function covers all domains for developing new

applications, from standard products through to advanced

development projects. Directors, project managers and all

members of their teams work on development projects for

the full spectrum of automakers. Project teams consist of

buyers, sales staff and employees specializing in R&D, quality

and processes.

The methodologies implemented by the Projects function

are taken from the 5 Axes approach. There are four project

categories at Valeo: P3 (creativity), P2 (generic standards), P1

(customer application) and P0 (changes during the production

phase). This policy sets out in detail the innovation process

at Valeo. In 2006 the Valeo project portfolio featured around

690 P0 projects, 1,849 P1 projects and around 600 P2 and P3

projects, giving a total of 3,139 projects. It covers a wide variety

of products from simple sensors, to highly sophisticated systems

or complex integrated modules. The project management

method is described in a document entitled Constant Innovation

Policy.

It also covers Group best practice and details the organization of

teams, resource management guidelines and the development

of systems and modules. Lean Investment techniques are also

used to minimize production costs and maximize team outputs.

The QRQC approach has been adapted to suit the Projects

function and its deployment is currently underway.

4.4. Research and Development

Designing the automobile of tomorrow, creating

technologies and products in accordance with the market,

while anticipating its expectations and driving the market

through innovation: these are the fundamental principles

of Valeo’s Research & Development strategy.

Innovation is, more than ever before, at the heart of the Group’s

development strategy. Valeo engineers seek to anticipate

automakers’ demand for solutions that offer real added-value

for drivers: increased comfort, performance and respect for the

environment. In 2006, research and development expenses

represented 6.6% of sales, and over 562 new patents were

filed.

Faced with an ever more demanding market in terms of new

products, Valeo has developed the processes necessary for

reducing design lead times for new products. Thus, the Group

works upstream to improve the in-house efficiency of projects,

ensuring the appropriateness of actions scheduled and checking

that existing competences correspond to those required. (see

also paragraph 4.3.4 Projects). Major efforts are made to reduce

the cost of research and development, in order to satisfy market

expectations.

Since an innovation’s success is closely linked to its effectiveness

and close conformance to drivers’ expectations, Valeo deploys

a large range of tools, market research, forecasts and testing.

•

•

•

•

•

Surveys are carried out to gain a better understanding of

driver requirements and tests evaluate how new products

are perceived. These tools thus enable Valeo to measure the

extent to which innovations are accepted. The ultimate goal is

to quickly develop and implement innovations which are useful

to the driver and generate growth for Valeo.

To reinforce its technological offering, Valeo also forges

partnerships with top specialists, who are leaders in their

field. In 2006, these efforts focused predominantly on ongoing

partnerships such as the association with Raytheon, the radar

technologies specialist, Jabil Circuit concerning the production of

printed circuit boards, Iteris for lane departure warning systems

and IBM for the development of on-board software.

Valeo also partners a variety of universities and academic

institutions, such as France’s École des Mines, which develops

on-board cameras and pedestrian detection within the Driving

Assistance Domain. The Group also works on simulation

techniques and fluid mechanics with Stanford University in the

United States. A framework agreement was also reached with

ESIGELEC (in France) for the electronics.

Finally, Valeo proposed projects for competitive centers on

themes relating to energy, powertrains, mechatronics, software

and complex systems, but also invested in the governance

of some of these centers (MOVEO, MTA, System@tic), which

enables Valeo to help bring universities, industry and research

closer together.

valeo R&D centers are located throughout the world. The

Group had 68 at the end of 2006, employing nearly 7,000

people. Very high level R&D centers have also been opened

in the developing countries: Valeo has sites dedicated to R&D

in Casablanca (Morocco), Mexico City (Mexico), Prague (Czech

Republic), Wuhan (China), Brazil and Poland. Teams working at

these centers contribute to projects for both the local market

and Group-wide projects.

In 2006, Valeo announced the construction of a second R&D

center in Shanghai in China. This technical center will design

advanced climate control systems for Chinese, Japanese and

European car makers. When fully operational, the new technical

center will accommodate up to 60 highly qualified engineers

and technicians.

4.5. international Affairs

valeo develops, produces and commercializes original

equipment and aftermarket products and systems for all car

and truck manufacturers. The Group’s commercial policy extends

well beyond everyday commercial relations and involves forging

very close partnerships and accompanying their customers in

developing their markets, throughout the world.

•

•

•

•

•


ACTiviTy1 The Group

4.5.1. Automaker customers

The Group aims to supply all automakers. Valeo’s top five OEM

customers, representing a total 64.4% of Group sales are (in

alphabetical order) DaimlerChrysler, General Motors, PSA Peugeot-

Citroën, Renault-Nissan, and Volkswagen.

The Group’s biggest customer represents just over 17% of Valeo’s

sales.

Its main original equipment customers are (in alphabetical

order):

BMW;

Chery;

DaimlerChrysler;

Fiat (including Iveco);

Ford Motor Company;

General Motors;

Honda;

Hyundai;

Man;

Mitsubishi;

Navistar;

Paccar;

Porsche;

PSA Peugeot-Citroën;

Renault Nissan;

Scania;

Tata Motors;

Toyota;

Volkswagen Group;

Volvo Trucks.

4.5.2. Operational structure of International Affairs

International Affairs consists of three networks:

National Directorates, which act as veritable ambassadors

for Valeo in given geographical areas. There are nine National

Directorates, based in Germany, North America, South America,

South Korea, China, Spain, Italy, Japan and Poland. The role

of these National Directorates is to promote the Valeo brand

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

in these regions, establish close relationships with the key

customers in the regions and to resolve locally any legal or

social problems, where necessary.

Group Customer Directors are the Commercial Directors

responsible for major automaker customers. They number

nine, and each represents Valeo in dealings with a given

manufacturer and coordinate relations with the customer on a

Group-wide basis, for all Product Families.

The Sales and Business Development network, consisting of

eleven Sales Directors each of whom is linked to a Group Product

Family, defines the commercial strategy and is responsible for

day-to-day customer relations.

To underline Valeo’s role with regard to automaker customers

and showcase the Group’s innovations at an early stage in

the vehicle development process, Valeo organizes technical

presentations at the customer’s premises and also “Ride &

Drive” events. These operations give Valeo an opportunity

to demonstrate its latest innovations grouped together into

the various Domains and give guests the chance to test them

for themselves at the wheel of Valeo’s specially-equipped

demonstration vehicles. The events bring together different

stakeholders in a private setting at the automaker’s premises,

including business sector and platform managers, directors of

research & development, product marketing and purchasing.

Valeo is also present at the major international motor shows,

with the goal of developing commercial relations with its

customers.

Valeo has developed a certain number of tools to ensure that

commercial relations with its customers foster a context of

profitable growth and drive markets: the Customer Development

Plan, for example, is a veritable tool for promoting the Group’s

commercial strategy. Customer satisfaction surveys are also

carried out on a regular basis.

Valeo has also developed an entire training module dedicated

to improving the effectiveness of its sales force: the valeo

Sales Academy.

•

•

•

•

•


ACTiviTy 1Geographical presence

Geographical presence

The Group optimizes its industrial footprint on an ongoing

basis in relation to customer demand, markets and labor

costs.

In 2006, Valeo continued the deployment of its sites in Asia, as

part of its globalization strategy and approach to accompanying

its automaker customers. Valeo now has production facilities in

each of the world’s major vehicle assembly regions and new

sites based in countries offering the most competitive production

costs.

Valeo presence by region at 31/12/2006

Production plants

R&D centers

Distribution platforms

Number of employees

Western Europe 56 42 6 31 540

Germany, Belgium, Spain, France, United Kingdom, italy, Portugal, Sweden, Netherlands

Eastern Europe 14 1 2 10 160

Hungary, Poland, Czech Republic, Romania, Slovakia, Turkey

North America 14 12 7 200

USA, Mexico

South America 10 1 3 600

Argentina, Brazil

Asia 26 11 7 500

China, South Korea, india, Japan, Thailand, Malaysia, indonesia, iran

Africa 9 2 9 700

South Africa, Morocco, Tunisia, Egypt

12� 6� � 6� �00

As part of normal operations, the capacity of some sites is currently

being expanded.

At December 31, 2006, the Group’s real estate portfolio (land and

buildings) had a net book value of 565 million euros. It is largely

composed of production sites, mostly wholly owned.

The Group’s equipment is largely made up of technical facilities,

materials and tools. At December 31, 2006, they were stated as

having a net value of 1,016 million euros excluding fixed assets

under construction (see Chapter 3, note 4.3 on Fixed Assets).

Environmental constraints result from the regulations applicable

in this area to all Group establishments (see Environment p. 20,

Industrial and Environmental Risks p. 43 and Environmental

Indicators p. 48).


ACTiviTy1 Competitive context

Competitive context

The market for automotive components and systems is

subject to fierce competition, in terms of cost, quality,

service and technology.

For some product lines supplied by the Group on the original

equipment market, Valeo is consistently one of three to five major

suppliers who together represent more than half of the market

(in sales), the remainder being made up of a large number of

regional suppliers:

in several product lines, Valeo competes against the four largest

international automotive suppliers (in alphabetical order):

Robert Bosch, Delphi, Denso and Visteon;

•

for certain product lines, such as transmissions, thermal systems

and lighting systems, the leading suppliers include companies

that are smaller or more geographically concentrated, such as

Behr, Hella and Luk, etc.;

the following Product Families are among the world leaders

in each segment (in sales): Transmissions, Climate Control,

Engine Cooling, Wiper Systems, Lighting Systems, and Electrical

Systems. In addition, several products in Switches & Detection

Systems, Electronics & Connective Systems and Security Systems

enjoy other European or regional leadership positions (source:

Valeo).

•

•

Key events in 2006

1. Commercial success

valeo won several new contracts in 2006, which have helped

achieve the goal of increasing the number of valeo products

per vehicle. OE orders came to 1.3 times sales, the highest

level since 2001.

As a leading supplier, Valeo took part in the launch of the

Peugeot 207, assembled at the Poissy site in France, Madrid

in Spain, and Trnava in Slovakia. Twenty product lines from all

three of the Group’s Domains feature on this vehicle from the

PSA Peugeot Citroen Group.

A new contract for the Starter-Alternator Reversible System

(StARS) technology was signed with an European manufacturer,

and mass production is planned for 2007. The FG alternators and

FS starters were a commercial success, resulting in substantial

order-taking from major automakers on all continents.

Valeo Climate Control increased its market share with most

of its customers, notably with the renewal of a platform for

a French automaker, a rear ventilation system for a German

customer and the supply of several complete air conditioning

systems to Asian customers. Lastly, a world first: Valeo fitted

Luc Alphand’s Corvette at the Le Mans 24 Hour Race with an

air conditioning system adapted to the race conditions in order

to reduce driver fatigue.

Valeo Engine Cooling registered major orders for exchangers

and engine cooling modules from a US automaker in Europe

•

•

•

•

and in North America. Also, in the light of the tightening of

standards on pollutant emissions, this product family developed

an innovative water cooling system, integrated into an air

intake module, in partnership with a German manufacturer.

When the time came to update one of the main models by a

French manufacturer, Valeo Engine Cooling also won all orders

for its exchangers and engine cooling modules. A first order for

front-end modules was taken in China, and orders for exhaust

gas recirculation systems for coolers were registered in China

and Brazil.

Valeo Transmissions registered its first orders for dual mass

flywheels in Asia and for torque converters in North America.

The DKS compressor by Valeo Compressors was chosen by

Nissan and Mazda in Japan and Ford in North America.

Valeo Electronics & Connective Systems won wiring contracts

for the replacement of a future vehicle in the Seat range, the

replacement of a future utility vehicle by Renault and the

replacement of new designs in the Logan range.

In October 2006, Valeo announced that its new Park4UTM parking

assistance system would equip its first production vehicle—the

VW Touran—in the first half of 2007. This is a world first. Valeo

Switches & Detection Systems also significantly increased its

order-taking with Japanese manufacturers. It also registered

•

•

•

•


ACTiviTy 1Key events in 2006

new orders for the blind spot detection system, with a US

automaker.

At the same time as orders from French manufacturers were

increasing, Valeo Security Systems stepped up its international

development, particularly in Asia, with orders taken in China

from Chinese manufacturers for mechanical and electronic

steering column locks, and latch and handle collections, and

also from the Japanese automaker Nissan for the supply of

latches for a new program, with production planned at Wuxi

(China). In addition, a first order for immobilizers was placed in

India by an Indian manufacturer, and orders placed by Toyota in

Japan rose sharply, particularly for collections of locks, remote

controls, steering column locks and radio frequency receivers.

In Europe, Valeo Security Systems reached a record level of

orders taken with a major European automaker for handles,

locks and latches.

For Valeo Lighting Systems, 2006 was notably marked by a major

order for daytime lighting using innovative LED technology, from

a major European automaker. Xenon technology was used on

the new Nissan Altima in North America by Valeo Sylvania,

a US-based joint venture in this product family. Finally, this

product family boosted its order intake among various Japanese

manufacturers and a German automaker.

The year 2006 was marked by the launch of the first application

of an electronically controlled front motor with integrated

linkage for the front wiper system on the Citroen Picasso, which

will be followed by 2009 by two other programs.

Valeo Engine Management Systems was chosen to supply its

dual-fuel engine management system to Iran Khodro, with

•

•

•

•

mass production due to start in 2007. This major automaker

controls 50% of the Iranian automotive market. A new order for

engine-control calculators for the 1.6 liter atmospheric engine

by the Renault-Nissan partnership destined for the Renault

platforms was registered by this product family.

In addition, in terms of emissions control, 2006 was a good

year for order-taking among major European automakers, for

new engines that comply with the Euro 5 standards and for

new markets such as: chokes for the Renault turbo diesel 1.9

liter engine in the future Renault Megane, Laguna and Espace,

and the 2.0 liter for the future Renault Megane, Espace and

Trafic; the EGR modules and dual chokes for the Euro 5 2.0

liter turbo diesel engines for PSA Peugeot Citroen / Ford, for

the replacements of the Peugeot 607, 407, 308 and B58, the

Citroen C4, C5, C6 and C4 Picasso, the Ford Mondeo and Cmax,

and the Volvo S40, XC50 and V50; second generation EGR

valves for Volkswagen’s “common rail” 2.0 liter engines; EGR

gas cooling modules for Nissan, notably for the 2.5 liter diesel

engine in the Navara pick-up and the Pathfinder 4x4.

Thanks to an improved service level, a long-term contract

was signed between Valeo Service and a French automaker

for the development of new technologies in wiper systems,

transmissions and engine cooling for the aftermarket. Valeo

Service also signed other contracts to supply lighting products

in the Accessories range and LED technology for front and rear

lighting to major manufacturers.

An innovative approach with the development of a customer-

specific range saw Valeo Service signing a contract for wiper

blades with Halfords, a major UK chain selling replacement

parts.

•

•

•

2. Technological innovations

Throughout 2006, Valeo consolidated its position as a major

driver of automotive progress, and demonstrated its ability

to introduce innovations through its three Domains.

2.1. Domains

The Domains were established to promote innovation using

technology and synergies between product families, leading to

the commercialization of global solutions in the fields of safety

(Driving Assistance), the environment (Powertrain Efficiency), and

well-being (Comfort Enhancement).

2.1.1. Driving Assistance

The Park4UTM automatic park assist system automatically

parks a car in less than 15 seconds. Using ultrasound technology,

it makes city driving safer and more comfortable.

•

The Blind Spot Detection System contributes to reducing

collisions with unseen vehicles during lane change maneuvers.

This system monitors the blind spot on both sides of the vehicle.

If a moving obstacle, such as another overtaking vehicle, is

present in the blind spot, the driver is alerted through a visible

icon on the outside rearview mirror. This system combines two

areas of expertise: the short-range radar expertise of Valeo and

the in-depth knowledge of radar systems from Raytheon. This

system has been selected as a finalist for the 2007 Automotive

News PACE (“Premier Automobile Suppliers Contributions to

Excellence”) Awards in its product innovation category.

The LanevueTM lane departure system, co-developed

with Iteris, comprises a miniature video camera, which uses

algorithms to monitor the lane markings ahead of the vehicle. If

the driver leaves the lane without indicating, the system alerts

the driver so that (s)he can take corrective action.

•

•

2006 Reference document - VALEO2�

ACTiviTy1 Key events in 2006

valeo actively promoted its v360 demonstrator, a vehicle

equipped with a range of innovative driving assistance systems.

This vehicle demonstrates the successful integration of different

technologies designed to inform, alert, assist, and control.

This role is controlled by systems using various technologies,

including radar, cameras, LEDs, infra-red vision, ultrasound, and

control and power electronics.

2.1.2. Powertrain Efficiency

The StARS micro-hybrid is the first step towards hybridisation.

The system is based on a reversible fan-driven 14V starter-

alternator which acts as both starter and alternator. It consists

of a reversible machine and electronics, which puts the engine

on standby when the vehicle is at a standstill, and when the

driver releases the brake it starts the engine quickly and

silently. This system won a 2006 PACE Award in the European

Products category. Subsequent stages towards hybridization

are in development, notably with the recovery of kinetic

energy by storing energy in super-capacitors when the vehicle

slows down. This innovative solution is being promoted

using a demonstration Volvo V70 turbo diesel fitted with this

technology.

The Smart valve Actuation (SVA) system replaces the

conventional mechanical operation of engine valves with the

cam belt, camshaft and hydraulic cam followers. It reduces fuel

consumption by around 15-20%, and also restricts pollutant

emissions.

The UltimateCoolingTM vehicle thermal architecture is a

revolution in the thermal control of the various engine fluids

and engine peripherals, based on the principle of a single heat

transfer fluid. In addition to improving engine performance, this

system can reduce the space required by the cooling module at

the front of the vehicle by up to 40%. This more compact design

allows for greater freedom in style and for the integration of

pedestrian protection systems.

2.1.3. Comfort Enhancement

Valeo has developed a new generation of hands-free cards.

In addition to providing keyless locking, unlocking and ignition

functions, the new identifier can remotely memorize and

activate personal settings such as driving seat and rearview

mirror positions, and provides, via a screen, a wide range

of data such as fuel level, tire pressure and outside/inside

temperature, which help ensure a safe journey.

Valeo designs environmentally-friendly air conditioning systems.

By replacing the refrigerant HFC134a, which contributes to global

warming, with an alternative fluid or a natural gas called

R744, Valeo’s systems represent a significant technological

step forward, helping protect the environment and anticipating

regulation due to come into force in 2011.

Valeo’s product families have made other contributions to the three

Domains and are covered in more more detail (see Chapter 2.

Domains and Product Families, The Group).

•

•

•

•

•

•

2.2. Recognition of valeo’s R&D prowess

The Group’s potential for technological innovation continued

to benefit from wide recognition among market players.

The StARS micro-hybrid (Starter-Alternator Reversible System)

won a “Premier Automobile Suppliers Contribtion to Excellence”

(PACE) Award 2006 in the European products category. The

PACE Awards honor “superior innovation through technological

advancement and business performance among automotive

suppliers.” The prizes are awarded in partnership with

Automotive News, Microsoft, SAP and the Transportation

Research Center. This micro-hybrid system is currently available

on the Citroën C2 and C3 Stop&Start, the only one currently

available on the market.

In July, Valeo Climate Control’s air quality system received

the Nissan Global Supplier Award for Innovation.

Valeo won an Automechanika Innovation Award for its Power

Line Communication system in the “Systems” category. The

innovative technology makes it possible to integrate new

equipment while simplifying a vehicle’s electrical architecture.

Electrical power and data are simultaneously transmitted on 12V

cables for “plug & play” integration. This prize was presented

to Valeo during an award ceremony at the opening of the

Automechanika trade show, in September 2006 in Frankfurt.

In its Powertrain Efficiency Domain, Valeo is involved in PSA

Peugeot Citroen’s hybrid/diesel project, one of six projects

approved and financed by the French Innovation Agency, a

governmental organization created in August 2005 with a

total investment budget of 1.7 billion euros in the automotive

domain. The Industrial Innovation Agency also agreed to

invest 61 million euros in the LowCO

2Motion research project :

a 211.6 million euros project over the period 2007-2011,

supporting the joint development of camless technology and

micro-hybrid with regenerative braking technology.

2.3. Collaborations and partnerships

The policy of forming partnerships with the best specialists

in each sector in order to speed up the introduction of new

technologies in automobiles continued, as in previous years:

with Raytheon, the radar expert, Jabil Circuit for the production

of electronic cards, Iteris for lane departure surveillance systems

and IBM for on-board software.

2006 was also the first of a three-year partnership between

Valeo and the French rally racer Luc Alphand, for the All-

Terrain Rally World Cup and the Le Mans Endurance Series.

This partnership is designed to allow Valeo to promote its

image as an innovative company looking for big challenges.

There is a technical aspect to the partnership, Valeo develops

lighting systems, wiping systems, and air-conditioning for the

vehicles in the Mitsubishi Motor Sports Team and Luc Alphand

Aventures. This year of partnership was marked by several Luc

•

•

•

•

•

•


ACTiviTy 1Key events in 2006

Alphand victories in all-terrain rallies: he won Dakar 2006 in

Africa, the “Por las Pampas” in Argentina, and in the UAE, the

Dubai Desert Challenge; he was also in winning positions for

the Le Mans Endurance Series.

3. Strategic operations

The acquisitions/disposals strategy is designed to reinforce

its three Domains and increase the organic growth potential

of the Group.

In this context, on June 29, 2006, Valeo announced the creation

of a 50/50 joint venture with its affiliate Ichikoh, one of the

leaders in lighting systems in Japan, with a view, initially, to

manufacturing lighting systems for Japanese automakers based

in China. A new 34,000 m² site in Foshan, near Guangzhou, will

start production in April 2007. At full capacity it will employ a

workforce of 400. This is the Group’s thirteenth joint venture

in China.

At the same time, in order to consolidate its operational facilities

in lighting systems in China, the Group increased from 75%

•

•

to 100% its shareholding in Hubei Valeo Auto Lighting Systems

Co., its other lighting joint venture in this country. Valeo’s lighting

systems units in China benefit from the Wuhan R&D center,

which employs 70 engineers.

The strategy of focusing on three Domains has resulted in

the disposal of Logitec, a logistic business in Japan which was

acquired in 2000 with the climate control businesses of Zexel,

and also in the disposal of Valeo’s entire 14.8% stake in Parrot

for a sum of 38 million euros.

Valeo sold its Motors & Actuators business, considered

non-strategic, to the Japanese group Nidec, for a sum of

142 million euros.

•

•

4. Operational excellence

4.1. Optimizing industrial facilities

Valeo continued to optimize its industrial facilities in order

to support its customers and ensure it has a competitive

cost base.

Valeo Electronics & Connective Systems closed down its

industrial activities at the Czechowice site in Poland. The

closure plan for the Rochester site (Wiper Systems) in the

United States was pursued, as defined and negotiated in 2005.

The deal signed with the IUE-CWA union Local 509 for the

reduction of headcount until closure of the Wiping Systems

plant on July 31, 2008. An information / consultation procedure

relating to the plan to dispose of the business of the joint

venture Valeo Plastic Omnium in Douai was initiated, following

Renault’s decision to change the technical concept for the front-

•

end of the vehicle replacing the current Megane and Scenic,

leading to the elimination of the modular concept. The Reims

site (Engine Cooling), the Abbeville site (Security Systems) and

the Amiens site (foundry – Transmissions) in France underwent

major restructuring. The four sites of the Motors & Actuators

product family - Bietigheim (Germany), Santa Perpetua (Spain),

Juarez (Mexico) and Zielonski (Poland) – were sold to Nidec.

The Diadema and Cantareira sites of Valeo Security Systems

were closed, and their activities transferred to the Garulhos

site in Brazil.

Two sites were opened at SeongJu (Transmissions) in South

Korea and at Changchun (Compressors) in China. An R&D

center (Climate Control) was opened in China in July 2006 and

a technical center (Switches & Detection Systems) of nearly

1,000 m² employing more than 50 engineers and technicians

was opened at Veszprem in Hungary, in August 2006.

•


ACTiviTy1 Key events in 2006

4.2. Supplier integration

In the difficult context of inflation in raw material prices

in 2006, Valeo continued to pursue its policy of selecting

and integrating suppliers as far upstream as possible, to

make them preferred partners in the long term, and to help

reduce costs and allow Valeo to communicate its quality

standards to suppliers.

The Group demonstrated great resistance to the record inflation

in raw material prices by increasing the use of all purchasing

resources available and pursuing its program to reduce the

number of its suppliers. The panel fell by 277 to around 2,728 at

end December 2006, while purchasing volume stood at around

5.1 billion euros. Valeo also pressed ahead with Convergence, a

program designed to engineer a dramatic cost reduction while

improving the quality of products produced by our suppliers.

This program currently includes almost 276 suppliers, i.e. almost

10% of the Group’s suppliers, and 58% of purchasing volume.

The VIP (Valeo integrated partners) program continued in 2006,

with 98 VIP suppliers at the end of the year.

The Group also continued to increase the share of supplies

originating from low-cost countries, which grew from 26% in

2005 to 33% in 2006.

The online purchasing system (reverse bidding) used by Valeo

that allows it to optimize purchasing prices and withstand

price increases, represented a record amount of more than

1 billion euros in reverse bidding in 2006 (compared to 631

million euros in 2005).

4.3. Awards

The quality of Valeo’s products and services was recognized

by its customers and institutional partners, testifying to the

Group’s operational excellence.

The third biggest Chinese manufacturer of heavy-duty trucks,

CNHTC, gave its Strategic Partner Award and its Best Product

Quality Award to NVCC, the Valeo Transmissions Division in

Nanjing.

The Transmissions Division in Bursa (Turkey) won the Best

Supplier Award from Ford Otosan Turkey.

PSA Peugeot Citroen awarded an EcoTech prize for reducing

technical costs to Valeo Electronics & Connective Systems and

its quality prize to Valeo Climate Control for its complete air

conditioning system and control panels.

•

•

•

•

•

•

Valeo won two Superior Awards for Quality from Toyota Europe

in recognition of the excellent performance of Valeo Lighting

and Valeo Transmissions.

The US Auto Division of Valeo Engine Cooling won Honda’s

Supplier Performance Award.

The Heavy-Duty Division of Valeo Engine Cooling in Jamestown,

USA, received Ford’s Silver World Excellence Award for its

performance in terms of quality, costs and delivery.

The Mexican plant at San Luis Potosi (Engine Cooling) received

a prize from the Volkswagen Group in the Excellence in

Development category.

Valeo Climate Control in Japan was named Best Supplier of the

Year 2005 by Fuji Heavy Industry.

Group Auto Union International awarded its Silver Prize for the

Best Supplier to Valeo Service.

The Engine Cooling and Lighting Systems product families were

named among the 22 best suppliers of the year 2005 by Volvo

Cars.

Hyundai-Kia Motors gave its Management Innovation Supplier

Award to the Korean Division of Valeo Electrical Systems, which

demonstrated industrial excellence through achieving a quality

level of 0 ppm (defective parts per million) in 2006. FVW gave

Valeo Electrical Systems Shanghai in China the 2006 FVW

Excellent Quality Award. The same division was also named

a 2006 Excellent Supplier by Liuzhou Wuling Liuji Dynamical

Co. Ltd.

Valeo Engine Cooling and Valeo Climate Control in Itatiba

(Brazil) were named Best Company To Work For, for the sixth

consecutive time, by Exame magazine.

Valeo Climate Control received the Nissan Aftermarket Product

Development Award for the development of its anti-allergy

filter kit for the aftermarket.

The Front-End Division of Valeo Engine Cooling in Camaçari in

Brazil was named Supplier of the Year by Ford.

The MAIS Award in the Evolution category went to Valeo Service

Brazil as the best manufacturer of replacement parts.

Valeo Service’s “beep & park” park assist system was selected

Product of the Year in the Car category in France.

The Eastern Europe Division of Valeo Service has achieved

superior levels of quality and service for its customer Inter Cars

(members of the ATR group in Poland).

•

•

•

•

•

•

•

•

•

•

•

•

•

•


ACTiviTy 1Recent events and outlook

Recent events and outlook

In December 2006, Valeo announced the signing of a draft

agreement with Ford Motor Company for the acquisition of

the Sheldon Road site in Plymouth, Michigan, which specializes

in the production of climate control systems. This acquisition

is conditional on a new competition agreement being signed

with the United Auto Workers Union.

On March 5, Valeo announced that the French Agency

for Industrial Innovation (AII) had agreed to fund its

LOwCO2MOTIONTM research program to improve the efficiency

of automobile engines and reduce their CO2 emissions, to the

tune of 61 million euros. The AII funding depends on obtaining

approval from the European Commission.

Also on March 5, 2007, the Pardus European Special

Opportunities Master Fund LP announced that on February 27,

2007 it exceeded the 10% threshold of voting rights, and at

March 1, 2007, held 10.57% of the capital and 10.36% of the

voting rights in the Company. In its declaration of intent, the

•

•

•

Pardus European Special Opportunities Master Fund LP declared

it was not acting in concert with any third party and had no

immediate plans to take over Valeo, whilst reserving its right to

continue buying and selling Valeo shares depending on market

opportunities, and to request the appointment of one or several

persons to Valeo’s Board of Directors.

Then, in a letter dated March 21, 2007, the Pardus European

Special Opportunities Master Fund LP declared it had exceeded,

on that date, the threshold of 12% of the Company’s capital

and voting rights.

Finally, the Board of Directors’ meeting held on March 22,

2007 announced that it had received notice of interest from

an investment fund targeting the Company’s capital. The Board

believed it was in the Group’s interest to give it preliminary and

non-exclusive consideration, whilst at the same time examining

other strategic options.

•

•


ACTiviTy1


2ManageMent RepoRt

Accounting methods P. 34

Statement of income P. 34

Main investments over the past three years P. 36

Change in stockholders' equity P. 37

Provisions P. 38

Cash flows and debt P. 39

Commitments P. 39

Remuneration of corporate officers and directors P. 39

Risks and uncertainties P. 41

Information likely to be impacted by a public tender offer P. 43

Claims and litigation P. 44

Outlook P. 44

Subsequent events P. 45

Parent company financial statements P. 45

Environmental Indicators P. 45

Social indicators P. 55


MAnAgEMEnt REPORt2 Accounting methods

1. Accounting methods

Pursuant to European Union regulation 1606/2002 of July 19,

2002, the consolidated financial statements have been prepared

in conformity with International Financial Reporting Standards

(IFRS) approved by the European Union.

The Group has elected for early application, respectively as of

January 1, 2004 and 2005, of the two following amendments to

IFRS that are obligatorily applicable as from January 1, 2006:

the amendment to IAS 19 introducing the option to recognize

actuarial gains and losses on defined benefit pension plans in

reserves;

the amendment to IAS 39 relating to hedge accounting of

forecast inter-company transactions.

•

•

New accounting standards that are not yet obligatorily applicable,

that have not been adopted early and that may have an impact

on the Group’s financial statements are as follows:

IFRS 7 "Financial Instruments: Disclosures", applicable as from

January 1, 2007;

IFRS 8 "Operating Segments"; this standard, which has not yet

been approved by the European Union, is obligatorily applicable

as from 2009.

The potential impacts of these two standards on the Group’s

financial statements are currently being analyzed.

•

•

2. Statement of income

Unless otherwise indicated, the comments given below refer to

the data for 2004 and 2005, adjusted as of December 31, 2006

for the contribution of Valeo Motors & Actuators, a non-strategic

activity as defined in note 1.19 of the consolidated financial

statements.

2.1. Review of operations

total operating revenues for the consolidated Group increased

by 2.6% to 10,086 million euros in 2006 from 9,834 million

euros in 2005. Changes in the scope of consolidation (mainly

attributable to the full-year consolidation of Johnson Control Engine

Electronics, Zexel Valeo Climate Control and the climate control

and cooling business in Thailand, as well as the disposal of Zexel

Logitec Company on June 30, 2006) had a positive impact of 1.5%

on total operating revenues. Changes in exchange rates made a

positive contribution of 0.6%. On a like-for-like basis (constant

Group structure and exchange rates), total operating revenues

rose 0.5% over the year, as compared with an estimated 1.2%

rise in the Group's automotive production benchmark (1).

Full-year net sales reached 9,970 million euros, comprising

8,214 million euros from the original equipment segment (82%

of the total) and 1,756 million euros from the aftermarket (18%),

compared to 8,003 million euros (82%) and 1,733 million euros

(18%), respectively, in 2005.

Full-year sales generated in Europe were up 2.3% in 2006 to

6,862 million euros, representing 69% of consolidated sales by

market (unchanged from 2005). Like-for-like sales edged up

0.9%, while light vehicle production in the region advanced by

2.7% (source: J.D. Power).

At 1,325 million euros, Group sales in north America contracted

by 2.9% compared to 2005. On a like-for-like basis, North

American sales retreated 2.7%, consistent with local light vehicle

production (source: J.D. Power). North America accounted for 13%

of consolidated sales in 2006, down from 14% in 2005.

Asia and the Middle East registered sales of 1,246 million euros,

up 7.6% compared to 2005. In Asia, like-for-like sales growth

came in at 3.6%, while local automotive production surged 8.8%

(1) Change in the production of light vehicles in Europe, North America, South America and Asia, estimated by J.D. Power and weighted by each region’s contribution to consolidated sales.

(1) Change in the production of light vehicles in Europe, North America, South America and Asia, estimated by J.D. Power and weighted by each region’s contribution to consolidated sales.


MAnAgEMEnt REPORt 2Statement of income

on the back of strong performances in China (up 26.8%) and Japan

(up 6.1%). Asia and the Middle East contributed 13% of Group

sales, as against 12% in 2005.

Sales generated in South America totaled 468 million euros,

up 9.1% compared to 2005. Like-for-like sales remained stable

year-on-year, while local automotive production grew by 7.7%

(source: J.D. Power). In 2006, South America represented 5% of

consolidated sales (4% in 2005).

2.2 Results

Consolidated gross margin amounted to 1,539 million euros in

2006, down 1.3% on the prior-year figure, and represented 15.4%

of sales versus 16.0% in 2005. Further increases in raw material

prices (notably non-ferrous metals and plastics) accounted for the

equivalent of 0.7% of net sales.

Research and development expenditure (1) reached 661 million

euros (6.6% of total operating revenues) compared to 640 million

euros (6.5%) in 2005. Excluding other operating revenues (mainly

customer contributions to development expenditure), these

expenses represented 5.4% of total operating revenues, down

0.1 percentage point on 2005.

The three Domains (2) accounted for 626 million euros or 94.7%

of R&D expenditure (2.8% higher than in 2005), breaking down

between Driving Assistance (178 million euros, up 1.7%),

Powertrain Efficiency (216 million euros, up 3.3%) and Comfort

Enhancement (232 million euros, up 3.1%).

Selling and administrative expenses totaled 195 million

euros (up 2.1% year-on-year) and 458 million euros (up 1.3%),

respectively. The proportion of selling and administrative expenses

to total operating revenues remained stable.

Taking into account other operating revenues, which amounted

to 116 million euros (98 million euros in 2005), operating margin (3)

came in at 341 million euros, down 8.8% on the 2005 figure

(374 million euros). In 2006, operating margin represented 3.4% of

total operating revenues, compared to 3.8% in the previous year.

Other income and expenses amounted to an net expense of

70 million euros (including 61 million euros in restructuring costs

and asset impairments, and a 14 million euro gain on the disposal

of Zexel Logitec Company), compared to net other expenses of

50 million euros in 2005 (including restructuring costs and asset

impairments totaling 34 million euros).

As a result, consolidated operating income for the year came in

at 271 million euros (2.7% of total operating revenues) compared

to 324 million euros (3.3%) in 2005.

The cost of net debt went from 52 million euros in 2005 to

57 million euros in 2006.

net other financial expenses amounted to 9 million euros in

2006 (52 million in 2005), and include a 24 million euro gain on

the disposal of the Group's interest in Parrot following its stock

market listing.

Income before income taxes came out at 205 million euros in

2006, which was 6.8% lower than the previous year.

Income tax expense was 75 million euros, representing an

effective Group tax rate of 36.6%, compared to 66 million euros

and 30.0%, respectively, in 2005.

Including income from non-strategic activities (36 million

euros, including a post-tax disposal gain of 41 million euros) and

minority interests (5 million euros), net attributable income

totaled 161 million euros, compared to 142 million euros one

year earlier.

Basic earnings per share, computed based on net attributable

income, was 2.10 euros (including 0.47 euro attributable to

income from non-strategic activities) compared with 1.80 euro

in 2005 (including a 0.15 euro loss attributable to non-strategic

activities). Diluted earnings per share for the year amounted to

2.09 euros, compared with 1.79 euro in 2005.

(1) Figures for 2004 to 2006 are now presented net of research tax credits previously recorded under “income taxes” (see note 3.3 to the consolidated financial statements).

(2) The objective of the Domains of Innovation is to foster and support innovation by bringing together different technologies and product

groups in order to propose comprehensive solutions based on safety (Driving Assistance), the environment (Powertrain Efficiency), and comfort (Comfort Enhancement).

(3) Operating income before other income and expenses.

(1) Figures for 2004 to 2006 are now presented net of research tax credits previously recorded under “income taxes” (see note 3.3 to the consolidated financial statements).

(2) The objective of the Domains of Innovation is to foster and support innovation by bringing together different technologies and product

groups in order to propose comprehensive solutions based on safety (Driving Assistance), the environment (Powertrain Efficiency), and comfort (Comfort Enhancement).

(3) Operating income before other income and expenses.


MAnAgEMEnt REPORt2 Main investments over the past three years

3. Main investments over the past three years

3.1. 2006

In 2006, investments in property, plant and equipment totaled

494 million euros, representing 4.9% of total operating revenues.

Investments in intangible assets – mainly capitalized development

expenditure – amounted to 165 million euros (1.6% of total

operating revenues). Changes in the scope of consolidation

(essentially the disposals of Zexel Logitec Company and the Valeo

Motors & Actuators business) had a 124 million euro net impact

on income. These disposals fall within the Group's strategy of

sharpening its focus on businesses having reached critical mass

in the three Domains.

3.2. 2005

In 2005, investments in property, plant and equipment

amounted to 441 million euros, or 4.5% of total operating

revenues. Investments in intangible assets – mainly capitalized

development expenditure – totaled 145 million euros (1.5%

of total operating revenues). Acquisition-led growth over the

year absorbed 466 million euros. Valeo implemented targeted

strategic operations aimed at boosting the technological offer

of its Domains and increasing the organic growth potential of its

Product Families. In particular, the acquisition of Johnson Controls

Engine Electronics (effective March 1, 2005) for 316 million euros

considerably boosted the potential of the Group's Powertrain

Efficiency Domain. Similarly, the acquisition (effective April 1,

2005) of the remaining shares held by Bosch in the climate

control and engine cooling businesses in Asia, enhanced the

growth potential of the Group's related activities in the promising

Asian markets, and strengthened its expertise in climate control

compressors, one of the main components of climate control

systems. In 2005, the Group also increased its shareholding in

Ichikoh, one of Japan's leading players in lighting systems, from

22.7% to 28.2%.

3.3. 2004

In 2004, Valeo spent a total of 413 million euros, or 4.5% of

the year's total operating revenues, on acquiring property, plant

and equipment, while investments in intangible assets – mainly

capitalized development expenditure – totaled 122 million euros

(1.3% of total operating revenues). Changes in the scope of

consolidation led to net disbursements of 73 million euros. In

line with its strategic objectives of consolidating its footprint in

Asia, Valeo took control of Shanghai Valeo Automotive Electrical

Systems in China and also increased its shareholdings in its China-

based motors and clutches operations.


MAnAgEMEnt REPORt 2Change in stockholders' equity

4. Change in stockholders' equity

4.1. Stockholders' equity

At December 31, 2006, stockholders' equity including minority

interests increased 35 million to 1,752 million euros, compared

to 1,717 million euros at December 31, 2005, reflecting:

deductions: the payment of 84 million euros in dividends relating

to 2005 and translation adjustments for 69 million euros;

additions: net income for the year of 166 million euros.

•

•

4.2. Share capital

4.2.1. Changes in share capital

The company's share capital went from 77,510,357 shares with

a par value of 3 euros each at December 31, 2005 to 77,580,617

shares with a par value of 3 euros each at December 31, 2006

following the exercise of 69,555 stock subscription options

granting entitlement to 70,260 shares (1).

At December 31, 2006, a maximum of 3,744,050 shares could

be issued on exercise of stock options awarded to the Group's

employees and corporate officers. At that date, all of the

OCEANE bonds were outstanding and were convertible and/or

exchangeable for 10,105,439 shares (2).

4.2.2. treasury shares

At year-end, Valeo held 686,704 of its own shares (0.89% of the

share capital) with a unit value (based on the purchase price) of

33.74 euros. At December 31, 2005, Valeo held 807,704 of its

own shares (1.04% of the share capital).

The number of treasury shares at December 31, 2006 includes:

(i) 617,704 shares to be allocated on the exercise of stock

options; and (ii) 69,000 shares to be used in connection with the

liquidity contract signed with an investment services provider

on April 22, 2004, and as required by the French Association

of Investment Companies (Association Française des Entreprises

d’Investissement) code of ethics.

On the date the liquidity contract was signed, 220,000 Valeo

shares and a sum of 6,600,000 euros were allocated to its

implementation. At December 31, 2006, 69,000 shares and

2,075,401 euros were allocated to the implementation of the

liquidity contract.

Through the investment services provider, in 2006 Valeo

acquired 1,178,396 shares at an average price of 29.53 euros,

and sold 1,299,396 shares at an average price of 29.72 euros.

In 2006, trading and transaction fees incurred within the scope

of the liquidity contract totaled 264,715 euros, compared to

271,615 euros in the previous year.

Market operations were carried out in accordance with the fifth

resolution adopted by shareholders at the General Meeting of

May 17, 2006. They were carried out under the terms of the

liquidity contract set up with an investment services provider, with

a view to boosting the liquidity of Valeo shares and stabilizing

their listed price.

4.2.3. Employee shareholdings

At December 31, 2006, employees held 1,041,149 shares (1.34%

of the share capital) under the terms of the Group's savings plans,

either directly or through two investment funds. At the 2005

year-end, employees held 1,418,375 shares, representing 1.83%

of the share capital at that date.

(1) Following the public share buyback offer and simplified public tender offer carried out in May and June 2005, which resulted in Valeo purchasing its own shares at an amount higher than the publicly quoted price, the allocation ratio for stock subscription and purchase options stood at 1.01 share per option.

(1) Following the public share buyback offer and simplified public tender offer carried out in May and June 2005, which resulted in Valeo purchasing its own shares at an amount higher than the publicly quoted price, the allocation ratio for stock subscription and purchase options stood at 1.01 share per option.

(2) Following the public share buyback offer and simplified public tender, and in accordance with applicable regulations and the contract governing the OCEANE bond issue, the conversion/exchange ratio applicable to the bonds was amended from 1 share per bond to 1.013 share per bond.

(2) Following the public share buyback offer and simplified public tender, and in accordance with applicable regulations and the contract governing the OCEANE bond issue, the conversion/exchange ratio applicable to the bonds was amended from 1 share per bond to 1.013 share per bond.


MAnAgEMEnt REPORt2 Provisions

4.2.4. transactions carried out by senior executives involving Company shares

The Company was not informed of any transactions falling within the scope of article L.621-18-2 of the French Monetary and Financial

Code (Code monétaire et financier) in 2006.

4.3. Dividends

5. Provisions

The balance sheet at December 31, 2006 showed total provisions of

1,355 million euros (including a non-current portion of 955 million

euros), versus 1,554 million euros (including a non-current portion

of 1,123 million euros) at the previous year-end.

Total provisions for reorganization expenses fell 5 million euros

on the year-earlier period, to 176 million euros.

Provisions for pensions and other employee benefits

totaled 748 million euros at the year-end, 135 million euros

lower than at December 31, 2005. The decrease in this item

reflects (i) the recognition in equity of actuarial gains and

losses for an amount of 27 million euros; (ii) changes in the

scope of consolidation for 27 million euros; and (iii) translation

adjustments for 34 million euros.

Other provisions decreased from 490 million euros at end-2005

to 431 million euros at December 31, 2006.

Dividends per share paid out for the last three years are analyzed in the table below:

Yeargross dividend per share

(In euros)net dividend per share

(In euros)tax credit/allowance

(In euros)total excluding tax credit

(In millions of euros)

2003 1,57 1,05 tax credit of 0.525* 86

2004 na 1.10

Eligible for the 50% tax allowance provided for in article 158-3-2 of the French general tax

Code (Code générale des impôts). 91

2005 na 1.10 84

* Applicable to shareholders eligible for the 50% tax credit.


MAnAgEMEnt REPORt 2Commitments

The Group's main commitments break down as follows at December 31:

(In millions of euros) 2006 2005 2004

Lease commitments 76 79 74

guarantees and deposits 29 30 33

non-cancelable purchase commitments for fixed assets 72 57 58

Other commitments 101 66 49

TOTAL 278 232 214

These commitments are described in note 5.3 to the consolidated financial statements.

6. Cash flows and debt

In 2006, net cash provided by operating activities amounted to

680 million euros (717 million euros in gross operating cash flows)

compared with 820 million euros one year earlier (778 million

euros in gross operating cash flows).

Excluding the impact of changes in the scope of consolidation,

net cash used in investing activities during the year totaled

610 million euros (165 million euros relating to intangible assets

and 494 million relating to property, plant and equipment),

compared to 548 million euros in 2005 (145 million euros relating

to intangible assets and 441 million euros relating to property,

plant and equipment). Changes in the scope of consolidation

resulted in a net inflow of 124 million euros, compared with a

net outflow of 466 million euros in 2005.

Financing activities generated cash outflows of 643 million euros

(including 553 million euros in repayments of long-term debt)

compared to cash inflows of 297 million euros in 2005, which

included a 252 million euro share buyback.

The net decrease in cash and cash equivalents for 2006 amounted

to 448 million euros, compared to a net increase of 131 million

euros one year earlier.

net debt – which is the sum of debt, net current financial

liabilities, short-term loans and bank overdrafts, less cash and cash

equivalents – totaled 968 million euros at the year-end, compared

to 1,080 million euros at December 31, 2005. The consolidated

gearing ratio is therefore 55% at December 31, 2006, compared

to 63% at December 31, 2005.

8. Remuneration of corporate officers and directors

8.1. Corporate officersThe remuneration paid by Valeo to Mr Thierry Morin, Chairman and

CEO, is set by the Board of Directors based on recommendations

provided by the Remuneration Committee. In 2006 the gross fixed

remuneration for the year paid by Valeo to Mr Morin amounted

to 1,519,538 euros (compared to 1,302,395 euros in 2005),

including gross remuneration of 1,500,288 euros (1,284,000 euros

in 2005) and benefits in kind of 19,251 euros (18,395 euros in

2005). Thierry Morin did not receive any variable compensation

in 2006.

Thierry Morin also earned directors’ fees of 35,000 euros in his

capacity as director of Valeo, the same amount as in 2005.

7. Commitments


MAnAgEMEnt REPORt2 Remuneration of corporate officers and directors

The gross remuneration received by Mr Morin from companies

controlled by Valeo (within the meaning of article L. 233-16 of the

French Commercial Code) totaled 120,883 euros (118,758 euros

in 2005), made up of directors’ fees of 45,750 euros (unchanged

from 2005) and a contribution of 75,133 euros to a pension fund

(73,008 euros in 2005). Thierry Morin did not receive any benefits

in kind in 2006 from companies controlled by Valeo.

In view of the prohibited periods set down by French stock

exchange regulations, the Board did not award any stock options

or free shares to Mr Morin in 2005. The award was deferred until

March 2006, and comprised 150,000 stock options and 50,000

free shares granted under the following conditions:

the Board set the purchase price for the shares underlying

the stock options at 33.75 euros, it being specified that (i)

50% of the options awarded to Mr Morin are exercisable from

March 3, 2008, and all of the options from March 3, 2009, and

that the shares obtained on exercise of the options may not be

sold before March 3, 2010; and (ii) options not exercised will

become null and void on March 2, 2014;

the definitive vesting date for free shares was set by the Board

of Directors at June 3, 2008 on condition that: (i) Thierry Morin

continues to hold an employment contract or a corporate

officer's position within the Valeo Group at that date; and (ii)

the vesting of 30,000 of the shares awarded are subject to

performance criteria specifying operating margin targets for

2006 and 2007.

In 2006, Mr Morin did not exercise any options awarded in

previous years.

•

•

Mr Morin continues to benefit from the supplementary pension

scheme set up for senior executives who were formerly members

of the Management Board, as agreed by the Supervisory Board

on October 17, 2002. This scheme is designed to top up existing

pension benefits (Social Security, Arrco, Agirc, etc.) to enable

beneficiaries to acquire benefits representing 2% of their final

salary per year of service with the Group. The total amount of

pension benefits may not exceed 60% of a beneficiary’s final

salary. The scheme only applies to beneficiaries who have a

minimum of 15 years' service in the Valeo Group when they

retire and for whom Valeo or one of its subsidiaries was their last

employer at their retirement date.

Finally, should Mr Morin leave the Company following a decision

of the Board of Directors or of his own volition in the event of

a difference of opinion concerning the strategy pursued by the

Board further to a public tender offer, his termination benefits

are set at three times his most recent annual salary, excluding

bonuses. These benefits are not payable in the event that the

Board’s decision is taken on the grounds of gross misconduct in

the performance of his duties.

8.2. DirectorsDirectors receive directors' fees, which are paid every six months.

However, these fees are not paid if directors attend fewer than

half the Board meetings or, if applicable, meetings of committees

formed within the Board of which they are a member, over the

six-month period.

Directors’ fees are allocated to members of the Board of Directors as follows: 20,000 euros for each director and an additional 15,000 euros

for those participating in one of the aforementioned committees.

Total directors' fees paid to Board members in 2006 were 305,000 euros (301,250 euros in 2005), as follows:

(In euros)

thierry Morin 35,000

Carlo De Benedetti -

Pierre-Alain De Smedt 35,000

François grappotte 35,000

Philippe guédon 35,000

Erich Spitz 27,500

Alain Minc 35,000

Véronique Morali 27,500

Jean-Bernard Lafonta 35,000

Yves-André Istel 20,000

Daniel Camus 10,000

Jérôme Contamine 10,000

In 2006, no Board member apart from Thierry Morin (see

pages 160 and 161) and Yves-André Istel received any other

remuneration or benefit. Directors were not awarded stock

subscription or purchase options or free shares, and none of them

hold stock subscription options.


MAnAgEMEnt REPORt 2Risks and uncertainties

9. Risks and uncertainties

9.1. Industrial and environmental risks

9.1.1. Dependence on the automotive sector

The Group's sales are dependent on the level of automotive

production, especially in Europe and North America. Production

itself is affected by a number of factors, especially vehicle stock

levels, consumer confidence, employment trends, disposable

income and interest rates. The volume of production is also

influenced by government initiatives, especially those designed to

encourage vehicle acquisition, sales agreements, new regulations

and social issues such as strikes and walkouts.

Valeo's four main customers account for almost 60% of its OE

sales. In decreasing order of sales these are Renault-Nissan, PSA

Peugeot Citroën, Volkswagen and DaimlerChrysler, each of which

account for between 10% and 20% total sales.

Supply contracts take the form of open orders for all or part of the

equipment needs of a vehicle model, with no volume guarantee.

They are granted directly for the vehicle's individual functions and

generally last for the model's lifespan. Valeo's sales and results can

therefore be impacted by a model's commercial failure and/or by

the Group not being selected to work on the production of a new

range of vehicles. The risks are however broadly diversified, with

Valeo’s wide range of products and services used in the production

of a very large number of vehicles.

9.1.2. Environmental risks

In the various countries in which it operates, the Group's business

is subject to diverse and evolving environmental regulations

which constantly raise the standard of environmental protection.

Valeo's environmental policy is described in the activity report,

and is designed to control and minimize environmental risks as

far as possible.

9.2. Market risks

The Group operates in an international environment in which it

is confronted with market risks, specifically foreign currency risk,

price risk and interest rate risk. It uses derivatives to manage and

reduce its exposure to changes in foreign exchange rates, raw

materials prices and interest rates. In general, foreign currency

risks, price risks in respect of base metals and interest rate risks

for all Group companies are managed centrally by Valeo.

9.2.1. Foreign currency risk

Group entities may bear transaction risk in respect of purchases

or sales transacted in currencies other than their functional

currency. Hedging of subsidiaries’ current and future trading and

investments transactions is generally performed for durations

of less than six months. Subsidiaries principally hedge their

transactions with Valeo, the parent company, which hedges net

Group positions with external counterparts. Based on the net

foreign currency position at year-end, a movement in exchange

rates would only have a minor impact on the Group’s consolidated

financial statements.

The Group is also exposed to foreign currency risk through its

investments in foreign subsidiaries, particularly to risks of a

movement in the exchange rate of a subsidiary’s currency

against the Group’s functional currency. The Group can decide on

a case-by-case basis to hedge the net investment. No derivative

instrument relating to hedging of a net investment is recognized

in the Group balance sheet at December 31, 2006.

9.2.2. Metals risk

The Group's industrial activity requires the use of metals,

particularly non-ferrous metals. The Group hedges its future

purchases of base metals over a period which is generally

less than six months. However, the Group may occasionally

contract hedges for periods longer than six months, or it may

cease hedging certain metals altogether.

The raw materials currently hedged (aluminum, processed

aluminum, copper, zinc and tin) are quoted on official markets. The

Group favors hedging instruments which do not involve the physical

delivery of the underlying commodity. At December 31, 2006, the


MAnAgEMEnt REPORt2 Risks and uncertainties

Group’s balance sheet shows an unrealized gain of 6 million euros

with respect to cash flow hedges.

9.2.3. Interest rate risk

The Group uses interest rate swaps to convert exchange rates

on its debt into either a variable or a fixed rate, either as from

origination or during the term of the loan.

At December 31, 2006, 82% of long-term debt is at a fixed rate

(83% at December 31, 2005) and the Group’s financing rate is

4.5%, down by 0.1% on 2005.

For fixed-rate debt, a 1% fall in interest rates would lead to

changes in the fair value of the net position of approximately

45 million euros.

9.2.4. Equity risk

At December 31, 2006, the Group's balance sheet shows cash

and cash equivalents of 618 million euros, (949 million euros

at December 31, 2005). Cash equivalents are comprised of

marketable securities of 97 million euros, including money

market mutual funds invested in very short-term securities

with no capital risk, in line with the Group's cash management

policy. In accordance with applicable accounting standards, these

instruments are measured at market value, which approximates

their carrying amount.

Under IAS 32, treasury stock is deducted from stockholders’ equity

at the date of acquisition. Changes in the value of treasury stock

are not recorded. On disposal, stockholders’ equity is adjusted in

the amount of the fair value of the shares sold. The disposal of

121,000 treasury shares in 2006 led to a year-on-year increase

of 4 million euros in stockholders’ equity.

9.3. Legal risks

9.3.1. Intellectual property risk (patents)

As far as possible and when necessary, Valeo's industrial expertise

and innovations generated by the Group's research are covered

by patents designed to protect intellectual property. Valeo files a

large number of patents in its field, which constitute an effective

weapon in the fight against counterfeiting.

The Group also holds patent licenses from third parties within the

scope of its day-to-day activities.

9.3.2. Product and service liability

Valeo is exposed to warranty or liability claims by customers

with respect to the products and services it sells. Valeo may also

be exposed to liability claims for damage caused by defective

products or services sold by the Group. To protect itself from this

risk, Valeo has taken out an insurance policy to cover the financial

impact of these claims. However, it is uncertain whether this

insurance policy would be adequate to cover the full financial

impact of such claims.

9.4. Other risks

9.4.1. Counterpart risk

In the context of financial markets transactions entered into for

the purposes of risk management and treasury management,

the Group is exposed to counterpart risk. Limits have been

set by counterpart, taking account of the ratings of the

counterparts with ratings agencies. This also has the effect of

avoiding excessive concentration of market transactions with

a limited number of banks.

9.4.2. Liquidity risk

The Group targets maximization of its operating cash flows in

order to be in a position to finance both the investments required

for its development and growth and the dividend paid to its

stockholders. In addition, the strategy followed aims to ensure

that the Group has the cash resources necessary to honor its

commitments and meet investment needs. Thus, in 2005 the

Group issued 600 million euros worth of Euro Medium Term Notes

maturing in 2013. It also took out two syndicated loans for a total

of 225 million euros maturing in 2012. Valeo also has several

confirmed bank credit lines available for an average period of

three years in a total amount of 1.3 billion euros. None of these


MAnAgEMEnt REPORt 2Information likely to be impacted by a public tender offer

credit lines were used at December 31, 2006. The Group also

has a short-term commercial paper financing program capped

at 1.2 billion euros.

At December 31, 2006, the debt/equity ratio was well within

the limits stipulated by the covenants. Non-compliance with this

ratio causes the credit lines to be suspended and leads to early

reimbursement of prior drawdowns.

The Euro Medium Term Notes include an option granted to the

bondholders who can request early redemption of their bonds in

the case of a change in control of Valeo leading to a downgrade

in the bond’s rating to below investment grade.

9.4.3. Credit risk

Valeo is exposed to credit risk, particularly to risk of default by its

automotive customers.

Valeo works with all automakers in the sector. At

December 31, 2006, 20% of the Group’s accounts and notes

receivable correspond to one of Valeo’s four largest customers.

Approximately 7% of this line relate to the two largest American

automakers, Ford and General Motors. The downturn in the

automobile sector business environment in recent years has led

the Group to strengthen control of customer risks and settlement

periods which may, on a case-by-case basis, be subject to bilateral

negotiations with customers. The average settlement period at

December 31, 2006 is 69 days.

Valeo also generates 7% of its net sales in the aftermarket. The

Group’s large, dispersed customer base in this market is constantly

monitored and the risk of default is covered by a credit insurance

policy. These customers represent slightly more than 7% of Group

accounts and notes receivable at December 31, 2006.

10. Information likely to be impacted by a public tender offer

10.1 Direct or indirect shareholdings in the Company, brought to the Company’s attention (articles L. 233-7 and 233-12 of the French Commercial Code)

As far as the Company is aware, the following shareholders held more than 2% of the Company’s capital or voting rights at

February 12, 2007:

Shareholders % ownership % voting right

Caisse des Dépôts 6.5% 9.0%

the Boston Company Asset Management LLC 5.4% 5.3%

Brandes Investment Partners (USA) 5.3% 5.2%

Pardus European Special Opportunities Master Fund LP 5.2% 5.1%

Franklin Resources Inc, (USA) 4.8% 4.7%

tocqueville Finance S.A. 2.8% 2.8%

Wyser Pratte Management Company, Inc. 2.4% 2.3%

M&g Investment Management Ltd 2.2% 2.2%


MAnAgEMEnt REPORt2 Outlook

10.2 Agreements entered into by the Company that would change or terminate if there were a change in control of the Company, with the exception of those agreements whose disclosure would seriously harm its interests (except in the event of a legal obligation to disclose)

As specified in section 9.4.2 above, the 2013 Euro Medium Term

Notes program for an amount of 600 million euros includes

an option granted to the bondholders who can request early

redemption of their bonds in the case of a change in control

of Valeo leading to a downgrade in the bond’s rating to below

investment grade.

Some of Valeo’s customers have a clause in their general

purchasing conditions allowing them to terminate the contract

with Valeo in the event of a change in control.

10.3 Agreements providing for indemnities payable to employees or members of the Board of Directors if they resign or are dismissed without real or serious cause or if their employment contract is terminated as a result of a public tender offer

As specified in section 8.1 above, Thierry Morin, Chairman of the

Board of Directors, is entitled to termination benefits set at three

times his most recent annual salary (excluding bonuses) if he

should leave the Company following a decision of the Board of

Directors or of his own volition in the event of a difference of

opinion concerning the strategy pursued by the Board further to

a public tender offer. These benefits are not payable in the event

of gross misconduct in the performance of his duties.

11. Claims and litigation

Known claims and litigation involving Valeo or its subsidiaries were reviewed as of December 31, 2006 and all necessary provisions made

to cover the estimated contingencies and potential losses.

12. Outlook

Automotive production in the Group's key markets is not

expected to stabilize before the second half of 2007. Against this

background, and assuming stable raw materials prices, Valeo is

aiming to improve operating profitability on the back of increased

efforts in terms of competitiveness.


MAnAgEMEnt REPORt 2Environmental Indicators

13. Subsequent events

On December 4, 2006, the Group signed a memorandum of

understanding with Ford regarding the acquisition of the Sheldon

Road site (Plymouth, Michigan) specialized in the production of

climate control systems. This acquisition is contingent on the

signature of a new competitive agreement with the UAW (United

Auto Workers) union.

To the best of Valeo's knowledge, no other event has occurred

since December 31, 2006 that is likely to have a material impact

on the business, financial position, results or assets and liabilities

of the Group.

14. Parent company financial statements

Following the creation of subsidiaries for industrial activities in

2002, Valeo SA is now the Group's holding and cash management

company.

Valeo’s net financial income for the year amounted to 47 million

euros compared with 66 million euros in 2005. This decrease is

mainly due to a 203 million euro increase in write-downs of equity

investments, partially offset by a 159 million euro increase in

dividends and a 25 million euro rise in other financial income.

Net exceptional loss stood at 3 million euros in 2006, compared

with net exceptional income of 1 million in 2005.

Corporate income tax yielded a tax credit of 35 million euros

compared with a tax credit of 28 million euros in 2005.

Valeo's net income amounted to 74 million euros, compared to

88 million euros in 2005.

Valeo’s stockholders’ equity stood at 3,232 million euros at

December 31, 2006 compared with 3,240 million euros a year

earlier. This change mainly reflects net income for the year less

dividends.

15. Environmental Indicators

1. Introduction

This section provides an analysis of Valeo’s undertakings and

performance in terms of protecting the environment and

natural resources – two issues that underpin the very concept of

sustainable development.

In 2003, the Valeo Group joined the UN Global Compact – a set

of principles based on the Rio Declaration on Environment and

Development under which companies undertake to:

support a precautionary approach to environmental

challenges;

•

undertake initiatives to promote greater environmental

responsibility; and

encourage the development and diffusion of environmentally

friendly technologies.

For Valeo, this means:

designing and creating innovative products enabling it to reduce

the environmental impact of vehicles throughout their entire

life cycle and improve passenger safety;

preserving the environment during production at Group sites.

•

•

•

•


MAnAgEMEnt REPORt2 Environmental Indicators

Valeo’s sustainable development commitments are formally

documented in the Group's Environment Charter and form the

basis of numerous procedures in its Risk Management Manual.

These procedures apply equally to all Group sites irrespective of

local particularities and reflect the strategic approach adopted by

Valeo for over 15 years. This approach is rooted in a constant quest

to enhance the Group’s processes, backed by regular assessments

carried out by external consultants to track performance.

2. Environmental indicators

2.1. Presentation

In the majority of cases, indicators are expressed in terms of

both quantity of products consumed or emitted per million euros

and total quantity. Quantity per million euros is calculated by

dividing the total quantity by the total sales from the sites that

responded.

Comparative data have been provided for 2004 and 2005.

The extent to which the indicators are representative is expressed

by dividing the sales from each site that responded by the total

sales figure of all the sites included in the report.

In 2006, the Group decided to report environmental indicators on

a quarterly basis rather than annually as was previously the case,

in order to use them as a tool for managing the environmental

performance of the Group’s sites. Given the adaptation period

required for this quarterly reporting system, certain responses

were imprecise. In order to maintain a high level of reliability

of published data, these responses have not been taken into

account. Representativeness for 2006 is therefore sometimes

slightly below that for 2005.

As in previous years, all responses from sites were validated by an

external body in order to ensure quality and representativeness.

2.2. Scope

The environmental data published in this report concern all Valeo

production and distribution sites worldwide, except for the Group's

minority interests.

A total of 138 sites are included in the scope of environmental

indicators for 2006, including 12 “advanced supplier sites”, eight

Valeo Service sites and two storage sites, it being specified that:

the advanced supplier sites are manufacturing sites located at

an automaker;

sites dedicated exclusively to research and development, or to

office work, as well as sites that were acquired, sold or closed

during the year have not been included;

companies that are 50% controlled by Valeo are taken into

account at a rate of 50%. Companies over which Valeo exercises

more than 50% control are included on a 100% basis.

Valeo Engine Management Systems was included within the

scope of environmental indicators in 2006.

•

•

•

Valeo Motors and Actuators, which was sold to NIDEC at the end

of December 2006, was also included in the 2006 scope, with

the exception of recycled plastic and research and development

expenditure, for which data could not be obtained.

The scope of environmental indicators concerns all sites. A

reconciliation is carried out between the financial data reported

by the Group (sales, research and development expenditure, etc.)

and those reported by the individual sites.

This report was produced in compliance with the recommendations

of the Global Reporting Initiative (GRI).

ReseaRch and development (R&d) expendituRe

R&D expenditure in milllions of euros

200620052004

585646 661

2.3. Internal environmental management organization

The Risk, Insurance and Environment Department works hand-in-

hand with all Group departments, and is assisted by coordinators

assigned within each Product Family. These coordinators provide

technical support to Health, Safety, Security and Environment

(HSSE) managers at each site and report their findings to the

Risk Management Committee, which is the central oversight body

of the Risk, Insurance and Environment Department.

The HSSE managers provide expert advice to each site manager.

They are responsible for ensuring that procedures are correctly

applied, and perform internal audits to verify compliance with

both applicable regulations and Valeo’s standards.



2.4. Compliance of operations with applicable regulations and group standards

Valeo's risk management policy is set out in the Group’s Risk

Management Manual as well as in application guidelines

intended for each Group site. The related procedures are focused

on ensuring that operations comply with Group standards and

the regulations in force in each country. A major feature of this

policy is the Valeo audit program, introduced in 1991. This entails

regular audits carried out every one to three years by external

independent consultants, at the request of the Risk, Insurance and

Environment Department, in order to ensure that the Group's risk

management policy has been correctly applied. The audits help to

track progress at the sites and provide Group Management with

a good overview of risks.

During each audit, the sites' level of performance and progress is

appraised in relation to:

the environment;

occupational health and safety;

•

•

safety of buildings and equipment;

security of equipment and data.

Action plans are subsequently established by the sites, based on

observations resulting from the audit and prioritization of risks. A

status report on the action plans is provided every six months to

the Risk, Insurance and Environment Department.

exteRnal audits

42 42

115

5159 58

116

71

46 46

110

42

SecuritySafety of equipment

Occupational healthand safety

Environment

200620052004

•

•

3. Committing to the ongoing improvement of environmental performance and occupational health and safety through an internationally-recognized certification process.

To demonstrate of its focus on continually reducing its

environmental impact and improving the health and safety of its

employees, the Valeo Group has committed to two certification

processes: ISO 14001 for environmental management and

OHSAS 18001 for occupational health and safety.

The ISO 14001 certification process began in 1998, and by

December 31, 2006 substantially all the Group’s sites had been

certified. The recently opened sites at Mioveni in Romania and

Kosice in Slovakia were among those that obtained certification

in 2006.

The Group started to roll out its OHSAS 18001 certification

process in 2005 and obtaining this certification was one of its

key projects in 2006. By the end of the year, 72 sites had passed

the certification audit.

Implementing these management systems has enabled the

Group to improve its environmental performance and occupational

health and safety level, thus limiting any adverse impact of its

operations.

An integral component of the overall management system is

employee training, which Valeo provides on an ongoing basis

and which helps to change attitudes not only in the workplace

but also within daily life in general.

The Group uses its intranet site to make the relevant tools available.

For the roll-out of OHSAS 18001, for example, the Group provided

each site with a self-analysis and tracking tool. A regulatory

monitoring tool was also made available to the French sites.

The Group’s main objectives for 2007 are to:

obtain ISO 14001 certification at all of its sites;

extend the OHSAS 18001 certification process to all sites;

set up a risk management self-assessment tool for the sites;

consolidate efforts to reduce risks within the Group;

seek new opportunities to reduce the environmental impact

of its operations through targeted studies on key issues such

as transport-related CO2 emissions.

•

•

•

•

•



numbeR of iso 14001 and ohsas 18001

ceRtified sites

210

27

48

67

85

2

102

6

117

15

127

72

OSHAS 18001ISO 14001

200620052004200320022001200019991998

total numbeR of houRs of enviRonmental

tRaining

200620052004

38 97936 938 37 386

4. Optimizing water and energy use

For several years the Group has made significant efforts to preserve

water resources, notably by ceasing to use open-loop cooling

systems. The measures implemented led to a 45% decrease in

the Group’s water consumption in proportion to sales between

2001 and 2005. Consumption stabilized in 2006, with the Group

using approximately 250 liters of water per day per employee.

By way of comparison, the average consumption of a four-person

family in Europe is 440 liters per day (source: Veolia Eau).

Valeo plays an active role in cutting vehicle energy consumption

through the design of its products, mainly by decreasing the

weight of components but also by developing specific products

enabling energy consumption to be reduced (see section on these

areas in this document).

Group energy consumption at site level has been stable for

several years, amounting to approximately 30,000 KWh per year

per employee compared with 40,000 KWh consumed by a four-

person family occupying a 120 sq.m. house in Europe (source:

Greenpeace).

The Valeo Factory Design Guide, which defines the Group’s site-

construction principles, includes a generic plant concept with

a section on energy optimization. The thermal aspects of the

building, ventilation, lighting and energy integration of procedures

and utilities are now addressed at design stage to ensure that

operating energy output is properly controlled. In China, for

example, redesigning a plant’s heating and ventilation system

should result in energy savings of around 40%.

Several plants were audited in 2006 with a view to identifying

means of improving energy consumption. Heat recuperation

systems have already been integrated into certain manufacturing

equipment such as VOC combustion systems. A pilot project is in

progress within the Valeo Engine Cooling Product Family aimed at

developing a generic methodology for all of the Group’s plants.

The Group is also continuing to promote the use of thermal

energy sources such as natural gas, which have a relatively low

environmental impact.

WateR consumption

Total volume of water consumed/sales (m3/millions of euros)

Total volume of water consumed (m3 thousands)

Representativeness: 2004: 98.0% 2005: 99.7% 2006: 96.9%

200620052004

514

5 032

303

3 262

341

3 463

Figures for 2004 and 2005 have been rectified on the above graph

following the discovery of a reporting error by a site.

eneRgy consumption

Total energy consumption/sales (MWh/millions of euros)

Total energy consumption (GWh)


200620052004

179

1 739

171

1 814

185

1 868



bReakdoWn of eneRgy consumption

OtherFuel oilGasElectricity

200620052004

58% 63% 64%

33% 34% 34%

6% 2% 2%3% 1%

5. Reducing consumption of non-renewable raw materials

One of the Group’s objectives is to preserve raw materials and

diminish waste production. This applies to products and product

design processes alike.

For example, the Valeo Electronics & Connective Systems Product

Family has significantly reduced the number of electric wires

required to make the full set of a vehicle's components work. At

the same time, through its starter and alternator remanufacturing

activity Valeo Electrical Systems provides the aftermarket with

over one million parts each year, thus doubling the lifespan of

these products.

Packaging materials also use up raw materials and generate

waste. With this in mind, for the past several years the Group

has progressively implemented measures to replace single-use

packaging by multi-use packaging. One of the first steps was to use

specific packing boxes, usually made from plastic, for transporting

products between Group sites, customers and suppliers.

The Group’s current priority is to use recyclable plastic.

In 2006, a survey was carried out at all Group sites on the quality

of packaging materials purchased. Responses to this survey

showed that:

one third of all materials purchased are used several times;

most sites only use recycled plastic boxes. Only a few sites still

use mainly PVC boxes;

over half of all Valeo’s sites have made requests to their

suppliers regarding the volume and/or nature of packaging

used.

The Group’s consumption of packaging materials decreased

slightly between 2005 and 2006, and certain sites carried out

specific studies in this area. The Pedreira site in Brazil, for example,

put in place an action plan in conjunction with its customers

and suppliers that enabled it to reduce its packaging materials

purchases by 45% in 2006.

•

•

•

In 2007, pilot sites will be selected in each Product Family in order

to conduct studies in this domain with the aim of drawing up

action plans that could subsequently be deployed Group-wide.

use of Recycled plastic

(in tonnes)

6 219

5 198

6 150

200620052004

use of packaging mateRials

Total packaging materials used/sales (tonnes/millions of euros)

Total packaging materials used (tonnes)


200620052004

5 503

48 606

6 741

67 239

6 669

63 248



bReakdoWn of packaging mateRials used

OtherWoodCardboardPlastics

200620052004

8%17% 10%

48%

53%57%

44%29%

1%

32%

1%

6. Reducing the consumption of hazardous products

The main raw materials used by the Group in the manufacture

of its products are metals (ferrous metals, steel and aluminum in

particular) and plastics.

Continuously reduced quantities of halogenated solvents, including

trichloroethylene, and heavy metals (mainly lead) are used in

manufacturing processes.

Between 2001 and 2006 product substitution efforts enabled the

Group to reduce heavy metal use by over 90% and chlorinated

solvent use by 70% in proportion to sales.

In the interests of improving reporting on carcinogenic, mutagenic

and reprotoxic (CMR) substances, and as the classification of such

substances can vary from country to country, Valeo decided in

2006 that substances classified as CMR in Europe should be

recorded as such in every country. This resulted in a slight increase

in the quantity of CMR substances recorded for 2006 compared

with 2005.

use of chloRinated solvents

Use of chlorinated solvents/sales (kg/millions of euros)

Use of chlorinated solvents (tonnes)


200620052004

153

1 469

109

1 171

107

1 096

use of heavy metals

Use of heavy metals/sales (kg/millions of euros)

Use of heavy metals (tonnes)


200620052004

28

274

28 29

294296

use of caRcinogenic, mutagenic and RepRotoxic

(cmR) substances

Use of CMR substances/sales (kg/millions of euros)

Use of CMR substances (tonnes)


200620052004

107

1 062

98 111

1 1381 049



7. Reducing emissions of hazardous substances

To preserve the natural surroundings close to its sites, the Group

is firmly committed to reducing the emission of hazardous

substances into the air and water.

Between 2001 and 2006 the volume of industrial effluents

handled on site and discharged into the natural environment

decreased by 70% in proportion to sales. Reducing the use of

hazardous substances and enhancing processes has enabled

a significant number of sites to improve the quality of their

emissions, which can then be processed by the local waste

water treatment infrastructure. For example, the quantity of heavy

metals in industrial effluent has decreased by 90% over the last

six years in proportion to sales.

Equally encouraging results have been achieved as regards air

emissions.

The following decreases (as a percentage of sales) have been

achieved:

almost 50% for Volatile Organic Compounds (VOCs) between

2001 and 2006;

65% for Trichloroethylene (TCE) between 2003 and 2006;

and

80% for lead between 2003 and 2006.

Valeo’s day-to-day manufacturing processes do not have an impact

in terms of ground pollution, mainly because any processes that

could potentially damage the ground are carried out on waterproof

coverings.

volume of industRial effluent

Volume of industrial effluent emissions/sales (m³/millions of euros)

Volume of industrial effluent emissions* (m³ thousands)


200620052004

102

1 009

65

695

76

748

•

•

•

heavy metal content in effluent

Heavy metal content in effluent/sales (kg/millions of euros)

Heavy metal content in effluent (kg)


200620052004

0,04

365

0,02

208

0,03

278

voc atmospheRic emissions

VOC atmospheric emissions/sales (kg/millions of euros)

VOC atmospheric emissions (tonnes)


200620052004

143

1 242

162

1 708

153

1 489

tce atmospheRic emissions

TCE atmospheric emissions/sales (kg/millions of euros)

TCE atmospheric emissions (tonnes)

Representativeness: 2004: 96.5% 2005: 99% 2006: 96.6%

200620052004

54

536

44

465

32

327



lead atmospheRic emissions

Lead atmospheric emissions/sales (g/millions of euros)

Lead atmospheric emissions (kg)


200620052004

13

130

7

72

5

52

8. Reducing waste production

The Group’s main waste products, in descending order of volume,

are metal, wood and plastics. Almost all metal waste (98%) is sold

for recycling. 75% of wood is recycled and the remainder is used

for heating. Two-thirds of plastics are sold for recycling.

The Group’s waste production has been stable over the past few

years, fluctuating between 12 and 14 tonnes per million euros

of sales since 2001.

Waste pRoduced

Total quantity of waste produced/sales (tonnes/millions of euros)

Total quantity of waste produced (tonnes)


200620052004

13

123 216

12

132 725

14

138 772

type of Waste

Non-hazardous wasteHazardous waste

200620052004

17%

83%

17%

83%

17%

83%

Waste Re-use Rate

200620052004


59% 71% 72%



9. Combating climate change

Carbon dioxide (C02) is currently considered to be one of the main

contributors to the greenhouse gas effect that causes climate

change. It is the main greenhouse gas generated by the Valeo

Group, and is principally produced by the combustion of fossil fuel

and the Group’s means of transport.

Valeo has developed technologies that aim to significantly reduce

the energy consumption of vehicles and, consequently, their C02

emissions.

In 2001 the Group took steps to quantify emissions caused by the

combustion of fossil fuels. C02 emissions were calculated based

on energy consumption using the emission coefficients of the

Intergovernmental Panel on Climate Change.

The quantity of C02 emitted by the Group per million euros of

sales decreased by 25% between 2001 and 2006, but remained

stable over the last three years at approximately 12 tonnes per

million euros.

Some facts and figures:

the Group emits two tonnes of C02 per employee per year, which

is equivalent to that generated in one year by a French car driver

(source: French Environment and Energy Management Agency

- ADEME - and the French Institute for the Environment - Ifen);

•

annually, the entire Valeo Group emits the equivalent of less

than 5% of the C02 emissions allocation of a French thermal

power station.

These results confirm that the Valeo Group’s contribution to the

greenhouse effect is only minor. To date, none of the Group’s

sites have been implicated by regulations concerning quotas of

greenhouse gas emissions. Nevertheless, Valeo wishes to move

forward in this domain and has scheduled to undertake a review

in 2007 of its CO2 transport-related emissions.

co2 atmospheRic emissions

Greenhouse gas emissions/sales (tonnes equiv C02/millions of euros)

Greenhouse gas emissions (tonnes equiv C02)

Representativeness: 2004: 94.7% 2005: 100% 2006: 96.9%

200620052004

12

112 195

11

121 157

12

123 971

•

10. Reducing pollution

Minimizing all forms of pollution is another of the Group's ongoing

objectives. This concerns both the performance of products

developed by the Group and the processes implemented to create

such products.

The Group has developed a starter-alternator that allows an engine

to be stopped and restarted instantly and silently, resulting in a

notable reduction in noise pollution in urban areas.

In accordance with the recommendations of the Valeo Factory

Design guide, the visual impact of sites is taken into account at the

time of their construction, and a large section of each site is given

over to green spaces. The architectural design of a Valeo site is a

far cry from most people’s image of a manufacturing plant, with

particular priority being given to transparent surfaces.

Valeo’s activities are not especially noisy and sites are generally

located quite far from residential areas.

Odor pollution can be particularly unpleasant for local residents and

is usually caused by the emission of Volatile Organic Compounds.

Procedures have been put in place to reduce the use and emission

of such compounds at source, including the replacement of

solvent-based paints by water-based paints and the elimination

of trichloroethylene in the manufacture of clutch facings.

The Valeo sites concerned are equipped with systems for

treating these compounds in order to keep odor pollution below

the perception threshold. Such systems include biofiltration,

absorption, condensation and incineration, with incineration being

the most frequently used.

A generic study is in progress to find ways to link up VOC

incineration equipment and energy recuperation systems.

In 2006, a complaint was lodged by a neighbor regarding odor

pollution at Valeo’s Daegu site, in Korea. Although the site was

equipped with a VOC treatment system, its emissions still posed

a problem. Following this complaint the Group employed an

external expert to analyze the situation on-site and draw up

an action plan. The first step was to establish a communication

process between the plaintiff and the site managers.

The Group is particularly vigilant not to damage the health of local

residents. In 2005 it compiled a Directive on legionella bacteria.

This Directive is based on French law, which is one of the strictest

in this domain, and is applicable at all Valeo sites worldwide.



Under this Directive, the sites must:

where possible replace wet cooling towers by dry towers;

implement preventative treatment systems to avoid the

proliferation of legionella bacteria; and

carry out frequent controls to ensure the effectiveness of

treatments in place.

•

•

•

In 2006, Valeo’s head office, which is located in a particularly

sensitive urban environment, applied this Directive by replacing

the wet cooling towers for the building’s air conditioning system

with dry towers.

11. Managing the life cycle of a site

A site’s life cycle consists of finding a location, building the site,

operating the site and ultimately closing or selling it. Valeo has set

up particularly rigorous regulations with respect to these phases.

The sites are very often located near customer sites, in industrial

zones that already exist or are under construction, in order to

benefit from local infrastructure and qualified sub-contractors.

When choosing its locations, the Group systematically performs

audits to check (i) if there are any potential environmental

liabilities such as ground or ground water pollution, (ii) if

the surrounding area is hazardous or particularly sensitive

and (iii) if there is a risk of natural disasters such as floods or

earthquakes.

Sites are constructed or rehabilitated in accordance with the

generic plant concept developed by the Group in the Valeo

Factory Design manual.

Over and above the constraints and specifications set out

in this manual (architectural, environmental, organizational,

etc.), the key issue is the creation of a “project team”, which

from the outset includes specialists capable of addressing

certain concerns, particularly regarding the environment and

equipment safety. This project team is tasked with applying the

best possible sustainable development solutions at each stage

•

•

of a site’s life (construction, operation, extension, closure). For

example, the Group’s new plants in Poland (Chrzanow, Skawina

and Czechowice) as well as China (Nanjing and Wuhan) have

set up retention systems by using parking lots or unloading

docks to contain accidental spillages of products and fire

extinction water.

The operational phase of each site is governed by Group

Directives concerning employee health and safety, the

environment, equipment safety and general security. If ground

or groundwater pollution is suspected during this phase it is

investigated and an appropriate solution is put in place.

When a business is sold or terminated, Valeo systematically

performs an audit, usually along with an investigation of the

ground and subsurface water, to determine if any damage has

been caused during the operational phase. If any pollution

is discovered it is treated immediately. All the information

gathered during the audit and subsequent phases is disclosed in

all transparency to the buyer of the site and, where applicable,

to the Authorities. If a site is closed without there being an

immediate buyer, all the waste, raw materials, products and

equipment are removed and maintenance of the site is ensured

until a buyer is found.

•

•

12. Ensuring the safety of operations and equipment

There could be no sustainable development at Valeo if all sites were

not protected from natural disasters and technological risks.

The Group’s policy in this respect has always been to ensure the

highest possible levels of protection at its sites. For this reason:

most of Valeo’s sites are classified HPR (Highly Protected Risk)

and have an automatic sprinkler system to protect against

fire, as well as teams trained to deal with all kinds of risk

situations;

all sites located in seismic risk zones have been constructed

or renovated in compliance with the most recent seismic

regulations;

•

•

where possible, Valeo’s sites are located in areas not liable to

flooding or are equipped with means of protecting against

floods;

new Valeo sites are located far from sites posing potentially

significant risk (Seveso sites, etc.), which could have a domino

effect and endanger Valeo's sites;

the Risk Management Manual contains a specific Directive

dealing with the prevention of emergency situations as well

as situation-specific emergency plans. This Directive requires

each site to implement an emergency plan with a view to

preventing potential incidents. Valeo is currently working on a

•

•

•


MAnAgEMEnt REPORt 2Social indicators

project to provide all Group sites in 2007 with a tool called Valeo

Emergency and Recovery Management (VERM) to help them

design and implement emergency and crisis management

plans as well as procedures for restarting equipment.

VERM will enable each emergency plan to share a common

structure and content, will encourage employee involvement,

and will ensure that the plans are rapidly implemented.

13. Financial data

2004 2005 2006

Scope

Value (In thousands

of euros)

number of fines and compensation awards 5 5 3

Representativeness as a % of sales 98% 100% 99%

Amount of fines and compensation 25 16 4


Provisions and guarantees for environmental risks 7,580 8,054 3,091


Costs incurred by corporate departments to prevent any adverse environmental impacts of the business 14,140 13,861 16,417


Investments made (excluding pollution elimination costs) to prevent any adverse environmental impacts of the business 5,624 7,205 4,244


Specific pollution elimination costs 869 1,467 1,240


16. Social indicators

This social indicators report is based on the obligations and

recommendations set out in the French New Economic

Regulations Law (NRE) of May 15, 2001 and decree No. 2022-221

of February 20, 2002.

The Valeo Group has chosen to base its social indicators on data

from all of its companies worldwide. There are some exceptions

to this, which are listed on a case-by-case basis.

Valeo continued the step-by-step improvement of its indicators

system in 2006 in all 12 of its Product Families and holding

companies, representing a total of 129 production sites, 68 R&D

centers and nine distribution platforms in 27 countries.


MAnAgEMEnt REPORt2 Social indicators

1. Employment

1.1. number of employees

1.1.1. Changes in number of employees over three years

2004 2005 2006 *

Engineers and managers 11,249 11,953 12,134

Administrative staff, technicians and supervisors 11,477 11,514 11,198

Operators 40,593 41,499 41,126

Registered headcount 63,319 64,966 64,458

Agency temporary staff 3,957 5,338 5,206

TOTAL hEAdCOunT 67,276 70,304 69,663

including:

Permanent staff• 55,540 58,976 59,969

temporary staff• 11,736 11,329 9,695

* Excluding VMA (with the exception of its Chinese division).

At December 31, 2006, the Group employed 69,663 people

worldwide, down 0.9% on 2005 but up 3.4% on 2004. This

reduction is attributable to the sale of the Valeo Motors and

Actuators Product Family on December 27, 2006.

Overall temporary staffing levels (fixed-term contracts and agency

temporary personnel) decreased by a further 14% on the back

of the Group's efforts to increase job security. In 2006, temporary

staff represented 14% of the Group's total employees, compared

with 16% in 2005 and 17% in 2004.

The percentage of engineers and managers edged up once again

in 2006, to 18.8% of headcount versus 18.4% in 2005 and 17.8%

in 2004.

1.1.2. Internationalization of Group headcount

The Group's global expansion has given rise to an increasingly

international staff. 73% of employees currently work in countries

other than France, compared with 47.8% in 1995.

total headcount excl. fRance

1995 2000 2005 2006*

14,125 50,002 50,273 50,867


Western Europe

Eastern Europe Africa

north America

South America Asia

total headcount at December 31, 2006* 31,368 10,209 9,699 7,181 3,550 7,656

45.0 % 14.7 % 13.9 % 10.3 % 5.1 % 11.0 %


In line with changes in the world’s automotive markets, the Group has reduced the proportion of its staff based in Western Europe and the

United States (from 58.7% in 2005 to 55.3% in 2006) and increased the weighting of other regions in its total headcount (from 41.3%

in 2005 to 44.7% in 2006).



1.1.3. Generational turnaround

peRmanent WoRkfoRce by age bRacket*

1,08

61,

791

4,78

0

531

2,73

5

5,35

04,

078

13,4

06

14,6

252,

395

2,85

3

2,78

97,

632

151

67110

79

** I&C: Ingineers & Managers*** ATAM: Technicians, Supervisors & Administative Staff

ATAM***I&C**

>60 years50/59 years40/49 years30/39 years20/29 years<20 years

Operators

* Excluding VMA with the exception of its Chinese division.

At December 31, 2006, the Group's permanent workforce broke

down as follows:

31.8% under 30;

35.4% between 30 and 39;

20.4% between 40 and 39;

12.4% over 50.

The high number of new staff recruited each year generates

significant generational turnaround.

•

•

•

•

1.2. Recruitment

Apart from certain highly localized difficulties concerning positions

requiring advanced specialization or specific language skills,

thanks to its corporate image and experience, the Group did not

encounter any particular problems in relation to recruitment during

the year.

1.2.1. Permanent contracts

numbeR of neW hiRes on peRmanent contRacts

2004 2005 2006 *

Engineers and managers 1,475 1,772 1,890

technicians, supervisors and administrative staff 844 757 849

Operators 3,306 4,029 5,581

TOTAL 5,625 6,558 8,320

* Including VMA hires.

In 2006, Valeo stepped up its efforts to reduce the use of temporary

contracts, thus increasing the number of new hires on permanent

contracts by 27% across all socio-professional categories.

Engineers and managers accounted for 23% of these new hires

(27% in 2004 and 26% in 2003). Although this percentage is lower

than previous years, in volume terms new hires in this category

are still increasing. The lower proportion of new hires of engineers

and managers reflects the considerably increased weighting of

production operators in the total number of recruitments, up from

59% in 2004 to 61% in 2005 and 67% in 2006.



bReakdoWn of neW hiRes on peRmanent contRacts by geogRaphical aRea*

Western Europe


north America

South America Asia

Permanent contracts 2006* 1,394 2,059 481 2,624 771 991

16.8% 24.7% 5.8% 31.5% 9.3% 11.9%

* Including VMA.

The Group focused its recruitment efforts during the year on Eastern Europe and North America.

1.2.2. Fixed-term contracts

numbeR of neW hiRes fixed-teRm contRacts

2004 2005 2006*

Engineers and managers 241 258 239


Operators 7,924 7,655 6,876

TOTAL 8,438 8,293 7,354

* Including VMA.

7,354 fixed-term contracts were signed during the year, down 11.3% on 2005 and 12.8% on 2004.

Employees on fixed-term contracts occupied 4,489 posts at December 31, 2006, compared with 5,991 in 2005 and 7,779 in 2004.

bReakdoWn of neW hiRes on fixed-teRm contRacts by geogRaphical aRea

Western EuropeEastern Europe Africa

north America

South America Asia

Fixed-term contracts 2006* 2,984 1,112 2,320 581 0 357

40.6% 15.1% 31.5% 7.9% 0.0% 4.9%

* Including VMA.

1.3. Departures

2004 2005 2006*

Contract terminations 3,454 3,143 3,153

of which redundancies 1,661 993 1,017

Early retirement 367 462 162

Retirement 606 420 640

* Including VMA.

Valeo terminated 3,153 contracts in 2006, representing 5.3% of

the permanent workforce (5.3% in 2005 and 6.2% in 2004).

As in 2005, redundancies accounted for less than one third of total

contract terminations in 2006, compared with one-half in 2004.

Early retirement and retirement represented the equivalent of 1.3%

of the permanent headcount (1.5% in 2005 and 1.8% in 2004).



bReakdoWn of 2006 depaRtuRes by geogRaphic aRea

Western Europe


north America

South America Asia

Redundancies 473 62 39 425 0 18

46.5% 6.1% 3.8% 41.8% 0.0% 1.8%

Dismissals 265 237 317 800 491 26

12.4% 11.1% 14.8% 37.5% 23.0% 1.2%

Resignations 851 871 1,196 1,341 141 323

18.0% 18.4% 25.3% 28.4% 3.0% 6.8%

Early retirement 144 0 0 1 0 17

89.2% 0.0% 0.0% 0.6% 0.0% 10.2%

Retirement 312 17 2 258 4 47

48.8% 2.7% 0.3% 40.3% 0.6% 7.3%

* Including VMA

Information on rightsizing and employment protection

plans, transfer, rehiring and assistance measures

Valeo is firmly committed to a forward-looking employment

and skills management policy. During restructuring operations

the Group regularly consults with employee representatives and

explores all possible avenues to finding alternative employment for

staff, including internal transfers, outplacements, initiatives aimed

at finding buyers for divested operations and reindustrialization of

employment catchment areas.

Rightsizing programs launched in 2006 involved six of the Group’s

13 Product Families (10 in 2005), and a total of 727 employees

(1,640 in 2005). The six Product Families concerned were: Valeo

Climate Control, Valeo Engine Cooling, Valeo Compressors, Valeo

Lighting Systems, Valeo Wiper Systems, and Valeo Electronics &

Connective Systems.

In respect of programs completed in 2006, 173 out of a total

of 175 employees found new employment, a rate of 98.9%

(compared with 79.1% in 2005). Internal transfers accounted

for 56.1 points of this figure and outplacements for 5.8 points.

Early retirement and retirement made up another 3.5 points,

resignations accounted for 8.1 points, and alternative transfer

solutions represented 26.6 points. In addition, during the year

the Czechowice site in Poland, which was part of the Valeo

Electronics & Connective Systems Product Family, was able to

transfer its entire activity along with all 225 of its employee posts

to Valeo Electrical Systems – also in Czechowice – without having

to implement a redundancy plan.

2. Organization of the working week

2.1. Working hours/days

Full-time employees

The work of employees within the Group's 129 production sites, 68

R&D centers and nine distribution platforms is based on statutory

working time, which varies between 35 and 48 hours per week

depending on the country in question.

The most widespread statutory working time is 40 hours per

week.

In France, the agreement on the reduction in working time, signed with trade unions on April 20, 2000, sets the applicable working time

as follows:

Engineers and managers 215 days per year

technicians, supervisors and administrative staff 35 hrs

Employees without paid overtime hours 37.5 hrs

Operators 35 hrs



Part-time employees

As part-time work is defined as any work schedule lower than the standard working hours of a particular entity, the average working time for

part-time employees varies between 10 and 38 hours per week, depending on the country and socio-professional category concerned.

2.2. Shift patterns

employee bReakdoWn by shift patteRns in %

2004 2005 2006*

Day workers 41% 45% 43%

two 8-hour shifts 32% 27% 30%

three 8-hour shifts 21 21% 20%

night workers 5% 5% 5%

Weekend workers 1% 2% 2%


Most production employees work two or three shifts or nights in order to optimize plant utilization. In 2006, the number of shift workers

increased by 2%.

2.3. Overtime

In 2006, 6,554,338 hours of overtime were paid (as compared with 7,248,369 in 2005 and 19,930,387 in 2004). 81% of this was paid to

production employees (79% in 2005, 74% in 2004).

2.4. Part-time work

In 2006, 1,241 of the Group's employees worked part-time,

representing 1.9% of the permanent workforce, in line with the

2005 figure and down from 2.5% in 2004.

Women accounted for 75.2% of the Group’s part-time workers.

Part-time numbers break down as follows: engineers and

managers: 6.1%; technicians, supervisors and administrative staff:

16.9%; and operators: 77%.

In certain countries the percentage of part-time employees was

much higher than the Group average. This was particularly the

case in Germany (12.1%), Belgium (9.1%), Spain (5%), Italy

(2.5%) and France (2.1%).

2.5. Absenteeism

Absenteeism, expressed as the number of hours absent over

the possible number of working hours, fell once again in 2006

coming in at 2.7%, down 0.1 percentage point on 2005 and

0.2 percentage point on 2004. Absenteeism recorded during the

year was due to sickness (74.8%), work-related accidents (3.9%),

strikes (3.3%), unauthorized absences (5.2%), suspensions

(0.8%), authorized absences such as unpaid leave (7.6%) and

other reasons (4.3%).

The sustained reductions in absenteeism rates from 2.9% in

2004 and 3.4% in 2003 were achieved thanks to action plans

implemented across the Group.

The absenteeism rates recorded in 2006 varied from 0.3% in Japan

to 4.9% in the Czech Republic, with France coming halfway in the

ranking with a rate of 2.7%.



3. Equality between men and women in the workplace

bReakdoWn of Women by socio-pRofessional categoRy

2004 2005 2006*

Engineers and managers 16.0% 17.1% 17.1%

technicians, supervisors and administrative staff 26.9% 28.3% 26.5%

Operators 45.6% 44.4% 46.0%


peRcentage of Women hiRed undeR peRmanent contRacts oveR thRee yeaRs

Engineers and managersTechnicians, supervisors and administrative staff Operators Total

Women % Women % Women % Women %

2004 286 19.4% 209 24.8% 1,209 36.6% 1,703 30.3%

2005 369 20.8% 157 20.7% 1,470 36.5% 1,996 30.4%

2006* 414 21.9% 184 21.7% 2,268 40.6% 2,866 34.4%

* Including VMA.

3.2. Diversity

The Valeo Group has sites in 27 countries and is thus highly

diversified.

In 2006 the Group's workforce was comprised of employees of

91 nationalities.

The most prevalent nationalities in the Group are French, German,

Italian, Spanish and Chinese.

The countries with the most internationalized workforces are

France (59 nationalities), Germany (41 nationalities), the United

States (29 nationalities), Spain (20 nationalities) and Italy (20

nationalities).

The Group's most diversified Division is the Valeo Wiper Systems

Product Family in Germany, with 27 nationalities within a

workforce of 1,439 employees.

3.1. Male-female breakdown

Valeo places great importance on equality between men and

women in the workplace, in terms of career development, training

possibilities, salaries and rank within the company.

Valeo draws up a comparative, male-female status report for

the Group’s French companies every year. This report is used as

a basis for annual negotiations between labor and management

on targets for equality in the workplace and on the measures

required to achieve these targets.

The percentage of women employed by the Group is once again

on an upward trend, climbing to 37.2% in 2006 (36.9% in 2004

and 36.6% in 2005).



4. Labor relations and collective bargaining agreements

Valeo has developed an active contractual policy in respect of

labor relations. In 2006, a total of 359 agreements were signed

in 21 countries, compared with 315 in 2005 and 232 in 2004, in

various areas and in accordance with the terms and conditions

stipulated under different national legislations.

Among these agreements, 128 (35.7%) related to working time,

108 (30.1%) to salaries, 21 (5.8%) to profit-sharing and incentive

schemes, and 30 (8.4%) to premiums or bonuses.

In certain countries such as France, Italy, Germany, Tunisia and

Japan, a large number of meetings took place with trade unions,

which led not only to formal and informal exchanges but also to

the signature of numerous agreements, including:

Western Europe

France: agreement on the length of terms of office held by

employee representatives, 2006 wage agreements, agreements

on forward-looking employment and skills management and

the organization of working time and leave, pre-election

agreements, method agreements, and labor law provisions

in company bylaws.

Italy: agreements on the organization of working time and

leave, performance bonuses and unemployment benefits.

Germany: agreements on personal safety equipment, corporate

diversity and social cohesion, and retirement.

Spain: wage agreements.

Eastern Europe

Czech Republic: collective bargaining agreements and wage

agreements.

•

•

•

•

•

Africa

Tunisia: agreements on the organization of working time and

leave, personal safety equipment, the classification of staff,

and wages.

Morocco: wage agreement.

north America

Mexico: wage agreements and agreements on the organization

of working time and leave.

South America

Brazil: wage agreements, collective bargaining agreements and

agreements on employee profit-sharing, incentive schemes

and time savings accounts (épargne-temps).

Argentina: wage agreements.

Asia

Japan: agreements on the payment of premiums and bonuses,

and on the organization of working time and leave.

Thailand: agreements on retirement age and welfare cover.

The European Works Committee includes representatives from

Germany, Belgium, Spain, France, Hungary, Italy, Poland, Portugal,

the Czech Republic, Slovakia and Sweden. The Committee met

six times in 2006.

The countries in which employees are fully or partially covered

by a collective bargaining agreement are France, Spain, Portugal,

Italy, Germany, Sweden, the Czech Republic, Slovakia, Hungary,

Romania, Tunisia, the United States, Mexico, Brazil, Argentina,

South Korea, Japan and India.

•

•

•

•

•

•

•

5. Health and safety in the workplace

The Group’s target in terms of health and safety is to intensify its

approach to work-related accident prevention and reach a "Zero

Accident" rate.

Health and safety at work is a clear priority for Valeo. Systematic

audits are performed by external consultants to assess and control

risks, and Valeo has implemented Group-wide standards.

In 2006, Valeo pushed ahead with its endeavors to optimize

health and safety in the workplace, drawing up a roadmap to

help the Group achieve world-class standards. As part of this

process, Valeo has set up a formal procedure for responding to

and analyzing accidents, and the related information system can

be used to share best practices and ensure their implementation

with a view to eradicating risk.

In addition to the systematic audits and indicators already in place

(frequency rate and gravity rate), Valeo has instigated a physical

indicator which is monitored on a monthly basis for each site.

This new indicator measures all workplace accidents, regardless

of whether or not they lead to absence, as well as incidents

involving a potential risk of personal injury. In 2006, there were

763 accidents leading to absence, compared with 693 in 2005.

The Group has, however, stopped keeping track of the number of

days without accidents.



gRoup

2004 2005 2006

Frequency rate* 7.21 5.07 5.55

gravity rate** 0.16 0.16 0.15

* Frequency rate: number of accidents leading to absence per million hours worked.

** Gravity rate: number of days lost because of work-related accidents per thousand hours worked.

fRance

2004 2005 2006

Frequency rate 13.02 12.74 11.35

gravity rate 0.38 0.33 0.28

In France the frequency and gravity rates for work-related accidents

are lower by 56% and 75% respectively than the industry average

(source: UIMM 2004 - latest survey).

In general, the main causes of accidents leading to absence were

machines and processes (45.3%) and ergonomics (20.3%).

10.8% of the training hours provided within the Group in 2006

were dedicated to safety, up 0.7 point on 2005.

6. Remuneration

6.1. Changes in remuneration and social charges

(In millions euros) 2004(1) 2005 2006(2)

Payroll excluding social charges 1,698 1,616 1,675

Social charges 566 515 594

total payroll 2,264 2,131 2,269

Charge rate 33.3% 31.9% 35.46%

(1) Figures restated following the application of the new International Financial Reporting Standard.(2) Including VMA.

(In millions euros) 2004(1) 2005 2006(2)

Personnel costs (including temporary staff) 2,286 2,296 2,426

% of sales 24.8% 23.1% 23.9%

(1) Figures restated following the application of the new International Financial Reporting Standard.(2) Including VMA.

bReakdoWn by geogRaphic aRea in 2006*

(In millions euros) FranceEurope

(excl. France)Outside Europe

Payroll excluding social charges 664 548 463


total payroll 971 705 593

Charge rate 46.2% 28.6% 28.1%

* Including VMA



France has the highest headcount, with over 17,000

employees.

Overall wages went up an average of 2.4% in 2006, with inflation

standing at 1.5%.

17 wage agreements were signed in the Group’s 17 French

companies with employee representative bodies and unions. Of

these agreements, 11 (65%) were signed by the majority of the

representative unions, including nine (53%) that were agreed

unanimously.

6.2. Profit-sharing, incentive schemes and employee savings schemes

6.2.1. Profit-sharing

In 2006, 4,241,000 euros was set aside in a special profit-sharing

reserve by four out of the Group's 17 companies in France.

6.2.2. Incentive schemes

1,302,000 euros was paid out under incentive schemes to

employees from four of the Group's 17 companies in France in

2006.

6.2.3. Employee savings

Group savings scheme

Employees can invest sums of money from profit-sharing

and incentive schemes in a Group savings scheme set up on

November 13, 2001, under a collective agreement signed by

Group Management and four trade union organizations. Voluntary

payments can also be made with top-up payments of between

0% and 75% by Valeo. This scheme only applies to French

companies.

At December 31, 2006, 11,758 employees were members of

Valeo's Employee Savings Plan (PEG) (up 12.3% on the previous

year), representing 68.6% of the total French headcount (59.6%

in 2005), and a total amount of 33.2 millions euros split between

six investment funds.

Employee stock ownership

In late 2004, the Group set up an employee shareholders plan

entitled Valeorizon, which was subscribed to by 14% of employees

in 16 of the countries in which Valeo has operations.

1.3% of Valeo's capital is now held by its employees, making

them one of the Company’s main shareholder groups.

No new employee shareholding schemes were launched in

2006.

7. training

Trends in training over the last 3 years

The overall cost of training in 2006 amounted to 31,249,239 euros,

the equivalent of 1.9% of payroll excluding social charges.

The Group also took on 1,294 interns in 2006, 34% of whom

were women.

Work placement schemes and apprenticeships also play an

important role, with 1,126 young people taken on in this capacity

in 2006, 34% of whom were women.

343 young trainees were taken on as part of the international

internship program (VIE), 27% of whom were women.

In 2006, 85% of employees participated in at least one training

course, as part of the Group's skills development policy, compared

with 81.1% in 2005.

2004 2004 2006*

number of employees trained 51,008 52,692 56,116

number of training hours given 1,603,593 1,508,698 1,696,645

training costs €33,381,376 €31,752,527 €31,249,239

* Including VMA.



bReakdoWn of houRs by type of tRaining in 2006

5.80%Companyculture

9.50%Integration

9.50%Languages

5.20%Management

2.90%Office systems

10.80%Safety27.80%

Technical - Product

2.00%Communication

1.50%Environment

24.90%Other

peRcentage of employees tRained peR socio-pRofessional categoRy

2004 2005 2006*

Engineers and managers 91.1% 87.3% 90.4%

technicians, supervisors and administrative staff 82.1% 81.8% 87.5%

Operators 77.2% 79.1% 82.7%

TOTAL 80.6% 81.1% 85%

* Including VMA.

aveRage numbeR of tRaining houRs peR socio-pRofessional categoRy

2004 2005 2006*

Engineers and managers 48 48 44


Operators 23 20 25

TOTAL 31 29 30

* Including VMA.

A total of 1,696,645 hours of training were provided to 56,116

employees during the year, at a cost of 31,249,239 euros. The

number of employees trained is increasing steadily, particularly

among non-managerial staff, with the 2006 figure 5% higher than

in 2004.

With a view to providing training for its entire workforce (85% in

2006 compared with 81% in 2005), the Group continued to train

and certify internal trainers, thus increasing the volume of internal

and external training hours given by 12.5% in respect of both

specialist operational training and cross-disciplinary skills.

Thanks to the development of its online university

ValeoC@mpus, the Group is able to create more tailor-made

programs and combine different training methods such as online

and classroom-based training, as well as on-the-job coaching. In

turn, this enables Valeo to step-up the efficiency of its learning

tools while controlling the related costs, as illustrated by the 1.6%

reduction in costs for 2006 despite a 7.7% increase in the number

of employees trained.

Valeo C@mpus offers all employees access to training – at their

own pace and with the possibility of assistance from tutors – in

areas including languages and office systems, as well specific

modules such as “Valeo’s 5 Axes” or “Our products and processes”.

The offering is enhanced by internally-developed modules on

quality systems and methods.

As a complement to existing career plans, management also

worked on formalizing Individual Career Development Plans in

2006, based on a three-pronged approach – training, practical

application and experience. These new plans are expected to

further boost internal mobility.

A training and preparation plan for the role of supervisor has also

been developed for production workers.

Finally, the Group continued with the specialist-training approach

launched in 2004 for staff working in the Training unit within

the Human Resources department. Staff responsible for drawing

up and monitoring training plans have also been provided with

methodological tools and experience sharing systems.



8. Disabled employees

Valeo amended its Code of Ethics in 2004, further strengthening its

commitment to promote the respect of people's dignity and value

in the workplace as well as equal rights for workers. Consequently,

the Valeo Group participates in measures to promote the

employment and training of disabled workers.

At December 31, 2006, 1,027 disabled employees worked for the

Group, 10% less than in 2005.

In France there were 608 disabled employees at December 31,

2006 (652 at end-2005 and 510 at end-2004), representing

3.5% of the total headcount. The number of subcontracting and

service contracts set up with centers promoting the employment

of disabled workers represented almost 3.4 million euros in 2006

(3.7 million euros in 2005).

9. Social and cultural activities

In most of the countries in which it has operations the Group

makes financial contributions to sports, educational, cultural or

charity organizations. 34.8 million euros was spent on social

benefits programs in 2006, representing 2.1% of total payroll

excluding social charges.

Valeo dedicated 11.8 million euros, or 0.7% of total payroll

excluding social charges, to social benefits programs in France in

2006 (11 million euros in 2005 and 12 million euros in 2004).

10. Subcontracting

Valeo is particularly vigilant in ensuring that its subsidiaries comply

with the fundamental principles of national and international

labor law in all their dealings with subcontractors, and that

subcontractors and suppliers apply the provisions of the Valeo

Code of Ethics relating to fundamental human rights.

Subcontracting costs amounted to 175 million euros in 2006,

covering services such as security, cleaning, maintenance and

IT and administrative support. This figure represented 10.4% of

total payroll excluding charges. Subcontracting costs in France

amounted to 98 million euros.



11. the group's role in youth training and employment

11.1. International outlook

In order to assist with its recruitment requirements, Valeo has

entered into a number of partnerships with technical schools,

higher education establishments and universities in the regions

where it operates. It also participates in numerous forums and

open days in order to present the Group's activities to students

and future graduates. During 2006, Valeo took part in the Atuge

forum in Tunisia and France, the “Best” forum in Krakow (Poland),

the Franco-German forum in Strasbourg, the international

employment forum in Paris (VIE), the Careers in Europe forum

in Berlin, and open days or forums in the universities of Wuhan,

Nanjing and Changchun in China. In the United States, Valeo took

part in the Yes-Expo Program in Detroit, attended by more than

13,000 students, in order to promote the Group's technological

innovations among the student community.

11.2. In France

In order to assist with its recruitment requirements in France, Valeo

has strengthened its partnerships with educational establishments,

including:

Supélec, in connection with the PERCI program for teaching and

research in cooperation with industry;

ESIGELEC, through the signature of a framework collaboration

agreement;

UTC (Compiègne), thanks to Thierry Morin’s sponsorship of the

graduate year and the development of scientific partnerships;

•

•

•

ENSIETA (Brest), by participating in the graduation ceremony

for students sponsored by Thierry Morin;

ESTACA, by sponsoring the activities of “Elles Bougent”, an

association that promotes careers in engineering for women;

CENTRALE Paris, through participating in meetings with students

concerning the Year In Industry program and by organizing a

tour of the Nevers site.

At the same time, Valeo formed a new partnership with INSA

Lyon in the plastics processing field and played an active role in

various college and university forums, including those organized

by ENSAM, UTC, Supélec, Centrale Paris, Mines de Paris, Mines de

Douai, ESEO Angers, Ecole des Pétroles et Moteurs, ESO, HEC, ESSEC,

ESCP-EAP, Sciences Po Paris and EM Lyon. Valeo also participated

in the Ouest Avenir forum in Brest, the Rencontre forum in Lille,

and the engineers' trade fair organized by the French employment

organization Apec in Paris.

In addition, with a view to diversifying the profile of its new

recruits and making the automotive industry more attractive to

female high school students, Valeo became one of the sponsors

of the "Elles Bougent" association. It also took part in the “Women

in Leadership” forum in Paris to promote the Group’s businesses

among potential candidates.

Finally, Valeo strengthened its relations with the ParisTech network

by participating in two meetings relating to the ATHENS European

exchange program, open to non-French students from leading

Paris engineering schools.

•

•

•


MAnAgEMEnt REPORt2


3consolidated financial statements 2006

Consolidated statements of income P. 71

Consolidated balance sheets P. 72

Consolidated statements of cash flows P. 73

Statements of recognized income and expenses P. 74

Statement of changes in stockholders’ equity P. 75

Notes to consolidated financial statements P. 76

Statutory Auditors' report on the 2006 IFRS consolidated financial statements P. 126


CoNSolIdAted FINANCIAl StAtemeNtS 20063


CoNSolIdAted FINANCIAl StAtemeNtS 2006 3Consolidated statements of income

Consolidated statements of income

(In millions of euros) Notes2006 2005

Restated (1)

2004Restated (1)

NET SALES 3.1 9,970 9,736 9,018

other operating revenues 116 98 62

TOTAL OpERATiNg REVENuES 10,086 9,834 9,080

Cost of sales (8,431) (8,177) (7,467)

gROSS MARgiN (2) 1,539 1,559 1,551

% of net sales 15.4% 16.0% 17.2%

Research and development expenditure 3.3 (661) (640) (580)

Selling expenses (195) (191) (182)

Administrative expenses (458) (452) (431)

other income and expenses 3.4 (70) (50) (98)

OpERATiNg iNCOME 271 324 322

% of total operating revenues 2.7% 3.3% 3.5%

Cost of net debt 3.5 (57) (52) (32)

other financial income and expenses 3.6 (9) (52) (37)

iNCOME BEFORE iNCOME TAXES 205 220 253

Income taxes 3.7 (75) (66) (18)

equity in net earnings of associates - 6 5

iNCOME FROM CORE ACTiViTiES 130 160 240


Non-strategic activities (3) 36 (12) 8

NET iNCOME FOR THE pERiOD 166 148 248

minority interests (5) (6) (8)

Net income attributable to equity holders of the company 161 142 240


income from core activities attributable to equity holders of the company

Basic earnings per share (in euros)• 1.62 1.95 2.82

diluted earnings per share (In euros)• 1.62 1.93 2.63

Net income attributable to equity holders of the company

Basic earnings per share (in euros)• 3.8.1 2.10 1.80 2.92

diluted earnings per share (In euros)• 3.8.2 2.09 1.79 2.71

(1) The statements of income for 2004 and 2005 have been restated from those published on February 9, 2006, as described in notes 2.1 and 3.3.(2) Gross margin represents net sales (excluding other operating revenues) less cost of sales.(3) See note 2.1.

The notes are an integral part of the consolidated financial statements.


CoNSolIdAted FINANCIAl StAtemeNtS 20063 Consolidated balance sheets

Consolidated balance sheets

(In millions of euros) Notes2006 2005

Restated (1)

2004Restated (1)

ASSETS

Goodwill 4.1 1,415 1,484 1,158

other intangible assets 4.2 528 522 281

Property, plant and equipment 4.3 1,918 2,041 1,945

Investments in associates 4.4 103 116 96

Non-current financial assets 4.5 24 28 14

deferred tax assets 4.6 96 100 83

Non-current assets 4,084 4,291 3,577

Inventories 4.7 647 654 565

Accounts and notes receivable 4.8 1,834 1,906 1,726

other current assets 311 243 228

taxes recoverable 64 51 58

other current financial assets 5.2.5 10 24 -

Assets held for sale 4.3 20 11 -

Cash and cash equivalents 4.11 618 949 868

Current assets 3,504 3,838 3,445

TOTAL ASSETS 7,588 8,129 7,022

LiABiLiTiES AND EquiTy

Share capital 233 233 251

Additional paid-in capital 1,387 1,385 1,617

Retained earnings 94 56 (87)

Stockholders’ equity 1,714 1,674 1,781

minority interests 38 43 57

Stockholders’ equity including minority interests 4.9 1,752 1,717 1,838

Provisions - non-current portion 4.10 937 1,123 1,000

long-term debt 4.11 1,274 1,303 1,027

deferred tax liabilities 4.6 1 9 13

Non-current liabilities 2,212 2,435 2,040

Accounts and notes payable 1,955 1,925 1,685

Provisions - current portion 4.10 418 431 298

taxes payable 76 82 83

other liabilities 836 792 715

Current maturities of long-term debt 4.11 54 581 188

other current financial liabilities 5.2.5 11 9 -

Short-term debt 4.11 274 157 175

Current liabilities 3,624 3,977 3,144

TOTAL LiABiLiTiES AND EquiTy 7,588 8,129 7,022

(1) The balance sheets for 2004 and 2005 have been restated from those published on February 9, 2006, as described in note 6.



CoNSolIdAted FINANCIAl StAtemeNtS 2006 3Consolidated statements of cash flows

Consolidated statements of cash flows

(In millions of euros) Notes 2006 2005 2004

CASH FLOwS FROM OpERATiNg ACTiViTiES (1)

Net income for the period 166 148 248

equity in net earnings of associates - (6) (5)

Net dividends received from associates 4 4 3

expenses (income) with no cash effect 4.12 411 518 516

Cost of net debt 59 54 33

Income taxes (current and deferred) 77 60 17

gross operating cash flows 717 778 812

Income taxes paid (85) (65) (28)

Changes in working capital 4.12 48 107 45

Net cash provided by operating activities 680 820 829

CASH FLOwS FROM iNVESTiNg ACTiViTiES (1)

outflows relating to acquisitions of intangible assets (165) (145) (122)

outflows relating to acquisitions of property, plant and equipment (494) (441) (413)

Inflows relating to disposals of property, plant and equipment 17 41 19

Net change in non-current financial assets 32 (3) -

Impact of changes in scope of consolidation 2.6 124 (466) (73)

Net cash used in investing activities (486) (1,014) (589)

CASH FLOwS FROM FiNANCiNg ACTiViTiES (1)

dividends paid to parent company stockholders (84) (91) (85)

dividends paid to minority interests in consolidated subsidiaries (5) (5) (5)

equalization tax on dividends - - (101)

Issuance of share capital 4 1 33

Sale (purchase) of treasury shares 4 8 -

Issuance of long-term debt 3 826 26

Grants and contributions received 48 39 26

Net outflows related to capital reductions - (252) -

Net interest paid (60) (33) (28)

Repayment in long-term debt (553) (196) (36)

Net cash provided by (used in) financing activities (643) 297 (170)

Effect of exchange rate changes on cash 1 28 (1)

NET CHANgE iN CASH AND CASH EquiVALENTS (448) 131 69

Cash and cash equivalents at beginning of year 792 661 (2) 624

Cash and cash equivalents at end of year 344 792 693 (2)

of which :Cash and cash equivalents• 618 949 868

Short-term debt• (274) (157) (175)

(1) The impact of the sale of the Electric Motors & Actuators business is described in note 2.1.(2) The difference between net cash and cash equivalents at December 31, 2004 and at January 1, 2005 is due to the application of IAS 32 at January 1, 2005 (treasury

shares are now deducted from stockholders’ equity).



CoNSolIdAted FINANCIAl StAtemeNtS 20063 Statements of recognized income and expenses

Statements of recognized income and expenses


2006 2005Restated (1)

2004Restated (1)

exchange differences on translation of foreign operations (69) 135 6

Actuarial gains (losses) on defined benefit plans 27 (50) (42)

Cash flow hedges: Gains (losses) taken to equity• 7 23 -

transferred to profit and loss for the period• (19) (8) -

Net investment hedges: Gains (losses) taken to equity• - (3) -

Remeasurement of available-for-sale financial assets - - -

Income taxes on items recognized directly in equity (1) 5 1

income and expenses recognized directly through equity (55) 102 (35)

Net income for the period 166 148 248

Total recognized income and expenses for the period 111 250 213

Attributable to: equity holders of the company• 109 240 208

minority interests• 2 10 5

Corrections of errors (2) - - (9)

Attributable to:

equity holders of the company• - - (9)

minority interests• - - -

(1) The statements of recognized income and expenses for the periods to December 31, 2004 and December 31, 2005 have been restated from those published on

February 9, 2006, as described in note 6.(2) See note 6.



CoNSolIdAted FINANCIAl StAtemeNtS 2006 3Statement of changes in stockholders’ equity

Statement of changes in stockholders’ equity

Number of shares (In millions of euros)

Share capital

Additi- onal

paid-in capital

Transl-ation

adjust-ment

Retained earnings

Stockholders’ equity

Minority interests

Stockholders’ equity

including minority interests

82,133,728Stockholders’ equity at January 1, 2004 (Restated) (1) 246 1,589 - (90) 1,745 97 1,842

dividends - - - (85) (85) (7) (92)

equalization tax on dividends (2) - - - (101) (101) - (101)

1,575,296 employee share issue 5 28 - - 33 - 33

Share-based payments - - - 5 5 - 5

Income and expenses recognized directly through equity - - 9 (41) (32) (3) (35)

Net income - - - 240 240 8 248

other movements (3) - - - (24) (24) (38) (62)

83,709,024Stockholders’ equity at December 31, 2004 (Restated) (1) 251 1,617 9 (96) 1,781 57 1,838

(1,037,804)Total impact of financial instruments (iAS32, iAS39) - - - 27 27 - 27

82,671,220Stockholders’ equity at January 1, 2005 (Restated) 251 1,617 9 (69) 1,808 57 1,865

dividends - - - (91) (91) (5) (96)

230,100 treasury stock - - - 8 8 - 8

(6,250,000) Capital reduction (4) (19) (233) - - (252) - (252)

51,333 Share-based payments 1 1 - 7 9 - 9

Income and expenses recognized directly through equity - - 131 (33) 98 4 102

Net income - - - 142 142 6 148

other movements (3) - - - (48) (48) (19) (67)

76,702,653Stockholders’ equity at December 31, 2005 (Restated) (1) 233 1,385 140 (84) 1,674 43 1,717

dividends - - - (84) (84) (4) (88)

121,000 treasury stock - - - 4 4 - 4

Capital increase - - - - - 1 1

70,260 Share-based payments - 2 - 11 13 - 13

Income and expenses recognized directly through equity - - (66) 14 (52) (3) (55)

Net income - - - 161 161 5 166

other movements - - - (2) (2) (4) (6)

76,893,913Stockholders’ equity at December 31, 2006 233 1,387 74 20 1,714 38 1,752

(1) Stockholders’ equity at January 1, 2004, December 31, 2004 and December 31, 2005 has been restated from the amounts published on February 9, 2006, as described

in note 6.(2) This item includes:

- 18 million euros in equalization tax relating to dividends paid in 2004;

- 83 million euros in equalization tax which became due (on dividends paid in 2001 and 2002) further to the corporate income tax rebate obtained in 2004.(3) This item includes the impact of minority interest buyouts relating to Valeo Climatisation in 2004, as well as to Valeo Zexel China Climate Control and Valeo Thermal

Systems Japan Corp. in 2005.(4) Capital reduction carried out following the purchase by Valeo of around 7.5% of its own shares, in connection with a public share buyback offer and a simplified public

tender offer.



CoNSolIdAted FINANCIAl StAtemeNtS 20063

Notes to consolidated financial statements

1 - Accounting policies .......................................................................................................................................................................... p. 77

2 - Changes in the scope of consolidation ......................................................................................................................................... p. 83

3 - Notes to the statement of income ................................................................................................................................................ p. 85

4 - Notes to the balance sheet ............................................................................................................................................................. p. 89

5 - Additional disclosures ................................................................................................................................................................... p. 108

6 - Restatement of 2004 and 2005 financial information .......................................................................................................... p. 118

7 - list of consolidated companies ................................................................................................................................................... p. 119

Notes to consolidated financial statements


CoNSolIdAted FINANCIAl StAtemeNtS 2006 3Notes to consolidated financial statements

1 - Accounting policies

The consolidated financial statements of the Valeo Group for the

year ended December 31, 2006 include the accounts of Valeo,

its subsidiaries and the Group’s share of associates and jointly

controlled entities.

Valeo is an independent Group fully focused on the design,

production and sale of components, systems and modules for

the automobile sector. It is one of the world’s top automotive

suppliers.

Valeo is a French legal entity, listed on the Paris Stock Exchange,

whose head office is located at 43, rue Bayen, 75017 Paris.

Valeo’s consolidated accounts were authorized for issue by the

Board of Directors on February 12, 2007.

They will be submitted for approval to the Annual General Meeting

of shareholders which will be convened on May 21, 2007.

1.1 - Accounting standards applied

Under European Union regulation 1606/2002 of July 19, 2002,

the consolidated financial statements have been prepared in

conformity with International Financial Reporting Standards (IFRS)

approved by the European Union.

The Group has elected for early application, respectively as of

January 1, 2004 and 2005, of the two following amendments to

IFRS that are obligatorily applicable as from January 1, 2006:

the amendment to IAS 19 introducing the option to recognize

actuarial gains and losses on defined benefit pension plans

in reserves;

the amendment to IAS 39 relating to hedge accounting of

forecast inter-company transactions.

New accounting standards that are not yet obligatorily applicable,

that have not been adopted early and that may have an impact

on the Group’s financial statements are as follows:

IFRS 7 “Financial Instruments: Disclosures”, applicable as from

January 1, 2007;

IFRS 8 “Operating Segments”; this standard, which has not yet

been approved by the European Union, is obligatorily applicable

as from 2009.

The potential impacts of these two standards on the Group’s

financial statements are currently being analyzed.

1.2 - Basis of preparation

The financial statements are presented in euros and are rounded

to the closest million.

•

•

•

•

In addition they have been prepared in accordance with the

principal assumptions of IFRS:

true and fair view;

going concern;

accrual basis of accounting;

consistency of preparation;

materiality and aggregation.

Preparation of the financial statements requires Valeo to make

estimates and assumptions which could have an impact on the

amounts at which assets, liabilities, income and expenses are

stated. These estimates, and the assumptions underlying them,

have been made on the basis of past experience and of other

factors considered to be reasonable in the circumstances. They

thus serve as the basis for the judgment made in determining

the carrying amounts of assets and liabilities which could not be

determined directly from other sources. The definitive amounts

that will be stated in Valeo’s future financial statements may be

different from the amounts currently estimated. These estimates

and assumptions are reviewed on a continuous basis.

1.3 - Consolidation methods

The consolidated financial statements include the accounts of

Valeo and companies under its direct and indirect control.

The proportionate consolidation method is used when the

contractual arrangements for control of a company specify that

it is under the joint control of the two venturers. Companies of

this type are called joint ventures. In this case, the Group’s share

of each asset and liability and each item of income and expense

is aggregated, line-by-line, with similar items in its consolidated


All significant inter-company transactions are eliminated (for

joint ventures the elimination is performed to the extent of the

Group’s ownership interest in the company), as are gains on

inter-company disposals of assets, inter-company profits included

in inventories and inter-company dividends.

Companies over which Valeo has the power to exercise significant

influence are accounted for by the equity method. Valeo is

considered to exercise significant influence over companies in

which the Group owns more than 20% of the voting rights. This

method consists of replacing the book value of the investments

by the Group’s equity in the associate’s underlying net assets,

including goodwill.

Companies acquired during the year are consolidated as from

the date at which the Group exercises (sole or joint) control or

significant influence.

•

•

•

•

•


CoNSolIdAted FINANCIAl StAtemeNtS 20063 Notes to consolidated financial statements

1.4 - Foreign currency translation

Each Group company maintains its accounting records in its

functional currency. A company’s functional currency is the

currency of the principal economic environment in which it

operates, generally being the local currency.

Transactions carried out in a currency other than the company’s

functional currency are translated using the rate prevailing at the

transaction date. Monetary assets and liabilities denominated in

foreign currency are translated at the year-end exchange rate.

Non-monetary assets and liabilities denominated in foreign

currency are recognized at the historical exchange rate prevailing

at the transaction date. Differences arising from the translation

of foreign currency transactions are recognized in income, with

the exception of differences relating to loans and borrowings

which are in substance an integral part of the net investment in

a foreign subsidiary. These are recorded, for their amount net of

tax, in consolidated stockholders’ equity under translation reserves

until such time as the net investment is disposed of, at which

time they are recognized in income.

The financial statements of foreign subsidiaries whose functional

currency is not the euro are translated into euros as follows:

assets and liabilities are translated at the year-end exchange

rate;

income statement accounts are translated into euros at the

exchange rates applicable at the transaction dates or, in

practice, at the average exchange rate for the period, as long

as this is not rendered inappropriate as a basis for translation

by major fluctuations in exchange rates during the period;

unrealized gains or losses arising from the translation of the

financial statements of foreign subsidiaries are recorded

through stockholders’ equity.

1.5 - operating revenues

Operating revenues are comprised of net sales and other

operating revenues.

Net sales primarily include sales of finished goods and also

include all tooling revenues. Sales of finished goods and tooling

revenues are recognized at the date on which the Group transfers

substantially all the risks and rewards related to ownership to

the buyer and is no longer involved in the management or in

the effective control of the goods sold. In cases where the Group

retains control of the future risks and rewards related to tooling,

any customer contributions are recognized over the duration of

the project, over a maximum of 4 years.

Other operating revenues consist of all revenues for which the

associated costs are recorded below the gross margin line. They

mainly comprise sales of prototypes and contributions received from

customers to development costs. Such contributions are deferred as

•

•

•

appropriate and are taken to income over the period of sale of the

corresponding products, over a maximum of 4 years.

1.6 - Gross margin and operating income

Gross margin is defined as the difference between net sales and

cost of sales. Cost of sales primarily corresponds to the cost of

goods sold.

Operating income includes all income and expenses other than:

cost of net debt;

other financial income and expenses;

income taxes;

equity in net earnings of associates;

income from non-strategic activities.

In order to facilitate interpretation of the statement of income

and of Group performance, unusual items that are material to the

consolidated financial statements are separately presented within

operating income under “Other income and expenses”.

1.7 - Financial income and expenses

Financial income and expenses are comprised, firstly, of the

cost of net debt and, secondly, of other financial income and

expenses.

The cost of net debt corresponds to interest paid on debt less

interest earned on cash and cash equivalents.

Other financial income and expenses notably include:

foreign exchange gains and losses, including the impact of

derivative instruments used as hedges;

charges to provisions for credit risk as well as the cost of credit

insurance;

the effect of unwinding discount on provisions, including

discount on provisions for pensions and other employee

benefits;

and the expected return on pension and other post-employment

benefit plan assets.

1.8 - earnings per share

Basic earnings per share are calculated by dividing consolidated net

income by the weighted average number of shares outstanding

during the year, excluding the average number of shares held

in treasury stock.

Diluted earnings per share are calculated by including potentially

dilutive instruments such as stock options or convertible bonds,

when such instruments have a dilutive effect, which is particularly

the case for stock subscription options when their exercise price

is below the market price (average Valeo share price over the

•

•

•

•

•

•

•

•

•



year). When funds are received on the exercise of these rights

(such as on the subscription of shares), they are deemed to be

allocated in priority to the purchase of shares at market price.

This calculation method – known as the treasury stock method

– serves to determine the “unpurchased” shares to be added

to the shares of common stock outstanding for the purposes of

computing the dilution. When funds are received at the date of

issue of dilutive instruments (such as for convertible bonds), net

income is adjusted for the net of tax interest savings which would

result from the conversion of the bonds into shares.

1.9 - Business combinations

All identifiable assets acquired and liabilities and contingent

liabilities assumed, are recognized at their fair value at the date of

transfer of control to the Group (acquisition date), independently

of recognition of any minority interests.

The cost of a business combination is equal to the acquisition

price, plus any costs directly attributable to the acquisition. Any

excess of the acquisition cost over the fair value of the net assets

acquired and liabilities and contingent liabilities recognized, is

recorded in assets as goodwill. Goodwill is not amortized but is

rather subject to an impairment test at least once a year.

1.10 - Intangible assets

Innovation can be analyzed as either research or development.

Research is planned investigation undertaken with the prospect of

gaining new scientific or technical knowledge and understanding.

Development is the application of research findings with a

view to creating new products, before the start of commercial

production.

Research costs are recognized in expenses in the year they are

incurred.

Development expenditure is capitalized where the Group can

demonstrate:

that it has the intention, and the technical and financial

resources to complete the development;

that the intangible asset will generate future economic

benefits;

and that the cost of the intangible asset can be measured

reliably.

Capitalized development costs are then amortized over a

maximum period of 4 years from the start of volume production.

Impairment losses may, as required, be recognized in respect of

capitalized development costs.

Other intangible assets are carried at cost less any amortization

and impairment losses recognized. They are amortized on a

straight-line basis over their expected useful lives.

•

•

•

Intangible assets with indefinite useful lives are subject to an

impairment test in accordance with the methodology set out in

note 1.12. Intangible assets which are not yet in use at year-end

are also subject to such impairment tests.

1.11 - Property, plant and equipment

Property, plant and equipment are carried at cost, excluding

interest expense, less accumulated depreciation and impairment

losses. Material revaluations, recorded in accordance with laws

and regulations applicable in countries in which the Group

operates, have been eliminated in order to ensure the consistency

of valuation method of all fixed assets in the Group.

Tooling which is specific to a given project is subjected to an

economic analysis of contractual relations with the automaker in

order to determine which party has control over the future risks

and rewards relating to the specific tooling. When Valeo has such

control, tooling is capitalized in the balance sheet. In the event

that Valeo does not have control, it is included in inventories until

sold. Any resulting loss on the tooling contract (corresponding to

the difference between the automaker’s contribution and the

cost of the tooling) is provided for as soon as the amount of the

loss is known.

When the terms of a lease, entered into by the Group as lessee,

transfer substantially all risks and rewards inherent in ownership

to the Group, the corresponding asset is recognized in property,

plant and equipment in the Group’s balance sheet at a cost equal

to the lesser of its fair value and the present value of future

minimum lease payments. Such assets are subject to depreciation

and, if necessary, provisions for impairment. The corresponding

obligation is recorded as a liability.

Depreciation is calculated on a straight-line basis over the

estimated useful lives of the assets concerned:

buildings 20 years

fixtures and fittings 8 years

machinery and equipment 4 to 8 years

other fixed assets 3 to 8 years

Land is not depreciated.

Capital grants received are recognized in liabilities and are written

back to income proportionately to the recognition of depreciation

of the corresponding assets.

1.12 - Impairment of assets

At each balance sheet date, the Group assesses whether there is

an indication that an asset (other than a financial asset), a cash

generating unit (CGU – as defined by IAS 36), or a group of CGUs

may be impaired.

CGUs are autonomous management entities at the level of

which the resource allocation process is performed and results

•

•

•

•



are analyzed. They generally correspond to production sites or to

groups of production sites.

Intangible assets with indefinite useful lives are systematically

subjected to an impairment test at least once a year. If the

asset’s carrying amount is greater than its recoverable amount,

it is written down to its recoverable amount.

The recoverable amount of an asset or a CGU is the higher of its

fair value less costs to sell and its value in use. The method applied

is the discounted present value of future cash flows expected to

derive from an asset or a CGU. The discount rate used is the rate

that reflects both the current assessment of the time value of

money and risks specific to the asset (or group of assets) for which

future cash flows estimates have not been adjusted.

Impairment losses are allocated to CGU assets in the following

order: firstly to the goodwill allocated to the CGU and then to the

other CGU assets in proportion to their carrying amounts.

Impairment losses recognized on goodwill balances are never

reversed. For other assets, when an indicator shows that the

asset may no longer be impaired, the impairment loss previously

recognized is reversed in an amount so that the new carrying

amount is the lesser of the recoverable amount and the carrying

amount that the asset would have had if the impairment had not

been recognized in the first place.

1.13 - Financial assets and liabilities

Financial assets include non-consolidated investments, loans,

accounts and notes receivable, derivatives and cash and cash

equivalents. Financial liabilities include debt, accounts and notes

payable, derivatives and short-term bank debt.

Recognition and measurement principles in respect of financial

assets and liabilities are defined in IAS 32 and IAS 39. Valeo has

elected to apply these standards with effect from January 1, 2005.

The impact of the change in accounting policy was recorded in

equity at that date.

1.13.1 - Financial assets at fair value through income

Cash and cash equivalents are comprised of marketable securities

such as money-market funds, deposits, and very short-term risk-

free securities which can be easily sold or converted into cash as

well as cash at bank. Such investments are generally held to be

sold within a short timeframe.

1.13.2 - Trading receivables and payables

Trading receivables and payables are initially recognized at fair value.

The fair value of accounts receivable and accounts payable is deemed

to be their nominal amount in view of the fact that periods to

payment are generally less than 3 months. Such trading receivables

and payables are subsequently valued at amortized cost.

Accounts receivable can be subject to provisions for impairment

in value. If an event of loss is identified during the financial year

subsequent to initial recognition of the receivable, the required

provision will be calculated by comparing the estimated future

cash flows to the carrying amount in the balance sheet. Provisions

are recognized through other financial expenses if they are related

to a risk of insolvency of the debtor.

1.13.3 - Non-current financial assets

Non-current financial assets include investments and loans and

other long-term financial assets:

investments are available-for-sale financial assets. They are

initially recognized on origination at fair value. Any subsequent

change in fair value is recognized through stockholders’ equity

or through income in the event of a prolonged decline in

value;

long-term loans are held-to-maturity financial assets. They

are initially recognized at fair value on origination and are

subsequently valued on an amortized cost basis;

other non-current financial assets are securities with maturities

greater than 3 months. These securities are recognized in non-

current financial assets at fair value, with changes in fair value

being recognized through income. Such securities can be easily

sold and are risk-free.

1.13.4 - Debt

Bonds and other loansBonds and loans are valued at amortized cost. The amount of

interest recognized in financial expenses is calculated by applying

the loan’s effective interest rate to its carrying amount. Any

difference between the expense calculated using the effective

interest rate and the actual interest payment impacts the value

at which the loan is recognized.

Hedge accounting is generally applied to financial debt hedged

by interest rate swaps. Such loans are revalued to their fair value,

which is related to changes in interest rates.

OCEANEBonds convertible into new shares or exchangeable for new or

existing shares (OCEANE) grant bearers an option for conversion

into common shares of Valeo. They constitute a compound

financial instrument which, under IAS 32, must be split into its

two components:

the value of the debt component is calculated by discounting

the future contractual cash flows at the market rate applicable

at the date of issue of the bond (taking account of credit risk

at the date of issue) for a similar instrument with the same

characteristics but without a conversion option;

the value of the equity component is calculated as the

difference between the proceeds of the bond issue and the

amount of the debt component.

•

•

•

▪

▪

•

•



Short-term bank debtThis caption mainly includes credit balances with banks and

commercial paper issued by Valeo for its short-term financing

needs. Commercial paper has a maximum maturity of 3 months

and is valued at amortized cost.

1.13.5 - Recognition and measurement of derivatives

Derivatives are recognized in the balance sheet at fair value

under the other current financial assets and other current financial

liabilities captions. The accounting impact of changes in fair value

of derivatives differs depending on whether hedge accounting

is applied or not.

When hedge accounting is applied:

for fair value hedges of recognized assets and liabilities, the

hedged portion of these items is stated at fair value. Changes

in this fair value are recognized through income and offset,

for the effective portion, the symmetrical changes in the fair

value of the derivatives;

for cash flow hedges, the effective portion of the change in

the fair value of the derivative is recognized directly through

equity and the ineffective portion is taken to other financial

income and expenses;

for hedges of net investments in foreign subsidiaries, the

change in fair value of the hedging instruments is taken to

equity (for the effective portion) until the disposal of the net

investment.

In cases where hedge accounting is not applied, changes in the

fair value of derivatives are recognized in other financial income

and expenses.

Foreign currency derivativesChanges in the value of derivatives are generally recognized in

financial income and offset, as applicable, by changes in the fair

value of the underlying receivables and payables. In certain cases,

the Group applies hedge accounting for highly probable future

flows as from the inception of the hedging relationship: changes

in the fair value of the derivatives are then recognized through

equity for the effective component of the hedge. Amounts that

flowed through equity are subsequently taken to operating

income when the underlying hedged item affects operating

income. The ineffective portion is recognized in other financial

income and expenses.

Metals derivativesThe Group applies cash flow hedge accounting. The effective

portion of the hedge is reclassified from equity to operating

income when the hedged position affects income. The ineffective

portion is recognized in other financial income and expenses.

interest rate derivativesThe Group generally applies fair value hedge accounting. Changes

in the fair value of debt, related to changes in interest rates,

and symmetrical changes in the fair value of the interest rate

▪

•

•

•

▪

▪

▪

derivatives are recognized in other financial income and expenses

for the period.

In certain cases, interest rate derivatives are not designated as

hedging instruments in the meaning ascribed to that term by

IAS 39. In such cases changes in fair value are recognized in other

financial income and expenses for the period.

1.14 - Inventories

Inventories are stated at the lower of cost or net realizable value.

Cost includes the cost of raw materials, labor and other direct

manufacturing costs on the basis of normal activity levels. These

costs are determined by the “First in-First out” (FIFO) method

which, due to the rapid inventory turnover rate, approximates

the latest purchase cost at the balance sheet date.

A provision for impairment in value is recorded by comparison

to net realizable value.

1.15 - Income taxes

Income tax expense includes current income taxes and deferred

taxes of consolidated companies. Deferred taxes are accounted for

using the liability method on all temporary differences between

the tax base and the carrying amount of assets and liabilities in

the consolidated financial statements and on all tax loss carry

forwards. The main temporary differences relate to provisions

for pensions and other employee benefits and other temporarily

non-deductible provisions. Deferred tax assets and liabilities are

calculated using enacted, or virtually enacted, tax rates that will

be in force at the time of reversal of the temporary differences.

Deferred tax assets are only recognized to the extent that it

appears probable that the Valeo Group will generate future

taxable profits against which these tax assets will be able to be

recovered.

The Group reviews the probability of future recovery of deferred

tax assets on a periodic basis. This review can, if necessary, lead

the Group to no longer recognize deferred tax assets that it had

recognized in prior years.

Taxes payable and tax credits receivable on planned dividend

distributions by subsidiaries are recorded in the statement of

income.

1.16 - Share-based payments

Employee stock option plans and plans for granting free shares

and Stock Appreciation Rights (SARs) to employees lead to

recognition of a personnel expense. This expense corresponds

to the fair value of the instrument issued. It is recognized over

the rights’ vesting period. Fair value is estimated on the basis of

valuation models adapted to the characteristics of the instruments



(Black-Scholes-Merton model for options, Monte Carlo method

for SARs, etc.).

1.17 - Pensions and other employee benefits

Pensions and other employee benefits cover two categories of

employee benefits:

post-employment benefits which include statutory retirement

bonuses, supplementary pension benefits and coverage of

certain medical costs for retirees and early retirees;

other long-term benefits payable (during employment),

corresponding primarily to long-service bonuses.

These benefits are broken down into:

defined contribution plans, under which the employer pays

fixed contributions on a regular basis and has no legal or

constructive obligation to pay further contributions;

defined benefit plans, under which the employer guarantees

a future level of benefits.

The provision for pensions and other employee benefits (including

long-term benefits) is equal to the present value of Valeo’s future

benefit obligation less, where appropriate, the fair value of plan

assets in funds allocated to finance such benefits. The calculation

of this provision is based on valuations performed by independent

actuaries using the projected unit credit method and final salaries.

These valuations incorporate both financial assumptions (discount

rate, expected rate of return on plan assets, salary increases, rise

in medical costs) and demographic assumptions, including rate of

employee turnover, retirement age and life expectancy.

The effects of differences between previous actuarial assumptions

and what has actually occurred (experience adjustments) and

the effect of changes in actuarial assumptions (assumption

adjustments) give rise to actuarial gains and losses. Such actuarial

gains and losses arising on long-term benefits during employment

are fully recognized in the income statement at each balance

sheet date. However as regards post-employment benefits,

actuarial gains and losses are recognized directly through equity

in the financial year in which they arise, in application of the

option provided by IAS 19 as amended in December 2004.

1.18 - Provisions

A provision is recognized when the Group has a legal or

constructive obligation resulting from a past event, where it is

probable that future outflows of resources embodying economic

benefits will be necessary to extinguish the obligation and

where the obligation can be estimated reliably. Commitments

resulting from restructuring plans are recognized when the

detailed plans have been prepared and when commencement of

implementation, or an announcement, has created a reasonable

expectation among the individuals concerned.

•

•

•

•

Provision is made for estimated product warranty costs at the time

of sale of the products. The corresponding expense is recognized

in cost of sales.

When the effect of the time value of money is material, the

amount of the provision is discounted using the risk free rate

applicable to the corresponding country and maturity. The

increase in the provision related to the passage of time (termed

“unwinding”) is recognized through income in other financial

income and expenses.

1.19 - Assets held for sale and non-strategic operations

When the Group expects to recover the value of an asset, or a

group of assets, through sale rather than through use, such assets

are presented separately under the “Assets held for sale” caption

in the balance sheet. Any liabilities related to such assets are also

presented under a separate caption in balance sheet liabilities.

Assets classified as held for sale are valued at the lower of their

carrying amount and their estimated sale price “less costs to

sell”. Such assets are thus no longer subject to depreciation and

amortization. Any impairment losses and the result of sale of

these assets are recognized through Group operating income.

In accordance with IFRS 5, non-strategic operations represent a

major line of business of the Group, an operation that forms part

of a single coordinated plan to dispose of a line of business or a

company acquired solely with a view to resale. Classification as

a non-strategic operation occurs at the date of sale or at a prior

date if the business meets the criteria to be recognized as an

asset held for sale. The results of these operations, as well as

any capital gains or losses on disposal, are presented, net of tax,

under a separate income statement caption.

1.20 - Segment reporting

According to IAS 14, segment reporting should be provided at two

levels – a primary and secondary level. The choice of segments

and of levels of disclosure depends on the differences in terms of

risk and return and on the organizational structure of the Group.

The Group’s risks and returns are based on the nature of its

products or services, of its production processes, the type of clients

to whom the products or services are to be sold, the methods

used to distribute the products or provide the services and the

nature of the regulatory environment. They also depend on the

countries in which the Group operates and markets its products,

raw material costs used in the production cycle and the Group’s

capacity to innovate in order to offer its clients products that meet

market expectations.

Analysis of these factors demonstrates that they are common to

the Group’s business as a whole and different business segments

cannot be separately identified within the meaning of IAS 14.



The Group is organized in a multi-dimensional manner:

the Group is decentralized into autonomous Divisions in which

the allocation of resources and performance measurement are

carried out. However, as there are approximately one hundred

such divisions, none of them can be considered to be material

within the meaning of IAS 14;

the Divisions benefit from the support of Valeo’s functional

networks and Branches, which oversee the coherence of the

Group’s Product Families; they also exploit synergies with

the Innovation Domains, and are coordinated by National

Directorates.

In 2006, the Group’s organization was unchanged from 2005,

which saw the strengthening of the role of the three Innovation

•

•

Domains and the grouping together of all the industrial branches

under a single management team.

Analysis of this organizational structure does not allow any specific

dimension of the Group’s business to be favored over others from

the perspective of IAS 14.

In consequence, the above matters lead:

to the conclusion that the Group as a whole operates as a single

business segment (“Automotive equipment”);

to the provision, for the secondary level of segment reporting, of

disclosures by geographical area, supplemented by information

in respect of the most appropriate criteria for understanding of

the Group’s business.

•

•

2 - Changes in the scope of consolidation

2.1 - Sale of electric motors & Actuators business

In December 2006, Valeo sold its Electric Motors & Actuators

business to the Japanese group Nidec. The sale price for this

business was 142 million euros. This transaction generated a

capital gain of 46 million euros before tax and 41 million euros

after tax. This positive impact is recognized in the statement of

income for 2006 under “Non-strategic activities”.

The Electric Motors & Actuators business was already classified

in “Non-strategic activities” in the interim financial statements

published at June 30, 2006, in accordance with the criteria set out

in IFRS 5. The profit after tax of the Electric Motors & Actuators

business for the three financial years 2004, 2005 and 2006 is

thus presented in aggregate under “Non-strategic activities” in

the statement of income.

In accordance with IFRS 5, all assets and liabilities of this business are

not aggregated under specific balance sheet captions at December 31,

2004 and 2005. In 2006, at the date of disposal of the Electric Motors

& Actuators business, the assets and liabilities related to this business

exited the Group’s consolidated balance sheet.

the components of the income statement caption “Non-strategic activities” are as follows:


Income of non-strategic activities before income taxes (4) (12) 12

Pre-tax capital gain on disposal of non-strategic activities 46 - -

Income taxes on income of non-strategic activities (1) - (4)

Income taxes on capital on disposal of non-strategic activities (5) - -

Net income of non-strategic activities 36 (12) 8

Income from non-strategic activities attributable to equity holders of the company is analyzed as follows:


income from non-strategic activities attributable to equity holders of the company

Basic earnings per share (In euros)• 0.47 (0.15) 0.10

diluted earnings per share (In euros)• 0.47 (0.14) 0.09



Cash flows from non-strategic activities are analyzed as follows:


Cash flows from operating activities - non-strategic activities 4 12 15

Cash flows used in investing activities - non-strategic activities (6) (10) (13)

Cash flows from financing activities - non-strategic activities 19 5 24

Change in net cash 17 7 26

The impacts of the disposal of the Electric Motors & Actuators

business on consolidated net sales and on the Group consolidated

balance sheet are analyzed respectively in paragraphs 3.1 and

2.6.

2.2 - Sale of Parrot

In the context of Parrot’s IPO, Valeo decided to sell its 14.8%

interest in the company. The capital gain on the sale of this

non-consolidated investment was recognized in “Other financial

income and expenses” for an amount of 24 million euros.

2.3 - Investment in threestar, a Korean company

In February 2006, Valeo acquired 50% of Threestar, the leading

Korean manufacturer of automobile radiators. Valeo Samsung

Thermal Systems, created through this agreement, was

proportionally consolidated from January 1, 2006, with the

remaining 50% of the capital being owned by the Samsung

Climate Control Group. This company contributed 9 million euros

to Group sales in 2006.

2.4 - disposal of Zexel logitec

Valeo sold Zexel Logitec on June 30, 2006, and the company was

deconsolidated as of that date. Zexel Logitec contributed 30 million

euros to Group sales in 2006 for the period from January 1 to

June 30. It contributed 53 million euros to Group sales in 2005.

The capital gain recognized by the Group in the year in “Other

income and expenses” amounted to 14 million euros.

2.5 - other transactions carried out in 2006

2.5.1 - ichikoh

Valeo raised its interest in Ichikoh, one of the largest Japanese

lighting systems suppliers, from 28.2% at December 31, 2005

to 29.4% at December 31, 2006. Ichikoh is accounted for by the

equity method.

2.5.2 - Valeo Raytheon Systems inc.

Valeo continued to invest in Raytheon Systems Inc., increasing

its stake from 73.1% at December 31, 2005 to 77.2% at

December 31, 2006. Valeo owns Raytheon Systems Inc. jointly

with the Raytheon Group, and accounts for its interest by the

proportional consolidation method because of the characteristics

of the partnership agreement.

2.5.3 - investments in China

In the first half of 2006, Valeo created a Chinese joint-venture

with Ichikoh and increased its interest in the Chinese company

Hubei Valeo Auto Lighting Systems Co. Ltd. from 75% to 100%.

These two transactions did not have material impacts on Group

sales in 2006.



2.6 - Impact of changes in scope of consolidation on the consolidated balance sheet

the assets, liabilities and contingent liabilities that have been acquired or sold in 2006, 2005 and 2004, measured at their

date of entry into the Group or exit from the Group, are analyzed below and reconciled with the corresponding cash flows:


2006 2005 2004

Disposal of Electric Motors

& Actuators

Other Total

Goodwill related to businesses sold (23) (3) (26) - -

other intangible assets (10) (3) (13) 198 1

Property, plant and equipment (58) 2 (56) 150 5

Investments in associates - 3 3 8 (1)

deferred tax assets (2) - (2) 1 -

Current assets (56) (5) (61) 298 9

Stockholders’ equity (50) (13) (63) 48 24

long-term debt 1 - 1 (54) (2)

other non-current liabilities 33 - 33 (218) (3)

Current liabilities 43 5 48 (244) (6)

Net assets acquired (sold) (122) (14) (136) 187 27

minority interests - 4 4 19 38

Total net assets acquired (sold) after minority interests (122) (10) (132) 206 65

Goodwill on entities acquired - 8 8 260 8

impact of changes in scope of consolidation (122) (2) (124) 466 73

The impact of changes in scope of consolidation in 2006 amounts

to 124 million euros, after deducting costs paid on the sale of the

Electric Motors & Actuators business.

The impact of the changes in the scope of consolidation on Group

cash in 2005 (466 million euros) is mainly due to the following

two transactions:

acquisition of the Engine Electronics business of Johnson

Controls Inc. for a total cost of 321 million euros; and

•

acquisition of the remainder of the shares of ZVCC (Zexel Valeo

Climate Control) and VZCCC (Valeo Zexel China Climate Control)

for a total cost of 104 million euros.

In 2004, Group cash was notably impacted by the following

changes in the scope of consolidation:

buyout of the remaining minority interests in Valeo

Climatisation;

the increase in Valeo’s interest in Shanghai Valeo Automotive

Electrical Systems Co. Ltd. from 30% to 50%.

•

•

•

3 - Notes to the statement of income

3.1 - Net sales

Group net sales amounted to 9,970 million euros in 2006

versus 9,736 million euros in 2005, an increase of 2.4% on the

comparable prior-year period.

Changes in Group structure and changes in exchange rates had

positive impacts of 1.5% and 0.5%, respectively. Consolidated net

sales remained stable between 2005 and 2006 on a comparable

Group structure and exchange rate basis.

As indicated in note 2.1, these amounts do not include net sales of

the Electric Motors & Actuators business, which is included under

the “Non-strategic activities” income statement caption for the

three financial years presented.

Net sales of the Electric Motors & Actuators business amounted

respectively to 224, 253 and 267 million euros for the 2006, 2005

and 2004 financial years.



The increase in net sales in 2005 compared to 2004 is principally

due to the following two transactions:

the acquisition of the Engine Electronics business of Johnson

Controls Inc. on March 1, 2005, which had a favorable impact

of 365 million euros on net sales; and

•

the increase of Valeo’s interest in a Japanese company, Valeo

Thermal Systems Japan Corp., from 50% to 100% on April 1,

2005. This additional investment contributed 255 million euros

to Group net sales.

•

3.2 - Personnel expenses

2006 2005 2004

total employees (excluding non-strategic activities) (1) 69,700 68,600 64,500

(1) Including temporary staff.

The increase in the number of employees between 2004 and 2005 is due to the two main acquisitions carried out in 2005, as described

in note 3.1.

the statement of income presents operating expenses by function. operating expenses include the following personnel-

related expenses:


Wages and salaries (1) 1,794 1,739 1,634


Share-based payments 11 7 5

Pension expenses in respect of defined contribution schemes 115 126 136

(1) Including temporary staff

Pension costs under defined benefit plans are set out in note 4.10.2.

3.3 - Research and development expenditure

In 2006, research and development expenditure amounted to

661 million euros after deduction of 15 million euros corresponding

to research tax credits granted in connection with these research

and development costs.

In the previously published 2005 and 2004 statements of income,

research and development tax credits were recognized under

“income taxes”. Research and development expenditure relating

to these years has been restated in a manner comparable to

2006. Such expenditure amounted to 640 and 580 million euros

for 2005 and 2004, respectively, after deduction of research tax

credits of 6 and 5 million euros.

This reclassification of research tax credits did not modify either

stockholders’ equity or net income for 2005 and 2004.

3.4 - other income and expenses


Claims and litigation (13) (16) (9)

Restructuring and asset impairment (61) (34) (74)

Goodwill impairment - - (15)

other 4 - -

Other income and expenses (70) (50) (98)



3.4.1 - Claims and litigation

In 2006, this account mainly includes costs relating to commercial

and labor disputes in progress.

The Group recognized income of 23 million euros in 2005 following

the favorable completion of an industrial property dispute. The

balance on this account notably includes costs related to the

resolution in the year of customer claims.

3.4.2 - Restructuring and asset impairment losses

Asset impairment lossesAsset impairment losses of 15 million euros were recognized in

other income and expenses in 2006, compared with 27 million

euros in 2005.

These impairment losses mainly result from impairment tests

carried out in accordance with the following methodology:

The recoverable amounts of groups of CGUs is calculated using five-

year cash flow projections prepared on the basis of the budgets

and medium-term plans of the Group’s divisions. The forecasts are

based on past experience, macroeconomic data in respect of the

automobile market, order backlogs and products under development.

After five years, cash flows are extrapolated using a growth rate of

1%. This growth rate does not exceed the average long-term growth

rate of the Group’s business sector. A post-tax discount rate of 7.5%

is applied to the cash flows in 2006 (7% in 2005, 8% in 2004), on

the basis of the Group’s weighted average cost of capital. The use

of after tax rates leads to the calculation of recoverable amounts

▪

identical to those that would be obtained from applying pre-tax rates

to non-taxed cash flows.

These tests led the Group to recognize an exceptional impairment

loss of 14 million euros in 2006 and 11 million euros in 2005 on

a CGU in the lighting systems product group.

RestructuringRestructuring expenses of 46 million euros were recognized in

2006, comprising costs relating to the rationalization and closure

of industrial sites, mainly in Western Europe.

3.4.3 - goodwill impairment

Goodwill is allocated to cash generating units (CGUs) on the

basis of the product groups to which the goodwill is related.

Such goodwill is subject to impairment tests at least once a

year, following the same method as that used for the CGUs (see

note 3.4.2).

These tests did not give rise to recognition of any goodwill

impairment in 2006 and 2005; however they led to recognition of

an impairment loss of 15 million euros at December 31, 2004.

3.4.4 - Other

In 2006, this caption notably includes the capital gain on the

disposal of Zexel Logitec Company for an amount of 14 million

euros.

The balance on this account notably includes costs relating to

strategic transactions.

▪

3.5 - Cost of net debt


Interest expense (1) (78) (72) (49)

Interest income 21 20 17

Cost of net debt (57) (52) (32)

(1) The application of IAS 39 on financial instruments at January 1, 2005 led to a year-on-year increase in interest expense of 7 million euros compared to 2004, mainly

on OCEANE bonds.

3.6 - other financial income and expenses


Interest expense on unwinding of discount on pension obligations (1) (49) (56) (52)

expected returns on pension plan assets (1) 19 17 14

Currency gains and losses - net 1 (8) (1)

Charges to provisions for credit risk (4) (6) -

Gain (loss) on disposal of financial assets 27 - -

miscellaneous (3) 1 2

Other financial income and expenses (9) (52) (37)

(1) See note 4.10.2.



“Charges to provisions for credit risk” notably include an

impairment provision of 2 million euros relating to a second tier

customer, as well as the costs of credit insurance.

The “Gain (loss) on disposal of financial assets” caption mainly

includes the income related to the sale of Parrot, for an amount

of 24 million euros (see note 2.2).

3.7 - Income taxes

3.7.1 - income tax expense


Current taxes (84) (71) 6

deferred taxes 9 5 (24)

income tax expense (75) (66) (18)

3.7.2 - Effective tax rate

The Group’s average weighted tax rate for 2006 was 37% as

against 30% in 2005 and 7% in 2004. The net tax charge for

2004 included an 83 million euro tax rebate received from the

French tax authorities in respect of tax paid in 2001 on the gain

from the disposal of the Group’s 50% interest in LuK (an initial

rebate of 88 million euros was received in 2003).

(% of income before tax) 2006 2005 2004

Standard tax rate in France (34.4) (34.9) (35.4)

Impact of: income taxed at other rates• 8.5 6.8 1.7

unused tax losses (current year) and unrecognized deferred tax assets• (27.6) (24.4) (16.1)

use of prior-year tax losses• 5.7 5.4 3.8

permanent differences between book income and taxable income• 7.4 6.3 3.0

tax credits• 3.8 10.8 35.9

Effective group tax rate (36.6) (30.0) (7.1)

3.8 - earnings per share

3.8.1 - Basic earnings per share

2006 2005 2004

Net income attributable to equity holders of the company (In millions of euros) 161 142 240

Average number of shares outstanding (In thousands) 76,795 79,320 82,202

Basic earnings per share (In euros) 2.10 1.80 2.92



3.8.2 - Diluted earnings per share

2006 2005 2004

Net income attributable to equity holders of the company (In millions of euros) 161 142 240

Interest expense on convertible bonds (1) - - 11

Average number of shares outstanding (In thousands) 76,795 79,320 82,202

Stock options (In thousands) 199 330 200

oCeANe convertible bonds (1) - - 10,105

Average number of shares used for the calculation of diluted earnings per share (In thousands) 76,994 79,650 92,507

Diluted earnings per share (In euros) 2.09 1.79 2.71

(1) Not taken into account in 2005 and 2006, in view of the potentially anti-dilutive impact of this adjustment (see note 1.8).

4 - Notes to the balance sheet

4.1 - Goodwill


Net goodwill, January 1 1,484 1,158 1,185

Acquisitions during the year 8 260 5

Purchase price payments in respect of acquisitions made in previous years - - 3

disposals (26) - -

translation adjustments (51) 66 (20)

Impairment (1) - - (15)

Net goodwill, December 31 1,415 1,484 1,158

Accumulated impairment losses at december 31 (32) (33) (33)

(1) See note 3.4.3..

In 2006, the change in goodwill excluding the effect of foreign

currency movements is mainly due to the sale of the Electric

Motors & Actuators business (see note 2.1).

In 2005, Valeo notably carried out the following transactions:

acquisition of the Engine Electronics business of Johnson

Controls Inc.;

purchase of the entire share capital of Japanese company Valeo

Thermal Systems Japan Corp.;

•

•

increase of its interest in two Thai companies, Valeo Siam

Thermal Systems Co. Ltd. and Valeo Thermal Systems Sales

Thailand Co. Ltd.

Following identification and measurement of the assets acquired

and liabilities assumed, goodwill relating to these 2006 acquisitions

amounted to 260 million euros at December 31, 2005.

•



the main goodwill balances are broken down by group of CGUs as follows:

At december 31


Wiper Systems 221 236 216

electronics and Connective Systems 213 217 214

Climate Control 209 223 175

Switches and detection Systems 170 175 167

engine management Systems 181 181 -

other 421 452 386

TOTAL 1,415 1,484 1,158

4.2 - other intangible assets

At december 31

2006 2005 2004

gross value Amortization and impairment

losses

Net value Net value Net value


Software 132 (97) 35 32 29

Patents and licenses 85 (54) 31 56 11

Capitalized development expenditure 550 (258) 292 279 222

other 187 (17) 170 155 19

Intangible assets 954 (426) 528 522 281

Other intangible assets include customer relationship intangibles, mainly purchased in the context of 2005 acquisitions. In addition, patents

and licenses include assets relating to technology intangibles acquired.

Changes in other intangible assets over 2004, 2005 and 2006 are analyzed below:

2004

Software patents and licenses

Capitalized development expenditure

Other intangible

assets

Total


gross at January 1, 2004 75 39 233 28 375

Accumulated amortization and impairment (52) (25) (50) (14) (141)

Net at January 1, 2004 23 14 183 14 234

Acquisitions 9 3 97 13 122

disposals 2 (1) (3) (1) (3)

Changes in scope of consolidation - - - 1 1

Impairment losses - - (6) - (6)

Amortization (14) (6) (47) (2) (69)

translation adjustments - - (1) - (1)

Reclassifications 9 1 (1) (6) 3

Net at December 31, 2004 29 11 222 19 281



2005



Other intangible

assets

Total


gross at January 1, 2005 94 41 325 27 487


Net at January 1, 2005 29 11 222 19 281


disposals 2 (1) - (3) (2)

Changes in scope of consolidation 1 53 3 141 198

Impairment losses - - (7) (1) (8)

Amortization (19) (10) (65) (7) (101)

translation adjustments 1 (1) 8 (1) 7

Reclassifications 6 2 - (6) 2

Net at December 31, 2005 32 56 279 155 522

2006



Other intangible

assets

Total


gross at January 1, 2006 119 96 458 171 844


Net at January 1, 2006 32 56 279 155 522


disposals - - (2) - (2)

Changes in scope of consolidation (2) (2) (8) (1) (13)

Impairment losses - - (10) - (10)

Amortization (19) (9) (85) (8) (121)

translation adjustments (1) (1) (4) (1) (7)

Reclassifications 12 (17) (6) 6 (5)

Net at December 31, 2006 35 31 292 170 528

4.3 - Property, plant and equipment

At december 31

2006 2005 2004


gross carrying amount

Depreciation and

impairment losses

Net carrying amount

of which finance leases

Net carrying amount


Net carrying amount


land 156 (10) 146 - 167 - 145 1

Buildings 971 (552) 419 6 458 15 456 12

Plant and equipment 3,322 (2,452) 870 4 933 5 880 4

Specific tooling 1,169 (1,023) 146 3 155 9 152 7

other 468 (370) 98 5 123 6 120 8

Non-current assets in progress 239 - 239 - 205 - 192 -

property, plant and equipment 6,325 (4,407) 1,918 18 2,041 35 1,945 32

Property, plant and equipment pledged as security amounted to 24 million euros at December 31, 2006.



Changes in property, plant and equipment over 2004, 2005 and 2006 are analyzed below:

2004


Land Buildings plant and equipment

Specific tooling

Other Fixed assets in progress

Total

gross at January 1, 2004 156 895 2,927 1,000 475 197 5,650

Accumulated depreciation and impairment (8) (449) (1,972) (812) (353) - (3,594)

Net at January 1, 2004 148 446 955 188 122 197 2,056

Capital expenditure 2 37 110 42 40 200 431

disposals - (6) (2) (4) (2) (11) (25)

Changes in scope of consolidation - 2 3 - - - 5

Impairment losses (1) - (8) (3) - - (12)

depreciation - (48) (274) (112) (57) - (491)

translation adjustments (2) 1 (3) - - 1 (3)

Reclassifications (2) 24 99 41 17 (195) (16)

Net at December 31, 2004 145 456 880 152 120 192 1,945

2005



Specific tooling


Total

gross at January 1, 2005 155 934 2,977 1,021 489 192 5,768

Accumulated depreciation and impairment (10) (478) (2,097) (869) (369) - (3,823)

Net at January 1, 2005 145 456 880 152 120 192 1,945


disposals (10) (13) (8) (2) - (12) (45)

Available-for-sale assets (1) (2) (9) - - - - (11)

Changes in scope of consolidation 30 20 71 4 7 18 150

Impairment losses (1) (2) (12) (2) (9) - (26)

depreciation - (50) (286) (113) (55) - (504)

translation adjustments 6 20 40 9 6 7 88

Reclassifications (2) 17 94 42 11 (165) (3)

Net at December 31, 2005 167 458 933 155 123 205 2,041

(1) In the context of application of IFRS 5, buildings for which the Group is actively seeking buyers are classified in Assets held for sale.



2006



Specific tooling


Total

gross at January 1, 2006 178 1,012 3,346 1,155 538 205 6,434

Accumulated depreciation and impairment (11) (554) (2,413) (1,000) (415) - (4,393)

Net at January 1, 2006 167 458 933 155 123 205 2,041


disposals - (1) (1) (2) (3) (8) (15)

Available-for-sale assets (1) - (9) - - - - (9)

Changes in scope of consolidation (8) (17) (20) (4) (3) (4) (56)

Impairment losses (1) - (5) (1) (1) - (8)

depreciation (1) (50) (284) (103) (46) - (484)

translation adjustments (8) (6) (13) (3) (3) (6) (39)

Reclassifications (5) 20 81 41 (2) (139) (4)

Net at December 31, 2006 146 419 870 146 98 239 1,918

(1) In the context of application of IFRS 5, buildings for which the Group is actively seeking buyers are classified in Assets held for sale.

4.4 - Investments in associates

Changes in the “Investments in associates” caption can be analyzed as follows:


investments in associates at January 1 116 96 99

Share of profit in associates - 6 5

dividend payments (4) (4) (3)

Impacts of changes in the scope of consolidation 3 8 (1)

translation adjustments (13) 7 (4)

other 1 3 -

investments in associates at December 31 103 116 96

At december 31

Ownership interest(%)

Equity in net assets (In millions of euros)

2006 2005 2004 2006 2005 2004

Ichikoh 29.4 28.2 22.7 72 80 64

Faw Valeo Climate Control 36.5 36.5 36.5 23 25 21

other - - - 8 11 11

investments in associates - - - 103 116 96

Ichikoh is a company listed on the Tokyo Stock Exchange. At December 31, 2006, the market capitalization of the shares held by the Valeo

Group was 58 million euros. The carrying amount of the investment is supported by its value in use.



Summarized financial data in respect of associates are set out below:

(In millions of euros) 2006 2005 2,004

total assets 703 754 776

total liabilities 483 509 490

total operating revenues 950 1,011 1,228

Net income for the period (3) 20 20

4.5 - Non-current financial assets

Non-current financial assets are broken down as follows:

At december 31


Non-consolidated investments 2 9 8

long-term loans 16 12 2

Security deposits 3 3 2

other 3 4 2

Non-current financial assets 24 28 14

4.6 - deferred taxes

Deferred tax assets and liabilities are offset when a legal right of

offset of current tax assets and liabilities exists and the deferred

tax assets and liabilities concern income taxes levied by the

same tax authority. In France, Valeo elected for tax consolidation

for the years 2003 to 2007. The tax group includes the parent

company and its principal French subsidiaries that are eligible for

tax consolidation.

Valeo also elected for tax consolidation for its subsidiaries in other

countries whose legislation permits it (Germany, Spain, Italy, the

United Kingdom and the United States).

At december 31


2004 2005 Recognized through income

Othermovements (1)

2006

loss carry forwards (2) 17 12 9 12 33

Capitalized development expenditure (69) (82) (14) 4 (92)

Pensions and other employee benefits 53 63 4 - 67

other provisions 42 62 (10) 13 65

Inventories 13 15 - - 15

Provisions for reorganization expenses 14 11 7 2 20

tooling 9 8 (1) - 7

Non-current assets (5) (4) 9 (6) (1)

other (4) 6 5 (30) (19)

Total deferred taxes 70 91 9 (5) 95

of which:deferred tax assets• 83 100 96

deferred tax liabilities• (13) (9) (1)

(1) Other movements comprise (1) million euros of deferred taxes relating to actuarial gains and losses recognized through stockholders’ equity, (2) million euros related

to the impact of changes in the scope of consolidation and (2) million euros related to translation adjustments. In addition, reclassifications have been made between

the different types of deferred taxes.(2) Deferred tax assets are recognized in respect of tax loss carry forwards to the extent that it is probable that future profits will be available against which they may be offset.



At december 31, 2006, deferred tax assets not recognized by the Group are broken down as follows:

(In millions of euros) Base potential tax saving

tax loss carry forwards - expiration date 2007 to 2010 137 47

tax loss carry forwards - expiration date 2010 and beyond 632 212

tax loss carry forwards - available indefinitely 839 287

Current tax loss carry forwards 1,608 546

Unrecognized deferred tax assets on temporary differences - 232

Total unrecognized deferred tax assets 1,608 778

4.7 - Inventories

At december 31, 2006, inventories are broken down as follows:


2006 2005 2004

gross provisions Net Net Net

Raw materials 275 (44) 231 221 189

Work-in-progress 80 (6) 74 81 71

Finished goods, supplies and specific tooling 401 (59) 342 352 305

inventories - net 756 (109) 647 654 565

Provisions for impairment in the value of inventories amounted

to 109 million euros at December 31, 2006 (130 millions euros at

December 31, 2005), including an allowance of 26 million euros

in the year.

In 2005, allowances to provisions for impairment amounted to

35 million euros.

The cost of inventories recognized in cost of sales (excluding the

Electric Motors & Actuators business) was 8,166 million euros in

2006 as against 7,923 million euros in 2005 and 7,230 million

euros in 2004.

4.8 - Accounts and notes receivable

At december 31


Accounts and notes receivable 1,864 1,938 1,748

less provisions (30) (32) (22)

Accounts and notes receivable - net 1,834 1,906 1,726

Allowances to provisions against accounts and notes receivable are recognized in “Other financial income and expenses” where such a

provision results from a risk of client default (see note 3.6) and in administrative expenses in other cases.

4.9 - Stockholders’ equity

4.9.1 - Share capital

At December 31, 2006, Valeo’s share capital totaled 233 million

euros, represented by 77,580,617 shares of common stock with a

par value of 3 euros each, all fully paid-up. Shares that have been

registered in the name of the same holder for at least four years

carry double voting rights (2,215,541 at December 31, 2006).

Valeo’s potential share capital would amount to 274 million euros,

representing 91,430,106 shares, in the event of:

the exercise of stock subscription options granted to Valeo

Group employees;

the conversion of bonds issued as part of the OCEANE program

into new shares (see note 4.11.2).

•

•



Terms and conditions of stock subscription plans

year in which the plan was set up Number of shares subject to options

Exercise priceof options (1)

(In euros)

Number of optionsoutstanding at

December 31, 2006 (2)

Expiry date

2000 1,300,000 48.00 419,673 2008

2001 80,000 55.82 80,800 2009

2001 600,000 42.48 303,000 2009

2001 442,875 42.69 301,808 2009

2002 420,000 43.84 241,188 2010

2002 600,000 28.30 353,248 2010

2003 700,000 23.51 506,817 2011

2003 780,000 32.91 580,273 2011

2004 1,123,200 28.46 957,243 2012

TOTAL 6,046,075 3,744,050(1) Exercise price equal to 100% of the average Valeo share price over the 20 trading days preceding the meeting of the Board of Directors or Management Board granting

the stock subscription options.(2) The number of shares includes the impact of the public share buyback offer and simplified public tender offer, which increased the share allocation ratio to 1.01 Valeo

share from 1 Valeo share.

Terms and conditions of stock option plans

year in which the plan was set up Number of shares subject to options

Exercise priceof options (1)

(In euros)

Number of optionsoutstanding at

December 31, 2006 (2)

Expiry date

2003 500,000 32.91 371,457 2011

2004 280,800 32.74 240,370 2012

2005 650,000 32.32 596,380 2013

2006 187,000 33.75 187,000 2014

2006 1,309,250 32.63 1,309,250 2014

TOTAL 2,927,050 2,704,457(1) Exercise price equal to 100% of the average Valeo share price over the 20 trading days preceding the meeting of the Board of Directors or Management Board or 100%

of the average purchase price of treasury stock held if this is greater than the Valeo quoted share price.(2) The number of shares includes the impact of the public share buyback offer and simplified public tender offer, applicable to grants prior to 2005, which increased the

share allocation ratio to 1.01 Valeo share from 1 Valeo share.

▪

▪

the following employee stock option plans and free share plans approved by the Annual General meeting were in progress at

december 31, 2006:

Terms and conditions of free share awards

year in which plan was set up Number of free shares granted

Number of shares not yet issued at

December 31, 2006

year of vesting

2005 600,000 (1) 541,870 2008

2006 63,000 (2) 63,000 2008

2006 100,000 100,000 2009

TOTAL 763,000 704,870(1) Including 300,000 shares granted subject to the Group achieving certain profitability criteria.(2) Including 36,500 shares granted subject to the Group achieving certain profitability criteria

▪



movements on the stock option plans can be analyzed as follows:

2004 2004

Number of options and free shares

weighted average exercise price

Options not exercised at January 1, 2004 5,524,925 40.92

options granted/free shares to be issued 1,404,000 29.32

options cancelled (393,700) 39.91

options expired (58,250) 67.40

options exercised - -

Options not exercised/free shares not issued on December 31 6,476,975 38.23

Options which can be exercised on December 31, 2004 3,288,725 46.75

2005 2005







options exercised (51,120) 25.69



2006 2006







options exercised (69,555) 25.88



Taking account of the impact of the public share buyback offer

and the simplified public tender offer, the 7,109,400 stock options

and free shares in circulation at December 31, 2006 carry rights

to 7,153,377 Valeo shares. The 69,555 options exercised in 2006

carried rights to 70,260 Valeo shares.

the principal data and assumptions underlying the valuation of equity instruments at fair value can be analyzed as

follows:

2006

March Novembertype Free shares and

purchase optionFree shares and purchase option

Share price at date of grant (Euros) 31.79 30.16

expected volatility (%) - and 24.6 - and 29.0

Risk-free rate (%) 3.3 and 3.5 3.9

dividend rate (%) 3.2 3.2

duration of the option (Years) 2.25 and 4 3 and 4

Fair value of the equity instrument (Euros) 29.28 and 4.92 26.32 and 5.54



4.9.7 - Minority interests

Changes in minority interests can be analyzed as follows:


Minority interests at January 1 43 57 97

equity in net earnings 5 6 8

dividends paid (4) (5) (7)

translation adjustment (3) 4 (3)

Changes in the scope of consolidation (3) (19) (38)

Minority interests at December 31 38 43 57

2005 2004 2003

type Free shares and purchase option

Subscription option and purchase option

Subscription option

Share price at date of grant (Euros) 31.46 29.77 32.63 and 20.21

expected volatility (%) - and 26.4 25.8 31.7 and 36.6

Risk-free rate (%) 2.9 and 3.1 3.1 3.7 and 3.2

dividend rate (%) 3.1 3.4 3.4

duration of the option (Years) 2.25 and 4 4 4

Expected volatility is determined as being the implicit volatility

at the date of grant of the plan. The maturity of four years used

for stock option plans corresponds to the period for which the

availability of options is restricted by tax legislation, which is

estimated to correspond to the duration of the option.

Given an employee turnover assumption of 5%, an expense of

11 million euros was recognized in respect of 2006, as against

an expense of 7 million euros for 2005.

An expense of 2 million euros was recognized in 2004 reflecting

recognition of a liability in respect of SARs (Share Appreciation

Rights) granted in the context of an employee share plan. A

derivative used to hedge the corresponding commitment was

recognized on January 1, 2005 in an amount of 2 million euros

on first time application of IAS 39.

At December 31, 2006, the liability and the derivative are both

recognized in the Group’s financial statements in an amount of

1 million euros. As rights related to the SARs (“Share Appreciation

Rights”) were not vested at the year-end their intrinsic value is nil.

4.9.2 - Additional paid-in capital

Additional paid-in capital represents the net amount received,

either in cash or in assets, in excess of the par value on issuance

of Valeo shares.

4.9.3 - Translation adjustment

The translation adjustment reserve at December 31, 2006

primarily includes gains and losses arising from the translation of

the net assets of Valeo’s Tunisian, Turkish, Mexican, US, Brazilian,

Japanese, South Korean and Chinese subsidiaries.

4.9.4 - Retained earnings

Consolidated retained earnings include net income for the year

amounting to 161 million euros (before appropriation of the

dividend to be proposed at the Annual General Meeting).

The balance of the parent company’s distributable retained

earnings amounts to 1,589 million euros, before appropriation

of 2006 net income (respectively 1,593 and 1,596 million euros

in 2005 and 2004).

4.9.5 - Dividends per share

Dividends paid in 2006 amounted to 84,391 thousand euros,

being 1.10 euro per share, as against 91,276 euros (1.10 euro per

share) in 2005 and 85,307 thousand euros (1.05 euro per share)

in 2004. A dividend of 1.10 euro per share for the year ended

December 31, 2006 will be proposed to the Annual General

Meeting. This distribution is not recognized in accrued liabilities

in the financial statements at December 31, 2006.

4.9.6 - Treasury stock

At December 31, 2006, Valeo owns 686,704 of its own shares,

representing 0.89% of share capital, as against 807,704 shares

(1.04%) at December 31, 2005 and 1,037,804 shares (1.24%)

at December 31, 2004.



4.10 - Provisions

Changes in provisions can be analyzed as follows:


provisions for reorganization

expenses

provisions for pensions and other employee benefits

Other provisions

Total

provisions at January 1, 2004 224 870 265 1,359

Amounts used during the year (102) (112) (57) (271)

Impacts of changes in the scope of consolidation - 1 2 3

translation adjustments (3) (30) (1) (34)

Reclassification (6) 6 (1) (1)

Additions 57 39 100 196

Unwinding of discount - 40 - 40

Reversals (5) - (31) (36)

Actuarial gains and losses recognized through equity - 42 - 42

provisions at December 31, 2004 165 856 277 1,298


Impacts of changes in the scope of consolidation 10 15 192 217

translation adjustments 10 62 13 85

Reclassification (6) 13 (6) 1

Additions 108 89 154 351

Unwinding of discount 1 39 - 40

Reversals (2) (4) (152) (49) (205)

Actuarial gains and losses recognized through equity - 50 - 50



Impacts of changes in the scope of consolidation (3) (27) (3) (33)

translation adjustment (10) (33) (6) (49)

Reclassification (1) 42 (41) 3 4

Additions 55 28 105 188

Unwinding of discount 4 30 - 34

Reversals (11) (3) (51) (65)

Actuarial gains and losses recognized through equity - (27) - (27)


of which current portion (< 1 year) 89 73 256 418

(1) Releases of provisions for pension and other employee benefits include an amount of (127) million euros relating to amendments to the healthcare insurance plan in

the United States and an amount of (20) million euros in connection with the reduction in benefit entitlement due to the closure of the Rochester site. (2) Including, in 2006, a reclassification of 41 million euros from provisions for pensions to provisions for reorganization expenses in connection with healthcare plans for

early retirees in the United States.

4.10.1 - provisions for reorganization expenses

Provisions for reorganization expenses correspond to a series

of measures adopted by the Group as part of an industrial

streamlining plan aimed at more closely tailoring Valeo’s industrial

base to customer requirements, in terms of cost competitiveness

and geographical location.

The provisions include costs relating primarily to:

continued rightsizing and production streamlining measures;

and specific severance payments (CATS) applicable at certain

French sites, in accordance with the industry agreement signed

in March 2001.

•

•



4.10.2 - provisions for pensions and other employee benefits

Description of the plans in force within the groupThe Group’s commitments in relation to pensions and other

employee benefits primarily concern the following defined

benefit plans:

termination benefits (France, Italy, Mexico, South Korea);

supplementary pension benefits (United States, Germany,

United Kingdom, Japan and France) which top up the statutory

pension schemes in force in those countries. These plans are

generally externally funded, with the exception being in

Germany;

the payment of certain medical and life insurance costs for

retired employees (United States),

▪

•

•

•

certain of the above-mentioned benefits granted specifically

under early retirement schemes (United States, Germany and

France),

other long-term benefits (long-service bonuses in France and

Germany).

The costs relating to all of these benefits are accounted for in

accordance with the accounting policy described in note 1.17.

Actuarial assumptionsThe actuarial assumptions used by the Group to calculate its

obligations relating to pensions and other employee benefits take

into account the specific demographic and financial conditions

of each country in which the Group operates and each Group

company.

Discount rates are determined by reference to market yields at

the valuation date on high quality corporate bonds with a term

consistent with that of the employee benefits concerned.

•

•

▪

In 2006, the average discount rates used in the countries representing the Group’s most significant obligations were as

follows:

At december 31

2006 2005 2004

(%) (%) (%)

France 4.5 4.3 4.5

Germany 4.4 4.1 4.8

United Kingdom 5.0 4.8 5.3

Italy 4.3 4.0 4.0

United States 5.9 5.6 5.7

mexico 9.3 8.5 10.2

Japan 2.1 1.8 2.0

South Korea 5.3 5.8 4.5

The discount rates for early retirement plan obligations are lower than the rates set out above, as the obligations have shorter terms than

for pensions.

the expected long-term return on plan assets has been calculated taking into account the structure of the investment

portfolio in each country. the rates are as follows for the principal funds invested by the Group:

At december 31

2006 2005 2004

(%) (%) (%)

United States 8.5 8.5 8.5

United Kingdom 6.4 6.7 7.0

Japan 2.7 2.0 2.0

South Korea 4.5 4.5 5.0

The weighted average rate of long-term salary increases was 3.5%

at December 31, 2006, unchanged compared to December 31,

2005. It was 3.6% at December 31, 2004.

The rate of increase for medical costs in the United States used

to value the Group’s obligations was 10% at December 31, 2006,

2005 and 2004, reducing by one percentage point a year from

2010 to reach 5% in 2014.



Breakdown of obligations

At december 31, 2004


France Other European countries

North America

Other countries

Total

Present value of unfunded obligations 168 248 303 37 756

Present value of funded obligations 19 58 230 30 337

market value of plan assets (1) (37) (148) (25) (211)

Deficit 186 269 385 42 882

Unrecognized past service cost (34) - 8 - (26)

provisions recognized at December 31, 2004 152 269 393 42 856




North America

Other countries

Total




Deficit 200 317 329 48 894






North America

Other countries

Total




Deficit 203 298 224 48 773



▪



Movements in provisions



North America

Other countries

Total

provisions at January 1, 2004 148 254 436 32 870

Actuarial gains and losses recognized through equity 5 14 18 5 42

Amounts used during the year (1) (21) (18) (68) (5) (112)

Impacts of changes in the scope of consolidation - - - 1 1

Reclassification pensions/reorganization expenses (3) (1) 10 - 6

translation adjustments - (1) (30) 1 (30)

Provisions for the year (expense):

service cost• 10 9 12 7 38

interest expense• 8 13 31 2 54

past service cost• 7 - (6) - 1

expected return on plan assets• - (2) (11) (1) (14)

other items• (2) 1 1 - -

provisions at December 31, 2004 152 269 393 42 856

Actuarial gains and losses recognized through equity 7 40 15 (12) 50


Impacts of changes in the scope of consolidation 5 1 2 7 15

Reclassification pensions/reorganization expenses - - 13 - 13

translation adjustments - 1 54 7 62




past service cost• 6 - (127) (2) - (121)


other items• - (2) 21 (3) - 19


Actuarial gains and losses recognized through equity 3 (4) (28) 2 (27)


Impacts of changes in the scope of consolidation - (25) (1) (1) (27)

Reclassification pensions/reorganization expenses - 1 (42) - (41)

translation adjustments - 1 (32) (2) (33)




past service cost• 5 - (19) - (14)


other items• (3) - - - (3)


of which current portion (< 1 year) 20 17 31 5 73

(1) Including benefits paid directly to beneficiaries or contributions paid to external funds, depending on the plan concerned.(2) Corresponds to changes in retiree medical plans.(3) Of which (20) million euros in connection with the reduction in benefit entitlement and the 41 million euro effect of acceleration of rights in the context of the closure

of the Rochester site.

▪



Movements in obligations



North America

Other countries

Total

Obligations at January 1, 2004 165 281 550 59 1,055

Service cost 10 9 11 8 38

Interest expense 8 13 31 2 54

Benefits paid (21) (18) (42) (7) (88)

Actuarial gains and losses 2 12 25 4 43

Plan amendments 26 3 - - 29

Impacts of changes in the scope of consolidation - - - 1 1

other (3) 6 - - 3

translation adjustments - - (42) - (42)

Obligations at December 31, 2004 187 306 533 67 1,093



Benefits paid (18) (15) (42) (10) (85)

Actuarial gains and losses 9 43 16 (7) 61

Plan amendments 2 (1) (116) - (115)

Impacts of changes in the scope of consolidation 5 1 4 31 41

other - - 13 - 13





Benefits paid (21) (15) (10) (10) (56)

Actuarial gains and losses 3 (4) (28) 2 (27)

Plan amendments - - (19) - (19)

Impacts of changes in the scope of consolidation - (25) (1) (1) (27)

other (2) 2 (18) - (18)



Movements in plan assets



North America

Other countries

Total

plan assets at January 1, 2004 2 33 116 28 179

expected return on plan assets - 2 11 1 14

Contributions paid to external funds 1 2 31 2 36

Benefits paid (1) - (5) (4) (10)

Actuarial gains and losses (1) - 7 (1) 5

Impacts of changes in the scope of consolidation - - - - -

other - - - - -

translation adjustments - - (12) (1) (13)

plan assets at December 31, 2004 1 37 148 25 211

▪

▪





North America

Other countries

Total



Contributions paid to external funds 2 - 13 4 19

Benefits paid (1) (1) (6) (7) (15)

Actuarial gains and losses 1 3 - 5 9

Impacts of changes in the scope of consolidation - - 3 23 26

other - - - - -





North America

Other countries

Total



Contributions paid to external funds 2 1 9 3 15

Benefits paid - (1) (1) (5) (7)

Actuarial gains and losses - - 1 - 1

Impacts of changes in the scope of consolidation - - - - -

other - - 5 - 5



Breakdown of plan assets



North America

Other countries

Total

Cash at bank - - 3 22 25

Shares 1 28 125 - 154

Government bonds - 5 13 - 18

Corporate bonds - 4 7 3 14

Breakdown of plan assets at December 31, 2004 1 37 148 25 211

Cash at bank - - 5 4 9

Shares 2 29 163 19 213

Government bonds - 7 22 25 54

Corporate bonds 1 6 7 4 18


Cash at bank - 6 8 14

Shares 3 44 167 15 229

Government bonds - 1 22 23 46

Corporate bonds 2 - 10 - 12


Contributions of 15 million euros were paid to external funds in 2006. Contributions in 2007 are estimated at 30 million euros.

The effective return on plan assets amounted to 31 million euros in 2006, as against 26 million euros in 2005 and 21 million euros in

2004.

▪



the effects of a change of one point in the rate of increase in medical costs in the United States are as follows:

2006 2005 2004

(In millions of euros) increase Decrease increase Decrease increase Decrease

effect on service cost and interest expense - - 2 (2) 2 (2)

effect on obligations 2 (2) 3 (3) 29 (23)

4.10.3 - Other provisions

At december 31


Provisions for product warranties 180 226 108

other (1) 251 264 169

Other provisions 431 490 277

(1) Other provisions mainly concern contractual, labor, environmental or tax risks and litigation.

At December 31, 2005, movements of 125 million euros in this account caption arise as a result of changes in the scope of consolidation

in that year.

4.11 - debt

4.11.1 - gross debt

At december 31, 2006, the Group’s gross debt can be analyzed as follows:


long-term debt (note 4.11.2) 1,274 1,303 1,027

Current maturities of long-term debt (note 4.11.2) 54 581 188

Short-term debt (note 4.11.3) 274 157 175

gross debt 1,602 2,041 1,390

4.11.2 - Long-term debt

Analysis of long-term debt▪

At december 31


Bond issues 595 1,094 500

oCeANe (1) 427 419 463

Syndicated loans 216 221 127

lease obligations 15 25 28

other borrowings 49 86 72

Accrued interest 26 39 25

Long-term debt 1,328 1,884 1,215

(1) The carrying amount of the OCEANE was reduced from 463 million euros to 419 million euros following application of IAS 32 at January 1, 2005.



Long-term debt includes:

600 million euros worth of eight-year fixed rate bonds issued

by Valeo on June 24, 2005. The interest rate on these bonds is

3.75% of the nominal amount. These bonds were issued in the

context of the Euro Medium Term Note program. The effective

interest rate on these bonds is 3.89%;

463 million euros worth of bonds convertible for new shares

or exchangeable for existing shares (OCEANE) issued on

August 4, 2003, representing 9,975,754 bonds with a nominal

value of 46.4 euros each. The interest on these bonds is

2.375% per annum payable in arrears on January 1 of each

year. Bearers of the bonds can at any time request conversion

and/or exchange into common stock on the basis of 1.013

Valeo shares for one bond.

In addition, Valeo has a call option that may be exercised

between January 31, 2007 and December 31, 2010 if the

•

•

Valeo share is valued at an average price of 60 euros. The

effective interest rate of the OCEANE amounts to 4.54% (4.46%

excluding the call);

two seven-year syndicated loans for a total amount of

225 million euros issued on July 29, 2005, hedged by two

interest rate swaps which are perfectly matched in both

amount and duration. These loans and the related hedges

have the following characteristics:the first loan is at a variable rate and incorporates a cap which limits the interest rate to a maximum of 4.735%. It is hedged by a derivative which offsets the option incorporated in the loan,

the second loan is at a fixed rate of 3.62% and incorporates a swap option that enables the Group to opt for a variable rate in 2009. It is hedged by a derivative which has identical characteristics to those of the option incorporated in the loan.

The 500 million euro bond issued by Valeo in 2001 was redeemed

on maturity on July 13, 2006.

•

−

−

Maturities of long-term debt

At december 31

(In millions of euros) 2008 2009 2010 2011 20122013 and

beyond Total

Bond issues - - - - - 595 595

oCeANe - - - 427 - - 427

Syndicated loans - - - - 216 - 216

lease obligations 3 2 1 - - 2 8

other borrowings 2 2 3 4 3 14 28

TOTAL 5 4 4 431 219 611 1,274

4.11.3 - Short-term debt

At december 31


Commercial paper 140 - 50

Short-term loans and overdrafts 134 157 125

Short-term debt 274 157 175

4.11.4 - Cash and cash equivalents

At december 31


marketable securities 97 454 488

Cash 521 495 380

Cash and cash equivalents 618 949 868

▪



4.11.5 - Net debt

Net debt is defined as all long-term debt (including current

maturities thereof) and short-term debt, less loans, other non

current financial assets and cash and cash equivalents.

Net debt at January 1, 2005Application of IAS 32 and IAS 39 at January 1, 2005 had the effect

of reducing the Group’s net debt by 23 million euros, mainly

related to adjustments to the OCEANE and treasury stock.

▪

Breakdown of net debt

(In millions of euros) 2006 2005January 1,

2005 2004

long-term debt (note 4.11.2) 1,274 1,303 972 1,027

Current maturities of long-term debt (note 4.11.2) 54 581 188 188

loans and other long-term financial assets (16) (12) (2) (2)

Total long-term debt 1,312 1,872 1,158 1,213

Short-term debt (note 4.11.3) 274 157 175 175

Cash and cash equivalents (note 4.11.4) (618) (949) (836) (868)

Net cash and cash equivalents (344) (792) (661) (693)

Net debt 968 1,080 497 520

4.11.6 - Analysis of net debt by currency

Net debt can be analyzed as follows by currency:

At december 31


euro 1,151 1,179 612

US dollar (52) (64) (44)

Yen 34 110 66

Brazilian Real (22) (25) (15)

Korean Won (59) (44) (47)

Chinese Yuan (24) (21) (23)

other currencies (60) (55) (29)

TOTAL 968 1,080 520

4.12 - Notes to the cash flow statement

4.12.1 - Expenses (income) with no cash effect


Expenses (income) with no cash effect

depreciation, amortization and provisions for impairment 623 639 593

Net charges to/(reversals from) provisions (96) (99) (84)

Customer contributions (51) (35) (13)

losses (gains) on sale of non-current assets (74) 6 11

expenses related to share-based payment 11 7 7

other expenses (income) with no cash effect (2) - 2

TOTAL 411 518 516

▪



4.12.2 - Changes in working capital


Changes in working capital

Inventories (17) 3 (5)

Accounts and notes receivable 5 53 21

Accounts and notes payable 88 30 51

other receivables and payables (28) 21 (22)

TOTAL 48 107 45

5 - Additional disclosures

5.1 - Segment reporting

The Valeo Group comprises a single business segment

(“Automotive equipment”). The Group’s secondary reporting

level – geographical areas – corresponds to production areas.

Additional information is included in order to provide a more

relevant analysis of the Group’s business.

Balance sheet and statement of income items relating to “Non-

strategic activities” are restated as indicated in note 2.1.

5.1.1 - Reporting by geographical area


Net sales by market

Net sales by production area

Total assets Capital expenditure for the period (1)

Number of employees

2006

europe 6,931 7,327 3,966 437 51,400

North America 1,325 1,263 539 86 7,200

South America 468 454 210 39 3,600

Asia 1,246 1,238 754 87 7,500

eliminations - (312) (147) (2) -

TOTAL 9,970 9,970 5,322 647 69,700

2005

europe 6,785 7,163 4,048 436 51,400

North America 1,364 1,296 575 67 6,800

South America 429 402 195 35 3,400

Asia 1,158 1,134 759 59 7,000

eliminations - (259) (149) (5) -

TOTAL 9,736 9,736 5,428 592 68,600

2004

europe 6,501 6,795 3,802 437 49,700

North America 1,356 1,284 498 59 6,900

South America 320 302 131 17 3,200

Asia 841 808 444 47 4,700

eliminations - (171) (70) (7) -

TOTAL 9,018 9,018 4,805 553 64,500

(1) Capital expenditure in 2006 do not include those related to the Electric Motors & Actuators business which was sold in 2006.



total segment assets reconcile to total Group assets as follows:


total segment assets 5,322 5,428 4,805

Financial assets 755 1,117 976

deferred tax assets 96 100 83

Goodwill 1,415 1,484 1,158

TOTAL 7,588 8,129 7,022

Goodwill balances cannot be broken down by geographical area as they are allocated to groups of CGUs which belong to several such

areas.

5.1.2 - Research and development expenditure by Domain of innovation and sales by product group

The objective of the Domains of Innovation is to enhance and support innovation by bringing together different technologies and product

groups in order to propose overall solutions to the market based on the themes of comfort, safety and the environment.

(In millions of euros) 2006 2005 (1) 2004 (1)

driving Assistance 178 175 164

Propulsion efficiency 216 209 180

Comfort enhancement 232 225 199

other 35 37 42

TOTAL 661 646 585

(1) Before taking into account the restatement related to research tax credits (see note 3.3).

the domains of Innovation aim to assist development of sales of the product portfolio, production and sale of which is placed

under the responsibility of the Group’s divisions. the product portfolio is broken down into the following product groups:


transmissions 761 742 693

Climate Control 1,546 1,510 1,397

engine Cooling 1,550 1,475 1,435

lighting Systems 1,189 1,151 1,071

electrical Systems 1,084 1,041 985

Wiper Systems 1,027 1,056 1,163

Security Systems 719 676 661

Switches & detection Systems 829 833 878

electronics & Connective Systems 594 606 672

Compressors 430 398 190

engine management Systems 352 366 -

other and eliminations (111) (118) (127)

TOTAL 9,970 9,736 9,018



5.2 - Risk management policy

In the context of its industrial and sales activity, the Group

operates in an international environment in which it is confronted

with market risks, specifically foreign currency risk, price risk and

interest rate risk. It uses derivatives to manage and reduce its

exposure to changes in foreign exchange rates, raw materials

prices and interest rates.

In general, foreign currency risks, price risks in respect of base

metals and interest rate risks for all Group companies are

managed centrally by Valeo.

In addition to market risks, the Group is also exposed to liquidity

risk, financial instrument counterpart risk and to credit risk in

respect of its accounts and notes receivable.

5.2.1 - Market risks

Foreign currency risk

transaction risk

Group subsidiaries may bear transaction risk in respect of

purchases or sales transacted in currencies other than their

functional currency, whether such transactions are already

recognized in the balance sheet or are simply forecast future

▪

transactions. Hedging of subsidiaries’ current and future trading

and investment transactions is generally performed for durations

of less than six months.

Subsidiaries principally hedge their transactions with Valeo, which

hedges net Group positions with external counterparts.

The principal hedging instruments that the Group uses are

forward firm purchases and sales of foreign currencies, swaps

and options.

Not all derivatives used by the Group to hedge its foreign currency

risk qualify as hedging instruments in the meaning ascribed to

that term by IAS 39.

In certain cases, however, the Group applies hedge accounting for

highly probable future flows as from the date that the derivatives

are put in place.

The unrealized loss of less than 1 million euros recognized in

equity at December 31, 2005 was fully reclassified into operating

income for the year.

No foreign currency derivative is recognized as a hedging

instrument, in the meaning ascribed to that term by IAS 39, in

the Group balance sheet at December 31, 2006.

At december 31, 2006, the Group’s net position in its principal currencies excluding functionnal currencies of entities is as

follows:

At december 31

(In millions of euros) uSD Jpy gBp Euro

total assets 228 82 4 414

total liabilities (31) (21) (11) (542)

Net balance sheet position before risk management 197 (61) (7) (128)

Forward sales (189) (80) (8) (7)

Forward purchases 18 30 17 35

Risk management (171) (50) 9 28

Net position after risk management 26 11 2 (100)

Net investment risk

The Group is also exposed to foreign currency risk through its

investments in its foreign subsidiaries, particularly to risks of a

movement in the exchange rate of the currency of the country

in which a subsidiary is located against the euro, which is the

Group’s functional currency. Such movements can impact Group

stockholders’ equity.

The Group can thus decide, on a case-by-case basis, to hedge the

net investment. Any gain or loss resulting from such a hedge will

be deferred by being recognized through stockholders’ equity until

such time as the foreign investment is wholly or partly sold.

No derivative instrument relating to hedging of a net investment is

recognized in the Group balance sheet at December 31, 2006.

Metal price riskIn order to reduce its exposure to changes in prices of non-ferrous

metals, the Group hedges its future purchases of base metals

▪

over a period which is generally less than six months. The raw

materials currently hedged (aluminum, processed aluminum,

copper, zinc, and tin) are quoted on official markets.

The Group favors hedging instruments which do not involve

physical delivery of the underlying commodity: swaps and options

on the average monthly price.

Base metals derivatives used by the Group are designated as

cash flow hedges under IAS 39. An unrealized gain of 6 million

euros related to hedges in place at December 31, 2006 has been

recognized through Group stockholders’ equity.

The unrealized gain of 22 million euros recognized in stockholders’

equity at December 31, 2005 was in respect of hedges on raw

materials purchases in second-half 2005 and was thus fully taken

to operating income in the first half of 2006.



the unrealized gain of 6 million euros at december 31, 2006 is broken down as follows by type of metal:

At december 31

(In millions of euros) 2006 2005

Aluminum 4 10

Processed aluminum - 2

Copper - 7

tin - -

Zinc 2 3

TOTAL 6 22

64% of the unrealized gain of 6 million euros relates to purchases of raw materials denominated in euros and 36% to purchases

denominated in US dollars.

interest rate riskThe Group uses interest rate swaps to convert exchange rates

on its debt into either a variable or a fixed rate, either as from

origination or during the term of the loan.

The interest rate derivatives used by the Group to hedge against

changes in value of its fixed-rate debt are designated as fair value

hedges under IAS 39. These derivatives are recorded at fair value

in the balance sheet with changes in fair value being taken to

▪ income. The impact on income is offset, for the effective portion,

by a symmetrical revaluation of the hedged component of the

debt. The interest rate derivatives used by the Group to hedge

its variable-rate debt are not designated as hedging instruments

in the meaning ascribed to that term by IAS 39.

The Group’s financing rate was 4.5% in 2006 (4.6% in 2005).

At December 31, 2006, 82% of long-term debt is at a fixed rate

(83% at December 31, 2005)

Fixed-rate position

At december 31


Less than 1 year 1 to 5 years More than 5 years

total assets at fixed rate - - -

total liabilities at fixed rate 53 440 830

Net fixed-rate position before risk management 53 440 830

Risk management - - (225)

Net position after risk management 53 440 605

A decrease in interest rates of 1% would result in a change in the fair value of the net position of about 45 million euros.

Variable-rate position

At december 31


Less than 1 year 1 to 5 years More than 5 years

total assets at variable rate (618) (16) -

total liabilities at variable rate 276 2 1

Net variable-rate position before risk management (342) (14) 1

Risk management (2) - -

Net position after risk management (344) (14) 1

An increase of 1% in interest rates would lead to an increase in interest income of about 4 million euros.



5.2.2 - Counterpart risk

In the context of financial markets transactions entered into for

the purposes of risk management and treasury management,

the Group is exposed to counterpart risk. Limits have been

set by counterpart, taking account of the ratings of the

counterparts with ratings agencies. This also has the effect of

avoiding excessive concentration of market transactions with

a limited number of banks.

5.2.3 - Liquidity risk

The Group targets maximization of its operating cash flows in

order to be in a position to finance both the investments required

for its development and growth and the dividend paid to its

stockholders.

In addition, the strategy followed aims to ensure that the Group

has the cash resources necessary to meet all circumstances. For

these reasons, the Group borrows long-term funds when market

conditions are favorable, either from banks or by accessing public

debt markets. Thus, in 2005, Valeo issued 600 million euros worth

of Euro Medium Term Notes maturing in 2013. It also took out

two syndicated loans for a total amount of 225 million euros

maturing in 2012.

Valeo also has several confirmed bank credit lines available for an

average period of three years in a total amount of 1.3 billion euros.

None of these credit lines were used at December 31, 2006.

The Group also has a short-term commercial paper financing

program in a maximum amount of 1.2 billion euros and a

medium- and long-term Euro Medium Term Notes financing

program in a maximum amount of 2 billion euros.

Covenants: existing credit lines have an early repayment clause

related to the Group’s debt/equity ratio. This requires that the

Group’s net debt should not exceed 120% of stockholders’

equity. Non-compliance with this ratio causes the credit lines

to be suspended and leads to early reimbursement of prior

drawdowns. At December 31, 2006, the Group’s ratio is well

below this level.

The Euro Medium Term Notes include an option granted to the

bondholders who can request early redemption of their bonds

in the case of a change of control of Valeo which leads to a

downgrade in the bond’s rating to below investment grade.

Such a change of control is deemed to occur if a stockholder, or

several stockholders acting together, acquire(s) more than 50%

of Valeo’s share capital or come(s) to hold more than 50% of

voting rights.

5.2.4 - Credit risk

Through its sales, Valeo is exposed to credit risk, particularly to

risk of default by its customers.

Valeo only operates in the automobile sector and is thus

dependent on the sector’s performance, principally in Europe

and North America.

In 2006, a provision of 2 million euros, in respect of defaults

by second tier customers, was recognized against accounts

receivable.

Valeo works with all automakers in the sector. At December 31,

2006, 20% of the Group’s accounts and notes receivable

correspond to one of Valeo’s four largest customers. Approximately

7% of this line relate to the two largest American automakers. The

downturn in the automobile sector business environment in recent

months has led the Group to strengthen control of customer risks

and settlement periods which may, on a case-by-case basis, be

subject to bilateral renegotiations with customers. The average

settlement period at December 31, 2006 is 69 days.

Valeo also generates more than 7% of its net sales in the

aftermarket. The Group’s numerous, dispersed customer base

in this market is constantly monitored and the risk of default is

covered by a credit insurance policy. These customers represent

slightly more than 7% of Group accounts and notes receivable

at December 31, 2006.

5.2.5 - Financial instruments

Fair value of financial instruments

At december 31

2006

(In millions of euros) Carrying amount Fair value

ASSETS

Non-current financial assets 24 24

Accounts and notes receivable 1,834 1,834

Cash and cash equivalents 618 618

▪



2006

(In millions of euros) Carrying amount Fair value

LiABiLiTiES

Bonds 595 564

oCeANe (debt component) 427 422

Syndicated loans 216 218

other long-term debt 90 90

Accounts and notes payable 1,955 1,955

Short-term debt 274 274

The fair values of bonds presented above are calculated on the basis of listed prices on active markets. For the debt component of the

OCEANE and for the syndicated loans, fair value is estimated by discounting future cash flows at the market rate applicable at year-end,

taking account of an issuer spread for the Group estimated at 0.549% for the OCEANE and at 0.60% for the syndicated loans.

Fair value of derivatives

Foreign currency derivatives

At december 31

2006

(In millions of euros) Nominal Fair value

Forward foreign currency purchases 24 -

Forward foreign currency sales (48) 1

Currency swaps (120) 1

Total assets (144) 2

Forward foreign currency purchases 33 (1)

Forward foreign currency sales (30) -

Currency swaps (22) -

Total liabilities (19) (1)

Net impact - 1

The fair value of foreign currency derivatives is calculated using the following valuation method: future cash flows are calculated using

forward exchange rates at year-end and are discounted using the interest rate of the valuation currency.

Metals derivatives

At december 31

2006


Swaps – Purchases 81 7

Swaps – Sales (2) -

Total assets 79 7

Swaps – Purchases 36 (1)

Swaps – Sales (3) -

Total liabilities 33 (1)

Net impact - 6

The fair value of metal derivatives is calculated using the following valuation method: future cash flows are calculated using forward raw

materials prices and forward exchange rates at year-end and are then discounted using the interest rate of the valuation currency.

▪



interest rate derivatives

At december 31

2006


Interest rate swaps 227 (9)

TOTAL LiABiLiTiES 227 (9)

The fair value of interest rate swaps is calculated by discounting future cash flows at market interest rates at year-end.

5.3 - Commitments given

To the best of Valeo’s knowledge, no other significant commitments exist or exceptional events have occurred, other than those disclosed

in the notes to the financial statements, that are likely to have a material impact on the business, financial position, results or assets and

liabilities of the Group.

5.3.1 - Lease commitments

Future minimum lease commitments existing at december 31, 2006 (excluding capital leases) are as follows:

At december 31


less than 1 year 34 38 36

1 to 5 years 33 31 29

more than 5 years 9 10 9

TOTAL 76 79 74

lease rentals recognized in expenses in the year were as follows:


Rent 53 56 52

lease commitments in respect of capital leases are as follows:

At december 31


Future minimum lease payments


1 to 5 years 7 10 15


TOTAL FuTuRE MiNiMuM LEASE pAyMENTS 17 28 31

of which interest charges (2) (3) (3)

present value of future lease payments


1 to 5 years 6 9 13


TOTAL pRESENT VALuE OF FuTuRE LEASE pAyMENTS 16 25 28



5.3.2 - Other commitments given

Valeo has also given the following commitments:


Guarantees given 29 30 33

Non-cancellable purchase commitments for fixed assets 72 57 58

other commitments given 101 66 49

TOTAL 202 153 140

Other commitments correspond to warranties granted by Valeo in the context of sale transactions.

the following items, recognized in assets in the Group’s balance sheet, have been pledged as security:

At december 31


Property, plant and equipment 24 84 49

Financial assets 12 12 13

TOTAL 36 96 62

5.3.3 - Claims and litigation

Known claims and litigation involving Valeo or its subsidiaries have been reviewed as of the date of these financial statements. Based on

the advice of counsel, all necessary provisions have been made to cover the estimated contingencies and potential losses.

5.4 - Commitments received

When Valeo purchased the Engine Electronics business of Johnson

Controls Inc. on March 1, 2005, the latter company granted a

warranty concerning the division’s liabilities, including in particular

a four-year warranty in respect of quality and product liability

claims related to the activities of this division.

5.5 - Contingent liabilities

The Group has contingent liabilities relating to legal proceedings

arising in the normal course of its business.

The Group does not expect these items to give rise to material

liabilities other than those that have already been recognized in

its financial statements.

5.6 - French statutory training entitlement

Under the French law of May 4, 2004 relating to professional

training, each French employee of the Group, irrespective of

qualifications, obtained a statutory training entitlement which

can be accumulated and used at the employee’s initiative, subject

to agreement of the employer. Thus, according to the law, each

employee has a new entitlement to at least 20 hours’ training

per year.

The cumulative volume of training hours corresponding to Group

employees’ vested rights under the statutory training entitlement

is 875,000 hours for 2004, 2005 and 2006.



5.7 - Related party transactions

5.7.1 - Management and Directors’ remuneration

management and directors are comprised of the members of the Group’s management Committee and its Board of directors.

Remuneration paid during the year is broken down as follows:


Salaries and other short-term benefits 12 12 13

Contract termination payments - - 2

TOTAL 12 12 15

In addition, the Group recorded expenses related to pension

obligations in an amount of 2 million euros in 2006 (2 million

euros in 2005). It also recorded expenses in relation to stock

option and free share plans in an amount of 3 million euros in

2006 (2 million euros in 2005).

At December 31, 2006, provisions included in the Group balance

sheet in respect of these pension obligations amounted to

14 million euros (13 million euros at December 31, 2005).

5.7.2 - Transactions with Associates

The consolidated financial statements include transactions carried out in the normal course of business between the Group and its associates.

These transactions are carried out at market prices.


Sales of goods and services 17 13 3

Purchases of goods and services (7) (18) (17)

Interest and dividends received 3 4 3

At december 31


operating receivables 4 4 4

operating payables 1 1 3

5.7.3 - Transactions with Joint ventures

The consolidated financial statements include transactions carried out in the normal course of business between the Group and its joint

ventures. These transactions are carried out at market prices.


Sales of goods and services 28 25 20

Purchases of goods and services (11) (9) (12)

Interest and dividends received 2 4 9

At december 31


operating receivables 13 10 10

operating payables 5 4 5



5.8 - Joint ventures

the following amounts are recorded in the Group’s consolidated financial statements in respect of joint ventures consolidated

under the proportionate method of consolidation:

At december 31


Non-current assets 70 51 163

Current assets 101 86 207

Non-current liabilities 12 15 67

Current liabilities 88 75 242

total operating revenues 251 334 681

total operating expenses 244 321 642

5.9 - Subsequent events

On December 4, 2006, Valeo signed a Memorandum of

Understanding with Ford Motor Company for the acquisition of

the Sheldon Road site (Plymouth, Michigan) specialized in the

production of heating systems. This acquisition is subject to the

signature of a new competitive agreement with the United Auto

Workers Union.

This site, which employs approximately 1,250 employees, supplies

climate control systems and radiators to Ford’s North American

factories. Its forecast net sales for 2006 are 350 million euros.



6 - Restatement of 2004 and 2005 financial information

IFRS requires that previously published comparative periods be

restated in the following situations:

activities meeting IFRS 5 criteria;

business combinations (recognition of the definitive fair value of

assets acquired and liabilities and contingent liabilities incurred

or assumed when this fair value was estimated on a provisional

basis at the previous balance sheet date);

•

•

changes in accounting policies (subject to the transitional

provisions for first-time application of new standards); and

corrections of prior period errors.

Consequently, certain previously published financial data have

been modified. Such restatements are described below.

•

•

the corresponding impacts (after tax) on stockholders’ equity including minority interests as published on december 31,

2005 and december 31, 2004 are as follows:


As originally reported

Business combinations

Other As restated

Stockholders’ equity at January 1, 2004 1,850 - (8) 1,842

Income and expenses recognized directly through equity (35) - - (35)

Net income for the period 249 - (1) 248

other movements (217) - (217)

Stockholders’ equity at December 31, 2004 1,847 - (9) 1,838

Impact of financial instruments (IAS32, IAS39) 27 - - 27

Stockholders’ equity at January 1, 2005 1,874 - (9) 1,865

Income and expenses recognized directly through equity 102 - - 102

Net income for the period 147 1 - 148

other movements (374) (24) - (398)

Stockholders’ equity at December 31, 2005 1,749 (23) (9) 1,717

6.1 - Business combinations

The impact on stockholders’ equity at December 31, 2005 of

restatements related to business combinations corresponds

to remeasurements, in a total amount of 24 million euros, of

provisions relating to:

the interest previously held in Valeo Thermal Systems Japan

Corp. (previously Zexel Valeo Climate Control);

the interest previously held in Siam Zexel Co. and Valeo

Thermal Systems Sales Thailand Co. Ltd. (previously Zexel Sales

Thailand Co).

•

•

On the other hand, remeasurements of the interests acquired

in these companies in 2005 have no impact on stockholders’

equity as they gave rise to a simultaneous adjustment to goodwill

(cf. note 4.1).

6.2 - other

Other restatements to stockholders’ equity at December 31, 2004

and December 31, 2005 correspond notably to adjustments relating

to pension obligations not previously identified, which have been

recognized as corrections of errors in accordance with IAS 8.



7 - list of consolidated companies

2006 2005 2004

Companies Countries % voting rights

%interest

% voting rights

%interest

% voting rights

%interest

Valeo SA (Parent company) France

EuROpE

Cablea (merged with Valeo Câblage) France - - - - 100 100

dAV France 100 100 100 100 100 100

equipement 11 France 100 100 100 100 100 100

equipement 7 France 100 100 100 100 100 100

Valeo Câblage (ex-Cablea and Financière Cablea) France 100 100 100 100 100 100

SC2N France 100 100 100 100 100 100

Société de Participations Valeo France 100 100 100 100 100 100

telma France 100 100 100 100 100 100

Valeo Bayen France 100 100 100 100 100 100

Valeo electronique et Systèmes de liaison France 100 100 100 100 100 100

Valeo embrayages France 100 100 100 100 100 100

Valeo equipements electriques moteur France 100 100 100 100 100 100

Valeo Finance France 100 100 100 100 100 100

Valeo Four Seasons (2) France 50 50 50 50 50 50

Valeo Furukawa Wiring Systems (2) France 50 50 50 50 50 50

Valeo liaisons electriques France 100 100 100 100 100 100

Valeo management Services France 100 100 100 100 100 100

Valeo matériaux de Friction France 100 100 100 100 100 100

Valeo Plastic omnium S.N.C. (2) France 50 50 50 50 50 50

Valeo Sécurité Habitacle France 100 100 100 100 100 100

Valeo Service France 100 100 100 100 100 100

Valeo Switches & detection Systems — VSdS France 100 100 100 100 100 100

Valeo Systèmes de Contrôle moteur France 100 100 100 100 - -

Valeo Systèmes d’essuyage France 100 100 100 100 100 100

Valeo Systèmes thermiques France 100 100 100 100 100 100

Valeo thermique Habitacle France 100 100 100 100 100 100

Valeo Ventures France 100 100 100 100 100 100

Valeo Vision France 100 100 100 100 100 100

Valeo Zexel China Climate Control (merged with Valeo Systèmes thermiques) France - - - - 60 60

(1) Company accounted for by the equity method.(2) Company accounted for on a proportional basis.(3) Company accounted for on a proportional basis on 2004 and fully consolidated since 2005.(4) Company accounted for by the equity method in 2004 and fully consolidated since 2005.(5) Company fully consolidated in 2004 and accounted on a proportional basis since 2005.(6) Company sold in 2005.(7) Company sold in 2006.



2006 2005 2004


%interest

% voting rights

%interest

% voting rights

%interest

Valeo Componentes Automoviles (7) Spain - - 100 100 100 100

Valeo españa, S.A. Spain 100 100 100 100 100 100

telma Retarder españa, S.A. Spain 100 100 100 100 100 100

Valeo Climatización, S.A. Spain 100 100 100 100 100 100

Valeo Iluminación, S.A. Spain 99.8 99.8 99.8 99.8 99.8 99.8

Valeo materiales de Fricción, S.A. Spain 100 100 100 100 100 100

Valeo Plastic omnium S.l. (2) Spain 50 50 50 50 50 50

Valeo Service españa, S.A. Spain 100 100 100 100 100 100

Valeo Sistemas de Conexion electrica, S.l. Spain 100 100 100 100 100 100

Valeo Sistemas de Seguridad y de Cierre, S.A. Spain 100 100 100 100 100 100

Valeo Sistemas electricos, S.l. Spain 100 100 100 100 100 100

Valeo termico, S.A. Spain 100 100 100 100 100 100

Cablagens do Ave Portugal 100 100 100 100 100 100

Valeo Viana Portugal 100 100 100 100 100 100

Cablauto, S.r.l. Italy 100 100 100 100 100 100

Cavisud, S.r.l. Italy 100 100 100 100 100 100

Valeo Service Italia, S.p.a. Italy 99.9 99.9 99.9 99.9 99.9 99.9

Valeo, S.p.a. Italy 99.9 99.9 99.9 99.9 99.9 99.9

Valeo Cablaggi e Commutazione, S.p.a. Italy 100 100 100 100 100 100

Valeo Sicurezza Abitacolo, S.p.a. Italy 100 99.9 100 99.9 100 99.9

Valeo Sistemi di Climatizzazione, S.r.l. Italy 100 100 100 100 100 100

Valeo Communitazione S.r.l. Italy 99.9 99.9 - - - -

Valeo Auto electric GmbH Germany 100 100 100 100 100 100

Valeo Auto-electric Beteiligungs GmbH Germany 100 100 100 100 100 100

Valeo Germany Holding GmbH Germany 100 100 100 100 100 100

Valeo Holding deutschland GmbH Germany 100 100 100 100 100 100

Valeo Grundvermogen Verwaltung GmbH Germany 100 100 100 100 100 100

Valeo Beleuchtung deutschland GmbH Germany 100 100 100 100 100 100

Valeo Klimasysteme GmbH Germany 100 100 100 100 100 100

Valeo Klimasysteme Verwaltung SAS & Co. KG Germany 100 100 - - - -

Valeo motoren und Aktuatoren GmbH (7) Germany - - 100 100 100 100




2006 2005 2004


%interest

% voting rights

%interest

% voting rights

%interest

Valeo Schalter und Sensoren GmbH Germany 100 100 100 100 100 100

Valeo Service deutschland GmbH Germany 100 100 100 100 100 100

Valeo Sicherheitssysteme GmbH Germany 100 100 100 100 100 100

Valeo Verwaltungs-beteiligungs GmbH & Co. KG Germany 100 100 100 100 100 100

Valeo Wischersysteme GmbH Germany 100 100 100 100 100 100

Valeo Compressor europe GmbH (ex-Zexel Valeo Compressor europe GmbH) (3) Germany 100 100 100 100 50 50

Valeo UK ltdUnited

Kingdom 100 100 100 100 100 100

labauto ltdUnited

Kingdom 100 100 100 100 100 100

telma Retarder ltdUnited

Kingdom 100 100 100 100 100 100

Valeo Climate Control ltdUnited

Kingdom 100 100 100 100 100 100

Valeo engine Cooling UK ltd (ex-Valeo Security Systems ltd)

United Kingdom 100 100 100 100 100 100

Valeo Service UK ltdUnited

Kingdom 100 100 100 100 100 100

Valeo Vision Belgique Belgium 100 100 100 100 100 100

Valeo Service Belgique Belgium 100 100 100 100 100 100

Coreval luxembourg 100 100 100 100 100 100

Valeo Holding Netherland B.V. Netherlands 100 100 100 100 100 100

Valeo International Holding B.V. Netherlands 100 100 100 100 100 100

Valeo Service Benelux B.V. Netherlands 100 100 100 100 100 100

Valeo Vymeniky tepla S.r.o.Czech

Republic 100 100 100 100 100 100

Sylea tchequia S.r.o.Czech

Republic 100 100 100 100 100 100

Valeo Autoklimatizace S.r.o.Czech

Republic 100 100 100 100 100 100

Valeo Compressor europe S.r.o. (3)

Czech Republic 100 100 100 100 50 50

Valeo Slovakia S.r.o. Slovakia 100 100 100 100 100 100

Valeo Autosystemy Sp.zo.o. Poland 100 100 100 100 100 100

Valeo Service eastern europe Sp.zo.o. Poland 100 100 100 100 100 100

Valeo electric and electronic Systems Sp.zo.o. Poland 100 100 100 100 100 100

Valeo Auto electric Hungary Spare Parts Production llC Hungary 100 100 100 100 100 100

Valeo Kabli, d.o.o. Slovenia 100 100 100 100 100 100

Valeo Cablaje S.r.l. (ex-Valeo electronice si Sisteme de Conectare Romania) Romania 100 100 100 100 100 100




2006 2005 2004


%interest

% voting rights

%interest

% voting rights

%interest

Valeo electrical Connective Systems S.r.l. Romania 100 100 100 100 - -

Cablea tunisie, S.A. tunisia 100 100 100 100 100 100

dAV tunisie tunisia 100 100 100 100 100 100

Société tunisienne de Câblages S.t.C. tunisia 100 100 100 100 100 100

Valeo mateur (ex-Sylea tunisie) tunisia 100 100 100 100 100 100

Valeo embrayages tunisie S.A. tunisia 100 100 100 100 100 100

Valeo Bouskoura (ex-Cabelec) morocco 100 100 100 100 100 100

Valeo Ain Sebaa (ex-Cablea maroc) morocco 100 100 100 100 100 100

Cablinal maroc, S.A. morocco 100 100 100 100 100 100

Valeo Bouznika morocco 100 100 100 100 100 100

Nursan ed (1) turkey 40 40 40 40 40 40

Nursan oK (1) turkey 40 40 40 40 40 40

Valeo otomotiv dagitim A.S. turkey 100 100 100 100 100 100

Valeo otomotiv Sistemleri endustrisi A.S. turkey 100 100 100 100 100 100

Valeo Interbranch Automotive Software (egypt) egypt 100 100 - - - -

Valeo Systems South Africa (Proprietary) ltd South Africa 51 51 51 51 51 51

NoRtH AmeRICA

Valeo Aftermarket, Inc. United States 100 100 100 100 100 100

Valeo electrical Systems, Inc. United States 100 100 100 100 100 100

Valeo Investment Holdings, Inc. United States 100 100 100 100 100 100

Valeo Raytheon Systems, Inc. (5) United States 77.2 77.2 73.1 73.1 66.6 66.6

Valeo Compressor North America, Inc. (ex-Selective technology, Inc.) (3) United States 100 100 100 100 50 50

telma Retarder Inc. United States 100 100 100 100 100 100

Valeo Acustar thermal Systems, Inc. United States 51 51 51 51 51 51

Valeo Climate Control Corp. United States 100 100 100 100 100 100

Valeo Friction materials, Inc. United States 100 100 100 100 100 100

Valeo, Inc. United States 100 100 100 100 100 100

Valeo Switches & detection Systems, Inc. United States 100 100 100 100 100 100

Valeo Sylvania, llC (2) United States 50 50 50 50 50 50

Valeo Sylvania Services, S de Rl de CV (2) mexico 50 50 50 50 50 50

Valeo termico, SA de CV mexico 100 100 100 100 100 100

delmex de Juarez S de Rl de CV mexico 100 100 100 100 100 100




2006 2005 2004


%interest

% voting rights

%interest

% voting rights

%interest

telma Retarder de mexico, SA de CV mexico 100 100 100 100 100 100

Valeo Automotive electrical Systems de mexico, SA de CV mexico 100 100 100 100 100 100

Valeo Sistemas electricos, SA de CV mexico 100 100 100 100 100 100

Valeo Sistemas electricos Servicios, S de Rl de CV mexico 100 100 100 100 100 100

Valeo Sistemas electronicos, S de Rl de CV mexico 100 100 100 100 100 100

Valeo Sylvania Iluminaciòn, S de Rl de CV (2) mexico 50 50 50 50 50 50

Valeo termico, SA de CV mexico 100 100 100 100 100 100

Valeo termico Servicios, S de Rl de CV mexico 100 100 100 100 100 100

Valeo Climate Control de mexico, SA de CV mexico 100 100 100 100 100 100

Valeo Climate Control de mexico Servicios, S de Rl de CV mexico 100 100 100 100 100 100

Valeo materiales de Fricciòn de mexico, SA de CV mexico 100 100 100 100 100 100

SoUtH AmeRICA

Valeo Climatizacao Brasil (merged with Valeo Sistemas Automotivos ltda) Brazil - - - - 100 100

Valeo Sistemas Automotivos ltda Brazil 100 100 100 100 100 100

Cibié Argentina, SA Argentina 100 100 100 100 100 100

dAV Argentina, SA (merged with Cibié Agentina, SA) Argentina - - - - 100 100

emelar Sociedad Anonima Argentina 100 100 100 100 100 68

Il tevere (6) Argentina - - - - 50 50

Interclima (6) Argentina - - - - 50 26

mirgor (6) Argentina - - - - 50 26

Valeo embragues Argentina, SA Argentina 100 100 100 100 68 68

Valeo termico Argentina, SA Argentina 100 100 100 100 100 100

ASiA

Valeo Armco engine Cooling Co. (2) Iran 51 51 51 51 - -

Valeo Compressor (thailand) Co. ltd (ex-Zexel Valeo Compressors) (3) thailand 98.5 98.5 98.5 98.5 50 48.1

Valeo Compressor Clutch (thailand) Co. ltd (ex-Zexel Clutches Co. ltd) (3) thailand 97.3 97.3 97.3 97.3 50 48.1

Valeo Siam thermal Systems Co.ltd (ex-Siam Zexel Co. ltd) (4) thailand 74.9 74.9 74.9 74.9 39 19.5

Valeo thermal Systems Sales (thaïland) (ex-Zexel Sales thailand) (4) thailand 74.9 74.9 89.9 74.9 7,8 7.8




2006 2005 2004


%interest

% voting rights

%interest

% voting rights

%interest

Valeo electrical Systems Korea ltd South Korea 100 100 100 100 100 100

Valeo Pyeong Hwa Co. ltd (2) South Korea 50 50 50 50 50 50

Valeo Pyeong Hwa distribution Co. ltd (2) South Korea 50 50 50 50 50 50

Valeo Samsung thermal Systems (2) South Korea 50 50 - - - -

Valeo Compressor Korea Co. ltd (ex-Zexel Valeo Climate Control Korea Co. ltd) (3) South Korea 100 100 100 100 50 50

dae myong Precision Corporation (3) South Korea 100 100 100 100 50 50

Konno Sangyo Co. ltd (7) Japan - - 100 100 50 50

Zexel logistics Company (Butsuryu) (7) Japan - - 100 100 50 50

Zexel logitec Company (7) Japan - - 100 100 50 50

Ichikoh Industries limited (1) Japan 29.4 29.4 28.2 28.2 22.7 22.7

Valeo engine Cooling Japan Co. ltd Japan 100 100 100 100 100 100

Valeo Unisia transmissions K.K. Japan 66 66 66 66 66 66

Valeo thermal Systems Japan Corp. (ex-Zexel Valeo Climate Control Corporation) (3) Japan 100 100 100 100 50 50

Valeo Automotive transmissions Systems (Nanjing) Co. ltd China 100 100 - - - -

Hubei Valeo Autolighting Company ltd China 100 100 75 75 75 75

Valeo Automotive Air Conditioning Hubei Co. ltd China 55 55 55 55 55 33

Faw Valeo Climate Control System (1) China 36.5 36.5 36.5 36.5 36.5 21.9

Huada Automotive Air Conditioner Co. ltd (1) China 30 30 30 30 30 15

Valeo lighting Hubei technical center Co. ltd China 100 100 100 100 100 100

Nanjing Valeo Clutch Co. ltd (2) China 55 55 55 55 50 50

Shanghai Valeo Automotive electrical Systems Company ltd (2) China 50 50 50 50 50 50

Valeo Shanghai Automotive electric motors & Wiper Systems Co. ltd China 55 55 55 55 55 55

taizhou Valeo-Wenling Automotive Systems Co. ltd China 100 100 55 55 55 55

telma Vehicle Braking System (Shanghai) Co. ltd China 70 70 70 70 - -

Shenzhen Valeo Hangsheng Automotive Switches & detection Syst. Co. ltd China 75 75 75 75 - -

Valeo Automotive Security Systems (Wuxi) Co. ltd China 100 100 100 100 - -




2006 2005 2004


%interest

% voting rights

%interest

% voting rights

%interest

Valeo Fawer Compressor (Changchun) Co. ltd (2) China 60 60 60 60 - -

Valeo management (Beijing) Co. ltd China 100 100 - - - -

Foshan Ichikoh Valeo Auto lighting Systems Co. ltd (2) China 50 50 - - - -

Valeo engine Cooling (Shashi) Co. ltd China 100 100 - - - -

Pt Valeo AC Indonesia (1) Indonesia 49 49 49 49 49 24.5

Valeo engineering Center (India) Private limited India 100 100 - - - -

Amalgamations Valeo Clutch Private limited (2) India 50 50 50 50 50 50

Valeo Friction materials India limited India 60 60 60 60 60 60



CoNSolIdAted FINANCIAl StAtemeNtS 20063 Statutory auditors' report on the 2006 IFRS consolidated financial statements

Statutory auditors' report on the 2006 IFRS consolidated financial statements

Year ended december 31, 2006

Following our appointment as statutory auditors by your Annual General Meeting, we have audited the accompanying consolidated financial

statements of Valeo (the Company) for the year ended December 31, 2006, as presented on pages 71 to 125.

The consolidated financial statements have been approved by the Board of Directors. Our role is to express an opinion on these consolidated

financial statements based on our audit.

This is a free translation into English of the statutory auditors’ report issued in French and is provided solely for the convenience

of English speaking users. The statutory auditors’ report includes information specifically required by French law in such reports,

whether modified or not. This information is presented below the opinion on the consolidated financial statements and includes

an explanatory paragraph discussing the auditors’ assessments of certain significant accounting and auditing matters. These

assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a

whole and not to provide separate assurance on individual account captions or on information taken outside of the consolidated


This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards

applicable in France.

opinion on the consolidated financial statements

We conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and perform

the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit

includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes

assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation

of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements give a true and fair view of the assets and liabilities and of the financial position of

the consolidated group as at December 31, 2006 and of the results of its operations for the year then ended in accordance with IFRSs as

adopted by the European Union.

Justification of our assessments

In accordance with the requirements of article L. 823-9 of the French Commercial Code (Code de commerce) relating to the justification

of our assessments, we bring to your attention the following matters:

The Company records provisions related to pensions and other post-employment benefits in accordance with the policy described in

note 1.17 to the consolidated financial statements. Such obligations have generally been determined with the assistance of independent


CoNSolIdAted FINANCIAl StAtemeNtS 2006 3Statutory auditors' report on the 2006 IFRS consolidated financial statements

Paris La Défense and Neuilly-sur-Seine, February 12, 2007

actuaries. We have reviewed the data and assumptions used and the calculations completed. We have not identified any item that could

affect the amounts and methods used to account for pensions and other post-employment benefits.

The Company performs at the end of each year impairment tests of the amounts recorded as goodwill and also assesses whether

indicators point to a lasting impairment of fixed assets in accordance with the policy described in note 1.12 to the consolidated financial

statements. We have reviewed the methods and assumptions used by the Company in preparing the accounts and we have verified that

such assumptions were reasonable.

These assessments were made in the context of our audit of the consolidated financial statements taken as a whole, and therefore

contributed to the opinion which is expressed in the first part of this report.

Specific verification

In accordance with professional standards applicable in France, we have also verified the information given in the group’s management

report. We have no matters to report as to its fair presentation and its consistency with the consolidated financial statements.

the Statutory Auditors

Salustro Reydelmember of KPmG International PricewaterhouseCoopers Audit

Jean-Pierre Crouzet emmanuel Paret Serge Villepelet Jean-Christophe Georghiou


CoNSolIdAted FINANCIAl StAtemeNtS 20063 Statutory auditors' report on the 2006 IFRS consolidated financial statements


4CoRpoRate GoveRnanCe

Report of the Chairman of the Board of Directors relating to the conditions of preparation and organization of the Board’s work, the possible limitations to the powers of the Chief Executive Officer and the internal control procedures put in place by the Valeo Group P. 130

Composition of the Board of Directors at December 31, 2006 P. 139

Statutory Auditors’ Report on the report of the Chairman of the Board of Directors P. 142


CORPORAtE GOVERnAnCE4 Report of the Chairman of the Board of Directors

Report of the Chairman of the Board of Directors relating to the conditions of preparation and organization of the Board’s work, the possible limitations to the powers of the Chief Executive Officer and the internal control procedures put in place by the Valeo Group

1. Preparation and organization of the work of the Board of Directors

On March 31, 2003, the Board of Directors adopted Internal Rules in

line with the recommendations of the Bouton Report on corporate

governance, aimed at precisely defining the operating procedures

of the Board, in addition to legal and regulatory requirements

and the provisions of the Company’s bylaws. These Internal Rules

were amended on July 24, 2006 in order to authorize Directors to

participate in Board meetings by videoconference, or by any other

telecommunication means that enables them to be identified

and ensures that they actually participate in the meeting. On

December 14, 2006 the Internal Rules were further amended

following the merger of the Nomination and Remuneration

Committees, and the dissolution of the Strategy Committee (see

“Committees created by the Board” below).

1.1. Rules specific to the functioning and organization of the Board and their application

1.1.1. Composition of the Board of Directors

The bylaws provide that the Board of Directors must have between

3 and 18 members. Following the appointment of Daniel Camus

and Jérôme Contamine as Directors at the General Shareholders’

Meeting held on May 17, 2006 and the resignation of Carlo De

Benedetti effective from July 13, 2006, the Board currently has

11 members.

Details concerning the composition of the Board of Directors are

set out in the appendix to this report.

In accordance with the independence criteria set out in the

Board’s Internal Rules, the Board of Directors has reviewed

whether or not its members continue to classify as independent.

Under these rules, independent Directors are those who have

no relations whatsoever with the Company, the Group or the

Group’s management that may compromise his or her ability to

exercise freedom of judgment.

In particular, a Director is presumed to be independent if he/she:

is not an employee or a corporate officer of the Company, or an

employee or Director of one of its consolidated subsidiaries, and

has not been in such a position for the previous five years;

is not a corporate officer of a company in which the Company

holds a directorship, either directly or indirectly, or in which an

employee appointed in that role, or a corporate officer of the

Company (currently in office or having held such office in the

past five years), is a Director;

is not a customer, supplier, investment banker or commercial

banker that is material for the Company or Group, or for which

the Company or Group represents a significant portion of the

business of the Director concerned;

is not related by close family ties to a corporate officer;

has not been an auditor of the Company in the past five

years;

has not been a Director of the Company for more than twelve

years on the date when he/she was appointed to his/her

current term of office.

For Directors holding in excess of 10% of the Company’s capital

and/or voting rights, or representing a business that holds such

a stake, the classification as independent takes into account the

Company’s ownership structure and any potential conflict of

interests.

In application of these criteria, the Board of Directors noted that:

one Director is both Chairman and Chief Executive Officer of the

Company: Thierry Morin;

three Directors have been members of the Board of Directors

(and previously the Supervisory Board) for over twelve years:

Yves-André Istel, Alain Minc, and Erich Spitz;

•

•

•

•

•

•

•

•


CORPORAtE GOVERnAnCE 4Report of the Chairman of the Board of Directors

seven Directors are independent with respect to the criteria

set forth in the Internal Rules and in accordance with the

recommendations set out in the Bouton Report on corporate

governance: Pierre-Alain De Smedt, François Grappotte,

Philippe Guédon, Jean-Bernard Lafonta and Véronique Morali,

as well as Daniel Camus and Jérôme Contamine, following

their appointment by the General Shareholders’ Meeting on

May 17, 2006.

1.1.2. Average period of notice for calling Board meetings

In accordance with the Internal Rules, each Director is notified of

the dates of Board meetings at the beginning of each fiscal year

at the latest. The average period of notice for calling Board of

Directors’ meetings is approximately two weeks.

1.1.3. Representation of Directors

A Director may be represented at meetings of the Board of

Directors by another Director. The proxy must be given in writing.

During the 2006 fiscal year, eight Directors used the possibility of

being represented at Board meetings.

1.1.4. Chairman of Board meetings

The Board meetings are chaired by the Chairman of the Board or,

in his/her absence, by a Vice-Chairman or a Director designated

by the Board of Directors. All ten Board meetings held during the

2006 fiscal year were chaired by the Chairman.

1.1.5. Directors’ participation in Board meetings

Following the General Shareholders’ Meeting held on May 17,

2006, article 16 of the Company’s bylaws and the Internal Rules

were amended in order to authorize Directors to participate in

Board meetings by any telecommunication technology that

enables them to be identified and ensures that they actually

participate in the meeting. Accordingly, Directors who take part in

Board meetings through such means are deemed to be present

for the purposes of calculating the quorum and majority, except at

meetings dedicated to the preparation of the annual Company and

consolidated financial statements and the related management

reports (as provided for in articles L. 232-1 and L. 233-16 of the

French Commercial Code). The Chairman is required to state in

the relevant notice of meeting if these methods can be used

for certain meetings. Directors wishing to participate in a Board

meeting by these methods must contact the Board Secretary at

least 2 (two) working days before the meeting date (except in an

emergency situation) in order to ensure that the relevant technical

information can be exchanged and tests performed before the

meeting takes place.

• 1.2. Directors’ access to information

1.2.1. Directors’ access to information

Each Director is given all the information required to perform his

or her duties and can ask for any document he or she deems

useful. The Chairman provided this information within a sufficient

timeframe in 2006.

1.2.2. Guests of the Board

During the year, the Group Financial Control Director attended

all Board meetings except those held on March 3, 2006 and

November 20, 2006 which were attended by the Financial

Controller of the Industrial Branches. The lawyers and bankers

representing Valeo as well as the Vice-President, Financial Affairs

participated in the Board meeting held to review the merger

between Valeo and Visteon.

1.3. Frequency of Board meetings and average attendance rates of the Directors

In accordance with the Internal Rules of the Board, the Board of

Directors meets at least four times a year. The Board of Directors

met on ten occasions in 2006.

The average attendance rate of the members of the Board of

Directors (in person or via proxy) during 2006 was 92%. The

average attendance rate of the members of the Board of Directors

in person during 2006 was 80%.

1.4. Role of the Board

The principal role of the Board of Directors is to determine

the business strategies of the Company and oversee their

implementation.

In 2006 the Board of Directors analyzed the 2005 financial

statements of the Company and the Group, assessed the

performance of the Board, reviewed whether the Directors were

still classified as independent in accordance with the criteria set

out in the Board’s Internal Rules, examined the management

forecasts and budget for 2006, reviewed the Group’s strategic

transactions (particularly disposals and acquisitions), heard the

reports on the work carried out by the various Board Committees,

merged the Nomination and Remuneration Committees, dissolved

the Strategy Committee, authorized the Chairman to issue bonds

(either under a renewed EMTN program or otherwise) and granted

stock options and consideration-free shares to the employees and

corporate officers who had been the most directly involved in the

Group’s development.



1.5. Committees created by the Board

In 2003, the Board created four committees to improve its

functioning and provide effective assistance for preparing its

decisions: the Strategy Committee, the Audit Committee, the

Remuneration Committee and the Nomination Committee.

At the Board meeting of December 14, 2006, the Nomination

Committee was merged with the Remuneration Committee

and the Strategy Committee was dissolved. The Board therefore

currently has two standing committees – the Audit Committee

and the Nomination and Remuneration Committee.

The work of the Strategy, Audit, Remuneration and Nomination

Committees was presented to the Board of Directors throughout

the year in the form of reports and is summarized below.

1.5.1. Audit Committee

The Audit Committee has four members including a Chairman,

appointed by the Board of Directors. All members of the Audit

Committee are independent Directors as defined by the criteria

in the Internal Rules.

The members of the Audit Committee are Pierre-Alain De Smedt,

François Grappotte, Jean-Bernard Lafonta and Daniel Camus (since

November 20, 2006). The Audit Committee is chaired by Pierre-

Alain De Smedt.

The Committee’s roles and responsibilities are:

to ensure the relevance and due application of the accounting

and financial methods adopted to prepare the consolidated

financial statements, as well as the appropriate accounting

treatment of transactions at both product-family and Group

level;

to check that internal procedures are defined for compiling

and controlling financial and accounting information in order

to ensure its reliability and guarantee rapid reporting, to review

the Group’s internal audit plan and Management’s related

comments, and to keep informed of the Group’s internal and

external audits and Management’s related comments;

to express an opinion on the choice of Statutory Auditors or the

renewal of their terms of office;

to review any financial or accounting matter referred to it by

the Chairman of the Board of Directors as well as any conflict

of interest issue of which it is aware.

The Audit Committee met four times in 2006 with a 66%

attendance rate. During these meetings, the Committee reviewed

the consolidated financial statements for the year ended

December 31, 2005 and the interim financial statements for first-

half 2006. The Committee particularly focused on the application

of International Financial Reporting Standards (IFRS) which were

adopted for the first time in 2005, as well as the restatement of

2004 data. The members of the Audit Committee also reviewed

the operations carried out by the Internal Audit Department in

2006 as well as the methodology used for risk mapping and the

internal audit work schedule for 2007.

•

•

•

•

The Audit Committee’s work was conducted in line with its

objectives. The Statutory Auditors and the Group Financial

Controller (or, where applicable, the Financial Controller of the

Industrial Branches) attended all of the meetings held in 2006.

The Committee was also assisted by the work carried out by

the Internal Audit Department. The presentations made by the

Statutory Auditors mainly related to the findings of their audit of

the annual financial statements of the Company and the Group

and their limited review of the interim financial statements. The

Audit Committee did not have any reservations concerning the

annual consolidated and Company financial statements or the

interim financial statements presented to it.

1.5.2. Nomination and Remuneration Committee

The Nomination Committee and the Remuneration Committee

– which were set up in 2003 – were merged on December 14,

2006 and renamed the Nomination and Remuneration Committee.

The work carried out by the separate committees during 2006

is set out below.

1.5.2.1. the work of the Remuneration Committee

in 2006

Prior to its merger with the Nomination Committee, the

Remuneration Committee had three members appointed by

the Board of Directors, including a Chairman and two Directors

classified as independent in accordance with the criteria in the

Internal Rules: Alain Minc (Chairman), François Grappotte and

Philippe Guédon.

The Remuneration Committee met on two occasions in 2006,

with a 100% attendance rate. The roles and responsibilities of

this Committee were:

to study and make recommendations concerning compensation

paid to corporate officers;

to recommend to the Board the rules for allocating attendance

fees; and

to examine any issues submitted to it by the Chairman, including

plans to launch employee share issues.

During its meetings, the Committee drew up proposals relating

to the compensation to be paid to the Chairman and Chief

Executive Officer and recommended to the Board that Thierry

Morin should be granted 150,000 stock options and 50,000 shares

free of consideration (see “Compensation paid to the Chairman

and Chief Executive Officer”). This recommendation was approved

by the Board of Directors on March 3, 2006. During its meeting

of November 20, 2006 the Board also approved the proposal by

the Remuneration Committee to grant a total of 1,309,250 stock

options to the employees and corporate officers who had been the

most directly involved in the Group’s development and 100,000

consideration-free shares to high potential junior managers.

•

•

•



1.5.2.2. the work of the nomination Committee in 2006

Prior to its merger with the Remuneration Committee on

December 14, 2006, the Nomination Committee had five

members appointed by the Board of Directors, including a

Chairman and three Directors classified as independent in

accordance with the criteria in the Internal Rules: Alain Minc

(Chairman), François Grappotte, Philippe Guédon, Thierry Morin

and Véronique Morali.

The Nomination Committee met twice in 2006, with a 90%

attendance rate.

During the year, the Committee examined whether the Directors

were still classified as independent in accordance with the

criteria set out in the Board’s Internal Rules. It also reviewed

the composition of the Company’s corporate governance bodies

and recommended to the Board that Daniel Camus and Jérôme

Contamine should be put forward as directorship candidates at

the General Shareholders’ Meeting of May 17, 2006.

1.5.2.3. Merger of the nomination Committee and

the Remuneration Committee into a single

nomination and Remuneration Committee

At its December 14, 2006 meeting, the Board of Directors decided

to merge the separate Nomination and Remuneration Committees

into a single Nomination and Remuneration Committee. The

members of this new committee are Alain Minc (Chairman),

François Grappotte, Philippe Guédon and Véronique Morali.

According to its Internal Rules, the roles and responsibilities

of the Nomination and Remuneration Committee include the

following:

Concerning remuneration: studying and making recommendations concerning the compensation paid to corporate officers (particularly in relation to the variable portion of their compensation),

recommending to the Board an aggregate amount of attendance fees payable to Directors and the individual amounts payable to each Director,

providing recommendations to the Board of Directors on the Group’s general stock option policy and specific stock option grants;

Concerning selections and nominations: preparing the composition of the Company’s corporate governance bodies by making recommendations for the appointment of corporate officers and Directors,

reviewing the position of each Director in relation to the independence criteria set out in paragraph 1.2(b) of the Board’s Internal Rules.

1.5.3. Strategy Committee

Before it was dissolved on December 14, 2006, the Strategy

Committee had five members appointed by the Board of Directors,

including a Chairman and two independent Directors as defined

by the criteria set forth in the Internal Rules: Philippe Guédon

•−

−

−

•−

−

(Chairman), Jean-Bernard Lafonta, Alain Minc, Thierry Morin and

Erich Spitz.

The roles and responsibilities of the Strategy Committee were:

to express an opinion to the Board concerning the strategic

goals of the Company and the Group and any other major

strategic issue referred to the Committee by the Board or the

Chairman;

to analyze annual budgets and interim reviews, as well as

the medium- and long-term strategic development plans of

the Group.

The Committee’s role also included examining and expressing

an opinion to the Board on issues submitted to it concerning

major transactions including acquisitions, disposals, financing

and debt.

The Strategy Committee met three times during 2006 with a 93%

attendance rate. During its meetings, the Committee reviewed

the Group’s results, studied certain planned acquisitions and

reviewed the strategy, roles and responsibilities of each of Valeo’s

three Domains.

At its December 14, 2006 meeting, the Board of Directors decided

that strategic issues concerning the Group will henceforth be

discussed in full Board meetings and tasked Philippe Guédon

with carrying out any preparatory work required to facilitate such

discussions during these meetings.

1.6. Evaluation of the Board of Directors

In accordance with the Internal Rules, the Board carries out a

self-assessment to review its modus operandi and to ensure that

its meetings are properly organized.

In 2006, this assessment was performed with the assistance of

an external firm during the last quarter of the year. A detailed

questionnaire was sent to all Directors concerning their assessment

of the way in which the Board operates and suggestions for

improvement. The topics covered included the operation and

composition of the Board, Directors’ access to information, the

choice of issues discussed, as well as the quality of the discussions

and the general functioning of the Board Committees.

The Directors’ replies were analyzed and the findings presented

at the meeting of the Board held on February 12, 2007. The vast

majority of the Directors stated that the organization of the Board’s

work and the quality of its discussions had improved since the

last evaluation, enabling members of the Board to be involved in

all key decisions relating to the Group’s future. They did however

put forward a number of recommendations on how to improve

the way the Board operates.

•

•



1.7. Shareholdings and securities transactions

Each Director must hold at least 100 Valeo shares during his or

her entire term of office.

On accepting their position, members of the Board of Directors

and the Executive Management of the Group agreed to a Code

of Conduct in relation to trading in the Company’s securities.

This Code was updated twice by the Board of Directors in 2006.

Under the terms of the Code, Directors must declare to the

Group’s General Counsel any transactions that they have entered

into involving the Company’s securities, within a maximum of

five trading days following the transaction. In accordance with

applicable regulations, this information must then be disclosed to

the French securities regulator (Autorité des Marchés Financiers)

and subsequently made public.

1.8. Agreements governed by Article L. 225-38 of the French Commercial Code

At its meeting of October 18, 2004, the Board of Directors

authorized a number of transactions governed by the procedures

concerning regulated, related-party agreements. The agreements

concerned – which were entered into between the Company

and its Spanish subsidiaries as part of the implementation of the

2004 Valeorizon international employee stock ownership plan

– remained in force during 2006.

The agreements authorized by the Board of Directors at its

December 15, 2005 meeting – which were entered into between

the Company and the Group’s operating subsidiaries in connection

with trademark royalties agreements – also remained in force

during the year.

At its meeting of October 6, 2006 the Board of Directors authorized

the signature of a consulting agreement with Yves-André Istel,

covering assistance and advisory services provided in connection

with the study group’s possible merger with Visteon.

1.9. Authorization granted regarding sureties, endorsements and guarantees governed by Article L. 225-35 of the French Commercial Code

During the year the Board of Directors authorized the Chairman,

who is entitled to delegate this authority, to issue sureties,

endorsements and guarantees in the Company’s name up to a

maximum amount of 23 million euros, and to maintain in effect

the sureties, endorsements and guarantees previously issued.

This authorization, which was granted for a 12-month period,

expires on February 9, 2007. No new commitments were given

by the Chairman under this authorization during 2006.

1.10. General management of the Company and limitations on the powers of the Chief Executive Officer

The Company’s Board of Directors has chosen to combine the

positions of Chairman of the Board of Directors and Chief Executive

Officer.

The Board of Directors has not imposed any specific limits on the

powers of the Chief Executive Officer. The Chairman and Chief

Executive Officer therefore has the widest possible powers to act

in any circumstances in the Company’s name. He exercises his

powers within the scope of the Company’s corporate purpose

and subject to the powers that the law specifically grants to

Shareholders’ Meetings or the Board of Directors. The Chairman

and Chief Executive Officer represents the Company in its relations

with third parties.

1.11. Compensation paid to the Chairman and Chief Executive Officer

1.11.1. Compensation paid during 2006

Acting on the recommendation of the Remuneration Committee,

at its February 9, 2006 meeting the Board of Directors approved

the principles for calculating the compensation and benefits-in-

kind granted to the Chairman and Chief Executive Officer.

Fixed compensation

The total gross fixed compensation paid to Thierry Morin for 2006

was set at 1,519,538 euros, breaking down as 1,500,288 euros in

gross compensation (including travel expenses), and 19,251 euros

in benefits-in-kind.

Exceptional bonus

Thierry Morin did not receive any exceptional compensation in

2006 for 2005.

At its meeting of February 9, 2006, the Board of Directors decided

that any exceptional bonus to be awarded to the Chairman and

Chief Executive Officer for 2006 would be exclusively contingent

on the level of gross margin and operating margin achieved by

the Group, and would be subject to a ceiling set by the Board.

Attendance fees

In 2006, Thierry Morin received 35,000 euros in attendance fees

in his capacity as a Director of Valeo.

Compensation paid by companies controlled by Valeo

In 2006 Thierry Morin received total gross compensation of

120,883 euros from companies controlled by Valeo (as defined

in article L. 233-16 of the French Commercial Code). This total was

made up of 45,750 euros in attendance fees and 75,133 euros in

contributions to a pension fund. Thierry Morin did not receive any

benefits in kind in 2006 from companies controlled by Valeo.



Stock options and shares awarded free of consideration

(share awards)


exchange regulations, the Board of Directors did not grant any

stock options or share awards to Thierry Morin during 2005. At

its March 3, 2006 meeting, the Board granted Thierry Morin

150,000 stock options and 50,000 shares free of consideration,

in accordance with the following terms and conditions: the purchase price of the shares to be issued on exercise of the options is set at 33.75 euros. Half of the options granted may be exercised as from March 3, 2008 and all of the options may be exercised as from March 3, 2009. The shares obtained on exercise of the options may not be sold before March 3, 2010. If the options are not exercised they will be forfeited on March 2, 2014;

the vesting date for the shares awarded free of consideration was set by the Board of Directors at June 3, 2008 subject to the following conditions: (i) Thierry Morin must still hold an employment contract or a corporate officer’s position within the Valeo Group at June 3, 2008, and (ii) the achievement of certain performance criteria concerning operating margin targets for 2006 and 2007 (applicable to the vesting of 30,000 of the total shares awarded).

In 2006, Thierry Morin did not exercise any options granted in

previous years.

•

−

−

•

1.11.2. Pension scheme

Thierry Morin is still a member of the supplementary pension

scheme set up for executives who were formerly members of

Valeo’s Management Board, as approved by the Supervisory Board

on October 17, 2003. This system is designed to top up existing

pension benefits (statutory pension, ARRCO, AGIRC, etc.) to enable

beneficiaries to acquire benefits representing 2% of their final

salary per year of service with the Group. The total amount of

pension benefits may not exceed 60% of a beneficiary’s final

salary and the scheme will only apply to beneficiaries who have

a minimum of 15 years’ service in the Valeo Group when they

retire and for whom Valeo or one of its subsidiaries was their last

employer at their retirement date.

1.11.3. Termination benefits

In the event that Thierry Morin leaves the Company, either

by way of a decision of the Board of Directors, or at his own

initiative following a difference of opinion concerning the strategy

implemented by the Board further to a public tender offer, the

amount of his termination benefits will represent three times his

last annual compensation, excluding bonuses. Such termination

benefits will not be payable in the event of gross misconduct

(faute grave).

2. Internal control proceduresThis report was presented to the Audit Committee on February 12, 2007.

2.1. Definition and aims of internal control procedures

Internal control as defined by the Valeo Group is the process

implemented by Management and employees to provide

reasonable assurance regarding the achievement of objectives

in the following categories:

reliability of financial and management data;

compliance with laws and regulations;

safeguarding of assets;

effectiveness and efficiency of operations.

Valeo has adopted a definition of internal control in line with that

provided by the COSO (Committee Of Sponsoring Organization of

the Treadway Commission), the findings of which were published

in 1992 in the United States.

As with any control system, Valeo’s internal control procedures

can only provide reasonable assurance – and not an absolute

guarantee – that the Group’s objectives will be achieved and that

risks will be avoided. The objective of the system put in place by

Valeo is to reduce the probability of risks occurring.

•

•

•

•

2.2. the components of Valeo’s internal control procedures

Valeo’s internal control procedures are based on the following five

interrelated components defined in the COSO framework.

Control Environment

The control environment sets the tone of an organization,

influencing the level of awareness of its people to be need for

controls.

Valeo’s decentralized structure enables it to respond swiftly and

locally to customer needs, which in turn enables the Group to

expand in its markets. Against this backdrop, the Group has set

up operating principles and rules applicable in all of its companies.

One example is the Code of Conduct, which is sent out to all of the

Group’s managers and sets out principles on how employees are

required to act and behave. This Code is available on the Intranet

and forms the basis of detailed procedures which must be applied

by all of the Group’s companies. It was updated in 2004 to include

new processes relating to human resources management.



Risk Assessment

Risk assessment is the identification and analysis of risks that

may impact the objectives set by the Group, forming a basis for

determining how the risks should be managed. The Group’s main

risks are described in section 9 of the Management Report (“Risks

and uncertainties).

Control Activities

Control activities are the policies and procedures that help ensure

management directives are carried out. They occur throughout

the organization, at all levels and in all functions. In this context,

the Group’s Administrative and Financial Manual has been the

benchmark for Valeo’s financial and management operations

for over 15 years. The manual is used on a daily basis by all

operational staff and comprises two parts:

part one concerns the rules governing management and

internal control;

part two defines how the main items of the balance sheet and

statement of income should be measured and presented.

Every year, the Director and Financial Control Director of each

Division sign a letter of representation in which they undertake

to ensure compliance with the manual’s rules.

Specific rules and procedures have also been put in place by the

Group’s various corporate divisions, in line with the Administrative

and Financial Manual. These include:

the Constant Innovation Charter, which provides a strict definition

of the management principles applicable to development

projects;

marketing procedures and sales practices;

human resources procedures;

purchasing procedures, aimed at reducing the number of listed

suppliers in order to facilitate quality control;

the Risk Management Manual and implementation guides in

relation to security, safety and the environment, together with

the Insurance Manual. Valeo has undertaken to comply with

local regulations concerning safety and the environment at a

minimum and, in certain cases, to comply with even higher

standards;

legal procedures that set down the principles with which

the Group must comply. These mainly concern the laws and

regulations applicable in the countries where the Group operates

as well as respecting contractual obligations and protecting the

Group’s intellectual property.

Substantially all of the information concerning these rules and

procedures is accessible on the Group’s Intranet by the staff

concerned.

In terms of quality, Valeo has set its own benchmarks – Valeo

1000 and Valeo 5000. In addition, the QRQC (Quick Response

Quality Control) method ensures the prompt implementation

of corrective action, and the Lesson Learned Card (LLC) process

•

•

•

•

•

•

•

•

enables the Group to monitor best practices and explore avenues

for improvement.

Valeo has launched a certification program for its manufacturing

sites in accordance with the ISO 14001 standard relating to

environmental management and the OHSAS 18001 standard

concerning occupational health and safety. At December 31,

2006, these two standards had been awarded to 125 and 71

sites respectively, out of a total of 129 sites.

Information and Communication

Pertinent information must be identified, captured and

communicated in a form and timeframe that enable all of the

Group’s people to carry out their responsibilities and perform the

controls required of them.

Group Financial Control is responsible for preparing the financial

statements of the Company and the Group, and reports to the

Chairman and Product Family Directors on this process. The budget

and monthly reporting procedure is a critical tool for Valeo in

managing its operations. Any variances can be identified, analyzed

and dealt with during the year, thereby increasing the reliability

of the interim and annual accounts closing process. The same

information system is used for the consolidation and reporting

processes, thus ensuring that the Group has constant control over

the preparation and processing of financial information.

The Group has put in place an integrated software application,

which is gradually being rolled out to all of its operating units.

As well as providing a structured framework, this software

application enables user profiles to be defined and access controls

to be monitored, enabling the Group to comply with regulations

concerning the segregation of tasks.

Monitoring internal control procedures

The Group’s General Management team oversees the internal

control system and delegates responsibility to the Financial

Control, and Risk, Insurance and Environment Departments as

well as to the individual Product Families for the management of

issues within their remit. The internal control system is audited by

the Valeo Internal Audit Department, whose task is to carry out

assignments within the Group to ensure that the procedures set

up function properly. Based on observations made during these

assignments, recommendations are put forward to the audited

operating units, which are subsequently required to implement

appropriate action plans. The Internal Audit team is also called

upon at regular intervals to carry out audits of performance

indicators at various manufacturing sites and Divisions, and to

coordinate the updates to the Group’s financial and management

procedures.

The application of Valeo’s quality standards is regularly checked

via “VAQ” (Valeo Assurance Quality) audits, and the environmental

and safety aspects are overseen by the Risk, Insurance and

Environment Department.



2.3. Review of work carried out in previous years

Valeo carried out the following tasks at Group level in previous

years:

an analysis of the existing internal control procedures in light

of the five main components defined in the COSO Framework

(control environment, risk assessment, control activities,

information and communication, and monitoring);

a preliminary mapping of major risks and processes based on

interviews with the Group’s main operational and administrative

managers;

the identification of material accounts and their interaction

with the processes, as well as an inventory of existing internal

control procedures relating to the preparation of the financial

statements.

The Group has put in place a specific project designed to improve

internal control in relation to the reliability of financial information.

Over the long term, Valeo’s aim is to be able to assess the relevance

and correct implementation of its internal control procedures in

relation to the reliability of financial information.

In order to achieve this, 132 key control points have been identified

in relation to the seven processes set out below:

sales, receivables management and payments received;

procurement, payables management and payments made;

monitoring of assets;

monitoring of inventory;

payroll;

cash flow;

accounts closing policies.

Rules relating to documentation and testing – particularly

regarding the size of the sample used – have been defined to

ensure uniformity between the sites. The process was initially

implemented at a number of pilot sites in order to enable the

approach to be validated, forecasts of required resources to be

finetuned, and documentation and testing for all the sites to be

standardized. The approach was then rolled out to the Group’s

other operating units. A specific database of best internal control

practices has been created and posted on the Group’s Intranet. In

addition, Valeo has set up a new tool for reporting the findings

of its internal control self-assessment procedures, in order to

centralize documentation relating to the controls and tests

performed in connection with the French Financial Security Act

(LSF project). This tool, which is overseen by the Internal Audit

team, is also used by the Group’s financial controllers to monitor

in real time the action plans implemented to enhance the internal

control system.

In parallel, Valeo has set up a procedure aimed at reviewing the

user profiles and access controls for the SAP software, which has

been progressively rolled out to all the Group’s main sites. The

underlying aim of this process is to establish consistent internal

•

•

•

•

•

•

•

•

•

•

control practices across all of the operating units. On the basis

of matrices showing incompatibilities for each of the processes,

optimized standard user profiles have been identified. SAP user

profiles and access controls have been deployed at 18 of the

Group’s most important sites.

The LSF project also included the “Corporate” functions, and the

internal control procedures for the Valeo Internal Bank (BIV) were

documented as part of this process.

The Group’s standards on quality, manufacturing, project

management and safety have been updated as part of the Valeo

5000 quality certificate.

2.4. Work carried out in 2006

During 2006 the Group continued its twin objectives of improving

internal control in relation to the relevance of financial information

and applying a self-assessment approach in all of its operating

units. The Internal Audit team continued to implement its quality

controls in relation to documentation and tests performed at the

operating units. The Group’s Statutory Auditors also carried out a

review of the work performed by certain divisions.

SAP user profiles and access controls have now been rolled out to

substantially all of the Group’s operating units, with accompanying

manuals and incompatibility matrices drawn up by Internal Audit

in conjunction with each division. During the year the Group also

carried out a centralized review of the SAP automatic and manual

controls, as well as management procedures for the corresponding

access rights. At the same time, it reviewed the security of its

information systems.

As part of its risk assessment process the Group updated and

enriched its risk mapping process. The risks concerned were

assessed in terms of their impact and how they are controlled

by the Group’s main operating and administrative managers.

The Group also identified the people responsible for controlling

its main risks, monitoring corrective action and performing

independent reviews of the coverage of the risks concerned. The

risk mapping process formed a major component of the work

undertaken to prepare the audit plan, which was presented to

the Audit Committee in November 2006.

2.5. Outlook for 2007 and 2008

A two-year audit plan (2007/2008) has been drawn up for the

Group’s main risks, based on the findings from the risk mapping

process and the work conducted by the Internal Audit team. The

plan covers both cross-business and technical risks.

The key controls, user documentation, test procedures and the

internal control reporting system will be reviewed and updated

in order to factor in changes in the Group and its accounting

policies.



A specific review will be carried out on the access controls and

user profiles of sites that do not use SAP, and reporting tools and

monitoring procedures will be put in place. The central review

performed concerning the Group’s internal control procedures and

the security of the SAP application will be supplemented by a

review within each operating unit. This review will include an

analysis of how the centrally defined key controls are applied at

a local level and a verification of the manual controls performed

by local users.

A documentation plan will be drawn up for the “Corporate”

functions, together with a definition of the applicable key

controls and a test plan based on defined samples, notably for

specific holding company processes and for financial consolidation

procedures.

On a general level, the Group will pursue its ongoing efforts to

improve its internal control procedures, with the underpinning aim

of constantly adapting its management and control tools in line

with changes in the Group’s structure and its objectives.

These efforts are wholly supported by the Group’s General

Management team.

Thierry Morin

Chairman of the Board of Directors


CORPORAtE GOVERnAnCE 4Composition of the Board of Directors at December 31, 2006

Composition of the Board of Directors at December 31, 2006

Name First appointedEnd of term of office

Main position held within the Company

Main position held outside the Company

Other directorships and positions held in all companies in 2006

Thierry Morin March 31, 2001

General Shareholders’ Meeting to be called to approve the 2006 financial statements

Chairman and Chief Executive Officer

Chairman of Société de Participations Valeo, Valeo Bayen, Valeo Service, Valeo Finance, Valeo thermique Habitacle, Valeo España, S.A., Valeo SpA, Valeo Japan Co. Ltd, and Valeo (UK) LimitedLegal Manager of Valeo Management Services, Valeo Auto-Electric Beteiligungs GmbH, Valeo Germany Holding GmbH, Valeo Grundvermögen Verwaltung GmbH, and Valeo Holding Deutschland GmbHDirector of Valeo Électronique & Systèmes de Liaison, Valeo Service España S.A., Valeo Iluminacion, S.A., and Valeo termico, S.A.Director of CEDEP and Arkema

•

•

•

•

Carlo De Benedetti(until July 13, 2006) July 4, 1986 July 13, 2006

Chairman of the Board of Directors of CIR SpA

Cofide-CIR GroupChairman of the Board of Directors of Cofide SpA and CIR SpADirector of Gruppo Editoriale L’Espresso SpA and Sogefi SpA

Outside the Cofide-CIR GroupChairman of the Board of Directors of CDB Web tech SpAChairman of the Supervisory Board of M&C Management & Capitali SpADirector of Pirelli SpA and Banca Intermobiliare SpA

•

•

•

•

•

Daniel Camus May 17, 2006


Chief Operating Officer in charge of finance and international development in the EDF Group

EDF GroupChairman of the Board of Directors of EDF Energy (United Kingdom) and EDF InternationalDirector of Edison (Italy) and transalpina di Energia (Italy)Member of the Supervisory Board of EnBW (Germany)

Outside the EDF GroupMember of the Supervisory Board of Dalkia and Morphosys (Germany)

•

•

•

•

Jérôme Contamine May 17, 2006


Senior Executive Vice-President of Veolia Environ-nement

Veolia GroupDirector of VE Services-Ré, Veolia transport, Veolia Propreté, Veolia Environmental Services Plc (United Kingdom), Veolia ES Holdings Plc (United Kingdom), and Veolia UK (United Kingdom)Member of the Supervisory Board of Veolia Eau and Dalkia FranceMember of Dalkia’s A and B Supervisory Boards

Outside the Veolia GroupChairman of Venao (United States)Director of Rhodia and Venac (United States)

•

•

•

••


CORPORAtE GOVERnAnCE4 Composition of the Board of Directors at December 31, 2006





Pierre-Alain De Smedt March 7, 2005


Chairman of FEBIAC (the Belgian Federation of the Car and two-wheeler Industries) and director of various companies in Belgium

Director of Belgacom, C.n.P. (Compagnie nationale à Portefeuille/A. Frère Group), Deceuninck Plastics, and AlcopaMember of the Executive Committee and Director of FEBIAC (Belgian Federation of the Car and two-wheeler Industries)Member of the Management Committee of FEB (Belgian Business Federation)

•

•

•

François Grappotte March 31, 2003


Honorary Chairman of Legrand S.A.

Legrand GroupChairman of Legrand S.A.S., Lumina Management S.A.S., and Legrand S.A.Director and Chief Executive Officer of Legrand Holding S.A. and Lumina Parent (Luxembourg)Director of B. ticino (Italy) and Legrand Española (Spain)

Outside the Legrand GroupDirector of BnP ParibasMember of the Supervisory Board of MichelinMember of the Banque de France Consultative Committee, the Administrative Board of F.I.E.E.C. (Fédération des Industries Électriques, Électroniques et de Communication), the Administrative Board of Gimelec (Groupement des industries de l’équipement électrique, du contrôle-commande et des services associés), and the Board of Promotelec (Promotion de l’installation électrique dans les bâtiments neufs et anciens)

•

•

•

•••

Philippe Guédon March 31, 2003


Managing Partner of Espace Développement

Yves-André Istel January 29, 1992


Senior Advisor to Rothschild, Inc.

Director of Compagnie Financière Richemont AG, Imperial Sugar Company, and tiedemann trust Company

•


CORPORAtE GOVERnAnCE 4Composition of the Board of Directors at December 31, 2006





Jean-Bernard Lafonta

December 7, 2001


Chairman of the Management Board of Wendel Investis sement

Wendel GroupChairman of the Supervisory Board of Editis HoldingChairman of the Supervisory Board of Bureau VeritasMember of the Supervisory Board of Oranje-nassau Groep B.V.Director of Legrand Holding and Legrand S.A.

Outside the Wendel GroupChairman of the Board of Directors of Winvest S.A. (Luxembourg)Legal Manager of Granit (SARL), JBMn (Luxembourg), and Winvest Conseil (Luxembourg)

•

•

•

•

•

•

Alain Minc July 4, 1986


Chairman of A.M. Conseil

Chairman of the Supervisory Board of Le MondeDirector of Fnac and Vinci

•

•

Véronique Morali March 31, 2003


Director and Chief Operating Officer of Fimalac

Fimalac GroupSole Director of FCBS GIEMember of the Board of Fimalac Inc., Fitch Ratings, Inc., and Fitch Risk Management, Inc.

Outside the Fimalac GroupDirector of Eiffage, Club Méditerranée, and Algorithmics (Canada)

••

•

Erich Spitz June 24, 1987


Advisor to thales

Thales GroupChairman of thales Avionics LcdDirector of thales Corporate Ventures

Outside the Thales GroupChairman of the Supervisory Board of novaled and RiberMember of the Management Board of ERACorrespondent member of the Académie des SciencesMember of the Académie des technologiesHonorary Chairman of European Industrial Research Management Association (EIRMA)

••

•

••

••


CORPORAtE GOVERnAnCE4 Statutory Auditors’ Report

Statutory Auditors’ Report prepared in accordance with article L.225-235 of the French Commercial Code (Code de commerce) on the report of the Chairman of the Board of Directors on internal control procedures relating to the preparation and processing of financial and accounting information

This is a free translation into English of the statutory auditors’ report issued in the French language and is provided solely for the

convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French

law and professional auditing standards applicable in France.

Valeo 43, rue de Bayen 75017 Paris

To the Shareholders,

In our capacity as statutory auditors of Valeo, and in accordance with article L. 225-235 of the French Commercial Code (Code de commerce),

we hereby report to you on the report prepared by the Chairman of your Company in accordance with article L. 225-37 of the French

Commercial Code for the year ended December 31, 2006.

It is for the Chairman to give an account, in his report, notably of the conditions in which the duties of the Board of Directors are prepared

and organized and of the internal control procedures in place within the company.

It is our responsibility to report to you our observations on the information set out in the Chairman’s report on the internal control procedures

relating to the preparation and processing of financial and accounting information.

We performed our procedures in accordance with professional guidelines applicable in France. These require us to perform procedures to

assess the fairness of the information set out in the Chairman’s report on the internal control procedures relating to the preparation and

processing of financial and accounting information. These procedures notably consisted of:

obtaining an understanding of the objectives and general organization of internal control, as well as the internal control procedures

relating to the preparation and processing of financial and accounting information, as set out in the Chairman’s report;

obtaining an understanding of the work performed to support the information given in the report.

On the basis of these procedures, we have no matters to report in connection with the information given on the internal control procedures

relating to the preparation and processing of financial and accounting information, contained in the report of the Chairman of the Board,

prepared in accordance with the last paragraph of article L. 225-37 of the French Commercial Code.

Neuilly-sur-Seine and Paris, February 12, 2007

•

•

The Statutory Auditors

Salustro Reydel

Member of KPMG InternationalPricewaterhouseCoopers Audit

Jean-Pierre Crouzet Emmanuel Paret Serge Villepelet Jean-Christophe Georghiou

Year ended December 31, 2006


CORPORAtE GOVERnAnCE 4


CORPORAtE GOVERnAnCE4


5InfoRmatIon on the company and Its capItal

General information about the issuer P. 1461. Legal provisions and Company bylaws ..............................................................................................................146

2. Corporate governance structure ..........................................................................................................................148

3. Compensation paid to senior managers and members of the Board of Directors ......................................160

4. Related party transactions ...................................................................................................................................164

5. Governmental, legal and arbitration proceedings ...........................................................................................164

6. Insurance and risk coverage ................................................................................................................................164

Fees paid by the Group to the Auditors and members of their networks P. 166

General information about the Company’s capital P. 1671. Changes in Valeo’s share capital .........................................................................................................................167

2. Authorized, unissued capital ...............................................................................................................................168

3. Share equivalents ..................................................................................................................................................169

4. Other securities ......................................................................................................................................................169

Current ownership structure P. 1721. Changes in ownership structure since 2004......................................................................................................172

2. Disclosure thresholds ............................................................................................................................................174

3. Shareholder identification ....................................................................................................................................174

Market for the Company’s securities P. 1761. Share performance over 18 months ...................................................................................................................176

2. Share buyback program and cancellation of treasury shares .........................................................................176

3. Dividends ................................................................................................................................................................177

Investor relations P. 1781. Individual shareholder relations .........................................................................................................................178

2. Institutional shareholder relations ......................................................................................................................178

3. Ownership structure ..............................................................................................................................................179

5. Per share data ........................................................................................................................................................180

6. Share price from January 1, 2002 through December 31, 2006 ....................................................................180

7. Monthly trading volumes .....................................................................................................................................181

Information on subsidiaries and affiliates P. 181

Person responsible for the registration document P. 184Person responsible for the information provided in the registration document .............................................184

Declaration by the person responsible for the registration document..............................................................184


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 General information about the issuer

General information about the issuer

1. Legal provisions and Company bylaws

Corporate name and registered office

The name of the Company is Valeo. Its registered office is at 43,

rue Bayen, 75017 Paris, France (tel.: +33 (0) 1 40 55 20 20).

Legal form and governing law – Corporate governance

Valeo is a joint-stock company (“société anonyme”) with a Board

of Directors. It is governed by French law, notably the provisions

of Section II of the French Commercial Code and Decree 67-236

dated March 23, 1967.

With a view to increasing the transparency of information disclosed

to the public, the Company has set up a number of procedures to

ensure that it complies with best corporate governance practices.

Further information is provided on page 131 in the report of the

Chairman of the Board of Directors on the conditions for preparing

and organizing the work conducted by the Board and internal

control procedures.

Date of incorporation and term

The Company was incorporated on February 10, 1923 and its term

was extended for a further 99 years on February 10, 1972.

Corporate purpose

The Company’s corporate purpose is as follows (Article 3 of the

bylaws):

The research and development, manufacture, sale, trading or

supply of any products, equipment or services for industry and

business purposes which may be manufactured, finished or

developed by the Company or other Valeo Group companies or

which may interest their customers;

Operations of any nature – including industrial, commercial,

financial and investing activities, or acquisitions and divestments

– which are directly or indirectly related to the corporate purpose

or designed to facilitate the development or realization thereof.

Registration particulars

The Company is registered at the Paris Companies Registry under

number 552 030 967.

Fiscal year

The Company’s fiscal year covers a twelve-month period from

January 1 to December 31.

Consultation of documents

The Company’s press releases and annual registration documents

filed with the AMF (including historical financial information

relating to the Company and the Group), as well as any updates

thereto can be accessed on the Company’s website at www.valeo.

com. Copies are also available on request from the Company’s

head office.

The bylaws, minutes of Shareholders’ Meetings, Statutory Auditors’

reports and all other corporate documents can be consulted at

Valeo’s head office in accordance with the law and the Company’s

bylaws.

Auditors

Statutory Auditors

PricewaterhouseCoopers Audit SA, represented by Serge

Villepelet and Jean-Christophe Georghiou – 63, rue de Villiers,

92200 Neuilly-sur-Seine, France.

- Member of the Compagnie régionale des Commissaires aux

comptes de Versailles.

- First appointed on March 31, 2003.

- Current term of office began on April 5, 2004 and expires at the

close of the General Shareholders’ Meeting to be held to approve

the financial statements for the year ending December 31,

2009.

Salustro Reydel, Member of KPMG International, represented by

Jean-Pierre Crouzet and Emmanuel Paret – Immeuble Le Palatin

– 3, cours du Triangle, 92939 Paris La Défense Cedex, France.



•

•


InFORMAtIOn On the COMPAny AnD ItS CAPItAL 5General information about the issuer

- First appointed on May 27, 1998.

- Current term of office began on April 5, 2004 and expires at the

close of the General Shareholders’ Meeting to be held to approve

the financial statements for the year ending December 31,

2009.

Alternate Statutory Auditors

Yves Nicolas – 63, rue de Villiers, 92200 Neuilly-sur-Seine,

France.



- First and current term of office began on April 5, 2004 and

expires at the close of the General Shareholders’ Meeting to be

held to approve the financial statements for the year ending

December 31, 2009.

Philippe Arnaud – 198, boulevard Malesherbes, 75017 Paris,

France.


comptes de Paris.

- First and current term of office began on April 5, 2004 and

expires at the close of the General Shareholders’ Meeting to be

held to approve the financial statements for the year ending

December 31, 2009.

Yves Nicolas and Philippe Arnaud were appointed as Alternate

Statutory Auditors on April 5, 2004. Philippe Arnaud replaced

Jean-Louis Mullenbach, who had been appointed by the General

Shareholders’ Meeting of May 27, 1998 for a six-year term.

Dividends

Each share entitles its holder to a proportion of income equal to

the proportion of capital represented by the share.

Distributable income is composed of net income for the year

less any prior year losses and amounts appropriated to the legal

reserve, plus any income carried forward. Subject to the provisions

of the law, shareholders in a General Meeting may decide to

distribute amounts taken from available reserves and/or retained

earnings. In this case, the related resolution approved by the

shareholders must clearly specify the reserve account from which

the distributed amounts are to be taken.

Shareholders may resolve to pay out a dividend only after

approving the financial statements for the year and noting

that amounts are available for distribution. Shareholders or the

Board of Directors set the applicable conditions for any dividend

payments.

The Board of Directors may decide to pay an interim dividend

before the financial statements are approved, subject to the

conditions set down by law.

At the General Meeting called to approve the financial statements,

shareholders may decide to offer a stock dividend alternative

•

•

•

representing all or part of the dividend, or interim dividend, as

provided for by law.

Dividends unclaimed after a period of five years from the date

they were made payable are paid to the French government.

Liquidation surpluses

Liquidation surpluses are allocated between the shareholders in

proportion to their interests in the Company’s capital.

General Shareholders’ Meetings

Ordinary and Extraordinary General Shareholders’ Meetings are

called and conduct business in accordance with the conditions

set down by law.

In accordance with Article 136 of Decree 67-236 dated March

23, 1967, as amended by Decree 2006-1566 of December 11,

2006, shareholders may participate in General Meetings subject

to submitting evidence of ownership of their shares. Share

ownership is evidenced by an entry in Valeo’s share register in the

name of the shareholder (or of the intermediary acting on their

behalf) or in the register of bearer shares held by an accredited

intermediary. Such entries must be recorded by 0 hours (Paris

time) on the third working day preceding the date of the Meeting.

In the case of bearer shares, the accredited intermediary shall

provide a participation certificate for the shareholders concerned,

which must be attached to the corresponding postal voting or

proxy form or to the admission card made out in the name of

the shareholder or in the name of the registered intermediary

representing the shareholder.

Subject to the above-mentioned conditions, all shareholders are

entitled to attend General Meetings provided they have settled

all capital calls related to their shares.

Shareholders who are unable to attend a meeting in person may

give proxy to their spouse or another shareholder or may cast

a postal vote. Alternatively, they may return the signed form of

proxy to the Company without naming a person to represent

them, in accordance with the applicable laws and regulations.

In compliance with the conditions set down by the applicable

law and regulations, shareholders may send proxy and postal

voting forms for General Meetings either in paper format or, if

authorized by the Board of Directors in the notice of meeting, in

electronic form.

Minutes of shareholders meetings are drawn up, and copies and

extracts thereof are certified and delivered, in accordance with

the law.



Double voting rights

Each shareholder has a number of votes corresponding to the

number of shares held or represented by proxy. However, since

the General Shareholders’ Meeting of June 16, 1992, article 23

of the Company’s bylaws provides that double voting rights are

attached to all fully-paid shares that have been registered in the

name of the same holder for at least four years. In the case of a

capital increase paid up by capitalizing reserves, income or share

premiums, the new registered shares allocated to a shareholder

in respect of existing shares with double voting rights will also

carry double voting rights from the date of issue. Double voting

rights are automatically stripped from any registered shares that

are converted into bearer shares or sold. However, registered

shares are not stripped of voting rights and the above four-year

qualifying period continues to run following the transfer of shares

included in the estate of a deceased shareholder, or in connection

with the settlement of the marital estate, or a donation inter vivos

to a spouse or relative in the direct line of succession. Double

voting rights may be removed at an Extraordinary Shareholders’

Meeting, subject to the approval of the shareholders entitled to

double voting rights, obtained at a special meeting held for the

purpose.

Changes in share capital and rights attached to shares

Any changes in the Company’s share capital or voting rights

attached to shares are subject to the applicable law as the

bylaws do not contain any specific provisions in relation to such

operations.

2. Corporate governance structure

2.1. executive Management

The Group’s Executive Management team includes the Chairman

and Chief Executive Officer, and Valeo’s Functional and Operational

Directors.

Chairman and Chief Executive Officer:

Thierry Morin

Term of office started on March 31, 2003 and expires at the

General Shareholders’ Meeting to be called to approve the 2006


At its meeting of March 31, 2003, Valeo’s Board of Directors

elected to combine the roles of Chairman of the Board of Directors

and Chief Executive Officer.

In his capacity as Chairman and Chief Executive Officer, Thierry

Morin has the broadest ranging powers to act in any circumstances

in the Company’s name. He exercises these powers within the

limits of the Company’s corporate purpose and subject to the

powers that the law specifically grants to Shareholders’ Meetings

or to the Board of Directors. Thierry Morin represents the Company

in its relations with third parties.

Functional Directors

Michel Boulain

Vice-President, Human Resources

Robert Charvier

Financial Controller, Industrial Products

Bernard Clapaud

Vice-President, Strategy

France Curis

Taxation Director

Jean-Luc Di Paola-Galloni

Chairman’s Delegate

Rémy Dumoulin

Investor Relations Director

André Gold

Technical Senior Vice-President

Martin Haub

Vice-President, Research & Development and Product

Marketing



Kazuo Kawashima

Quality Director

Hans-Peter Kunze

Senior Vice-President, Sales and Business Development

Géric Lebedoff

General Counsel

Serge Le Berre

Industrial Vice-President

Vincent Marcel

Vice-President, Financial Affairs and Strategic Operations

Kate Philipps

Communications Director

Xavier Véret

Financial Control Director

Operational Directors

Luc Blériot

Chief Operating Officer

Antoine Doutriaux

Vice-President, Electronics & Connective Systems Product Family

Pierre Ensch

Vice-President, Engine Cooling Product Family

Michel Giannuzzi

Vice-President, Wiper Systems Product Family

Claude Leïchlé

Vice-President, Lighting Systems Product Family

Alain Marmugi

Vice-President, Climate Control Product Family

Christian Marsais

Vice-President, Compressors Product Family

Christophe Périllat-Piratoine

Vice-President, Switches & Detection Systems Product Family

Orazio Ragni

Vice-President, Electrical Systems Product Family

Michael Schwenzer

Vice-President, Transmissions Product Family

Michel Serre

Vice-President, Security Systems Product Family

Henri Trintignac

Vice-President, Engine Management Systems Product Family

Robert de la Serve

Senior Vice-President, Valeo Service Activity

Léonard de la Seiglière

Vice-President, Independent Aftermarket Branch

Dirk Strothmann

Vice-President, Original Equipment Spares Branch

2.2. Board of Directors

2.2.1. Composition of the Board of Directors

The following table includes the names of the members of Valeo’s

Board of Directors at the filing date of this registration document,

together with their age, the date on which they were first

appointed, and the start and end dates of their current terms of

office. Information is also provided on the main positions that they

hold outside the Company and other directorships and positions

that they have held in companies other than Valeo subsidiaries

during the past five years.

The current directorships and positions set out below are those

held at January 31, 2007 except for Helle Kristoffersen for whom

the information is based on the date she was appointed as a

Director by the Board to fill the seat left vacant by Véronique

Morali.



Name/ business address

Number of Valeo

shares held

First appointed

Start of term of office

End of term of office

Main position

held within the Company

Main positions held outside

the Company

Other directorships and positions held in companies other than Valeo subsidiaries during the past five years

Thierry MorinAged 55Valeo43, rue Bayen – 75017 ParisFrance

4,300 March 21, 2001

March 31, 2003

General Shareholders’

Meeting to be called

to approve the 2006 financial

statements

Chairman and Chief executive

Officer

Management positions and directorships

in several Valeo Group subsidiaries (see p. 140)

Chairman of Valeo’s Management Board from May 9, 2001 to March 2003 when the Company changed its corporate governance structure to a company governed by a Board of DirectorsDirector of CeDeP* and Arkema*

•

•

Daniel CamusAged 55eDF – Direction Finance22-30 avenue de Wagram – 75382 ParisCedex 08France

200 May 17, 2006

May 17, 2006




statements

Chief Operating Officer in charge of

finance and international

development in the eDF group

EDF GroupChairman of the Board of Directors of eDF energy (United Kingdom)* and eDF International*Director of edison (Italy)*, transalpina di energia (Italy)*, and eDF trading (United Kingdom)Member of the Supervisory Board of enBW (Germany)*

Outside the EDF GroupDirector of Aventis Pharma, Inc. (United States)Member of the Management Board of hoechst Marion Roussel AG (Germany) and Aventis Pharma AG (Germany)Chairman of the Supervisory Board of Aventis Pharma Gmbh (Germany)Member of the Supervisory Board of Dalkia*, Morphosys (Germany)*, and Aventis Pharma SA

•

•

•

•

•

•

•

* Current directorships and positions.




Number of Valeo

shares held

First appointed



Main position



the Company


Jérôme ContamineAged 49Veolia environnement38, avenue Kléber – 75116 ParisFrance

2,000 May 17, 2006

May 17, 2006




statements

Senior executive Vice-President

of Veolia environnement

Veolia GroupChairman of the Board of Directors of Ve Services-RéDirector of Veolia transport*, Veolia Propreté*, Ve Services-Ré, Veolia UK (United Kingdom), Veolia environmental Services Plc (United Kingdom)*, and Veolia eS holdings Plc (United Kingdom)*Member of the Managing Board of Vivendi environnementMember of the Supervisory Board of Veolia eau* and Dalkia France*Member of Dalkia’s A and B Supervisory Boards*

Outside the Veolia GroupPresident and Chairman of VenAO (United States)*Director of Rhodia*, VenAC (United States)*, Statoil (norway), FCC espagne, and Cementos Portland espagne

•

•

•

•

•

•

•

Pierre-Alain De SmedtAged 63Résidence Château d’Issanhofstraat 31B –8400OostendeBelgium

200 March 7, 2005

March 7, 2005




statements

Chairman of FeBIAC

(the Belgian Federation of

the Car and two-wheeler

Industries) and director

of various companies in

Belgium

executive Vice-President of Renault SADirector of Belgacom*, C.n.P. (Compagnie nationale à Portefeuille/A. Frère Group)*, Deceuninck Plastics*, and Alcopa*Member of the executive Committee and Director of FeBIAC (the Belgian Federation of the Car and two-wheeler Industries)*Member of the Management Committee of FeB (the Belgian Business Federation)

•

•

•

•





Number of Valeo

shares held

First appointed



Main position



the Company


François GrappotteAged 71Legrand128, avenue du Maréchal de Lattre de tassigny –87045 Limoges CedexFrance

500 March 31, 2003

March 31, 2003




statements

honorary Chairman of Legrand S.A.

Legrand GroupChairman and Chief executive Officer of Legrand S.A.Chairman of Legrand S.A.S., Lumina Management S.A.S., B. ticino (Italy), and FIMAF S.A.S.Chief executive Officer of Legrand holding S.A., FIMeP S.A., and Lumina Parent (Luxembourg)Director of Legrand holding S.A.*, Legrand S.A.*, Legrand France*, B. ticino (Italy), Bufer elektrik (turkey), eltas elektrik (turkey), Legrand española (Spain), Lumina Parent (Luxembourg), Pass & Seymour (United States), the Wiremold Company (United States), and FIMeP S.A.

Outside the Legrand GroupDirector of BnP Paribas* and France telecomMember of the Supervisory Board of Michelin* and Galeries LafayetteMember of the Banque de France Consultative Committee*, the Administrative Board of F.I.e.e.C. (Fédération des Industries electriques, electroniques et de Communication), the Administrative Board of Gimelec (Groupement des industries de l’équipement électrique, du contrôle-commande et des services associés), and the Board of Promotelec (Promotion de l’installation électrique dans les bâtiments neufs et anciens)

•

•

•

•

•

•

•





Number of Valeo

shares held

First appointed



Main position



the Company


Philippe GuédonAged 73espace Développement 16, rue troyon 92316 SèvresFrance

100 March 31, 2003

March 31, 2003




statements

Managing Partner

of espace Développement

Chairman and Chief executive Officer of MatraChairman of the Supervisory Board of Matra Automobile

•

•

Yves-André IstelAged 71Rothschild, Inc.1251 Avenue of the Americas,51st floor new york, ny 10020, USA

500 January 29, 1992

March 31, 2003




statements

Senior Advisor to Rothschild,

Inc.

Rothschild GroupVice-Chairman of Rothschild, Inc.Director of Banque Rothschild & Cie

Outside the Rothschild Group

Director of Compagnie Financière Richemont AG*, Imperial Sugar Company*, Chalone Wine Group, and tiedemann trust CompanyMember of the Supervisory Board of Valeo

•

•

•

•

Helle Kristoffersen**Aged 43Alcatel-Lucent54 rue La Boétie75008 ParisFrance

- March 22, 2007

March 22, 2007




statements

Vice President, Corporate

Strategy Alcatel-Lucent

Vice President, economic Analysis of the Alcatel group

•

* Current directorships and positions.** Appointed to fill the seat left vacant by Véronique Morali.




Number of Valeo

shares held

First appointed



Main position



the Company


Jean-Bernard LafontaAged 45Wendel Investissement89, rue taitbout 75009 ParisFrance

100 December 7, 2001

March 31, 2003




statements

Chairman of the Management

Board of Wendel

Investissement

Wendel GroupChairman of the Supervisory Board of editis holding*Vice-Chairman and Chairman* of the Supervisory Board of Bureau VeritasChief executive Officer of Compagnie Générale d’Industrie et de Participations - CGIPexecutive Vice-President of Wendel InvestissementMember of the Supervisory Board of Oranje-nassau Groep B.V.*Director of Legrand holding*, Legrand S.A.*, Lumina Parent, Wendel Investissement, and Bureau VeritasPermanent representative of Sofu on the Supervisory Board of Bureau Veritas

Outside the Wendel GroupChairman of Banque DirecteChairman of the Board of Directors of Winvest S.A. (Luxembourg)*Legal Manager of Granit (SARL)*, JBMn (Luxembourg)*, and Winvest Conseil (Luxembourg)*Member of the General Management Committee of BnP ParibasMember of the Supervisory Board of ValeoDirector of Cap Gemini

•

•

•

•

•

•

•

•

•

•

•

•

•* Current directorships and positions.




Number of Valeo

shares held

First appointed



Main position



the Company


Alain MincAged 58A.M. Conseil10, avenue George V 75008 ParisFrance

500 July 4, 1986 March 31, 2003




statements

Chairman of A.M. Conseil

Chairman of the Supervisory Board of Le Monde*Chairman of Société des Lecteurs du MondeDirector of Fnac*, Vinci*, and yves Saint-Laurent S.A.Member of the Supervisory Board of ValeoMember of the Supervisory Board of Pinault-Printemps-Redoute

•

•

•

•

•

Erich SpitzAged 76thalesRD 128 –91767 Palaiseau CedexFrance

144 June 24, 1987

March 31, 2003




statements

Advisor to thales

Thales GroupChairman of thales Avionics Lcd*Director of thales Corporate Ventures*

Outside the Thales GroupChairman of the Supervisory Board of novaled* and Riber*Member of the Management Board of eRAMember of the Supervisory Board of ValeoCorrespondent member of the Académie des Sciences*Member of the Académie des technologies*honorary Chairman of the european Industrial Research Management Association (eIRMA)*

•

•

•

•

•

•

•

•




thierry Morin joined the Valeo Group in 1989 as Finance Director

of the Clutches Branch. He then became Finance Director of the

Engine Cooling Branch and subsequently Group Financial Control

Director. In 1997, he was appointed Deputy Managing Director and

Director of Financial and Strategic Operations. On June 5, 2000 he

was appointed Senior Vice-President in charge of Finance, Strategic

Operations and Information Systems and became a member of the

Management Committee. He was named Chairman of the Board

of Directors on March 21, 2001, Chairman of the Management

Board on May 9, 2001 and on March 31, 2003 was appointed as

Valeo’s Chairman and Chief Executive Officer.

Before joining Valeo, Thierry Morin was Assistant Director of the

ISD Division at Thomson Consumer Electronics in Los Angeles. He

also held various financial positions during ten years spent with

Schlumberger.

Thierry Morin has a Masters degree in Management from the

University of Paris-IX Dauphine.

Daniel Camus is Chief Operating Officer in charge of finance and

international development in the EDF group. He joined the EDF

group in 2002 after working in the chemicals and pharmaceuticals

industry for 25 years as part of the Hoechst-Aventis group in

Germany, the United States, Canada and France. He is a graduate

of the Paris Political Studies Institute (Institut d’Études Politiques de

Paris) and holds a doctorate in Economics. He is also an Associate

Professor in Management Sciences.

Jérôme Contamine joined Veolia in 2000 as Executive Vice-

President, Finance, before becoming Executive Vice President

responsible for cross-functional activities in 2002 and Senior

Executive Vice-President in 2003.

Between 1988 and 2000, he held several posts within the Elf

Group including Financing and Treasury Director (1991 to 1994),

Assistant Director, Europe and the USA for the Exploration and

Production Division, CEO of Elf Norway (1995-1998), and Head

of Continental European and Central Asian Operations for the

Exploration and Production Division (2000).

Jérôme Contamine graduated from École Polytechnique and École

Nationale d’Administration and is a special adviser to the French

Audit Commission (Cour des Comptes).

Pierre-Alain De Smedt is qualified as a Sales Engineer and

holds a Commercial and Financial Sciences degree from the

Université Libre de Bruxelles in Belgium. He began his career

in 1966 in the IT Department of Solvay before joining Bosch

Belgium in 1971 as Financial Director responsible for Purchasing,

Logistics, Organization and IT. He was appointed to the same

position within the Volkswagen group in 1973 and in 1985 was

nominated Chairman of the Board of Directors of the Volkswagen

subsidiary responsible for logistics, purchasing, organization and IT.

In 1988, he became a Director of Tractebel and Chairman of the

Executive Committee of the electricity companies Ebes, Intercom

and Unerg.

In 1991, Pierre-Alain De Smedt was appointed Managing Director

of Autolatina – the leading Latin American private company and a

joint venture between Volkswagen and Ford – and in 1997 he was

named Chairman of Seat, a subsidiary of the Volkswagen group.

In 1999, he joined Renault as Executive Vice-President, Industry

and Technology and is currently a member of the Executive

Committee of the Renault Group and of the Renault/Nissan

Alliance Board.

In 2006, he also took on the role of Chairman of the FEBIAC (the

Belgian Federation of the Car and Two-wheeler Industries).

François Grappotte is Honorary Chairman of Legrand S.A.

He joined Legrand S.A. in 1983 and went on to become Chief

Executive Officer and subsequently Chairman and CEO, a position

he held until December 31, 2003. He then served as Chairman

of the company until March 17, 2006.

After seven years at the French Ministry of Industry and Ministry

of Finance and the Economy from 1963 through 1970, François

Grappotte joined Rothschild Bank as a Deputy Director. He was

subsequently appointed Assistant Director and then Director

(1970-1972) before taking up the position of General Secretary

at La Compagnie Electromécanique (CEM) in 1973. He went on

to become the Chief Executive Officer of CEM, a position which

he held until 1983.

François Grappotte has a degree in law and post-graduate diplomas

in political economics and economic and financial sciences from

the Law Faculty of the University of Paris. He also graduated from

the Paris Political Studies Institute (Institut d’Études Politiques de

Paris) and École Nationale d’Administration (ENA).

Philippe Guédon has been Managing Partner of Espace

Développement since 2003. He joined Simca in 1956 as an

After-Sales Service Engineer and went on to become a Research

Engineer until 1965. He then joined Matra, where he also held

the post of Research Engineer, and in 1983 took on the position of

Technical Director. In that year he was appointed as Chairman and

Chief Executive Officer of Matra – a post he occupied until 2003.

Philippe Guédon was the designer of the Matra 530, the Bagheera,

the Rancho, the Murena, the Espace and the Avantime.

He graduated as an engineer from the Arts et Métiers school in

Angers, France in 1956.

yves-André Istel is currently Senior Advisor to Rothschild Inc. in

New York.

From 1964 to 1983 he was a Partner and Director of Kuhn, Loeb

Inc. and subsequently Lehman Bros. He then held the position of

Co-Chairman of First Boston International between 1984 and 1988

before taking up the post of Chairman of International Wasserstein

Perella between 1988 and 1992. He was then appointed as Vice-

Chairman of Rothschild Inc., a position he held from 1993 to

2002.

Yves-André Istel graduated from the University of Princeton in

1957.



Jean-Bernard Lafonta is currently the Chairman of the

Management Board of Wendel Investissement.

He began his career as an engineer and held various public

functions between 1986 and 1992, including within Ministerial

cabinets. In 1993 he joined the M&A team of Lazard Bank as

Deputy Managing Director in Paris. In 1996 he joined BNP as

Strategy Director working with Michel Pébéreau who in the same

year requested him to take responsibility for all of the Bank’s capital

markets activities. In 2000, he became a member of BNP Paribas’

General Management Committee and was appointed Chairman of

Banque Directe before joining the Wendel Investissement Group

as Director and Executive Vice-President in September 2001.

Jean-Bernard Lafonta graduated from École Polytechnique and has

an engineering degree from Corps des Mines de Paris.

Alain Minc has been the Chairman of A.M. Conseil since April

1991.

Earlier in his career, he held the following positions: Finance

Director of Compagnie de Saint-Gobain (1979-1986); Chairman

of the Orient-Gestion SICAV fund (1984-1985); Chairman of

Sofimatique (1979-1983); Chairman and CEO of Air Industrie (1982-

1984), then Director, Vice-Chairman and CEO and subsequently

Chairman of Cochery Bourdin et Chaussé (1985-1986); Chairman

of La Société des Lecteurs du Monde (1985-2003); CEO of Société

Générale d’Entreprises (1985-1986); Director and CEO (1986-

1989) and subsequently Vice-Chairman and CEO (1989) of Cerus;

Vice-Chairman and CEO of Dumenil Leblé S.A., renamed Cerus

(1989-1991).

Alain Minc graduated as a civil engineer (Ingénieur Civil des

Mines) and has post-graduate diplomas from the Paris Political

Institute (Institut d’Études Politiques de Paris) – Major 1971

– and École Nationale d’Administration (ENA) (Major – Economic

Administration – Léon Blum class 1975).

erich Spitz joined Compagnie Générale de TSF in 1958 (since

renamed Thomson-CSF). He began his career with the company

as Director of the Central Research Laboratory before becoming

Research and Development Director of the Thomson Group from

1983 to 1994.

Eric Spitz graduated from Prague Polytechnic University and holds

a doctorate in science.

On March 22, 2007 helle Kristoffersen was appointed by the

Board to fill the seat left vacant by Véronique Morali who has

stepped down. Shareholders are expected to be asked to ratify

Helle Kristoffersen’s appointment at the next General Shareholders’

Meeting.

Helle Kristoffersen is Vice President of Corporate Strategy and

Secretary of the Strategy Committee of the Alcatel-Lucent group.

She joined what was previously the Alcatel group in 1994 as Head

of Financial Operations.

Between 1989 and 1991 she worked as an analyst in the mergers

and acquisitions department at Banque Lazard & Cie before joining

the Bolloré group where she held the following positions: Deputy

Financial Director responsible for mergers and acquisitions, Head

of Operational Strategy for the Maritime Division and Head of

Mergers and Acquisitions reporting to the Chairman and CEO.

Helle Kristoffersen is a graduate of Ecole Normale Supérieure

and of Ecole Nationale de la Statistique et de l’Administration

Economique (ENSAE). She also holds a Masters degree in

Econometrics from Sorbonne University Paris I.

2.2.2. Declarations concerning members of the Board of Directors

As far as the Company is aware, there are no family relationships

between the members of the Board of Directors.

As far as the Company is aware, in the past five years, (i) none

of the members of the Board of Directors has received any

convictions for fraudulent offences, (ii) none of the members of

the Board of Directors has been involved in any bankruptcies,

receiverships or liquidations, (iii) no official public incriminations

and/or sanctions have been issued against any member of the

Board of Directors by statutory or regulatory authorities (including

designated professional bodies), and (iv) none of the members

of the Board of Directors has been disqualified by a court of law

from acting as a member of the administrative, management or

supervisory bodies of an issuer or from acting in the management

or conduct of the affairs of any issuer.

To the best of the Company’s knowledge there are no potential

conflicts of interest between the duties of the members of the

Board of Directors of Valeo and their private interests and/or any

other duties.

As far as the Company is aware, none of the members of the

Board of Directors has agreed to any restrictions concerning the

disposal of their holdings in the Company’s securities within a

certain period of time, other than the restrictions set down by law

or the Company’s bylaws or in the Company’s stock option, stock

grant or employee share ownership plans, under which certain

members of the Board of Directors have acquired shares.

To the best of the Company’s knowledge there are no

arrangements or understandings with major shareholders,

customers or suppliers pursuant to which any member of the

Board of Directors was selected as a Director or member of Valeo’s

Executive Management.

2.2.3. Service contracts between the members of the Board of Directors and the Company or any of its subsidiaries

No service contracts have been entered into between the

members of the Board of Directors and the Company or any

of its subsidiaries providing for benefits upon termination of

employment.



2.3. Organization and operation of the Board of Directors

On March 31, 2003, the Company’s Board of Directors adopted a

set of Internal Rules of Operation in line with the recommendations

set out in the Bouton report on promoting better corporate

governance in French listed companies.

These internal rules set out the Board’s modus operandi and the

procedures to be followed when appointing Board members.

They are applied alongside the provisions set down by law, the

applicable regulations and the Company’s bylaws.

2.3.1. Composition of the Board and appointment of Directors

The Company’s bylaws provide that the Board of Directors must be

made up of at least three and no more than eighteen members

(subject to any amendments in line with the applicable law). The

Board of Directors currently has eleven members. There are no

Directors elected by employees or any non-voting Directors.

Directors are appointed by shareholders in a General Meeting

on the recommendation of the Board of Directors, which in turn

receives proposals from the Nomination and Remuneration

Committee.

Members of the Board are appointed for renewable four-year

terms which expire at the close of the Annual Shareholders’

Meeting called to approve the accounts for the year in which

their terms expire. Where one or more seats on the Board

become vacant due to the death or resignation of any member

or members, the Board of Directors may appoint new members

on a temporary basis until the next Shareholders’ Meeting, in

accordance with the applicable legislation. The term of office of

the Chairman may not exceed his term of office as a Director.

The proportion of Board members over the age of 70 may

not exceed one third. This age limit provision applies both to

individuals and to permanent representatives of legal entities

holding directorships. The Chairman’s term of office expires at

the latest at the close of the General Shareholders’ Meeting held

to approve the accounts for the year in which he reaches his

seventieth birthday.

Directors may be removed from office by shareholders in a

General Meeting at any time.

2.3.2. Independent Directors

In accordance with its Internal Rules of Operation, each year prior

to the publication of the Annual Report, the Board of Directors

assesses the position of each Director with respect to the

independence criteria set out in the Internal Rules of Operation,

in line with the recommendations of the Bouton report. Under

these rules, independent Directors are those who do not have

any relations whatsoever with the Company, the Group or the

Group’s management that may compromise his or her ability to

exercise freedom of judgment.

In particular, independence is presumed to exist when a

Director:

(i) is not currently and has not been in the past five years, an

employee or a corporate officer of Valeo, or an employee or

Director of a company consolidated by Valeo;

(ii) is not a corporate officer in a company in which the

Company directly or indirectly holds a directorship, or in which

an employee appointed in that role or a corporate officer of

the Company (current or having been so in the past five years)

holds a directorship;

(iii) is not a customer, supplier, investment banker or commercial

banker which is material for the Company or the Group, or for

which the Company or Group represents a material proportion

of the entity’s activity;

(iv) does not have any close family ties with a corporate officer

of the Company;

(v) has not been an auditor of the Company in the past five

years;

(vi) has not been a Director of the Company for more than

twelve years on the date on which they were appointed to

their current term of office.

For Directors holding at least 10% of the Company’s capital or

voting rights, or representing a legal entity that holds such a stake,

the classification as independent takes into account the Company’s

ownership structure and any potential conflict of interests.

In application of these criteria, at its meeting of November 20,

2006, the Board of Directors noted that:

one Director holds the positions of Chairman and Chief Executive

Officer of the Company: Thierry Morin;

three Directors have been members of the Board of Directors

(and previously the Supervisory Board) for over twelve years:

Alain Minc, Yves-André Istel and Erich Spitz;

seven directors are independent based on the criteria set out in

the Board’s Internal Rules of Operation: Daniel Camus, Jérôme

Contamine, Pierre-Alain De Smedt, François Grappotte, Philippe

Guédon, Jean-Bernard Lafonta and Véronique Morali.

2.3.3. Roles and responsibilities of the Board of Directors

The Board of Directors represents all shareholders. It determines

the Company’s overall business strategies and oversees their

implementation. Subject to the powers expressly reserved for

Shareholders’ Meetings and within the limits of the corporate

purpose, the Board of Directors deals with any issues relating

to the efficient functioning of the Company and makes any and

all decisions relating thereto. The Board devotes one meeting

per year to reviewing the Group’s overall industrial and financial

strategies.

•

•

•



The Chairman convenes meetings of the Board as often as

required in the general interest of the Company and at least

once a quarter. The dates for the quarterly meetings are issued at

the beginning of each fiscal year at the latest. In 2006, the Board

of Directors held ten meetings with a 92% average attendance

rate (in person or by proxy).

Board meetings are chaired by the Chairman of the Board or, in

his absence, by any Director who has been temporarily authorized

to chair Board meetings, a Vice-Chairman or a Director appointed

for the role by the Board of Directors.

Board meetings are only validly constituted if at least half of the

members are present or deemed present (in accordance with the

law and the Company’s bylaws), excluding members attending

by proxy. Decisions are taken based on a majority vote of the

members present, deemed present, or represented, in accordance

with the law and the Company’s bylaws. Each member who is

present or represented has one vote and each member present

may only represent one other member. In the case of a split

decision, the Chairman has the casting vote.

Minutes are drawn up after each Board Meeting, which are signed

by the Chairman and one other Director.

In accordance with its Internal Rules of Operation, the Board of

Directors includes an assessment of Board performance on the

agenda of one meeting per year. In 2006, this assessment was

performed with the assistance of an external firm during the

last quarter of the year. A detailed questionnaire was sent to

all Directors concerning their assessment of the way in which

the Board operates and suggestions for improvement. The topics

covered included the operation and composition of the Board,

Directors’ access to information, the choice of issues discussed,

the quality of the discussions, and the general running of the

Board Committees. The Directors’ replies were analyzed and the

findings presented at the meetings of the Board held on February

12, 2007 and March 22, 2007. The results of this assessment are

provided on page 131 in the report of the Chairman of the Board

of Directors on the conditions for preparing and organizing the

work conducted by the Board and internal control procedures.

2.3.4. Directors’ rights and duties - Compensation

The Board’s Internal Rules of Operation impose certain duties on

Directors in order to ensure that they are aware of the rules

and regulations applicable to them, that conflicts of interest are

avoided, that they dedicate the necessary time and attention to

their function and that they respect the applicable law relating

to multiple directorships.

Members of the Board of Directors are also responsible for

ensuring that they have all the necessary information to carry

out their duties. To this end, the Chairman provides Directors

with the data and documents required in order for them to fully

perform their duties.

As compensation for the work carried out by Directors,

shareholders in a General Meeting may grant an annual fixed

amount of attendance fees which may be freely allocated

by the Board among its members. The Board may also grant

Directors exceptional compensation for specific assignments or

tasks entrusted to them. The Board of Directors is responsible for

setting the Chairman’s compensation.

Article 14 of the Company’s bylaws stipulates that each Director

must hold at least 100 Valeo registered shares throughout his or

her term of office.

On accepting their position, each member of the Board of Directors

and the Group’s Executive Management team agrees to a Code

of Conduct in relation to transactions involving the Company’s

securities. This Code sets out the legal and regulatory provisions

applicable to them in relation to declaring transactions concerning

those securities. It also specifies the periods during which

members of the Board and the Group’s Executive Management

team are prohibited from trading in the Company’s securities and

recalls the fact that they may not carry out any such transactions

based on insider information.

2.4. Board Committees

The Board of Directors has set up committees in order to

enhance its operation and to provide assistance with preparing

its decisions.

The following standing committees were originally created:

the Audit Committee, the Strategy Committee, the Nomination

Committee and the Remuneration Committee. Each of the Board

Committees is governed by a set of internal rules approved by

the Board of Directors.

At the Board meeting of December 14, 2006, the Nomination

Committee was merged with the Remuneration Committee

and the Strategy Committee was dissolved. The Board therefore

currently has two standing committees – the Audit Committee

and the Nomination and Remuneration Committee.

Further details relating to the composition and running of these

standing committees are provided on page 131 in the report

of the Chairman of the Board of Directors on the preparation

and organization of the Board’s work and internal control

procedures.



3. Compensation paid to senior managers and members of the Board of Directors

The Nomination and Remuneration Committee plays a central

role in determining the compensation paid to Valeo’s corporate

officers and members of the Board of Directors. It reviews

the compensation paid to corporate officers and makes

recommendations, especially in relation to the variable portion.

The Committee defines the rules used to set this variable portion,

taking into account the officers’ performance over the year and

the medium-term strategy of the Company and the Group. It

is also responsible for ensuring that these rules are applied. In

addition, the Nomination and Remuneration Committee provides

recommendations to the Board of Directors on the Group’s general

stock option policy and specific stock option grants, as well as

on pensions granted to corporate officers and all other forms of

benefits.

The Nomination and Remuneration Committee’s tasks also

encompass recommending to the Board an overall amount

of attendance fees payable to Directors to be submitted to

shareholders for approval, as well as rules relating to the allocation

of these fees and the individual amounts payable to each Director

based on their attendance record at meetings of the Board, and

where appropriate, Board Committees.

Finally, the Nomination and Remuneration Committee is informed

of the compensation policy applicable to the senior managers of

the Company and other Group companies who are not corporate

officers.

3.1. executive Management

3.1.1. Compensation paid to the Chairman and Chief Executive Officer

The Board of Directors sets the compensation paid by Valeo to

Thierry Morin, the Company’s Chairman and Chief Executive Officer,

based on recommendations provided by the Nomination and

Remuneration Committee.

Fixed compensation and benefits in kind

The total gross fixed compensation paid to Thierry Morin in 2006

came to 1,519,538 euros, including 19,251 euros in benefits

in kind which break down as follows: 12,401 euros for the

use of a company car and 6,850 euros in contributions to the

business leaders social welfare fund (Garantie Sociale des Chefs

d’Entreprise).

Variable compensation

Thierry Morin did not receive any variable compensation in

2006.

Attendance fees paid by the Company

In 2006, Thierry Morin received 35,000 euros in attendance fees

in his capacity as a Director of Valeo.

Compensation paid by controlled companies

Thierry Morin received total gross compensation of 120,883 euros

from companies controlled by Valeo (as defined in article L. 233-

16 of the French Commercial Code). This total was made up of

45,750 euros in attendance fees and 75,133 euros in contributions

to a pension fund.

Thierry Morin did not receive any benefits in kind in 2006 from

companies controlled by Valeo.

Stock options and shares awarded free of consideration

(share grants)


exchange regulations, the Board of Directors did not allocate

any stock options or share grants to Thierry Morin during 2005.

This allocation was deferred until March 2006, and comprised

150,000 stock options and 50,000 shares free of consideration,

in accordance with the following terms and conditions:

the purchase price of the shares to be issued on exercise of

the options is set at 33.75 euros. Half of the options granted

may be exercised as from March 3, 2008 and all of the options

may be exercised as from March 3, 2009. The shares obtained

on exercise of the options may not be sold before March 3,

2010. If the options are not exercised they will be forfeited on

March 2, 2014;

the vesting date for the shares awarded free of consideration

was set by the Board of Directors as June 3, 2008 subject to

the following conditions: (i) Thierry Morin must still hold an

•

•



employment contract or a corporate officer’s position within

the Valeo Group at June 3, 2008, and (ii) the achievement

of certain performance criteria concerning operating margin

targets for 2006 and 2007 (applicable to the vesting of 30,000

of the total shares granted).

For the same reasons as those described above, at its March

7, 2007 meeting, the Board of Directors granted Thierry Morin

200,000 stock options in relation to 2006, in accordance with the

following terms and conditions:

the purchase price of the shares to be issued on exercise of

the options is set at 36.97 euros. Half of the options granted

may be exercised as from March 7, 2009 and all of the options

may be exercised as from March 7, 2010. The shares obtained

on exercise of the options may not be sold before March 7,

•

2011. If the options are not exercised they will be forfeited on

March 6, 2015;

in accordance with French Act no. 2006-1770 issued on

December 30, 2006 relating to the promotion of employee

profit-sharing and share ownership, if Thierry Morin exercises

the stock options granted to him he will be required to hold, in

registered form, at least 75% of the number of shares issued on

exercise of said options until such time as he leaves his position.

The calculation of this 75% holding will be made after the sale

of the number of shares necessary to finance the exercise of the

options and pay the related taxes and transaction costs.

In 2006, Thierry Morin did not exercise any options granted in

previous years.

•

Compensation paid to the Chairman and Chief executive Officer over the last three years

The table below provides a breakdown of the total gross compensation and benefits paid to Thierry Morin over the last three years.

(In euros)

Compensation paid by the Company

Benefits in kind

Compensation paid by

controlled companies

Total gross compensation

and benefitsFixed portionVariable portion

Attendance fees

2004 1,272,760 150,000 35,000 17,892 116,922 1,592,574

2005 1,284,000 0 35,000 18,395 118,758 1,456,153

2006 1,519,538 0 35,000 19,251 120,883 1,694,672

Pension scheme

Thierry Morin is still a member of the supplementary pension

scheme set up for members of the former Management Board,

as approved by the Supervisory Board on October 17, 2002. This

system is designed to top up existing pension benefits (statutory

pension, ARRCO, AGIRC, etc.) to enable beneficiaries to acquire

benefits representing 2% of their final salary per year of service

with the Group. The total amount of pension benefits may not

exceed 60% of a beneficiary’s final salary and the scheme will

only apply to beneficiaries who have a minimum of 15 years’

service in the Valeo Group when they retire, and for whom

Valeo or one of its subsidiaries was their last employer at their

retirement date.

termination benefits

In the event that Thierry Morin leaves the Company, either by

way of a decision of the Board of Directors, or at his own initiative

in the event of a difference of opinion concerning the strategy

implemented by the Board further to a public tender offer, the

amount of his termination benefits will correspond to three times

his last annual compensation, excluding bonuses. Such termination

benefits will not be payable in the event of misconduct.

3.1.2. Total compensation paid to other Group executive managers

The total gross compensation paid to Valeo’s Functional and

Operational Directors in 2006 amounted to 10,820,943 euros,

compared with 10,438,062 euros in 2005 and 10,895,652 euros

in 2004. Of the 2006 total, 9,240,726 euros corresponded to

fixed compensation, 1,199,687 euros to variable compensation,

240,606 euros to benefits in kind, 45,735 euros to attendance

fees, and 94,189 euros to profit-sharing.

During the year, the Group’s Functional and Operating Directors

(excluding corporate officers) also received a total of 288,000

stock options.

3.2. Members of the Board of Directors

Directors receive attendance fees, which are paid every six

months. These fees are not, however, paid to Directors if their

average attendance at Board Meetings, or where applicable, at

Committee meetings is lower than 50% during the six months

in question.



The General Shareholders’ Meeting of March 31, 2003 set the

aggregate annual total of attendance fees paid to Directors at

450,000 euros, an amount which has remained unchanged since

that date.

In 2006, attendance fees were allocated as follows by the Board

of Directors: 20,000 euros to each Director and an additional

15,000 euros for each Director who is a member of one of the

Board Committees.

Total attendance fees paid by the Company to members of the Board of Directors amounted to 305,000 euros in 2006 (301,250 euros in

2005), breaking down as follows:

Amount in euros 2006 2005 2004

thierry Morin 35,000 35,000 35,000

Daniel Camus 10,000 - -

Jérôme Contamine 10,000 - -

Pierre-Alain De Smedt 35,000 18,750 -

François Grappotte 35,000 35,000 35,000

Philippe Guédon 35,000 35,000 35,000

erich Spitz 27,500 35,000 35,000

Alain Minc 35,000 35,000 35,000

Véronique Morali 27,500 35,000 10,000

Jean-Bernard Lafonta 35,000 35,000 35,000

yves-André Istel 20,000 27,500 25,000

Stock options granted to and exercised by members of the Board of Directors

Number of options granted/

exercised

Weighted average exercise

price Expiry dateDate of Board

MeetingOptions granted in 2006 by Valeo* and/or other Group companies

150,000 stock purchase options** €33.75 March 2, 2014 March 3, 2006

Options exercised in 2006 none

* No Group company other than Valeo issued stock options during the year.** In view of the prohibited periods under the applicable French stock exchange regulations, in 2005 the Board of Directors did not grant any stock options to Thierry

Morin in relation to that year. The 150,000 stock options with an exercise price of 33.75 euros set out in the table above were therefore allocated on March 3, 2006

in relation to 2005.

For the same reasons, at its March 7, 2007 meeting the Board of Directors granted Thierry Morin 200,000 stock purchase options for 2006 (see page 161).

Apart from Thierry Morin (see pages 160 and 161) and Yves- André

Istel, no other compensation or benefits were paid to members of

the Board of Directors during the year. Other than Thierry Morin,

no Directors hold stock options or were awarded share grants

during the year.

3.3. Information concerning stock options and share grants

3.3.1. Stock options granted and exercised during the year

No stock options were granted to Directors in 2006 apart from to Thierry Morin. In addition, no Board members exercised any stock options

during the year.



Stock options granted to and exercised by the ten employees with the highest number of options

Number of options granted/

exercised

Weighted average exercise

price Expiry dateDate of Board

meeting

Options granted in 2006 by Valeo* and/or other Group companies to the ten employees of Valeo or other Group companies receiving the highest number of options

175,000 ** stock purchase

options (16 beneficiaries***) €32.63 nov. 19, 2014 nov. 20, 2006

Options exercised in 2006 by the ten employees of Valeo or other Group companies exercising the highest number of options

26,500 stock subscription

options €27.31 - -

* No Group companies other than Valeo issued stock options during the year.** Out of a total of 1,309,250 stock options allocated.*** Thirteen beneficiaries received the same number of shares in second position.

3.3.2. Share grants

No share grants were made to members of the Board of Directors other than Thierry Morin in 2006.

Share grants to members of the Board of Directors

Number of shares received

free of consideration

Date of Board of Directors’ meeting

Shares granted free of consideration in 2006 by Valeo and/or other Group companies 50,000* March 3, 2006* In view of the prohibited periods under the applicable stock exchange regulations, in 2005 the Board of Directors did not grant any shares free of consideration to

Thierry Morin relating to that year. The 50,000 shares concerned were therefore granted on March 3, 2006. The vesting date for these shares was set by the Board of

Directors as June 3, 2008 subject to the following conditions: (i) Thierry Morin must still hold an employment contract or a corporate officer’s position within the Valeo

Group at that date, and (ii) the achievement of performance criteria concerning operating margin targets for 2006 and 2007 applicable to the vesting of 30,000 of the

total shares granted.

In accordance with the authorization granted in the fifteenth

resolution of the May 3, 2005 General Shareholders’ Meeting,

on November 20, 2006 the Board of Directors granted 100,000

Valeo shares free of consideration to a restricted number of high-

potential managers, excluding corporate officers.

Share grants to the ten employees receiving the highest number of shares without consideration

Number of shares received

free of consideration

Date of Board of Directors’ meeting

Shares granted free of consideration in 2006 to the ten employees of Valeo or related entities as defined in article L. 225-197-2 of the French Commercial Code, who received the highest number of such shares 18,500 nov. 20, 2006

The vesting date for these shares was set by the Board of Directors

as November 20, 2009 (i.e. three years from the Board meeting

at which the share grants were decided), provided that the

beneficiaries hold an employment contract or a corporate officer’s

position within the Valeo Group at that date.

Provided the above-mentioned condition is met, the beneficiaries

will become the owners of the shares granted free of consideration

on the vesting date and will have the same rights in relation

thereto as all other shareholders. They may not, however, sell

the shares received for a period of two years as from the vesting

date.

In addition, at its March 7, 2007 meeting, the Board of Directors

granted 100,000 shares free of consideration to some one

hundred high-potential managers (excluding corporate officers),

in accordance with the same terms and conditions as above. The

vesting date for these shares was set as March 7, 2010.



5. Governmental, legal and arbitration proceedings

To the best of Valeo’s knowledge, during the past twelve months

there were no governmental, legal or arbitration proceedings,

including proceedings in process, pending or expected, that may

have, or have had in the recent past, a significant impact on the

financial position or profitability of the Company or the Group.

6. Insurance and risk coverage

The Group’s insurance strategy is strongly rooted in risk prevention

and protection, and is aimed at covering the major risks to which

Valeo is exposed. The Group self-insures recurring risks with a

view to optimizing insurance costs.

All Group companies have taken out insurance policies with

first-rate insurance companies for all major risks which could

have a material impact on their business, results or assets and

liabilities.

The risks covered include property damage, business interruption,

merchandise and equipment transportation, third party liability,

and occupational illnesses and accidents.

4. Related party transactions

4.1. transactions carried out during 2006

At its meeting of October 6, 2006 the Board of Directors authorized

the signature of a consulting agreement with Yves-André Istel,

covering assistance and advisory services provided in connection

with the Group’s merger with Visteon.

Also during the year, Valeo carried out further transactions with

its Spanish subsidiaries as part of the implementation of the

2004 Valeorizon international employee stock ownership plan.

These transactions were authorized by the Board of Directors at

its meeting of October 18, 2004. In addition, the brand licensing

agreements entered into between the Company and several of

the Group’s operating subsidiaries – which were authorized by

the Board of Directors on December 15, 2005 (see opposite)

– remained in force in 2006.

4.2. transactions carried out during 2004 and 2005

At its meeting of December 15, 2005, the Board of Directors

authorized the signature of brand licensing agreements between

the Company and several of the Group’s operating subsidiaries.

On October 18, 2004 the Board of Directors authorized Valeo

España SA, Valeo Service España SA, Valeo Iluminacion SA and

Valeo Termico SA, to grant stock options exercisable for Valeo

shares under the 2004 Valeorizon international employee stock

ownership plan.

Further details on these transactions can be found in the Statutory

Auditors’ special reports on regulated agreements relating to

2004 and 2005 and incorporated by reference in this registration

document.

3.4. Pensions and other post-employment benefits

At December 31, 2006, the total amount of provisions set aside by

Valeo and its subsidiaries for the payment of pensions and other

post-employment benefits to members of the Board of Directors

and other members of the Group’s Executive Management team

came to 14 million euros, versus 13 million euros one year

earlier.

In 2006, the total expense recorded by Valeo and its subsidiaries

for the payment of these benefits to former Board members and

other Group executive managers came to 84,154.97 euros.



The table below provides details of the coverage limits by type of risk:

Type of insuranceCoverage limit

(In euros)

Property damage/business interruption 1 billion

General liability and product and environmental liability 200 million

Merchandise and equipment transportation 4,575 million

Directors' and Officers’ liability 60 million

employee-related liability claims 50 million

Property damage cover is based on replacement value and business interruption cover on the margin lost over one year.

In 2006, insurance premiums paid out by the Group in connection with its insurance coverage totaled 12.1 million euros.


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 Fees paid by the Group to the Auditors and members of their networks

Fees paid by the Group to the Auditors and members of their networks

2006 (In millions of euros) PricewaterhouseCoopers % KPMG %

AuDIT

Issuer - -

Consolidated subsidiaries (4.7) (2.7)

Statutory audit and contractual audits (4.7) (2.7)

Issuer - -


Audit-related services (1.6) (0.7)

Sub-total – Audit (6.3) 88% (3.4) 89%OTHER SERVICES PROVIDED BY MEMBERS OF THE AuDITORS’ NETWORKS TO CONSOLIDATED SuBSIDIARIES

Legal and tax advisory services (0.9) (0.4)

Other - -

Sub-total – Other services (0.9) 12% (0.4) 11%

TOTAL (7.2) (3.8)

2005 (In millions of euros) PricewaterhouseCoopers % KPMG %

AuDIT

Issuer - -


Statutory audit and contractual audits (5.1) (2.2)

Issuer - -


Audit-related services (2.9) (0.5)

Sub-total – Audit (8.0) 92% (2.7) 90%OTHER SERVICES PROVIDED BY MEMBERS OF THE AuDITORS’ NETWORKS TO CONSOLIDATED SuBSIDIARIES

Legal and tax advisory services (0.7) (0.3)

Other - -

Sub-total – Other services (0.7) 8% (0.3) 10%

TOTAL (8.7) (3.0)


InFORMAtIOn On the COMPAny AnD ItS CAPItAL 5General information about the Company’s capital

General information about the Company’s capital

1. Changes in Valeo’s share capital

At December 31, 2006, Valeo’s share capital totaled

232,741,851 euros, represented by 77,580,617 common shares

with a par value of 3 euros each, all in the same class and all

fully paid-up. The Valeo share is quoted on the Eurolist market

of Euronext.

To the best of the Company’s knowledge, none of these shares

have been pledged.

Changes in capital since December 31, 2002 are as follows:

Changes (In millions of euros)

Year Type of operationPar Value Prermium Total Number of

sharesTotal number

of shares

2002Issuance of shares on exercise of

stock options 1 11 12 277,125 83,333,728

Capital reduction by cancellation of treasury stock (4) (47) (51) 1,200,000 82,133,728

2003 - - - - - 82,133,728

2004 employee share issue 5 28 33 1,575,296 83,709,024


stock options - 1 1 51,333

Capital reduction further to public tender offers (19) (233) (252) (6,250,000) 77,510,357


stock options - 2 2 70,260 77,580,617

In 2004, Valeo set up an international employee stock ownership

plan entitled “Valeorizon 2004” and carried out an employee share

issue under an authorization given at the Annual Shareholders’

Meeting of April 5, 2004. The issue was described in an information

memorandum registered with the French securities regulator

(Autorité des marchés financiers - AMF) on August 27, 2004 under

number 04-738. As a result of this operation, on December 16,

2004, Valeo placed on record a capital increase through the issue

of 1,575,296 new shares, including 400,653 subscribed by Société

Générale in order to offer employees of subsidiaries in certain

countries outside France a leveraged formula equivalent to that

offered through a corporate mutual fund. The shares were issued

without pre-emptive subscription rights for existing shareholders,

at a price of 23.65 euros per share, representing a 20% discount

to the average of the opening prices quoted for Valeo shares over

the twenty trading days preceding the Board of Directors’ decision

setting the opening date of the offer period.

During 2005, Valeo bought back 6,250,000 shares from the

Company’s shareholders, at a price of 40 euros each, representing

approximately 7.5% of the Company’s capital. The shares were

purchased under a public share buyback offer and a simplified

public tender offer, described in an information memorandum

registered with the AMF on April 28, 2005 under number 05-323.

The offer period ended on June 3, 2005 and on June 20, 2005

the Board of Directors canceled the acquired shares and reduced

the Company’s capital by 18,750,000 euros, representing the par

value of the shares.


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 General information about the Company’s capital

2. Authorized, unissued capital

Securities concerned Date of Shareholders’ Meeting (duration and expiry of authorization)

Maximum amount of issue

Maximum capital increase

utilizations of authorizations

during the year

Issues with pre-emptive subscription rights for existing shareholders

Issuance of shares and/or share equivalents (A) AGM of May 3, 2005 – eighth resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007)

1.52 billion euros worth of debt securities(A)+(C)+(G)

ceiling = 2 billion euros

76.22 million euros (A)+(B)+(C)+(D)+(e)+(F)+

(G) ceiling = 180 million euros

none

Capital increase paid up by capitalizing income, retained earnings or additional paid-in capital (B) AGM of May 3, 2005 – eleventh resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007)



none

Issues without pre-emptive subscription rights for existing shareholders

Issuance of shares and/or share equivalents (C) AGM of May 3, 2005 – ninth resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007)

1.52 billion euros worth of debt securities(A)+(C)+(G)




none

Issuance of shares for the purpose of stock-for-stock exchanges. AGM of May 3, 2005 – tenth resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007)

10% of the Company’s share capital(A)+(B)+(C)+

(D)+(e)+(F)+ (G) ceiling = 180 million euros

none

Issuance of shares to members of the employee stock ownership plan (e) AGM of May 3, 2005 – thirteenth resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007)



none

Employee stock options and share grants

Options to purchase new shares AGM of April 5, 2004 – twelfth resolution (authorization given for a maximum of 38 months, expiring on June 5, 2007)

1,500,000 shares* none

Share grants (F) AGM of May 3, 2005 – fifteenth resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007)

the number of new or existing shares granted

free of consideration may not exceed 10% of the

Company’s capital.

(A)+(B)+(C)+(D)+(e)+(F)+ (G) ceiling

= 180 million euros

163,000 existing shares granted free of

consideration

Issues with or without pre-emptive subscription rights for existing shareholders

Issuance of shares under a greenshoe option, with or without pre-emptive subscription rights for existing shareholders (G) AGM of May 3, 2005 – twelfth resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007)

Issue capped at 15% of the initial issue 1.52

billion euros worth of debt securities(A)+(C)+(G)


(A)+(B)+(C)+(D)+(e)+(F)+ (G) ceiling

= 180 million euros

none

* * The twelfth resolution of the Combined Annual and Extraordinary Shareholders’ Meeting of April 5, 2004 authorized the Board of Directors to grant stock purchase

and/or subscription options. At the Combined Annual and Extraordinary Shareholders’ Meeting of May 3, 2005, the authorization to grant stock purchase options

was renewed. The 1,500,000 ceiling mentioned in the table above applies to the aggregate amount of shares allocated on the exercise of either stock purchase

options or stock subscription options. The 2004 authorization was used during that year to grant 1,123,200 stock subscription options and 280,800 stock purchase

options.



3. Share equivalents

3.1. Bonds convertible into new shares and/or exchangeable for existing shares (OCeAnes)

Under the terms of the authorization granted by the General

Shareholders’ Meeting of June 10, 2002 (and confirmed on

March 31, 2003 when the Company’s management structure

was changed), on July 25, 2003 Valeo issued 9,975,754 bonds

convertible into new shares and/or exchangeable for existing shares

(OCEANEs) with a nominal value of 46.40 euros each, representing

an aggregate nominal value of 462,874,985.60 euros.

These bonds – which mature on January 1, 2011 – are quoted on

the Eurolist market of Euronext. They bear interest at 2.375% per

annum and since August 4, 2003 may be exercised at any time.

The bond issue is described in detail in the prospectus registered

with the Commission des Opérations de Bourse on July 25, 2003

under number 03-707.

On June 20, 2005, the Board of Directors adjusted the exercise

conditions of the OCEANE bonds following the public share buyback

offer and simplified public tender offer carried out in May and June

2005, which resulted in Valeo purchasing its own shares at an

amount higher than the publicly quoted price. This adjustment

was made in order to maintain the rights of the bondholders in

accordance with article 242-11 of the March 23, 1967 Decree

and with the OCEANE bond issue contract. Consequently, the

conversion/exchange ratio applicable to the OCEANE bonds was

amended from 1 share for 1 bond to 1.013 shares for 1 bond.

At March 15, 2007, all of the OCEANE bonds were outstanding

and were convertible and/or exchangeable for 10,105,439

shares, taking into account the adjustment due to the public share

buyback offer and simplified public tender offer.

3.2. Stock option plans

The table on page 171 and 172 presents the stock option plans

put in place since 2000.

In accordance with article 174-9-A of the Decree dated March 23,

1967, following the public share buyback offer and simplified

public tender offer, on June 20, 2005 the Board of Directors

adjusted the number of shares underlying the Company’s stock

options. As a result, the exercise ratio was raised from 1 share to

1.01 shares for 1 stock option, with the number of shares to be

allocated on the exercise of options rounded up to the nearest

whole number.

At December 31, 2006, 2,698,217 stock purchase options were

outstanding, exercisable for 2,704,457 existing shares (including

6,240 related to the public share buyback offer and simplified

public tender offer), and 3,706,313 stock subscription options

were outstanding, exercisable for 3,744,050 new shares (including

37,737 related to the public share buyback offer and simplified

public tender offer).

4. Other securities

Under the terms of the authorization granted by the General

Shareholders’ Meeting of May 27, 1998, Valeo issued 500 million

euros worth of bonds on July 13, 2001 maturing on July 13, 2006,

with a fixed annual interest rate of 5.625%. These bonds were

redeemed at maturity.

The General Shareholders’ Meeting of June 10, 2002 granted

the Management Board a five-year authorization in its sixth

resolution to issue bonds subject to a ceiling of 2 billion euros.

This authorization – which was confirmed on March 31, 2003 at

the time of the change in Valeo’s management structure – expires

on June 10, 2007.

The Board of Directors used the above authorization to set up a

Euro Medium Term Notes (EMTN) program in October 2002, which

has been regularly renewed since. Under the program set up on

March 11, 2005, Valeo issued 600 million euros worth of notes

on June 24, 2005. The notes have an eight-year term and bear

fixed interest of 3.75%.


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 General information about the Company’s capital

Stock option and Share grant planS in force at december 31, 2006

Impact of tender

offers (56,330 at

June 21, 2005)

No. of shares to be

subscribed or

purchasedResidual grantees

Date of Shareholders’ Meeting

No. of options Term Date (1)

Exercice price

No. of grantees

No. of options

O/w granted to corporate

officers

O/w granted to Executive

man. excl corp. officers

O/w granted to top ten

grantees (2)Conditional

options Start date of exercise periodExpiry

date

Options out at

12/31/2005

Options exercised in

2006

Options exercised at

12/31/2006 (aggregate)

Options cancelled in

2006

Options cancelled at

12/31/2006(aggregate)

Options outstanding

at 12/31/2006

Stock subscription option plans in force at December 31, 2006

05/27/98 500,000 6 years

04/12/00 54.52 € 1 37,500 35,625 0 0 35,625 357 100% conditional 04/11/06 35,625357

00

00

35,625357

37,500357

00

00

0

05/25/00 60.70 € 1 50,000 50,000 0 0 0 500 100% immediately 05/24/06 50,000500

00

00

50,000500

50,000500

00

00

0

122,875 0 0 10/16/06 0 0 0 0 122,875 0 0 0

05/25/99 500,000 6 years

10/17/00 48.00 € 1,084 500,000 0 0 8,28750%-2 years; 100%-3 years 10/16/06 360,000 0 0 360,000 500,000 0 0 594

05/25/00 800,000 8 years

677,125 0 210,000 154,000 0 10/16/08 442,5008,115

0 0 27,0003,942

261,6254,114

415,5004,173

419,673

03/21/01 55.82 € 2 80,000 80,000 0 0 0 800 100% immediately 03/20/09 80,000800

0 0 00

00

80,000800

80,800 2

12/07/01 42.48 € 5 600,000 600,000 0 0 300,000 3,000 50% immediately; 50% conditional

12/06/09 300,000 0 0 0 300,000 300,000 303,000 5

05/09/01 1,000,000 8 years

3,000 0 0 3,000

12/10/01 42.69 € 213 442,875 0 140,000 118,000 0 3,455 50%-2 years; 100%-3 years 12/09/09 331,8003,340

0 0 33,000332

144,075447

298,8003,008

301,808 130

06/10/02 1,500,000 8 years

07/01/02 43.84 € 699 420,000 0 2,500 96,700 0 2,724 50%-2 years; 100%-3 years 06/30/10 264,0002,640

0 0 25,200252

181,200336

238,8002,388

241,188 474

11/25/02 28.30 € 229 600,000 0 159,500 107,500 0 4,568 50%-2 years; 100%-3 years 11/24/10 434,7054,348

30,455305

53,750385

54,500545

196,500685

349,7503,498

353,248 153

03/31/03 23.51 € 755 700,000 160,000 52,750 44,000 0 6,022 50%-2 years; 100%-3 years 03/30/11 571,425 35,300 63,125 34,375 135,125 501,750 506,817 549

03/31/03 1,500,000 8 years

5,789 362 495 360 460 5,067

11/06/03 32.91 € 1,005 780,000 61,000 117,766 77,395 0 7,185 50%-2 years; 100%-3 years 11/05/11 628,1936,932

00

00

54,240612

206,047865

573,9536,320

580,273 748

04/05/04 1,500,000 8 years

11/08/04 28.46 € 1,094 1,123,200 160,000 169,600 134,400 0 10,682 50%-2 years; 100%-3 years 11/07/12 1,033,36010,339

3,80038

3,80038

81,800818

171,6401,161

947,7609,483

957,243 907

TOTAL STOCK SuBSCRIPTION PLANS 6,133,575 1,146,625 852,116 731,995 335,625 47,580 4,531,60846,160

69,555705

120,675918

755,7407,718

2,183,7128,925

3,706,31337,737

3,744,050

Stock purchase option plans in force at December 31, 2006

03/31/03 1,500,000 8 years

11/06/03 32.91 € 1,005 500,000 39,000 75,484 49,605 0 4,263 50%-2 years; 100%-3 years 11/05/11 402,4574,116

00

00

34,760356

132,303503

367,6973,760

371,457 748

04/05/04 1,500,000 8 years

11/08/04 32.74 € 1,094 280,800 40,000 42,400 33,600 0 2,787 50%-2 years; 100%-3 years 11/07/12 258,3402,694

00

00

20,450214

42,910307

237,8902,480

240,370 907

05/03/05 4,500,000 8 years

11/17/05 32.32 € 1,082 650,000 0 94,300 48,900 0 50%-2 years; 100%-3 years 11/16/13 650,000 0 0 53,620 53,620 596,380 596,380 1,028

03/03/06 33.75 € 2 187,000 150,000 37,000 0 0 50%-2 years; 100%-3 years 03/02/14 0 0 0 0 187,000 187,000 2

11/20/06 32.63 € 1,298 1,309,250 0 251,000 175,000 0 50 %-2 ans ; 100 %-3 ans 11/19/14 0 0 0 0 1,309,250 1,309,250 1,298

TOTAL STOCK PuRCHASE PLANS

2,927,050 229 000 500,184 307,105 0 7,050 1,310,7976,810

00

00

108,830570

228,833810

2,698,2176,240

2,704,457

Share grant plans in force at December 31, 2006

05/03/05 4,500,000 - 11/17/05 Price at 02/17/08

1,082 600,000 0 141,450 73,350 300,000 Vesting period: 2 years 3 mths50% cond (½ based on 2006 perf.; ½ based on 2007 perf.*)

600,000 0 0 58,130 58,130 541,870 541,870 1,028

03/03/06 Price at 06/03/08

2 63,000 50,000 13,000 0 36,500 Vesting period: 2 years 3 mths50% cond (½ based on 2006 perf.; ½ based on 2007 perf.*)

0 0 0 0 0 63,000 63,000 2

11/20/06 Price at 11/20/09

116 100,000 0 0 18,500 0 Vesting period: 3 years 0 0 0 0 0 100,000 100,000 116

TOTAL SHARE GRANT PLANS 763,000 50,000 154,450 91,850 336,500 0 600,000 0 0 58,130 58,130 704,870 704,870

(1) Date of board of Directors/Supervisory Board/Management Board meeting.(2) Including Directors who are not corporate officers.

On March 7, 2007, the Board of Directors granted 250,000 stock purchase options with an exercise price of 36.97 euros, including 200,000 granted to Thierry Morin

that are subject to lock-up provisions as described in paragraph 3.1.1 on page 161, and 50,000 to another of the Group’s executive managers (non-corporate officer).

On the same date, the Board also granted 100,000 shares free of consideration to a limited number of high-potential managers.

* 2006 performance: the Group’s consolidated operating margin before non-recurring expenses as a % of total income from operations ≥ 4.5%

* 2007 performance: the Group’s consolidated operating margin before non-recurring expenses as a % of total income from operations ≥ 5%.

Public share buyback/simplified public tender offer.



Impact of tender

offers (56,330 at

June 21, 2005)

No. of shares to be

subscribed or

purchasedResidual grantees

Date of Shareholders’ Meeting

No. of options Term Date (1)

Exercice price

No. of grantees

No. of options

O/w granted to corporate

officers

O/w granted to Executive

man. excl corp. officers

O/w granted to top ten

grantees (2)Conditional

options Start date of exercise periodExpiry

date

Options out at

12/31/2005

Options exercised in

2006

Options exercised at

12/31/2006 (aggregate)

Options cancelled in

2006

Options cancelled at

12/31/2006(aggregate)

Options outstanding

at 12/31/2006

Stock subscription option plans in force at December 31, 2006

05/27/98 500,000 6 years

04/12/00 54.52 € 1 37,500 35,625 0 0 35,625 357 100% conditional 04/11/06 35,625357

00

00

35,625357

37,500357

00

00

0

05/25/00 60.70 € 1 50,000 50,000 0 0 0 500 100% immediately 05/24/06 50,000500

00

00

50,000500

50,000500

00

00

0

122,875 0 0 10/16/06 0 0 0 0 122,875 0 0 0

05/25/99 500,000 6 years

10/17/00 48.00 € 1,084 500,000 0 0 8,28750%-2 years; 100%-3 years 10/16/06 360,000 0 0 360,000 500,000 0 0 594

05/25/00 800,000 8 years

677,125 0 210,000 154,000 0 10/16/08 442,5008,115

0 0 27,0003,942

261,6254,114

415,5004,173

419,673

03/21/01 55.82 € 2 80,000 80,000 0 0 0 800 100% immediately 03/20/09 80,000800

0 0 00

00

80,000800

80,800 2

12/07/01 42.48 € 5 600,000 600,000 0 0 300,000 3,000 50% immediately; 50% conditional

12/06/09 300,000 0 0 0 300,000 300,000 303,000 5

05/09/01 1,000,000 8 years

3,000 0 0 3,000

12/10/01 42.69 € 213 442,875 0 140,000 118,000 0 3,455 50%-2 years; 100%-3 years 12/09/09 331,8003,340

0 0 33,000332

144,075447

298,8003,008

301,808 130

06/10/02 1,500,000 8 years

07/01/02 43.84 € 699 420,000 0 2,500 96,700 0 2,724 50%-2 years; 100%-3 years 06/30/10 264,0002,640

0 0 25,200252

181,200336

238,8002,388

241,188 474

11/25/02 28.30 € 229 600,000 0 159,500 107,500 0 4,568 50%-2 years; 100%-3 years 11/24/10 434,7054,348

30,455305

53,750385

54,500545

196,500685

349,7503,498

353,248 153

03/31/03 23.51 € 755 700,000 160,000 52,750 44,000 0 6,022 50%-2 years; 100%-3 years 03/30/11 571,425 35,300 63,125 34,375 135,125 501,750 506,817 549

03/31/03 1,500,000 8 years

5,789 362 495 360 460 5,067

11/06/03 32.91 € 1,005 780,000 61,000 117,766 77,395 0 7,185 50%-2 years; 100%-3 years 11/05/11 628,1936,932

00

00

54,240612

206,047865

573,9536,320

580,273 748

04/05/04 1,500,000 8 years

11/08/04 28.46 € 1,094 1,123,200 160,000 169,600 134,400 0 10,682 50%-2 years; 100%-3 years 11/07/12 1,033,36010,339

3,80038

3,80038

81,800818

171,6401,161

947,7609,483

957,243 907

TOTAL STOCK SuBSCRIPTION PLANS 6,133,575 1,146,625 852,116 731,995 335,625 47,580 4,531,60846,160

69,555705

120,675918

755,7407,718

2,183,7128,925

3,706,31337,737

3,744,050

Stock purchase option plans in force at December 31, 2006

03/31/03 1,500,000 8 years

11/06/03 32.91 € 1,005 500,000 39,000 75,484 49,605 0 4,263 50%-2 years; 100%-3 years 11/05/11 402,4574,116

00

00

34,760356

132,303503

367,6973,760

371,457 748

04/05/04 1,500,000 8 years

11/08/04 32.74 € 1,094 280,800 40,000 42,400 33,600 0 2,787 50%-2 years; 100%-3 years 11/07/12 258,3402,694

00

00

20,450214

42,910307

237,8902,480

240,370 907

05/03/05 4,500,000 8 years

11/17/05 32.32 € 1,082 650,000 0 94,300 48,900 0 50%-2 years; 100%-3 years 11/16/13 650,000 0 0 53,620 53,620 596,380 596,380 1,028

03/03/06 33.75 € 2 187,000 150,000 37,000 0 0 50%-2 years; 100%-3 years 03/02/14 0 0 0 0 187,000 187,000 2

11/20/06 32.63 € 1,298 1,309,250 0 251,000 175,000 0 50 %-2 ans ; 100 %-3 ans 11/19/14 0 0 0 0 1,309,250 1,309,250 1,298

TOTAL STOCK PuRCHASE PLANS

2,927,050 229 000 500,184 307,105 0 7,050 1,310,7976,810

00

00

108,830570

228,833810

2,698,2176,240

2,704,457

Share grant plans in force at December 31, 2006

05/03/05 4,500,000 - 11/17/05 Price at 02/17/08

1,082 600,000 0 141,450 73,350 300,000 Vesting period: 2 years 3 mths50% cond (½ based on 2006 perf.; ½ based on 2007 perf.*)

600,000 0 0 58,130 58,130 541,870 541,870 1,028

03/03/06 Price at 06/03/08

2 63,000 50,000 13,000 0 36,500 Vesting period: 2 years 3 mths50% cond (½ based on 2006 perf.; ½ based on 2007 perf.*)

0 0 0 0 0 63,000 63,000 2

11/20/06 Price at 11/20/09

116 100,000 0 0 18,500 0 Vesting period: 3 years 0 0 0 0 0 100,000 100,000 116

TOTAL SHARE GRANT PLANS 763,000 50,000 154,450 91,850 336,500 0 600,000 0 0 58,130 58,130 704,870 704,870

(1) Date of board of Directors/Supervisory Board/Management Board meeting.(2) Including Directors who are not corporate officers.

On March 7, 2007, the Board of Directors granted 250,000 stock purchase options with an exercise price of 36.97 euros, including 200,000 granted to Thierry Morin

that are subject to lock-up provisions as described in paragraph 3.1.1 on page 161, and 50,000 to another of the Group’s executive managers (non-corporate officer).

On the same date, the Board also granted 100,000 shares free of consideration to a limited number of high-potential managers.

* 2006 performance: the Group’s consolidated operating margin before non-recurring expenses as a % of total income from operations ≥ 4.5%

* 2007 performance: the Group’s consolidated operating margin before non-recurring expenses as a % of total income from operations ≥ 5%.

Public share buyback/simplified public tender offer.


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 Current ownership structure

Current ownership structure

1. Changes in ownership structure since 2004

Wendel Investissements

GroupCaisse des Dépôts

et consignations**

The Boston Company

Asset Management

LLC

Brandes Investment Partners LP

Franklin Resources,

Inc.

Pardus European

Special Opportunities

Master Fund LP Employees

Treasury stock Other

December 31, 2004

number of shares 8,186,045 5,367,080 3,075,521 602,105 8,465,610 1,575,296 1,037,804 55,399,56

% 9.78 6.41 3.67 0.72 10.11 1.88 1.24 66.19

number of voting rights* 8,816,045 6,982,835 3,075,521 602,105 8,465,610 1,575,296 0 54,933,725

% 10.44 8.27 3.64 0.71 10.02 1.87 0 65.05

December 31, 2005

number of shares 1,012,072 5,061,559 4,124,213 3,996,838 8,323,865 1,418,375 807,704 52,765,731

% 1.31 6.53 5.32 5.16 10.74 1.83 1.04 68.07

number of voting rights* 1,012,072 7,128,860 4,124,213 3,996,838 8,323,865 1,418,375 0 52,918,450

% 1.28 9.03 5.23 5.06 10.55 1.80 0 67.05

December 31, 2006

number of shares 592,072 5,061,559 4,208,278 4,120,338 3,752,183 3,450,000 1,041,149 686,704 54,668,334

% 0.76 6.52 5.42 5.31 4.84 4.45 1.34 0.89 70.47

number of voting rights* 592,072 7,128,860 4,208,278 4,120,338 3,752,183 3,450,000 1,041,149 0 54,816,574

% 0.75 9.01 5.32 5.21 4.74 4.36 1.32 0 69.29

* Shares registered in the name of the same shareholder for a minimum of 4 years carry double voting rights (see page 148).* * Caisse des Dépôts et consignations interest held in its own account. Caisse des Dépôts et consignations is the only shareholder owning over 5% of the capital that has

double voting rights.

1.1. Major shareholders

To the best of the Company’s knowledge, the only shareholders

directly or indirectly holding 5% or more of the Company’s capital

or voting rights at December 31, 2006 were Caisse des Dépôts et

consignations, The Boston Company Asset Management LLC and

Brandes Investment Partners LP.

As far as the Company is aware, the only shareholders directly

or indirectly holding 2% or more of the Company’s capital or

voting rights at December 31, 2006 were Caisse des Dépôts

et consignations, The Boston Company Asset Management

LLC, Brandes Investment Partners LP, Pardus European Special

Opportunities Master Fund LP, Franklin Resources, Inc., Tocqueville

Finance S.A., and M&G Investment Management Ltd.

On April 24, 2006, M&G Investments Management Ltd. declared

that it had increased its interest to above the 2% disclosure

threshold provided in the Company’s bylaws and that it held

2.10% of the Company’s capital and 2.06% of the voting rights.

On September 11, 2006, Franklin Resources, Inc. declared that it

had reduced its interest to below the statutory 10% disclosure

threshold and the 2% threshold provided in the Company’s


InFORMAtIOn On the COMPAny AnD ItS CAPItAL 5Current ownership structure

bylaws, and that it held 7.38% of the Company’s capital and

7.26% of the voting rights.

On October 25, 2006, Franklin Resources, Inc. declared that it had

reduced its interest to below the statutory 5% disclosure threshold

and the 2% threshold provided in the Company’s bylaws, and

that it held 4.84% of the Company’s capital and 4.74% of the

voting rights.

On November 27, 2006, Pardus European Special Opportunities

Master Fund LP declared that it had increased its interest to

beyond the 2% disclosure threshold provided in the bylaws in

relation to the Company’s capital and voting rights.

On December 21, 2006, Pardus European Special Opportunities

Master Fund LP declared that it had increased its interest to

beyond the 2% disclosure threshold provided in the bylaws and

that it held 4.45% of the Company’s capital and 4.36% of the

voting rights.

In early 2007, Pardus European Special Opportunities Master Fund

LP declared that it had increased its interest to beyond the 5%

disclosure threshold on January 10, 2007 and that it held 5.16%

of the Company’s capital and 5.07% of the voting rights. Pardus

European Special Opportunities Master Fund LP subsequently

declared that it had increased its interest to beyond the 10%

disclosure thresholds both in relation to the Company’s capital

(on February 21, 2007) and voting rights (on February 27, 2007),

and that it held 10.57% of Valeo’s capital and 10.36% of its voting

rights. In its statement of intention, Pardus European Special

Opportunities Master Fund LP stated that it was not acting in

concert with any third party and it had no immediate plans to take

over control of Valeo although it did reserve the right to continue

to purchase or sell Valeo shares based on market opportunities

and to request the appointment of one or more persons of its

choosing as members of Valeo’s Board of Directors.

Finally, on March 21, 2007, Pardus European Special Opportunities

Master Fund LP declared that at that date it had increased its

interest in the Company to beyond the disclosure threshold of

12% of the capital and voting rights.

1.2. treasury stock

At December 31, 2006, Valeo directly or indirectly held 686,704

of its own shares, representing 0.89% of the Company’s share

capital, with a unit value of 32.53 euros per share based on their

purchase price. At December 31, 2005, Valeo held 807,704 of its

own shares (1.04% of the share capital).

Out of the total number of treasury shares held at December 31,

2006, 617,704 were earmarked for allocation on the exercise of

stock options and 69,000 shares were allocated for use under a

liquidity contract that complies with the Code of Ethics issued by

the AFEI (French Association of Investment Companies), signed

with an investment services provider on April 22, 2004.

At the signature date of this contract 220,000 Valeo shares and

an amount of 6,600,000 euros were allocated for use under

this liquidity agreement. The total resources earmarked for this

purpose at December 31, 2006 represented 69,000 shares and

13,039,863 euros

During the year, Valeo acquired, through an investment services

provider, 1,178,396 shares at an average price of 29.53 euros, and

sold 1,299,396 shares at an average price of 29.72 euros. Trading

fees as well as the fees relating to the liquidity contract with the

investment services provider totaled 264,712 euros, compared

with 271,615 euros in 2005.

Market transactions were carried out under the authorizations

granted under the sixth resolution of the General Shareholders’

Meeting of May 3, 2005 and the fifth resolution of the General

Shareholders’ Meeting of May 17, 2006, in accordance with a

liquidity contract entered into with an investment services provider

in order to provide a liquid market for the Company’s shares and

stabilize the share price.

1.3. Directors’ interests

As part of the employee share issue carried out in 2004 (see

page 168), Thierry Morin, Chairman and Chief Executive Officer of

Valeo, subscribed to 153,617 units in the Valeorizon mutual fund,

corresponding to 153.62 Company shares, and 921,702 units in

the Valeorizon+ mutual fund, entitling him to 7,373.62 shares as

a result of the applicable leverage effect. Thierry Morin’s total

investment in these funds came to 25,431.30 euros, representing

23.65 euros per unit.

At December 31, 2006, Thierry Morin and other members of the

Board of Directors held less than 1% of Valeo’s capital and voting

rights in a personal capacity.

1.4. employee stock ownership

At December 31, 2006, employees held a total of 1,041,149

shares under Group employee stock ownership plans, directly

or through two corporate mutual funds, representing 1.34% of

the Company’s capital. At December 31, 2005 employees held

1,418,375 shares, representing 1.83% of the capital.


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 Current ownership structure

1.5. Change in control

To the best of the Company’s knowledge, there are no shareholder

pacts or agreements that could lead to a change in control of

the Company.

There are no provisions in the Company’s bylaws or internal rules

that may delay, postpone or prevent a change in the Company’s

control.

1.6. Capital under option

At the date of this registration document, no capital of any

member of the Group was under option or agreed conditionally

or unconditionally to be put under option.

3. Shareholder identification

Registered and bearer shares are recorded in shareholders’

accounts in accordance with applicable laws and regulations.

However, a bank, broker or other intermediary may register

on behalf of shareholders who are domiciled outside France

in accordance with article 102 of the French Civil Code. This

registration may be made in the form of a joint account or several

individual accounts, each corresponding to one shareholder. Any

such intermediary must inform the Company or the intermediary

managing the Company’s account that it is holding the shares on

behalf of another party.

The Company is entitled to identify all holders of shares and

other securities redeemable, exchangeable, convertible or

otherwise exercisable for shares carrying rights to vote at General

Shareholders’ Meetings, in accordance with the procedure provided

for in article L. 228-2 et seq. of the French Commercial Code.

In order to identify holders of bearer shares, in accordance with

the applicable laws and regulations, the Company is entitled to

request, at any time, from the central depository responsible for

its securities issues account, in exchange for a fee, the name

– or, in the case of corporate shareholders, the company name -,

nationality, year of birth – or, in the case of corporate shareholders,

the year of incorporation - and address of holders of bearer shares

and other securities redeemable, exchangeable, convertible or

otherwise exercisable for shares carrying rights to vote at General

Shareholders’ Meetings, together with details of the number of

2. Disclosure thresholds

In accordance with article L. 233-7 of the French Commercial

Code, any individual or legal entity, acting alone or in concert that

holds a number of shares representing over 5%, 10%, 15%, 20%,

25%, 33-1/3%, 50%, 66-2/3%, 90% or 95% of the Company’s

capital or voting rights, is required to disclose to the Company

and the AMF by letter that the related disclosure threshold has

been exceeded. Said disclosure must be made within five trading

days from the date when the threshold is exceeded and must

also state the total number of shares and voting rights held by

the shareholder concerned. The AMF subsequently publishes the

disclosures. This disclosure obligation also applies when an interest

in the Company’s capital and/or voting rights is reduced to below

the above-mentioned thresholds.

If any shareholder fails to comply with these disclosure

requirements, the shares in excess of the relevant threshold will

be stripped of voting rights at any and all General Shareholders’

Meetings held within the two-year period from the date when

the omission is remedied.

Since the General Shareholders’ Meeting of March 31, 2003,

article 9 of the Valeo bylaws states that, in addition to the

applicable statutory disclosure thresholds, any individual or legal

entity, acting alone or in concert, that raises or reduces its interest

in the Company’s capital or voting rights to above or below 2%

respectively (or any multiple thereof), is required to disclose to

the Company by registered letter with return receipt requested

that the relevant disclosure threshold has been crossed. Said

disclosure must be made within 15 days from the date when

the threshold is crossed and the shareholder concerned must state

their own identity as well as that of any parties acting in concert

with the shareholder. In accordance with the seventh paragraph

of article L. 228-1 of the French Commercial Code, this disclosure

obligation also applies to shares held through an intermediary.

Non-compliance with the above obligations is subject to the

penalties set out in article L. 233-14 of the French Commercial

Code, at the request of one or several shareholders together

holding at least 2% of the Company’s capital or voting rights, as

recorded in the minutes of the General Shareholders’ Meeting.


InFORMAtIOn On the COMPAny AnD ItS CAPItAL 5Current ownership structure

shares held by each such shareholder and of any restrictions

applicable to the securities concerned.

Based on the list provided by the above-mentioned organization,

where the Company considers that shares may be held on behalf

of third parties, it may request, in accordance with the same

conditions, either through the organization or directly from the

parties mentioned on the list, the same information concerning

the holders of the shares. If one of the parties mentioned on the

list is a bank, broker or other intermediary, it must disclose the

identity of the shareholders for whom it is acting. The information

is provided directly to the financial intermediary managing the

Company’s share account, which shall pass on said information

either to the Company or the above-mentioned central depositary,

as applicable.

For registered shares and other securities redeemable,

exchangeable, convertible or otherwise exercisable for shares,

any intermediary holding the securities on behalf of a third party

must disclose the identity of the person or entity for whom it

is acting as well as the number of shares held by each, upon

simple request by the Company or its representative, which may

be made at any time.

The Company may also request from any corporate shareholder

holding over 2.5% of the Company’s capital or voting rights,

information concerning the identity of persons or companies

holding either directly or indirectly over one third of the corporate

shareholder’s capital or voting rights.

If an individual or corporate shareholder is asked to provide

information in accordance with the above conditions and fails to

provide it by the applicable deadline, or provides incomplete or

incorrect information, the shares or other securities redeemable,

exchangeable, convertible or otherwise exercisable for shares

recorded in the shareholder’s account shall be stripped of voting

rights for all General Shareholders’ Meetings held until the

identification request has been fulfilled, and the payment of any

corresponding dividends shall also be deferred until that date.

In addition, if an individual or company registered in the Company’s

shareholders’ account deliberately ignores their obligations, the

Company or one or more shareholders holding at least 5% of the

Company’s capital may apply to the court of the place in which the

Company’s registered office is located to obtain an order to totally

or partially strip the shares concerned of their voting rights and the

corresponding dividend, for a maximum period of five years.


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 Market for the Company’s securities

Market for the Company’s securities

1. Share performance over 18 months

Date

Price (In euros)

Trading volume(no. of shares)

Trading volume (In millions of

euros)High Low Closing (average)

September 2005 35.14 32.99 33.73 14,434,933 489.14

October 2005 35.14 30.50 32.73 12,923,368 424.15

november 2005 32.07 30.68 31.41 6,620,180 208.34

December 2005 32.26 30.50 31.64 7,733,743 246.93

January 2006 33.49 31.28 32.33 9,304,957 301.22

February 2006 34.75 32.90 33.82 9,615,280 324.81

March 2006 35.40 31.58 33.15 12,008,779 400.94

April 2006 34.88 32.90 34.09 12,088,063 412.42

May 2006 34.56 29.46 31.85 11,416,718 361.92

June 2006 30.06 26.73 28.18 10,950,165 309.46

July 2006 29.18 25.00 26.91 15,883,516 429.02

August 2006 29.08 27.11 27.97 11,942,198 335.11

September 2006 29.08 26.35 27.81 17,235,513 477.23

October 2006 31.30 26.52 27.98 24,508,984 691.80

november 2006 31.20 28.81 30.09 15,424,406 464.32

December 2006 32.25 29.26 31.31 13,152,450 410.19

January 2007 36.77 31.35 34.24 18,429,439 637.83

February 2007 38.55 34.91 36.88 14,875,097 550.19

Source : Euronext Paris.

2. Share buyback program and cancellation of treasury shares

2.1. Share buyback program

In the fifth resolution of the Combined Annual and Extraordinary

Shareholders’ Meeting held on May 17, 2006, in accordance

with articles L. 225-209 et seq. of the French Commercial Code,

the Company’s shareholders granted the Board of Directors an

eighteen-month authorization from the date of said Meeting

to trade in the Company’s shares, including by delegation. This

authorization may be used for the following purposes: (i) to

allocate shares further to the exercise of stock options, (ii) to

award shares to employees by way of profit-sharing bonuses

and in connection with company savings plans, (iii) to grant

shares free of consideration (subject to an annual ceiling of 1%

of the Company’s capital), (iv) to attribute shares on redemption,

conversion, exercise or exchange of share equivalents, (v) to

purchase shares with a view to canceling some or all of them,

(vi) to attribute shares in exchange for shares in another entity

in connection with acquisitions, (vii) to ensure liquidity in the

secondary market for the Company’s shares in accordance with

a liquidity contract entered into with an investment services

provider, and (viii) to enable an investment services provider to

carry out share purchases, sales or transfers, including through

off-market transactions.

The number of shares that may be acquired under this authorization

may not represent over 10% of the Company’s capital.

The purchase price may not exceed 70 euros per share.

This authorization, given for an eighteen-month period as of the

Shareholders Meeting held on May 17, 2006, superseded, for the

unexpired period, the unused portion of the authorization granted


InFORMAtIOn On the COMPAny AnD ItS CAPItAL 5Market for the Company’s securities

in the sixth resolution of the Combined Annual and Extraordinary

Shareholders’ Meeting held on May 3, 2005.

A description of the 2006 renewal of the Company’s share buyback

program was drawn up in accordance with articles 241-1 et seq.

of the AMF’s General Regulations and published on both Valeo’s

and the AMF’s website on May 16, 2005.

In 2006 Valeo carried out a number of share sale and purchase

transactions under the above mentioned share buyback program,

as well as the program authorized by shareholders at the General

Meeting of May 3, 2005.

During the year the Company purchased 1,178,396 shares at

an average price of 29.53 euros and sold 1,299,396 shares at

an average price of 29.72 euros. All of these transactions were

carried out under the liquidity contract signed on April 22, 2004

with an investment services provider which complies with the

Code of Ethics of the AFEI (French Association of Investment

Companies).

At the year-end, Valeo held 686,704 treasury shares representing

0.89% of Company’s capital, with a unit value of 32.53 euros based

on their purchase price. At December 31, 2005, the Company held

807,704 treasury shares, representing 1.04% of its capital.

The number of shares held in treasury at December 31, 2006

broke down as 617,704 to be allocated on the exercise of stock

options and 69,000 to be used in connection with the above-

mentioned liquidity contract.

2.2. Cancellation of treasury shares

In the fifteenth resolution of the Combined Annual and

Extraordinary Shareholders’ Meeting held on May 3, 2005,

shareholders confirmed the authorization granted to the Board of

Directors by the Combined Annual and Extraordinary Shareholders’

Meeting of April 5, 2004 to reduce the Company’s share capital

by canceling treasury shares. The number of shares cancelled in

any given twenty-four month period may not exceed 10% of the

Company’s capital.

3. Dividends

Dividends per share over the past three years were as follows:

2003 2004 2005

Gross dividend per share (in euros) 1.57 na na

net dividend per share (in euros) 1.05 1.10 1.10

tax credit/allowance (in euros) 0.525* ** ***

total dividend (excluding tax credit/allowance) - (in millions of euros) 86 91 84* For shareholders entitled to a 50% tax credit.** This amount is eligible for the 50% tax allowance provided for in article 158-3-2 of the French General Tax Code.*** This amount is eligible for the 40% tax allowance provided for in article 158-3-2 of the French General Tax Code.

In view of the Group’s results in 2006, at the General Shareholders’

Meeting to be held to approve the accounts for the year, the

Board of Directors will recommend a net dividend of 1.10 euros

per share.

As the dividend distribution rate is not fixed, future dividend

payments will depend on the Group’s results as well as the

financing required to drive future growth. The Company cannot

guarantee the amount of dividends to be paid for any particular

year.


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 Investor relations

Investor relations

Valeo aims to provide a steady flow of exhaustive and detailed

real-time information to its diverse financial community, comprising

current and prospective private and institutional shareholders, as

well as financial analysts.

1. Individual shareholder relations

2. Institutional shareholder relations

Valeo’s senior management team maintained frequent contacts

with investors and analysts over the course of the year. In total,

more than 800 shareholder representatives or advisors were

put in touch with the senior management team or the Investor

Relations Director in 2006.

Meetings were organized in major financial centers in Europe,

North America and Asia. These took various forms, including

one-on-one meetings, group events, conference calls, themed

or general investor conferences, and site visits.

The objective of the Group’s Investor Relations Department is

to serve as an interface between the Group and investors and

analysts, in order to keep them informed of the Group’s strategy,

products, key events and financial performance.

Contact:

Rémy Dumoulin

Investor Relations Director

Valeo

43, rue Bayen

F-75848 Paris Cedex 17

France

Tel: +33 (0) 1 40 55 20 39

Fax: +33 (0) 1 40 55 20 40

E-mail: [email protected]

Provisional financial communication calendar

First-quarter 2007 results: April 24, 2007.

First-half 2007 results: July 26, 2007.

Third-quarter 2007 results: October 17, 2007.

Full-year 2007 results: first half of February 2008.

•

•

•

•

Based on the Company’s estimates, individual shareholders control

approximately 5% of Valeo’s share capital. These shareholders,

who are mostly domiciled in France, have access to the following

communication tools:

A toll-free line (0 800 814 045) available to individual

shareholders in France since 1998. In 2006, this service dealt

with approximately 200 requests relating to Valeo’s share price,

communications strategy, shareholder rights, and news and

outlook relating to the Group.

The valeo.com website which is aimed at providing information

to all shareholders. The Finance section of the site provides real-

time stock market and shareholder information, including the

latest share prices, ownership structure, dividends, and AGM

documents. Financial publications can also be consulted on-line,

•

•

such as annual and interim reports and financial presentations,

as well as all press releases and prospectuses. In addition,

visitors to the site can submit financial questions to the Group’s

spokesperson. Since November 2003, users who register their

details on-line receive a periodical newsletter providing relevant

information for those interested in monitoring the Group’s

progress. At the end of the year some 3,300 people were

subscribers to the newsletter.

The share registrar service provided by Société Générale

since the end of 2000. This service, used by more than 3,000

shareholders at December 31, 2006 – mainly individual

shareholders – provides a share information line (0825 820 000),

available only in France, for questions concerning dividends, tax

issues and placing orders.

•


InFORMAtIOn On the COMPAny AnD ItS CAPItAL 5Investor relations

3. Ownership structure

3.1. Ownership structure at December 31, 2006

% capital (% voting rights)

5.31 % (5.21 %)Brandes Investment Partners LP

4.84 % (4.74 %)Franklin

Resources, Inc.

73.46 %** (71.36 %)Autres

** Including 686,704 treasury shares (0.89 %)* Own account

Number of voting rights: 79,109,454Number of shares: 77,580,617

6.52 % (9.01 %)Caisse des Dépôts et consignations (CDC)*

5.42 % (5.32 %)The Boston Company Asset Management LLC

Pardus European


Master Fund LP

4.45 % (4.36 %)

3.2. Ownership structure at March 15, 2007

% capital (% voting rights)

4.84 % (4.74 %)Franklin Resources, Inc.

72.76 %** (70.68 %)Autres

** Including 639,504 treasury shares (0.82 %)* Own account

Number of voting rights: 79,153,315Number of shares: 77,580,617

6.52 % (9.01 %)Caisse des Dépôts et consignations (CDC)*

5.31 % (5.21 %)Brandes Investment Partners LP

Pardus European


Master Fund LP

10.57 % (10.36 %)

4. Stock market data

2006 2005 2004 2003 2002

Market capitalization at year-end (in billions of euros) 2.45 2.43 2.58 2.61 2.46

number of shares 77,580,617 77,510,357 83,709,024 82,133,728 82,133,728

highest share price (in euros) 35.40 38.20 38.35 36.40 53.00

Lowest share price (in euros) 25.00 30.25 27.22 19.75 23.00

Average share price (in euros) 30.58 33.79 32.47 29.27 40.14

Share price at end of year (in euros) 31.53 31.41 30.80 31.75 29.90


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 Investor relations

5. Per share data

(In euros)

IFRS

2006 2005 (1) 2004 (1) 2004

earnings per share (based on the average number of shares) 2.10 1.80 2.92 2.93

net dividend 1.10* 1.10 1.10 1.10

Gross dividend** n.a.** n.a.** n.a.** n.a.**

* 1.10 euro dividend subject to approval by shareholders at the General Shareholders’ Meeting to be held to approve the 2006 financial statements.** Amounts eligible for the tax allowance provided for in article 158-3-2 of the French General Tax Code – 50% for 2004 and 40% for 2005 and 2006.(1) The data for 2005 and 2004 have been restated, primarily in relation to non-strategic operations.

6. Share price from January 1, 2002 through December 31, 2006

0

10

20

30

40

50

60

OJAJOJAJOJAJOJAJOJAJ

2002 2003 2004 2005 2006

Valeo

CAC 40


InFORMAtIOn On the COMPAny AnD ItS CAPItAL 5Information on subsidiaries and affiliates

7. Monthly trading volumes

2002 2003 2004 2005 2006

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

OJAJOJAJOJAJOJAJOJAJ

Volume

Information on subsidiaries and affiliates

Following the creation of subsidiaries for industrial activities in

2002, Valeo is now the Group’s holding and treasury management

company. As such, Valeo centralizes the management of market

risks to which its operating subsidiaries are exposed, including

changes in interest rates as well as fluctuations in exchange

rates and quoted commodities prices. Valeo also centralizes the

financing requirements of these subsidiaries and is generally the

sole counterparty of the financial institutions that provide the

funding to cover these requirements. The related assets (cash

and marketable securities) and liabilities (external debt) are

included in Valeo’s balance sheet. Valeo is also responsible for

upholding the image of the Valeo brand. To this end, it has entered

into brand licensing agreements with certain of its operating

subsidiaries (see related party transactions on page 165). Group-

wide control and support functions, encompassing accounting,

legal counsel, information technology, procurement, real-estate

management and supply-chain management, are performed

by Valeo Management Services, which bills a fee to the French

subsidiaries. The Group’s operating assets and liabilities are carried

by its 172 subsidiaries, mainly by the industrial and commercial

entities listed on page 183. A list of consolidated companies

– including their geographic location – is provided in Note 7 to

the consolidated financial statements on pages 120-126.


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 Information on subsidiaries and affiliates

ICHIKOH INDUSTRIESLIMITED

29.4

VALEO SERVICE DEUTSCHLAND GmbH

VALEO ENGINE COOLING A.B.

(Sweden)100

VALEO SERVICE UK LIMITED

(UK)

European Union Other European Countries

Africa North America North America South America Asia

France Germany Belgium,UK, Netherlands,

Sweden

Italy, Spain,

Portugal

Hungary, Poland, Czech Republic,

Slovakia

Turkey,Romania

Morocco,Tunisia,

South Africa

United States Mexico Brazil,Argentina

Iran South Korea China Japan India Thailand, Indonesia

VALEO EMBRAYAGES VALEO BELEUCHTUNG VALEO VISION BELGIQUE

VALEO S.p.a. (Italy)

VALEO AUTO-ELECTRIC HUNGARY SPARE

PARTS PRODUCTION LLC (Hungary)

VALEO OTOMOTIV SISTEMLERI

ENDUSTRISI A.S. (Turkey)

VALEO BOUSKOURA (Morocco) VALEO, INC.

VALEO MATERIALES DE FRICCION DE MEXICO

SA de CV

VALEO SISTEMAS AUTOMOTIVOS Ltda

(Brazil)

VALEO ARMCO ENGINE COOLING

Co.

VALEO ELECTRICAL SYSTEMS KOREA Ltd

TAIZHOU VALEO-WENLING AUTOMOTIVE SYSTEMS

Company Limited

VALEO ENGINE COOLING JAPAN Co. Ltd

VALEO FRICTION MATERIALS INDIA

LIMITED

VALEO THERMAL SYSTEMS SALES (Thailand) Co. Ltd

100 100 100 99.9 100 100 100 100 100 100 51 100 100 100 60 74.9

VALEO MATERIAUX DE FRICTION

VALEO SCHLATER UND SENSOREN GmbH

VALEO SERVICE BELGIQUE

VALEO SICUREZZA ABITACOLO

S.p.a. (Italy)

VALEO ELECTRIC AND ELECTRONIC SYSTEMS Sp.zo.o. (Poland)

VALEO OTOMOTIV DAGITIM A.S.

(Turkey)

VALEO FRICTION MATERIALS, INC.

VALEO SISTEMAS ELECTRICOS SA de CV

VALEO EMBRAGUES ARGENTINA S.A.

VALEO PYEONG HWA Co. Ltd

HUBEI VALEO AUTO LIGHTING COMPANY LTD

VALEO UNISIA TRANSMISSIONS K.K.

AMALGAMATIONS VALEO CLUTCH

LIMITED

VALEO SIAM THERMAL SYSTEMS Co. Ltd

(Thailand)100 100 100 99.9 100 100 100 100 100 100 50 100 66 50

VALEO ENGINEERING CENTER (INDIA)PRIVATE LIMITED

100

74.9VALEO SWITCHES &

DETECTION SYSTEMS-VSDS

TELMA RETARDER LIMITED

(UK)

VALEO SISTEMI DI CLIMATIZZAZIONE

S.p.a. (Italy)

NURSAN ED (Turkey)

VALEO AIN SEBAA (Morocco)

VALEO INVESTMENT HOLDINGS, INC.

VALEO TERMICO SA de CV

EMELAR Sociedad Anonima

(Argentina)

VALEO PYEONG HWA DISTRIBUTION Co. Ltd

VALEO AUTOMOTIVE AIR CONDITIONING HUBEI Co. Ltd

VALEO THERMAL SYSTEMS JAPAN CORP.

VALEO COMPRESSOR (Thailand) Co. Ltd

100 100 100 100 40 100 100 100 100 50 55 100 98.5

VALEO EQUIPEMENTS ELECTRIQUES MOTEUR

VALEO CABLAGGI E COMMUTAZIONE

S.r.l. (Italy)

VALEO SERVICE EASTERN EUROPE Sp.zo.o. (Poland)

NURSAN OK (Turkey)

VALEO BOUZNIKA(Morocco)

VALEO ELECTRICALSYSTEMS, INC.

DELMEX DE JUAREZ S. de R.L. de CV CIBIE ARGENTINA S.A. VALEO SAMSUNG

THERMAL SYSTEMSCo. Ltd

FAW-VALEO CLIMATE CONTROL SYSTEMS Co. Ltd

VALEO COMPRESSOR CLUTCH (Thailand) Co. Ltd

100 100 100 100 40 100 100 100 10050

VALEOCOMPRESSORKOREA Co. Ltd

100

36.5 97.3

VALEO SECURITE HABITACLE

CABLAUTO S.r.l. (Italy)

VALEO VYMENIKY TEPLA S.r.o.

(Czech Republic)

100VALEO

AUTOSYSTEMYSp.zo.o. (Poland)

VALEO CABLAJE S.r.l. (Romania)

CABLEA TUNISIE S.A.

VALEO CLIMATECONTROL CORP.

VALEO SISTEMAS ELECTRONICOS S. de R.L. de CV

NANJING VALEO CLUTCH Co. Ltd PT VALEO AC INDONESIA

100 100

100

100 100 100 100 100 100 55 49

VALEO SYSTEMES D’ESSUYAGE

CAVISUD S.r.l. (Italy)

VALEO AUTOKLIMATIZACE S.r.o.

(Czech Republic)

VALEO ELECTRICAL CONNECTIVE SYSTEMS

S.r.l. (Romania)

SOCIETE TUNISIENNE DE CABLAGES - "STC"

VALEO SYLVANIA LLCVALEO CLIMATE CONTROL

DE MEXICO SA de CV

VALEO SHANGHAI AUTOMOTIVEELECTRIC MOTORS & WIPER

SYSTEMS Co. Ltd100 100

100

100VALEO

COMMUTAZIONE S.r.l (Italy)100

100100 100 50 100 55

VALEO PLASTIC OMNIUM S.N.C.

VALEO ENGINE COOLING UK Ltd

(UK)

VALEO SERVICE BENELUX B.V. (Netherlands)

VALEO SERVICE ITALIA S.p.a.

VALEO MATEUR (Tunisia)

VALEO SYLVANIA ILUMINACIÓN S. de R.L. de CV

SHANGHAI VALEO AUTOMOTIVEELECTRICAL SYSTEMSCompany Limited

50 100

100

99.9

100 100 100 50 50

VALEO VISION

VALEO ESPAÑA S.A.

VALEO COMPRESSOR EUROPE S.r.o.

(Czech Republic)VALEO EMBRAYAGES

TUNISIE SA TELMA RETARDER INC.

TELMA RETARDER DE MEXICO SA de CV

HUADA AUTOMOTIVE AIR CONDITIONER Co. Ltd

100

100

100

100 100 100 100 30

VALEO ELECTRONIQUEET SYSTEMES DE LIAISON

VALEO SLOVAKIA S.r.o.(Slovakia) DAV TUNISIE VALEO AFTERMARKET, INC.

VALEO LIGHTING HUBEI TECHNICAL CENTER Co. Ltd

100

100

100

DAV

VALEO SYSTEMS SOUTH AFRICA (Proprietary)

Limited

VALEO SWITCHES & DETECTION SYSTEMS, INC.

TELMA VEHICLE BRAKING SYSTEM (SHANGHAI)

Co. Ltd100

99,8

100

70

VALEO LIAISONS ELECTRIQUES VALEO TERMICO S.A.

(Spain)

VALEO RAYTHEONSYSTEMS, INC.

SHENZHEN VALEO HANGSHENG AUTOMOTIVE SWITCHES AND DETECTION SYSTEMS Co. Ltd

100

50

77.2

75

SC2NVALEO ILUMINACIÓN S.A.

(Spain)

VALEO COMPRESSOR NORTH AMERICA, INC.

VALEO AUTOMOTIVE SECURITY SYSTEMS (WUXI) Co. Ltd

100

100

100

100

VALEO CABLAGE

VALEO PLASTIC OMNIUM S.L.

VALEO FAWER COMPRESSOR (CHANGCHUN) Co. Ltd

100

100

60VALEO ENGINE COOLING

(SHASHI) Co. Ltd100

FOSHAN ICHIKOH VALEO AUTO

LIGHTING SYSTEMS Co. Ltd50

VALEO AUTOMOTIVE TRANSMISSIONS SYSTEMS

(NANJING) Co. Ltd100

VALEO FOUR SEASONS

TELMA RETARDER ESPAÑA S.A.

VALEO SISTEMAS ELECTRICOS S.L.

(Spain)

VALEO MATERIALES DEFRICCIÓN S.A.

(Spain)

50

100

TELMA

VALEO CLIMATIZACIÓN S.A. (Spain)

100

100

VALEO SERVICE

100

100

VALEO SYSTEMES THERMIQUES

100

VALEO FURUKAWA WIRING SYSTEMS

VALEO SISTEMAS DE CONEXION ELECTRICA S.L.

(Spain)

50

100

VALEO SISTEMAS DE SEGURIDAD Y DE

CIERRE S.A. (Spain)

VALEO SYSTEMES DE CONTRÔLE MOTEUR

VALEO SERVICE ESPAÑA S.A

100

100VALEO VIANA

(Portugal)100

CABLAGENS DO AVE (Portugal)

Main Industrial and Commercial Entities

Direct and indirect stakes by country (% of interest 12.31.2006)

Industrial

Commercialization

DEUTSCHLAND GmbH

VALEO WISCHERSYSTEME

GmbH

VALEO SICHERHEITS- SYSTEME GmbH

VALEO KLIMASYSTEME GmbH

VALEO COMPRESSOR EUROPE GmbH

51


InFORMAtIOn On the COMPAny AnD ItS CAPItAL 5Information on subsidiaries and affiliates

ICHIKOH INDUSTRIESLIMITED

29.4

VALEO SERVICE DEUTSCHLAND GmbH

VALEO ENGINE COOLING A.B.

(Sweden)100

VALEO SERVICE UK LIMITED

(UK)

European Union Other European Countries

Africa North America North America South America Asia

France Germany Belgium,UK, Netherlands,

Sweden

Italy, Spain,

Portugal

Hungary, Poland, Czech Republic,

Slovakia

Turkey,Romania

Morocco,Tunisia,

South Africa

United States Mexico Brazil,Argentina

Iran South Korea China Japan India Thailand, Indonesia

VALEO EMBRAYAGES VALEO BELEUCHTUNG VALEO VISION BELGIQUE

VALEO S.p.a. (Italy)

VALEO AUTO-ELECTRIC HUNGARY SPARE

PARTS PRODUCTION LLC (Hungary)

VALEO OTOMOTIV SISTEMLERI

ENDUSTRISI A.S. (Turkey)

VALEO BOUSKOURA (Morocco) VALEO, INC.

VALEO MATERIALES DE FRICCION DE MEXICO

SA de CV

VALEO SISTEMAS AUTOMOTIVOS Ltda

(Brazil)

VALEO ARMCO ENGINE COOLING

Co.

VALEO ELECTRICAL SYSTEMS KOREA Ltd

TAIZHOU VALEO-WENLING AUTOMOTIVE SYSTEMS

Company Limited

VALEO ENGINE COOLING JAPAN Co. Ltd

VALEO FRICTION MATERIALS INDIA

LIMITED

VALEO THERMAL SYSTEMS SALES (Thailand) Co. Ltd

100 100 100 99.9 100 100 100 100 100 100 51 100 100 100 60 74.9

VALEO MATERIAUX DE FRICTION

VALEO SCHLATER UND SENSOREN GmbH

VALEO SERVICE BELGIQUE

VALEO SICUREZZA ABITACOLO

S.p.a. (Italy)

VALEO ELECTRIC AND ELECTRONIC SYSTEMS Sp.zo.o. (Poland)

VALEO OTOMOTIV DAGITIM A.S.

(Turkey)

VALEO FRICTION MATERIALS, INC.

VALEO SISTEMAS ELECTRICOS SA de CV

VALEO EMBRAGUES ARGENTINA S.A.

VALEO PYEONG HWA Co. Ltd

HUBEI VALEO AUTO LIGHTING COMPANY LTD

VALEO UNISIA TRANSMISSIONS K.K.

AMALGAMATIONS VALEO CLUTCH

LIMITED

VALEO SIAM THERMAL SYSTEMS Co. Ltd

(Thailand)100 100 100 99.9 100 100 100 100 100 100 50 100 66 50

VALEO ENGINEERING CENTER (INDIA)PRIVATE LIMITED

100

74.9VALEO SWITCHES &

DETECTION SYSTEMS-VSDS

TELMA RETARDER LIMITED

(UK)

VALEO SISTEMI DI CLIMATIZZAZIONE

S.p.a. (Italy)

NURSAN ED (Turkey)

VALEO AIN SEBAA (Morocco)

VALEO INVESTMENT HOLDINGS, INC.

VALEO TERMICO SA de CV

EMELAR Sociedad Anonima

(Argentina)

VALEO PYEONG HWA DISTRIBUTION Co. Ltd

VALEO AUTOMOTIVE AIR CONDITIONING HUBEI Co. Ltd

VALEO THERMAL SYSTEMS JAPAN CORP.

VALEO COMPRESSOR (Thailand) Co. Ltd

100 100 100 100 40 100 100 100 100 50 55 100 98.5

VALEO EQUIPEMENTS ELECTRIQUES MOTEUR

VALEO CABLAGGI E COMMUTAZIONE

S.r.l. (Italy)

VALEO SERVICE EASTERN EUROPE Sp.zo.o. (Poland)

NURSAN OK (Turkey)

VALEO BOUZNIKA(Morocco)

VALEO ELECTRICALSYSTEMS, INC.

DELMEX DE JUAREZ S. de R.L. de CV CIBIE ARGENTINA S.A. VALEO SAMSUNG

THERMAL SYSTEMSCo. Ltd

FAW-VALEO CLIMATE CONTROL SYSTEMS Co. Ltd

VALEO COMPRESSOR CLUTCH (Thailand) Co. Ltd

100 100 100 100 40 100 100 100 10050

VALEOCOMPRESSORKOREA Co. Ltd

100

36.5 97.3

VALEO SECURITE HABITACLE

CABLAUTO S.r.l. (Italy)

VALEO VYMENIKY TEPLA S.r.o.

(Czech Republic)

100VALEO

AUTOSYSTEMYSp.zo.o. (Poland)

VALEO CABLAJE S.r.l. (Romania)

CABLEA TUNISIE S.A.

VALEO CLIMATECONTROL CORP.

VALEO SISTEMAS ELECTRONICOS S. de R.L. de CV

NANJING VALEO CLUTCH Co. Ltd PT VALEO AC INDONESIA

100 100

100

100 100 100 100 100 100 55 49

VALEO SYSTEMES D’ESSUYAGE

CAVISUD S.r.l. (Italy)

VALEO AUTOKLIMATIZACE S.r.o.

(Czech Republic)

VALEO ELECTRICAL CONNECTIVE SYSTEMS

S.r.l. (Romania)

SOCIETE TUNISIENNE DE CABLAGES - "STC"

VALEO SYLVANIA LLCVALEO CLIMATE CONTROL

DE MEXICO SA de CV

VALEO SHANGHAI AUTOMOTIVEELECTRIC MOTORS & WIPER

SYSTEMS Co. Ltd100 100

100

100VALEO

COMMUTAZIONE S.r.l (Italy)100

100100 100 50 100 55

VALEO PLASTIC OMNIUM S.N.C.

VALEO ENGINE COOLING UK Ltd

(UK)

VALEO SERVICE BENELUX B.V. (Netherlands)

VALEO SERVICE ITALIA S.p.a.

VALEO MATEUR (Tunisia)

VALEO SYLVANIA ILUMINACIÓN S. de R.L. de CV

SHANGHAI VALEO AUTOMOTIVEELECTRICAL SYSTEMSCompany Limited

50 100

100

99.9

100 100 100 50 50

VALEO VISION

VALEO ESPAÑA S.A.

VALEO COMPRESSOR EUROPE S.r.o.

(Czech Republic)VALEO EMBRAYAGES

TUNISIE SA TELMA RETARDER INC.

TELMA RETARDER DE MEXICO SA de CV

HUADA AUTOMOTIVE AIR CONDITIONER Co. Ltd

100

100

100

100 100 100 100 30

VALEO ELECTRONIQUEET SYSTEMES DE LIAISON

VALEO SLOVAKIA S.r.o.(Slovakia) DAV TUNISIE VALEO AFTERMARKET, INC.

VALEO LIGHTING HUBEI TECHNICAL CENTER Co. Ltd

100

100

100

DAV

VALEO SYSTEMS SOUTH AFRICA (Proprietary)

Limited

VALEO SWITCHES & DETECTION SYSTEMS, INC.

TELMA VEHICLE BRAKING SYSTEM (SHANGHAI)

Co. Ltd100

99,8

100

70

VALEO LIAISONS ELECTRIQUES VALEO TERMICO S.A.

(Spain)

VALEO RAYTHEONSYSTEMS, INC.

SHENZHEN VALEO HANGSHENG AUTOMOTIVE SWITCHES AND DETECTION SYSTEMS Co. Ltd

100

50

77.2

75

SC2NVALEO ILUMINACIÓN S.A.

(Spain)

VALEO COMPRESSOR NORTH AMERICA, INC.

VALEO AUTOMOTIVE SECURITY SYSTEMS (WUXI) Co. Ltd

100

100

100

100

VALEO CABLAGE

VALEO PLASTIC OMNIUM S.L.

VALEO FAWER COMPRESSOR (CHANGCHUN) Co. Ltd

100

100

60VALEO ENGINE COOLING

(SHASHI) Co. Ltd100

FOSHAN ICHIKOH VALEO AUTO

LIGHTING SYSTEMS Co. Ltd50

VALEO AUTOMOTIVE TRANSMISSIONS SYSTEMS

(NANJING) Co. Ltd100

VALEO FOUR SEASONS

TELMA RETARDER ESPAÑA S.A.

VALEO SISTEMAS ELECTRICOS S.L.

(Spain)

VALEO MATERIALES DEFRICCIÓN S.A.

(Spain)

50

100

TELMA

VALEO CLIMATIZACIÓN S.A. (Spain)

100

100

VALEO SERVICE

100

100

VALEO SYSTEMES THERMIQUES

100

VALEO FURUKAWA WIRING SYSTEMS

VALEO SISTEMAS DE CONEXION ELECTRICA S.L.

(Spain)

50

100

VALEO SISTEMAS DE SEGURIDAD Y DE

CIERRE S.A. (Spain)

VALEO SYSTEMES DE CONTRÔLE MOTEUR

VALEO SERVICE ESPAÑA S.A

100

100VALEO VIANA

(Portugal)100

CABLAGENS DO AVE (Portugal)

Main Industrial and Commercial Entities

Direct and indirect stakes by country (% of interest 12.31.2006)

Industrial

Commercialization

DEUTSCHLAND GmbH

VALEO WISCHERSYSTEME

GmbH

VALEO SICHERHEITS- SYSTEME GmbH

VALEO KLIMASYSTEME GmbH

VALEO COMPRESSOR EUROPE GmbH

51


InFORMAtIOn On the COMPAny AnD ItS CAPItAL5 Person responsible for the registration document

Person responsible for the registration document

Person responsible for the information provided in the registration document

Thierry Morin, Chairman and Chief Executive Officer of Valeo.

Declaration by the person responsible for the registration document

I hereby declare that, having taken all reasonable care to ensure that such is the case, the information contained in the registration document

is, to the best of my knowledge, in accordance with the facts and contains no omission likely to affect its import.

I obtained a statement from the Statutory Auditors at the end of their engagement affirming that they have read the whole “document

de référence” (registration document), of which this document is a free translation from the original, and examined the information about

the financial position and the accounts contained therein.

The Statutory Auditors issued an observation in their report on the consolidated financial statements for the year ended December 31,

2004, presented on page 103 of the registration document filed with the Autorité des marchés financiers on March 29, 2005 under

number D.05-0290. This observation concerned the change in method of accounting for retirement commitments presented in Note 1.2

to the consolidated financial statements.

Paris, March 29, 2007

Thierry Morin

Chairman and Chief Executive Officer

Key figures p. 2

The English language version of this report is a free translation from the original, which was prepared in French. All possible care has

been taken to ensure that the translation is an accurate presentation of the original. However, in all matters of interpretation, views or

opinions expressed in the original language version of the document in French take precedence over the translation.

1 ACTiViTy p. 7

History p.8

TheGroup p.10

Geographicalpresence p.25

Competitivecontext p.26

Keyeventsin2006 p.26

Recenteventsandoutlook p.31

2 MANAgEMENT REpORT p. 33

Accountingmethods p.34

Statementofincome p.34

Maininvestmentsoverthepastthreeyears p.36

Changeinstockholders’equity p.37

provisions p.38

Cashflowsanddebt p.39

Commitments p.39

Remunerationofcorporateofficersanddirectors p.39

Risksanduncertainties p.41

Informationlikelytobeimpactedbyapublictenderoffer p.43

Claimsandlitigation p.44

Outlook p.44

Subsequentevents p.45

parentcompanyfinancialstatements p.45

EnvironmentalIndicators p.45

SocialIndicators p.55

3 CONsOLiDATED FiNANCiAL sTATEMENTs 2006 p. 69

Consolidatedstatementsofincome p.71

Consolidatedbalancesheets p.72

Consolidatedstatementsofcahflows p.73

Statementsofrecognizedincomeandexpenses p.74

Statementofchangesinstockholders’equity p.75

Notestoconsolidatedfinancialstatements p.76

StatutoryAuditors’reportonthe2006IFRSconsolidatedfinancialstatements p.127

4 CORpORATE gOVERNANCE p. 129

RapportoftheChairmanoftheBoardofDirectorsrelatingtotheconditionsofpreparationandorganizationoftheBoard’swork,thepossiblelimitationstothepowersoftheChiefExecutiveOfficerandtheinternalcontrolproceduresputinplacebytheValeoGroup p.130

CompositionoftheBoardofDirectorsatDecember31,2006 p.139

StatutoryAuditors’ReportonthereportoftheChairmanoftheBoardofDirectors p.142

5 iNFORMATiON ON ThE COMpANy AND iTs CApiTAL p. 145

Generalinformationabouttheissuer p.146

FeespaidbythegrouptotheAuditorsandmembersoftheirnetworks p.166

GeneralinformationabouttheCompany’scapital p.167

Currentownershipstructure p.172

MarketfortheCompany’ssecurities p.176

Investorrelations p.178

Informationonsubsidiariesandaffiliates p.181

personresponsiblefortheregistrationdocument p.184


VALE

O R

EFER

ENCE

DO

CUM

ENT

2006

Reference document

2006

43, rue Bayen - 75848 Paris cedex 17, FranceTel. : 33 (0)1 40 55 20 20 - Fax : 33 (0)1 40 55 21 71Valeo French ”Société Anonyme” with a capital of 232,741,851 euros - 552 030 967 RCS ParisValeo.com


Date post:	10-Aug-2020
Category:	Documents
Upload:	others
View:	2 times
Download:	0 times

2006 - Valeo · 2019-05-14 · VALEO REFERENCE DOCUMENT 2006 Reference document 2006 43, rue Bayen...

Documents