ANNUAL REPORT 2018 ABOUT US | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION ABOUT US Burckhardt Compression is the worldwide market leader for reciprocating compressor systems and the only manufacturer and service provider that covers a full range of recipro- cating compressor technologies and services. Its customized compressor systems are used in the upstream oil & gas, gas transport and storage, refinery, chemical, petrochemical and industrial gas sectors. Burckhardt Compression’s leading technology, broad portfolio of compressor components and the full range of services help customers around the world to find the optimized solution for their reciprocating compressor systems. Since 1844, 175 years and counting, its highly skilled workforce has crafted superior solutions and set the bench- mark in the gas compression industry. 2 CONTENTS | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 3 76 76 77 78 79 80 81 82 104 Financial report Comments on Financial Report, Sales and gross profit, Operating income Financial income and tax expenses, Net income, Balance sheet, Cash flow Consolidated income statement Consolidated balance sheet Consolidated cash flow statement Consolidated statement of changes in equity Notes to the consolidated financial statements Financial statements of Burckhardt Compression Holding AG, Winterthur 114 Imprint Sustainability report Commitment and leadership, Economic sustainability Social sustainability Environmental sustainability Corporate governance Group structure and shareholders Capital structure Board of Directors Executive Board Compensation, shareholdings and loans, Shareholders’ participation rights, Changes of control and defensive measures, Auditors Information policy Compensation report Basis, Compensation policy, Organization, duties and powers, Compensation system Compensation paid with comparative figures for the previous year Overview of shareholdings and allocated/distributed shares Transactions with the Board of Directors, the Executive Board and related parties, Motions for the Annual General Meeting, Evaluation of the compensation system Auditor’s report of the compensation report CONTENTS 2 3 4 6 8 10 12 12 13 14 15 16 22 22 24 25 30 31 32 33 38 39 40 46 46 49 51 54 54 55 56 62 65 66 67 67 69 71 73 74 About us Contents To our shareholders 175th anniversary Milestones 2018 Figures at a glance Our company History, Vision and Mission, Burckhardt Compression brand Guiding principles, Strategy and Mid-Range Targets, Product development and innovation Main application areas Customers, Compressor systems Service and components business Review of the fiscal year Financial performance Capacity, Acquisitions, Customers, Research and development Brand management Review of the fiscal year Systems Division Financial performance, Markets Sales/Distribution, Infrastructure “Pulling Systems Together” for positive change, Outlook Review of the fiscal year Services Division Financial performance, Markets, Sales structures strengthened, New service centers Outlook 4 TO OUR SHAREHOLDERS | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION TO OUR SHAREHOLDERS DEAR SHAREHOLDERS The results for the fiscal year 2018 met our overall expectation we provided during the course of the year. Order intake rose sharply, sales were slightly above the figure reported for the previous year. Operating income and net income increased but have not yet reached the levels we have targeted for the coming years. Order intake: Renewed rise at both divisions Group order intake totaled CHF 658.7 mn and exceeded the prior-year figure by a pleasing 25.4%; excluding currency translation effects, incom- ing orders were up 25.6%. Orders received reached all-time highs at both divisions. The Systems Division accounted for CHF 428.0 mn of the new orders, which represents an increase of 33.8% from the previous year. All targeted market segments contributed to this order growth. Orders received in the Services Division rose by 12.3% to CHF 230.7 mn. Spare parts and engineering ser- vices accounted for much of this order growth. Sales at prior-year level Consolidated sales for fiscal year 2018 edged 0.8% higher to CHF 599.3 mn; excluding currency translation effects, sales were up 0.9% year-on-year. Sales were 6.5% higher in the Services Division and 2.3% lower in the Systems Division. Operating margin improves Gross profit of CHF 135.7 mn was 8.5% more than the prior-year figure of CHF 125.1 mn and the resulting gross profit margin was 22.6% (previous year: 21.0%). The Systems Division’s gross margin improved to 8.1% (previous year: 7.1%). Gross profit at the Ser- vices Division rose 7.5% to CHF 105.2 mn, bringing its gross profit margin to 47.0%, slightly above the 46.6% margin reported for the previous fiscal year. Operating income amounted to CHF 44.5 mn or 7.4 percent of sales (previous year: 7.0%) and exceeded the prior-year figure by CHF 2.8 mn. Because of the substantial additional costs incurred in its LNGM business, the Systems Division closed fiscal year 2018 with an operating loss of CHF –8.7 mn (previous year: CHF –9.0 mn), while the Services Division increased its operating income from CHF 54.4 mn in the previous year to CHF 58.2 mn in fiscal year 2018. Consolidated net income amounted to CHF 32.2 mn, 10.9% more than in the previous fiscal year. As a result of a strong contribution of Shenyang Yuanda Compressor (40% still owned by the founder) to the Groups result, the net income per share decreased by 4.2% to CHF 8.15. Equity remains strong Total assets on the balance sheet closing date amounted to CHF 848.7 mn, an increase of CHF 51.1 mn or 6.4% compared to the previous fiscal year. This increase is mainly attributed to invoicing activity in the final quarter of the fiscal year, which led to a considerable increase in accounts receivable. The equity ratio at the end of fiscal year 2018 was 40.7% (previ- ous year: 42.0%). The net financial position at year-end amounted to CHF –49.4 mn, an improve- ment of CHF 12.7 mn compared to the end of March 2018. Realization of the projects of the Mid-Range Plan 2018–2022 on track The execution of proj- ects detailed in the Mid-Range Plan that was approved in December 2017 is proceeding as planned. Having achieved growth in all of its targeted market segments, the Systems Division was able to defend its leading market position. It continued to successfully execute projects to lower its operating costs and optimize business processes to bring about the necessary improvement in profitability. The Systems Division replaced its formerly centralized sales organization with a decentralized sales structure so it can process the clearly higher level of inquiries being received by customers more efficiently. TO OUR SHAREHOLDERS | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 5 The Services Division continued to successfully pursue its growth strategy and strengthen its market position, especially in engineering and spare parts. We are effectively leveraging our com- pressor manufacturing expertise in the Services Division through our engineering solutions, which are obviously appreciated by our customers. This valuable know-how is also opening new windows of opportunity in the OBC (Other Brand Compressors) business, where considerable growth potential can be tapped. New factory in Shenyang Planning for a new manufacturing site for Shenyang Yuanda in China has begun. It is scheduled to be operational in the autumn of 2020 and will replace the company’s current site. This relocation project can be traced to a decision by Shenyang city officials to con- vert the company’s existing manufacturing site, which has been completely engulfed by the rapidly growing city of Shenyang, to residential use. Shenyang Yuanda Compressor signed an agreement on the terms of its factory relocation with local government officials during the period under review. The consolidation of two separate sites at the new, larger site and the re design of business processes in conformity with the latest standards and best practices will further improve Shenyang Yuanda’s operating efficiency. Valentin Vogt Change in Board of Directors Hans Hess, a member of the Board of Directors of Burckhardt Compression Holding AG since 2006, will not be standing for re-election at the Annual General Meeting of July 6, 2019. Hans Hess became a director immediately after Burckhardt Compression Holding AG went public and was the listed company’s first chairman until 2011. We thank Hans Hess for his extraordinary engagement for Burckhardt Compression. The Board of Directors will propose the election of David Dean, member of the Board of Directors of Bossard Group, to the Board of Directors. Outlook for fiscal year 2019 We expect the general environment in our key markets to remain positive in the current fiscal year as customers maintain high levels of capital expenditure. Full-year sales are forecasted to range between CHF 600 mn and 640 mn. Substantial additional costs associated with the LNGM business are likely to be incurred for the last time in fiscal year 2019. Never theless, we expect to report a slight increase in profit margins. Dividend The Board of Directors will propose an unchanged dividend of CHF 6.00 per share at the Annual General Meeting. This corresponds to a payout ratio of 73.6% of net income per share (previous year: 70.5%), which is slightly above the targeted range of 50% to 70%. Marcel Pawlicek A word of thanks We wish to thank our 2’400 employees around the world for their continued hard work and dedication over the past year and our approximately 4’000 shareholders for their enduring support. We are also grateful for the working partnerships we share with our custom- ers and suppliers, some of which go back many years. Yours sincerely, Valentin Vogt Chairman of the Board of Directors Marcel Pawlicek CEO Winterthur, May 28, 2019 6 175TH ANNIVERSARY | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 175 YEARS BURCKHARDT COMPRESSION Burckhardt Compression was established as a mechanic’s workshop in 1844 and it is celebrating its 175th anniversary in 2019. Today, Burckhardt Compression is the world’s leading manufacturer of reci procating compressor systems and the only OEM and service provider that can offer the full range of reciprocating compressor technology and services. 1883 FIRST RECIPROCATING COMPRESSOR The first single-stage, dry-running reciprocating compressor is developed and sold by the company. The compres- sor’s discharge pressure is 6 bar. Burckhardt Compression has focused on manufacturing reciprocating compressors ever since. 1969 SULZER GROUP Maschinenfabrik Burckhardt is acquired by Sulzer Group. The company begins operating at two locations in Switzerland, one in Basle and one in Winterthur. A few years later, Maschinenfabrik Burckhardt is renamed Sulzer-Burckhardt AG. 1844 COMPANY ESTABLISHED In 1844, Franz Burckhardt purchases his first three pieces of property along the Rümlinbach in Basle and sets up his mechanics workshop. Its first products are rolling and engraving tools used by the city’s then flourishing textile industry to weave silk ribbons. Franz later branches out, manufacturing milling machines, gas-powered machinery and even frames and fittings for belfries. 175TH ANNIVERSARY | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 7 2015 STRONG PRESENCE IN THE USA Burckhardt Compression acquires a minority interest in Arkos Field Services, a US provider of compressor services and components to the natural gas industry. Arkos Field Services has 17 strategically located operating sites in the US. Acquiring this interest gives Burckhardt Compression much better access to the US market. 2016 FURTHER EXPANSION Burckhardt Compression acquires a majority interest in Shenyang Yuanda Compressor, the number one manufac- turer of reciprocating compressor systems in China. This acquisition gives Burckhardt Compression a local market footprint in China and broadens its portfolio so it can address a wider range of market needs. 2019 BURCKHARDT COMPRESSION CELEBRATES Burckhardt Compression celebrates its 175th anniversary with guests from the worlds of business and politics as well as science and technology. The street at company’s headquarters is renamed to Franz-Burckhardt-Strasse in honor of the company’s founder. 2002 MANAGEMENT BUYOUT A management buyout by five Executive Board members in April 2002 makes Burckhardt Compression a legally inde - pendent company; Sulzer-Burckhardt AG becomes Burckhardt Compression AG. 2006 IPO Burckhardt Compression Holding AG goes public on SIX Swiss Exchange (BCHN). The five executives hold 20.9% of the shares after the IPO and sign a shareholder agreement that has since been renewed to this day. 8 MILESTONES 2018 | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION MILESTONES 2018 Three major projects won in China Burckhardt Compression was selected to provide compressors for three LDPE (low-density polyethylene) production lines in China during the year under review. Hyper Compressors and booster/ primary compressors were ordered. Annual production output will be 300 and 400 kilotons, respectively. LDPE is used to manufacture products such as foils and films, insulation for electrical wire and cable, and floor coverings. Hyper Compressors are highly special- ized high-pressure compressors with a discharge pressure of up to 3’500 bar. → Page 31 First standard high-pressure com- pressors sold to a Canadian customer Burckhardt Compression sold its first standard high-pressure compressors built by its plant in India to a customer in Canada. Canada’s stringent regula- tions were met despite a tight produc- tion schedule. The customer was quite satis fied with the result and more orders have been received from Canada in the meantime. → Page 26 First compressor order for cruise ship Burckhardt Compression received its first compressor order for a cruise ship equipped with an alternative liquid natural gas-powered propulsion system. Natural gas emits virtually no sulfur dioxide and CO2 emissions are more than 20% lower compared to the equi - valent level of engine performance using conventional marine diesel and heavy fuel oil, so many ship operators are transitioning to this innovative propulsion system as they seek to comply with increasingly strict environ- mental regulations. The Laby® compres- sor installed for this contract is ideal for boil-off gas applications be cause of its high operational efficiency. What’s more, routine compressor main tenance can be performed by the ship’s crew. → Page 31 MILESTONES 2018 | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 9 Compressors built to order in record time A fire at a facility of one of our custo- mers that produces polysilicon for solar cells using a competitor’s compressors caused extensive damage and had to be rebuilt as quickly as possible to keep downtime to a minimum. Burckhardt Com pression managed to deliver two compressors in record time. Good coordi - nation and short decision-making path - ways, both internally and externally, were instrumental for this successful project outcome. → Page 26 Training program for customers The customer training sessions Burckhardt Compression offered last year were very well booked. Our in-house specia lists are highly familiar with compressor life cycles and they provided valuable insights into topics that most conventional training courses do not cover. Our training center is equipped with modern technical equipment for theoretical and practical instruction. It is located right next to the compressor manufacturing and testing facilities in Winterthur, which yields further opportunities to deepen our customer relationships. → Page 40 Service center in Slovakia opened Burckhardt Compression together with its local partner Sultrade opened a service center in Slovakia. Customers in the Czech Repub lic, Hungary, Poland and Austria are also being served from this new fully equipped and modern service center, which offers a full range of services and repairs for all brands of reciprocating compressors, including hyper compressor services. → Page 39 10 FIGURES AT A GLANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION FIGURES AT A GLANCE ORDER INTAKE CHF mn 700 600 500 400 300 200 100 0 SALES CHF mn 6 00 500 400 300 200 100 0 OPERATING INCOME (EBIT) CHF mn 100 80 60 40 20 0 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 NET INCOME CHF mn SHAREHOLDERS’ EQUITY NET FINANCIAL POSITION CHF mn CHF mn 80 70 60 50 40 30 20 10 0 350 300 250 200 150 100 50 0 160 140 120 100 80 60 40 20 0 –20 –40 –60 –80 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 SHARE PRICE SINCE IPO BCHN SPI FISCAL YEAR 2018 BCHN CHF 500 450 400 350 300 250 200 150 100 50 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 04/01/2018 CHF 302.20 CHF 500 450 400 350 300 250 200 150 100 50 0 03/31/2019 CHF 271.00 FIGURES AT A GLANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 11 Sales Gross profit in % of sales Sales Gross profit in % of sales Sales Gross profit in % of sales in CHF mn Order intake: – Systems Division – Services Division Total Sales and gross profit: – Systems Division – Services Division Total Operating income (EBIT) in % of sales Net income in % of sales Depreciation and amortization Cash flow: – from operating activities – from investing activities – from financing activities (incl. translation differences) Total Total balance sheet assets Non-current assets Current assets Shareholders’ equity in % of total balance sheet assets Net financial position (in CHF mn) Headcount as per end of fiscal year (full-time equivalents) Total remuneration Board of Directors (in TCHF) Total remuneration Executive Board (in TCHF) Share price as per end of fiscal year (in CHF) Market capitalization (in CHF mn) Market capitalization/shareholders’ equity (ratio) Net income per share (EPS) (in CHF) Dividend per share (in CHF) Number of issued shares 1 Motion to the Annual General Meeting 2017 2018 Change 2017/2018 319.8 205.4 525.2 384.4 27.2 7.1% 210.2 97.9 46.6% 594.6 125.1 21.0% 41.7 7.0% 29.0 4.9% 21.3 44.4 –17.2 –27.0 0.2 797.6 251.8 545.8 335.2 42.0% –62.1 2’214 569 2’378 304.80 1’036.3 3.1 8.51 6.00 428.0 230.7 658.7 375.4 30.5 8.1% 223.9 105.2 47.0% 599.3 135.7 22.6% 44.5 7.4% 32.2 5.4% 21.8 41.8 –7.8 –26.1 7.9 848.7 250.8 597.9 345.0 40.7% –49.4 2’346 569 2’557 271.00 921.4 2.7 8.15 6.001 3’400’000 3’400’000 33.8% 12.3% 25.4% –2.3% 12.1% 6.5% 7.5% 0.8% 8.5% 6.8% 10.9% 2.5% –5.9% 6.4% –0.4% 9.5% 2.9% 6.0% 0.0% 7.5% –11.1% –11.1% –13.6% –4.2% 0.0% 12 OUR COMPANY | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION OUR COMPANY HISTORY Our company history began 175 years ago. On January 9, 1844, founder Franz Burckhardt laid the foundation for success by purchasing the first company premises in Basle. In its early years, Burckhardt’s mechanics workshop manufactured machines for the textile industry. Over the years, Burckhardt expanded his field of activity to general mechanical engineer- ing. In 1856, the company started producing steam engines. In 1878, the first reciprocating compressor was developed and the first sales recorded in 1883. As additional capital was needed to finance the construction of the new factory on Dornacher- strasse in Basle, the “Engineering Works Burckhardt Ltd.” was established in Basle in 1890 by August Burckhardt, who had taken over the company from his deceased father Franz. Another milestone was achieved in 1913 with the delivery of the first ammonia synthesis compressor with an end pressure of 300 bar to BASF in Ludwigshafen, Germany – a customer that had purchased one of Burckhardt’s first compressors back in 1885. In 1935, Sulzer supplied the Hürlimann Brewery in Zurich with the first Sulzer Labyrinth Piston Compressor and in 1951, the company received an order from Imperial Chemical Industries (ICI) for 11 Hyper Compressors for the production of low density polyethylene (LDPE) with an end pressure of 1’500 bar. After several years’ cooperation between Burckhardt and Sulzer, the Engineering Works Burckhardt was taken over by Sulzer and became a subsidiary of the Sulzer Group on May 8, 1969. In 1982, as part of an intensified cooperation, the recipro- cating compressor activities of the Sulzer Group were consoli- dated under one legal entity, the Sulzer-Burckhardt Engineering Works Ltd. In 1994, the company celebrated its 150th anniver- sary. In the process of restructuring the entire Group in 1999, Sulzer decided to consolidate the activities of Sulzer-Burck- hardt Switzerland in Winterthur. Activities in Basle were relo- cated to Winterthur and the building on Dornacherstrasse in Basle was sold. In 2000, Sulzer decided to concentrate its activities on four divisions. As Sulzer-Burckhardt did not fit in with this new strat- egy, the decision was made to divest Sulzer-Burckhardt. Together with the financial investor Zurmont Finanz AG, five members of management purchased Sulzer-Burckhardt Engi- neering Works Ltd. on April 30, 2002. In the course of separat- ing from Sulzer, Sulzer-Burckhardt became Burckhardt Com- pression in May 2002. In 2006, Zurmont decided to divest its shares in Burckhardt Compression by means of an IPO. Our company has been listed on the SIX Swiss Exchange since June 26, 2006, and at the end of the year under review it was one of the 90 largest listed companies in Switzerland by market capitali zation. In May 2016, the Group acquired a 60% majority interest in Shenyang Yuanda Compressor, the leading manufacturer of reciprocating compressor systems in China. In June 2016, Burckhardt Compression introduced a divisional organizational structure with two divisions, Systems and Services, which enables it to address customer needs even better than before. In December 2017, Burckhardt Compression adopted the Mid- Range Plan for fiscal years 2018 to 2022. This sets the compa- ny’s strategic direction for the next five years and defines its targets. On January 9, 2019, Burckhardt Compression officially celebrated its 175th corporate anniversary with distinguished guests from the worlds of business and politics as well as sci- ence and technology. Burckhardt Compression is also showing its appreciation of the efforts of its employees by organizing internal events that will be held at every company site through- out the year to commemorate this milestone. VISION AND MISSION Vision We are our customers’ first choice for gas compression solu- tions across the entire product life cycle. Mission Systems Division: We provide optimal gas compression solu- tions for every customer. Services Division: We build trust with customers and depend- able, uncomplicated business relationships while ensuring the reliable, efficient operation of their compressors over the entire product cycle. BURCKHARDT COMPRESSION BRAND Burckhardt Compression and its umbrella brand stand for qual- ity and worldwide leadership in innovative reciprocating com- pressor systems and technology. Cutting-edge technology, a vast portfolio of compressors and components and a full range of services make Burckhardt Compression an ideal partner for customers around the world who want highly reliable, custom- tailored solutions for their reciprocating compressor systems. Our collaboration with external and internal customers is dedi- cated, solutions-oriented and distinguished by genuine enthusi- asm for our reciprocating compressors. The umbrella brand and corresponding logo in the form of the red-blue, stylized compressor valve plate have been internationally registered for many years. Burckhardt Compression’s brand and patent attor- neys will vigorously and steadfastly defend the company against OUR COMPANY | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 13 any imitations, counterfeiting or patent infringements. There are clear rules governing the use of Burckhardt Compression brands and their perception is developed and promoted through active usage in our corporate and marketing communication activities. expansion of its local and regional presence to the buildup of its maritime services network, to achieve its targets in the Ser- vices Division. Furthermore, digitalization will help to create new business models and applications in both divisions and optimize produc- tion processes. PRODUCT DEVELOPMENT AND INNOVATION Innovation management and systematic product development/ management serve to strengthen our competitive position and enable us to optimally address new applications for reciprocat- ing compressors by developing and delivering customer- oriented solutions. Burckhardt Compression’s prime objective is to develop reciprocating compressors and components that optimally address customer needs and ensure its technology leadership in the market for reciprocating compressors. Qual- ity, technology, materials and design specifications are geared towards high operational reliability, optimal service intervals and easy maintenance – the overall aim being to achieve the lowest possible operating costs. Burckhardt Compression’s product development activities have been guided by a stage- gate process for many years. This process is first applied in the idea generation and screening phase and continues during the initial evaluation of product viability and market attractiveness followed by the elaboration of product performance specifica- tions, market analysis and then the actual development and subsequent launch of the product. After a product has been successfully developed and placed into operation, a concluding review of the development project is conducted. All stage-gate milestones are subject to approval by the “Innovation Board,” which is headed by members of the Executive Board. GUIDING PRINCIPLES In response to the Group’s substantial growth in recent years and ongoing internationalization, Burckhardt Compression issued uniform “Values and Behaviors” that serve as the very foundation of our corporate culture. This document is also per- tinent in the increasing collaborative interaction and increas- ingly virtual collaboration between the Group’s subsidiaries and sites across the world. In this context, it is vital that all our employees share a common understanding of the values and principles that guide our actions. STRATEGY AND MID-RANGE TARGETS Burckhardt Compression is the world’s leading manufacturer of reciprocating compressors. It operates in two divisions, Sys- tems and Services. Burckhardt Compression’s Mid-Range Plan for the fiscal years 2018 to 2022 targets the continued expan- sion of its market position through organic growth and selec- tive acquisitions, with the ultimate objective of strengthening its market leadership. No acquisitions were made during the year under review. Mid-Range Plan for fiscal years 2018 to 2022 Consolidated sales of around CHF 700 mn in fiscal year 2022 are targeted in the Mid-Range Plan with a fairly balanced sales mix between the two divisions and an EBIT margin of 10% to 15% at Group level. The Systems Division will aim to improve its profitability while maintaining its global market leadership. Its sales target for 2022 is CHF 340 mn with an EBIT margin of 0% to 5%. A greater emphasis on global procurement and further cost optimization will help it to achieve these targets. The division will also broaden its presence in its targeted market segments and introduce new applications. The 2022 sales target for the Services Division including Arkos Field Service is CHF 360 mn. The target range for its EBIT margin is 20% to 25%. Servicing the compressors of other manufacturers is an important growth priority for this division. Burckhardt Compression will launch further operational initia- tives, ranging from implementing global processes and the 14 OUR COMPANY | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION MAIN APPLICATION AREAS Upstream oil & gas Despite increasing energy efficiency, global demand for energy continues to grow, spurring efforts to discover new deposits of oil and gas as well as new ways of improving recovery from existing wells. Moreover, producers must comply with increas- ingly stringent regulations requiring the environmentally responsible disposal of toxic and non-toxic gases that arise dur- ing extraction and production. Burckhardt Compression offers onshore and offshore solu- tions for a wide range of applications. High-quality, low-speed reciprocating compressors (compliant with API standard 618) have been developed for these applications, which include enhanced oil recovery (EOR) methods. EOR is a technique where pressurized gas is injected into productive fields either directly through existing well bores (gas lift) or through separate well bores (gas injection), resulting in significantly higher recovery rates. Recovery rates are typically around 30% using conven- tional production methods and can often be increased to more than 60% using EOR methods. Natural gas is used to enhance recovery rates and it is often mixed with other gases. EOR methods can also be combined with environmentally responsi- ble methods for disposing of unwanted gases, which in the past were usually flared, thereby polluting the surrounding environ- ment and atmosphere. Burckhardt Compression is an expert at building compressors for compressing these gases, which often contain aggressive sulfuric components. In deepwater applica- tions, CO2 injection is also used for EOR methods with pressure levels of up to 600 bar. Onsite preprocessing applications in the oil and gas industries offer additional opportunities for Burck- hardt Compression. In these applications individual compo- nents of extracted gas are separated at the wellhead to facili- tate the subsequent gas transport through the gathering lines to centralized points. Gas transport and storage Demand for environmentally friendly natural gas will continue to increase over the long term. Replacing the liquid fossil fuels of diesel, gasoline and oil with natural gas would reduce global carbon dioxide emissions by about 25%. That fact and more stringent emissions regulations, especially in the maritime industry, are additional incentives to switch to natural gas as a source of fuel. Liquid natural gas is increasingly being used as propulsion fuel for LNG tankers, merchant ships and cruise ships. More coal-fired and nuclear power plants will be replaced with natural gas power plants in many regions of the world over the long run amid widespread efforts to decarbonize growing economies and diversify energy supply. The development of new sources of natural gas, such as shale gas deposits, is increasing the volume of international trade in natural gas, and transport and storage volumes are therefore rising as well. This is especially evident in the non-pipeline mode of gas transpor- tation via LNG tankers, which offers greater flexibility and avoids the geostrategic risks associated with gas pipeline infra- structure. More than 40% of total natural gas transport volumes traded and transported worldwide are liquefied, which reduces gas transport volumes by a factor of 600. The LNG process chain begins with the extraction, purification and liquefaction of the natural gas, followed by ship loading, transportation and subsequent off-loading, then the storage and regasification and, ultimately, injection into a gas distribution grid. Burckhardt Compression offers unique solutions for compressing and reliq- uefying boil-off gas (BOG) from liquid gases, for gas injection systems for two- or four-stroke marine diesel engines, and for recovering or storing natural gas and other hydrocarbons at onshore or offshore installations. Refinery Refineries process crude oil into products such as gasoline, ker- osene, diesel, liquefied petroleum gas (LPG) as well as solvents and lubricants. Worldwide demand for these products will con- tinue to grow over the long term and most of the growth in demand will stem from non-OECD countries, especially China and India. Additional factors encouraging investment in the refining industry are more stringent environmental regulations, cost-cutting pressure, plant expansion trends and the need to process both lower-quality grades of crude oil and, in techno- logically more advanced processes, heavy petroleum by- products. New refineries are being built in areas where addi- tional processing capacity is needed. For state-owned refiner- ies, strategic issues regarding location and supply security are also of considerable importance. Burckhardt Compression offers Process Gas Compressors with the highest possible availability and lowest life cycle costs for all relevant oil refin- ing processes that require gas (mostly hydrocarbon gas/hydro- carbon mixtures). Petrochemical/chemical industry The production of a vast range of petrochemical and chemical products such as polyolefins (polymers), lacquers, synthetic rubbers, adhesives and dyes, solvents, paints, fertilizer, deter- gents or textiles entails, among other things, the processing of oil, natural gas and even coal. Demand for petrochemical and chemical products, especially for polyolefins, will steadily increase worldwide over the long term. In this application area, too, companies will continue their efforts to reduce costs by replacing smaller scale plants with larger ones, establishing strategic production sites, and extending value-added chains. OUR COMPANY | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 15 An additional source of growth is the growing production of natural gas from shale formations worldwide. In terms of potential, the US is the leading market in this segment. Burck- hardt Compression offers several product lines with individual, reliable and benchmark-setting reciprocating compressor solu- tions for a broad spectrum of applications. hot spots. The Laby® Compressor is designed to compress bone-dry, dirty, abrasive and other gases. The gastight casing reduces gas emissions and losses to the environment to virtu- ally zero. The Laby® Compressor easily manages the compres- sion of LNG boil-off gas at suction temperatures of as low as minus 160 °C (-250 °F). Industrial gases Industrial gases such as argon, helium, carbon dioxide, carbon monoxide, oxygen, nitrogen and hydrogen are produced in air separation or hydrogen generation plants. The end market for industrial gases is quite broad, encompassing industries as diverse as metalworking and metallurgy, chemicals, energy technology, food manufacturing, green technology, glass, pulp and paper manufacturing, electronics, construction, rubber and plastics processing, and healthcare. Growth drivers are regional growth and industry-specific growth. The production of hydro- gen for the energy (refineries) and transportation sectors is expected to be a particularly strong growth driver in this mar- ket segment. This serves as another example of an application area where Burckhardt Compression is profiting from the increased extraction of shale gas deposits, especially in the US. Burckhardt Compression’s dependable compressors are used in a wide variety of applications to process industrial gases. CUSTOMERS The customers we serve include some of the largest companies in the world active in the oil and gas industry, the gas transpor- tation sector, the petrochemical/chemical industry and the industrial gas sector, as well as a considerable number of gen- eral engineering companies that design and construct plants or industrial complexes for our end customers. COMPRESSOR SYSTEMS Burckhardt Compression’s reciprocating compressors are the key part of compressor systems which, in turn, are part of large-scale processing plants. Laby® – Labyrinth Piston Compressors The Labyrinth Piston Compressor offers unrivaled reliability and availability thanks to its unique labyrinth sealing system on the piston and piston rod gland, which enables oil-free and contact- free compression. The result is a longer service life, which has a positive impact on overall reliability and operating costs. This prevents piston ring debris from contaminating the gas as well as friction-induced Laby®-GI Compressors The Laby®-GI Compressor has a fully balanced design that eliminates unbalanced moments and forces, so it can be used on offshore vessels and installations. Strict guidelines for offshore applications regarding maximum allowable vibration levels on deck structures must be observed. The Laby®-GI Com- pressor is mainly used for the compression of LNG boil-off gas. The unique combination of labyrinth seal design and tried-and- tested ring seal technology makes Laby®-GI Compressors the solution of choice for both low-temperature and high-pressure applications. The proven technology is a guarantee for maxi- mum efficiency and lowest life cycle costs. Depending on the operating conditions, Laby®-GI Compressors can feature either lubricated or non-lubricated compression. Process Gas Compressors per API 618 Process Gas Compressors built by Burckhardt Compression are synonymous with unrivaled availability and long operating lives. Optimal sizing and the use of top quality compressor components ensure low operating and maintenance costs. The design, the advanced Swiss technology and superb quality together with the robust construction translate into excellent reliability and very low life cycle costs. Our Process Gas Compressors are built according to indi- vidual application specifications in accordance with the API 618 guidelines (5th edition). Burckhardt Compression offers non- lubricated and lubricated Process Gas Compressors, horizontal and vertical. They are especially suited for high-pressure com- pression of hydrogen, hydrocarbon and corrosive gases. In order to satisfy the demanding processes in refineries, Burckhardt Compression has extended its range and now offers a complete portfolio of Process Gas Compressors for refineries. In addition to our premium product line, which focuses on low- ering operating costs through optimized design and high- quality components, we now also offer a robust, modular and CAPEX-optimized product line. Thanks to Burckhardt Compres- sion’s worldwide engineering and service organization, we can take ad vantage of the Group’s competence centers all over the world, offering a complete solution that is focused fully on the needs of the customer. 16 OUR COMPANY | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION Hyper Compressors The Hyper Compressor is a high-pressure reciprocating com- pressor for low density polyethylene (LDPE) plants with a dis- charge pressure of up to 3’500 bar. Burckhardt Compression has established an outstanding track record with up to 60 years of experience in building Hyper Compressors. These compres- sors are distinguished by a long operational life and high safety standards, which can be traced to their unique construction design and Burckhardt Compression’s global one-stop mainte- nance and service capabilities. The most powerful compressor in the world, driven by a 33’000 kW electric motor and compression capacity of 400’000 metric tons of ethylene a year, was built by Burckhardt Compression in 2016. Burckhardt Compression is the world market leader for Hyper Compressors. Standard High Pressure Compressors Standard High Pressure Compressors from Burckhardt Com- pression are extremely robust and reliable reciprocating com- pressors with a compact design and low weight. They are deliv- ered skid-mounted with structural supports that dampen vibrations, so there is no need for a special foundation. Due to the low-pressure conditions per compressor speed range, greater piston displacement can be achieved at lower compres- sion temperatures. The result is high compression efficiency, low wear and less maintenance expense. The air- and water- cooled compressors are used to compress air, hydrogen, nitro- gen, helium, argon, natural gas and other non-corrosive gases and gas mixtures at land facilities and on ships. The Standard High Pressure Compressors are smaller than the other com- pressors in Burckhardt Compression’s portfolio of reciprocating compressors, with a maximum power of 220 kW, maximum dis- charge pressure of 400 bar and suction volumes of up to 1’500 Nm3/h. SERVICE AND COMPONENTS BUSINESS The Services Division is a full-range provider of services for reciprocating compressors and related engineering expertise. Its comprehensive range of services is backed by OEM parts with high supply readiness as well as vast engineering know- how, from simple modifications to extensive retrofit and revamp projects as well as turnkey solutions. Experienced field service technicians ensure close interaction with the customer and rapid response. Depending on the size of the project and site, Burckhardt Compression also offers a 24/7 shift operation, so production systems can be put back into operation even faster. We also provide reliable, expert monitoring and diagnostic solu- tions as well as advisory services, all from a single source. Comprehensive engineering, revamp and repair expertise Reliability, availability and cost-effectiveness are crucial for operators of reciprocating compressor systems, which is why they appreciate expert partners with extensive knowledge of such systems who can offer them sound advice. Burckhardt Compression stands out from other manufacturers and service providers because of its comprehensive in-house expertise. A wide range of complementary services are offered for all brands of reciprocating compressors and their auxiliary system, and even for all types of other compressors. Our internal spe- cialists come from various technical fields and use proprietary, advanced software tools to model, calculate and optimize reciprocating compressor performance, regardless of make or brand. They are capable of resolving even highly complex tech- nical problems cost-effectively and efficiently. A highly moti- vated team carries out revamp projects of any complexity to the full satisfaction of customers and can prolong the operat- ing life of older compressors by retrofitting them with the latest technology. Original spare parts for optimal compressor operation Original spare parts backed by Burckhardt Compression’s full warranty as an OEM stand for superior quality and ensure low life cycle costs as well as the optimal operation of compressor systems. These top-quality compressor components are tai- lored to specific system requirements. Compressor compo- nents such as valves, seals and packings are subject to wear and tear, so these parts largely determine the duration of ser- vice intervals and operational availability and, ultimately, the overall life cycle costs of reciprocating compressors. Besides operational availability, Burckhardt Compression stands by its commitment to supply compressor parts and components over a long-term period. Burckhardt Compression is methodically expanding this business in close collaboration with numerous operators of reciprocating compressors. OUR COMPANY | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 17 Diagnosis and monitoring for superior operational reliability Preventive services and rapid response times, based on online diagnostic data and analyses, play a vital role in optimizing compressor availability. Reliable condition monitoring and diag- nostic systems for reciprocating compressors and equipment, integrated within the top-level systems for monitoring an entire production facility, are effective tools for enhancing opera- tional reliability and for longer service intervals. Continuous machine diagnosis detects potential and actual anomalies at an early stage and thus helps to avoid costly and unscheduled downtime. Other advantages include the optimization of oper- ating parameters and central control and monitoring of com- pressors that are in operation at different sites. The diagnostic systems made by our subsidiary PROGNOST Systems GmbH are designed for use with all types of reciprocating compressors as well as with many other types of rotating machinery. They are backed by unrivaled technology and reliability and deliver value day after day in the oil, gas and chemical industries. Field service – close to the customer Geographic proximity, a local presence and long-lasting cus- tomer relationships grounded in trust are another key to our success. Having a local presence simplifies interaction with the customer, shortens the supply chain and reduces field service hours. Burckhardt Compression is active in all relevant markets through its own subsidiaries and its business partners. It cur- rently operates 50 service centers around the world and boasts a strong regional reach. It will continue to expand this service network going forward. Customer training sessions The training sessions we have been offering to our customers for many years empower them to make better use of our know- how. Theoretical and practical training courses for various types of compressors and our own and third-party components are offered at our modern training center that we have set up in Winterthur and we also provide on-site training at customer sites with the systems they have. Qualified technical special- ists instruct customers on a wide range of maintenance and operational issues over the life cycle of any compressor sys- tem. 18 WE ARE BURCKHARDT COMPRESSION 175TH ANNIVERSARY – AND FIT FOR THE FUTURE Founded as a mechanics workshop in 1844, Burckhardt Compression is proudly celebrating its 175th anniversary in 2019. This long history would not have been possible without a truly innovative spirit, a steady focus on the customer and an unwavering passion for compressor systems and services. Well-qualified and dedicated employees ensure our successful future. 19 20 21 22 REVIEW OF THE FISCAL YEAR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION REVIEW OF THE FISCAL YEAR FINANCIAL PERFORMANCE Order intake: Renewed rise at both divisions Group order intake totaled CHF 658.7 mn and exceeded the prior-year figure by a pleasing 25.4%; excluding currency trans- lation effects, incoming orders were up 25.6%. Orders received reached all-time highs at both divisions. The Systems Division accounted for CHF 428.0 mn of the new orders, which repre- sents an increase of 33.8% from the previous year. All targeted market segments contributed to this order growth. Orders received in the Services Division rose by 12.3% to CHF 230.7 mn. Spare parts and engineering services accounted for much of this order growth. Sales at prior-year level Consolidated sales for fiscal year 2018 edged 0.8% higher to CHF 599.3 mn; excluding currency translation effects, sales were up 0.9% year-on-year. Sales were 6.5% higher in the Services Division and 2.3% lower in the Systems Division. Operating margin improves Gross profit of CHF 135.7 mn was 8.5% more than the prior-year figure of CHF 125.1 mn and the resulting gross profit margin was 22.6% (previous year: 21.0%). The Systems Division’s gross margin improved to 8.1% (previous year: 7.1%). Gross profit at the Services Division rose 7.5% to CHF 105.2 mn, bringing its gross profit margin to 47.0%, slightly above the 46.6% margin reported for the previous fiscal year. Operating income amounted to CHF 44.5 mn or 7.4 percent of sales (previous year: 7.0%) and exceeded the prior-year figure by CHF 2.8 mn. Because of the substantial additional costs incurred in its LNGM business, the Systems Division closed fiscal year 2018 with an operating loss of CHF –8.7 mn (previous year: CHF –9.0 mn), while the Services Division increased its operating income from CHF 54.4 mn in the previous year to CHF 58.2 mn in fiscal year 2018. Consolidated net income amounted to CHF 32.2 mn, 10.9% more than in the previous fiscal year. As a result of a strong con- tribution of Shenyang Yuanda Compressor (40% still owned by the founder) to the Groups result, the net income per share decreased by 4.2% to CHF 8.15. Equity remains strong Total assets on the balance sheet closing date amounted to CHF 848.7 mn, an increase of CHF 51.1 mn or 6.4% compared to the previous fiscal year. This increase is mainly attributed to invoicing activity in the final quarter of the fiscal year, which led to a considerable increase in accounts receivable. The equity ratio at the end of fiscal year 2018 was 40.7% (previous year: 42.0%). The net financial position at year-end amounted to CHF –49.4 mn, an improvement of CHF 12.7 mn compared to the end of March 2018. Realization of the projects of the Mid-Range Plan 2018–2022 on track The execution of projects detailed in the Mid-Range Plan that was approved in December 2017 is proceeding as planned. Having achieved growth in all of its targeted market segments, the Systems Division was able to defend its leading market position. It continued to successfully execute projects to lower its operating costs and optimize business processes to bring about the necessary improvement in profitability. The Systems Division replaced its formerly centralized sales organization with a decentralized sales structure so it can process the clearly higher level of inquiries being received by customers more efficiently. The Services Division continued to successfully pursue its growth strategy and strengthen its market position, especially in engineering and spare parts. We are effectively leveraging our compressor manufacturing expertise in the Services Division through our engineering solutions, which are obviously appreci- ated by our customers. This valuable know-how is also opening new windows of opportunity in the OBC (Other Brand Compres- sors) business, where considerable growth potential can be tapped. Workforce growth The number of employees at the end of the fiscal year stood at 2’346, an increase of 132 from the year-ago figure of 2’214. This increase was fairly evenly split between the two divisions. At the end of March 2019, 738 employees (32%) were employed in Switzer land, 1’130 (48%) in BRIC countries and 478 (20%) in other countries. REVIEW OF THE FISCAL YEAR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 23 ORDER INTAKE CHF mn SALES CHF mn 700 600 500 400 300 200 100 0 6 00 500 400 300 200 100 0 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 EBIT AND NET INCOME CHF mn 100 80 60 40 20 0 09 10 11 12 13 14 15 16 17 18 EBIT Net income EQUITY RATIO CHF mn 1’000 900 800 700 600 500 400 300 200 100 0 % 100 80 60 40 20 0 50 51 53 55 56 50 50 39 42 41 09 10 11 12 13 14 15 16 17 18 Balance sheet total Shareholders’ equity Equity ratio (%) 24 REVIEW OF THE FISCAL YEAR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION CAPACITY RESEARCH AND DEVELOPMENT The Services Division partnered with Sultrade to open a new service center in Slovakia during the year under review. Petro- chemical and refinery customers in neighboring countries will also be served from this new location. In Thailand, a service center for compressor valves was opened in partnership with SPAN Maintenance and Service Co. Ltd. ACQUISITIONS No acquisitions were made during the past fiscal year. CUSTOMERS Working with customers in a spirit of partnership is important to Burckhardt Compression. Both divisions regularly conduct customer surveys in a bid to understand customer needs even better, and such surveys were carried out while preparing the latest Mid-Range Plan. The survey findings and resulting action plans and initiatives were incorporated in the new plan. Compressor systems for marine applications We added two new products to our portfolio of compressors for large LNG carriers during the past year. With this portfolio expansion we can offer optimal solutions for all our customers’ needs in this segment. We continued to adjust our operations to the developments in this dynamic market during the year under review to meet the needs of our customers going forward. We also developed new solutions to optimize the operation of the considerable number of already installed marine com- pressors. These help to sustain the value of our products at customer installations. New materials for the Persisto® portfolio We enlarged and optimized our portfolio of Persisto® compressor sealing systems materials during the year under review. These mostly PTFE-based materials have superior tribological qualities and significantly extend the service lives of oil-lubricated and oil- free compressors. Many of these materials were engineered by Burckhardt Compression and are also manufactured in-house in accordance with our quality management system. Our portfolio of Persisto® materials for compressor sealing systems continued to grow over the year. Optimization of our valve portfolio We also optimized our valve portfolio during the year under review. We developed more energy-efficient valves and intro- duced new materials with the aim of extending the service life of compressor valves. Portfolio of refinery and industrial gas compressors ex panded As well as constantly optimizing our portfolio of process gas compressors, we have added a smaller compressor to the range that specifically addresses the needs of refinery customers. This is a commercially very interesting product that meets standard specifications and creates more business opportuni- ties for us in the highly competitive refinery compressor market. REVIEW OF THE FISCAL YEAR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 25 BRAND MANAGEMENT We are constantly striving to optimize and strengthen the inter- national profile of the Burckhardt Compression brand. Our cor- porate identity and long-term brand strategy express the orga- nization’s values and principles and highlight Burckhardt Compression’s position as a unique, long-term partner with a strong Swiss tradition. In the period under review, various print and online communi- cations tools were introduced for both divisions and Burckhardt Compression’s trade show visuals were improved. 26 SYSTEMS DIVISION “Burckhardt Compression’s order intake during the past fiscal year was higher than ever before and included orders for three LDPE lines with Hyper Compressors and the very first order for handling boil-off gas on a cruise ship. We also sold our first standard high pressure compressors to a customer in Canada, a milestone of which all of us in India are rightfully proud.” Suraj Ghadge, Plant Maintenance, Burckhardt Compression India 27 28 29 30 REVIEW OF THE FISCAL YEAR SYSTEMS DIVISION | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION REVIEW OF THE FISCAL YEAR SYSTEMS DIVISION ORDER INTAKE CHF mn 500 400 300 200 100 0 SALES CHF mn 4 00 300 200 100 0 GROSS PROFIT CHF mn 100 80 60 40 20 0 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 OPERATING INCOME (EBIT)1 CHF mn 50 40 30 20 10 0 –10 09 10 11 12 13 14 15 16 17 18 FIGURES in CHF mn Order intake Sales and gross profit Operating income (EBIT) in % of sales Sales Gross profit in % of sales 2016 2017 2018 Change 2017/2018 280.6 319.8 428.0 33.8% 367.2 36.5 9.9% –1.5 –0.4% 384.4 27.2 7.1% –9.0 –2.3% 375.4 30.5 8.1% –8.7 –2.3% –2.3% 12.1% Headcount as per end of fiscal year (full-time equivalents) 1’446 1’425 1’506 5.7% 1 Before fiscal year 2015, no EBIT was reported at divisional level. REVIEW OF THE FISCAL YEAR SYSTEMS DIVISION | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 31 FINANCIAL PERFORMANCE All-time high order intake Full-year order intake at the Systems Division reached an all- time high of CHF 428.0 mn, which represents a 33.8% increase year-on-year. This pleasing growth was largely driven by robust market demand, as well as by Burckhardt Compression’s lead- ing position in all key applications in the petrochemical, refinery and maritime market segments. Divisional sales of CHF 375.4 mn were slightly lower (–2.3%) than in the previous year. The result- ing gross profit was up by 12.1% year-on-year but still unsatis- factory at CHF 30.5 mn, which corresponds to a gross profit margin of 8.1% (previous year: 7.1%). Gross profit was diminished by additional costs related to the ramp-up of the LNGM busi- ness, while further progress was made in reducing other cost items. More action plans aimed at improving profitability were devised within the scope of the “Pulling Systems Together” pro- gram. The division’s full-year operating loss of CHF –8.7 mn was slightly less than in the previous fiscal year (CHF –9.0 mn). MARKETS Burckhardt Compression offers compressor system solutions for the following application areas: – Upstream oil & gas – Gas transport and storage – Refinery – Petrochemical/chemical industry – Industrial gases Order intake at the Systems Division topped the year-ago figure by 34% and set an all-time high. Burckhardt Compression performed well during the past fiscal year in the face of unrelenting competitive pressure. In China, for example, we won contracts to supply compressors for three LDPE production lines, which comes on the heels of several other large orders placed by Chinese customers in the previous fiscal year. This represents a renewed strengthening of the divi- sion’s already strong market position in this segment. Upstream oil & gas Overdue investments in upstream production were observed during the year under review after several years of suppressed capex caused by low prices for oil and natural gas. This is the only application area targeted by Burckhardt Compression that is impacted by crude oil prices. Gas transport and storage The LNG (liquefied natural gas) market clearly gained momen- tum in 2018 after showing signs of a tepid recovery in the previ- ous fiscal year. The number of new LNG tankers under construc- tion showed pleasing growth and reflects increasing global demand for greener and more cost-effective sources of energy. Operators of both container and cruise ships must comply with increasingly strict environmental regulations; for example, sulfur dioxide and nitrogen oxide emissions will be capped at significantly lower levels beginning in 2020. Technology that enables different types of vessels to be equipped with environ- mentally cleaner propulsion systems will further develop in the market. Burckhardt Compression introduced more solutions in the year under review to address market demand and won its first order to equip a cruise ship with compressors. A frame- work agreement was also signed with an important Korean shipyard for large-scale LNG tankers, and Burckhardt Compres- sion is proud to occupy a leading position in this attractive market. New orders for LNG terminals in China were another highlight of the fiscal year and will create significant growth opportunities in years to come. Refinery Business momentum in this segment remained positive during the period under review, buoyed by the double-digit growth of the underlying global market volume. Growth has been quality- driven as all classes of fossil fuels must now be virtually sulfur- free in all major world markets. Looking ahead, the two large markets of China and India are expected to generate further quantitative growth. These positive trends in the refinery mar- ket have also been driven by the long-term strategies being pur- sued in major countries to increase domestic value creation, thereby reducing their dependency on imported refinery prod- ucts. Our compressor business is benefiting from these efforts. Burckhardt Compression received major orders for process gas compressors from customers in the Middle East and, for the first time ever, the US. We also note that Shenyang Yuanda Compres- sor claims a significant share of the refinery market in China. Petrochemical and chemical industry Business in this segment was pleasing. Burckhardt Compres- sion’s Laby compressors for low-pressure PCI applications sold well, particularly in China, Southeast Asia, the Middle East and the USA. Orders to supply compressors for three LDPE produc- tion lines in China were received. Growing global demand for plastic products represents a long-term growth driver for the petrochemical and chemical industries. The petrochemical industry is adding production capacity at a fast clip due to the strong demand and government policies to increase domestic value creation. 32 REVIEW OF THE FISCAL YEAR SYSTEMS DIVISION | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION INFRASTRUCTURE Planning for a new manufacturing site for Shenyang Yuanda in China began during the period under review. The new site is scheduled to be operational in the autumn of 2020 and will replace the company’s current site. This relocation project can be traced to a decision by Shenyang city officials to convert the company’s current manufacturing site, which has been com- pletely engulfed by the rapidly growing city of Shenyang, to res- idential use. Shenyang Yuanda Compressor signed an agree- ment on the terms of its factory relocation with local government officials during the period under review. The con- solidation of two separate sites at the new, larger site and the redesign of business processes in conformity with the latest standards and best practices will further improve Shenyang Yuanda’s operating efficiency. Considerable infrastructure investments were also made at various other sites last year. In India, we concluded a project to expand production capacity for mid-scale process gas compres- sors. Our Global Support Center in the country was also expanded and, given the increase in order inflow, the headcount in Design & Manufacturing and Contracting was increased at every manufacturing site. Industrial gases Given the vast range of applications for industrial gases, this segment also displayed good growth. We expect that the vari- ous targeted industries will grow at least in step with global GDP growth, if not slightly faster, so demand for compressors is likewise expected to increase. The very first order for our new diaphragm compressor designed for use in the promising mar- ket of hydrogen fuel production was the highlight of the year in this segment. SALES/DISTRIBUTION In the year under review, the sales organization for new com- pressor systems was decentralized. Responsibility for cus- tomer relationship management and project negotiations (front sales) was transferred to the respective regions and offices for preparing and processing technical proposals and quotes (appli- cation engineering) were set up in each region. This process of decentralization is nearing completion and is already providing a payback in terms of risk management and quality assurance. Furthermore, it has enabled the Systems Division to handle the higher order flows within the required timelines in close col- laboration with its customers. The two geographic regions of Southeast Asia and Eastern Europe / Central Asia were estab- lished as autonomous sales regions for new compressor systems with the corresponding sales offices in Bangkok and Winterthur. This clear delegation of responsibility gives us a strong er regional presence. An agreement was reached with our external agents in countries where we do not employ our own sales staff to work on a project-specific basis, which will make our collaboration with externals more efficient and effective. REVIEW OF THE FISCAL YEAR SYSTEMS DIVISION | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 33 “PULLING SYSTEMS TOGETHER” FOR POSITIVE CHANGE A sweeping process- and cost-optimization program was initi- ated in the Systems Division at the end of 2016 to improve its ability to respond to sudden fluctuations in order volumes and to bring about a significant and lasting improvement in its operational excellence over the medium term. Approximately 30 separate projects are being pursued in the “Pulling Systems Together” program and they affect every unit in the division, including its design, procurement, production workflow, project management, logistics and capacity management activities. Considerable progress was made last year and most of the projects have been completed. Besides the aforementioned expansion of the Global Support Center in India and the decen- tralization of the divisional sales organization, the changes made in its procurement unit during the previous year yielded further significant cost savings. OUTLOOK The Systems Division expects a stable market environment in fiscal year 2019. All of its targeted application areas should benefit from this. The strong growth witnessed in the maritime business during the past fiscal year should continue in the current year. Further growth is expected in the petrochemical market given the growing consumption of plastics in China and across Southeast Asia. Demand for compressors is also expected to continue growing in the refinery segment, primarily fueled by demand for cleaner fossil fuels. In the industrial gases segment, a steady increase in overall demand is expected thanks to the wide range of consuming industries, many of which have historically grown in line with the general economy. Our marine business should continue to grow in 2019. The top priority of the Systems Division in the current year remains unchanged: achieving a significant improvement in its profitability while maintaining its global market leadership. Under the current Mid-Range Plan for 2018 to 2022, sales are targeted to reach CHF 340 mn in fiscal year 2022 with an EBIT margin of 0% to 5%. This sales figure has already been realized in the year under review and will further rise in 2019. The mea- sures that have been implemented to improve every process step, including the procurement activities, have already improved the divisional profitability but the operating loss for the year was still clearly unsatisfactory. This is attributed to additional costs that were incurred to expand our presence in the LNGM business. 34 35 SERVICES DIVISION “We are pleased to have continued our growth trajectory and to have achieved record high new orders. We also opened additional service centers during the past year, bringing us closer to the customer, and enlarged our engineering team.” Raimund Arztmann, Technical Support Engineer, Burckhardt Compression Switzerland 36 37 38 REVIEW OF THE FISCAL YEAR SERVICES DIVISION | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION REVIEW OF THE FISCAL YEAR SERVICES DIVISION ORDER INTAKE CHF mn 250 200 150 100 50 0 SALES CHF mn 250 200 150 100 50 0 GROSS PROFIT CHF mn 120 100 80 40 20 0 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 OPERATING INCOME (EBIT)1 CHF mn 60 50 40 30 20 10 0 09 10 11 12 13 14 15 16 17 18 FIGURES in CHF mn Order intake Sales and gross profit Operating income (EBIT) in % of sales Sales Gross profit in % of sales 2016 2017 2018 Change 2017/2018 194.3 205.4 230.7 12.3% 190.5 94.0 49.4% 53.0 27.8% 210.2 97.9 46.6% 54.4 25.9% 223.9 105.2 47.0% 58.2 26.0% 6.5% 7.5% 7.0% Headcount as per end of fiscal year (full-time equivalents) 649 778 830 6.7% 1 Before fiscal year 2015, no EBIT was reported at divisional level. REVIEW OF THE FISCAL YEAR SERVICES DIVISION | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 39 FINANCIAL PERFORMANCE On track for further growth The Services Division maintained its growth trajectory in 2018. Orders received amounted to CHF 230.7 mn, which topped the figure for the previous fiscal year by 12.3% and marked a new all-time high for the division. Sales also rose, by a pleasing 6.5% to CHF 223.9 mn, and now account for 37% of the Group’s con- solidated sales. Canada was a strong growth driver thanks to CSM Compressor Supply & Machine Works Ltd, the services provider acquired during the previous year, as well as countries in the Middle East and Eastern Europe. Gross profit for the Services Division increased by 7.5% to CHF 105.2 mn, resulting in a gross profit margin of 47.0% (46.6% in the prior-year period). Operating income amounted to CHF 58.2 mn, an increase of 7.0% from the prior year (CHF 54.4 mn). Incoming orders also reached an all-time high at the Services Division and were up by about 12% from the previous year. MARKETS Burckhardt Compression’s services cover the following areas: – Spare Parts – Engineering/Revamp/Repair – Field Service – Monitoring/Diagnostics Major contracts were received from customers in Singapore, China and elsewhere during the year under review. On the inno- vation front, new sealing materials for piston rings were added to the portfolio and new diagnostic and analysis tools and tech- nology for older compressor systems were developed, along with guidelines for modernizing, retrofitting and overhauling such systems. Spare Parts There was another pleasing increase in orders for spare parts in fiscal year 2018. Customers are increasingly ordering spare parts for compressors made by Burckhardt Compression and other manufacturers with the services we provide. The market response to our strategy of growing this business to include spare parts for other brands remained positive. Engineering/Revamp/Repair The growth trend in large-scale compressor overhaul and mod- ernization projects remained intact in fiscal year 2018 but smaller and mid-scale projects accounted for a larger share of the overall business in this segment than in fiscal year 2017. Long-term service contracts are a sound platform for future growth in the Services Division. Major engineering projects were acquired in the Middle East and Eastern Europe. Field Service Burckhardt Compression profited from the commissioning of numerous new systems in the US and China last year and LNGM vessels already in operation were another source of growth. Our preventive maintenance services for Burckhardt Compression and other-brand compressors continued to deliver good growth too. Monitoring/Diagnostics Sales of new monitoring and diagnostics systems were slightly lower year-on-year but the services business continued to grow. Demand was particularly high for gas transport & storage and petrochemical applications. SALES STRUCTURES STRENGTHENED The centralized management system introduced in the previous year to oversee quote and order processes and the realization of service engineering solutions proved its worth in 2018. Regional sales structures were strengthened too. Our local Field Service Representatives are highly qualified employees who are also responsible for managing customer relationships and assessing local market opportunities. A new partnership model to provide services as a local player close to customers in smaller but fast- growing markets was introduced through a limited investment. NEW SERVICE CENTERS We continued to expand our geographic reach during the year under review. In December 2018, Burckhardt Compression opened a new service center in Slovakia with its local partner Sultrade Compressor Services (SCS) for the Central Europe region. This enables it to offer compressor operators in Slovakia, the Czech Republic, Hungary, Poland and Austria a full range of services and repairs for all reciprocating compressor brands as well as Hyper Compressor services. The new location brings Burckhardt Compression closer to its customers in the region and enables it to respond to customer needs and inquiries more quickly. Another service center was opened in Thailand in collabora- tion with local partner SPAN Maintenance and Service. It offers compressor valve services and repairs. The new service center in Sweden was officially inaugurated together with our strate- gic local partner Kompressorteknik ML AB. 40 REVIEW OF THE FISCAL YEAR SERVICES DIVISION | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION In China, Burckhardt Compression expanded its component manufacturing capacity at its existing site in Shanghai. Besides valves, it now manufactures rings and packings to address increasing market demand in China attributable, among other factors, to our cooperation with Shenyang Yuanda – customers are increasingly ordering Burckhardt Compression’s spare parts for their other brand compressors. OUTLOOK The outlook for growth in our services business remains attractive: – More and more customers are outsourcing service-related operations. – The installed base of compressor units continues to grow. – Compressor operators are seeking efficiency gains to sharpen their competitive profile, which requires retrofit and overhaul services. – Preventive maintenance in conjunction with the continuous condition monitoring of compressor systems is growing in importance. Therefore we believe that the demand for a full range of com- pressor services from a single source will grow more strongly than the spare parts business alone. Customers are increasingly expecting engineering solutions, competent onsite advisory ser- vices and tailor-made maintenance concepts. Laby®-GI fuel gas supply compressors, we will establish a ser- vices organization that addresses the specific needs and requirements of the marine business. Digitalization will also be used to create new services and applications. The main aims here are to improve access to company and customer data and the utilization thereof, foster transparent communication, and optimize business processes. Stricter cost controls will also be imposed. Last year’s achievements indicate that the Services Division is on the right track. The market response to the expansion of our service presence and our engineering and project manage- ment resources was very positive. Numerous engineering spe- cialists and sales staff were hired to strengthen this unit. We also offered more training courses and resources, not only for our own employees but also for our customers’ service and maintenance technicians. A large-scale customer satisfaction survey conducted for the first time in 2018 confirmed that we are moving in the right direction with our latest strategic initiatives. The target groups of this survey were our customers’ service and maintenance technicians and other employees with a technical background as well as procurement specialists. The survey showed that our customers are very satisfied with the competence of our field service specialists and the quality of the spare parts we make. These findings were evaluated with inputs from all of our coun- try organizations and specialist units and corrective measures were taken where necessary. This survey will now be conducted on a periodical basis. In view of the growing number of LNG tankers, we established a services organization that addresses the specific needs of the marine business. In our Mid-Range Plan for 2018 to 2022, we expect the Ser- vices Division to achieve annual organic growth of 6% to 8%. Including the expected consolidation of Arkos Field Services, the divisional sales target for 2022 is CHF 360 mn. The target range for its EBIT margin is 20% to 25%. Growth priorities are services for compressors made by other manufacturers and people-driven services. To ensure success in this business, Burckhardt Compression has launched operational initiatives to strengthen customer relationship management, for example, and expand its local and regional service capabilities. Other measures include the expansion of its engineering and project management resources in the Services Division and the imple- mentation of global processes for all service center locations. In view of the growing number of LNG tankers equipped with REVIEW OF THE FISCAL YEAR SERVICES DIVISION | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 41 42 43 BURCKHARDT COMPRESSION GROUP “Sustainability is a high-priority topic for us. We’re proud to have won the GreenCo Award for a third consecutive year. We also were honored with an energy efficiency award and an award for the best waste management and recycling project.” Sneha Panse, Associate Manager, Burckhardt Compression India 44 45 46 SUSTAINABILITY REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION SUSTAINABILITY REPORT COMMITMENT AND LEADERSHIP Burckhardt Compression has made a long-term commitment to the economy, society and the environment. Our aim is to create the framework for continuing the company’s 175-year history of success on all levels. This can only be achieved if a balance is found between the different and sometimes opposing interests of the individual stakeholders. We are committed to transparency. Only by knowing exactly where things stand can appropriate goals be set and the right measures initiated to achieve them. Regular management reviews and appropriate controlling instruments ensure that we achieve the goals we set. Burckhardt Compression’s sustain- ability credentials are evaluated by an external specialist (GAM) on a regular basis. During the latest assessment in 2018 we again achieved our goal of exceeding the average rating for a selected group of comparable Swiss companies. Burckhardt Compression modified its occupational health and safety management systems during the year under review in accordance with OHSAS 18001 requirements and introduced an environmental management system in compliance with ISO 14001, obtaining certification for both standards. ECONOMIC SUSTAINABILITY Objective Our company’s primary objective is to achieve our financial goals, since failure to meet these goals could have a profound impact on the future of our company. The continued existence of Burckhardt Compression over the long term is ensured only if we manage to achieve financial results that at least average those of our direct competitors. As part of the effort to maintain economic sustainability, Burckhardt Compression regularly produces a Mid-Range Plan, usually covering a period of five fiscal years. This is periodically reviewed and modified to reflect the prevailing economic, polit- ical and technological environment. Investors We maintain an open and transparent dialog with our investors and interested parties. The aim of our Investor Relations is to accurately portray our company to enable a fair valuation of Burckhardt Compression’s stock. In an effort to further that dia- log, we organize Investor Days, most recently at the company’s headquarters in Winterthur in January 2018, where we pre- sented the targets and objectives of our Mid-Range Plan for 2018 to 2022. Our Investor Relations are evaluated by independent firms and receive consistently very good ratings considering the size of our company. The leading Swiss business newspaper “Finanz und Wirtschaft” gives us an A– rating (A being the highest rat- ing) for Investor Relations and transparency. In the yearly ranking of annual reports conducted by HarbourClub and the business magazine “Bilanz” our 2017 annual report scored a very high 26th (out of a total of 230 com- panies) in the Value Reporting (Print) category. In the 2018 survey of company boards carried out by zRating in collaboration with the “Finanz und Wirtschaft,” Burckhardt Compression ranked 15th among the 174 Swiss listed companies covered by the survey. This excellent ranking is based on 26 cri- teria pertaining to board organization, independence, transpar- ency, compensation and sustainability. Customers Burckhardt Compression seeks to establish lasting customer relationships, given that the average useful life of our compres- sors is 30 to 50 years. Following the project phase, we provide our customers with the necessary services and components they need throughout the entire life cycle of the compressor systems. Our longest-standing customer relationship dates back to 1885, when we supplied BASF in Ludwigshafen with one of the first compressors ever built by our company. The various business activities of Burckhardt Compression also call for a variety of tools for measuring customer satisfac- tion. Here a distinction is made between direct and indirect key performance indicators (KPI), which are measured and evalu- ated. Customer satisfaction is evaluated during claims and war- ranties meetings, which are an integral part of the manage- ment process and are held with the designated management teams. Appropriate measures are then introduced and imple- mented based on the results of the evaluation. In the year under review, customer satisfaction surveys were focused on the Ser- vices Division. Competition We are committed to fair competition, in which there is no room for price fixing, cartels or other activities that distort competi- tion. We value our corporate and business know-how, especially our technical and commercial know-how, and are constantly safeguarding it against loss or unauthorized access. Suppliers A well-functioning supply chain ensures our continual product development and manufacturing activities. Burckhardt Com- pression buys its products from various global and regional suppliers. We cooperate closely with them as early as the devel- opment stage and aspire to establish long-lasting partnerships. SUSTAINABILITY REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 47 by Burckhardt Compression and evaluated by its executives. We also work with suppliers, universities, institutions and advisors worldwide to develop and improve products or processes in areas where we do not have the necessary expertise. Collabo- ration with external experts and specialists fosters new ideas and maximizes creative potential, also within the company. Capital expenditure Burckhardt Compression has invested CHF 125.9 mn over the past five years (excluding acquisitions). Most of its capital expenditure during the period under review was spent on proj- ects in Winterthur and at Shenyang Yuanda Compressor. Value-based management We measure the value generated for our shareholders in two ways: – Market capitalization as a percentage of equity – Change in earnings per share Market cap divided by shareholder equity at the end of the reporting year resulted in a quotient of 2.7 (previous year 3.1). This clearly shows that we continue to generate substantial value with the capital of our shareholders (shareholders’ equi ty). Net income per share attributable to the shareholders of Burck- hardt Compression for the period under review amounted to CHF 8.15 (previous year: CHF 8.51). We aim to increase this fig- ure going forward. All acquisition targets must meet three specific criteria: 1) The acquired activities must be a good strategic fit for our company; 2) the price must be in accord with our expectations; 3) the corporate culture of the target company must be com- patible with our own. We adhere to the principles set out in our Code of Conduct and ensure that they are strictly complied with in all dealings with our suppliers. The Code of Conduct is available to the public and can be downloaded at www.burckhardtcompression.com/ about-us/vision-mission-values. We systematically test their suitability and annually assess their performance by means of visits and audits, and by measuring key performance indicators. We were honored to receive an SAP Gold Award in the “Fast Delivery” category for our swift and smooth implementation of SAP’s Success Factors HR software in fiscal year 2018. Procurement is an integral part of Burckhardt Compres- sion’s strategic management cycle. The relevant procurement managers report at regular intervals on the most important changes in the global procurement market, such as price trends for raw materials and finished products. Decisions are made together with the divisional management teams to ensure a smooth supply chain. Every year, we reward the best suppliers in the various categories, to encourage them to achieve even more. In the year under review, we organized a Supplier Day in Switzerland and in India to deepen our contact with our suppli- ers and inform them about various changes and projects. We were honored with the SAP Gold Award in the “Fast Delivery” category in connection with the roll-out of SAP’s Success Factors HR software in fiscal year 2018. SAP’s award is given in recognition of superb project planning and the fast and cost-effective implementation of SAP software solutions, focusing closely on SAP standards. Innovation Burckhardt Compression was named world market leader for reciprocating compressor systems during the year under review. The Global Market Leaders Index was developed by the Busi- ness School of the University of St. Gallen in collaboration with the Akademie Deutscher Weltmarktführer. The index lists com- panies that offer leading technology and outstanding products and services. Process improvement The quest for continuous improvement by Burckhardt Compres- sion’s executives and employees forms the foundation on which the company is based. Every year, the personal objectives of our executives and employees include implementing continuous improvement proj- ects. These projects are implemented using methods developed 48 SUSTAINABILITY REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION Risk management As the world’s leading manufacturer of reciprocating compres- sors, Burckhardt Compression is exposed to a number of risks. We have developed a comprehensive risk management plan for our company and integrated it into our planning and manage- ment process. The Executive Board’s assessment of risks is discussed with the Audit Committee twice a year. We distinguish between two categories of risk: 1. Internal: Risks that Burckhardt Compression can directly influence. 2. External: Risks over which Burckhardt Compression has little or no influence. The objectives of our risk management activities are: – to systematically detect special risks; – to establish processes for monitoring, reducing and, in a best case, preventing risks; – achieving a balance between risks and rewards for our business. Warranty costs The significant increase in actual warranty costs in the fiscal year 2018 is mainly due to additional costs incurred in the LNGM business. ACTUAL WARRANTY COSTS AS A PERCENTAGE OF SALES % 10 11 12 13 14 15 16 17 18 0.7 1.0 0.8 0.7 0.8 0.6 0.8 1.0 1.4 NET INCOME PER SHARE CHF 07 08 09 10 11 12 13 14 15 16 17 18 20.00 21.46 16.68 13.56 15.22 16.42 15.87 16.93 16.34 9.12 8.51 8.15 SUSTAINABILITY REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 49 SOCIAL SUSTAINABILITY Corporate culture A well-founded and sound corporate culture is the foundation of a company’s competitiveness. Our “Values and Behaviors” policy document ensures that all employees at the Group’s var- ious sites and subsidiaries share the same corporate values and principles. This shared understanding makes collaboration between teams and across borders much easier. All employees are briefed on the company’s binding values and code of conduct. Members of the Executive Board have also stressed the importance of these common values and behav- iors in video podcasts. These measures help to ensure that our employees are familiar with our corporate culture and live up to our core values. Our executives are important role models in this regard. Sustainable HR policy Only satisfied employees are willing to go that extra mile to meet the needs of our customers. That’s why we are committed to sustainable HR policies. We actively promote a good balance of employees in terms of gender and age. High levels of employee loyalty and identification with the company are con- firmed by the fact that the typical employee has been with the company for 8.4 years. Toward the end of the previous fiscal year, Burckhardt Com- pression conducted an engagement survey with all employees around the world. The high response rate of 89% is another reflection of our employees’ commitment. According to GfK, which conducted the global survey, Burckhardt Compression employee views on the quality of management, internal com- munications and employee focus were better than the average industry scores. Cross-departmental collaboration and change were two areas where our scores were below the industry aver- age. Burckhardt Compression therefore organized Group-wide workshops, action plans and projects to further improve employee satisfaction. This employee survey will be conducted every two years to measure changes in employee satisfaction. We have a responsibility to ensure the expertise of our employees and promote the exchange of knowledge. Our new employee orientation process ensures that new hires are famil- iarized with their area of work and our corporate culture. Per- sonal development is part of our annual appraisal and perfor- mance reviews and it is financed by Burckhardt Compression. We have developed an internal training program with various technical, product-specific and management modules to ensure the continual development of our technical and leadership com- petencies. Training courses for specific skill sets are organized for the entire Burckhardt Compression Group several times a year. Burckhardt Compression conducts an annual appraisal and performance review with every employee (MyPerformance@ BC), comprising personal development goals and suggestions for continuous improvement. Periodic reviews of the progress made toward performance goals, formal meetings with employ- ees and goal-setting are part of the (MyPerformance@BC) sys- tem. 13.8% of our employees worldwide are women (previous year: 13.6%). We aim to raise this percentage steadily over the coming years to 20%. Both men and women sit on the Board of Directors and the Executive Board of our company. This meets one of the recommendations from the Code of Best Practice for Corporate Governance published by economiesuisse and we are convinced that mixed-gender teams perform better. Our employees are regularly informed about the course of business and other corporate developments by their managers. Burckhardt Compression employees in Switzerland are informed twice a year by the CEO and the heads of their divisions. The still high employee turnover rate of 9.8% in the period under review (previous year: 9.8%) is attributed to the good state of the global economy. We aim to reduce this rate to a signifi- cantly lower level. Promoting new talent and career development We actively promote and support new talent at all levels and we are committed to the Swiss system of apprentice training. There are currently 57 apprentices in Switzerland and 27 in India receiving vocational training in eight different trades. We are a founding member of the initiative launched under the aus- pices of the Swiss Federal Office for Professional Education and Technology and the Swiss-Indian Chamber of Commerce to establish an apprenticeship system of learning in India pat- terned after the Swiss model and we are a corporate sponsor of the AZW Training Center in Winterthur for vocational career pathways. Apprentices with a good performance record are generally retained by Burckhardt Compression upon comple- tion of their apprenticeship. Burckhardt Compression’s annual spending on apprenticeship training programs (cash out) amounts to about CHF 1.4 mn. Based on the internal talent review process, potential new managers and specialists are identified at an early stage and offered selective talent devel- opment programs. Vacant job positions at all levels are also advertised internally. External as well as internal candidates must go through a proprietary screening process. The system- atic evaluation and development of the company’s future man- agers, which we have practiced internally with success for many years, enabled us to again fill various management vacan- cies during the past year with internal candidates. If there are no suitable candidates available in-house to succeed a depart- 50 SUSTAINABILITY REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION ing executive or to fill a new management-level position, we are in a good position to recruit well-qualified external candidates, not least due to our company profile and image. GEOGRAPHIC BREAKDOWN OF THE WORKFORCE, 2018 100% = 2’346 Occupational health & safety Safety at work is very important to Burckhardt Compression. We believe it is important that all employees are informed of the risks involved in their work and aware of the accident pre- vention measures. Regular training is provided on the topic of safety at work. Work safety audits and safety inspections are carried out annually by external professionals and the findings are implemented accordingly. The health and general well-being of our employees are also important to us. Burckhardt Compression acknowledges that physical and mental health correlates with employee produc- tivity and performance. An extensive range of physical activi- ties, preventive measures and measures on specific topics help to improve employee satisfaction, health and motivation, and to reduce absences. During the year under review the Occupa- tional Health & Safety System introduced at all of Burckhardt Compression’s sites received OHSAS 18001 certification. Vari- ous activities such as more frequent or detailed risk assess- ments, safety tours with managers, and safety training courses for employees have had a positive impact on the relevant KPIs. At the Winterthur site, all workshop employees are now also required to wear protective footwear. The average number of working days lost because of illness declined to 6.1 days per employee (previous year: 7.5 days). Our aim is to bring this down to less than 6.0 days. Measures were taken to achieve this goal. Environmental management All Burckhardt Compression sites received ISO 14001 certifica- tion in the past fiscal year. In addition to compliance with the applicable standards, activities here were primarily focused on environmentally relevant aspects, with the aim of reducing energy consumption. A comprehensive chemicals management concept was also drawn up, hazardous chemicals were replaced with less hazardous ones and our storage practices were optimized. Employees (full-time equivalents) Other 20% BRIC Countries 48% Switzerland 32% GLOBAL WORKFORCE BY GENDER Employees (full-time equivalents) 812 872 939 1’072 1’217 1’257 10 11 12 13 14 15 16 17 18 105 111 139 160 168 175 277 302 324 Men Women EMPLOYEE TURNOVER RATIO % 10 11 12 13 14 15 16 17 18 8.0 7.5 5.2 5.0 4.4 5.4 10.2 9.8 9.8 1’830 1’912 2’022 SUSTAINABILITY REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 51 Social environment We are well established in our social environment. We actively cooperate with citizens and the authorities at all locations. Our company supports employees who are committed to doing good for the community. Therefore, we support the engagement of our executives and employees in political and charitable aspira- tions with the aim of alleviating problems facing society. For example, our Board Chairman has held the unpaid position of chairman of the Swiss Employers’ Association since 2011 and of “Check your Chance,” a Swiss association that fights youth unemployment, since 2014. Our CEO serves as the honorary chair of the Swiss-CIS/Georgia Joint Chamber of Commerce. To strengthen local social networks, we run programs at the locations of our biggest companies in Switzerland and India that support local social and cultural projects. In doing so, we specifically encourage our employees to become personally involved in such projects. ENVIRONMENTAL SUSTAINABILITY “We are a company that cares about the environment and that strongly supports responsible and prudent consumption of energy and our planet’s finite natural resources. By exercising foresight and prudence, we help to minimize the use of energy, water and chemicals of all kinds while addressing the issue of harmful emissions.” (Code of Conduct) Innovation Environmental protection starts with product design and devel- opment. We focus on sustainable and efficient product develop- ment concepts, taking into account the entire life cycle of a product, given that our compressors have an average lifetime of 30 to 50 years. Whenever it makes sense, our customers are included early on in the development stage of new products, in order to find joint innovative solutions and verify ideas. Products Highly functional products enable our compressor systems to run optimally. The following newly developed products and solutions promise to offer customers greater benefits while improving our environmental footprint: – Laby®-GI Compressors: The dual-fuel propulsion system developed for LNG carriers can be powered by environmen- tally friendly natural gas instead of marine diesel oil. The Laby®-GI fuel gas compressors by Burckhardt Compression compress the boil-off gas from the LNG tanks, which is then injected directly into a diesel engine. The dual-fuel propulsion system for LNG carriers significantly reduces CO2 and SOX emissions when powered by natural gas. – Process Gas Compressors per API 618: These compressors are used specifically in industrial processes for the desulfuriza- tion of fuels. – PROGNOST®-SILver: Systems for monitoring and diagnosing the condition of reciprocating compressors are key tools for increasing operational reliability, extending service intervals and preventing failures. 52 SUSTAINABILITY REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION Procurement We draw on the experience of our suppliers to help us continu- ously improve our products. Much of our value creation is dependent on them. Therefore, we place the same high demands on them as we do on ourselves. They are integrated into our environmental and quality policy. Checks are made on site or when goods arrive to ensure adherence to specifications and are verified by reviewing the required audit reports. Manufacturing and logistics In our efforts to transfer knowledge and production know-how between our various production and engineering centers, we are also transferring safe, efficient and environmentally friendly production and engineering processes. We have optimized our internal logistics processes and transportation operations through the “PULL@BCAG” program. We are also reducing the number of transport runs by consolidating deliveries and deploying more container delivery solutions. “PULL@BCAG” is not simply a project but rather a reflection of our basic philoso- phy about the work we do. Local procurement of machine accessories brings us even closer to our customers and allows us to reduce transport runs. Buildings and fixtures At the Winterthur site, a multi-year project to replace conven- tional lighting with LEDs in our offices and workshops is under- way to save energy. More investments were made to reduce fine respirable dust at our foundry operations in China. A new sand mixer was installed for Shenyang Yuanda Com- pressor’s foundry. This new machine produces a better sand mixture and thus a more homogenous sand composition, which in turn, reduces the required amounts of sand hardeners. Other green investments were made to reduce fine respirable dust caused by the foundry’s operations. Our factory in Pune, India, received another GreenCo Gold Award during the year under review. GreenCo is an environ- mental rating system introduced by the Confederation of Indian Industry (CII) that takes a holistic approach to measuring the effectiveness of a company’s environmental policies. The Pune factory also received a gold award for its energy-saving activi- ties and an honorable mention for the best waste management and recycling project. It increased the renewables share of its energy mix and installed more roof-top solar panels, and reduced its overall energy consumption. Environmental management, recycling and waste disposal Hazardous goods and chemicals are transported, stored and disposed of in accordance with applicable laws and regulations. We try to recycle as much of our waste as possible. Internal col- lection points help our employees sort and dispose of waste correctly. This allows most of our waste to be recycled. The rest is sent to a nearby waste incineration plant that produces district heat for water and space heating systems. Specialized companies are engaged to ensure that recycled certain materi- als (e.g. metals) are recycled in the proper, most environmen- tally friendly way. The waste management concept introduced in collabora- tion with external consultants was continued and expanded and will lead to even greater separation of waste in the future. Burckhardt Compression reviewed and modified its chemi- cals concept at its Winterthur site during the year under review. Combustible chemicals were replaced with less flammable chemicals, and all storage containers were relabeled. Oil stor- age tanks were retrofitted with spill containment systems and special transport tanks, which improves our chemical safety practices and process efficiency. The substitution of hazardous chemicals further reduced our consumption of VOC gases (Vol- atile Organic Compounds), which have harmful effects on human health and the environment. These and other measures are part of the EOHS system that is being introduced at all Group sites in compliance with ISO 14001 and OHSAS 18001 standards. Official certification was obtained in 2018. SUSTAINABILITY REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 53 ELECTRICITY CONSUMPTION MWh 10 11 12 13 14 15 16 17 18 3’717 3’707 4’136 3’672 5’305 5’385 6’773 6’933 7’029 WATER CONSUMPTION m3 10 11 12 13 14 15 16 17 18 WASTE t 10 11 12 13 14 15 16 17 18 41’639 35’040 28’251 14’851 17’792 18’865 29’157 24’310 29’019 256 246 197 235 280 326 284 321 343 Figures without Shenyang Yuanda Compressor 54 CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION CORPORATE GOVERNANCE Burckhardt Compression is committed to responsible corpo- rate governance. The company adheres to the Directive on Information Relating to Corporate Governance (DCG) issued by SIX Swiss Exchange, where applicable to Burckhardt Compres- sion, and the “Swiss Code of Best Practice for Corporate Gover- nance” issued by economiesuisse. This report is structured in accordance with the DCG’s out- line and numbering. Unless otherwise noted, the information presented reflects the situation on March 31, 2019. 1. GROUP STRUCTURE AND SHAREHOLDERS 1.1. Group structure 1.1.1. Organizational group structure Burckhardt Compression is managed through a divisional orga- nizational structure consisting of two divisions, the Systems Division (compressor manufacturing business) and the Services Division (compressor services and components). The manage- ment structure of the Burckhardt Compression Group is given in the organizational chart below: CEO M. Pawlicek 1.1.2. Listed Group companies Burckhardt Compression Holding AG, a corporation organized under the laws of Switzerland with legal domicile in Winterthur, is the only listed Group company. Burckhardt Compression reg- istered shares (BCHN) are listed on the SIX Swiss Exchange in Zurich (ISIN: CH0025536027; security number 002553602). Its market capitalization as per March 31, 2019 amounted to CHF 921’400’000. 1.1.3. Unlisted Group companies Information on the unlisted companies included in the scope of consolidation of Burckhardt Compression Holding AG is given in the financial report on page 107, Note 102, “Investments in sub- sidiaries.” With the exception of Burckhardt Compression Holding AG, none of the companies included in the scope of consolidation hold any BCHN shares. 1.2. Significant shareholders According to information available to the company from the disclosure notifications of the SIX Swiss Exchange AG, the shareholders listed in the following table reported sharehold- ings of at least 3% of the voting rights as per March 31, 2019. In accordance with the company’s Bylaws, the voting rights of NN Group N.V., J O Hambro Capital Management Limited and Atlantic Value General Partner Limited are limited in each case to 5.0% of the total number of BCHN registered shares recorded in the commercial register: CHRO S. Pitt President Systems Division F. Billard CFO R. Brändli Name Country % of shares President Services Division R. Dübi (from 02/15/2019) M. Wendel (until 02/14/2019) MBO shareholder pool NN Groep N.V. J O Hambro Capital Management Limited CH NL UK Atlantic Value General Partner Limited (Mondrian) UK Ameriprise Financial Inc. Credit Suisse Funds AG Massachusetts Mutual Life Insurance Company (Oppenheimer) UBS Fund Management (Switzerland) AG US CH US CH 12.4 6.9 6.1 5.0 3.5 3.0 3.0 3.0 More detailed information on the disclosure notifications is available on the website of the SIX Swiss Exchange’s Disclosure Office (https://www.six-exchange-regulation.com/de/home/ publications/significant-shareholders.html). 1.3. Cross-shareholdings Burckhardt Compression Holding AG has no cross-sharehold- ings with any other company or group of companies. CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 55 2.6. Limitations on transferability and nominee registrations No person or entity will be registered in the Share Register with voting rights for more than 5% of the issued share capital. This entry restriction is also applicable to persons whose shares are held, in whole or part, by Nominees. This restriction is also valid if shares are acquired through the exercise of subscription, option or conversion rights, with the exception of shares acquired through inheritance, division of an estate or marital property law. Legal entities and partnerships associated with each other by uniformly managed capital or votes or in any other way, as well as private and legal entities or partnerships which form an association to evade registration restrictions, are regarded as one person. Individual persons who have not expressly declared in their registration application that they hold the shares for their own account (Nominees) will be entered in the Share Register with voting rights if the Nominee concerned provides proof that he/ she is subject to supervision by an accredited bank and financial market regulator and if he/she has concluded an agreement with the Board of Directors concerning his/her status. Nomi- nees holding up to 2% of the issued shares will be entered in the Share Register with voting rights without having to sign an agreement with the Board of Directors. Nominees holding more than 2% of the issued shares will be entered in the Share Reg- ister with 2% voting rights and, for the remaining shares, with- out voting rights. Above this 2% cap, the Board of Directors may have Nominees entered in the Share Register with voting rights if they disclose the names, the addresses, the nationalities and the shareholdings of the persons for whom they hold more than 2% of the issued share capital. 2.7. Convertible bonds and options The company does not have any outstanding convertible bonds and has not issued any option rights. 2. CAPITAL STRUCTURE 2.1. Capital The issued share capital of Burckhardt Compression Holding AG amounts to CHF 8’500’000, comprising 3’400’000 fully paid registered shares with a nominal value of CHF 2.50 each. 2.2. Details on authorized and conditional capital The Board of Directors is empowered to increase the company’s share capital by a maximum of CHF 1’275’000 at any time until June 30, 2019 by issuing a maximum of 510’000 fully paid reg- istered shares with a nominal value of CHF 2.50 each (autho- rized share capital). The date and amount of the issuance, the time of dividend entitlement and, if applicable, the type of con- tribution will be determined by the Board of Directors. Partial increases in capital are permitted. The transferability of the shares shall be subject to the registration restrictions set forth in the Bylaws, if any. The Board of Directors is authorized to exclude shareholders’ subscription rights, in part or whole, in favor of third parties if the new shares are used to i) acquire companies through an exchange of shares or ii) finance the pur- chase of companies in whole or part. The Board of Directors is also authorized to exclude subscription rights of shareholders if the newly created shares are issued by means of a public offering. Shares for which subscription rights have been granted but not exercised will be allotted by the Board of Directors at its own discretion. Apart from the above, Burckhardt Compres- sion Holding AG has no other authorized and/or conditional share capital. 2.3. Changes in capital There has been no movement in share capital since the IPO in June 2006. 2.4. Shares and participation certificates Voting rights may only be exercised after the shareholder has been registered in the Share Register. All shares are entitled to full dividend rights. Voting rights per shareholder are restricted to 5% of the total number of the registered shares recorded in the commercial register. This does not apply to shareholders who were in possession of more than 5% of the shares of Burck- hardt Compression Holding AG before the Initial Public Offering (IPO). The voting rights of treasury shares – held by Burckhardt Compression Holding AG – will be suspended. The company has not issued any participation certificates. 2.5. Dividend-right certificates The company has not issued any dividend-right certificates. 56 CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 3. BOARD OF DIRECTORS From left: Urs Leinhäuser, Dr. Monika Krüsi, Valentin Vogt, Hans Hess, Dr. Stephan Bross CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 57 3.1. Members and 3.2. Other activities and interests The Bylaws stipulate that the Board of Directors consists of a minimum of three and a maximum of seven members. At pre s- ent, the composition of the Board of Directors is as follows: Name Nationality Function First elected Term expires Valentin Vogt Hans Hess Dr. Monika Krüsi Urs Leinhäuser Dr. Stephan Bross CH CH CH/IT CH DE AC = Audit Committee NCC = Nomination and Compensation Committee SC = Strategy Committee Chairman, non-executive, Chairman SC Deputy Chairman, non-executive, Chairman NCC Member, non-executive, member SC, member AC Member, non-executive, Chairman AC Member, non-executive, member NCC 2002 2006 2012 2007 2014 2018 2018 2018 2018 2018 Valentin Vogt was CEO of Burckhardt Compression Group from the year 2000 until March 31, 2011. No other Board member has served as a member of the Executive Board of a Burckhardt Compression Group company. None of the directors have material business relationships with a Burckhardt Compression Group company. The competencies of the Board members are depicted in the following matrix: Valentin Vogt Hans Hess Urs Leinhäuser Monika Krüsi Stephan Bross Executive competence (>200 FTEs) Strategic competence Competence in non-European cultures Supply chain competence Competence in BC markets Technological competencies Financial competencies M&A competence Board-level competencies CEO coaching competencies • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • The company’s Legal Counsel, who serves as Secretary to the Board of Directors, has a degree in law (Dr. iur.). 58 CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION Biographical details and information on other activities and commitments of the individual members of the Board of Directors: VALENTIN VOGT (1960) HANS HESS (1955) Education Lic. oec. HSG St. Gallen, Switzerland Professional background Since 2011 self-employed, Switzerland 2000–2011 CEO, Burckhardt Compres- sion Group, Switzerland 1992–2000 General Manager, Sulzer Metco AG, Switzerland 1989–1992 CFO, Sulzer Metco AG, Switzerland 1986–1989 CFO, Alloy Metals, USA 1985–1986 Controller, Sulzer AG, Switzerland Duties and responsibilities as a director of Burckhardt Compression Holding AG – Chairman of the Board of Directors – Chairman of the Strategy Committee Education Master’s degree in Materials Science & Engineering, ETH Zurich, Switzerland, MBA University of Southern California, USA Professional background Since 2006 self-employed, Hanesco AG, Switzerland 1996–2005 Delegate of the Board of Directors and CEO, Leica Geosystems AG, Switzerland 1993–1996 President, Leica Optronics Group, Switzerland 1989–1993 Vice President, Leica Microscopy Group, Switzerland 1983–1988 Head of Polyurethane Division, Huber & Suhner AG, Switzerland 1981–1983 Development Engineer, Sulzer AG, Switzerland Other activities and commitments – Chairman of the Board, Kistler Holding AG, Switzerland – Board member, Bucher Industries AG, Duties and responsibilities as a director of Burckhardt Compression Holding AG – Deputy Chairman of the Board of Switzerland Directors – Board member, Ernst Göhner Stiftung – Chairman of the Nomination and Com- Beteiligungen AG, Switzerland – Chairman of the Swiss Employers’ Confederation, Switzerland – Member of Economic Advisory Board, pensation Committee Other activities and commitments – Chairman of the Board, COMET Swiss National Bank, Switzerland Holding AG, Switzerland – Chairman of the Board, Reichle & De-Massari AG, Switzerland – Board member, dormakaba Holding AG, Switzerland – Chairman, Swissmem, Switzerland – Vice President, economiesuisse, Switzerland – Trustee, Swisscontact, Switzerland – Trustee, Technorama, Switzerland CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 59 DR. MONIKA KRÜSI (1962) URS LEINHÄUSER (1959) DR. STEPHAN BROSS (1962) Education Engineering degree, University of Braun- schweig, Germany Professional background Since 2018 Executive Board member (CTO), KSB SE & Co. KGaA, Germany 2017 Executive Board member, Technology, KSB AG, Germany 2014–2017 Senior Vice President, Pumps, KSB AG, Germany 2007–2013 Senior Vice President, Service, KSB AG, Germany 2002–2007 Head Product Management and Development Engineered Pumps, KSB AG, Germany 1997–2001 Head Development and Services Fluid Flow Technical Systems, KSB AG, Germany 1996–1997 Head of Fluid Mechanics Research, KSB AG, Germany 1993–1996 R&D Engineer, KSB AG, Germany Duties and responsibilities as a director of Burckhardt Compression Holding AG – Member of the Board of Directors – Member of the Nomination and Compensation Committee Education PhD in Business Informatics, MBA, University of Zurich, Switzerland Professional background Since 2003 Partner, MKP Consulting AG, Switzerland 2001–2003 Partner, Venture Incubator Partners AG, Switzerland 1991–2001 Associated Partner, McKinsey & Co., Inc., Switzerland 1986–1990 Credit Suisse, Switzerland Duties and responsibilities as a director of Burckhardt Compression Holding AG – Member of the Board of Directors – Member of the Strategy Committee – Member of the Audit Committee Other activities and commitments – Chair of the Board of Directors, Repower AG, Switzerland – Chair of the Board of Directors, ACP, Switzerland – Board member, 360°, Switzerland – Board member, Otto Suhner AG, Switzerland – Board member, Signal AG, Switzerland – Board member, Technopark Luzern, Switzerland Education Degree in Business Administration, University of Applied Sciences, Zurich, Switzerland IMD Lausanne (SSE) Professional background Since 2016 Partner/Consultant ADULCO GmbH, Switzerland 2014–2016 self-employed, Switzerland 2011–2014 CFO and Deputy CEO, Member of Executive Board, Autoneum Holding AG, Switzerland 2003–2011 CFO and Head Corporate Center, Member of Group Executive Committee, Rieter Holding AG, Switzerland 1999–2003 CFO, Member of Group Executive Committee, Mövenpick Holding, Switzerland 1997–1999 Head of Finance and Controlling, Piping Systems Division, Georg Fischer AG, Switzerland 1995–1997 Head of Corporate Control- ling, Georg Fischer AG, Switzerland 1992 Managing Director, Cerberus, Denmark 1988–1994 Group Controller, Cerberus AG, Switzerland 1986–1988 Tax Consultant, Deputy Head, Tax Consultancy Department, Refidar Moore Stephens, Switzerland 1983–1986 Tax Inspector, Cantonal Tax Department SH, Switzerland Duties and responsibilities as a director of Burckhardt Compression Holding AG – Member of the Board of Directors – Chairman of the Audit Committee Other activities and commitments – Chairman of the Board of Directors, Avesco AG, Switzerland – Board member, Ammann Group Holding AG, Switzerland – Board member, Liechtensteinische Landesbank AG, Liechtenstein – Board member, VAT Group AG, Switzerland 60 CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 3.3. Rules in the Bylaws concerning the number of per- mitted activities Members of the Board of Directors may not hold more than ten (10) additional board memberships, whereof not more than four (4) in listed companies. 3.4. Election and term of office Each member of the Board of Directors, the Board Chairman, and each member of the Nomination and Compensation Com- mittee are elected annually by the Annual General Meeting. The members of the Board of Directors shall be automatically retired from the Board of Directors in the year in which they reach the age of 70. 3.5. Internal organization The Board of Directors has the final responsibility for the busi- ness strategy and the management of the Burckhardt Com- pression Group. It has final authority and defines the guidelines regarding strategy, organization, financial planning and accounting for the Burckhardt Compression Group. The Board of Directors has delegated executive management responsibil- ity to the CEO of Burckhardt Compression Group. The Board of Directors appoints a secretary for the Board and for the com- pany. The Secretary does not need to be a member of the Board. This role is currently assigned to the company’s Legal Counsel. The Board of Directors meets as often as business requires, but at least four times per year. In fiscal year 2018, the Board of Directors and Board committees convened the following meetings: The Board of Directors has a quorum when the majority of the members are present. Decisions are passed by a simple majority. In the event of a tie, the Chairman has the casting vote. The CEO, the two Presidents of the Systems and Services Divisions, the CFO, the CHRO and the Legal Counsel, in his role as secretary, are regularly invited to attend Board meetings to report on developments in their respective business areas. The Board of Directors has set up the following committees: Audit Committee The Audit Committee advises and supports the Board in all matters related to external and internal audits, risk management, accounting policies and practices and com- pliance with accounting standards issued. The CEO, the CFO, the head of the internal audit unit and representatives of the external auditors also participated in the Audit Committee’s ordinary meetings. Members are Urs Leinhäuser (Chairman) and Dr. Monika Krüsi. Nomination and Compensation Committee This committee advises and assists the Board of Directors on appointing, assessing and dismissing members of the Executive Board, and draws up proposals for the appointment or dismissal of mem- bers of the Board of Directors. Furthermore the Nomination and Compensation Committee advises and assists the Board of Directors on questions relating to the compensation of the directors and the Executive Board members. The CEO and the CHRO also attend the ordinary meetings of the NCC. Members are Hans Hess (Chairman) and Dr. Stephan Bross. Meetings 04/27/2018, Board telephone conference 05/23/2018, AC meeting 05/23/2018, NCC meeting 05/24/2018, BOD meeting 08/21/2018, e.o. AC meeting 08/21/2018, BOD meeting 10/26/2018, AC meeting 10/26/2018, NCC meeting 10/26/2018, BOD meeting 11/23/2018, Strategy Day 12/07/2018, BOD meeting 02/13/2019, Board telephone conference 03/04/2019, BOD meeting Governing body BOD AC NCC BOD AC BOD AC NCC BOD BOD BOD BOD BOD BOD = Board of Directors AC = Audit Committee NCC = Nomination and Compensation Committee SC = Strategy Committee Duration Valentin Vogt Hans Hess Urs Leinhäuser Monika Krüsi Stephan Bross 1.5 hours 3.5 hours 3 hours 6 hours 1 hour 6 hours 3 hours 2 hours 6 hours 10 hours 7 hours 1.5 hours 6 hours • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 61 Strategy Committee The Strategy Committee supports the CEO in developing corporate strategy and advises the Board of Directors in strategic matters such as acquisitions and divest- ments. It evaluates the implementation of company strategy on a regular basis and submits proposals to the Board of Directors if adjustments or other measures are deemed necessary. Members are Valentin Vogt (Chairman) and Dr. Monika Krüsi. 3.6. Definition of areas of responsibility The Board of Directors has delegated the executive management of the company and the Group to the CEO of Burckhardt Compres- sion Group, with the exception of the following matters: – Definition of the Group’s business policies and strategy – Definition of the top-level organizational structure of the Group – Approval of the periodic forecasts, the Annual Report and of reporting and accounting policies – Ensuring adequate internal control systems based on the rec- ommendations of the Audit Committee – Determination of the appropriate capital structure – Appointment and dismissal of members to and from the Exe- cutive Board, as well as compensation of the Executive Board – Decisions on new subsidiaries, major capital expenditure pro- jects, acquisitions, financing transactions, the insurance con- cept and the provision of guarantees if such decisions exceed the powers conferred on the CEO. The powers of the Executive Board and of the Group company executives are listed in detail in the delegation of powers and duties policy. 3.7. Information and control instruments relating to the Executive Board Financial reporting and planning Order intake, the income statement, balance sheet, liquidity planning and cash flow, headcount, personnel costs and capital expenditure are consol- idated and annotated on a monthly basis. A rolling forecast of Group results for the current and coming fiscal years is also prepared and annotated four times a year (April, July, October and January). Targets for the coming fiscal year are determined based on the January forecast. The financial report and the forecasts are distributed to the members of the Executive Board and all members of the Board of Directors. At every meeting of the Board of Directors, the members of the Execu- tive Board report on the course of business and on all issues of relevance to the Group. Internal Group Audit and internal control system (ICS) The Internal Group Audit unit reports to the Chairman of the Board of Directors’ Audit Committee. Management responsibility for the unit has been delegated to the Head of Accounting of Burck- hardt Compression AG, who is also responsible for planning and conducting the audits. The CFO is responsible for coordination between the Audit Committee and the Head of Internal Group Audit. The Internal Group Audit team consists of qualified staff from the Finance and Controlling departments of Burckhardt Compression AG and several selected financial specialists from the Group’s subsidiaries. These employees perform the internal audit duties assigned to them in addition to their core duties and responsibilities within the Finance and Controlling depart- ments and in this additional capacity they report directly to the Head of Internal Group Audit, who in turn reports in this func- tion directly to Chairman of the Board of Directors’ Audit Com- mittee. This efficient organization is tailored to the needs and size of Burckhardt Compression Group and fosters an active exchange of information and best practices with the objective of creating sustained value added for Burckhardt Compression Group by means of continual process improvement. The inter- nal auditors undergo regular training for the performance of their tasks. The training received is coordinated by the Head of Internal Group Audit. The schedule for internal audits is deter- mined by the Audit Committee of the Board of Directors on an annual basis and may be changed or expanded by the Audit Committee as and when required. Six internal audits were car- ried out in fiscal year 2018. The internal auditors’ reports were distributed to the management of the audited company, the members of the Audit Committee of the Board of Directors, the Executive Board members and to the external company audi- tors. The statutory auditor assesses the effectiveness of the internal control system (ICS) in a written report submitted to the Audit Committee and the Board of Directors once a year. Risk management Burckhardt Compression has an integrated risk management policy. In a two-stage process, key risks are identified using an anticipatory approach and grouped under one of three risk categories – strategic, financial or operational – that have been defined by the Board of Directors. The risks are then evaluated, managed and stringently monitored, avoided, mitigated or transferred to third-parties through ade- quate risk management measures. The first stage of the risk management process entails a continuous risk management process conducted by the two divisions and the major subsidiar- ies of Burckhardt Compression Group within the scope of a peri- odic leadership cycle through which potential risks are system- atically identified and assessed and the appropriate risk control measures as well as the corresponding duties and responsibili- ties and implementation timelines are established and moni- tored. Internal and external factors are included in the evalua- tion of potential risks. The second stage of the risk management process consists of a periodic Risk Management Review which takes place twice a year at the meetings of the Board of Directors’ Audit Committee. To this end, the CEO prepares an overview of the main risks faced by Burckhardt Compression Group and an assessment of the likelihood of these risks occurring and the effects they would have. This overview is presented to the Audit Committee together 62 CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION with the risk mitigation measures, the people responsible for implementing them, and an implementation timetable. The Audit Committee then reports to the Board of Directors about the findings of the Risk Management Review. 4. EXECUTIVE BOARD 4.1. Members of the Executive Board and 4.2. Other activities and commitments Name Nationality Function Marcel Pawlicek Rolf Brändli Sandra Pitt Fabrice Billard Rainer Dübi Martin Wendel CH CH DE FR CH DE CEO CFO CHRO President Systems Division President Services Division (from 02/15/2019) President Services Division (until 02/14/2019) From left: Rainer Dübi, Fabrice Billard, Marcel Pawlicek, Sandra Pitt, Rolf Brändli Biographical details and information on other activities and commitments of the members of the Executive Board: CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 63 MARCEL PAWLICEK (1963) ROLF BRÄNDLI (1968) Education Degree in Business Administration, HWV Zurich, Switzerland Professional background Since 2008 CFO, Burckhardt Compres- sion Group, Switzerland 2001–2008 Head of Finance & Adminis- tration, Sulzer Brasil S.A., São Paulo, Brazil; Regional Controller, Sulzer Pumps South America & South Africa 1997–2001 Regional Controller Asia/ Pacific, Sulzer International Ltd.; General Manager, Sulzer Hong Kong Ltd., Hong Kong, SAR China 1994–1997 Management Consultant, OBT Treuhand AG Zurich, Switzerland Education Degree in Mechanical Engineering, HTL Winterthur, Switzerland, MBA Marketing and International Business, Fordham University, New York, USA Professional background Since 2011 CEO, Burckhardt Compres- sion Group, Switzerland 2008–2011 Head of Design & Manufac- turing, Burckhardt Compression AG, Switzerland 2001–2008 Head of CSS, Burckhardt Compression AG, Switzerland 1999–2001 Head Sales and Contracting HPI, Sulzer-Burckhardt AG, Switzerland 1989–1999 Project Manager and Mar- keting & Sales Manager for Burckhardt compressors, Sulzer Inc., USA 1986–1989 Design Engineer, Sulzer- Burckhardt AG, Switzerland Other activities and commitments – President of the Swiss-CIS/Georgia Chamber of Commerce – Vice President of AZW Winterthur, Switzerland 64 CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION SANDRA PITT (1971) FABRICE BILLARD (1970) RAINER DÜBI (1969) Education Degree in Business Administration/ Business Informatics, Germany, MBA International Finance/International HR, American University Washington, USA Professional background Since 2015 CHRO, Burckhardt Com- pression Group, Switzerland 2013–2015 Head Corporate HR, AFG Management AG, Switzerland 2012–2013 Head Personal Central Europe, Holcim (Schweiz) AG, Switzerland 2010–2012 Head Personal, Holcim (Schweiz) AG, Switzerland 2007–2009 Head Personal BASF Group Switzerland, BASF Schweiz AG, Switzerland 2006–2007 HR Director Europe, BASF AG, Division Europe, Germany 2003–2006 Internal Consultant Perfor- mance Management, BASF AG, Division Personal Global, Germany 2002–2003 HR Coordinator Europe, BASF AG, Division Personal Global, Germany Education Master of Science in aeronautics and aerospace engineering, Ecole Centrale Paris, France Education Degree in Mechanical Engineering, HTL Winterthur, MASBA School of Mana gement, Switzerland Professional background Since 2016 President Systems Division, Burckhardt Compression Group, Switzerland 2015–2016 Chief Strategy Officer, Sul- zer, Switzerland 2012–2015 Head Business Unit Mass Transfer Technology, Sulzer Chemtech, Switzerland/Singapore 2010–2012 Head Europe, Middle East, India, Russia & Africa Business Unit Mass Transfer Technology, Sulzer Chem- tech, Switzerland 2008–2010 Vice President Business Development, Sulzer Chemtech, Switzerland 2005–2008 Head Global Customer Ser- vices, Sulzer Pumps, Switzerland 2004–2005 Strategic Development Manager, Sulzer Corporate, Switzerland 1999–2004 Principal, The Boston Con- sulting Group, Switzerland/France Professional background Since February 15, 2019 President Services Division, Burckhardt Compres- sion Group, Switzerland 2012–2019 Head of Design & Manufac- turing, Burckhardt Compression AG, Switzerland 2010–2012 Senior Sales Manager, Burckhardt Compression AG, Switzerland 2007–2010 Manager Sizing, Burckhardt Compression AG, Switzerland 2003–2007 Sizing Project Engineer, Burckhardt Compression AG, Switzerland 2001–2003 Commissioning Lead Engineer, Alstom, Switzerland 1999–2001 Commissioning Engineer, ABB, Switzerland CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 65 4.3. Rules in the Bylaws concerning the number of permit- ted activities Members of the Executive Board may not hold more than five additional board memberships, whereof not more than two in listed companies. 4.4. Management contracts There are no management contracts with third parties. 5. COMPENSATION, SHAREHOLDINGS AND LOANS The principles and elements of compensation paid to members of the Board of Directors and the Executive Board as well as the authority and the mechanisms used to determine such compen- sation are explained in the Compensation Report on pages 67 to 73. The shareholdings of the members of the Board of Directors and the Executive Board in Burckhardt Compression Holding AG are listed in the Compensation Report on pages 67 to 73 and in the financial statements, note 103, “Share capital and share- holders” on page 105. Burckhardt Compression Group did not grant any loans, credit or collateral to any of the members of the Board of Direc- tors or the Executive Board in fiscal year 2018 and there are no arrangements of this nature outstanding. 6. SHAREHOLDERS’ PARTICIPATION RIGHTS 6.1. Voting rights restrictions and representation of voting rights No person or entity will be registered as a shareholder in the Share Register for more than 5% of the issued share capital. This entry restriction is also applicable to persons whose shares are held, in whole or part, by Nominees. This restriction is also valid if shares are acquired through the exercise of sub- scription, option or conversion rights. This restriction on voting rights does not apply to shareholders who were in possession of more than 5% of the shares of Burckhardt Compression Holding AG before the IPO. There is no provision for measures to remove restrictions. A shareholder may be represented at the Annual General Meeting by the independent proxy holder or by another person with legal capacity. All shares held by a shareholder can only be represented by one person. 6.2. Statutory quorums A majority of at least two-thirds of the voting rights repre- sented is required for changes to the company’s Bylaws. 6.3. Convocation of the General Meeting of Shareholders None of the applicable rules deviate from the law. 6.4. Inclusion of items on the agenda Shareholders who together represent at least 10% of the share capital or shares with a nominal value of at least CHF 1.0 mn can ask for an item to be included on the agenda of the General Meeting. The Board of Directors must receive written proposals for items to be included on the agenda, specifying the issue to be discussed and the shareholders’ proposals, at least 40 days before the date of the General Meeting. 6.5. Entries in the Share Register The record date for registered shareholders to be entered in the Share Register prior to an Annual General Meeting will be stated in the invitation to the Annual General Meeting. 7. CHANGES OF CONTROL AND DEFENSIVE MEASURES 7.1. Obligation to make an offer Once a shareholder acquires 33⅓% of share capital and voting rights, they will be under an obligation to submit a public ten- der offer. The Bylaws contain neither an opting-out nor an opting-up clause. 7.2. Clauses on change of control There are no provisions for special severance payments for members of the Board of Directors or members of the Executive Board in the event of a change of control over Burckhardt Com- pression Holding AG. 8. AUDITORS 8.1. Duration of mandate and term of office of the auditor in charge PricewaterhouseCoopers AG (PwC) has been the statutory audi- tor of Burckhardt Compression Holding AG since 2002 and is also in charge of the audit of the consolidated financial state- ments. The statutory auditor is elected by the General Meeting of Shareholders for one year at a time. Burckhardt Compression plans to tender its external audit contracts at least every 10 years and examine all bids received. The most recent invitation to tender was issued during the fiscal year 2012. PwC was awarded the contract in March 2013 as decided by the Board of Directors and PwC was reelected as statutory auditor by the General Meeting of Shareholders in 2013. The auditor in charge will be changed after a maximum period of seven years. Beat Inauen has served as auditor in charge since the 2013 reporting period. 66 CORPORATE GOVERNANCE | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 8.2. Auditor’s fees Total fees for auditing services provided by PwC worldwide dur- ing fiscal year 2018 amounted to TCHF 327 (previous year: TCHF 374). 8.3. Additional fees The additional fees for services provided by PwC worldwide during fiscal year 2018 amounted to TCHF 80 (previous year: TCHF 1). Additional services rendered by PwC pertain to the implementation of new accounting policies and other issues. 8.4. Information tools of the external auditors The Audit Committee assists the Board of Directors in monitor- ing the Company’s accounting and financial reporting. It assesses the internal control procedures, the management of business risks, the audit plan and scope, the conduct of the audits and their results. The Audit Committee also reviews the auditor’s fees. The statutory auditor is present during the examination of the consolidated annual and semiannual finan- cial statements. Once a year, the members of the Audit Com- mittee receive from the statutory auditor a summary of the audit findings and suggested improvements. The Audit Commit- tee held two ordinary half-day meetings during the 2018 report- ing period, in which the auditor in charge and another represen- tative of the auditor took part. 9. INFORMATION POLICY Burckhardt Compression Holding AG reports order intake, sales, operating results, balance sheet, cash flow and changes in shareholders’ equity on a semiannual basis, together with comments on the trend of business and the outlook for the future. Burckhardt Compression Holding AG provides price- sensitive information in accordance with the ad hoc disclosure requirements set out in the Listing Rules of the SIX Swiss Exchange. Burckhardt Compression Holding AG will send poten- tially price-sensitive information to all interested parties via an e-mail distribution list. Financial reports are available on our website (www.burckhardtcompression.com) and will be deliv- ered to interested parties on request. Key dates for 2019 and 2020 July 6, 2019 Annual General Meeting November 5, 2019 Results for the first half of 2019 (closing September 30, 2019) June 2, 2020 2019 Annual Report (closing March 31, 2020) July 3, 2020 Annual General Meeting Details of these dates, possible changes, the company profile, current share prices, presentations and contact addresses can be found at www.burckhardtcompression.com, where inter- ested parties can also subscribe to the e-mail distribution list. COMPENSATION REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 67 COMPENSATION REPORT 1. BASIS This Compensation Report describes the policies and system in place for the compensation of the Board of Directors and the Executive Board of Burckhardt Compression and it contains information on their annual compensation. This report was pre- pared in accordance with the provisions of the Swiss Federal Ordinance Against Excessive Compensation in Listed Compa- nies (OAEC), the Directive on Information relating to Corporate Governance (DCG) issued by the SIX Swiss Exchange, and the Bylaws of Burckhardt Compression Holding AG. 2. COMPENSATION POLICY Burckhardt Compression has established a transparent and long-term-oriented compensation system. The objectives pur- sued with this system are to ensure that the compensation of the Board of Directors and the company executives is market competitive and to achieve a good balance between the inter- ests of the shareholders, the directors and executive manage- ment. Market-competitive pay is a basic prerequisite for attract- ing well-qualified directors and executives and ensuring that they remain with the company for the long run. 3. ORGANIZATION, DUTIES AND POWERS The Nomination and Compensation Committee (NCC) is com- prised of at least two members of the Board of Directors. The members of the NCC are elected individually and annually by the Annual General Meeting and their term of office shall expire at the end of the next Annual General Meeting. The Annual Gen- eral Meeting of July 7, 2018 elected Hans Hess and Dr. Stephan Bross to the Nomination and Compensation Committee. The Board of Directors appointed Hans Hess Chairman of the Nomi- nation and Compensation Committee. The NCC meets at least twice a year. The CEO and CHRO attend these meetings in an advisory capacity, except during deliberation of meeting topics that pertain to themselves. The Nomination and Compensation Committee held two meetings during the year under review. The duties and powers of the NCC are set forth in the com- pany’s Bylaws and Organizational Regulations. The NCC sup- ports the Board of Directors in the performance of its duties pertaining to the compensation and personnel policies of the company and the entire Group as prescribed by law or the com- pany’s Bylaws. The most important duties and powers of the NCC with regard to compensation are given in the table below. The Annual General Meeting of Burckhardt Compression Holding AG casts the following votes in relation to the compen- sation of the Board of Directors and Executive Board: – a prospective vote on the maximum aggregate amount of fixed compensation for the Board of Directors and the Execu- tive Board for the fiscal year following the Annual General Meeting – a retrospective vote on the maximum aggregate amount of variable compensation for the Executive Board for the fiscal year preceding the Annual General Meeting. Furthermore, the Annual General Meeting casts a consul tative vote on the Compensation Report. 4. COMPENSATION SYSTEM Burckhardt Compression Group’s compensation system con- sists of a mix of fixed and variable components. In accordance with the Bylaws of Burckhardt Compression Holding AG, vari- able compensation can be paid in whole or part in the form of shares, conditional rights to receive shares, or in comparable instruments of the company. Topic Proposal/recommendation by Approval authority Compensation principles and guidelines Compensation Report Compensation of Board of Directors Compensation of CEO Aggregate compensation of Executive Board Compensation per member of Executive Board (excl. CEO) Loans and additional pension benefits for Executive Board (excl. CEO) NCC NCC NCC NCC NCC CEO CEO BOD BOD BOD BOD BOD NCC NCC 68 COMPENSATION REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 4.1. Compensation system for the Board of Directors Compensation for the Board of Directors consists of a fixed component, 80% of which is paid in cash, 20% in shares; a fixed cash supplement for directors who serve on a formal Board committee; and a fixed lump-sum for expenses. The number of shares awarded is based on the average share price (daily clos- ing price on the SIX exchange) for the period between the announcement of the full-year results and the Annual General Meeting. The fixed cash component amounts to CHF 81’000 for mem- bers of the Board of Directors and CHF 134’000 for the chair- man. The fixed cash supplement for directors serving on a for- mal Board committee is CHF 10’000 a year. The lump sum for expenses is CHF 4’000 for members of the Board of Directors and CHF 6’000 per year for the chairman of the Board of Direc- tors. 4.2. Compensation system for the Executive Board Compensation of the Executive Board consists of three compo- nents: – a fixed base salary – a variable performance- and profit-related annual bonus paid in cash – a variable performance- and profit-related long-term incen- tive bonus awarded in the form of free shares. Base salary The members of the Executive Board are assigned to so-called Global Grades as defined by a global functional grading system (Willis Towers Watson Global Grading System). Market data for each Global Grade and the results of annual performance appraisals are taken into consideration when determining the base salary of the members of the Executive Board. Annual Bonus The members of the Executive Board receive a variable performance- and profit-related bonus in addition to their base salaries. The annual bonus is calculated as the math- ematical product of Burckhardt Compression’s consolidated net income and a percentage rate. The percentage rate applied for the CEO is 0.28%. The percentage rate for other members of the Executive Board – depending on their Global Grade – ranges from 0.08 to 0.16%. In the case of the CEO, the CFO and the CHRO, the percentage rate is multiplied by the goal attain- ment indicator of the Return On Net Operating Assets (RONOA) of Burckhardt Compression Group, which serves as an indicator of goal attainment. The percentage for the heads of the two divisions is multiplied by the respective divisional operating profit as the goal attainment indicator. The goal attainment indicator ranges from 0 to 1.5. If the defined goal is achieved, the goal attainment indicator is 1.0. The annual bonus is capped at 50% of annual base salary. Long-term incentive pay Members of the Executive Board additionally receive long-term incentive pay awarded in the form of free shares. The long-term bonus program is valid for a six-year period (fiscal years 2017–2022). Long-term incentive pay is based on the attainment of the Mid-Range Plan targets for organic growth (sales) and net income of Burckhardt Com- pression Group for the fiscal years 2018 to 2022 and for the 2017 fiscal year. The basis upon which the long-term incentive pay is calcu- lated consists of a fixed, predefined amount per Global Grade. If the sales and net income targets set in the Mid-Range Plan are attained by the end of the fiscal year 2022, this fixed amount will be multiplied by a factor of 1.0 (0.5 each for sales and net income) and awarded in the form of shares (free shares). The targeted amount of the long-term bonus for the entire six-year period is CHF 900’000 for the CEO and between CHF 405’000 and CHF 600’000 for the members of the Executive Board, depending on their Global Grade. The sales target in the Mid- Range Plan (aggregate) for the six years amounts to CHF 3’819 mn, the net income target is CHF 300 mn. If the tar- gets are only partially achieved, the factors will be reduced by a corresponding amount. Minimum financial targets have been defined for both cumulative sales and for cumulative net income. The minimum cumulative sales target is set at CHF 3’346 mn, minimum cumulative net income at CHF 195 mn. If cumulative sales or net income fall short of these minimum thresholds, the corresponding factor will be reduced to zero. If the Mid-Range Plan targets for sales or net income are exceeded, the corresponding factors will be increased up to a maximum amount of 0.6 each (1.2 in total). An interim evaluation of the attained targets will be con- ducted after three years. Members of the Executive Board whose employment with the company has not been terminated as of July 31, 2020 will on that date be awarded a fixed number of free shares for the fiscal years 2017, 2018 and 2019. These free shares will be distributed at the end of July 2020. The sec- ond allotment of free shares for the fiscal years 2020, 2021 and 2022 will be distributed at the end of July 2023, provided the employment contract for the respective Executive Board mem- bers has not been terminated. Persons subsequently appointed to the Executive Board will be entitled to long-time incentive pay on a pro rata basis. The number of shares awarded will be based on the average share price for the periods from the announcement of the full-year results to the annual general meetings for the fiscal years 2019 and 2022, respectively. All shares received will not be subject to any restrictions upon the date of transfer. Employment contract terms Employment contracts with Executive Board members are entered into for an indefinite period with a notice period of six months. COMPENSATION REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 69 Fees 144 91 91 101 91 518 Fees 144 91 91 101 91 518 Social insurance contributions and other benefits 17 10 4 10 10 51 Social insurance contributions and other benefits 17 10 4 10 10 51 2018 Total 161 101 95 111 101 569 5801 2017 Total 161 101 95 111 101 569 5801 5. COMPENSATION PAID WITH COMPARATIVE FIGURES FOR THE PREVIOUS YEAR 5.1. Compensation paid to the Board of Directors The following aggregate compensation was paid to the mem- bers of the Board of Directors for the fiscal years 2018 and 2017: in CHF 1’000 Name Function Members of the Board of Directors Valentin Vogt Chairman Hans Hess Deputy Chairman Dr. Stephan Bross Dr. Monika Krüsi Urs Leinhäuser Total Member Member Member Approved by the 2017 AGM for fiscal year 2018 in CHF 1’000 Name Function Members of the Board of Directors Valentin Vogt Chairman Hans Hess Deputy Chairman Dr. Stephan Bross Dr. Monika Krüsi Urs Leinhäuser Total Member Member Member Approved by the 2016 AGM for fiscal year 2017 1 This amount includes a contingency reserve of CHF 9’000. The total fixed compensation in the fiscal year under review is unchanged from the previous fiscal year. The Annual General Meeting of July 1, 2017 approved aggregate fixed compensation in the amount of CHF 580’000 (gross, incl. social insurance con- tributions) for the Board of Directors (5 persons) for fiscal year 2018. The amount of compensation actually paid was CHF 11’000 less than the approved amount. 70 COMPENSATION REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 5.2. Compensation paid to the Executive Board The following compensation was paid to the members of the Executive Board for the fiscal years 2018 and 2017: in CHF 1’000 Name Function Executive Board Marcel Pawlicek CEO Other members of the Executive Board Total Approved by the 2017 AGM for fiscal year 2018 in CHF 1’000 Name Function Executive Board Marcel Pawlicek CEO Other members of the Executive Board2 Total Approved by the 2016 AGM for fiscal year 2017 Fixed base salary, cash Social insurance contributions and other benefits Total fixed compen- sation (gross) Variable annual bonus, cash Share-based long-term incentive pay Total variable compen- sation (gross) Social insurance contributions and other benefits 2018 Total 425 1’117 1’542 116 268 384 541 1’385 1’926 2’1202 84 161 245 105 177 282 40 65 105 229 403 632 770 1’7881 2’558 Fixed base salary, cash Social insurance contributions and other benefits Total fixed compen- sation (gross) Variable annual bonus, cash Share-based long-term incentive pay Total variable compen- sation (gross) Social insurance contributions and other benefits 2017 Total 425 1’066 1’491 116 260 376 541 1’326 1’867 2’1303 64 118 182 75 172 247 29 53 82 168 343 511 709 1’669 2’378 1 This amount includes Martin Wendel’s compensation for the 2018 fiscal year and Rainer Dübi’s pro rata compensation as of February 15, 2019. 2 This amount includes a contingency reserve of CHF 250’000. 3 This amount includes a contingency reserve of CHF 200’000. The CEO’s fixed base salary for the period under review is com- parable to the level from the previous fiscal year. The total amount of fixed base salary for the other members of the Execu- tive Board is CHF 51’000 more than in the prior-year period. The Annual General Meeting of July 1, 2017 approved a total sum of CHF 2’120’000 (gross, including social insurance contributions) for the fixed compensation of the entire Executive Board for the fiscal year 2018. The amount of fixed compensation actually paid (gross, including social insurance contributions) was CHF 194’000 less than the approved amount. The annual bonus for the Executive Board in fiscal year 2018 was CHF 63’000 more than in the previous year. This is because of the increase in reported net profit, which serves as the basis for the annual bonus, and because the targets set in conjunc- tion with the Group and Divisional factors described above were exceeded. Personnel expenses for the Executive Board’s long- term bonus were CHF 35’000 more than in the previous year. The provision made for the long-term bonus has been adjusted for two reasons: firstly, on the basis of an assessment of busi- ness performance over a multi-year period; secondly, in accor- dance with Swiss GAAP FER, the related expenses must be allo- cated over the program’s vesting period, which can lead to adjustments within individual fiscal years. COMPENSATION REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 71 6. OVERVIEW OF SHAREHOLDINGS AND ALLOCATED/DISTRIBUTED SHARES 6.1. Detailed overview of allocated and distributed shares In the fiscal years 2017 and 2018 the following shares were allo- cated and distributed: Name Function Shares allocated in FY 2017 Shares allocated in FY 2018 Shares distributed in FY 2017 Shares distributed in FY 2018 Members of the Board of Directors Valentin Vogt Chairman Hans Hess Deputy Chairman Dr. Stephan Bross Member Dr. Monika Krüsi Urs Leinhäuser Total1 Member Member Executive Board Marcel Pawlicek CEO Other members of the Executive Board Total2 Total 187 125 125 125 125 687 673 859 1’532 2’219 75 45 45 45 45 255 0 0 0 255 187 125 125 125 125 687 1’295 1’170 2’465 3’152 75 45 45 45 45 255 0 0 0 255 1 The reduction of the number of shares in fiscal year 2018 is a result of the changes in the compensation system for the Board of Directors. 2 The shares from the long-term incentive pay are not annually allocated or distributed. 72 COMPENSATION REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 6.2. Detailed overview of shareholdings As per March 31, 2019, the members of the Executive Board and the Board of Directors (and related persons) owned the follow- ing numbers of shares of Burckhardt Compression Holding AG: Name Position Members of the Board of Directors Valentin Vogt Chairman Deputy Chairman Member Member Member CEO CFO CHRO President Systems Division President Services Division President Services Division Hans Hess Dr. Stephan Bross Dr. Monika Krüsi Urs Leinhäuser Total Executive Board Marcel Pawlicek Rolf Brändli Sandra Pitt Fabrice Billard Rainer Dübi2 Martin Wendel1 Total Total In % of total shares 1 Member of the Executive Board until February 14, 2019 2 Member of the Executive Board as from February 15, 2019 03/31/2019 03/31/2018 Total shares Total shares 203’288 5’663 215 985 1’080 211’231 42’111 1’702 278 400 600 n/a 45’091 256’553 7.5% 203’213 5’618 170 940 1’035 210’976 42’111 1’702 278 400 n/a 231 44’722 255’698 7.5% COMPENSATION REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 73 7. TRANSACTIONS WITH THE BOARD OF DIRECTORS, THE EXECUTIVE BOARD AND RELATED PARTIES No other payments or fees for additional services were paid to the members of the Board of Directors or the Executive Board or to related parties during the fiscal year 2018. No signing bonuses were paid during the fiscal year 2018. At the reporting date no loans, credit lines or pension benefits over and above those provided by mandatory occupational pension plans had been granted to members of the company’s boards. 9. EVALUATION OF THE COMPENSATION SYSTEM Burckhardt Compression’s compensation system is regularly reviewed by the Nomination and Compensation Committee and the Board of Directors and may be modified if necessary. Annual benchmarking reviews based on Willis Towers Wat- son’s Global Grading System and the compensation market data it provides are part of the company’s fair and integrated com- pensation system. These are conducted periodically, most recent ly in fiscal year 2018. 8. MOTIONS FOR THE ANNUAL GENERAL MEETING 8.1. Approval of the maximum aggregate amount of vari- able compensation for the Executive Board Fiscal year 2018 The Board of Directors proposes that an aggregate amount of CHF 632’000 (gross, including social insurance contributions and other benefits) be approved as variable compensation for the Executive Board for fiscal year 2018. 8.2. Consultative vote on the Compensation Report Fiscal year 2018 The Board of Directors proposes that shareholders approve the Compensation Report for fiscal year 2018 in a consultative vote. 8.3 Approval of the maximum aggregate amount of fixed compensation for the members of the Board of Directors Fiscal year 2020 The Board of Directors proposes that a maximum aggregate amount of CHF 580’000 (gross, including social insurance con- tributions and other benefits) be approved as fixed compensa- tion for the Board of Directors for fiscal year 2020. The pro- posed amount includes a contingency reserve of CHF 11’000. 8.4. Approval of the maximum aggregate amount of fixed compensation for members of the Executive Board Fiscal year 2020 The Board of Directors proposes that a maximum aggregate amount of CHF 2’120’000 (gross, including social insurance con- tributions and other benefits) be approved as fixed compensa- tion for the Executive Board for fiscal year 2020. The proposed sum includes a contingency reserve of CHF 200’000. 74 COMPENSATION REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION Report of the statutory auditor to the General Meeting of Burckhardt Compression Holding AG Winterthur We have audited the remuneration report of Burckhardt Compression Holding AG for the year ended 31 March 2019. The audit was limited to the information according to articles 14–16 of the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Ordinance) contained in the tables on pages 69 and page 70 of the remuneration report. Board of Directors’ responsibility The Board of Directors is responsible for the preparation and overall fair presentation of the remuneration report in accordance with Swiss law and the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Ordinance). The Board of Directors is also responsible for designing the remuneration system and defining individual remuneration packages. Auditor’s responsibility Our responsibility is to express an opinion on the accompanying remuneration report. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the remuneration report complies with Swiss law and articles 14–16 of the Ordinance. An audit involves performing procedures to obtain audit evidence on the disclosures made in the remuneration report with regard to compensation, loans and credits in accordance with articles 14–16 of the Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatements in the remuneration report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of remuneration, as well as assessing the overall presentation of the remuneration report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. PricewaterhouseCoopers AG, Bahnhofplatz 17, Postfach, CH-8400 Winterthur, Switzerland Telefon: +41 58 792 71 00, Telefax: +41 58 792 71 10, www.pwc.ch PricewaterhouseCoopers AG is a member of the global PricewaterhouseCoopers network of firms, each of which is a separate and independent legal entity. COMPENSATION REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 75 Opinion In our opinion, the remuneration report of Burckhardt Compression Holding AG for the year ended 31 March 2019 complies with Swiss law and articles 14–16 of the Ordinance. PricewaterhouseCoopers AG Beat Inauen Audit expert Auditor in charge Winterthur, 23 May 2019 Oliver Illa Audit expert 76 FINANCIAL REPORT Burckhardt Compression Holding AG’s fiscal year 2018 com- prises the period from April 1, 2018 to March 31, 2019. COMMENTS ON FINANCIAL REPORT Summary in CHF 1’000 Order intake Sales Gross profit Operating income (EBIT) in % of sales Net income Total assets Total equity Earnings per share attributable to shareholders of Burckhardt Compression Holding AG (in CHF) FTEs as per end of fiscal year 2018 2017 Change 2017/2018 658’675 599’280 135’677 44’507 7.4% 32’201 848’732 345’034 8.15 2’346 525’229 594’574 125’060 41’682 7.0% 29’023 797’583 335’200 8.51 2’214 25.4% 0.8% 8.5% 6.8% 10.9% 6.4% 2.9% –4.2% 6.0% SALES AND GROSS PROFIT OPERATING INCOME Operating income increased by 6.8% to CHF 44.5 mn yielding an EBIT-margin of 7.4% (previous year: 7.0%). Selling and marketing together with general and administrative expenses increased by 7.5% or CHF 6.1 mn due to higher quoting and sales activities as well as some one-off consulting fees. Other operating income amounted to CHF 4.1 mn, whereof CHF 3.4 mn is attributable to the operating result of the real estate company in Winterthur (Burckhardt Compression Immobilien AG). Research and devel- opment expenses amounted to CHF 8.7 mn, which is slightly more than reported last year (CHF 8.0 mn). Sales in the 2018 fiscal year amounted to CHF 599.3 mn, which corresponds to an increase of 0.8% from the previous fiscal year. While the Systems Division closed the fiscal year at CHF 375.4 mn, a decline of 2.3% compared to the strong prior year period, the Services Division grew by 6.5% to CHF 223.9 mn. The growth in services came from basically all business lines, including other brand compressors (OBC). Excluding cur- rency translation effects, total sales increased by 0.9%. From a regional perspective, the growth was mainly driven by China and Europe, while both North- and South America stood below last year’s performance. The total gross profit margin came in at 22.6% (compared to 21.0% in the previous fiscal year). Despite substantial addi- tional costs for LNG applications sold over the last two years, the gross margin in the Systems Division rose by 100 base points to 8.1%. The gross margin reported in the Services Divi- sion arrived at 47.0% (46.6% in the previous year). FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 77 FINANCIAL INCOME AND TAX EXPENSES CASH FLOW Cash and cash equivalents totaled CHF 83.0 mn at the balance sheet closing date, CHF 7.9 mn above last year. Cash flow from operating activities decreased by CHF 2.6 mn to CHF 41.8 mn. The net cash outflow from investing activities was with CHF –7.8 mn at a lower level than in the prior-year period (CHF –17.2 mn). Dividends paid amounted to CHF 20.4 mn, CHF 3.5 mn less than last year. The net financial position closed at CHF –49.4 mn (prior year: CHF –62.1 mn). The share of results of associates is entirely related to the 40% interest which Burckhardt Compression owns in Arkos Field Services. Although the negative impact was reduced compared to the previous year, we still carry a proportional loss in the amount of CHF –1.2 mn (prior year: CHF –1.9 mn), as the local service market in the US picked up only towards the end of the fiscal year. Financial expenses rose by 19.9% to CHF 2.2 mn. While interest expenses remained at a very low level, the over- all financial expenses ended up CHF 0.4 mn above the prior- year period due to higher exchange rate losses on intercompany loans. The tax rate for the year was 21.6%, almost two percent- age points below the previous year (23.5%), mainly an effect of the higher share of taxable income of countries with lower tax rates. NET INCOME The net income rose by 10.9% to CHF 32.2 mn. The correspond- ing net income margin is 5.4% (previous year: 4.9%). As a result of the strong contribution of Shenyang Yuanda (of which the founder of the company still owns 40%) to the Group’s result, the net income per share attributable to shareholders of Burckhardt Compression Holding AG decreased by 4.2% to CHF 8.15 (previ- ous year: CHF 8.51). BALANCE SHEET Total assets increased by 6.4% to CHF 848.7 mn. Property plant and equipment totaled CHF 191.2 mn, slightly below the previ- ous year, while inventories increased by CHF 11.3 mn to CHF 222.0 mn. Due to the high volume of projects invoiced towards the fiscal year-end, accounts receivable ended up at CHF 261.1 mn, CHF 33.4 mn above prior year. 31.5% of the accounts receivable were overdue more than 90 days as per year-end (prior year: 28.1%). The majority of overdue positions are related to projects in China. The balance between advance payments from customers compared to work in progress and advance payments to suppliers ended the year at CHF –39.2 mn (previous year: CHF –42.4 mn). The negative balance is also related primarily to projects in China with either unfavorable payment terms from public bids or delayed project schedules. The equity ratio declined slightly to 40.7% (prior year: 42.0%). FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 78 CONSOLIDATED INCOME STATEMENT Notes 2018 2017 in CHF 1’000 Sales Cost of goods sold Gross Profit Selling and marketing expenses General and administrative expenses Research and development expenses Other operating income Other operating expenses Operating income Share of results of associates Financial income and expenses Earnings before taxes Income tax expenses Net income Share of net income attributable to shareholders of Burckhardt Compression Holding AG Share of net income attributable to non-controlling interests Basic earnings per share in CHF Diluted earnings per share in CHF 599’280 –463’603 135’677 –48’952 –37’589 –8’711 28’651 –24’569 44’507 –1’208 –2’238 41’061 –8’860 32’201 27’644 4’557 8.15 8.15 594’574 –469’514 125’060 –45’341 –35’127 –8’004 25’158 –20’064 41’682 –1’888 –1’867 37’927 –8’904 29’023 28’837 186 8.51 8.51 7 8 8 14 9 10 11 11 The enclosed notes are an integral part of the consolidated financial statements. FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 79 CONSOLIDATED BALANCE SHEET Notes 03/31/2019 03/31/2018 in CHF 1’000 Non-current assets Intangible assets Property, plant and equipment Investment in associates Deferred tax assets Other financial assets Total non-current assets Current assets Inventories Trade receivables Other current receivables Prepaid expenses and accrued income Cash and cash equivalents Total current assets Total assets Equity Share capital Capital reserves Treasury shares Retained earnings and other reserves Equity attributable to shareholders of Burckhardt Compression Holding AG Non-controlling interests Total equity Liabilities Non-current liabilities Non-current financial liabilities Deferred tax liabilities Non-current provisions Other non-current liabilities Total non-current liabilities Current liabilities Current financial liabilities Trade payables Customers’ advance payments Other current liabilities Accrued liabilities and deferred income Current provisions Total current liabilities Total liabilities Total equity and liabilities The enclosed notes are an integral part of the consolidated financial statements. 12 13 14 10 15 16 17 18 19 19 20 10 21 22 20 23 24 21 11’369 191’188 11’539 9’061 27’689 250’846 222’045 261’113 28’482 3’236 83’010 597’886 13’200 193’170 12’249 7’871 25’313 251’803 210’703 227’699 29’546 2’755 75’077 545’780 848’732 797’583 8’500 446 –1’582 295’100 302’464 42’570 345’034 64’742 15’348 14’074 7’401 8’500 421 –1’652 288’798 296’067 39’133 335’200 65’599 14’599 14’249 5’900 101’565 100’347 67’666 86’731 129’233 36’510 60’881 21’112 402’133 71’538 65’294 120’642 21’373 63’340 19’849 362’036 503’698 462’383 848’732 797’583 FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 80 CONSOLIDATED CASH FLOW STATEMENT Notes 2018 2017 10 9 14 13 12 10 13 12 4 in CHF 1’000 Cash flow from operating activities Net income Income tax expenses Financial income and expenses Share of results of associates Depreciation Amortization Change in inventories Change in trade receivables Change in other current assets Change in trade payables Change in customers’ advance payments Change in provisions Change in other liabilities Adjustment for non-cash items Interest received Interest paid Income taxes paid Total cash flow from operating activities Cash flow from investing activities Purchase of property, plant and equipment Sale of property, plant and equipment Purchase of intangible assets Increase in Financial Assets Acquisition of group companies net of cash acquired Disposal of group companies Total cash flow from investing activities Cash flow from financing activities Increase in financial liabilities Decrease in financial liabilities Dividends paid Transactions with non-controlling interests Total cash flow from financing activities Currency translation differences on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Net change in cash and cash equivalents The enclosed notes are an integral part of the consolidated financial statements. 32’201 8’860 2’238 1’208 17’667 4’170 –13’736 –37’991 317 22’730 10’298 1’160 4’767 2’093 568 –1’883 –12’872 41’795 –22’384 18’490 –2’546 –1’485 – 144 –7’781 367 –5’096 –20’361 – –25’090 –991 7’933 75’077 83’010 7’933 29’023 8’904 1’867 1’888 17’411 3’897 42’029 –10’412 –10’627 3’452 –46’169 2’037 19’119 1’082 578 –1’743 –17’977 44’359 –8’730 810 –5’101 – –4’197 – –17’218 2’322 –6’961 –23’859 299 –28’199 1’243 185 74’892 75’077 185 FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 81 Total equity 317’103 29’023 4’965 5’354 –23’859 299 – 2’878 –563 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY in CHF 1’000 Share capital Capital reserves Treasury shares Hedge reserve Translation reserve Goodwill offset 8’500 – –6’582 –5’788 –993 –103’267 3’138 5’354 421 4’930 Non- controlling interests 37’056 186 1’827 –235 299 Other retained earnings Equity attributable to share- holders of Burckhardt Compression Holding AG 388’177 28’837 –23’624 280’047 28’837 3’138 5’354 –23’624 – –5’351 – 2’878 2’878 –563 –563 8’500 421 –1’652 –434 2’145 –103’830 390’917 296’067 39’133 335’200 8’500 421 –1’652 –434 2’145 –103’830 –1’778 –971 25 70 390’917 27’644 –20’361 –95 296’067 27’644 –1’778 –971 –20’361 – 1’863 1’863 39’133 4’557 –1’120 335’200 32’201 –2’898 – – –971 –20’361 – 1’863 8’500 446 –1’582 –1’405 367 –103’830 399’968 302’464 42’570 345’034 Balance at 04/01/2017 Result for the period Currency translation differences Changes of cash flow hedges Dividends paid Transactions with non-controlling interests Share-based payments (distributed) Share-based payments (allocated) Goodwill on acquisition Balance at 03/31/2018 Balance at 04/01/2018 Result for the period Currency translation differences Changes of cash flow hedges Dividends paid Share-based payments (distributed) Share-based payments (allocated) Balance at 03/31/2019 The enclosed notes are an integral part of the consolidated financial statements. FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION Burckhardt Compression is a manufacturer and service pro- vider for a full range of reciprocating compressor technologies and services. Its customized compressor systems are used in the upstream oil & gas, gas transport and storage, refinery, chemical, petrochemical and industrial gas sectors. Burckhardt Compression’s leading technology, broad portfolio of compres- sor components and the full range of services help customers around the world to find their optimized solution for their recip- rocating compressor systems. Burckhardt Compression Holding AG is a company limited by shares incorporated and domiciled in Switzerland. The address of its registered office is: Franz-Burckhardt-Strasse 5, 8404 Winterthur, Switzerland. Burckhardt Compression registered shares (BCHN) are listed on the SIX Swiss Stock Exchange in Zurich (ISIN: CH0025536027). Burckhardt Compression Holding AG’s fiscal year 2018 com- prises the period from April 1, 2018 to March 31, 2019. These consolidated financial statements were authorized for issue by the Board of Directors on May 23, 2019 and will be submitted to shareholders for approval at the annual general meeting sched- uled for July 6, 2019. 2. ACCOUNTING POLICIES 2.1. Basis of Preparation The consolidated financial statements of Burckhardt Compres- sion Holding AG have been prepared in accordance with the entire Swiss GAAP FER accounting and reporting standards. In addition, the provisions of the Listing Rules of the SIX Swiss Exchange and Swiss accounting law were complied with. The consolidated financial statements have been prepared under the historical cost convention unless otherwise stated in the following consolidation and accounting policies. 2.2. Use of Judgments and Estimates These consolidated financial statements include estimates and assumptions that affect the reported figures and related disclosures. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongo- ing basis. Revisions to estimates are recognized prospectively. 2.3. Principles of Consolidation The consolidated financial statements include all entities where Burckhardt Compression Holding AG has the power to control the financial and operating policy, usually as a result of directly or indirectly owning more than 50% of the voting rights. All of the assets and liabilities as well as the income and expenses of these companies are fully included. Non-control- ling interests are presented separately in the balance sheet and the income statement. Intercompany transactions, balances and unrealized gains or losses on transactions between group companies are eliminated. Group companies are disclosed in note 33. Acquired companies are fully consolidated from the date on which control was effectively transferred. Companies which have been divested are included in the consolidated financial statements until the date on which control ceased. Capital con- solidation is based on the acquisition method (purchase method). At the time of the acquisition, all previously recog- nized assets and liabilities of the company are initially valued at fair value. Acquisition-related costs are expensed as incurred. The net assets acquired are compared with the purchase price, and any resulting goodwill is directly offset against equity. In the notes to the financial statements, the effects of a theoretical capitalization and any impairment are shown using an amortization period of five years. In the event of a possible subsequent sale, the goodwill offset against shareholders’ equity at the time of the acquisition is recognized in the income statement against the proceeds of the sale. Associates are those entities in which Burckhardt Compres- sion has significant influence, but no control, over the financial and operating policies. Significant influence is generally pre- sumed to exist when Burckhardt Compression holds, directly or indirectly, between 20% and 50% of the voting rights. Associ- ates are accounted for using the equity method. The propor- tionate share of net income is shown in the consolidated income statement. Associates are disclosed in note 33. 2.4. Foreign Currency Translation The consolidated financial statements of Burckhardt Compres- sion are prepared in Swiss francs (CHF). Foreign Currency Translation at Company Level Foreign currency transactions are recorded at the exchange rate of the transaction date. Monetary assets and liabilities which are denominated in foreign currencies are translated at period-end exchange rates. Resulting translation differences are recorded in the income statement. Foreign Currency Translation for Consolidation Purposes As sets and liabilities of foreign subsidiaries are translated into CHF using period-end exchange rates. Average exchange rates are used for the translation of the income statements. Transla- tion differences arising from the consolidation of financial statements are recorded as a separate component of equity. Likewise, exchange differences arising on inter-company loans with equity character are directly recorded in equity. FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 83 Major Foreign Currency Exchange Rates Average rates 2018 1.15 0.99 14.77 Period-end rates 03/31/2019 03/31/2018 1.18 1.12 1.00 14.77 0.96 15.21 2017 1.13 0.97 14.66 1 EUR 1 USD 100 CNY 2.5. Impairment of Assets All non-current assets are tested for impairment when indica- tors exist that the carrying amount of the asset might exceed its recoverable amount. Where the carrying amount of an asset is higher than the recoverable amount, the asset is impaired to its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and its value in use. Impairment tests are performed based on discounted cash flows at the level of the corresponding cash-generating units, representing the lowest level at which such assets are evalu- ated for recoverability. 2.6. Intangible Assets and Goodwill Acquired software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. The estimated useful life for software generally amounts to three to five years. Internal costs associated with developing or maintaining software are recognized as an expense as incurred. Other intangible assets are recorded at acquisition or pro- duction costs less accumulated amortization. The amortiza- tion expense is calculated on a straight-line basis over the esti- mated useful life of the asset. Goodwill resulting from acquisitions is offset against equity at the date of acquisition. The consequences of a theoretical capitalization and amortization of goodwill (using an amortiza- tion period of five years) are disclosed in note 12. 2.7. Property, Plant and Equipment Items of property, plant and equipment are stated at cost less accumulated depreciation. They are depreciated on a straight- line basis over their estimated useful lives. Land is stated at cost and is not depreciated, except land use rights in China, which are depreciated over their useful lives. The estimated useful lives are as follows: – Buildings: 20 to 50 years – Machinery: 5 to 15 years – Technical equipment: 5 to 10 years – Other non-current assets: maximum 5 years 2.8. Other Financial Assets Other financial assets include loans and long-term rental deposits. They are stated at cost less appropriate impairment losses. 2.9. Inventories Inventories are stated at the lower of cost or net realizable value. The cost of work in progress and finished goods comprises material costs, direct and indirect production costs and other order-related production costs. Inventories are stated at weighted average costs or standard costs based on their type and use. Valuation allowances are recognized for slow-moving and excess inventory items. 2.10. Trade and Other Current Receivables Trade receivables and other current receivables are stated at nominal value less valuation allowances for doubtful amounts. Impairments are assessed case by case. An impairment loss is recognized when there is objective evidence that Burckhardt Compression will not be able to collect the full amount due, such as substantial financial problems of the customer or a declaration of bankruptcy. 2.11. Cash and Cash Equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid invest- ments with original maturities of three months or less. 2.12. Financial Liabilities Financial liabilities mainly consist of bank debt and are recog- nized at nominal value. 2.13. Provisions Provisions are recognized for warranty obligations, unprofitable contracts, personnel expenses and various commercial risks where Burckhardt Compression has an obligation towards third parties arising from past events, the amount of the liability can be reliably measured and it is probable that the settlement will result in an outflow of resources. The amount of the provisions is based on the expected expenditures required to cover all obli- gations and liabilities. 2.14. Treasury Shares Treasury shares are stated at acquisition cost and deducted from equity. No subsequent valuation is made. If the treasury shares are disposed of, the resulting gain or loss is recognized as an addition to or a reduction of capital reserves. 2.15. Government Grants Grants from governments or similar organizations are recog- nized at their fair value when there is reasonable assurance that the grant will be received and Burckhardt Compression will com- ply with all attached conditions. Government grants related to income and government grants related to assets are deferred and recognized as income over the period necessary to match them with the related costs which they are intended to compensate. 2.16. Derivative Financial Instruments Burckhardt Compression uses derivative financial instruments to mitigate currency risks. The risk management policy is described in note 3. The derivative financial instruments are rec- ognized at fair value. Where such derivative financial instruments FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 84 are linked to specific projected transactions and cash flows, the hedging is deemed to be effective and documented accordingly, changes in the fair value of the cash flow hedges are recognized in equity as long as the hedged item has not been recognized on the balance sheet. Otherwise, the gain or loss relating to fair value changes of the derivative financial instruments is recog- nized immediately in the income statement as part of other operating income or other operating expenses. 2.17. Revenue Recognition Burckhardt Compression recognizes revenue arising from the sale of goods and the rendering of services upon completion of the contract, net of sales or value-added taxes, credits, dis- counts and rebates. Revenue and the related cost of goods sold are recognized in the accounts when the risks and rewards have passed to the customers subject to the conditions of sale. The following conditions must be met in this regard: – Deliveries have been made and/or the service as per contract has been performed. – A contractually-agreed sales price exists or can be reliably estimated. – Collection of the payment is reasonably assured. – The costs (including those yet to be incurred) can be reliably measured. 2.18. Research and Development Research and development costs are expensed as incurred. 2.19. Income Taxes Income tax expenses include all income tax on the taxable prof- its of the group. Deferred income tax is recorded in full using the liability method. Deferred income tax assets and liabilities arise on temporary differences between the carrying amounts of assets and liabilities under Swiss GAAP FER and their related tax values. The tax rates and laws enacted or substantively enacted at the balance sheet date are used to determine deferred income tax. Deferred income tax assets result from tax loss carry-for- wards, tax credits as well as temporary valuation differences of assets and liabilities. They are recognized to the extent that realization through future taxable profits is probable. 2.20. Off-Balance-Sheet Transactions Contingent liabilities and other non-recognizable commitments are valued and disclosed on each balance sheet date. 2.21. Share-Based Payments Share-based payments with compensation through equity instruments are valued at fair value at the grant date. The cor- responding personnel expenses are distributed over the vesting periods. 2.22. Employee Benefits There are various pension plans within Burckhardt Compression based on local conditions in their respective countries. An eco- nomic obligation is recognized as a liability if the requirements for the recognition of a provision are met under Swiss GAAP FER. An economic benefit is capitalized provided that Burckhardt Compression is entitled to such benefit in the future, for example, to offset future pension expenses. For Swiss pension plans, economic benefits and/or eco- nomic obligations are determined on the basis of the annual financial statements of the pension funds prepared in accord- ance with Swiss GAAP FER 26. Freely available employer con- tribution reserves are recognized as financial asset. For foreign plans, the economic impact is determined according to country- specific methods. 3. FINANCIAL RISK MANAGEMENT Basic Principles The goal of the group-wide risk management policy is to mini- mize the negative impact of changes in the financing structure and financial markets, particularly with regard to currency fluctuations. Derivative financial instruments such as foreign exchange contracts may be used to address the respective risks. Burckhardt Compression pursues a conservative, risk- averse financial policy. Financial risk management is based on the principles and regulations established by the Board of Directors. These govern Burckhardt Compression’s financial policy and outline the conduct and powers of the group’s treas- ury department, which is responsible for the group-wide man- agement of financial risks. The financial principles and regula- tions govern areas such as financing policy, the management of foreign currency risk, the use of derivative financial instru- ments and the investment policy applicable to financial resources not required for operational purposes. Liquidity Risks Each Burckhardt Compression group company is responsible for managing its liquidity so that day-to-day business can be handled smoothly, while the group treasury is responsible for maintaining the group’s overall liquidity. Some of the group sub- sidiaries may secure loans from local creditors within the limits approved by the group management. The group treasury pro- vides the local group companies with the necessary funds or invests their excess liquidity. The group treasury maintains suf- ficient liquidity reserves and open credit and guarantee lines to fulfill the financial obligations at all times. The actual and future cash flows and cash reserves are compiled monthly in a rolling liquidity forecast. The Executive Board and the Board of Directors are informed about the liquid- ity situation and outlook with the regular financial reporting. Currency Risks Burckhardt Compression hedges all major USD-denominated sales transactions of its non-US entities to the extent that such transactions are not fully or partially naturally hedged. EUR- denominated sales and purchase transactions of the Swiss com- pany are fairly evenly balanced when viewed over a period of FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 85 4. BUSINESS COMBINATIONS AND OTHER CHANGES IN THE SCOPE OF CONSOLIDATION Burckhardt Compression Tehran SSK (Iran) On November 2, 2018, Burckhardt Compression sold its subsidi- ary Burckhardt Compression Tehran SSK (BCIR), an Iranian sub- sidiary based in Tehran, in a share deal. BCIR was fully consoli- dated in the Burckhardt Compression Group until October 31, 2018. The effect on net income from the divestment amounts to CHF –0.6mn. CSM Compressor Supplies & Machine Work Ltd. (Canada) On June 23, 2017, Burckhardt Compression acquired CSM Com- pressor Supplies & Machine Work (CSM), a Canadian business based in Edmonton and Drumheller, in an asset deal. CSM has 35 years of experience in component supply and repair, focused on the upstream market. This acquisition enables Burckhardt Compression Canada to establish a presence in the upstream compressor service market and, in parallel, offer comprehen- sive service to downstream customers. The following table shows the fair value of assets and liabilities acquired at the acquisition date and the goodwill arising from this transaction. in CHF 1’000 Intangible assets Property, plant and equipment Inventories Trade receivables Prepaid expenses and accrued income Trade payables Accrued liabilities and deferred income Net assets acquired at fair value Goodwill Total Less cash and cash equivalents acquired Net cash outflow on acquisition 48 545 1’664 1’495 19 –124 –13 3’634 563 4’197 – 4’197 A complete list of all Group companies is shown in note 33. 1–2 years and are therefore, to a certain extent, naturally hedged at the net profit level over said period. These foreign-exchange flows are regularly monitored by the group treasury; if there is evidence of a sustained shift in these flows, major sales and purchase transactions will be hedged on a case-by-case basis. For this, the group treasury normally uses forward exchange contracts. The other companies belonging to Burckhardt Compression group may, after consultation with group treasury, hedge the foreign-exchange risks of their sales and purchase transactions through local qualified institutions or group treas- ury, the objective being the optimization of the net profit of each group company as reported in its functional local currency. The group management regularly monitors the changes in the most important currencies and may adjust the hedging policy accord- ingly in the future. As a globally active corporation, Burckhardt Compression is also exposed to currency risks resulting from the translation into Swiss francs of items in the balance sheets of the foreign group companies. Burckhardt Compression Hold- ing AG does not hedge these translation risks. Credit Risks Credit risk in respect of trade receivables is limited due to the diverse nature and quality of the customer base. Such risk is mini mized by means of regular credit checks, advance payments, letters of credit and other tools. There is no concentration of customer-related risks within Burckhardt Compression Group as the most important customers in the project business, which account for a large share of Burckhardt Compression’s overall business, vary from one year to the next. In past years Burckhardt Compression experienced no major impairments of receivables. Credit risks of banks and financial institutions are moni- tored and managed centrally. Generally, only independently rated parties with a strong credit rating are accepted, and the total volume of transactions is split among several banks to reduce the individual risk with one bank. Interest Rate Risks Interest rate risks arise from fluctuations in interest rates which could have a negative impact on the financial position of Burckhardt Compression. Assets and liabilities at variable rates expose Burckhardt Compression to cash flow interest rate risk. Capital Risks The capital managed by Burckhardt Compression is its consoli- dated equity. With regard to its capital management policies, Burckhardt Compression seeks to secure the continuation of its business activities, to achieve an acceptable return for the shareholders and to finance the growth of the business to a certain extent from own cash flow. In order to achieve these objectives Burckhardt Compression can adjust the dividend payments, repay share capital, issue new shares or divest parts of the assets. FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION Others Certain expenses related to the corporate center are not attrib- utable to a particular segment. They are reported in the column “Others”. Furthermore, “Others” includes the income and expenses of Burckhardt Compression’s real estate company in Switzerland (Burckhardt Compression Immobilien AG) as well as expenses for strategic projects. 86 5. SEGMENT REPORTING Systems Division Burckhardt Compression’s Systems Division covers a complete range of reciprocating compressor technologies. Its customized compressor systems are used in the upstream oil & gas, gas transport and storage, refinery, chemical, petrochemical and industrial gas sectors. Depending on the customers’ needs, Burckhardt Compression offers solutions to minimize life cycle costs of the reciprocating compressor systems or solutions to minimize the capital expenditure. Services Division Burckhardt Compression’s Services Division is a one-stop pro- vider of a full range of services for reciprocating compressors and stands for top-quality, high-performance components for all makes of reciprocating compressors, as replacement parts, or to repair or upgrade existing installations. Original spare parts backed by Burckhardt Compression’s manufacturing guar- antees stand for superior quality and ensure together with var- ious complementary service modules both low life cycle costs as well as the optimal operation of compressor systems. Systems Division Services Division Others 2018 2017 2018 2017 2018 2017 375’400 384’392 –344’906 –357’201 223’880 210’182 –118’697 –112’313 30’494 8.1% –8’669 –2.3% 27’191 7.1% –8’974 –2.3% 105’183 47.0% 58’185 26.0% 97’869 46.6% 54’352 25.9% – – – – – – – – –5’009 – –3’696 – Total 2018 599’280 –463’603 135’677 22.6% 44’507 7.4% 2017 594’574 –469’514 125’060 21.0% 41’682 7.0% 2018 2017 Capital expenditure for property, plant and equipment in CHF 1’000 155’346 19’052 43’843 5’175 34’484 123’670 3’116 Europe Africa 99’481 North America 14’017 South America 26’964 Middle East 208’969 155’970 China 2018 2017 9’279 4 161 4 106 11’875 955 22’384 2’251 47 352 30 473 4’222 1’355 8’730 Other Asia & Australia 132’411 171’356 Other Asia & Australia Total 599’280 594’574 Total in CHF 1’000 Sales Cost of goods sold Gross profit Gross profit as % of sales Operating income Operating income as % of sales Geographic information Sales by customer location in CHF 1’000 Europe Africa North America South America Middle East China FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 87 6. PERSONNEL EXPENSES 9. FINANCIAL INCOME AND EXPENSES in CHF 1’000 Wages and salaries Social security and pension expenses Other personnel expenses Total personnel expenses 2018 2017 –131’986 –118’515 –19’708 –24’253 –13’533 –11’531 in CHF 1’000 Interest expenses Interest income Other financial income (+) and expenses (–) –169’772 –149’754 Total financial income and expenses 2018 2017 –2’186 –2’491 863 –915 819 –195 –2’238 –1’867 7. RESEARCH AND DEVELOPMENT EXPENSES Other financial income and expenses include the exchange rate gains and losses on intercompany loans. Research and development activities in the fiscal year 2018 cen- tered on extending our compressor solution portfolio for marine applications including the development of advanced sealing tech- nologies for the lubeless sealing of pistons and piston rods. 1O. INCOME TAXES Income Tax Expenses 8. OTHER OPERATING INCOME AND EXPENSES in CHF 1’000 Current income tax expenses Deferred income tax income (+) and expenses (–) 2018 2017 Total income tax expenses in CHF 1’000 Currency exchange gains Other operating income Total other operating income Currency exchange losses Other operating expenses Total other operating expenses 14’271 14’380 16’575 8’583 28’651 25’158 –15’487 –9’082 –14’861 –5’203 –24’569 –20’064 Total other operating income and expenses 4’082 5’094 Other operating income includes the operating income of CHF 6.6 mn (prior year: CHF 6.6 mn) of the real estate company (Burckhardt Compression Immobilien AG). Other operating expenses include expenses amounting to CHF 3.2 mn (prior year: CHF 3.0 mn) of the real estate company (Burckhardt Compression Immobilien AG). Reconciliation of Income Tax Expenses in CHF 1’000 Earnings before taxes Expected income tax expenses Effect of non-recognition of tax loss carry forwards Effect of recognition and offset of tax loss carry forwards not recognized in prior years Effect of income tax of prior periods Effect of changes in tax rates Effect of non-deductible expenses Total income tax expenses as % of earnings before taxes 2018 2017 –9’418 558 –12’470 3’566 –8’860 –8’904 2018 2017 41’061 –8’489 –161 37’927 –8’955 –362 – 591 36 –99 –147 468 –530 –116 –8’860 21.6% –8’904 23.5% The expected tax rate of Burckhardt Compression Group of 21.6% (prior year: 23.5%) corresponds to the weighted average tax rate based on the profit before income taxes and the tax rate of each group company. The lower tax rate is mainly an effect of the higher share of taxable income of countries with lower tax rates. FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 88 Current Income Taxes 11. EARNINGS PER SHARE Net current income tax liabilities in CHF 1’000 2018 2017 in CHF 1’000 2018 2017 Net income attributable to the shareholders of Burckhardt Compression Holding AG Average number of outstanding shares Earnings per share (CHF) 27’644 3’393’911 28’837 3’387’252 8.15 8.51 The average number of outstanding shares is calculated based on the issued shares minus the weighted average number of treasury shares. There are no conversion rights or option rights outstanding; therefore, there is no potential dilution of earnings per share. Balance as per 04/01/2018 / 04/01/2017 Changes in the consolidation scope Recognized in the income statement Income taxes paid Translation differences Balance as per 03/31/2019 / 03/31/2018 thereof current tax assets thereof current tax liabilities 5’594 – 9’418 10’935 – 12’470 –12’872 –17’977 –49 2’091 678 2’769 166 5’594 371 5’965 Deferred Income Taxes Net deferred income tax liabilities in CHF 1’000 2018 2017 Balance as per 04/01/2018 / 04/01/2017 Changes in the consolidation scope Recognized in the income statement Recognized in equity Translation differences Balance as per 03/31/2019 / 03/31/2018 thereof deferred tax assets 6’728 – –558 –265 382 6’287 9’061 9’743 – –3’566 659 –108 6’728 7’871 thereof deferred tax liabilities 15’348 14’599 Tax Loss Carry-Forwards in CHF 1’000 Expiring in the next 3 years Expiring in 4 years or later Total tax loss carry forwards Potential deferred tax assets from tax loss carry forwards Effect of non-recognized tax loss carry forwards Effective deferred tax assets from tax loss carry forwards 03/31/2019 03/31/2018 635 17’782 18’417 4’087 452 11’454 11’906 2’705 –257 –447 3’830 2’258 FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 12. INTANGIBLE ASSETS Acquisition Costs in CHF 1’000 Balance as per 04/01/2018 / 04/01/2017 Changes in the consolidation scope Additions Disposals Reclassifications Currency translation differences Software 30’091 – 1’552 –2’321 546 –238 Balance as per 03/31/2019 / 03/31/2018 29’630 Other intangible assets Intangible assets under construction 2018 Total Software Other intangible assets Intangible assets under construction 770 –2 18 – – –32 754 2’072 – 976 – –546 –7 2’495 32’933 –2 2’546 –2’321 – –277 27’157 48 1’054 – 1’579 253 32’879 30’091 345 – 405 – – 20 770 – – 3’642 – –1’579 9 2’072 Accumulated Amortization in CHF 1’000 Software Other intangible assets Intangible assets under construction 2018 Total Software Other intangible assets Intangible assets under construction Balance as per 04/01/2018 / 04/01/2017 Changes in the consolidation scope Additions Disposals Reclassifications Currency translation differences –19’308 – –4’058 2’221 – 152 Balance as per 03/31/2019 / 03/31/2018 –20’993 –425 – –112 – – 20 –517 – – – – – – – –19’733 – –4’170 2’221 – 172 –15’450 – –3’763 – – –95 –285 – –134 – – –6 –21’510 –19’308 –425 – – – – – – – 89 2017 Total 27’502 48 5’101 – – 282 32’933 2017 Total –15’735 – –3’897 – – –101 –19’733 Net Book Value in CHF 1’000 Software Other intangible assets Intangible assets under construction 2018 Total Software Other intangible assets Intangible assets under construction 2017 Total As per 04/01/2018 / 04/01/2017 As per 03/31/2019 / 03/31/2018 10’783 8’637 345 237 2’072 2’495 13’200 11’369 11’707 10’783 60 345 – 2’072 11’767 13’200 FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 90 Goodwill Goodwill from acquisitions is fully offset against equity at the date of acquisition. The theoretical amortization of goodwill is based on the straight-line method and an amortization period of five years. The carrying amounts of goodwill existing at con- version from IFRS to Swiss GAAP FER as per April 1, 2016 have been included in the theoretical movement schedule below using the currency rates as of April 1, 2016. Goodwill from new acquisitions is fixed to Swiss francs using the closing rate at acquisition date. Therefore, there are no exchange rate differ- ences in the movement schedules. The impact of the theoreti- cal capitalization and amortization of goodwill is disclosed below. 2018 2017 in CHF 1’000 Acquisition costs Balance as per 04/01/2018 / 04/01/2017 Additions from acquisitions Balance as per 03/31/2019 / 03/31/2018 in CHF 1’000 Accumulated amortization Balance as per 04/01/2018 / 04/01/2017 Amortization expense Balance as per 03/31/2019 / 03/31/2018 in CHF 1’000 Net book value Theoretical net book value as per 04/01/2018 / 04/01/2017 Theoretical net book value as per 03/31/2019 / 03/31/2018 in CHF 1’000 Theoretical impact on equity Equity as per balance sheet Theoretical capitalization of goodwill Theoretical equity including net book value of goodwill in CHF 1’000 Theoretical impact on net income Net income as per income statement Amortization of goodwill Theoretical net income after goodwill amortization 103’830 – 103’830 2018 –51’128 –17’162 –68’290 2018 52’702 35’540 103’267 563 103’830 2017 –33’995 –17’133 –51’128 2017 69’272 52’702 03/31/2019 03/31/2018 345’034 35’540 380’574 2018 32’201 –17’162 15’039 335’200 52’702 387’902 2017 29’023 –17’133 11’890 FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 91 13. PROPERTY, PLANT & EQUIPMENT Acquisition Costs in CHF 1’000 Land and buildings Machinery and equipment Other business assets Assets under con struction 2018 Total Land and buildings Machinery and equipment Other business assets Assets under con struction 2017 Total Balance as per 04/01/2018 / 04/01/2017 Changes in the consolidation scope 164’158 122’172 –253 – 27’317 –87 Additions Disposals Reclassifications 8’055 –5’932 338 5’399 –668 2’918 Currency translation differences –1’093 –1’060 2’157 –573 150 –396 4’895 – 6’773 – –3’406 318’542 162’185 113’486 545 –340 – 22’384 –7’173 122 4’034 –113 –2’326 –117 –2’665 1’641 – 323 5’324 1’109 26’014 – 1’760 –962 211 294 7’758 – 2’814 –5 –5’858 309’443 545 8’730 –3’406 – 186 3’230 Balance as per 03/31/2019 / 03/31/2018 165’526 128’508 28’568 8’145 330’748 164’158 122’172 27’317 4’895 318’542 Accumulated Depreciation in CHF 1’000 Balance as per 04/01/2018 / 04/01/2017 Changes in the consolidation scope Additions Disposals Reclassifications Currency translation differences Land and buildings Machinery and equipment Other business assets Assets under con struction 2018 Total Land and buildings Machinery and equipment Other business assets Assets under con struction 2017 Total –30’992 –75’622 –18’758 12 35 – –4’938 –9’849 –2’880 1’249 –2 343 491 –63 634 438 65 277 – – – – – – – –125’372 –25’672 –66’915 –16’477 – 47 – – –17’667 –4’945 –9’649 –2’817 2’178 113 1’682 – – – 801 – 1’254 –488 –740 –265 –139’560 –30’992 –75’622 –18’758 – – – – – – – –109’064 – –17’411 2’596 – –1’493 –125’372 Balance as per 03/31/2019 / 03/31/2018 –34’340 –84’374 –20’846 Net Book Value in CHF 1’000 Land and buildings Machinery and equipment Other business assets Assets under con struction 2018 Total Land and buildings Machinery and equipment Other business assets Assets under con struction 2017 Total As per 04/01/2018 / 04/01/2017 As per 03/31/2019 / 03/31/2018 133’166 46’550 44’134 131’186 8’559 7’722 4’895 8’145 193’170 136’513 46’571 191’188 133’166 46’550 9’537 8’559 7’758 4’895 200’379 193’170 Relocation Shenyang Yuanda Compressor Co. Ltd (SYCC) In 2018, SYCC started the relocation of its manufacturing and assembly facility, to the newly established China Germany Equipment Manufacturing Industrial Park, which is also located in the city of Shenyang. The relocation is planned to be com- pleted end of 2020. In the course of this transaction SYCC will purchase and build new PPE and at the same time give back the existing PPE to the Chinese government. The whole transaction is subsidized by the Chinese Government. In fiscal year 2018, SYCC invested more than CHF 8 mn for this project in new PPE and gave back land and buildings in amount of CHF 4.7 mn (net book value). FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 92 14. INVESTMENTS IN ASSOCIATES in CHF 1’000 Balance as per 04/01/2018 / 04/01/2017 Changes in the consolidation scope Share of net results Currency translation differences Balance as per 03/31/2019 / 03/31/2018 15. OTHER FINANCIAL ASSETS Other financial assets include a promissory note from Arkos Group companies amounting to CHF 18.3 mn (prior year: CHF 17.4 mn) and loans to Arkos Group companies amounting to CHF 6.0 mn (prior year: CHF 4.3 mn). 16. INVENTORIES in CHF 1’000 Raw materials, supplies and consumables Work in progress Finished products and trade merchandise Advance payments to suppliers Valuation allowance Total inventories The capital invested in work in progress and advance payments to suppliers is to a large extent financed by advance payments from customers, leaving a negative balance as of March 31, 2019 of CHF –39.2 mn (prior year: CHF –42.4 mn). 2018 12’249 – –1’208 498 11’539 2017 14’704 – –1’888 –567 12’249 03/31/2019 03/31/2018 24’033 139’565 42’249 28’894 –12’696 222’045 22’580 133’789 37’586 29’293 –12’545 210’703 FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 17. TRADE RECEIVABLES in CHF 1’000 Trade receivables, gross Allowance for bad debts Trade receivables, net in CHF 1’000 Allowance for bad debts Balance as per 04/01/2018 / 04/01/2017 Changes in the consolidation scope Additions Release Utilization Currency translation adjustments Balance as per 03/31/2019 / 03/31/2018 93 03/31/2019 03/31/2018 269’456 –8’343 261’113 237’676 –9’977 227’699 03/31/2019 03/31/2018 –9’977 – –2’655 2’658 1’391 240 –8’343 –9’629 – –1’672 1’206 486 –368 –9’977 The allowance for bad debts at the end of the 2018 and 2017 fiscal years was entirely related to accounts receivables which were more than 90 days overdue as per closing date. in CHF 1’000 Age profile of trade receivables Not due Overdue 1–30 days Overdue 31–60 days Overdue 61–90 days Overdue more than 90 days Balance as per 03/31/2019 / 03/31/2018 03/31/2019 03/31/2018 124’311 19’853 17’766 16’984 82’199 261’113 47.6% 7.6% 6.8% 6.5% 31.5% 100.0% 128’037 18’567 11’865 5’133 64’097 227’699 56.2% 8.2% 5.2% 2.3% 28.1% 100.0% Trade receivables overdue more than 90 days are to a large extent related to projects in China. FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 94 18. OTHER CURRENT RECEIVABLES 20. FINANCIAL LIABILITIES 03/31/2019 03/31/2018 03/31/2019 03/31/2018 in CHF 1’000 Notes receivable VAT receivables Derivative financial instruments Current tax assets Other current receivables Total other current receivables 4’811 8’550 2’198 678 12’245 28’482 19. SHARE CAPITAL AND TREASURY SHARES 969 371 7’296 29’546 in CHF 1’000 14’178 6’732 Non-current financial liabilities Current financial liabilities Total financial liabilities 64’742 67’666 65’599 71’538 132’408 137’137 The average effective interest rate amounted to 1.6% in fiscal year 2018 (prior year: 1.6%). Some credit agreements are subject to financial covenants such as a minimum equity ratio or net financial indebtedness to EBITDA. All covenants were adhered to in fiscal year 2018 (same as prior year). 03/31/2019 03/31/2018 Currencies of Financial Liabilities Number of shares issued 3’400’000 3’400’000 The nominal value per share amounts to CHF 2.50. All shares are registered shares and are paid in full. The breakdown of equity into its individual components is shown in the statement of changes in equity. The Board of Directors is empowered to increase the company’s share capital by a maximum of CHF 1’275’000 at any time until June 30, 2019 by issuing a maxi- mum of 510’000 fully paid registered shares with a nominal value of CHF 2.50 each (authorized capital). At the upcoming annual general meeting of shareholders on July 6, 2019, the Board of Directors of Burckhardt Compression Holding AG will propose a dividend for the 2018 fiscal year of CHF 6.00 (prior year: CHF 6.00). in CHF 1’000 03/31/2019 03/31/2018 Financial liabilities in CHF Financial liabilities in USD Financial liabilities in other currencies 60’650 62’716 9’042 63’550 60’915 12’672 Total financial liabilities 132’408 137’137 Burckhardt Compression’s real estate company (Burckhardt Compression Immobilien AG), which uses the Swiss franc as functional currency, has a mortgage loan in USD. The currency risk is hedged using a currency swap. Maturities of Non-Current Financial Liabilities As of March 31, 2019, non-distributable reserves amounted to CHF 1.7 mn (prior year: CHF 1.7 mn). in CHF 1’000 03/31/2019 03/31/2018 Number of treasury shares 5’999 6’267 All treasury shares are held for the share-based long-term incentive program within the Burckhardt Compression Group. Due within 2 years Due within 3 years Due within 4 years Due within 5 years Due beyond 5 years Total non-current financial liabilities 03/31/2019 03/31/2018 13’252 7’958 206 86 43’240 64’742 11’306 747 8’454 3’467 41’625 65’599 FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 95 21. PROVISIONS in CHF 1’000 Balance as per 04/01/2018 / 04/01/2017 Changes in the consolidation scope Additions Release Utilization Currency translation differences Employee- related Warranties, penalties, unprofitable contracts Other 2018 Total Employee- related Warranties, penalties, unprofitable contracts Other 2017 Total 7’434 – 1’064 –270 –727 –132 24’774 – 5’055 –3’349 –2’503 84 1’890 – 2’872 –975 –7 –24 34’098 – 8’991 –4’594 –3’237 –72 7’020 – 1’460 –290 –907 151 24’269 – 5’510 –3’571 –1’270 –164 1’636 13 859 –405 –157 –56 32’925 13 7’829 –4’266 –2’334 –69 Balance as per 03/31/2019 / 03/31/2018 7’369 24’061 3’756 35’186 7’434 24’774 1’890 34’098 Thereof non-current Thereof current 5’225 2’144 8’696 15’365 153 3’603 14’074 21’112 5’385 2’049 8’782 15’992 82 1’808 14’249 19’849 Employee-related provisions include employee benefit obliga- tions (see also note 31), provisions for long-term service awards and ordinary termination benefits. 22. OTHER NON-CURRENT LIABILITIES Other non-current liabilities mainly consist of various govern- ment grants in China in the context of the relocation process (see also note 13). 23. OTHER CURRENT LIABILITIES in CHF 1’000 Notes payable VAT payables Derivative financial instruments Current tax liabilities Other current liabilities Total other current liabilities 11’321 2’410 2’330 2’769 17’680 36’510 3’588 2’799 1’298 5’965 7’723 21’373 Other current liabilities mainly consist of various government grants in China in the context of the relocation process (see also note 13). 24. ACCRUED LIABILITIES AND DEFERRED INCOME in CHF 1’000 Contract-related liabilities Vacation and overtime Salary and bonus payments 03/31/2019 03/31/2018 Miscellaneous Total accrued liabilities and deferred income 03/31/2019 03/31/2018 44’504 3’585 8’045 4’747 49’137 3’227 7’050 3’926 60’881 63’340 25. DERIVATIVE FINANCIAL INSTRUMENTS Burckhardt Compression uses derivative financial instruments to mitigate currency risks. The risk management policy is described in note 3. On the balance sheet, derivative financial instruments are shown as “Other Current Receivables” and “Other Current Liabilities”. in CHF 1’000 Contract value Positive fair values Negative fair values 03/31/2019 03/31/2018 178’319 2’198 2’330 102’943 969 1’298 FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 96 26. CONTINGENT LIABILITIES 27. COMMITMENTS Guarantees Burckhardt Compression guarantees essentially for securing customer advance payments and for eventual warranty claims from customers. Guarantees are issued by third-party banks or by Burckhardt Compression Holding AG. In addition, standing guarantees have been issued by Burckhardt Compression Holding AG to secure credit lines and guarantee limits granted by foreign banks. in CHF 1’000 Guarantees issued by banks for Burckhardt Compression Guarantees issued by Burckhardt Compression Holding AG Total guarantees 03/31/2019 03/31/2018 169’666 122’125 106’928 276’594 109’389 231’514 Other Contingent Liabilities Burckhardt Compression owns 40% of Arkos Group LLC. Burck- hardt Compression has agreed on the conditions of the poten- tial transfer of the remaining 60% stake of Arkos Group LLC with the current owner. On the one hand, Burckhardt Compres- sion has received call options on the remaining 60% stake of Arkos Group LLC. On the other hand, Burckhardt Compression has issued put options on the remaining 60% stake of Arkos Group LLC. Burckhardt Compression owns 60% of Shenyang Yuanda Compressor Co. Ltd. Burckhardt Compression has agreed on the conditions of the potential transfer of the remaining 40% stake of Shenyang Yuanda Compressor Co. Ltd. with the cur- rent owner. On the one hand, Burckhardt Compression has received call options on the remaining 40% stake of Shenyang Yuanda Compressor Co. Ltd. On the other hand, Burckhardt Compression has issued put options on the remaining 40% stake of Shenyang Yuanda Compressor Co. Ltd. The options regarding Shenyang Yuanda Compres- sor Co. Ltd. are currently not exercisable. The options regarding Arkos Group LLC are de facto partially consumable from fiscal year 2019 at the earliest. As the options do not meet the recog- nition criteria for an asset or a liability, they are not recognized on Burckhardt Compression’s balance sheet. Operating Leases in CHF 1’000 03/31/2019 03/31/2018 Operating leases due in less than 1 year Operating leases due in 1 to 5 years Operating leases due in more than 5 years 2’739 7’956 1’710 2’412 6’862 2’836 Total operating lease commitments 12’405 12’110 Purchase commitments Purchase commitments for capital expenditure as per March 31, 2019 amounted to CHF 10.5 mn (prior year: CHF 1.5 mn). The increase in purchase commitments is connected to the reloca- tion activities in Shenyang (see also note 13). 28. PLEDGED ASSETS As per March 31, 2019, Burckhardt Compression had pledged assets with a carrying amount of CHF 119.5 mn (prior year: CHF 111.5 mn) to secure mortgage loans and guarantees. The pledged assets consisted mainly of land and buildings, and to a lesser degree of inventories and receivables. 29. SHARE-BASED PAYMENTS Since 2017, there is a long-term incentive plan for the members of the Executive Board and certain other employees. Long-term incentive pay is awarded in the form of free shares. None of the shares are subject to any restrictions upon the date of transfer. Further details regarding the long-term incentive plan are disclosed in the Compensation Report section of this Annual Report. In 2018, 268 shares at a fair value of CHF 358 were granted to participants of the long-term incentive plan. In 2017, parti- cipants of the long-term incentive plan were granted 18’699 shares at a fair value of CHF 286. Personnel expenses in 2018 for share-based payments amounted to CHF 1.9 mn (prior year: CHF 2.9 mn). FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 97 30. RELATED PARTY TRANSACTIONS Members of the Board of Directors and of the Executive Board Except for the remuneration as disclosed in the Compensation Report section of this Annual Report, no further relations or transactions existed in 2018 and 2017 with the members of the Board of Directors and of the Executive Board. Associated Companies The following transactions were carried out with associated companies (mainly Arkos Group companies). in CHF 1’000 2018 2017 Sales of goods and services Purchase of goods and services 3’290 591 4’579 912 The following balances with associated companies (mainly Arkos Group companies) were outstanding as of the balance sheet date. 03/31/2019 03/31/2018 Burckhardt Compressions pension plans in Switzerland con- sist of two independent pension funds: “Sulzer Vorsorgeeinrich- tung” (SVE), a base plan for all employees, and “Johann Jakob Sulzer Stiftung” (JJS), a plan for employees with salaries exceed- ing a certain limit. The majority of the active participants in the two pension funds are employed at companies not belonging to Burckhardt Compression. The board of trustees for the base plan comprises ten employer representatives and ten employee rep- resentatives of the contributing companies and is responsible for asset allocation and risk management. The pension plans con- tain a cash balance benefit formula. Under Swiss law, the pen- sion funds guarantee the vested benefit amount as confirmed annually to members. Interest may be added to member bal- ances at the discretion of the board of trustees. At retirement date, members have the right to take their retirement benefit as a lump sum, an annuity or part as a lump sum with the balance converted to an annuity. The pension funds may adapt the con- tribution and benefits at any time. In case of underfunding, this may involve special payments from the employer. The surplus or underfunding cannot be determined per company. The coverage of the collective plans as a whole as of December 31, 2018 amounted to 109.6% (SVE; prior year: 113.6%) and 105.6% (JJS; prior year: 112.3%). The technical interest rate used by both col- lective plans amounted to 2.0% (prior year: 2.0%). in CHF 1’000 Receivables Payables 25’348 65 23’382 270 Employer Contribution Reserves Burckhardt Compression does not have any employer contribu- tion reserves. Receivables include a promissory note from Arkos Group com- panies with a carrying amount of CHF 18.3 mn (prior year: CHF 17.4 mn) and loans to Arkos Group companies with a carry- ing amount of CHF 6.0 mn (prior year: CHF 4.3 mn). 31. EMPLOYEE BENEFIT OBLIGATIONS Burckhardt Compression has various pension plans to which most of its employees contribute. With the exception of com- panies in Switzerland and Germany, these pension plans are defined contribution pension arrangements. Under these, as a rule, payments are made into pension funds administered by third parties. Burckhardt Compression has no payment obliga- tions beyond making these defined contributions. 32. EVENTS AFTER THE BALANCE SHEET DATE There were no events between the balance sheet date and the date these consolidated financial statements were approved by the Board of Directors which would require additional disclo- sures or changes in the consolidated financial statements. Economic Benefits/Economic Obligations and Pension Benefit Expenses Economic portion of the organization in CHF 1’000 Pension plans with surplus Unfunded pension plans Total 03/31/2019 – 03/31/2018 – –2’121 –2’121 –2’238 –2’238 Change to prior year period recog- nized in the current result of the period 2018 – 3 3 Currency translation differences Contributions of the fiscal year Pension benefit expenses 2018 – 114 114 2018 –7’230 – –7’230 2018 –7’230 3 –7’227 2017 –6’716 54 –6’662 FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 98 33. GROUP COMPANIES AND ASSOCIATES Company Registered office Registered capital Interest in capital & h c r a e s e R t n e m p o l e v e d g n i r e e n i g n e & g n i r u t c a f u n a M Burckhardt Compression AG 1 Burckhardt Compression Immobilien AG 1 Winterthur, Switzerland Winterthur, Switzerland Burckhardt Compression (Deutschland) GmbH Neuss, Germany Burckhardt Compression (Italia) S.r.l. Milan, Italy Burckhardt Compression (France) S.A.S. Cergy Saint Christophe, France Burckhardt Compression (España) S.A. Madrid, Spain Burckhardt Compression (UK) Ltd. Burckhardt Compression (US) Inc. Burckhardt Compression (Canada) Inc. Bicester, United Kingdom Houston, USA Mississauga, Canada Burckhardt Compression (Japan) Ltd. Tokyo, Japan Burckhardt Compression (Shanghai) Co. Ltd. Burckhardt Compression (India) Private Ltd. Burckhardt Compression (Brasil) Ltda. Burckhardt Compression (Middle East) FZE Burckhardt Compression Korea Ltd. Burckhardt Kompresör San. ve Tic. Ltd. Burckhardt Compression Singapore Pte Ltd. Shanghai, China Pune, India São Paolo, Brazil Dubai, United Arab Emirates Seoul, South Korea Istanbul, Turkey Singapore, Singapore Burckhardt Compression South Africa (Pty) Ltd. Sunnyrock, South Africa CHF 2’000’000 CHF 5’000’000 EUR 30’000 EUR 400’000 EUR 300’000 EUR 550’000 GBP 250’000 USD 18’250’000 CAD 200’000 JPY 50’000’000 CNY 14’198’000 INR 331’140’000 BRL 5’818’000 AED 2’000’000 KRW 250’000’000 TRY 800’000 SGD 700’000 ZAR 3’000’000 Burckhardt Compression Korea Busan Ltd. Burckhardt Compression (Saudi Arabia) LLC Burckhardt Compression North America Service LLC CSM Compressor Inc. Busan, South Korea Dammam, Saudi Arabia Wilmington, USA Edmonton, Canada KRW 7’000’000’000 SAR 1’000’000 USD 1’800’000 CAD 10’000 g n i t c a r t n o C • • • • • • 100% • • 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% • • • • 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% • • s e l a S e c i v r e S • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION Company Registered office Registered capital Interest in capital Shenyang Yuanda Compressor Co. Ltd. 1 Liaoning Yuanyu Industrial Machinery Co. Ltd. Shenyang Yuanda Compressor Automatic Control System Co. Ltd. Shenyang Yuanda Compressor Energy Service Co. Ltd. Shenyang Yuanda Compressor Import and Export Co. Ltd. Shenyang Yuanda Shengda Turbine Compressor Co. Ltd. 2 Shunyuan Resources Recycling Equipment Industry (Liaoing) Co. Ltd. 2 Compressor Tech Holding AG 1 PROGNOST Systems GmbH PROGNOST Systems Inc. Shenyang, China Kaiyuan, China Shenyang, China Shenyang, China Shenyang, China Shenyang, China Shenyang, China Zug, Switzerland Rheine, Germany Houston, USA Société d’Application du Métal Rouge SAS Pont Sainte Marie Cedex, France Arkos Group LLC 2 Arkos Field Services LP 2 Arkos Realty & Investments LP 2 Precision Arkos Machine, LP 2 Houston, USA Houston, USA Houston, USA Houston, USA CNY 100’000’000 CNY 39’000’000 CNY 5’000’000 CNY 1’000’000 CNY 1’000’000 CNY 100’000’000 CNY 65’000’000 CHF 200’000 EUR 200’000 USD 240’000 EUR 501’000 USD 26’250’000 – – – 60% 60% 36% 60% 60% 24% 24% 100% 100% 100% 100% 40% 40% 40% 28% g n i t c a r t n o C • • • • & h c r a e s e R t n e m p o l e v e d • • g n i r e e n i g n e & g n i r u t c a f u n a M • • • • • • • • • • 99 s e l a S e c i v r e S • • • • • • • • • • • • • • • • • • • • • • 1 Company is directly held by Burckhardt Compression Holding AG. All other companies are indirectly held by Burckhardt Compression Holding AG. 2 Company is accounted for using the equity method. All other companies are fully consolidated. FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 100 Report of the statutory auditor to the General Meeting of Burckhardt Compression Holding AG Winterthur Report on the audit of the consolidated financial statements Opinion We have audited the consolidated financial statements of Burckhardt Compression Holding AG and its subsidiaries (the Group), which comprise the consolidated income statement for the year ended 31 March 2019, the consolidated balance sheet as at 31 March 2019, consolidated cash flow statement and consolidated statement of changes in equity for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the consolidated financial statements (pages 78 to 99) give a true and fair view of the consolidated financial position of the Group as at 31 March 2019 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Swiss GAAP FER and comply with Swiss law. Basis for opinion We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report. We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit approach Overview Overall Group materiality: CHF 2’740’000 We concluded full scope audit work at four reporting units in three countries. Our audit scope addressed over 74% of the Group's sales. As key audit matter the following area of focus has been identified: Accounting for work in progress of the systems division PricewaterhouseCoopers AG, Bahnhofplatz 17, Postfach, CH-8400 Winterthur, Switzerland Telefon: +41 58 792 71 00, Telefax: +41 58 792 71 10, www.pwc.ch PricewaterhouseCoopers AG is a member of the global PricewaterhouseCoopers network of firms, each of which is a separate and independent legal entity. FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 101 Materiality The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate, on the consolidated financial statements as a whole. Overall Group materiality CHF 2'740'000 How we determined it 5% of average earnings before tax over the past five years Rationale for the materiality benchmark applied We chose earnings before taxes as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured and it is a generally accepted benchmark for materiality considerations. The five year average takes into account the volatility of the business environment. We agreed with the Audit Committee that we would report to them misstatements above CHF 270'000 identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons. Audit scope We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The audit strategy for the audit of the consolidated financial statements was determined taking into account the work performed by the Group auditor and the component auditors in the PwC network. The Group auditor performed the audit of the consolidation, the disclosures and the presentation of the consolidated financial statements. Where audits were performed by component auditors, we ensured that, as Group auditor, we were adequately involved in the audit in order to assess whether sufficient appropriate audit evidence was obtained from the work of the component auditors to provide a basis for our opinion. Our involvement comprised analysing the reporting, communication with the component auditors, communicating the risks identified at Group level and determining the materiality thresholds for the audits performed by component auditors. Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 102 Accounting for work in progress of the systems division Key audit matter How our audit addressed the key audit matter Burckhardt Compression Group has projects in the systems division, which are accounted for as work in progress in accordance with Swiss GAAP FER. As at 31 March 2019, work in progress from systems division projects in the amount of CHF 139.6 million was recognised in the balance sheet. Management estimates the costs to be incurred until their completion, possible penalties as well as net realisable value. This involves significant scope for judgement and an incorrect estimate could have a significant impact on the result for the period. Please refer to page 83 (Accounting policies – Inventories) and page 92 (Inventories) in the notes to the Group financial statements. Our audit procedures regarding the accounting for work in progress of systems division projects included in particular the following: • We assessed the design and the existence of the key controls regarding the systems division projects and tested the effectiveness of selected controls. • We selected a sample of systems division projects, based on the contract volumes, the contribution margin and changes in the margin compared to the planning phase, and focussed our testing on the following: – We assessed the contract related calculations to determine whether the contractual terms had been recorded appropriately. – We discussed with the project controllers and project managers the progress of the projects based on the latest project reports, the costs still to be incurred until their completion and changes in the estimated margin. – We obtained written information from the legal representatives of the Group. We inspected this written information with regard to indications of potential quality deficiencies or penalties and assessed whether these matters were presented appropriately in the consolidated financial statements. • • During the audit, we conducted onsite inspec- tions of various compressors still under construction. For the systems division projects completed during the year under review, we compared various final parameters with the estimates made in the planning phase in order to assess, with hindsight, the accuracy of the estimates made by Management. The results of our audit support the accounting of work in progress of the systems division in the 2018 consolidated financial statements. FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 103 Responsibilities of the Board of Directors for the consolidated financial statements The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with Swiss GAAP FER and the provisions of Swiss law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. A further description of our responsibilities for the audit of the consolidated financial statements is located at the website of EXPERTsuisse: http://expertsuisse.ch/en/audit-report-for-public-companies. This description forms part of our auditor’s report. Report on other legal and regulatory requirements In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved. PricewaterhouseCoopers AG Beat Inauen Audit expert Auditor in charge Winterthur, 23 May 2019 Oliver Illa Audit expert FINANCIAL REPORT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 104 FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR BALANCE SHEET in CHF 1’000 Current assets Cash and cash equivalents Other current receivables due from third parties Other current receivables due from group companies Total current assets Non-current assets Financial assets – Long-term loans to group companies – Investments in subsidiaries Total non-current assets Total assets Current liabilities Trade payables due to third parties Other current liabilities due to third parties Accrued liabilities and deferred income Current provisions Total current liabilities Equity Share capital Legal reserves from retained earnings Free reserves from retained earnings – Profit brought forward – Net income Treasury shares Total equity Total equity and liabilities INCOME STATEMENT in CHF 1’000 Income Dividend income from group companies Interest income from group companies Gain on sale of own shares Income from services provided to group companies Total income Expenses Operating expenses Direct Taxes Total expenses Net income Notes 03/31/2019 03/31/2018 102 103 104 363 12 – 375 1’114 23 31 1’168 26’000 171’781 197’781 22’966 171’781 194’747 198’156 195’915 2 4 120 165 291 8’500 1’700 166’691 22’556 –1’582 197’865 25 3 103 183 314 8’500 1’700 184’990 2’063 –1’652 195’601 198’156 195’915 2018 2017 23’280 249 – 192 23’721 –1’103 –62 –1’165 22’556 3’000 241 421 192 3’854 –1’762 –29 –1’791 2’063 FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 105 NOTES TO THE FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG 101 Accounting policies The financial statements as per March 31, 2019 are in compli- ance with the requirements of Swiss corporate law. The financial statements have been prepared in accordance with the provisions of commercial accounting as set out in the Swiss Code of Obligations (Art. 957 to 963b CO). The following disclosures are not being made separately in the statutory financial statements pursuant to Art. 961d (1) CO as Burckhardt Compression Holding AG is presenting its con- solidated financial statements according to Swiss GAAP FER: – Additional disclosures in the notes (auditor’s fee; disclosure on non-current interest-bearing liabilities) – Cash flow statement – Management report The treasury shares are stated at acquisition cost and deducted from equity. No subsequent valuation is made. If the treasury shares are disposed of, the resulting gain or loss is recognized in the profit and loss statement. Burckhardt Compression Holding AG uses derivative finan- cial instruments exclusively as hedges of the exposure to vari- ability in cash flows that is attributable to a particular risk associated with a recognized asset or liability or a highly prob- able future transaction (cash flow hedges). At inception of the hedge, Burckhardt Compression Holding AG documents the hedging relationship and the effectiveness between the hedg- ing instrument and the hedged item. The derivative financial instruments are off-balance sheet items. All the values in the annual financial statements are reported in thousand Swiss Francs unless otherwise indicated. Burckhardt Compression Holding AG’s fiscal year 2018 com- prises the period from April 1, 2018 to March 31, 2019. 102 Subsidiaries The equity interests held directly and indirectly by Burckhardt Compression Holding AG are shown in note 33 “Group Compa- nies and Associates”. 103 Share capital and shareholders The share capital amounts to CHF 8’500’000 and is composed of 3’400’000 shares, each with a nominal value of CHF 2.50. All shares are registered shares and are paid in full. The Board of Directors is empowered to increase the company’s share capital by a maximum of CHF 1’275’000 at any time until June 30, 2019 by issuing a maximum of 510’000 fully paid registered shares with a nominal value of CHF 2.50 each (authorized capital). No person will be registered in the Share Register as share- holder with voting rights with respect to more than five percent of the issued share capital. This entry restriction is also appli- cable to persons whose shares are totally or partially held by nominees. This restriction is also valid if shares are purchased when practicing subscription, warrant and conversion rights, with the exception of shares acquired by succession, distribu- tion of inheritance or matrimonial regime. Legal entities and partnerships associated with each other by uniformly managed capital or votes or in any other way, as well as private and legal entities or partnerships, which form an association to evade the entry restriction, are regarded as one person. Individual persons, who have not expressly declared in the application of entry that they hold the shares for their own account (Nominees), will be entered in the Share Register with voting rights, if the Nominee concerned establishes his subor- dination to an accredited banking supervision and securities authority, and if he/she has concluded an agreement with the Board of Directors of the company concerning his/her position. Nominees holding two or less than two percent of the issued shares will be entered in the Share Register with voting rights without an agreement with the Board of Directors. Nominees holding more than two percent of the issued shares will be entered in the Share Register with two percent voting rights and, for the remaining shares, without voting right. Above this limit of two percent, the Board of Directors may enter in the Share Register Nominees with voting rights if they disclose the names, addresses, nationality, and shareholdings of the per- sons for whom they hold more than two percent of the issued shares. As of March 31, 2019, there is no such declaration between a nominee-shareholder and the board of directors. Shareholder groups which had existed before June 23, 2006 are excluded from the voting rights restrictions. According to information available to the company from the disclosure notifications of the SIX Swiss Exchange Ltd., the fol- lowing shareholders reported shareholdings of at least 3% of the share capital and voting rights as of March 31, 2019 (accord- ing to the statutory bylaws the voting rights of NN Group N.V., JO Hambro Capital Management Limited and Atlantic Value General Partner Ltd. (Mondrian) are limited to 5% of the total number of the registered BCHN shares recorded in the commer- cial register): FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 106 Shareholders Name MBO Aktionärsgruppe NN Group N.V. J O Hambro Capital Management Limited Atlantic Value General Partner Limited (Mondrian) Ameriprise Financial Inc. Credit Suisse Funds AG UBS Fund Management (Switzerland) AG Oppenheimer Funds As per March 31, 2019 the members of the Executive Board and the non-executive members of the Board of Directors (and related persons), owned the following numbers of shares of Burckhardt Compression Holding AG: Name Position Members of the Board of Directors Valentin Vogt Chairman Deputy Chairman Member Member Member CEO CFO CHRO President Systems Division President Services Division President Services Division Hans Hess Dr. Stephan Bross Dr. Monika Krüsi Urs Leinhäuser Total Executive Board Marcel Pawlicek Rolf Brändli Sandra Pitt Fabrice Billard Rainer Dübi2 Martin Wendel1 Total Total In % of total shares 1 Member of the Executive Board until February 14, 2019 2 Member of the Executive Board as from February 15, 2019 03/31/2019 03/31/2018 % of shares 12.40 6.93 6.13 5.03 3.49 3.03 3.01 3.01 % of shares 12.40 6.93 6.89 4.99 3.49 3.03 3.01 3.01 Country CH NL GB GB US CH CH US 03/31/2019 03/31/2018 Total shares Total shares 203’288 5’663 215 985 1’080 211’231 42’111 1’702 278 400 600 n/a 45’091 256’553 7.5% 203’213 5’618 170 940 1’035 210’976 42’111 1’702 278 400 n/a 231 44’722 255’698 7.5% FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 104 Treasury shares Number at the beginning of the period Purchases Sales Number at the end of the period The average selling price did amount to CHF 263.66. 105 Further disclosures pursuant to Article 959c par. 2 of the Swiss Code of Obligations: Full-time employees Burckhardt Compression Holding AG does not employ any employees. Liabilities to pension funds in CHF 1’000 Total liabilities to pension funds Net release of undisclosed reserves in CHF 1’000 Net release of undisclosed reserves Derivative financial instruments in CHF 1’000 107 2018 2017 6’267 0 –268 5’999 24’966 0 –18’699 6’267 03/31/2019 03/31/2018 0 0 03/31/2019 03/31/2018 0 0 03/31/2019 03/31/2018 Forward foreign exchange contracts (negative current fair value on cash flow hedge) 0 0 Guarantees in CHF 1’000 Guarantees 03/31/2019 03/31/2018 106’927 109’389 Burckhardt Compression Holding AG issues advance payment guarantees and performance bonds in the name of Burckhardt Compression AG and in favor of a small number of selected cus- tomers. In addition, standing guarantees have been given to secure credit lines and guarantee limits granted by foreign banks. The credit lines and guarantee facilities extended to Burck- hardt Compression AG by financial institutions do not require any assets or shares of Burckhardt Compression Holding AG to be pledged as collateral. FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 108 Remuneration of the Board of Directors and the Executive Board Type and amount of remuneration of the members of the Board of Directors and the Executive Board as well as the principles and basic elements of the company’s compensation policy are depicted and explained in the compensation report on pages 67 to 73. Events after the balance sheet date There were no additional events after the balance sheet date which affect the annual results or would require an adjustment to the carrying amounts of Burckhardt Compression Hold- ing AG’s assets and liabilities. Proposal by the Board of Directors for the appropriation of retained earnings in CHF 1’000 Retained earnings at the beginning of the period Distributed dividend Net income Retained earnings at the disposal of the Annual General Meeting The Board of Directors proposes the following appropriation – Gross dividend Retained earnings carried forward The Board of Directors will propose payment of a gross dividend of CHF 6.00 per registered share at the Annual General Meeting of Shareholders on July 6, 2019. Gross dividend Less 35% withholding tax Net dividend Annual General Meeting of Shareholders The Annual General Meeting of Shareholders will take place at 10.00 am on Saturday, July 6, 2019 at the Park Arena, Barbara- Reinhart-Strasse 24, 8404 Winterthur, Switzerland. 2018 2017 187’053 –20’362 22’556 189’247 208’615 –23’625 2’063 187’053 –20’400 –20’400 168’847 166’653 2018 2017 2016 6.00 –2.10 3.90 6.00 –2.10 3.90 7.00 –2.45 4.55 FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 109 FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 110 Report of the statutory auditor to the General Meeting of Burckhardt Compression Holding AG Winterthur Report on the audit of the financial statements Opinion We have audited the financial statements of Burckhardt Compression Holding AG, which comprise the balance sheet as at 31 March 2019, income statement and notes for the year then ended, including a summary of significant accounting policies. In our opinion, the financial statements (pages 104 to 108) as at 31 March 2019 comply with Swiss law and the company’s articles of incorporation. Basis for opinion We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the “Auditor’s responsibilities for the audit of the financial statements” section of our report. We are independent of the entity in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit approach Overview Overall materiality: CHF 1’980’000 We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the entity, the accounting processes and controls, and the industry in which the entity operates. As key audit matter the following area of focus has been identified: Impairment testing of investments in subsidiaries PricewaterhouseCoopers AG, Bahnhofplatz 17, Postfach, CH-8400 Winterthur, Switzerland Telefon: +41 58 792 71 00, Telefax: +41 58 792 71 10, www.pwc.ch PricewaterhouseCoopers AG is a member of the global PricewaterhouseCoopers network of firms, each of which is a separate and independent legal entity. FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 111 Materiality The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate, on the financial statements as a whole. Overall materiality CHF 1’980’000 How we determined it 1.0% of total assets Rationale for the materiality benchmark applied We chose total assets as the benchmark because, in our view, it is a relevant benchmark for holding company, and it is a generally accepted benchmark for holding companies. We agreed with the Audit Committee that we would report to them misstatements above CHF 198’000 identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons. Audit scope We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we considered where subjective judgements were made; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Impairment testing of investments in subsidiaries Key audit matter How our audit addressed the key audit matter Investments in subsidiaries is a significant asset cate- gory on the balance sheet (CHF 171.8 million). Impairment testing of investments whose book value is greater than the book value of the underlying net assets requires Management to consider capitalised earnings. Doing so involves significant scope for judgement, particularly to determine the assumptions to use concerning future business results. In identifying the potential need for impairment of investments in subsidiaries, Management uses a pre- defined impairment testing process. Please refer to page 105 (Subsidiaries) in the notes to the financial statements. In our audit of investments in subsidiaries, we performed the following main audit procedures: • • We compared the book value of the investments in the year under review with their pro-rata share of the respective company's equity or the company's valuation, based on capitalised earnings. We checked for plausibility the key assumptions applied by Management (revenue and margin growth). We consider the valuation process and the assumptions used to be an appropriate and adequate basis for the impairment testing of the goodwill as at 31 March 2019. FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 112 Responsibilities of the Board of Directors for the financial statements The Board of Directors is responsible for the preparation of the financial statements in accordance with the provisions of Swiss law and the company’s articles of incorporation, and for such internal control as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Board of Directors is responsible for assessing the entity’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located at the website of EXPERTsuisse: http://expertsuisse.ch/en/audit-report-for-public-companies. This description forms part of our auditor’s report. Report on other legal and regulatory requirements In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. PricewaterhouseCoopers AG Beat Inauen Audit expert Auditor in charge Winterthur, 23 May 2019 Oliver Illa Audit expert FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 113 FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION 114 IMPRINT | ANNUAL REPORT 2018 | BURCKHARDT COMPRESSION IMPRINT The statements in this review relating to matters that are not historical facts are forward-looking statements that are not guarantees of future performance and involve risks and uncer- tainties, including but not limited to: future global economic conditions, foreign exchange rates, regulatory rules, market conditions, the actions of competitors and other factors beyond the control of the company. The Annual Report is published in German and English and is avail- able on the internet under report.burckhardtcompression.com as an online version. The German version is binding. The financial report is available in English only. Publisher: Burckhardt Compression Holding AG, Winterthur Concept/Layout: Source Associates AG, Zurich Photography: Scanderbeg Sauer Photography, Zurich PR consultant: PEPR, Oetwil am See Burckhardt Compression Holding AGCH-8404 Winterthur, SwitzerlandTel. +41 52 262 55 00Fax +41 52 262 00 51info@burckhardtcompression.comwww.burckhardtcompression.comBC-20.37.14.40