Burckhardt Compression
Annual Report 2019

Plain-text annual report

ANNUAL REPORT 2019 ABOUT US | ANNUAL REPORT 2019 | 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 skilled workforce has crafted superior solutions and set the benchmark in the gas compression industry. 2CONTENTS | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 3 76 76 77 78 79 80 81 82 105 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 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 2019 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, Completion of “Pulling Systems Together” program for improvement Outlook Review of the fiscal year Services Division Financial performance, Markets Continued expansion of sales organization, New service centers, Outlook 4 TO OUR SHAREHOLDERS | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION TO OUR SHAREHOLDERS DEAR SHAREHOLDERS Our full-year results for 2019 are largely in line with the guid- ance we gave during the presentation of our half-year report. Incoming orders did not match the record-high figure from the previous fiscal year. Sales were in line with our expectations. Operating and net income showed another improvement, but are still not yet at the levels we have targeted in our Mid-Range Plan. Order intake lower versus previous year Consolidated order intake amounted to CHF 607.3 mn, 7.8% below the figure for the previous fiscal year, which was the highest ever recorded in the history of Burckhardt Compression. Excluding the effects of currency translation and acquisition activity, incoming orders declined by 8.8% y-o-y. Both divisions experienced order defer- rals during the final quarter of the fiscal year (January to March 2020) due to the global coronavirus outbreak. New orders at the Systems Division amounted to CHF 361.2 mn, 15.6% less than in the previous fiscal year. The Services Division increased its order intake by 6.7% to CHF 246.1 mn, of which Arkos contrib- uted CHF 17.6 mn following the full acquisition of this company in late November 2019. Higher sales Sales rose by 5.1% to CHF 629.6 mn; excluding the effects of currency translation and acquisitions, year-on-year sales growth was 3.9%. Sales at the Services Division rose by 7.8% to CHF 241.3 mn, while the Systems Division reported a 3.4% increase to CHF 388.3 mn. Services now account for almost 40% of Group sales. Renewed increase in operating and net income Gross profit of CHF 149.8 mn topped the prior-year figure of CHF 135.7 mn by 10.4% and the resulting gross profit margin was 23.8% (pre- vious year: 22.6%). The gross margin at the Systems Division improved to 11.0% (previous year: 8.1%), despite the recognition of the remaining cost overruns in connection with the LNGM business, which amounted to approximately CHF 10 mn in the fiscal year under review. Gross profit at the Services Division rose by 1.7% to CHF 107.0 mn, resulting in a gross profit margin of 44.3%. This is well below the prior-year gross margin of 47.0%, primarily because the gross margin at Arkos Field Ser- vices is much lower than the average margin of the Group’s other services operations. Excluding acquisition activity, the gross profit margin of the Services business stood at 47.8%. Consolidated operating income increased by CHF 10.3 mn to CHF 54.8 mn, which corresponds to 8.7% of sales (previous year: 7.4%). Operating income at the Services Division declined to CHF 54.7 mn from CHF 58.2 mn in the previous fiscal year. The Systems Division returned to profitability, contributing a positive CHF 6.4 mn in operating income compared to a loss of CHF –8.7 mn in the previous year. Consolidated net income rose by 23.8% y-o-y to CHF 39.9 mn or 6.3% of sales (previous year: 5.4%). Due to the substantial positive contribution of Shenyang Yuanda Compressor (whose founder still holds a 40% stake in the company) to the Group’s bottom line, earnings per share attributable to Burckhardt Compression shareholders showed a proportionally smaller increase of 17.3% to CHF 9.56. Solid balance sheet Total assets at the end of March 2020 amounted to CHF 883.0 mn, an increase of CHF 34.3 mn or 4.0% compared to the prior-year figure. Arkos Field Services is included in this figure as a fully consolidated subsidiary. The equity ratio at year-end was 36.0% (previous year: 40.7%). The entire goodwill from the various acquisitions Burck- hardt Compression has made in recent years was taken directly to equity in accordance with Swiss GAAP FER. This resulted in a deterioration of the equity ratio in the short term, but eliminated the risk of goodwill impairments in future reporting periods. The net financial position at the end of the fiscal year amounted to CHF –91.7 mn (previous year: CHF –49.4 mn), which primarily reflects the increase in net working capital, the acquisition of the remaining 60% interest in Arkos Field Ser- vices and fixed investment at the new factory in Shenyang. Continued implementation of projects within the scope of the Mid-Range Plan for 2018–2022 Various projects initiated under the current Mid-Range Plan were successfully completed during the past fiscal year. A global procurement organization was established and expanded, for example, resulting in another CHF 7 mn in cost savings. “Best-cost areas” for the sourced products were identified and products were standardized. We launched a platform that we use together with our global sup- pliers for tracking and communication purposes and also intro- duced a four-stage gate process for our interaction with suppli- ers as well as an e-auction system. These projects marked a big step forward for our procurement operations in terms of digita- lization and increased their efficiency. R&D collaborated with colleagues in Sales on the further modularization of new com- pressor systems, which led to a more efficient quote prepara- tion process and simplified compressor development and man- ufacturing processes. The upturn in sales at the Systems Division held the divi- sion’s leading market position and the Services Division contin- ued to grow thanks to the full acquisition of Arkos Field Ser- vices. Burckhardt Compression’s growing knowledge and skills in the OBC business are leading to new growth opportunities in the US. New factory in Shenyang on track Construction of the new factory in Shenyang, China, is well on track despite an interrupt of six weeks because of the coronavirus outbreak and the new factory will be able to commence operations in autumn 2020 as planned. Acquisition of the compressor business of JSW In March 2020, we signed an agreement (closing April 2020) with The Japan Steel Works Ltd., or JSW in short, to purchase its global com- pressor business. This transaction with JSW clearly strength- TO OUR SHAREHOLDERS | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 5 ens Burckhardt Compression’s market presence in Japan and bolsters the company’s global leadership. Change in the Board of Directors After serving as a director for 18 years, nine of them as chairman, Valentin Vogt, the cur- rent chair of the Board of Directors, will not be standing for re- election at the Annual General Meeting on July 3, 2020. Ton Büchner has been nominated for election as a new member of the Board of Directors and as its new chairman. He served as CEO and President of AkzoNobel from 2012 to 2017 and worked for Sulzer for 18 years before that, ultimately serving as CEO from 2007 to 2011. Outlook We are guiding for more than CHF 650 mn in sales for fiscal year 2020. The challenges encountered in the LNGM busi- ness over recent years were successfully overcome in fiscal year 2019, so no other according additional costs are expected on this front in fiscal year 2020. On the other hand, we expect consequences due to the current global uncertainties. From today’s perspective, we expect stable profit margins for the 2020 financial year. The longer-term effects of the global corona situation on Burckhardt Compression’s business cannot be estimated at this time. Order intake for our products and services in the first two months of the new fiscal year was lower than in the comparable prior-year period. Dividend proposal The Board of Directors will propose an unchanged dividend of CHF 6.00 per share at the Annual Gen- eral Meeting. This corresponds to a payout ratio of 62.8% of net income per share (previous year: 73.6%), which is in the targeted range of 50% to 70%. Thank you We thank our approximately 2’600 employees around the world for their untiring efforts during the past fiscal year and our shareholders for their continued trust in our company. Special thanks are also given to our many, often long-standing, customers and suppliers. Yours sincerely, Valentin Vogt Chairman of the Board of Directors Marcel Pawlicek CEO Winterthur, June 2, 2020 Valentin Vogt Marcel Pawlicek 6 175TH ANNIVERSARY | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 175 YEARS BURCKHARDT COMPRESSION Burckhardt Compression celebrated its 175-year anniversary during the past fiscal year. This special anniversary was celebrated at the company’s various locations by all employees and their families in a series of regionally organized events. On January 9, 2019, the exact date of the company’s establishment 175 years earlier, an anniversary celebration was held in Winterthur with about 100 invited guests. SWITZERLAND, JANUARY 9, 2019 The street in front of the company’s headquarters is renamed Franz-Burck- hardt-Strasse in honor of the company’s founder. An official anniversary celebra- tion was held in the evening at the Casinotheater Winterthur, with more than 100 guests. APRIL 18, 2019 A celebration with employees at the Winterthur site, a private performance by Circus Knie followed by a street food festival BRAZIL, JUNE 28, 2019 An open house day for all employee families and a barbecue 175TH ANNIVERSARY | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 7 SOUTH AFRICA, APRIL 13, 2019 A circus show, magicians and balloon artists, topped off with a celebration dinner INDIA, APRIL 18, 2019 Traditional lamps light up an evening of entertainment for young and old CHINA, APRIL 20, 2019 A big celebration with a traditional dinner for all employees 8 MILESTONES 2019 | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION MILESTONES 2019 Full takeover of Arkos Field Services Burckhardt Compression acquires the remaining 60% of Arkos Group LLC on November 25, 2019. Arkos Field Services thus becomes a wholly-owned sub- sidiary of Burckhardt Compression and is fully consolidated as of this date. Through this transaction, Burckhardt Compression, with Arkos Field Services, is unique in its ability to provide its US customers with compressors as well as with compressor services for every seg- ment of the market – upstream, mid- stream and downstream. The US is the country with the highest number of reciprocating compressor installations in the world. First compressor for an underground gas storage facility in Europe Burckhardt Compression is supplying Ganzair, a Hungarian company, with a high-speed compressor that will inject natural gas from a pipeline into an underground storage facility. This compressor will be compliant with ISO 13631 and will be the first high- speed compressor made by Burckhardt Compression to be used for this purpose in Europe. Burckhardt Compression offers customers worldwide a line of high-speed compressors with a wide power range from 100 kW to 7.5 MW, covering a wide variety of applications in the upstream and midstream segments. Long-term agreement to service nine LNG carriers Burckhardt Compression has signed a five-year service agreement with a leading transporter of liquefied natural gas (LNG) to service the Laby®-GI compressors installed on nine of the company’s LNG carriers. The long-term service agreement covers all compres- sors and compressor system parts requiring maintenance, customer support, remote diagnostics for preventive maintenance, on-site field services, and overall project manage- ment. Maintenance will be performed while the carriers are in operation in the open sea for maximum efficiency. All nine LNG carriers are ME-GI-powered and equipped with Laby®-GI compres- sors for handling BOG. MILESTONES 2019 | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 9 New customers thanks to capex- optimized API 618 compressor Burckhardt Compression receives its very first order for its recently launched capex-optimized API 618-compliant compressors in January 2020. The compressors ordered by Hyundai Engineering Company from this new product line will be used in propane dehydrogenation and propylene produc- tion applications at a petrochemical plant in Poland. Burckhardt Compressi- on makes the most of its global manufacturing footprint, cost-efficient engineering capabilities and global supply chain by launching this new product line. Service Center in Qatar opened Burckhardt Compression strengthens its services operations in the Middle East by opening a new service center in Doha, Qatar, in collaboration with Oriental Trading Company (OTC). This “Authorized Service Center” offers maintenance, repair, and engineering services for Burckhardt Compression compressors as well as other brand compressors. The new center brings Burckhardt Compression even closer to its customers in this region and guarantees quick response times. Cooperating with GRZ to develop a new hydrogen technology Burckhardt Compression has joined forces with GRZ Technologies, a spin-off of ETH Lausanne, Switzerland, to develop a new hydrogen compression technology for applications ranging from hydrogen fuel stations to hydrogen energy storage systems. The new technology involves thermal active metal hydrides. Burckhardt Compression has developed a static hydrogen compressor with no moving parts that uses thermal active metal hydrides to compress the hydrogen. Hydrogen is one of several promising sources of carbon-neutral energy for industrial and mobility applications. 10 FIGURES AT A GLANCE | ANNUAL REPORT 2019 | 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 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 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 –90 –100 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 SHARE PRICE SINCE IPO BCHN SPI FISCAL YEAR 2019 CHF CHF 500 450 400 350 300 250 200 150 100 50 0 400 350 300 250 200 150 100 50 0 –50 –100 BCHN SPI 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 2020 04/01/2019 CHF 279.50 (BCHN) CHF 181.13 (SPI) 03/31/2020 CHF 192.40 (BCHN) CHF 181.13 (SPI) FIGURES AT A GLANCE | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 11 2018 2019 Change 2018/2019 Sales Gross profit in % of sales Sales Gross profit in % of sales Sales Gross profit in % of sales Operating income (EBIT) in % of sales Operating income (EBIT) in % of sales Operating income (EBIT) Operating income (EBIT) in % of sales 428.0 230.7 658.7 375.4 30.5 8.1% 223.9 105.2 47.0% 599.3 135.7 22.6% –8.7 –2.3% 58.2 26.0% –5.0 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 2’558 271.00 921.4 2.7 8.15 6.00 361.2 246.1 607.3 388.3 42.8 11.0% 241.3 107.0 44.3% 629.6 149.8 23.8% 6.4 1.7% 54.7 22.7% –6.3 54.8 8.7% 39.9 6.3% 20.5 50.7 –49.7 6.3 7.3 883.0 234.1 648.9 317.5 36.0% –91.7 2’621 573 2’893 192.40 654.2 2.1 9.56 6.001 3’400’000 3’400’000 –15.6% 6.7% –7.8% 3.4% 40.3% 7.8% 1.7% 5.1% 10.4% –6.0% 23.1% 23.8% –5.9% 21.3% 4.0% –6.7% 8.5% –8.0% 11.7% 0.7% 13.5% –29.0% –29.0% –22.8% 17.3% 0.0% in CHF mn Order intake: – Systems Division – Services Division Total Sales and gross profit: – Systems Division – Services Division Total Operating income (EBIT): – Systems Division – Services Division – Others Total 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 12 OUR COMPANY | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION OUR COMPANY HISTORY The history of our company begins 176 years ago. Company founder Franz Burckhardt lays the cornerstone of Burckhardt Compression’s success on January 9, 1844 with the purchase of a commercial site for the company in Basel. During the found- ing years, his mechanical workshop makes machines for the textile industry. As the years go by, Franz Burckhardt expands the scope of the company’s operations, becoming a general builder of machinery. In 1856, the company starts producing steam-powered machines. Its first reciprocating compressor is designed in 1878 and enters the market in 1883. In 1890, August Burckhardt, the son of the now-deceased company father Franz Burckhardt, establishes “Maschinenfabrik Burckhardt” as a joint stock company to raise capital for the construction of a new factory on Dornacherstrasse in Basel. Another milestone is achieved in 1913 with the sale of the company’s first compressor for producing ammonia synthesis gas. This compressor has a discharge pressure of 300 bar and is delivered to BASF in Ludwigshafen, Germany – a customer that purchased one of Burckhardt’s first compressors back in 1885. In 1935, the Swiss company Sulzer delivers its first Sulzer Labyrinth Piston Compressor to the Hürlimann Brewery in Zurich and in 1951 the company receives an order from Imperial Chemical Industries (ICI) for 11 ultra-high-pressure compressors with a discharge pressure of 1’500 bar that will be used to pro- duce low-density polyethylene (LDPE). After years of collabora- tion between Burckhardt and Sulzer, Maschinenfabrik Burck- hardt is acquired by Sulzer on May 8, 1969 and becomes a subsidiary of Sulzer Group. In 1982, in the wake of their greater collaboration, the reciprocating compressor activities of the Sulzer Group are transferred to a single legal entity called Mas- chinenfabrik Sulzer-Burckhardt AG. In 1994, the merged entity celebrates its 150th anniversary. In 1999, as part of a Group-wide restructuring program, Sulzer decides to consolidate Sulzer- Burckhardt’s Swiss activities at the site in Winterthur. The oper- ations in Basel are moved to Winterthur and the building on Dornacherstrasse in Basel is sold. In 2000, Sulzer decides to focus its activities on four divi- sions. Sulzer-Burckhardt is put up for sale because it does not fit with the new strategy. Together with the financial investor Zurmont Finanz AG, five members of the Executive Board of Maschinenfabrik Sulzer-Burckhardt AG buy out the company on April 30, 2002. In the wake of the management buyout, Sulzer- Burckhardt’s name is changed to Burckhardt Compression in May 2002. In 2006, Zurmont decides to sell its shares in Burck- hardt Compression by means of an IPO. The company is listed on the SIX Swiss Exchange on June 26, 2006 and it ranks among the 100 largest listed companies in Switzerland by market cap- italization at the end of 2019. In May 2016, the Group acquires a 60% majority interest in Shenyang Yuanda Compressor, the number one manufacturer of reciprocating compressor systems in China. In June 2016, Burckhardt Compression introduces a divisional organizational structure with two divisions, Systems and Services, with the aim of addressing customer needs even better than before. In December 2017, Burckhardt Compression adopts a Mid-Range Plan for fiscal years 2018 to 2022. It serves as a strategic road map over the five-year period and lays out the company’s goals. On January 9, 2019, Burckhardt Compression celebrates its 175th anniversary with guests from the worlds of business and politics as well as science and technology. Special events are organized at Burckhardt Compression’s sites around the world during the 2019 fiscal year to thank employees for their dedica- tion and commitment. All employees and their families join in the anniversary celebrations. After its initial purchase of a 40% interest in Arkos Field Services, a provider of compressor services in the US, in 2015, Burckhardt Compression acquires the remaining shares in November 2019. This transaction makes Burckhardt Compres- sion the only independent provider of compressor systems and compressor services serving customers in every segment of the US market – upstream, midstream and downstream. In March 2020, Burckhardt Compression announces the pur- chase of the compressor business of The Japan Steel Works (JSW) to further strengthen its global market reach, especially in Japan. 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 are totally committed to providing ser- vices that make a difference. We get the job done. BURCKHARDT COMPRESSION BRAND Burckhardt Compression and its umbrella brand stand for qual- ity and worldwide leadership in innovative reciprocating com- pressor systems and technologies. 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- OUR COMPANY | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 13 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. When making acquisitions, Burckhardt Compression decides during the integration process whether a brand is retained or integrated into an existing house brand. Other brands that belong to Burckhardt Compression Group are: – Shenyang Yuanda Compression, one of the largest manufac- turers of reciprocating compressors in China, whose products are mostly sold in its domestic market – Arkos Field Services, our exclusive services provider in the US – CSM, together with Burckhardt Compression Canada, our ser- vices provider in Canada – Prognost, the world’s leader in compressor monitoring and diagnostic systems – SAMR, a French manufacturer of sliding bearings – BCS Compression, products made by Shenyang Yuanda Com- pressor for export markets that leverage Burckhardt Com- pression’s global processes, supply chains and service organi- zation, and cost-effective engineering capabilities Burckhardt Compression’s brand and patent attorneys will vig- orously and steadfastly defend the company against any imita- tions, 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 activi- ties. 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 to the growing collaborative interaction and increasingly virtual collaboration between the Group’s subsidiaries and sites across the world. In this context, it is vital that all company 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. In the year under review, Burckhardt Compression acquired the remaining 60% of Arkos Field Ser- vices, a provider of compressor services in the US, and announced the purchase of the compressor business of The Japan Steel Works, or JSW for short. Mid-Range Plan for fiscal years 2018 to 2022 Consolidated sales of around CHF 700 mn are targeted for fis- cal year 2022 in the current Mid-Range Plan with sales split fairly evenly between the two divisions and an EBIT margin of 10% to 15% at Group level. The Systems Division is aiming 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 opti- mization will help it to achieve these targets. The division will also broaden its presence in its targeted market segments and new applications will be launched. 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 global processing and the continued expan- sion of its local and regional presence to the buildup of its mar- itime services network, to achieve its targets in the Services 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-ori- ented solutions. Burckhardt Compression’s prime objective is to develop reciprocating compressors and components that opti- mally address customer needs and ensure its technology lead- 14 OUR COMPANY | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION ership in the market for reciprocating compressors. Quality, 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 attractive- ness, followed by the elaboration of product performance speci- fications, 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. MAIN APPLICATION AREAS Upstream oil & gas Despite increasing energy efficiency, global demand for energy continues to grow in the long run spurring on 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 increasingly stringent regulations requiring the environ- mentally responsible handling of toxic and non-toxic gases that arise during 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 methods (EOR). 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, polluting the surrounding environment and atmosphere. Burckhardt Compression is an expert at building compressors for compressing these gases, which often contain aggressive, sulfuric components. In deepwater applications, CO2 injection is also used for EOR methods with pressure levels of up to 600 bar. Preprocessing applications at the point of pro- duction in the oil and gas industries offer additional opportuni- ties for Burckhardt Compression and its new high-speed com- pressors are particularly suited for these applications. In these applications individual components of extracted gas are sepa- rated at the wellhead to facilitate the subsequent gas trans- port through the gathering lines to centralized points. Gas transport and storage Demand for 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 regula- tions, especially in the maritime industry, are additional incen- tives to switch to natural gas as a source of fuel. Liquid natural gas is increasingly being used as propulsion fuel for LNG carri- ers, merchant ships, and cruise ships. The importance of natu- ral gas will further grow with the 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 transportation via LNG carriers, which offers greater flexibility and avoids the geostrategic risks associated with gas pipeline infrastructure. 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 storage and re-gasification, and, ultimately, injection into a gas distribution grid. Burckhardt Compression offers unique solutions for compressing and reli- quefying 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, heating oil, liquefied petroleum gas (LPG), as well as solvents and lubricants. Worldwide demand for these prod- ucts will continue to grow over the medium term and most of the growth in demand will come from non-OECD countries, especially in Asia. Additional factors encouraging investment in the refining industry are more stringent environmental regula- tions, cost-cutting pressure, plant expansion trends, and the need to process both lower-quality grades of crude oil and, in technologically 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 OUR COMPANY | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 15 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 and 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. An additional source of growth is the growing production of nat- ural gas from shale formations worldwide. In terms of poten- tial, the US is the leading market in this segment. Burckhardt Compression offers several product lines with individual, reli- able and benchmark-setting reciprocating compressor solu- tions for a broad spectrum of applications. 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, chemical companies, 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 produc- tion of hydrogen for the energy (refineries) and transportation sectors is a particularly fast-growing section of this market. Demand for ultra-pure compressed hydrogen gas for fuel cells is surging and this represents a prime opportunity for Burck- hardt Compression to leverage its tremendous experience and its wide range of oil-free compressors. CUSTOMERS Our customer base includes some of the largest, most famous, and most innovative companies in the world. We serve – energy companies, – natural gas transportation and storage companies (onshore and offshore), – petrochemical/chemical companies, – industrial gas companies and – general engineering companies that design and construct pro- duction lines or entire plants 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 con- tact-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- and friction- induced hot spots. The Laby® Compressor is suitable for bone- dry, dirty, abrasive and other gases. The gastight casing reduces gas emissions and losses to the environment to virtually zero. Laby® Compressors can be relied on to compress LNG boil-off gas at suction temperatures of as low as minus 160 °C (–250 °F). 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 off- shore applications regarding maximum allowable vibration lev- els 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 be engineered for lubricated or non-lubricated compression applications. 16 OUR COMPANY | ANNUAL REPORT 2019 | BURCKHARDT 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 to customer-spe- cific application requirements 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 to the high-pressure compression 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-qual- ity components, we now also offer a robust, modular and capex- optimized product line. Burckhardt Compression has global engineering and service organizations and the Group’s own cen- ters of excellences leverage those resources to offer compre- hensive solutions that are entirely focused on the needs of the customer. We have many years of experience with hydrogen gas com- pression systems for the refining industry and are now also offering hydrogen compression solutions for the mobility mar- ketplace. These Process Gas Compressors with lubricated or non-lubricated designs can be operated at the typical fuel pres- sures of up to 500 bar. 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 nearly 60 years of experience in building Hyper Compressors. These com- pressors are distinguished by a long operational life and high safety standards, which can be traced back to their unique con- struction design and Burckhardt Compression’s global one-stop maintenance 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 Burckhardt Compression’s Standard High Pressure Compres- sors are extremely robust and reliable reciprocating compres- sors with a compact design and low weight. They are delivered 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 pis- ton displacement can be achieved at lower compression tem- peratures. The result is high compression efficiency, low wear and less maintenance expense. The air- and water-cooled com- pressors are used to compress air, hydrogen, nitrogen, helium, argon, natural gas and other non-corrosive gases and gas mix- tures at land facilities and on ships. The standard high-pressure compressors are smaller than the other compressors in Burck- hardt Compression’s portfolio of reciprocating compressors, with a maximum power of 220 kW, maximum discharge pres- sure of 400 bar and suction volumes of up to 1’500 Nm3/h. High-Speed Compressors High-speed compressors are basically process gas processors with shorter stroke diameters and very high rotational speeds (1000–1800 RPM). These compressor systems are used for stan- dardized natural gas production and transport applications, and they are often powered by gas engines instead of electric motors. Due to the short-term nature of planning decisions in this industry, there is a strong desire to keep initial investment costs at a minimum. With this in mind, Shenyang Yuanda Com- pressor launched a compressor especially for natural gas pro- duction and transport companies several years ago that it is now marketing to selected other industries through Burckhardt Compression’s distribution channels. Initial project wins in Europe attest to this product’s great potential. 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 and 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. OUR COMPANY | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 17 parameters and central control and monitoring of compressors 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 chemicals 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, giving it a strong regional reach and extensive field service capabilities. It will continue to expand this service network going forward. Customer training The objective of our ever-growing range of customer training and learning programs is to foster a frequent technical exchange with our customers on compressors and its operation. Theoret- ical and practical training programs for various types of com- pressors and for our own and third-party components are offered at the modern training center we have set up in Winter- thur, and we also provide on-site training at customer sites with the systems they have. Qualified technical specialists instruct customers on a wide range of maintenance and operational issues over the life cycle of any compressor system. 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 lat- est 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. Diagnosis and monitoring for superior operational reli- ability Preventive services and rapid intervention guided by online diagnostic data and analyses are vital for optimal compressor availability. Reliable condition monitoring and diagnostic sys- tems for reciprocating compressors and equipment, integrated within the top-level systems for monitoring an entire produc- tion facility, are effective tools for enhancing operational reli- ability and optimizing service intervals. Continuous machine diagnosis detects potential and actual anomalies at an early stage and thus helps to avoid costly and unscheduled down- time. Other advantages include the optimization of operating 18 MID-RANGE PLAN 2018–2022 MORE PROJECTS SUCCESSFULLY COMPLETED WITHIN THE SCOPE OF THE MID-RANGE PLAN The Services Division acquired the remaining 60% of Arkos Field Services, a US company headquartered in Houston, Texas, during the year under review. This transaction gave it full ownership of the company and will help it to expand its business servicing compressors made by other manufacturers – one of the goals of the current Mid-Range Plan. The Systems Division also achieved an impor- tant Mid-Range Plan milestone returning to profitability. 19 20 21 22 REVIEW OF THE FISCAL YEAR | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION REVIEW OF THE FISCAL YEAR FINANCIAL PERFORMANCE Order intake lower versus previous year Consolidated order intake amounted to CHF 607.3 mn, 7.8% below the figure for the previous fiscal year, which was the highest ever recorded in the history of Burckhardt Compres- sion. Excluding the effects of currency translation and acquisi- tion activity, incoming orders declined by 8.8% y-o-y. Both divi- sions experienced order deferrals during the final quarter of the fiscal year (January to March 2020) due to the global coronavi- rus outbreak. New orders at the Systems Division amounted to CHF 361.2 mn, 15.6% less than in the previous fiscal year. The Services Division increased its order intake by 6.7% to CHF 246.1 mn, of which Arkos contributed CHF 17.6 mn follow- ing the full acquisition of this company in late November 2019. Higher sales Sales rose by 5.1% to CHF 629.6 mn; excluding the effects of currency translation and acquisitions, year-on-year sales growth was 3.9%. Sales at the Services Division rose by 7.8% to CHF 241.3 mn, while the Systems Division reported a 3.4% increase to CHF 388.3 mn. Services now account for almost 40% of Group sales. Renewed increase in operating and net income Gross profit of CHF 149.8 mn topped the prior-year figure of CHF 135.7 mn by 10.4% and the resulting gross profit margin was 23.8% (previous year: 22.6%). The gross margin at the Sys- tems Division improved to 11.0% (previous year: 8.1%), despite the recognition of the remaining cost overruns in connection with the LNGM business, which amounted to approximately CHF 10 mn in the fiscal year under review. Gross profit at the Services Division rose by 1.7% to CHF 107.0 mn, resulting in a gross profit margin of 44.3%. This is well below the prior-year gross margin of 47.0%, primarily because the gross margin at Arkos Field Services is much lower than the average margin of the Group’s other services operations. Excluding acquisition activity, the gross profit margin of the Services business stood at 47.8%. Consolidated operating income increased by CHF 10.3 mn to CHF 54.8 mn, which corresponds to 8.7% of sales (previous year: 7.4%). Operating income at the Services Division declined to CHF 54.7 mn from CHF 58.2 mn in the previous fiscal year. The Systems Division returned to profitability, contributing a positive CHF 6.4 mn in operating income compared to a loss of CHF –8.7 mn in the previous year. Consolidated net income rose by 23.8% y-o-y to CHF 39.9 mn or 6.3% of sales (previous year: 5.4%). Due to the substantial positive contribution of Shenyang Yuanda Compressor (whose founder still holds a 40% stake in the company) to the Group’s bottom line, earnings per share attributable to Burckhardt Compression shareholders showed a proportionally smaller increase of 17.3% to CHF 9.56. Solid balance sheet Total assets at the end of March 2020 amounted to CHF 883.0 mn, an increase of CHF 34.3 mn or 4.0% compared to the prior-year figure. Arkos Field Services is included in this figure as a fully consolidated subsidiary. The equity ratio at year-end was 36.0% (previous year: 40.7%). The entire goodwill from the various acquisitions Burckhardt Compression has made in recent years was taken directly to equity in accordance with Swiss GAAP FER. This resulted in a deterioration of the equity ratio in the short term, but eliminated the risk of goodwill impairments in future reporting periods. The net financial position at the end of the fiscal year amounted to CHF –91.7 mn (previous year: CHF –49.4 mn), which primarily reflects the increase in net working capital, the acquisition of the remaining 60% interest in Arkos Field Ser- vices and fixed investment at the new factory in Shenyang. Continued implementation of projects within the scope of the Mid-Range Plan for 2018–2022 Various projects initiated under the current Mid-Range Plan were successfully completed during the past fiscal year. A global procurement organization was established and expanded, for example, resulting in another CHF 7 mn in cost savings. “Best-cost areas” for the sourced products were identified and products were standardized. We launched a platform that we use together with our global suppliers for tracking and commu- nication purposes and also introduced a four-stage gate pro- cess for our interaction with suppliers as well as an e-auction system. These projects marked a big step forward for our pro- curement operations in terms of digitalization and increased their efficiency. R&D collaborated with colleagues in Sales on the further modularization of new compressor systems, which led to a more efficient quote preparation process and simplified compressor development and manufacturing processes. The upturn in sales at the Systems Division held the divi- sion’s leading market position and the Services Division contin- ued to grow thanks to the full acquisition of Arkos Field Ser- vices. Burckhardt Compression’s growing knowledge and skills in the OBC business are leading to new growth opportunities in the US. New factory in Shenyang on track Construction of the new factory in Shenyang, China, is well on track despite an interrupt of six weeks because of the corona- virus outbreak and the new factory will be able to commence operations in autumn 2020 as planned. REVIEW OF THE FISCAL YEAR | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 23 Acquisition of the compressor business of JSW In March 2020, we signed an agreement (closing April 2020) with The Japan Steel Works Ltd., or JSW in short, to purchase its global compressor business. This transaction with JSW clearly strengthens Burckhardt Compression’s market pres- ence in Japan and bolsters the company’s global leadership. Workforce growth The number of employees at the end of the fiscal year stood at 2’621, an increase of 275 from the previous year’s figure of 2’346 (full-time equivalents). This number includes 213 employees of Arkos Field Services. At the end of March 2020, 782 employees (30%) were based in Switzerland, 1’161 (44%) in BRIC countries and 678 (26%) in other countries. ORDER INTAKE CHF mn SALES CHF mn 700 600 500 400 300 200 100 0 6 00 500 400 300 200 100 0 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 EBIT AND NET INCOME CHF mn 100 80 60 40 20 0 10 11 12 13 14 15 16 17 18 19 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 51 53 55 56 50 50 39 42 41 36 10 11 12 13 14 15 16 17 18 19 Balance sheet total Shareholders’ equity Equity ratio (%) 24 REVIEW OF THE FISCAL YEAR | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION CAPACITY RESEARCH AND DEVELOPMENT The Services Division opened a new service center in Guwahati, India, during the year under review. New service centers were also opened in Malaysia in cooperation with Petroteam/IPS Aus- tralia and in Doha, Qatar, in cooperation with OTC. ACQUISITIONS Burckhardt Compression acquired the remaining 60% of Arkos Field Services in the US in November 2019. Arkos Field Services is our exclusive services provider in the US. In March 2020 Burckhardt Compression announced the acquisition of the global compressor business of The Japan Steel Works, or JSW for short. Burckhardt Compression’s market presence has grown through these transactions. 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 into the new plan. Compressor systems for marine applications We conducted a thorough design review of our successful Laby®-GI compressor for use aboard large LNG carriers. This resulted in efficiency gains and greater customer benefit, for example by eliminating the need for cylinder lubricants. Com- pressor manufacturing costs were introduced through the introduction of a structured value-engineering process. Meanwhile, our engineers optimized the sealing systems used in Laby®-GI compressors that are already in operation aboard LNG carriers, so these customers can have their com- pressors retrofitted with non-lubricated sealing systems too. The performance advantages are significant, because a com- plex system of cylinder lubrication is no longer needed, which improves the cost efficiency of the retrofitted systems. New materials for the Persisto® portfolio We enlarged and optimized our portfolio of Persisto® compres- sor 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-lubri- cated and oil-free compressors. Many of these materials were engineered by Burckhardt Compression and are manufactured in-house in accordance with our quality management system. This reengineered solution does not require cylinder lubrication, which lowers maintenance costs and increases value for money. New sealing rings for pistons and packings Innovative ring geometries enable process gas compressors to be operated without oil lubricants in fueling applications for hydrogen-powered trains, trucks or buses, with pressures of up to 500 bar. The technological advantages of reciprocating com- pressors for this market are unrivaled efficiency and long run- ning times. Thanks to this new sealing technologies, Burck- hardt Compression can offer compressors for this promising application area. REVIEW OF THE FISCAL YEAR | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 25 BRAND MANAGEMENT We are constantly striving to optimize and strengthen the inter- national profile of the “Burckhardt Compression” brand. Our corporate identity and long-term brand strategy express the organization’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 commu- nications tools were introduced for both divisions and Burck- hardt Compression’s trade show visuals were improved. 26 27 SYSTEMS DIVISION The Systems Division kept its market position in the face of strong competition. Shenyang Yuanda Compressor sold process gas compressors to customers outside China for the first time and Burckhardt Compression received orders for compressors that will be used at a hydrogen fuel plant and at an underground gas storage facility in Europe. 28 29 30 REVIEW OF THE FISCAL YEAR SYSTEMS DIVISION | ANNUAL REPORT 2019 | 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 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 OPERATING INCOME (EBIT)1 CHF mn 50 40 30 20 10 0 –10 10 11 12 13 14 15 16 17 18 19 FIGURES in CHF mn Order intake Sales and gross profit Operating income (EBIT) in % of sales Sales Gross profit in % of sales 2017 2018 2019 Change 2018/2019 319.8 428.0 361.2 –15.6% 384.4 27.2 7.1% –9.0 –2.3% 375.4 30.5 8.1% –8.7 –2.3% 388.3 42.8 11.0% +6.4 +1.7% 3.4% 40.3% Headcount as per end of fiscal year (full-time equivalents) 1’425 1’506 1’517 0.7% 1 Before fiscal year 2015, no EBIT was reported at divisional level. REVIEW OF THE FISCAL YEAR SYSTEMS DIVISION | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 31 FINANCIAL PERFORMANCE Back in the black Orders received by the Systems Division in fiscal year 2019 amounted to CHF 361.2 mn, a decline of 15.6% compared to the record-high figure from the previous fiscal year. Order intake was still trending higher in the first half, but customer order activity tapered off afterwards, particularly during the final quarter of the year, which is partly a reflection of the coronavi- rus outbreak. Meanwhile, divisional sales advanced 3.4% y-o-y to CHF 388.3 mn thanks to the high order intake from the pre- vious fiscal year and strong growth in China. Gross profit for the year of CHF 42.8 mn topped the prior-year figure by 40.3%, despite the recognition of the remaining cost overruns in the LNGM business, which amounted to approximately CHF 10 mn. The gross profit margin improved to 11.0% (previous year: 8.1%). Operating income improved by CHF 15.1 mn versus the previous fiscal year to a positive CHF 6.4, bringing the Systems Division back to profitability. 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 Burckhardt Compression won several contracts for large LDPE production lines in South Korea and China during the year under review. Burckhardt Compression kept its market position during the year under review despite strong competitive pressure, as evi- denced by the various orders it received for large LDPE lines in South Korea and China and for other projects. A major petro- chemical project was successfully completed in Canada. The very first large order for process gas compressors built by Shenyang Yuanda Compressor for a customer beyond its domestic market was received during the fiscal year under review. Besides this, Burckhardt Compression received an order for a Hydrogen production facility in the US that produces Hydrogen for fuel. The first high-speed compressor for an underground gas storage facility in Europe was delivered to a Hungarian customer. It will inject natural gas from a pipeline into the underground storage facility. Initial sales of the new and optimized line of API 618 compressors were also booked. Oil and gas production The drop in capital spending in the upstream oil & gas industry in the US had a negative effect on this application area during the year under review. This is the only application area targeted by Burckhardt Compression that is exposed directly to changes in crude oil prices. Gas transport and storage 2019 was another positive year for the LNG market (liquefied natural gas) targeted by Burckhardt Compression. Numerous new LNG terminals are under construction, especially in Asia. The growing importance of large LNG carriers reflects increas- ing global demand for cleaner and lower-cost sources of energy. Container liner and cruise ship operators must meet increas- ingly stringent environmental regulations. Most recently, the global limits on sulfur dioxide and nitrogen oxide emissions from ships were significantly tightened on January 1, 2020. Burckhardt Compression has claimed a large share of the mar- ket for LNG-powered vessels in recent years. Besides solutions for ME-GI diesel propulsion systems, we can now also offer solutions for the X-DF engines moving in parallel into the mar- ket. Regardless which system is used, ship operators can con- veniently switch from marine diesel to the naturally forming boil-off gas and vice versa during engine operation. We provided Laby® compressors for a ship powered by an X-DF engine during the year under review. Refinery Business momentum in this segment remained positive during the period under review, fueled by the double-digit growth of the global market. Pressure on refinery margins sustained the trend towards integrated production concepts throughout the value chain. Countries with substantial refinery capacity are aiming to increase the domestic share of the added value to reduce their dependency on imported refinery products. Our compressor business is benefiting from these efforts. Large production plants are currently under construction in China and Southeast Asia. India completed its transition to the stricter BS6 emission standard last year, which has boosted demand for hydrogen gas and compressors at the country’s refineries. 32 REVIEW OF THE FISCAL YEAR SYSTEMS DIVISION | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION INFRASTRUCTURE Construction of Shenyang Yuanda’s new plant continued as planned during the past fiscal year despite an interrupt of six weeks because of the coronavirus outbreak, so commissioning and startup will take place as scheduled in autumn 2020. This new plant is an investment in the future development of the systems business. The two existing factories will be moved to the new, larger site, where workflows and processes will reflect the latest standards and best practices, further improving over- all operating efficiency. We continued to expand our Global Sup- port Center in India. COMPLETION OF “PULLING SYSTEMS TOGETHER” PROGRAM FOR IMPROVEMENT This large-scale initiative launched in 2016 to optimize the Sys- tem Division’s processes and costs was completed at the end of the 2018 fiscal year. Some 30 different projects were launched as part of the “Pulling Systems Together” program and they covered practically every area of the division, from design, procurement, production workflows and project man- agement to logistics and capacity management. This program helped the division to effectively respond to temporary fluctua- tions in order volumes and to improve its operational excel- lence so as to bring about a significant and lasting improve- ment in its competitiveness over the medium term. Petrochemical and chemical industry The petrochemical and chemical industry has long witnessed increasing global demand for plastic products. Production capacity has grown as a result and efforts are being made across the industry to increase the local share of added value. This is particularly evident in China, where the share of imported products by value is still relatively high despite the substantial investments in local production capacity that have been made in recent years. Although the orders for LDPE production lines received during the year under review were fewer and smaller in scope than in the previous year, we still expect order inflow from this industry to increase in the coming years. Industrial gases Historically, the various industries in this application area have grown at roughly the same pace as world GDP. Hydrogen gas is attracting increasing attention as a source of fuel for trains and commercial vehicles and, looking further into the future, for cars as well. Hydrogen could become a more economical and greener source of energy for vehicles than electricity. Some states in the US are actively supporting this alternative trend and have begun investing in hydrogen production assets. Pro- ducers of industrial gases are challenging the conventional energy companies by developing technologies for hydrogen- powered vehicles. M&A activity has picked up in an effort to achieve scale in the current market environment. SALES/DISTRIBUTION In fiscal year 2018, the sales organization for new compressor systems was decentralized. Responsibility for customer rela- tionship management and project negotiations (front sales) was transferred to the respective regions and regional offices for preparing and processing technical proposals and quotes (appli- cation engineering) were set up. This organizational change delivered the expected results in the year under review and enabled further improvements in our sales and project execu- tion capabilities. Collaboration with external sales agents in countries where Burckhardt Compression does not employ its own sales staff was intensified in the fiscal year under review. New agents were signed in Abu Dhabi and Malaysia. REVIEW OF THE FISCAL YEAR SYSTEMS DIVISION | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 33 OUTLOOK As already pointed out, the precise impact of the global corona- virus outbreak on our operaions in fiscal year 2020 cannot be determined at the present time. The Systems Division began the year with a full order book. Supply chains are still intact, despite some complications as a result of the virus. Customers continue to take delivery of the products and services they’ve ordered from us and invoices are being paid. Achieving a further improvement in profitability while at the same time keeping its global market leadership remains the number one goal for the Systems Division. Further improving profitability while defending its global market leadership remains the top priority for the Systems Divi- sion. Under the current Mid-Range Plan for 2018 to 2022, sales of CHF 340 mn and an EBIT margin of 0% to 5% are targeted for fiscal year 2022. This sales target was already reached in fiscal year 2018 and then clearly exceeded during the year under review. The Systems Division also managed to return to profit- ability in 2019 after three consecutive years in the red with an EBIT margin of 1.7%, thanks to a host of measures affecting nearly every aspect of its business. This turnaround was achieved despite the recognition of the remaining substantial cost overruns in the LNGM business. The division will continue to make every effort to further improve its profitability. 34 SERVICES DIVISION After acquiring all outstanding shares in Arkos Field Services, the Services Division became a one-stop shop in the US for downstream, midstream and upstream compressor services. The division also signed long-term service agreements for marine compressors. Its Hyper Compressor services business showed pleasing growth in China, Japan and South Korea. 35 36 37 38 REVIEW OF THE FISCAL YEAR SERVICES DIVISION | ANNUAL REPORT 2019 | 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 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 OPERATING INCOME (EBIT)1 CHF mn 60 50 40 30 20 10 0 10 11 12 13 14 15 16 17 18 19 FIGURES in CHF mn Order intake Sales and gross profit Operating income (EBIT) in % of sales Sales Gross profit in % of sales 2017 2018 2019 Change 2018/2019 205.4 230.7 246.1 210.2 97.9 46.6% 54.4 25.9% 223.9 105.2 47.0% 58.2 26.0% 241.3 107.0 44.3% 54.7 22.7% 6.7% 7.8% 1.7% –6.0% Headcount as per end of fiscal year (full-time equivalents) 778 830 1’093 31.7% 1 Before fiscal year 2015, no EBIT was reported at divisional level. REVIEW OF THE FISCAL YEAR SERVICES DIVISION | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 39 FINANCIAL PERFORMANCE Continued growth The Services Division continued its multi-year growth trajec- tory in 2019. Order intake rose by 6.7% (excluding acquisition effects –0.9%) to CHF 246.1 mn. Divisional sales grew 7.8% (excluding acquisition effects 0.1%) to CHF 241.3 mn, and now account for 38% of consolidated sales (previous year: 37%). Gross profit edged 1.7% higher to CHF 107.0 mn, resulting in a margin of 44.3%. This is well below the prior-year margin of 47.0%, mainly due to the clearly sub-par gross profit margin of Arkos Field Services. Excluding acquisition activity, the divi- sional gross profit margin was 47.7%. Operating income declined by 6% from CHF 58.2 mn to CHF 54.7 mn in the fiscal year under review, which is mainly attributable to the additional costs related to the further expansion of the divisional sales network as well as the dilutive effect of the EBIT from Arkos Field Services. Burckhardt Compression won several long-term services agreements in the marine business, including a five-year agreement to service the compressors on nine LNG carriers. MARKETS In late November, Burckhardt Compression acquired the remain- ing 60% of Arkos Field Services, a provider of compressor ser- vices in the US. Arkos Field Services is now a wholly-owned sub- sidiary of Burckhardt Compression and serves our customers in the US as the country’s only one-stop compressor manufac- turer and services provider for every segment of the market – upstream, midstream and downstream. The US has the world’s largest installed base of reciprocating compressors. In March 2020, we signed an agreement with The Japan Steel Works Ltd., or JSW in short, to purchase its global com- pressor business. JSW is a conglomerate with operations in the steel, energy, and machinery manufacturing industries and the acquired compressor business accounts for 1% to 2% of its annual sales of CHF 1.9 bn. This transaction with JSW clearly strengthens Burckhardt Compression’s market presence in Japan and bolsters the company’s global leadership. New long-term service agreements for marine assets were signed, mostly with customers in the Middle East, but this will not be reflected in reported sales until fiscal year 2020 and beyond. These long-term projects enhance the reliability and accuracy of our planning processes. As an example, a five-year agreement was signed with a leading player in the LNG trans- port industry to service the Laby®-GI compressors aboard nine of its LNG carriers with the aim of forging a close and long-term partnership. The Hyper Compressor services business in China, Japan and Korea also showed pleasing trends. Improvements in our key account management processes over the past year will likely lead to more service agreements going forward. On the innovation front, cloud applications were used for the first time for compressor monitoring purposes. Sealing and rider rings made of the engineering plastic material Persisto® for use in a wide variety of applications were also well received by custom- ers. Spare Parts New orders for parts showed a slight decline in the year under review after the strong growth witnessed in the 2018 fiscal year. Customers are increasingly ordering spare parts for com- pressors made by Burckhardt Compression and other manufac- turers in connection with the services we provide them. Cus- tomers continue to appreciate our multi-year efforts to build up the range of products and services we offer for other brand compressors. Engineering/Revamp/Repair The decline in the Spare Parts business was more than offset by the rapid growth of the Engineering/Revamp/Repair busi- ness. Long-term service agreements in this particular area help to fuel the continued expansion of the services business in gen- eral. We won major revamp contracts in Singapore, Germany and elsewhere. Repair processes and guidelines were standard- ized across the Group to ensure uniformity and enhance cus- tomer satisfaction. Field Services Our Field Services operations maintained the pleasing momen- tum from the previous year. With the full acquisition of Arkos Field Services, Burckhardt Compression has significantly increased its presence in the US market and advanced the global expansion of its services organization. Thanks to this transaction, we were also able to manage several major proj- ects (offshore and onshore) with our own field service techni- cians. Monitoring/Diagnostics New system sales declined as customers were hesitant to invest in monitoring solutions during the year under review. Monitoring and diagnostics services showed renewed growth, however. Demand for leasing solutions also increased, reflect- ing an ongoing trend. We launched our first cloud-based moni- 40 REVIEW OF THE FISCAL YEAR SERVICES DIVISION | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION toring solutions based on the Prognost system during the past year and they were very well received by the market. OUTLOOK CONTINUED EXPANSION OF SALES ORGANIZATION The centralized quote management system introduced in 2017 and the new service engineering solutions continue to deliver the expected benefits. In the year under review we took further action to improve the efficiency of our sales processes by expanding our regional sales structures. Staff received special training in connection with the global sales development pro- gram initiated for both divisions. We increased our sales sup- port operations in India for Prognost. Our highly qualified field service representatives around the world are responsible for managing customer relationships and developing additional market opportunities. Under our new partnership model we are profiling ourselves as a local services provider, especially for customers in smaller but fast-growing markets with limited investment. NEW SERVICE CENTERS A new service center was opened in Slovakia in May 2019, from which Burckhardt Compression can offer compressor operators in Slovakia, the Czech Republic, Hungary, Poland and Austria a full range of services and repairs for all reciprocating compres- sor brands as well as hyper compressor services. A new service center was also opened in Guwahati, India, and new service cen- ters were opened in Malaysia in partnership with Petroteam/IPS Australia and in Doha, Qatar, in partnership with OTC. The proj- ect to expand our component manufacturing capacity in Shang- hai initiated in fiscal year 2018 continued throughout fiscal year 2019. As already pointed out, we cannot yet determine the precise impact the global coronavirus outbreak will have on our opera- tions in fiscal year 2020. We have not observed any major slow- down in demand for the products and services offered by the Services Division. Its supply chains are likewise still intact, despite some complications as a result of the coronavirus out- break. Customers continue to take delivery of the products and services they have ordered from us and invoices are being paid. The outlook for growth in our services business remains attrac- tive: – 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. – Predictive maintenance in conjunction with the continuous condition monitoring of compressor systems is growing in importance. Therefore we believe that demand for a full range compressor services from a single source will grow more strongly than the spare parts business alone. Customers are increasingly expect- ing engineering solutions, competent on-site advisory services and tailor-made maintenance concepts, especially for installa- tions at an advanced stage of their life cycle. Customers are increasingly expecting engineering solutions, competent field advisory services and tailor-made maintenance concepts, especially for older installations. In our Mid-Range Plan for 2018 to 2022, we expect the Services Division to achieve annual organic sales growth of 6% to 8%. Including the 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. Our ser- REVIEW OF THE FISCAL YEAR SERVICES DIVISION | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 41 vices capabilities will be expanded in the coming fiscal year, pri- marily in Latin America, Southeast Asia and Japan. Other mea- sures include the expansion of its engineering and project management resources in the Services Division and the intro- duction of uniform processes and guidelines for all service cen- ter locations. A large number of LNGM vessels were commissioned in recent years and the maintenance and spare parts needed are becoming business potential for Burckhardt Compression. This represents a new business opportunity for Burckhardt Com- pression. Long-term service agreements covering the entire life cycle of the compressor installations are particularly interest- ing here. From a geographic perspective, the Asia-Pacific region offers the most opportunities for growth, given the many new systems that have been installed in the region during recent years. In North America, we will benefit from our increased service capabilities following the integration of Arkos Field Ser- vices. Looking further into the future, we believe that preven- tive maintenance services in connection with compressor mon- itoring solutions will be an attractive growth driver. Service support for CNG fueling stations (CNG: compressed natural gas) and hydrogen gas solutions have also emerged as new pockets of growth for our company. We will make systematic use of dig- italization to launch new services and applications. The main aims here are to improve our ability to access and mine com- pany and customer data and improve our communication and optimize our business processes. Our online customer platform will be upgraded during the current fiscal year and a mobile solution will be introduced for our field service technicians. 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. Our engineering capabilities were clearly expanded. We also broadened the range of training courses for our own employees and our customers’ service and maintenance technicians. The detailed customer satisfaction survey conducted for the first time two years ago was repeated during the fiscal year under review. The results of this survey confirmed that our strategic initiatives are producing the intended results. The tar- get groups of this survey were our customers’ service and main- tenance technicians and other employees with a technical background as well as procurement specialists. The survey showed that our customers are very satisfied with the compe- tence of our field service specialists and the quality of the spare parts we make. These findings were evaluated with inputs from all of our country organizations and specialist units; appropriate corrective measures were taken where necessary. 42 BURCKHARDT COMPRESSION GROUP The delivery of two Hyper Compressors during the past year deserves special mention. They were first transported by water from Basel to Shanghai and from there to their final destination by a heavy haul trucking specialist. Burckhardt Compression also won several contracts to supply compressors for large LDPE production lines in South Korea and China during the reporting year. 43 44 45 46 SUSTAINABILITY REPORT | ANNUAL REPORT 2019 | 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 176-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. A firm understanding of the current status is needed to set the right goals and take the measures that will help 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 continued to adapt its occupa- tional health and safety management system and its environ- mental management system over the course of the past year to maintain compliance with the requirements of OHSAS 18001 and ISO 14001, respectively. 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. We organize an Investor Day to that end. The latest Investor Day was held at the company’s headquarters in Winterthur in January 2018, where we presented the targets and objectives of our Mid-Range Plan for 2018 to 2022. The next Investor Day is scheduled in autumn 2020 and will again take place at the company’s head- quarters in Winterthur. Our investor relations activities are evaluated by indepen- dent firms and they receive consistently very good ratings con- sidering the size of our company. The leading Swiss business newspaper “Finanz und Wirtschaft” gives us an A– rating (A being the highest rating) for investor relations as well as transparency and a B– rating for growth. In the yearly ranking of annual reports conducted by HarbourClub and the business magazine “Bilanz”, our 2018 annual report scored a very high 34th (out of a total of 238 com- panies) in the “Value Reporting Print” category. A significant improvement was achieved in the “Value Reporting Online” cat- egory, where Burckhardt Compression jumped 69 places to number 34. In the 2019 survey of company boards carried out by zRating in collaboration with the newspaper “Finanz und Wirtschaft,” Burckhardt Compression scored 24 points and ranked 39th among the 174 Swiss listed companies covered by the sur- vey. This ranking is based on criteria pertaining to board orga- nization, independence, transparency, compensation and sus- tainability. 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 team. 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 and have zero tolerance for price fixing, cartels or any other activities that distort com- petition. This is also clearly stated in our Code of Conduct. We value our corporate and business know-how, especially our technical and commercial expertise, and are constantly safe- guarding it against loss or unauthorized access. SUSTAINABILITY REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 47 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. 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. Strategic procurement is an integral part of Burckhardt Compression’s strategic management cycle. The relevant pro- curement 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 suppliers 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 Suc- cess Factors HR software in the previous fiscal year. SAP’s award is given in recognition of superb project planning and the fast and cost-effective implementation of SAP software solu- tions, focusing closely on SAP standards. Innovation Burckhardt Compression was named world market leader for reciprocating compressor systems in fiscal year 2017. The Global Market Leaders Index was developed by the Business School of the University of St. Gallen in collaboration with the Akademie Deutscher Weltmarktführer. The index lists compa- nies 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 of our company. Every year, the personal objectives of our executives and employees include implementing continuous improvement proj- ects. These projects are implemented using a method devel- oped by Burckhardt Compression and evaluated by its execu- tives. We also work with suppliers, universities, institutions, and advisors worldwide to develop and improve products or pro- cesses in areas where we do not have the necessary expertise. Collaboration with external experts and specialists fosters new ideas and maximizes creative potential, also within the com- pany. Capital expenditure Burckhardt Compression has invested CHF 136.8 mn over the past five years (excluding acquisitions). Most of its capital expenditure during the period under review was spent in Win- terthur 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 capitalization divided by shareholder equity at the end of the reporting year resulted in a quotient of 2.1 (previous year 2.7). This clearly shows that we continue to generate sub- stantial value with the capital of our shareholders (sharehold- ers’ equity) even in times with a coronavirus outbreak. Net income per share attributable to the shareholders of Burck- hardt Compression for the period under review amounted to CHF 9.56 (previous year: CHF 8.15). 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. 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 and the Board of Directors 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 lit- tle or no influence. 48 SUSTAINABILITY REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION The objectives of our risk management activities are: – to systematically detect special risks; – to establish processes for monitoring, reducing and, ideally, ACTUAL WARRANTY COSTS AS A PERCENTAGE OF SALES preventing risks; – achieving a balance between risks and rewards for our busi- ness. Warranty costs The significant increase in warranty costs over the past three fiscal years is mainly due to additional costs incurred in the LNGM business. % 10 11 12 13 14 15 16 17 18 19 0.7 1.0 0.8 0.7 0.8 0.6 0.8 1.0 1.4 1.9 NET INCOME PER SHARE CHF 07 08 09 10 11 12 13 14 15 16 17 18 19 20.00 21.46 16.68 13.56 15.22 16.42 15.87 16.93 16.34 9.12 8.51 8.15 9.56 SUSTAINABILITY REPORT | ANNUAL REPORT 2019 | 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 trained on the company’s values and behaviours and code of conduct. Members of the Executive Board have also stressed the importance of these common val- ues and behaviors in video podcasts. These measures help to ensure that our employees are familiar with our corporate cul- ture and live up to our core values. Our executives are impor- tant 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 8.5 years. Toward the end of the year under review, Burckhardt Com- pression conducted another survey of its employees around the world. The exceptionally high participation rate of 89% in the previous employee survey rose to an even higher 91% in the lat- est survey. Virtually every group-wide topic surveyed showed a very pleasing improvement, which indicates that the work- shops, initiatives and projects initiated based on the results of the previous survey have produced the desired outcomes. Employee feedback regarding collaboration, supervisors, and employee focus and information policies showed the greatest improvement. The overall pleasing results reinforce Burckhardt Compression’s plans and intentions to pursue further such ini- tiatives worldwide. This employee survey is conducted every two years to measure changes in employee satisfaction. The next employee survey is planned for fiscal year 2021. We have a responsibility to ensure the expertise of our employees and promote the exchange of knowledge. Our employee orientation programs ensure 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 program with various technical, prod- uct-specific and management training modules to ensure the continual development of our technical and leadership compe- tencies. 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 also part of our evaluation system. Women make up 14.5% of our global work force (13.8% in the previous year) and we aim to steadily raise this percentage to 20% over the coming years. 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 economiesu- isse, but, more than that, we are convinced that mixed-gender teams perform better. Burckhardt Compression conducted another global survey of its employees around the world. The remarkably high response rate of 91% reflects a high level of employee dedication. 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 employee turnover rate of 9.5% in the period under review (pre- vious year: 9.8%) includes all persons leaving as well as all expired temporary labor agreements and is attributed to the good state of the global economy. The rate of voluntary depar- tures within overall employee turnover for the year under review stood at 5.8%, below the defined upper threshold of 6%. 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 58 apprentices in Switzerland and 31 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 50 SUSTAINABILITY REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 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. An internal talent review process is in place to identity potential new managers and specialists at an early stage and guide them through 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- 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. Another Internal Management Development Program, or IMDP for short, was organized during the past fiscal year. Prom- ising mid- and upper-management talents from around the world receive training through this program. The IMDP consists of several modules that go beyond the functional roles of each participant and is intended to give them a better understanding of the company as a whole. Participants also work on multina- tional project teams with a strategic focus on the Mid-Range Plan as part the program. Occupational health and safety Workplace safety is very important to Burckhardt Compression. We go to great lengths to ensure that every employee is aware of potential workplace risks and accident prevention measures. Regular training is provided on work safety topics. Work safety audits are carried out annually by external professionals. Inter- nal safety inspections are performed to identify and mitigate hazards. The subsequent recommendations will be duly imple- mented. 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. For this reason, Burckhardt Compres- sion launched in this fiscal year the program Dr BeWell. It con- tains an extensive range of physical activities, preventative measures and theme-specific campaigns help improve employee satisfaction, health and motivation, and to reduce absences. In fiscal year 2018 the occupational health and safety management system of every Burckhardt Compression site received OHSAS 18001 certification and we intend to upgrade our certification to ISO 45001 in the 2020 fiscal year. Numerous measures ranging from detailed risk assessments and safety inspections accompanied by management to workplace safety GEOGRAPHIC BREAKDOWN OF THE WORKFORCE, 2019 100% = 2’621 Employees (full-time equivalents) Other 26% BRIC countries 44% Switzerland 30% 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 19 105 111 139 160 168 175 277 302 324 379 Men Women EMPLOYEE TURNOVER RATIO1 % 10 11 12 13 14 15 16 17 18 19 8.0 7.5 5.2 5.0 4.4 5.4 10.2 9.8 9.8 9.5 1 2016 onwards: contains all leaves 1’830 1’912 2’022 2’242 SUSTAINABILITY REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 51 training and mandatory protective footwear requirements for certain employees have led to a further improvement in the relevant key performance indicators. With 6.8 days (previous year: 6.1 days) the average number of working days lost per employee remained on a low level. We aim to bring this down to less than 6.0 days. Further action has been taken to achieve this goal. Environmental management Every Burckhardt Compression site received ISO 14001 certifi- cation in the fiscal year 2018. 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 opti- mized. 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 seeks to reduce youth unemployment, since 2014. Our CEO also serves as the honorary chair of the Swiss, Eastern Europe (non-EU), Central Asia and South Caucasus Joint Chamber of Commerce. To strengthen our 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. Employees in India have helped to build small man-made lakes in Kondhapuri and Vadner that will retain rainwater which can then be used by the surrounding communities for agricul- tural purposes. 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. Here, the focus is on sustainable and efficient develop- ment, taking into account the entire life cycle of a product. This is indispensable since our compressor systems have an average service life of 30 to 50 years. Whenever it makes sense, our cus- tomers 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: – Compressor systems for marine applications: The dual-fuel propulsion system developed for LNG carriers can be powered by environmentally friendly natural gas instead of marine die- sel 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, SOX and NOX emissions up to 30% when powered by natu- ral gas. – Process gas compressors per API 618: These compressors are used specifically in industrial processes for the desulfuriza- tion of fuels. – Process gas compressors for hydrogen fueling applications: Innovative ring geometries enable process gas compressors to be operated without oil lubricants in fueling applications for hydrogen-powered trains, trucks or buses, with pressures of up to 500 bar. The technological advantages of reciprocat- ing compressors for this market are unrivaled efficiency and long service lives. – 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 2019 | 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 opti- mized our internal logistics processes and transportation oper- ations through the “PULL@BCAG” program. We are also reduc- ing 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 phi- losophy 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 save energy in our offices and workshops is underway. Our plant in Pune reduced its energy consumption by 21% versus the 2015/16 base year and its freshwater consumption by 33%. Shenyang Yuanda Compressor’s new plant in Shenyang will draw more of its energy needs from district heating systems. The insulation concept for the exterior walls also deserves spe- cial mention. The insulated sandwich wall panels used will reduce the amount of energy required for heating purposes. Furthermore, when the new plant is operational, employee workwear and protective clothing will be washed at a central laundromat instead of the current system where every depart- ment has its own washing machine. The new concept will save both water and energy. A new sand mixer has been installed for Shenyang Yuanda Compressor’s foundry. The sand that is used for the casting molds can now be reprocessed and reused. The main building has also been renovated to improve energy efficiency. Our plant in Pune received the GreenCo STAR Performer Award during the year under review. GreenCo is an environmen- tal 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. Our plant in Pune received this award for achieving a 21% reduction in its energy consumption versus the 2015/16 base year and a 33% reduction in its freshwater consumption thanks to a rain- water harvesting system. Washing rather than disposing of oily cotton cleaning rags used in manufacturing processes saved 772 kg of cotton. Environmental management, recycling and waste disposal Hazardous goods and chemicals are transported, stored and disposed of in accordance with applicable laws and regulations. Internal collection points help our employees sort and dispose of waste correctly and allow us to recycle most of our waste. The rest is sent to a nearby waste incineration plant that pro- duces district heat for Burckhardt Compression’s water and space heating systems. Specialized companies are engaged to ensure that certain materials (e.g. metals) are recycled in the proper, most environmentally friendly way. The waste management concept introduced in in collabora- tion with external consultants was continued and expanded and will lead to even greater separation of waste in the future. Con- ventional lighting in Winterthur continued to be replaced with with LEDs during the past year. Burckhardt Compression opti- mized the chemicals 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 storage tanks were retrofitted with spill contain- ment systems and special transport tanks, which improves our chemical safety practices and process efficiency. The substitu- tion of hazardous chemicals further reduced our consumption of VOC gases (Volatile Organic Compounds), which are harmful for the environment. These and other measures are part of the EOHS system that has been introduced at all Group sites in compliance with ISO 14001 and OHSAS 18001 standards. Offi- cial certification was obtained in 2018. SUSTAINABILITY REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 53 ELECTRICITY CONSUMPTION MWh 10 11 12 13 14 15 16 17 18 19 3’717 3’707 4’136 3’672 5’305 5’385 6’773 6’933 7’029 7’231 WATER CONSUMPTION m3 10 11 12 13 14 15 16 17 18 19 WASTE t 10 11 12 13 14 15 16 17 18 19 41’639 35’040 28’251 14’851 17’792 18’865 29’157 24’310 29’019 30’311 256 246 197 235 280 326 284 321 343 352 Figures without Shenyang Yuanda Compressor 54 CORPORATE GOVERNANCE | ANNUAL REPORT 2019 | 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, 2020. 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 CHRO S. Pitt President Systems Division F. Billard CFO R. Brändli President Services Division R. Dübi 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, 2020 amounted to CHF 654’160’000. 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 106, Note 102, “Subsidiaries”. 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, 2020. In accordance with the company’s Bylaws, the voting rights of NN Group N.V. and Atlantic Value General Partner Limited are limited in each case to 5.0% of the total number of BCHN reg- istered shares recorded in the commercial register: Name Country % of shares MBO shareholder pool (Valentin Vogt, Harry Otz, Leonhard Keller, Martin Heller, Ursula Heller, Marcel Pawlicek) NN Group N.V. CH NL Atlantic Value General Partner Limited (Mondrian) UK Ameriprise Financial Inc. Credit Suisse Funds AG Vontobel Fonds Services AG BlackRock, Inc. UBS Fund Management (Switzerland) AG US CH CH US CH 12.4 10.3 5.0 3.5 3.2 3.1 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/en/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 2019 | 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 is subject to supervision by an accredited bank and financial mar- ket regulator and if he has concluded an agreement with the Board of Directors concerning his status. Nominees 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 Register with 2% vot- ing rights and, for the remaining shares, without 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 sharehold- ings 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 Hold- ing 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 July 6, 2021 by issuing a maximum of 510’000 fully paid regis- tered shares with a nominal value of CHF 2.50 each (authorized share capital). The date and amount of the issuance, the time of dividend entitlement and, if applicable, the type of contribu- tion 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) to finance the purchase of companies in whole or part. The Board of Directors is also authorized to exclude subscription rights of sharehold- ers if the newly created shares are issued by means of a public offering. Shares for which subscriptions rights have been granted but not exercised will be allotted by the Board of Direc- tors at its own discretion. Apart from the above, Burckhardt Compression Holding AG has no other authorized and/or condi- tional 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 2019 | BURCKHARDT COMPRESSION 3. BOARD OF DIRECTORS From left: David Dean, Dr. Stephan Bross, Valentin Vogt, Dr. Monika Krüsi, Urs Leinhäuser CORPORATE GOVERNANCE | ANNUAL REPORT 2019 | 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. The com- position of the Board of Directors is as follows: Name Nationality Function First elected Term expires Valentin Vogt Urs Leinhäuser Dr. Monika Krüsi Dr. Stephan Bross David Dean1 Hans Hess2 1 From July 7, 2019 2 Until July 6, 2019 CH CH CH/IT DE CH CH Chairman, non-executive; Chairman SC Member, non-executive; Chairman AC Member, non-executive; member SC, member AC2, Chair NCC1 Member, non-executive; member NCC Member, non-executive; member AC Deputy Chairman, non-executive; Chairman NCC 2002 2007 2012 2014 2019 2006 2020 2020 2020 2020 2020 2019 AC = Audit Committee NCC = Nomination and Compensation Committee SC = Strategy Committee 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 mate- rial business relationships with a Burckhardt Compression Group company. The competencies of the Board members are depicted in the following matrix: Valentin Vogt Urs Leinhäuser Monika Krüsi Stephan Bross David Dean Hans Hess 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 2019 | BURCKHARDT COMPRESSION Biographical details and information on other activities and commitments of the individual members of the Board of Directors are given below: VALENTIN VOGT (1960) Education Lic. oec. HSG St. Gallen, Switzerland Professional background Since 2011 Self-employed, Switzerland 2000–2011 CEO, Burckhardt Compression 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 Other activities and commitments – Chairman of the Board, Kistler Holding AG, Switzerland – Board member, Bucher Holding AG, Switzerland – Board member, Ernst Göhner Stiftung Beteiligungen AG, Switzerland – Chairman of the Swiss Employers’ Association, Switzerland URS LEINHÄUSER (1959) DR. MONIKA KRÜSI (1962) Education Ph.D. 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 – Chair of the Nomination and Compen- sation Committee – Member of the Strategy Committee Other activities and commitments – Chair of the Board of Directors, Repower AG, Switzerland – Board member, 360°, Switzerland – Board member, Otto Suhner AG, Swit- zerland – Board member, Signal AG, Switzerland – Board member, BGRB Holding 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 Controlling, 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 – Board member, PENSADOR Partner AG, Zurich CORPORATE GOVERNANCE | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 59 DR. STEPHAN BROSS (1962) DAVID DEAN (1959) Education Engineering degree, University of Braunschweig, 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 Education Swiss certified expert for accounting and controlling Swiss certified accountant Completed executive education programs at Harvard Business School, Boston, USA, and at the IMD, Lausanne, Switzerland Professional background Since 2019 Self-employed, Switzerland 2004–2019 CEO, Bossard Group, Switzerland 1998–2004 CFO, Bossard Group, Switzerland 1993–1998 Deputy CFO and Corporate Controller, Bossard Group, Switzerland Duties and responsibilities as a director of Burckhardt Compression Holding AG – Member of the Board of Directors – Member of the Audit Committee Other activities and commitments – Board member, Bossard Group, Switzerland HANS HESS (1955) All data until July 6, 2019 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 Duties and responsibilities as a director of Burckhardt Compression Holding AG – Deputy Chairman of the Board of – Board member, Komax Group, Directors Switzerland – Chairman of the Nomination and Com- Compensation Committee – Board member, Brugg Group, pensation Committee Switzerland – Board member, Haag-Streit Group, Switzerland (a division of Metall Zug Group) Other activities and commitments – Chairman of the Board, COMET Hold- ing AG, Switzerland – Board member, Agta Record AG, – Chairman of the Board, Reichle & De- Switzerland Massari AG, Switzerland – Vice President of the Board, dormak- aba Holding AG, Switzerland – Chairman, Swissmem, Switzerland – Vice President, economiesuisse, Swit- zerland – Trustee, Swisscontact, Switzerland – Trustee, Technorama, Switzerland 60 CORPORATE GOVERNANCE | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 3.3. Rules in the Bylaws concerning the number of permitted 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 2019, 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. The members are Urs Leinhäuser (Chairman) and David Dean. 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. The mem- bers are Dr. Monika Krüsi (Chair) and Dr. Stephan Bross. Meetings 05/23/2019, NCC meeting 05/23/2019, AC meeting 05/23/2019, BOD meeting 08/27/2019, e.o. NCC meeting 08/27/2019, BOD meeting 10/31/2019, AC meeting 10/31/2019, NCC meeting 10/31/2019, BOD meeting 10/04/2019, Board telephone conference 10/17/2019, Board telephone conference 12/13/2019, BOD meeting 01/13/2020, Board telephone conference 01/15/2020, Board strategy day 03/03/2020, BOD meeting 03/30/2020, Board telephone conference BOD = Board of Directors AC = Audit Committee NCC = Nomination and Compensation Committee Governing body NCC AC BOD NCC BOD AC NCC BOD BOD BOD BOD BOD BOD BOD BOD Hans Hess • • Duration Valentin Vogt Urs Leinhäuser Monika Krüsi Stephan Bross David Dean 2 hours 3 hours 6 hours 2 hours 5 hours 2 hours 3 hours 5 hours 1 hour 1 hour 4.5 hours 0.5 hours 10 hours 4.5 hours 1.5 hours • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • CORPORATE GOVERNANCE | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 61 Strategy Committee The Strategy Committee supports the CEO in developing corporate strategy and advises the Board of Directors on 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. The members are Valentin Vogt (Chairman) and Dr. Monika Krüsi. In addition, the Strategy Committee organizes and prepares the annual strategy day in collaboration with the CEO. 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 Com- pression 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 Exec- utive Board, as well as compensation of the Executive Board – Decisions on new subsidiaries, major capital expenditure proj- ects, 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 organization regulation (www.burckhardtcompression.com/corporate-governance). 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 audit reports to the Chairman of the Audit Committee of the Board of Directors. Management responsibility for the unit has been delegated to the Chief Accounting Officer of Burckhardt Compression AG, who is also responsible for plan- ning and conducting the audits. The CFO is responsible for coor- dination between the Audit Committee and the head of the 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. Qualified subject mat- ter experts from other fields (e.g. IT, Legal or Human Resources) may be consulted, depending on the auditing assignment. These employees perform the internal audit duties assigned to them in addition to their regular duties and in this additional capacity they report directly to the Head of Internal Group Audit, who in turn reports in this function directly to Chairman of the Board of Directors’ Audit Committee. This efficient organization is tai- lored to the needs and size of the Burckhardt Compression Group and fosters an active exchange of information and best practices with the objective of creating sustained added value for the Burckhardt Compression Group by means of continual process improvement. The internal auditors undergo regular training for the performance of their tasks. The training received is coordinated by the head of the internal Group audit. The schedule for internal audits is determined by the Audit Commit- tee of the Board of Directors on an annual basis and may be changed or expanded by the Audit Committee as and when required. Eight internal audits were carried out in fiscal year 2019. 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 auditors. The statutory auditor assesses the effectiveness of the internal control sys- tem (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 continuous risk management con- ducted by the two divisions and the major subsidiaries of Burck- hardt Compression Group within the scope of a periodic leader- ship cycle. In this process, potential risks are systematically identified and assessed and the appropriate risk control mea- sures as well as the corresponding duties, responsibilities and implementation timelines are established and monitored. Inter- nal and external factors are included in the evaluation of poten- tial risks. The second stage of the risk management process consists of a periodic risk management review that takes place twice a year at the meetings of the Board of Directors’ Audit Commit- tee. 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 with the risk mitigation measures, the people respon- 62 CORPORATE GOVERNANCE | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION sible 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 CH CH Sandra Pitt DE/CH Fabrice Billard Rainer Dübi FR CH CEO CFO CHRO President Systems Division President Services Division 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 2019 | BURCKHARDT COMPRESSION 63 MARCEL PAWLICEK (1963) ROLF BRÄNDLI (1968) Education Degree in Business Administration, HWV Zurich, Switzerland Professional background Since 2008 CFO, Burckhardt Compression Group, Switzerland 2001–2008 Head of Finance & Administration, 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 Compression Group, Switzerland 2008–2011 Head of Design & Manufacturing, 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 Marketing & 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 2019 | 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 Compression Group, Switzerland 2013–2015 Head Corporate HR, AFG Management AG, Switzerland 2012–2013 Head of HR Central Europe, Holcim (Schweiz) AG, Switzerland 2010–2012 Head of HR, Holcim (Schweiz) AG, Switzerland 2007–2009 Head of HR, BASF Group Switzerland, BASF Schweiz AG, Switzerland 2006–2007 HR Specialist Region Europe, BASF AG, Germany 2003–2006 Internal Consultant Performance Management, BASF AG, Germany 2002–2003 HR Coordinator Europe, BASF AG, Germany Education Master of Science in Aeronautics and Aerospace Engineering, Ecole Centrale Paris, France Education Degree in Mechanical Engineering, HTL Winterthur, MASBA School of Management, Switzerland Professional background Since 2016 President Systems Division, Burckhardt Compression Group, Swit- zerland 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, Swit- zerland 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 2019 President Services Division, Burckhardt Compression Group, Switzerland 2012–2019 Head of Design & Manufacturing, 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 2019 | BURCKHARDT COMPRESSION 65 4.3. Rules in the Bylaws concerning the number of permitted activities Members of the Executive Board may not hold more than five (5) additional board memberships, whereof not more than two (2) additional may be 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 75. 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 75 and in the financial statements, note 103, “Share capital and share- holders” on page 106. Burckhardt Compression Group did not grant any loans, credit, or collateral to any of the members of the Board of Directors or the Executive Board in fiscal year 2019 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 in part, by nominees. This restric- tion is also valid if shares are acquired through the exercise of subscription, option, or conversion rights, This restriction on voting rights does not apply to shareholders who were in pos- session of more than 5% of the shares of Burckhardt Compres- sion Holding AG before the IPO. There is no provision for mea- sures 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 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 the latest 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, he/she will be under an obligation to submit a public ten- der offer. The Bylaws contain neither an opting-out nor an opt- ing-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 invita- tion 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 2019 | BURCKHARDT COMPRESSION 8.2. Auditor’s fees Total fees for auditing services provided by PwC worldwide dur- ing fiscal year 2019 amounted to TCHF 343 (previous year: TCHF 327). 8.3. Additional fees The additional fees for services provided by PwC worldwide during fiscal year 2019 are in the amount of TCHF 0 (previous year: TCHF 80). 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 semi-annual 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 meetings lasting 2, respectively 3 hours each during the 2019 reporting period, in which the auditor in charge and another representative 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 semi-annual basis, together with comments on the trend of business and the outlook for the future. Burckhardt Compression Holding AG provides price-sen- sitive 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 email 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 2020 and 2021 July 3, 2020 Annual General Meeting November 4, 2020 Results for the first half of 2020 (closing September 30, 2020) November 4, 2020 Investor Day June 1, 2021 2020 Annual Report (closing March 31, 2021) July 3, 2021 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 email distribution list. COMPENSATION REPORT | ANNUAL REPORT 2019 | 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, together with 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 6, 2019 elected Dr. Monika Krüsi and Dr. Stephan Bross to the Nomination and Compensation Com- mittee. The Board of Directors appointed Dr. Monika Krüsi Chair of the Nomination 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 on meeting topics that pertain to themselves. The Nomination and Compensation Committee held three 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 (www.burck hardtcompression.com/corporate-governance). 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 Hold- ing AG casts the following votes in relation to the compensa- tion 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 consultative 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 Executive Board Loans to members of the Executive Board NCC NCC NCC NCC CEO BOD BOD BOD BOD NCC 68 COMPENSATION REPORT | ANNUAL REPORT 2019 | 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 based on Willis Towers Wat- son’s Global 50 Remuneration Planning Report and the results of annual executive performance appraisals are taken into con- sideration 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. A new annual bonus plan for the Executive Board went into effect in fiscal year 2018. The annual bonus is calculated as the mathematical product of three values: the consolidated net income of Burckhardt Compression Group, a percentage rate based on the Global Grade and a goal attain- ment factor. 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 0.12% to 0.16%. The goal attainment factor for the CEO, the CFO and the CHRO is based on the achievement of a goal for the Return On Net Operating Assets (RONOA) of Burckhardt Compression Group. For the heads of the two divisions the factor is based on the achievement of a goal for divisional operating profit. The goal attainment factor ranges from 0 to 1.5. If the defined goal is achieved, the goal achievement factor 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 450’000 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 number of free shares for the fiscal years 2017, 2018, and 2019, depending on the attainment of the goals. These free shares will be dis- tributed at the end of July 2020. The second distribution of free shares for the fiscal years 2020, 2021, and 2022 will be distrib- uted at the end of July 2023, provided the employment con- tract for the respective Executive Board members 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 aver- age 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 2019 | BURCKHARDT COMPRESSION 69 Fees 144 91 101 91 68 23 518 Fees 144 91 101 91 91 518 Social insurance contributions and other benefits 18 10 11 4 9 3 55 Social insurance contributions and other benefits 17 10 10 4 10 51 2019 Total 162 101 112 95 77 26 573 5803 2018 Total 161 101 111 95 101 569 5804 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 2019 and 2018: in CHF 1’000 Name Function Members of the Board of Directors Valentin Vogt Chairman Urs Leinhäuser Dr. Monika Krüsi Dr. Stephan Bross David Dean1 Hans Hess2 Total Member Member Member Member Deputy Chairman Approved by the 2018 AGM for fiscal year 2019 in CHF 1’000 Name Function Members of the Board of Directors Valentin Vogt Chairman Urs Leinhäuser Dr. Monika Krüsi Dr. Stephan Bross Hans Hess Total Member Member Member Deputy Chairman Approved by the 2017 AGM for fiscal year 2018 1 From July 7, 2019 2 Until July 6, 2019 3 This amount includes a contingency reserve of CHF 11’000. 4 This amount includes a contingency reserve of CHF 9’000. The total fixed compensation in the fiscal year under review is almost unchanged from the previous fiscal year. The Annual General Meeting of July 6, 2018 approved aggregate fixed com- pensation in the amount of CHF 580’000 (gross, incl. social insurance contributions) for the Board of Directors (5 persons) for fiscal year 2019. The amount of compensation actually paid was CHF 7’000 less than the approved amount. 70 COMPENSATION REPORT | ANNUAL REPORT 2019 | 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 2019 and 2018: in CHF 1’000 Name Function Executive Board Marcel Pawlicek CEO Other members of the Executive Board Total Approved by the 2018 AGM for fiscal year 2019 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 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 2019 Total 431 1’210 1’641 111 271 382 542 1’481 2’023 2’1202 107 285 392 98 231 329 45 104 149 250 620 870 792 2’1011 2’893 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 2’1204 84 161 245 105 177 282 40 65 105 229 403 632 770 1’7883 2’558 1 This amount includes Rainer Dübi’s compensation for the 2019 fiscal year and pro rata compensation for Martin Wendel until August 31, 2019. 2 This amount includes a contingency reserve of CHF 250’000. 3 This amount includes Martin Wendel’s compensation for the 2018 fiscal year as well as pro rata compensation for Rainer Dübi from February 15, 2019. 4 This amount includes a contingency reserve of CHF 250’000. The CEO’s fixed compensation for the period under review is comparable to the level from the previous fiscal year. The total amount of fixed compensation for the other members of the Executive Board is CHF 96’000 more than in the prior-year period. This is because fixed compensation was paid to 6 per- sons during the first 5 months of the reporting period. The Annual General Meeting of July 6, 2018 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 2019. The amount of fixed compensation actually paid (gross, including social insurance contributions) was CHF 97’000 less than the approved amount. The annual bonus for the Executive Board in fiscal year 2019 was CHF 147’000 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, because the targets set in conjunction with the Group and divisional factors described above were exceeded and because 6 persons were drawing a base salary during the first 5 months of the reporting period. Personnel expenses for the Executive Board’s long-term incentive pay rose by CHF 47’000 from the previous year. The provision made for the long-term incentive pay has been adjusted for two rea- sons: firstly, on the basis of an assessment of business perfor- mance over a multi-year period; secondly, in accordance with Swiss GAAP FER, the related expenses must be allocated over the program’s vesting period, which can lead to adjustments within individual fiscal years. The total variable compensation for the individual members of the Executive Board for the period under review ranged from 28% to 33% of total compensation. COMPENSATION REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 71 6. OVERVIEW OF SHAREHOLDINGS AND DISTRIBUTED SHARES 6.1. Detailed overview of distributed shares In the fiscal years 2018 and 2019 the following shares were distributed: Name Function Members of the Board of Directors Valentin Vogt Chairman Urs Leinhäuser Dr. Monika Krüsi Member Member Dr. Stephan Bross Member David Dean1 Hans Hess2 Total Member Deputy Chairman Executive Board Marcel Pawlicek CEO Other members of the Executive Board Total3 Total 1 From July 7, 2019 2 Until July 6, 2019 3 Shares are not allocated or are not distributed under the long-term incentive pay program every year. Shares distributed in FY 2018 Shares distributed in FY 2019 75 45 45 45 0 45 255 0 0 0 255 104 63 63 63 0 15 308 0 0 0 308 72 COMPENSATION REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 6.2. Detailed overview of shareholdings As per March 31, 2020, 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 Function Members of the Board of Directors Valentin Vogt Chairman Urs Leinhäuser Dr. Monika Krüsi Dr. Stephan Bross David Dean1 Hans Hess2 Total Executive Board Marcel Pawlicek Rolf Brändli Sandra Pitt Fabrice Billard Rainer Dübi3 Total Member Member Member Member Deputy Chairman CEO CFO CHRO President Systems Division President Services Division Total Board of Directors and Executive Board As a % of all outstanding shares 1 From July 7, 2019 2 Until July 6, 2019 3 Executive Board member as of February 15, 2019 03/31/2020 Total shares 03/31/2019 Total shares 203’392 1’643 1’048 278 355 NA 206’716 42’111 1’702 278 600 600 45’291 203’288 1’080 985 215 NA 5’663 211’231 42’111 1’702 278 400 600 45’091 252’007 256’322 7.4% 7.5% COMPENSATION REPORT | ANNUAL REPORT 2019 | 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 2019. No signing bonuses were paid during the fiscal year 2019. 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. 8. MOTIONS FOR THE ANNUAL GENERAL MEETING 8.1. Approval of the maximum aggregate amount of variable compensation for the Executive Board for fiscal year 2019 The Board of Directors proposes that an aggregate amount of CHF 870’000 (gross, including social insurance contributions and other benefits) be approved as variable compensation for the Executive Board for fiscal year 2019. 8.2. Consultative vote on the Compensation Report for fiscal year 2019 The Board of Directors proposes that shareholders approve the Compensation Report for fiscal year 2019 in a consultative vote. 8.3. Approval of the maximum aggregate amount of fixed compensation for the members of the Board of Directors for fiscal year 2020 The Board of Directors proposes that a maximum aggregate amount of CHF 640’000 (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 15’000. 8.4. Approval of the maximum aggregate amount of fixed compensation for the members of the Board of Directors for fiscal year 2021 The Board of Directors proposes that a maximum aggregate amount of CHF 650’000 (gross, including social insurance con- tributions and other benefits) be approved as fixed compensa- tion for the Board of Directors for fiscal year 2021. The proposed amount includes a contingency reserve of CHF 11’000. 8.5. Approval of the maximum aggregate amount of fixed compensation for members of the Executive Board for fiscal year 2021 The Board of Directors proposes that a maximum aggregate amount of CHF 2’200’000 (gross, including social insurance contributions and other benefits) be approved as fixed compen- sation for the Executive Board for fiscal year 2021. The pro- posed sum includes a contingency reserve of CHF 200’000. 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. The Nomination and Compensation Committee benchmarked independently market levels of board compensation and bene- fits during the year under review. Thirteen listed Swiss machin- ery manufacturers1 were selected for the benchmarking pur- poses. The compensation received by the Chairman of the Board of Directors of Burckhardt Compression was well below the benchmark level. In order to adjust the compensation received by the Chairman of the Board, a proposal adjusting the total amount of fixed compensation for the Board of Directors will therefore be submitted to the pending Annual General Meeting. A compensation benchmark based on external salary sur- veys compiled by Willis Towers Watson and presented in its Global 50 Remuneration Planning Report is one element of the integrated compensation system for the Executive Board. In the year under review, Willis Towers Watson was retained by the Nomination and Compensation Committee to review the global grades of the Executive Board functions and to conduct a compensation benchmark review. This benchmark review was based on a selection of 13 listed Swiss machinery manufactur- ers1. Willis Towers Watson was given no other mandates in the year under review. The Board of Directors decided in fiscal year 2019 to adjust the annual bonus system for the Executive Board beginning in fiscal year 2020. Annual bonus amounts will be calculated from fiscal year 2020 on by multiplying the net profit of the Burckhardt Com- pression Group by the fixed percentage of the global grade of each Executive Board member. Group and divisional factors will no longer be used in the calculations of compensation. 1 The 13 companies are: Starrag, Meyer Burger, Gurit, Komax, Burkhalter, Interroll, Belimo, Zehnder, Feintool, Phoenix Mecano, Bossard, Huber & Suhner and Schweiter. 74 COMPENSATION REPORT | ANNUAL REPORT 2019 | 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 2020. 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 to 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. Opinion In our opinion, the remuneration report of Burckhardt Compression Holding AG for the year ended 31 March 2020 complies with Swiss law and articles 14–16 of the Ordinance. PricewaterhouseCoopers AG Beat Inauen Audit expert Auditor in charge Winterthur, 27 May 2020 Oliver Illa Audit expert 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 2019 | BURCKHARDT COMPRESSION 75 76 FINANCIAL REPORT Burckhardt Compression Holding AG’s fiscal year 2019 com- prises the period from April 1, 2019 to March 31, 2020. 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 2019 2018 Change 2018/2019 607’303 629’585 149’785 54’795 8.7% 39’871 883’002 317’506 9.56 2’621 658’675 599’280 135’677 44’507 7.4% 32’201 848’732 345’034 8.15 2’346 –7.8% 5.1% 10.4% 23.1% 23.8% 4.0% –8.0% 17.3% 11.7% SALES AND GROSS PROFIT OPERATING INCOME Sales in the 2019 fiscal year increased by 5.1% to CHF 629.6 mn. Excluding the effects of currency translation and acquisitions, year-on-year sales growth was 3.9%. Sales at the Service Divi- sion rose by 7.8% to CHF 241.3 mn (excl. acquisitions +0.1%), while the Systems Division reported a 3.4% increase to CHF 388.3 mn on the back of a high order backlog entering the year and strong growth in China. Sales grew mainly across the regions China, other Asia & Australia and North America. Gross profit of CHF 149.8 mn topped the prior-year figure of CHF 135.7 mn by 10.4% and the resulting gross profit margin was 23.8% (previous year: 22.6%). The gross margin at the Systems Division improved to 11.0% (previous year: 8.1%), despite the recognition of the remaining cost overruns in connection with the LNGM business, which amounted to approximately CHF 10 mn in the fiscal year under review. Gross profit at the Services Division rose by 1.7% to CHF 107.0 mn, resulting in a gross profit margin of 44.3% (prior year: 47.0%). The lower gross margin is mainly resulting from the lower margin contribution from Arkos Field Services. Operating income increased by CHF 10.3 mn to CHF 54.8 mn, yielding an EBIT-margin of 8.7% of sales (previous year: 7.4%). Selling and marketing expenses together with general adminis- trative expenses were amounting to 14.8% of sales (prior year: 14.4%), including several one-off expenses such as consulting and legal fees in the context with the acquisition of the remain- ing 60% of Arkos and the acquisition of the compressor business of JSW. Other operating income was amounting to CHF 8.7 mn, mainly with contributions from the real estate company in Winterthur (Burckhardt Compression Immobilien AG) and from government grants to Shenyang Yuanda Compressor in China. Research and development expenses were amounting to CHF 10.5 mn (last year: CHF 8.7 mn). FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 77 FINANCIAL INCOME AND TAX EXPENSES CASH FLOW The share of results in associates is fully related to Arkos Field Services, of which Burckhardt Compression held a 40% minor- ity interest only until the end of November 2019. Despite the reduced period of eight months, the negative contribution dou- bled compared to last year to CHF –2.5 mn due to a large extent to significant expenses and lawyer’s fees in the context with the legal dispute around the execution of the call option. Finan- cial expenses rose to CHF 4.7 mn (prior year: CHF 2.2 mn), mainly as a result of the slightly higher average interest rate on financial liabilities (1.8% vs. 1.6% in the prior year) and foreign exchange losses on intercompany loans. Income tax expenses lowered to CHF 7.7 mn compared to CHF 8.9 mn the year before. The resulting tax rate declined to 16.2% (previous year: 21.6%), as an effect of the one-off reduction of income tax expenses in Switzerland due to an according tax reform and some other positive tax effects such as the higher share of taxable income in locations with tax exemptions. Cash and cash equivalents totaled CHF 90.3 mn by the end of fiscal year 2019, CHF 7.3 mn above the prior year. Cash flow from operating activities increased by CHF 8.9 mn to CHF 50.7 mn. The net cash outflow from investing activities was with CHF 49.7 mn, CHF 41.9 mn above the prior-year period (CHF –7.8 mn), including CHF 15.8 mn for the acquisition of the 60% stake in Arkos Field Services and the cash out for the assets under construction in the context with the relocation project of Shenyang Yuanda Compressor in China. Dividends paid were amounting to CHF 22.3 mn, CHF 1.9 mn more than last year. The net financial position (net debt) lowered to CHF –91.7 mn (prior year: CHF –49.4 mn), mainly due to the higher net working capital, the relocation project at SYCC, for which the main part of the Government subsidies will be paid upon completion only, and the acquisition of the remaining 60% of Arkos. NET INCOME Net income in fiscal year 2019 rose by 23.8% y-o-y to CHF 39.9 mn or 6.3% of sales (previous year: 5.4%). Due to the substantial positive contribution of Shenyang Yuanda Compressor (whose founder still holds a 40% stake in the company) to the Group’s net income, earnings per share attributable to shareholders of Burckhardt Compression noted a proportionally lower increase of 17.3% to CHF 9.56 (previous year: CHF 8.15). BALANCE SHEET The balance sheet total grew by 4.0% to CHF 883.0 mn. Prop- erty plant and equipment were totaling CHF 202.6 mn, mainly due to the higher amount of assets under construction related to the physical relocation project at Shenyang Yuanda Compres- sor in China and the full consolidation of Arkos Field Services. Inventories increased by CHF 42.4 mn to CHF 264.5 mn. Trade accounts receivables ended the fiscal year at CHF 256.1 mn, slightly below the prior year. 37.2% of the accounts receivables were overdue more than 60 days as per year-end (prior year: 38.0%). The majority of overdue positions are related to projects in China. The balance between advance payments from custom- ers compared to work in progress and advance payments to sup- pliers ended the year at CHF –47.0 mn (previous year: CHF –39.2 mn). The negative balance is also related primarily to projects in China with unfavorable payment terms. The equity ratio lowered to 36.0% (prior year: 40.7%), mainly as an effect of the acquisition of the remaining 60% of Arkos. As a result of the very high workload at year-end, total net working capital was amounting to CHF 230.6 mn (prior year: CHF 201.7 mn). FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION78 CONSOLIDATED INCOME STATEMENT Notes 2019 2018 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) 629’585 –479’800 149’785 –50’455 –42’753 –10’513 41’955 –33’224 54’795 –2’494 –4’741 47’560 –7’689 39’871 32’390 7’481 9.56 9.56 599’280 –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 7 8 8 14 9 10 11 11 The enclosed notes are an integral part of the consolidated financial statements. FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 79 CONSOLIDATED BALANCE SHEET Notes 03/31/2020 03/31/2019 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 12’943 202’632 – 14’513 4’034 234’122 264’479 256’121 33’377 4’584 90’319 648’880 11’369 191’188 11’539 9’061 27’689 250’846 222’045 261’113 28’482 3’236 83’010 597’886 883’002 848’732 8’500 435 –5’216 269’763 273’482 44’024 317’506 88’713 13’620 14’311 7’616 8’500 446 –1’582 295’100 302’464 42’570 345’034 64’742 15’348 14’074 7’401 124’260 101’565 93’259 91’337 145’297 13’895 77’122 20’326 441’236 67’666 86’731 129’233 36’510 60’881 21’112 402’133 565’496 503’698 883’002 848’732 FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 80 CONSOLIDATED CASH FLOW STATEMENT Notes 2019 2018 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 Purchase of treasury shares Dividends paid 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. 39’871 7’689 4’741 2’494 17’416 3’133 –36’129 5’331 –6’544 1’180 23’494 –70 1’947 2’455 227 –2’865 –13’627 50’743 –29’484 2’555 –4’851 –2’100 –15’783 – –49’663 43’010 –5’710 –3’735 –22’289 11’276 –5’047 7’309 83’010 90’319 7’309 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 FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY in CHF 1’000 Share capital Capital reserves Treasury shares Hedge reserve Translation reserve Goodwill offset 81 Other retained earnings Equity attributable to share- holders of Burckhardt Compression Holding AG 390’917 27’644 –20’361 –95 296’067 27’644 –1’778 –971 –20’361 – 1’863 1’863 Non- controlling interests Total equity 39’133 4’557 –1’120 335’200 32’201 –2’898 –971 – –20’361 – 1’863 302’464 32’390 –13’682 789 42’570 7’481 –4’101 345’034 39’871 –17’783 789 –20’363 –20’363 –1’926 –22’289 –3’735 – –90 2’948 2’948 –9’324 –9’324 –3’735 – 2’948 –9’324 8’500 421 –1’652 –434 2’145 –103’830 –1’778 –971 25 70 8’500 446 –1’582 –1’405 367 –103’830 399’968 302’464 42’570 345’034 8’500 446 –1’582 –1’405 367 –103’830 399’968 32’390 –13’682 789 –3’735 –11 101 8’500 435 –5’216 –616 –13’315 –121’835 405’529 273’482 44’024 317’506 –18’005 –18’005 –18’005 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 Balance at 04/01/2019 Result for the period Currency translation differences Changes of cash flow hedges Dividends paid Changes in treasury shares Share-based payments (distributed) Share-based payments (allocated) Revaluation of 40% Investment Arkos1 Goodwill on acquisition Balance at 03/31/2020 1 See note 4 “Business Combinations and Other Changes in the Scope of Consolidation” The enclosed notes are an integral part of the consolidated financial statements. FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION Burckhardt Compression is a manufacturer and service provi- der 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 reci- procating compressor systems. Burckhardt Compression Hol- ding AG is a company limited by shares incorporated and domic- iled 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 2019 com- prises the period from April 1, 2019 to March 31, 2020. These consolidated financial statements were authorized for issue by the Board of Directors on May 27, 2020 and will be submitted to shareholders for approval at the annual general meeting sched- uled for July 3, 2020. 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 disclo- sures. Actual results may differ from these estimates. Esti- mates and underlying assumptions are reviewed on an ongoing 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. When a company is acquired in a step up acquisition, the existing interest is reval- ued at the time when the company is first consolidated. The revaluation of shares previously owned is offset against retained earnings. Companies which have been divested are included in the consolidated financial statements until the date on which control ceased. Capital consolidation is based on the acquisition method (purchase method). At the time of the acqui- sition, all previously recognized 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 acquisi- tion is recognized in the income statement against the pro- ceeds 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 Assets 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. Translation differ- ences 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 2019 | BURCKHARDT COMPRESSION 83 Major Foreign Currency Exchange Rates Average rates 2019 1.10 0.99 14.16 Period-end rates 03/31/2020 03/31/2019 1.12 1.06 0.96 13.44 1.00 14.77 2018 1.15 0.99 14.77 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 amortization 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. prises 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 nominal value when there is reasonable assu- rance that the grant will be received, and Burckhardt Compres- sion will comply with all attached conditions. Government grants related to income are deferred and rec- ognized as income over the period necessary to match them with the related costs which they are intended to compensate. Gov- ernment grants related to assets are deducted directly from the carrying amount of the asset which they are intended to com- pensate. 2.9. Inventories Inventories are stated at the lower of cost or net realizable value. The cost of work in progress and finished goods com- 2.16. Derivative Financial Instruments Burckhardt Compression uses derivative financial instruments to mitigate currency risks. The risk management policy is described FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION84 in note 3. The derivative financial instruments are recognized at fair value. Where such derivative financial instruments 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 recognized 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-forwards, tax credits as well as temporary valuation differ- ences 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 ex- ample, 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 accor- dance 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 trea- sury 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 provi- des the local group companies with the necessary funds or in- vests 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- FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 85 denominated sales and purchase transactions of the Swiss com- pany are fairly evenly balanced when viewed over a period of 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 pur- chase transactions will be hedged on a case-by-case basis. For this, the group treasury normally uses forward exchange con- tracts. The other companies belonging to Burckhardt Compres- sion group may, after consultation with group treasury, hedge the foreign-exchange risks of their sales and purchase transac- tions through local qualified institutions or group treasury, 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 impor- tant currencies and may adjust the hedging policy accordingly in the future. As a globally active corporation, Burckhardt Com- pression 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 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 minimized by means of regular credit checks, advance pay- ments, letters of credit and other tools. There is no concentra- tion 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 monitored and managed centrally. Generally, only independently rated par- ties with a strong credit rating are accepted, and the total vol- ume 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 consol- idated 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 cer- tain extent from own cash flow. In order to achieve these objec- tives Burckhardt Compression can adjust the dividend pay- ments, repay share capital, issue new shares or divest parts of the assets. 4. BUSINESS COMBINATIONS AND OTHER CHANGES IN THE SCOPE OF CONSOLIDATION Arkos Group LLC (USA) On November 25, 2019, Burckhardt Compression acquired the remaining 60% shares of Arkos Group LLC, a well-established U.S. compression and equipment service provider in the field of gas compression. Together with the already existing interest of 40%, Burckhardt Compression now holds 100% of the US Com- pany. With the acquisition of the remaining ownership of Arkos, Burckhardt Compression together with Arkos Field Services will be the only independent one-stop provider for equipment and service in the upstream, midstream and downstream business. 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 Property, plant and equipment Inventories Deferred Tax Asset Trade receivables & Prepaid expenses Cash and cash equivalents Current liabilities Non-current liabilities Net assets acquired at fair value (excluding pre-existing relationships) Trade receivables & Prepaid expenses with BC Current liabilities with BC Non-current liabilities with BC Net assets acquired at fair value (including pre-existing relationships) Shares previously owned (40%) Goodwill Revaluation of shares previously owned Total Less cash and cash equivalents acquired Net cash outflow on acquisition 15’263 16’842 2’861 16’571 1’766 –11’901 –14’009 27’393 244 –2’664 –25’733 –760 –9’020 18’005 9’324 17’549 –1’766 15’783 The purchase price allocation for the acquisition of Arkos Group LLC is preliminary for up to 12 months after the acquisition date. Burckhardt Compression Tehran SSK (Iran) On November 2, 2018, Burckhardt Compression sold its subsid- iary 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. In fiscal year 2018 the effect on net income from the divestment amounted to CHF –0.6 mn. A complete list of all Group companies is shown in note 33. FINANCIAL REPORT | ANNUAL REPORT 2019 | 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 2019 2018 2019 2018 2019 2018 388’256 375’400 –345’482 –344’906 241’329 223’880 –134’318 –118’697 42’774 11.0% 6’443 1.7% 30’494 8.1% –8’669 –2.3% 107’011 44.3% 54’692 22.7% 105’183 47.0% 58’185 26.0% – – – – – – – – –6’340 – –5’009 – Total 2019 629’585 –479’800 149’785 23.8% 54’795 8.7% 2018 599’280 –463’603 135’677 22.6% 44’507 7.4% 2019 2018 Capital expenditure for property, plant and equipment in CHF 1’000 135’434 4’121 66’609 5’691 20’215 155’346 19’052 Europe Africa 43’843 North America 5’175 South America 34’484 Middle East 240’251 208’969 China 2019 2018 5’228 6 1’997 11 282 21’117 843 9’279 4 161 4 106 11’875 955 Other Asia & Australia 157’264 132’411 Other Asia & Australia Total 629’585 599’280 Total 29’484 22’384 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 2019 | 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 2019 2018 –151’390 –131’986 –24’253 –28’908 –16’188 –13’533 in CHF 1’000 Interest expenses Interest income Other financial income (+) and expenses (–) –196’486 –169’772 Total financial income and expenses 2019 2018 –3’760 –2’186 614 –1’595 863 –915 –4’741 –2’238 7. RESEARCH AND DEVELOPMENT EXPENSES Research and development activities in the fiscal year 2019 focused on the improvement of our marine solutions for new installations as well as for our service activities. Furthermore, we centered our activities on enhancing our compressor solutions for the hydrogen economy as well as our readiness to benefit from digital opportunities. Other financial income and expenses include the exchange rate gains and losses on intercompany loans. 1O. INCOME TAXES Income Tax Expenses in CHF 1’000 2019 2018 8. OTHER OPERATING INCOME AND EXPENSES Current income tax expenses Deferred income tax income (+) and expenses (–) –13’468 5’779 –9’418 558 Total income tax expenses –7’689 –8’860 in CHF 1’000 Currency exchange gains Other operating income Total other operating income Currency exchange losses Other operating expenses Total other operating expenses 2019 2018 26’016 15’939 14’271 14’380 41’955 28’651 –24’863 –8’361 –15’487 –9’082 –33’224 –24’569 Total other operating income and expenses 8’731 4’082 Other operating income includes the operating income of CHF 6.8 mn (prior year: CHF 6.6 mn) of the real estate company (Burckhardt Compression Immobilien AG). Other operating expenses include expenses amounting to CHF 3.3 mn (prior year: CHF 3.2 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 income tax of prior periods Effect of changes in tax rates Effect of non-deductible expenses / income not subject to tax Total income tax expenses as % of earnings before taxes 2019 2018 47’560 –8’333 –2’654 41’061 –8’489 –161 85 1’058 2’155 36 –99 –147 –7’689 16.2% –8’860 21.6% The effective tax rate of Burckhardt Compression Group of 16.2% (prior year: 21.6%) 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 and the tax reform in Switzerland. FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 88 Current Income Taxes 11. EARNINGS PER SHARE Net current income tax liabilities in CHF 1’000 2019 2018 in CHF 1’000 2019 2018 Net income attributable to the shareholders of Burckhardt Compression Holding AG Average number of outstanding shares Earnings per share (CHF) 32’390 3’386’838 27’644 3’393’911 9.56 8.15 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 04/01/2019 / 04/01/2018 Changes in the consolidation scope Recognized in the income statement Income taxes paid Translation differences Balance as per 03/31/2020 / 03/31/2019 thereof current tax assets thereof current tax liabilities 2’091 166 13’468 –13’627 –154 1’944 829 2’773 5’594 – 9’418 –12’872 –49 2’091 678 2’769 Deferred Income Taxes Net deferred income tax liabilities in CHF 1’000 2019 2018 Balance as per 04/01/2019 / 04/01/2018 Changes in the consolidation scope Recognized in the income statement Recognized in equity Translation differences Balance as per 03/31/2020 / 03/31/2019 thereof deferred tax assets thereof deferred tax liabilities 6’287 –2’861 –5’779 419 1’041 –893 14’513 13’620 6’728 – –558 –265 382 6’287 9’061 15’348 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 03/31/2020 03/31/2019 595 36’049 36’644 7’690 635 17’782 18’417 4’087 –2’718 –257 4’972 3’830 FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 12. INTANGIBLE ASSETS Acquisition Costs in CHF 1’000 Balance as per 04/01/2019 / 04/01/2018 Changes in the consolidation scope Additions Disposals Reclassifications Currency translation differences Software 29’630 – 1’540 –2’473 3’698 –403 Balance as per 03/31/2020 / 03/31/2019 31’992 Other intangible assets Intangible assets under construction 2019 Total Software Other intangible assets Intangible assets under construction 754 – 6 –36 –15 –77 632 2’495 – 3’305 – –3’683 –11 2’106 32’879 – 4’851 –2’509 – –491 30’091 – 1’552 –2’321 546 –238 34’730 29’630 770 –2 18 – – –32 754 2’072 – 976 – –546 –7 2’495 Accumulated Amortization in CHF 1’000 Software Other intangible assets Intangible assets under construction 2019 Total Software Other intangible assets Intangible assets under construction Balance as per 04/01/2019 / 04/01/2018 Changes in the consolidation scope Additions Disposals Reclassifications Currency translation differences –20’993 – –3’050 2’470 –15 291 –517 – –83 36 15 59 Balance as per 03/31/2020 / 03/31/2019 –21’297 –490 – – – – – – – –21’510 – –3’133 2’506 – 350 –19’308 – –4’058 2’221 – 152 –21’787 –20’993 –425 – –112 – – 20 –517 – – – – – – – 89 2018 Total 32’933 –2 2’546 –2’321 – –277 32’879 2018 Total –19’733 – –4’170 2’221 – 172 –21’510 Net Book Value in CHF 1’000 Software Other intangible assets Intangible assets under construction 2019 Total Software Other intangible assets Intangible assets under construction 2018 Total As per 04/01/2019 / 04/01/2018 As per 03/31/2020 / 03/31/2019 8’637 10’695 237 142 2’495 2’106 11’369 12’943 10’783 8’637 345 237 2’072 2’495 13’200 11’369 FINANCIAL REPORT | ANNUAL REPORT 2019 | 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. Goodwill from new acquisitions is fixed to Swiss francs using the closing rate at acquisition date. Therefore, there are no exchange rate differences in the movement sched- ules. The impact of the theoretical capitalization and amortiza- tion of goodwill is disclosed below. in CHF 1’000 Acquisition costs Balance as per 04/01/2019 / 04/01/2018 Additions from acquisitions Balance as per 03/31/2020 / 03/31/2019 in CHF 1’000 Accumulated amortization Balance as per 04/01/2019 / 04/01/2018 Amortization expense Balance as per 03/31/2020 / 03/31/2019 in CHF 1’000 Net book value Theoretical net book value as per 04/01/2019 / 04/01/2018 Theoretical net book value as per 03/31/2020 / 03/31/2019 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 2019 2018 103’830 18’005 121’835 2019 –68’290 –18’216 –86’506 2019 35’540 35’329 103’830 – 103’830 2018 –51’128 –17’162 –68’290 2018 52’702 35’540 03/31/2020 03/31/2019 317’506 35’329 352’835 2019 39’871 –18’216 21’655 345’034 35’540 380’574 2018 32’201 –17’162 15’039 FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 91 13. PROPERTY, PLANT & EQUIPMENT Acquisition Costs in CHF 1’000 Balance as per 04/01/2019 / 04/01/2018 Changes in the consolidation scope Additions Disposals Reclassifications Land and buildings Machinery and equipment Other business assets Assets under con struction 2019 Total Land and buildings Machinery and equipment Other business assets Assets under con struction 2018 Total 165’526 128’508 28’568 3’234 11’285 – 8’145 745 330’748 164’158 122’172 –253 15’263 – – 3’919 3’367 15’982 23’268 8’055 –4’439 –1’079 –3’584 –44 –9’146 –5’932 1’185 1’493 262 –216 338 5’399 –668 2’918 –3’156 –1’484 27’317 –87 2’157 –573 150 –396 4’895 – 6’773 – –3’406 318’542 –340 22’384 –7’173 – –117 –2’665 Currency translation differences –4’851 –3’834 –1’648 –11’817 –1’093 –1’060 Balance as per 03/31/2020 / 03/31/2019 168’706 129’007 30’199 20’188 348’100 165’526 128’508 28’568 8’145 330’748 Accumulated Depreciation in CHF 1’000 Balance as per 04/01/2019 / 04/01/2018 Changes in the consolidation scope Land and buildings Machinery and equipment Other business assets Assets under con struction 2019 Total Land and buildings Machinery and equipment Other business assets Assets under con struction 2018 Total –34’340 –84’374 –20’846 – – – Additions Disposals Reclassifications –4’751 –9’717 –2’948 2’387 1’014 3’190 216 – – Currency translation differences 1’262 2’350 1’089 Balance as per 03/31/2020 / 03/31/2019 –35’226 –90’727 –19’515 – – – – – – – –139’560 –30’992 –75’622 –18’758 12 – 35 – –17’416 –4’938 –9’849 –2’880 6’591 1’249 216 4’701 –2 343 491 –63 634 438 65 277 –145’468 –34’340 –84’374 –20’846 – – – – – – – –125’372 47 –17’667 2’178 – 1’254 –139’560 Net Book Value in CHF 1’000 Land and buildings Machinery and equipment Other business assets Assets under con struction 2019 Total Land and buildings Machinery and equipment Other business assets Assets under con struction 2018 Total As per 04/01/2019 / 04/01/2018 As per 03/31/2020 / 03/31/2019 131’186 7’722 44’134 133’480 38’280 10’684 8’145 20’188 191’188 133’166 46’550 44’134 202’632 131’186 8’559 7’722 4’895 8’145 193’170 191’188 Relocation Shenyang Yuanda Compressor Co. Ltd (SYCC) Back 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 has been purchasing and building new PPE and at the same time giving back existing PPE to the Chinese government. The whole transaction is subsidized by the Chinese Government. In fiscal year 2019, SYCC invested more than CHF 17 mn for this project. Overall SYCC in the period 2018 to 2020 will invest more than CHF 30 mn for this project. Once the relocation project is com- pleted land use rights, buildings and machinery that were built or acquired in the course of the relocation project will be offset with the subsidies received by the government (Netting of assets and liabilities). FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 92 14. INVESTMENTS IN ASSOCIATES in CHF 1’000 Balance as per 04/01/2019 / 04/01/2018 Changes in the consolidation scope Share of net results Currency translation differences Balance as per 03/31/2020 / 03/31/2019 15. OTHER FINANCIAL ASSETS Other financial assets mainly include time deposits. In the prior year other financial assets included a promissory note from Arkos Group companies amounting to CHF 18.3 mn and loans to Arkos Group companies amounting to CHF 6.0 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, 2020 of CHF –47.0 mn (prior year: CHF –39.2 mn). 2019 11’539 –9’020 –2’494 –25 – 2018 12’249 – –1’208 498 11’539 03/31/2020 03/31/2019 33’608 164’648 55’017 27’607 –16’401 264’479 24’033 139’565 42’249 28’894 –12’696 222’045 FINANCIAL REPORT | ANNUAL REPORT 2019 | 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 04/01/2019 / 04/01/2018 Changes in the consolidation scope Additions Release Utilization Currency translation adjustments Balance as per 03/31/2020 / 03/31/2019 93 03/31/2020 03/31/2019 265’032 –8’911 256’121 2019 –8’343 – –3’195 1’614 252 761 –8’911 269’456 –8’343 261’113 2018 –9’977 – –2’655 2’658 1’391 240 –8’343 The allowance for bad debts at the end of the 2019 and 2018 fis- cal years was entirely related to accounts receivables which were more than 90 days overdue as per closing date. in CHF 1’000 Maturity 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 03/31/2020 / 03/31/2019 03/31/2020 03/31/2019 129’255 17’170 14’410 9’348 85’938 256’121 50.5% 6.7% 5.6% 3.6% 33.6% 100.0% 124’311 19’853 17’766 16’984 82’199 261’113 47.6% 7.6% 6.8% 6.5% 31.5% 100.0% Trade receivables overdue more than 90 days are mainly related to projects in China. FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 94 18. OTHER CURRENT RECEIVABLES 20. FINANCIAL LIABILITIES 03/31/2020 03/31/2019 03/31/2020 03/31/2019 in CHF 1’000 Notes receivable VAT receivables Derivative financial instruments Current tax assets Other current receivables Total other current receivables 15’497 7’483 620 829 8’948 33’377 4’811 8’550 2’198 678 12’245 28’482 19. SHARE CAPITAL AND TREASURY SHARES in CHF 1’000 Non-current financial liabilities Current financial liabilities Total financial liabilities 88’713 93’259 64’742 67’666 181’972 132’408 The average effective interest rate amounted to 1.8% in fiscal year 2019 (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 2019 (same as prior year). 03/31/2020 03/31/2019 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 July 6, 2021 by issuing a maxi- mum of 510’000 fully paid registered shares with a nominal va- lue of CHF 2.50 each (authorized capital). At the upcoming annual general meeting of shareholders on July 3, 2020, the Board of Directors of Burckhardt Compression Holding AG will propose a dividend for the 2019 fiscal year of CHF 6.00 (prior year: CHF 6.00). in CHF 1’000 03/31/2020 03/31/2019 Financial liabilities in CHF Financial liabilities in USD Financial liabilities in other currencies 129’350 33’554 19’068 60’650 62’716 9’042 Total financial liabilities 181’972 132’408 Burckhardt Compression’s real estate company (Burckhardt Compression Immobilien AG), which uses the Swiss franc as functional currency, switched a mortgage loan from USD into CHF. Maturities of Non-Current Financial Liabilities As of March 31, 2020, non-distributable reserves amounted to CHF 1.7 mn (prior year: CHF 1.7 mn). in CHF 1’000 03/31/2020 03/31/2019 Number of treasury shares 21’616 5’999 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 03/31/2020 03/31/2019 15’693 16’267 2’395 2’106 52’252 88’713 13’252 7’958 206 86 43’240 64’742 FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 95 21. PROVISIONS in CHF 1’000 Balance as per 04/01/2019 / 04/01/2018 Changes in the consolidation scope Additions Release Utilization Currency translation differences Balance as per 03/31/2020 / 03/31/2019 Employee- related Warranties, penalties, unprofitable contracts 7’369 772 3’666 –3’000 –308 –427 8’072 24’061 302 6’155 –1’314 –3’502 –910 24’792 Other 2019 Total Employee- related Warranties, penalties, unprofitable contracts Other 2018 Total 3’756 – 693 –2’379 –81 –216 35’186 1’074 10’514 –6’693 –3’891 –1’553 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 1’773 34’637 7’369 24’061 3’756 35’186 Thereof non-current Thereof current 4’984 3’088 9’164 15’628 163 1’610 14’311 20’326 5’225 2’144 8’696 15’365 153 3’603 14’074 21’112 Employee-related provisions include employee benefit obliga- tions (see 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 project (see 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 2’471 1’148 421 2’773 7’082 13’895 11’321 2’410 2’330 2’769 17’680 36’510 Other current liabilities mainly consist of various social securi- ties payables as well as various taxes payables such as VAT or withholding taxes. In the previous year other current liabilities mainly consisted of various government grants in China in the context of the relocation process (see note 13). 24. ACCRUED LIABILITIES AND DEFERRED INCOME in CHF 1’000 Contract-related liabilities Vacation and overtime Salary and bonus payments 03/31/2020 03/31/2019 Miscellaneous Total accrued liabilities and deferred income 03/31/2020 03/31/2019 57’033 3’478 10’272 6’339 77’122 44’504 3’585 8’045 4’747 60’881 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 03/31/2020 03/31/2019 85’803 620 421 178’319 2’198 2’330 FINANCIAL REPORT | ANNUAL REPORT 2019 | 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 Hold- ing 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 03/31/2020 03/31/2019 178’904 331’635 169’666 106’928 510’539 276’594 Other Contingent Liabilities Burckhardt Compression owns 60% of Shenyang Yuanda Com- pressor 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 current ow- ner. On the one hand, Burckhardt Compression has received call options on the remaining 40% stake of Shenyang Yuanda Com- pressor 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 Compressor Co. Ltd. are currently not exercisable. As the options do not meet the recognition criteria for an asset or a liability, they are not recognized on Burckhardt Compression’s balance sheet. Operating Leases in CHF 1’000 03/31/2020 03/31/2019 Operating leases due in less than 1 year Operating leases due in 1 to 5 years Operating leases due in more than 5 years 2’930 11’467 5’831 2’739 7’956 1’710 Total operating lease commitments 20’228 12’405 Purchase commitments Purchase commitments for capital expenditure as per March 31, 2020 amounted to CHF 11.1 mn (prior year: CHF 10.5 mn). The purchase commitments are mainly connected to the relocation activities in Shenyang (see note 13). 28. PLEDGED ASSETS As per March 31, 2020, Burckhardt Compression had pledged assets with a carrying amount of CHF 135.5 mn (prior year: CHF 119.5 mn) to secure mortgage loans and guarantees. The pledged assets consisted mainly of land and buildings, and to a lesser degree of inventories and trade 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 in place. 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 2019, 383 shares at a fair value of CHF 235 were granted to participants of the long-term incentive plan. In 2018, partici- pants of the long-term incentive plan were granted 268 shares at a fair value of CHF 358. Personnel expenses in 2019 for share-based payments amounted to CHF 2.9 mn (prior year: CHF 1.9 mn). FINANCIAL REPORT | ANNUAL REPORT 2019 | 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 2019 and 2018 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 until November 25, 2019). in CHF 1’000 2019 2018 Sales of goods and services Purchase of goods and services 3’285 317 3’290 591 The following balances with associated companies (mainly Arkos Group companies until November 25, 2019) were out- standing as of the balance sheet date. 03/31/2020 03/31/2019 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, 2019 amounted to 117.1% (SVE; prior year: 109.6%) and 116.2% (JJS; prior year: 105.6%). The technical interest rate used by both collective plans amounted to 2.0% (prior year: 2.0%). in CHF 1’000 Receivables Payables – – 25’348 65 Employer Contribution Reserves Burckhardt Compression does not have any employer contribu- tion reserves. In the prior year receivables included a promissory note from Arkos Group companies with a carrying amount of CHF 18.3 mn and loans to Arkos Group companies with a carrying amount of CHF 6.0 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 On April 17, 2020, Burckhardt Compression acquired the global compressor business from the Japan Steel Works Ltd. (JSW), a Japanese business based in Tokyo. With the acquisition of the global compressor business from JSW Burckhardt Compression is strengthening its market presence in Japan. The purchase price for the acquisition was CHF 23.5 mn and settled in cash. At the time of approval of the consolidated financial statements, the process to determine the fair values of identifiable assets and liabilities of JSW was not yet com- pleted. 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 03/31/2020 – 03/31/2019 – –1’927 –1’927 –2’121 –2’121 Change to prior year period recog- nized in the current result of the period 2019 – 83 83 Currency translation differences Contributions of the fiscal year Pension benefit expenses 2019 – 111 111 2019 –7’987 – –7’987 2019 –7’987 83 –7’904 2018 –7’230 3 –7’227 FINANCIAL REPORT | ANNUAL REPORT 2019 | 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. Bicester, United Kingdom Burckhardt Compression (US) Inc. Houston, USA Burckhardt Compression (Canada) Inc. Mississauga, Canada Burckhardt Compression (Japan) Ltd. Tokyo, Japan Burckhardt Compression (Shanghai) Co. Ltd. Shanghai, China Burckhardt Compression (India) Private Ltd. Pune, India Burckhardt Compression (Brasil) Ltda. São Paolo, Brazil Burckhardt Compression (Middle East) FZE Burckhardt Compression Korea Ltd. Dubai, United Arab Emirates Seoul, South Korea Burckhardt Kompresör San. ve Tic. Ltd. Istanbul, Turkey Burckhardt Compression Singapore Pte Ltd. Singapore, Singapore Burckhardt Compression South Africa (Pty) Ltd. Sunnyrock, South Africa Burckhardt Compression Korea Busan Ltd. Burckhardt Compression (Saudi Arabia) LLC Burckhardt Compression North America Service LLC Busan, South Korea Dammam, Saudi Arabia Wilmington, USA CSM Compressor Inc. Edmonton, Canada 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 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 2019 | BURCKHARDT COMPRESSION 99 s e l a S e c i v r e S • • • • • • • • • • • • • • • • • • • • 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 • • • • • • • • • • Company Registered office Registered capital Interest in capital Shenyang Yuanda Compressor Co. Ltd. 1 Shenyang, China Liaoning Yuanyu Industrial Machinery Co. Ltd. Kaiyuan, China Shenyang Yuanda Compressor Automatic Control System Co. Ltd. 2 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 Shenyang, China Shenyang, China Shenyang, China Shenyang, China Shenyang, China Compressor Tech Holding AG 1 Zug, Switzerland PROGNOST Systems GmbH Rheine, Germany PROGNOST Systems Inc. Houston, USA PROGNOST Machinery Diagnostics Equipment and Services LLC Société d’Application du Métal Rouge SAS Abu Dhabi, United Arab Emirates Pont Sainte Marie Cedex, France Arkos Group LLC Houston, USA Arkos Field Services, LP Houston, USA Arkos Realty & Investments, LP 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 AED 300’000 EUR 501’000 USD 26’250’000 - - 60% 60% 36% 60% 60% 24% 24% 100% 100% 100% 100% 100% 100% 100% 100% 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 2019 | 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 2020, the Consolidated Balance Sheet as at 31 March 2020, 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 December 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 2'450'000 Materiality We concluded full scope audit work at five reporting units in four countries. Our audit scope addressed over 68% of the Group's sales. As key audit matters the following areas of focus have been identified: Accounting for work in progress of the systems division Audit scope Acquisition of Arkos Group Key audit matters 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 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 2019 | BURCKHARDT COMPRESSION 101 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 2'450'000 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 considera- tions. 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 245'000 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. 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 2020, work in progress from systems division projects in the amount of CHF 164.6 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 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 Burckhardt Compression Holding AG | Report of the statutory auditor to the General Meeting FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 102 incorrect estimate could have a significant impact on the result for the period. planning phase, and focussed our testing on the following: Please refer to page 83 (Accounting policies – Inventories) and page 92 (Inventories) in the notes to the Group financial statements. – 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 inspections 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 2019 consolidated financial statements. Burckhardt Compression Holding AG | Report of the statutory auditor to the General Meeting FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION Acquisition Arkos Group Key audit matter How our audit addressed the key audit matter 103 On 25 November 2019, Burckhardt Compression Group acquired the remaining 60% of the shares of Arkos Group, headquartered in Waller, USA. The assessment of the acquisition of the Arkos Group was deemed a key audit matter because of the critical estimates made by Management concerning the purchase price allocation in the opening balance sheet. Please refer to page 85 (Busines combinations and other Changes in the Scope of Consolidation) We assessed whether the amounts reported on the opening balance sheet as at 25 November 2019 had been identified in line with the share purchase agreement and recognised in line with the provisions of Swiss GAAP FER 30 “Consolidated financial statements”. We performed procedures including the following: • We identified significant components within the Arkos Group and performed procedures in order to assess the existence, completeness and valuation of the net assets. Furthermore, we assessed the adjustments between the book values determined under the accounting framework previously applied by Arkos Group and those in accordance with Swiss GAAP FER. • We assessed the appropriateness of the method used to reflect the acquisition. • We assessed the qualification and independence of the expert engaged by Burckhardt Compression Group to determine the value of the properties owned by the Arkos Group. • In addition, we assessed whether the transaction was accounted for and disclosed in the financial statements in accordance with the provision of Swiss GAAP FER 30 “Consolidated financial statements”. Our audit procedures are appropriate to corroborate Management’s allocation of the purchase price to the identifiable assets and liabilities measured at fair value and Management’s disclosure of the purchase of the Arkos Group in the 2019 consolidated financial statements. 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. Burckhardt Compression Holding AG | Report of the statutory auditor to the General Meeting FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 104 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, 27 May 2020 Oliver Illa Audit expert Burckhardt Compression Holding AG | Report of the statutory auditor to the General Meeting FINANCIAL REPORT | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION  FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR 105 BALANCE SHEET in CHF 1’000 Current assets Cash and cash equivalents Other current receivables due from third parties 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 Short-term loans from gruop companies 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 Income from services provided to group companies Total income Expenses Operating expenses Direct Taxes Total expenses Net income Notes 03/31/2020 03/31/2019 102 103 104 664 7 671 363 12 375 32’500 171’781 204’281 26’000 171’781 197’781 204’952 198’156 2 4 167 155 300 628 8’500 1’700 168’883 30’457 –5’216 204’324 2 4 120 165 – 291 8’500 1’700 166’691 22’556 –1’582 197’865 204’952 198’156 2019 2018 31’293 294 192 31’779 –1’262 –60 –1’322 23’280 249 192 23’721 –1’103 –62 –1’165 30’457 22’556 FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 106 NOTES TO THE FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG 101 Accounting policies The financial statements as per March 31, 2020 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 2019 com- prises the period from April 1, 2019 to March 31, 2020. 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 July 6, 2021 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, 2020, 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, 2020 (accord- ing to the statutory bylaws the voting rights of NN Group N.V., and Atlantic Value General Partner Ltd. (Mondrian) are limited to 5% of the total number of the registered BCHN shares recorded in the commercial register): FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION107 03/31/2020 03/31/2019 % of shares 12.40 10.31 5.03 3.49 3.24 3.05 3.04 3.01 < 3.00 % of shares 12.40 6.93 5.03 3.49 3.03 < 3.00 < 3.00 3.01 6.13 Country CH NL GB US CH CH US CH US 2019 2018 5’999 16’000 –383 21’616 6’267 0 –268 5’999 Shareholders Name MBO shareholder pool (Valentin Vogt, Harry Otz, Leonhard Keller, Martin Heller, Ursula Heller, Marcel Pawlicek) NN Group N.V. Atlantic Value General Partner Limited (Mondrian) Ameriprise Financial Inc. Credit Suisse Funds AG Vontobel Fonds Services AG BlackRock, Inc. UBS Fund Management (Switzerland) AG J O Hambro Capital Management Limited The number of shares held by the members of the Executive Board and the non-executive members of the Board of Directors (and related persons) as per March 31, 2020 are shown under point 6.2 within the compensation report. 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 263.63. FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 108 105 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 03/31/2020 03/31/2019 0 0 03/31/2020 03/31/2019 0 0 03/31/2020 03/31/2019 Forward foreign exchange contracts (negative current fair value on cash flow hedge) 0 0 Guarantees in CHF 1’000 Guarantees 03/31/2020 03/31/2019 236’662 106’927 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 2019 | BURCKHARDT COMPRESSION 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 75. 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 Holding 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 3, 2020. Gross dividend Less 35% withholding tax Net dividend 109 2019 2018 189’247 –20’364 30’457 199’340 187’053 –20’362 22’556 189’247 –20’400 –20’400 178’940 168’847 2019 2018 2017 6.00 –2.10 3.90 6.00 –2.10 3.90 6.00 –2.10 3.90 FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2019 | 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 2020, income statement and notes for the year then ended, including a summary of significant accounting policies. In our opinion, the financial statements (pages 105 to 109) as at 31 March 2020 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 1'500'000 Materiality 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: Audit scope Impairment testing of investments in subsidiaries Key audit matters 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 2019 | 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 1'500'000 How we determined it 0.73% 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 150'000 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 category 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 predefined impairment testing process. Please refer to page 106 (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 2020. Burckhardt Compression Holding AG | Report of the statutory auditor to the General Meeting FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2019 | 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, 27 May 2020 Oliver Illa Audit expert Burckhardt Compression Holding AG | Report of the statutory auditor to the General Meeting FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION 113 FINANCIAL STATEMENTS OF BURCKHARDT COMPRESSION HOLDING AG, WINTERTHUR | ANNUAL REPORT 2019 | BURCKHARDT COMPRESSION114 IMPRINT | ANNUAL REPORT 2019 | 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 proImageHub GmbH, Lukas Pitsch Arkos Field Services 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.com

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